Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, good afternoon, and welcome to the INWIT Third Quarter 2020 Financial Results and 2021-2023 Business Plan Update Conference Call. Emanuela Martinelli, Head of Finance and Investor Relations, will introduce the event.

[Emanuela Martinelli, executive]

Sure, and good evening. Welcome, everyone, and thank you for your attendance. Our CEO, Giovanni Ferigo; and our CFO, Diego Galli, will provide you with an update on our business and operations in Q3 2020, as well as an update on our business plan with a particular focus on the first 3 years from 2021 to 2023 and the connection to the 2026 guidance.

As usual, the presentation will be followed by a Q&A session. [Operator Instructions] Please take note of the disclaimer on Slide #2.

I leave the floor to Giovanni, who will guide you through the presentation. Giovanni, it's over to you.

[Giovanni Ferigo, executive]

Good evening to you all. Today, I would like to leave you in no doubt that INWIT is on the right trajectory, in line with the expectations set out in the past.

Specifically, we delivered a step change in growth during Q3. We have a long-term plan, which is in line or better than the one from July 2019. We are well placed to capture the opportunities that this attractive market presents, and we will continue to drive strong growth organically.

Today, we will go through our Q3 results. And we will give you an update of the business plan with focus on 2021-2023, reviewing the market dynamics, strategic pillars and financial targets.

So let's go to Slide #5. Okay. Let's start by looking at our Q3 results, where the business is significantly accelerated as you see on Slide 5, as I said. Now clearly, we are working in unprecedented times.

With regards to our operations, we continue our activity without disruption, and we have not registered at this time significant -- any significant impact on our business due to the pandemic. In fact, the business has significantly accelerated in line with our expectations and as we said in July. Revenues were up by 2% year-over-year on an organic basis compared to about 1% in the previous quarter.

Moving to the operations. We delivered more than 500 additional tenants, more than 600 new remote units for DAS and also more than 800 renegotiations and land acquisitions to optimize the cost base further. All of these are clear evidence of a material change of pace.

Also, from a commercial point of view, we made important steps. I'm pleased to say that we won the contract to enable 5G on the new M4 underground in Milan. Another example, winning the contract for DAS coverage of the Philip Morris plant near Bologna, supporting their drive to Industry 4.0 with automation enabled by sensor and robotics. We also joined forces with TIM to develop 5G, thanks to small cells starting from Milan and Genoa. And finally, reinforcing the market support for our business, we were able to issue 2 successful bonds for EUR 1.75 billion, which were 4x oversubscribed by primary investors.

Q3 showed a real step change in pace across all the dimensions of our business as you see in -- on Slide #6. In particular, we delivered 210 PoPs for our anchor tenants, who are at the start of the delivery of the common grid following the standstill period related to the merger project. And we delivered another 300 PoPs for other tenants, highlighting the attractiveness of our towers portfolio to fixed wire access operators. So we delivered a good part of the more than 1,000 tenants we expected by second half of 2020. We also met the antitrust requirements by making 150 locations available to other wireless operators to date.

Finally, in Q3, we executed 800 new renegotiation and land acquisition, proof of the strengths of our real estate department in optimizing the ground lease cost. As we said in July, the Q2, we completed several operational steps. And now in Q3, we have stepped up another new level, which sets the new baseline for the future.

So Diego, over to you.

[Diego Galli, executive]

Thank you, Giovanni. Good evening. As Giovanni said, we had a significant step-up in our operational performance as well as an initial improvement in our financials.

Looking at our numbers in detail. In Q3, total revenues were EUR 186 million, an increase of 0.9% quarter-on-quarter or an annualized run rate above 3%, which sets us up well for the future. Compared to the quarter 2019 pro forma, the organic growth is 1.9% year-on-year, which is an improvement when compared to the organic 1% growth in Q2. The main revenue growth driver was the MSA revenues offsetting the lower other revenues.

From a profitability standpoint, EBITDA stands at EUR 173 million with a 93% margin. And our EBITDA -- EBITDAaL margin stands at 65% of revenues. These positive results allow us to improve our previously communicated guidance on a reported basis: revenues to the top of the range and EBITDA and EBITDAaL slightly above the ranges, respectively, of just over EUR 600 million and EUR 400 million, respectively.

Now moving to cash on Slide 8. We continue to deliver strong cash conversion. Free cash flow stood at 56% of EBITDA or EUR 97 million, favorably impacted by no tax payment in the quarter. We are upgrading our recurring free cash flow guidance as well to slightly above our previously communicated range to over EUR 265 million. In the quarter, the net financial position also improved to EUR 3.76 billion, pushing down financial leverage to 5.5x, calculated as net debt on pro forma EBITDA 2020 guidance.

Let me now talk about shareholder remuneration. As you know, the shareholder agreement sets a minimum payout ratio of 80% of net income with the Board of Directors' decision based on the industrial plan, growth expectation and cash flow generation, rating consideration and strategic options available. The Board updated the policy, agreeing a dividend per share of EUR 0.30 per share to be paid in 2021 on year-end 2020 results, growing 7.5% annually thereafter. As Giovanni said, we are pleased with the progress we achieved in Q3, which will accelerate further in Q4, giving us the right momentum for the start of 2021.

Let's move now to the business plan 2021 to 2023 update. Before Giovanni talks about the attractive market we operate in and our strategy, I want to set out the key financial metrics underlying the industrial plan. We expect to deliver revenue between EUR 920 million to EUR 960 million by 2023, implying a 7.8% CAGR at the midpoint of the range. We expect EBITDA to grow in line with revenues, with margins remaining broadly stable. And we expect to deliver an EBITDAaL CAGR double-digit of over 12%, powered by our lease optimization cost initiatives. This will support a recurring free cash flow of EUR 560 million to EUR 600 million by 2023, implying a CAGR of 23%. Let me clarify that this number includes the annual benefit coming from the goodwill tax scheme. This current free cash flow represents a key milestone, considering we are close to achieving our recurring free cash flow 2026 target 3 years ahead of the previous plan.

Also, as you will see later, the financial progression to 2026 is in line or better than the previous guidance given in July 2019. Please note that the margin and CAGR reflect the midpoint, and the 2020 guidance is pro forma based on the reported guidance given in July this year.

Moving now to the capital allocation. The plan over 3 years will generate EUR 1.4 billion of cumulative recurring free cash flow. And this will support EUR 500 million of growth CapEx, EUR 320 million for the upfront payment of the tax scheme and EUR 900 million of dividends.

During the period, the continuous EBITDA improvement will allow us to deleverage to 4.6x, well below the target of a leverage of 6x. This gives us up to EUR 1 billion as headroom to capture growth opportunities beyond the plan or increase shareholder remuneration.

In conclusion, we are pleased with our Q3 results. Our plan is set for us to grow revenue, generating significant cash, which, in turn, will turn and will allow us to invest for growth, reward shareholders and create headroom to capture further opportunities beyond our plan.

Giovanni, please, back to you.

[Giovanni Ferigo, executive]

Okay. Let me talk to you about how we see the industry evolving, what the roles of tower will be and how INWIT will capture the market opportunities and growth.

Looking ahead, we think that 5G will be -- will drive the deployment of complementary technologies and will push the creation of the overall ecosystems. This will provide extensive connectivity at high capacity and low latency with millions of devices connected in a variety of ways.

In the 5G ecosystem, fiber will cover mainly mid- to high-density area, while fixed wireless access will provide ultra-broadband coverage in the low- to mid-density areas. Thus, we'll provide denser coverage and support bandwidth density, enhancing available connectivity in high footfall venues, particularly indoors. Small cells will be the way to achieve massive capacity and ultra-low latency, mainly outdoor in crowded locations, such as squares and high streets. Small cells will develop mostly over the 3, 6 years term.

Finally, high quantity of data and the need of low latency will drive the spread of distributed computing power close to the final user, growing up -- growing from hundreds to thousands of edge nodes over time. The 5G ecosystem will serve new digital use cases across multiple verticals. For example, the smart health care application such as remote surgery requires seamless connectivity and computing power. In education sector, we will have remote universities with remote students, remote lessons and interviews. We are seeing this already due to the pandemic.

Industrial automation will reshape manufacturing in the context of Industry 4.0 with robots and machineries, which will be served through dedicated networks. Another interesting business is related to drones developed to support video surveillance and other mission-critical services. So 5G will be the game changer for tower cost as you see on the next slide.

So what role will our tower play beyond just hosting? Simply, we will have a key role. Why? 3 simple reasons. First, our towers are everywhere, and this is the key for many of these applications. Second, most of our towers are connected to the fiber, and many of these new applications will require the ultra-broad, ultra-low latency and high throughput that only fiber can bring. Third, our towers are fully equipped with the necessary power, cooling system and security that this new application will require. So our towers will hold several network elements across these new applications, so evolving from passive to digital infrastructure enablers.

In this context, INWIT is very well placed as we can see on Slide 15. INWIT is the leading wireless infrastructure player in Italy with about 48% market share with the best asset quality, as TIM was the incumbent and Vodafone, the fierce challenger, and they designed the network selecting the best locations.

Today, we have more than 22,000 towers, more than 41,000 tenants and about 70% of sites are connected by fiber and 1,100 with our own fiber. We are also leading in the space of special projects, both indoor and outdoor through smart cell DAS, where are securing -- where we are securing important locations, including hospitals, train stations, museums, stadiums, for example, the main train station in Rome, Florence and Venice and 15 hospitals across the country.

So let's recap. Looking at Page 16. We see an acceleration of digitalization driven by 5G and a positive environment for investments, underpinned by government and European funds. INWIT is best positioned to capture a fair share of the market growth opportunity. This includes densification by MNOs, increased fiberization of towers, fixed wireless access growth, the development of DAS and small cell market, and development of IoT and ecosystem in smart cities among others.

Before going into our 4 strategic pillars, let me share with you a video that brings our towers to life. Please, to the video.

[Presentation]

[Giovanni Ferigo, executive]

Okay. We have a clear strategy for growth underpinned by 4 pillars: first, partnering with our anchor tenants to support the evolution to 5G; second, serving the other wireless operator in the market as neutral host; third, scaling DAS and small cell networks; and finally, piloting innovative services to grow other source of revenues beyond the core over time. These 4 growth pillars are supported by 4 enablers, including the refreshed plan to build a sustainable business, our operational plans for digital sales, resource optimization initiatives and our people.

Looking at each of our growth pillar in more detail. Starting with the first pillar, partnering with our anchor tenants for their 5G evolution. We have very attractive long-term contracts with TIM and Vodafone, our tier 1 anchor tenants. You could say that our contracts are never ending as they have 8 years revolving terms with an all-or-nothing mechanism. The MSAs are 100% CPI-linked with the floor at 0%.

The MSAs include 3 revenues components set out on the slide from the left to the right. First, the fixed fee, which cover the installed base. It's worth about EUR 650 million pro forma in 2020. This is a likely secured and predictable revenue stream.

Second, we deliver contracted services for our anchor tenants, which include the deployment of 4,800 additional PoPs on new sites, 7,900 additional PoPs on existing sites. This means that in total, we will have 12,700 new tenants from Vodafone and TIM in support of the realization of the common grid and the rollout of 5G. Of this, 11,000 or about 90% will be delivered by 2023. The committed service includes 1,700 new small cell and DAS and 805 backhauling links. Under the MSA, a different mix of committed services is allowed but granting to INWIT the same value of NPV. These slight changes reflect the needs of our anchor tenants.

The third revenue component is related to additional revenues INWIT will provide to TIM and Vodafone as the preferred supplier. There are ongoing commercial discussions to identify opportunity and contracting additional services. For example, we have just finalized an agreement with TIM to deploy small cells to support 5G rollout in 2 important cities, Milan and Genoa.

INWIT is a neutral host with the flexibility and clear strategic focus to provide services to all operators in the market, including Wind Tre, Iliad and Fastweb as well as to fixed wireless operators, such as Linkem, Open Fiber, EOLO and IoT operators. We expect to provide about 12,000 to 15,000 new PoPs by 2026, 8,000, 10,000 of them by 2023, capturing a meaningful share of the market growth, considering the quality of our assets. A lot of this will come from fixed wireless access operators. And let me remind that team with TIM and Vodafone have committed to the European Commission to make available to other operators 4,000 sites over the next 8 years.

I like now to move to the third growth pillar. DAS, small cell as you can see on Page 21. As I explained before, we're seeing strong potential for this business as small cell and DAS are key to providing denser indoor coverage and other high capacity, low latency. The business will develop at scale in the second part of the plan, following the progress of the rollout of 5G macro coverage.

Our plan will deliver 8,000 remote units by 2023, underpinning the overall ambition of the plan, reaching 24,000 remote units by 2026. We expect local government and European funding to support this particular growth vector.

To capture the opportunity, we have launched a new commercial organization that is focused on dedicated offers to the different location owners. As leaders, we will continue to drive the growth in exciting small cell and DAS opportunity in Italy. And we are supporting the operator with the installation of repeaters, particularly in retail and bank branches.

To conclude on our growth pillars, we will also pilot a number of innovative services across IoT, edge computing and drone infrastructure as we see significant potential in growth beyond the core of tower, small cell and DAS. In blue, on Slide 22, you may appreciate the part of the value chain where we can, and we want to make the difference. We are just at the beginning of this journey, but we do expect to grow over the second phase of the plan. Domestic inorganic moves into adjacent business may support the acceleration of growth.

Moving to sustainability, which is a key area of focus and to which this team is committed to as we feel that we need to do more and to do better. It's worth mentioning that our business is naturally linked to the United Nations Sustainable Development Goal for industry, innovation and infrastructure and smart cities that are fully consistent with our role to make Italy digital. We improved the sustainability plan, committing to the carbon neutral by 2025. To help achieve this target, we will install 1,600 solar panels and 1,300 high-efficiency transformers.

To conclude, we summarize, we are on Page 24, our very clear KPIs on which the management is incentivized. Let me just mention that we will have about 20,000 tenants by 2023, taking us to about 60,000. This means that our tenancy ratio will increase to about 2.1 with MNOs only, I underline with MNOs only.

So Diego, now to you.

[Diego Galli, executive]

Thank you, Giovanni. The 4 growth pillars that Giovanni just described will underpin the best-in-class revenue growth as you can see on Page 26. We will deliver a revenue CAGR of almost 8%, 8% in the next 3 years, which will continue also in the second part of the plan. In absolute terms, revenue will increase by EUR 190 million by 2023. The main growth contributors will be the new macro tenants on contractualized services with TIM and Vodafone. And the overall contractualized services, including also small cell, DAS and backhauling will account for about EUR 100 million of the total growth.

The other important driver will be the PoPs from other operators, both fixed wireless access, MNOs and IoT as well. In this context, the contracted revenues from our anchor tenants will decrease from 90% of revenues in 2020 to 80% by 2023. Also small cell and DAS will contribute significantly, though the growth will be more material in the second part of the plan as the market accelerates. Finally, the business will start contributing to the top line at the end of the period.

And looking at the margin now, we can move to Page 27. EBITDA will grow at a similar pace to revenue as we see OpEx gradually increasing, starting from a very low base due to the increase in commercial cost. At EBITDA level, we expect accelerated growth as we continue optimizing our lease cost, which is our largest expense item through the continuous renegotiation and land acquisition. This will drive EBITDAaL margin through 70% by 2023 and to 75% by 2026. The strong revenue margin growth are supported by a significant and focused investment plan of EUR 600 million in the period '21 to '23 and rising to over EUR 1 billion by 2026.

Going into more detail, the pie chart shows the indicative breakdown of the capital expenditure for the period 2021 to 2023 and show how the new site constructions, the land buyout and the small cell and DAS equipment play a central role in our strategy. It is also worth mentioning that the maintenance CapEx will continue to represent less than 2% of the revenue.

Moving to our ability to generate significant cash on Page 29. Recurring free cash flow show a 23% CAGR in the period, achieving the range between EUR 560 million to EUR 600 million by 2023. This means that we will achieve in 2023 recurring free cash flow very close to the guidance of more than EUR 600 million recurring free cash flow targeted for 2026, July 2019 plan.

Let me remind you that we benefit from the goodwill tax scheme, which drives about EUR 150 million lower cash in 2023. The main element of the tax scheme are an upfront payment of EUR 320 million in 2021 in exchange for an annual cash benefit of around EUR 150 million for the following 5 years. The IRR of the transaction is more than 22%, with more than EUR 160 million NPV.

On our previous recurring free cash flow guidance for 2026 of more than EUR 600 million, that guidance is, therefore, improved to about EUR 700 million. On the right-hand side of the slide, you can see the bridge from EBITDA to recurring free cash flow using the average figures related to the period 2021 to 2023. The chart shows that EBITDA converts to recurring free cash flow at a rate of 60% with the following bridging items: 6% cash taxes, 7% interest, 2% maintenance CapEx and 25% lease cost cash payment.

As a result of our ability to generate significant amount of cash, we will be able to deleverage quickly, as you see on Slide 30. Our leverage is expected to decrease to 4.6x by year-end 2023 and to 3.4x by 2026. In 2021, our leverage increases to 5.6x due to the goodwill tax scheme cashout of EUR 320 million we just mentioned. We confirm the target leverage of max 6x and that we want to maintain the current ratings. And within this framework, we will have the flexibility to finance further growth, either organically or M&A, or if there are no accretive opportunities, we can return cash to shareholders.

As Giovanni said at the beginning, we are also proud that INWIT issued 2 successful bonds between July and October for the total amount of EUR 1.75 billion, 4x oversubscribed by primary investors. So we achieved the full refinancing for the bank loan during 2022, and we have no financing needs expected by end of 2025. The refinancing set the cost of the debt at 1.8 and extends the maturity, the average maturity to 5.8 years.

Finally, I'm pleased to share on Slide 31 that the plan improves the July 2019 guidance. As you may see, all the metrics are in line or better than the original guidance, thanks to the steady and strong revenue growth all across the plan period coupled with our lease optimization programs.

Giovanni, over to you.

[Giovanni Ferigo, executive]

Okay. So in conclusion. We have delivered the acceleration in Q3 as we promised to you in July. We are in a strong position to capture digitalization opportunity driven by 5G. We are focused on execution to deliver strong organic growth. And we are committed to a plan, which will deliver an attractive shareholder return as Diego said.

In terms of numbers, we will deliver about 8% growth in revenues, generating EUR 1.4 billion of recurring free cash flow, distributing EUR 900 million of dividend while keeping EUR 1 billion of financial flexibility. We believe that, no doubt. Join us and be part of this new INWIT.

[Emanuela Martinelli, executive]

Giovanni, Diego, thank you. [Operator Instructions]

[Operator]

[Operator Instructions] First question comes from Mr. Andrew Lee from Goldman Sachs.

[Andrew Lee, analyst]

I guess the key question is now on the predictability on what you've laid out. So 2 questions from me. One, towers will be great because of visibility and your slides on 19 and your 20 -- Slide 19 and Slide 20 are really helpful. But how much of what -- of the growth -- of your overall guided growth is already contracted? And how much relies on your commercial execution, i.e., kind of what degree of visibility and confidence you have on the midterm guidance?

Secondly, as you said, your targeted net debt-to-EBITDA implies EUR 1 billion of further dividend remuneration or inorganic pursuits. What would those inorganic opportunities include? Are they all domestic? Just any kind of visibility you could give us on that would be really helpful. And will you determine now on a year-by-year basis?

And maybe if you don't mind, just a third question. Your ex tax RL FCF guidance of EUR 600 million by 2026 looks a little conservative relative to the midterm outlook. Is that fair? Any color on that would be great.

[Diego Galli, executive]

Okay. Let me start from the first. Let me say that the -- slightly more than 50% is, let me say, the share of the growth that is already contracted. The remaining bit is related to the opportunities with third-parties, for which we see a tangible demand, and we feel honestly quite good. And the third element is related to the plan services, mostly related to small cell and DAS and with Vodafone and TIM, for which similarly, there are ongoing discussion negotiation projects to move from the plan to the, let me say, the definition. And the recent agreement with TIM is a testimony of the opportunities that we have in front of us.

So if I may, just to recap, slightly more than 50% already contracted. The other components with tangible pipeline and initiatives which make us feel comfortable and good about the opportunities and the achievability of these targets.

The second about...

[Giovanni Ferigo, executive]

About inorganic. Okay. Let me take the opportunity to highlight again the strong cash flow generation emphasis by the plan EUR 1.4 billion recurring free cash flow in 3 years with almost EUR 700 million annual cash flow in 2026. We are totally concentrating now in delivering the plan, but we will be sure interested in exploring opportunities that may arise in Italy, let's say, on small tower portfolio or adjacent business. Let me say this is the issue. IoT, as I said, drones escalating and/or computing, let me say.

Let me remark, as usual, our strong financial discipline in addressing external growth, double-digit IRR will remain a key priority for us alongside 6x leverage and current rating. So this is enough.

[Diego Galli, executive]

And with regards to the third question, sorry, can you repeat?

[Andrew Lee, analyst]

Apologies. I hadn't heard that you said just to ask one question, so apologies for asking 3. The question was just that with your midterm growth outlook that you've laid out, the ex tax RL FCF guidance of EUR 600 million that you're guiding for 2026 just looks a bit conservative. Is that a fair conclusion? Or is there something that we're not seeing that's involved in that?

[Diego Galli, executive]

No. Yes. No, I would say it's a fair reflection of the cash generation that we do expect and the structure we do expect going forward. It means EUR 600 million at the end of the period, basically. That is fully consistent with the guidance on revenues that is higher than the EUR 1,100 million. So I wouldn't say it's conservative. I think it's quite balanced.

[Operator]

Next question comes from Mr. Sam McHugh from Exane.

[Samuel McHugh, analyst]

So I'm just trying to understand a little about how things have changed in the new business plan. And I guess I just wanted to ask, would you mind to characterize it as you're now planning a bit more top growth on macro side near term and maybe the small cell growth will be a bit more deferred beyond 2023? And I guess in that context, what gives you the confidence on the 8,000 to 10,000 overall PoPs you can add by 2023? And I wonder how much you've taken into consideration the Cellnex and Hutch deal this week? I mean, does that impact your view at all?

[Diego Galli, executive]

Yes. Let me take -- yes. I think your view is correct. There is in -- the initial part of the planned growth is driven clearly by the committed and common grid with Vodafone and TIM as well as the third-parties. The confidence comes from the pipeline that we see in front of us from the demand that we see from both MNOs and honestly, strong growth related to fixed wireless access.

We think that structurally, we've got, as Giovanni said, a very strong network where everybody wants to deliver a -- deploy a network with high quality as to depend and to rely on. So based on the visibility we have today, the tangible order book and pipeline and on clearly, market assumptions for the medium term, we have a solid degree of confidence. This is very reasonable. I think this was first part of the question, right, or?

[Samuel McHugh, analyst]

Correct. Yes. And then what would the Cellnex and Hutch deal change? Because, obviously, that would give them more of a national footprint as well?

[Diego Galli, executive]

Yes. The Hutch deal, again, we -- I think that the -- again, we came back to the structure and core of our network. And the fact that an operator, Wind Tre, they have already restructured the network with the merger. So we don't expect a significant change in the shape of the market.

[Giovanni Ferigo, executive]

If I can complete, Diego. We have just finished to redesign all the network based in our towers. So I think and as difficult the theme of repatriate in the sense that the -- let me say, the hospitalities of Wind will migrate to the Hutchison tower. So always, the point is that we have the best-positioned and the well-structured towers in Italy. And so this is, let me say, we have really a key role for the deployment of the network, okay?

[Operator]

Next question comes from Mr. Georgios Ierodiaconou from Citi.

[Georgios Ierodiaconou, analyst]

It's actually one question in 2 parts and it's around the use of additional cash flow flexibility, the EUR 1 billion that you highlighted. So my first question is, when do you plan to make a decision on whether to return back to shareholders? Is it something you will be doing on an ongoing basis every year? Or is it something we should expect to be relatively back-end loaded product in 2023?

And then as part of that, one clarification I wanted to have is related to the land acquisition that you highlighted, the 6,000 renegotiation and acquisition target for the next 3 years. You do show in -- on Slide 28 on EUR 150 million, I think, of CapEx, could be used for that. I was just curious whether that could be anything additional beyond this EUR 150 million that you may use and whether that will come out of this EUR 1 billion actual that you highlighted.

[Diego Galli, executive]

Yes. On the EUR 1 billion, clearly, the headroom up to EUR 1 billion will emerge gradually, actually starting already by the end of 2021. As we said, they will be in the mid of 2021, the impact of the upfront payment related to the tax goodwill scheme.

We have just -- the Board had just decided a new dividend policy that we expect that will cover the 3 years of the plan. So I think that the final decision will be, as you said, at the back-end loaded as in sequence, quarter-by-quarter, will be visible the achievement of the synergies and the results on the organic plan. We will assess, as Giovanni said, domestic opportunities in adjacent businesses. And this gradually will take us to be in the right position to assess also other opportunities or eventually return to the -- return -- to increase the return to shareholders. So in short, yes, we do expect this decision to be made at the end of the 3-year horizon.

[Giovanni Ferigo, executive]

About, let me say, site lease market, okay. We are -- we spoke about, we are very focused on rental cost optimization, and we have a dedicated team of about 30 FTEs, supported by 15 agency, recently renewed dealing with real estate. Our real estate chief was in charge of real estate at Vodafone before merger and was very successful in ground lease cost reduction.

As we demonstrate by the 800 land acquisition, renegotiation in Q3, we keep on optimizing the rental costs through or purchase of land, which represent important amount of our CapEx, contract renegotiation, offering cash advances or extended duration. So we set operation that took as old companies, let me say, the step change in Q2. And we set up also the organizational structure that has been able to pick up big numbers and lease buyout. So this is the result, okay?

[Operator]

Next question comes from Mr. Simon Coles from Barclays.

[Simon Coles, analyst]

You mentioned commercial costs are going to pick up to drive sort of acceleration in the business. I was just wondering are these sort of, say, temporary over the next sort of 3 to 6 years as you try and drive this acceleration in revenues due to going after third-party demand? And this be something that then starts to disappear in the future? Or should we assume that it stays at that sort of rate in the long term?

And then if I can just ask one more thing as everyone else has. Obviously, we're going to see a very being acceleration in tenancy deployment. Could you just talk about how you secure sort of construction capacity and the workforce to do that, seeing that it's going to be quite a material acceleration to what you've necessarily done in the past?

[Diego Galli, executive]

So I take the first part of the question that is related to the acceleration. The way the plan is envisaged is actually, yes, the -- we do expect the acceleration on the tenants in the first part of the plan in the next 3, 4 years, both on the anchor tenants and on the other players, while then the second part of the plan, the accelerated growth will be driven more by the micro coverage driven by small cell and DAS. So the first year is focused on macro coverage, additional macro tenants and fixed wireless access. Second part of the plan, the growth on tenants will slow down and will be substituted by the acceleration of growth on small cell and DAS.

With regards to the capacity to deliver, the step up?

[Giovanni Ferigo, executive]

In the meantime, we are, let me say, now we launched a new organization about this with dedicated sales force that finally looks for the right locations to anticipate the 5G small cell adoption so -- to increase the number of remote units where -- and to push the business as we want and we put in this presentation, okay? It's very, very important for us, okay?

[Diego Galli, executive]

And also from the operational point of view, we are an organization that is quite small. Actually, we are a team of 200 people, but we manage an ecosystem, a portfolio of partners.

By the way, we are refreshing and renewing at high speed in these days to really set the portfolio of key partners that will allow us to deliver this step-up in terms of capacity. The fact that the company relies on a structure that is already strongly, let me say, outsourced really allow us to increase the capacity very, very quickly as demonstrated by Q3, where the step-up in both the delivery of new tenants as well as the renegotiation has been achieved in a relatively a short time.

[Giovanni Ferigo, executive]

Short time.

[Diego Galli, executive]

So relying on this, on several partners across the regions and the different regions of Italy really give us a lot of flexibility. And clearly, in the last months, we have worked together to define the medium- and long-term plan. And we have seen already the partner scaling up, giving us full assurance that we will be able to deliver at this faster pace.

[Emanuela Martinelli, executive]

[Operator Instructions]

[Operator]

Next question comes from Mr. Roshan Ranjit from Deutsche Bank.

[Roshan Ranjit, analyst]

Great. On the ramp-up, if I could just break down into a bit more of the operational side because if I think back to Q2, we were thinking that about maybe 75 PoPs per month growth. Now looking at Slide #5, you obviously, you're looking at around 100 new PoPs from third-parties. Now should we expect that number to continue to accelerate because, I mean, you've upgraded your fiscal year '20 guidance, your midterm guidance, I don't see your longer-term guidance. So that demand is clearly driving quite material upside to the, I guess, new PoP growth. Is that fair to say?

And secondly, just circling back to some of the previous questions. On the land optimization, again, we've seen quite a ramp-up this quarter on some of the cost efficiencies you've been able to extract on the number of sites you're addressing. Now if I look at the synergy target, you're still abiding to this EUR 200 million EBITDA synergy target by 2026. So is it fair to say that these statements are necessarily coming from the Vodafone sites you've got access to, you've just been much more efficient in your existing sites? Or is there something else going on there?

[Giovanni Ferigo, executive]

Okay. Let me answer to the first question. Okay. In the Q3, the engine is on. We are going, and we are sure that for the Q4, this improvement will continue because we have an important order book, both from -- by fixed wireless access operators both of, let me say, the usual MNOs. So we are pushing. The next year will be very important for us. And the basis for the 2021 plan is the final of this year to guarantee the ramp-up of the next year. About the locations?

[Diego Galli, executive]

Yes, on lease cost, again, Q2 -- Q3 has been an acceleration, really demonstrating the power of the teams following again Q2, where we set up the operations. You may see on Page 24 that -- where on the bottom right of the graph, we talk about for the plan of about 10,000 renegotiation land buyout that somehow sets the pace across the different years. So we will continue broadly at this level.

And this is key for us to deliver the EBITDAaL margin at 75% at the end of the time because this is a key lever to container use rental cost, offsetting -- more than offsetting the impact of inflation, the impact of new sites through these specific programs, where, actually, we are, as Giovanni said, we are leveraging on the experience gained by the Vodafone towers team in the past, and we are replicating and extending the same approaches.

The synergies, the EUR 200 million synergies were mostly revenue driven. The -- and are confirmed as they were mostly driven by revenue and by business development with the 2 anchor tenants. The lease cost renegotiation were part -- optimization were part of the, let me say, organic opportunities considered already 2019 plan to deliver the incremental EBITDA.

[Operator]

Next question comes from Jakob Bluestone from Crédit Suisse.

[Jakob Bluestone, analyst]

I had a question on -- regarding Slide 31. So just trying to understand what is it that's changed in your business plan update versus the original guidance. And I guess this sort of 2 parts. What is it that's given you the confidence to raise the guidance for revenues by about EUR 100 million?

And then secondly, I didn't quite understand why the free cash flow guidance, excluding the tax effects, doesn't go up. So what else is it that -- what are the cost is rising given the higher revenues doesn't translate into sort of higher free cash flow ex the tax effect. So if you can maybe just clarify what's changed in your new and old business plan.

[Diego Galli, executive]

Yes. Sorry, yes. So the revenue and -- the story about the revenue and the confidence about achieve more than EUR 1.1 billion is related to the multiple layers of growth that we have in our plan, where the -- on top of the contractualized services, there is -- we are factoring in this plan the strong opportunities that we see from the spread, the expansion of fixed wireless access in the market as well as the demand that we see on other MNO operators. And this is a growth engine that is going to be very strong in the first 3 years.

And then when in the second part of the plan, a little bit later than the original plan, but it will come in the second part, the strong growth coming from small cell and DAS accumulating on top of the other 2 layers. So contractualized services and third parties, and -- then the third wave will come with small cell and DAS. These 3 layers of growth that we see, the first 2 very tangible for -- a little bit more on the short term, but also the second one is small cell and DAS coming after the -- the initial focus of the macro coverage from the operators. For this, we see tangible and tangible opportunities for these 3 layers of growth to accumulate at the end of the plan, allowing us to achieve the ambition of more than EUR 1.1 billion.

On the free cash flow, the free cash flow at the end of the plan -- the recurring free cash flow at the end of the plan will be particularly high anyway in the sense that it will be EUR 600 million cash generation out of the EUR 1.1 billion, which implies an EBITDA margin in line, basically in line with today and a reduction in this cost, which is a reduction in absolute terms as a result of what we said before.

The original business plan did include a further expansion of EBITDAaL. And that at this stage, we think, is really -- what we have embedded in our plan is really the highest level that can be reached in -- with high degree of -- with a good degree of confidence.

[Operator]

The next question is from Mr. Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Just a quick question regarding sensitivity from the impact of small cells, both on 2023 targets and 2026. If I remember well, the original plan was for 35 towers, small towers -- small cells, sorry, and an EBITDA in the region of EUR 60 million at the end of the plan. Could you give us a sensitivity, what is the contribution that you expect from this 8,000 small cells in '23 and in 2026? And just curiosity regarding the range of 2023 targets that you supplied, what are the main difference between the upper level and the lower level of this range?

[Giovanni Ferigo, executive]

Okay. Let me say, we have considered the market request of today. Let me say, I have -- sorry, I'm an engineer, so no one is perfect, but I have to say something. Okay, we now are considering only the indoor and outdoor small cell through 3.7 gigahertz frequency that we did an evaluation that starts from considering that there are in our portfolio about 6,000, let me say, tower, important towers in densified area where there will need high capacity to, let me say, to manage the -- that growth.

In this, we consider the start with about 5 small cells for sites. So let me say, our, let me say, item is about 30,000 small cells. We have -- we need sometimes more to consider the arrival in Europe in Italy, too, of the millimeter wave small cell, 26 gigahertz frequency, that are very, very dense, and the numbers are huge. Let me say, in outdoor environment, you have to install about one small cell with this frequency, each 150, 200 meters.

So now we did a prudential, let me say, target. We believe in these numbers. Now we are not at the United States for the use of millimeter waves. In Europe, we are at the beginning of the sub-5 gigahertz frequencies. The millimeter waves small cell will push in a very, very consistent way in the market. But at the moment, in a very transparent way, we have not consider this item because we have to wait for the real market needs. Okay. Diego, ask you to answer something about the economics. Okay.

[Diego Galli, executive]

Yes. Yes, in terms of -- so in terms of volume, I think there is the indication on the development of small cell on Slide 3, where we -- there is an addition up of 24,000. So we get up to 28,000 in 2026. This will -- the growth will continue after 2026, and we will achieve more than 30,000 in 2028. That is not far away the original guidance.

Having said that, on small cell and DAS, there is a different timing. So there is -- the number is lower in 2023. And also, let me say that I think it's helpful to give us an indication in terms of pricing, where we think that the development of markets based on the current experience, probably prices, will be slightly lower than originally assumed. We are in the range of around 10%. So I guess that this may help to give a sense of the opportunity in terms of revenue. In terms of margin, we do expect an EBITDA margin still high around 75% to 80%.

[Stefano Gamberini, analyst]

Just to understand the level of pricing, you said, it's 10% lower than the previous estimate. So could I realize that the EBITDA 2026 will be lower than the EUR 60 million expected in previous plan?

[Diego Galli, executive]

Yes. Yes, I guess. Yes. Yes, not materially but slightly below.

[Operator]

Next question comes from Mr. Luigi Minerva from HSBC.

[Luigi Minerva, analyst]

The first one is on -- obviously, I was wondering if the 5G equipment that you will gradually place on your towers will allow you some form of pricing power, the reason being that the equipment is normally going to be larger and heavier. So I was wondering if the MSA allows you to charge more for the 5G piece of equipment? And whether this is a part of your business plan?

And the second question is on the small sales project which you announced this morning. I think it's 100 small cells in Milan and Genoa. So maybe can you take us through practically how are you thinking about these projects, how you prioritize, together with your operators, where to deploy? Just to give us an idea of how you imagine developing such a project.

And lastly, just a clarification on Slide 29 just to make sure I get it right. So of the EUR 580 million of recurring free cash flow in 2023, is it EUR 150 million coming from the goodwill tax scheme?

[Giovanni Ferigo, executive]

About the Milan and Genoa, okay. According to TIM, as you know, the TIM announced within the year, the 95% covered 5G of the population and Genoa, too. And so this is the real -- our test to understand which are the needs in terms of capacity, not coverage because coverage is a theme of the macro sites. So with TIM, for the first time in Italy, we start to deploy with them in the towers where there is a high-density population and a high request of data consumption to install with all our, let me say, portfolio solution.

As you know, we can install the small cell underground with MNO that is the antenna. We can, let me say, install in the right place, where it's not, let me say, a problem for the artistic point of view. And this is a very, very interesting experiment starting with low numbers but that will give to us the right trajectory for our business plan.

[Diego Galli, executive]

And with regards to the other questions, yes, there is something can be said, but we don't relate it to the 5G and increased space occupancy. But we don't expect any material amount across the plan. On Page 21 -- 29, yes, let me clarify that the impact is 1-1-5, EUR 115 million.

[Operator]

Next question comes from Mr. Fernando Cordero from Banco Santander.

[Fernando Cordero, analyst]

Okay. In fact, 2. And my first question is regarding pricing that you have considered into your business plan, particularly on the hospitality services for secondary tenants. I would like to understand what kind of scenario are you already pricing once you have this -- the pricing already set for the MSA, obviously. Just willing to understand what scenario you are expecting for secondary tenants hospitality services?

And the second question is, I assume that you have considering your plan that there is no change on the electromagnetic emissions regulation. I just would like to understand what would be the impact if we see any kind of convergence of the tunnel regulation towards the European benchmark? And what would be the impact in your financials in case we see this exchange of the regulation?

[Giovanni Ferigo, executive]

Okay. Starting from the first question. Okay, the pricing. The average price is between EUR 10,000 and EUR 12,000 yearly for the mobile operators. And for the fixed wireless access, it's about 1/3 of the mobile operator. All our, let me say, prices depend from physical space and the power electromagnetic space that they ask. But this is the average price that we do to the third-parties.

Let me say about the change of the -- about the electromagnetic emission limit, starting from the consideration that I'm waiting this from 20 years in Italy, but okay, I think that is very, very difficult that will happen in a few years. Okay. If this limit, let me say, will permit to, let me say -- finally, if the limit will increase, okay, for us is an opportunity because we can post more, let me say, in our towers because the electromagnetic space increase. And let me say, there is, sure, a strong demand of hospitality, both in the city that -- in outdoor, that with the digitalization, I think that we will not have a significant impact about this.

[Operator]

Next -- last question is from Giorgio Tavolini from Intermonte.

[Giorgio Tavolini, analyst]

I was interested in understanding whether the dividend policy. You're talking about EUR 0.30 dividend per share for 2020. Assuming a 90% payout, is it fair to assume an adjusted net income in the range of EUR 250 million. Are you escalating the adjusted net income, excluding the PPA, EUR 100 million per year and the said taxes related to the goodwill substitution tax that is basically paid in 2021? Just to understand what are the main moving parts in the bottom line -- in the adjusted bottom line that we should look at.

[Diego Galli, executive]

Thanks for the questions, which allows me to clarify better. The new dividend policy actually fixes an amount, a fixed amount of dividend per share and then an increase for the following years of 7.5%, somehow delinking or removing the strict link to the percentage of -- on net profit.

So -- and this is consistent with the current policy, the previous policy, whereby the link of the 80%, the approach, the policy of 80% of the net profit was setting a minimum and then was up to the Board to decide according to the, as we said, as I said before, to the growth opportunity, recurring -- cash flow generation and long-term growth opportunities. So the 2 things are not strictly correlated anymore.

Clearly, there is a correlation between the perspective of cash generation. And the numbers that we did disclose, they do share that we -- that the -- basically, the recurring free cash flow -- sorry, the cash flow to equity generated in the 3 years plan will be broadly in line with the EUR 900 million dividend that this dividend policy will drive as dividend payout.

So just to summarize, the link between the percentage of net profit and dividend is not driving any more the payout. The payout is based on a fixed dividend per share amount plus a fixed growth for the next 3 years. Clearly, as I said, we did consider carefully to find a right balance between cash generation, availability of resources to support the growth, to reward the shareholders as well as to keep on creating headroom for further opportunity to capture -- to allow the company to capture further opportunities along the time.

[Emanuela Martinelli, executive]

Thank you. This was the last question for Q3 results and business plan update presentation. Thank you all. Thank you all of you for joining us and for your interest in our conference call. As usual, feel free to contact us for additional questions. Addition -- in addition, I wish you a good evening, and keep you safe. Thanks. Bye.

[Giovanni Ferigo, executive]

Thank you. Buh-bye.

[Diego Galli, executive]

Bye. Thank you very much. Bye.