Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Third Quarter 2024 INWIT Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Head of Investor Relations. Please go ahead, sir.

[Fabio Ruffini, executive]

Good morning, everyone. Thanks for joining us. With me, there is Diego Galli, INWIT's General Manager; and Emilia Trudu, Chief Financial Officer. Please allow me to draw your attention to the safe harbor statement you see on Page 2, and as usual, following a brief presentation on the results, we will open the floor to Q&A. Over to you, Diego.

[Diego Galli, executive]

Thank you, and good morning, everyone. Quarter 3 results continue to build on INWIT growth trajectory. Our main KPIs recorded a further expansion. The structural need for digital infrastructure in Italy is confirmed, and INWIT is proving resilient in a transitional year for our largest clients, which has an impact on market trends. Significant telco corporate transactions have been announced with the potential to improve market fundamentals and unleash additional investments. INWIT industrial execution is steady at high volume of delivery, we will add more than 900 towers in 2024, expanding the asset base at accretive returns. Financials are up in the high single-digit range, with yet another quarter of EBITDAaL margin expansion.

This implies an execution towards the low end of the guidance range for 2024 on the back of the OLOs market, which continues to grow at a low pace and investment in mobile generally still constrained by budget availability. Long-term growth visibility remains high. Based on CPI, MSA growth commitments until 2030 and operational plans with clients. From a balance sheet point of view, we continue on the path to reduce leverage despite having increased dividends by EUR 100 million and having completed a EUR 300 million share buyback. INWIT builds balance sheet flexibility that will be used to deliver incremental value to shareholders. We plan on updating the market on this front during Q4 results.

Moving to main trends on the quarter on Page 4. The key figures for the quarter show 7.6% revenue growth with new service up 61% year-on-year. 9% growth in EBITDA after lease with margin up by 1 percentage point, recurring cash flow up EUR 159 million, up 3% year-over-year. Net debt-to-EBITDA up 4.8x improving quarter-on-quarter. From an industrial point of view, solid delivery with more than 200 new sites, more than 900 new PoPs for a tenancy ratio up to 2.3x and solid pace of real estate transactions, main efficiency driver at more than 300. In brief, a resilient growth trajectory in the context of transformation for our largest clients, and a confirmed structural need for better digital infrastructure in Italy. Now I will turn it over to Emilia for a more detailed review of the results. Thank you.

[Emilia Trudu, executive]

Thank you, Diego, and good morning, everyone. On Page 5, the focus is on the development of new sites. 200 new towers in the quarter, reinforcing INWIT's position as a leading digital infrastructure player in Italy. We build new sites with a clear industrial approach driven by our technology and operations teams and with 2 committed anchor tenants, a distinctive feature of our model. New sites are an answer to operators' coverage and capacity needs across 3 distinct build-to-suit programs. Standalone 5G in Italy is still in its early stage and densification is expected to support demand for new sites for the foreseeable future, a very accretive use of capital.

Moving to Anchor PoPs on Page 6. 490 additional points of presence with TIM and Vodafone in the quarter. This trend shows a sequential improvement quarter-on-quarter in line with commitments and coherent with full year expectations of approximately 2,000 new PoPs. In terms of mix, the majority of new PoPs relates to new sites, we consider this trend as solid given the current market context. Turning to Page 7, we review OLOs, 420 new PoPs with clients other than TIM and Vodafone supporting a yearly volume growth rate of 13% for a total of nearly 15,000 PoPs at the end of September. The quarterly trend on the low end of the expected run rate reflects stable MNOs, including new PoPs from Iliad and Wind Tre. A soft FWA market with no tangible signs of improvement yet and good volumes in IoT clients, particularly in smart grid applications.

Next on Page 8, we review new services. In indoor locations, INWIT infrastructure enhances mobile connectivity, providing a multi-tenant solution, which enables advanced enterprise services and a better consumer experience. In the third quarter, revenues increased by more than 60% year-on-year, reaching more than EUR 18 million. Growth was fueled by the addition of 60 new locations served by indoor coverage solutions with DAS and repeater technologies and an increase in the tenancy ratio across the 580 locations we cover. INWIT is building a solid track record in a dynamic market with the transportation vertical being particularly interesting. I just flagged the Rome 5G project, which includes an upgrade to 5G connectivity in the subway system together with small cell deployment and the Milano M4 metro line extension.

Next, we review the P&L on Page 9. Revenue growth in the quarter stood at 7.6%. Anchors were up both year-on-year and quarter-on-quarter. OLOs instead were about stable compared to Q2 with revenues just above EUR 30 million, net effect of new PoPs and lower other revenues as previously flagged. Operational expenditures increased in line with maintenance activity levels and the support for new services. EBITDA margin was at 91.1% and is expected to improve in Q4 in line with guidance. EBITDA after lease improved by 9% with margin up by 1 percentage point to 72.8%, one of the highest in the sectors driven by real estate efficiencies. This income increased by 2% to EUR 87 million, reflecting the expected trends in D&A, interest and taxes.

Moving to the cash flow on Page 10. Recurring free cash flow was EUR 159 million in the quarter for a 67% cash conversion. We recorded limited recurring CapEx, no cash taxes, a positive net working capital move of nearly EUR 10 million and lease payment and financial charges in line with expectations. Reported leverage stood at 4.8x, slightly down quarter-on-quarter. This includes the impact of a higher ordinary dividend by EUR 100 million and most of the EUR 300 million share buyback, which was completed in mid-October. Our balance sheet remains well balanced with 70% of debt being fixed and no near-term maturities, the first significant repayment being the bond maturing in 2026.

On Page 11, a brief look at our business plan guidance. The update in 2024 reflects current market conditions characterized by limited investments by operators beyond commitments. This is particularly evident in the OLOs market. On 2025 onwards, we should also factor in that 2024 CPI expected at approximately 1% undershot our initial assumption of 2%. Supportingly the INWIT profile for the long term with a high level of visibility, we have strong anchor MSAs, high industrial activity with rollout of new sites, indoor coverage revenue growth and lease cost efficiencies to grow, expand margins, invest at accretive rates and build balance sheet flexibility. On top, there is an opportunity to grow further in case of acceleration of investments in mobile connectivity by the Italian operators. With this, I hand it back to Diego. Thank you.

[Diego Galli, executive]

Thanks, Emilia. A few more words from my side are highlighting the distinctive features of INWIT in an evolving industry context. We can count on the best tower assets which continue to expand, a deep industrial expertise, evident in our rollout capabilities, real estate track record and commercial capabilities in developing new services, strong MSAs and a clear capital allocation framework. In terms of execution, I'm satisfied with the progress in the new sites, new service revenue growth and lease cost efficiency, which is best-in-class.

Discretionary investments in mobile infrastructure have been at the minimum over the past few years and cannot be postponed forever. Rational to expect 2024 to be the low point of this trend. Digital infrastructure in Italy lags materially behind the European standard and there is the potential to unleash higher investments. INWIT is very well positioned in this context, and we look forward to updating you on our midterm ambition in the 2025 Capital Markets Day. On March 4, among other topics, we will provide financial target to 2030 and an update on capital allocation. With this, I thank you, and we are now ready for the Q&A session.

[Operator]

[Operator Instructions] The first question is from Roshan Ranjit of Deutsche Bank.

[Roshan Ranjit, analyst]

Great. Diego, you mentioned 2024 being the low point of growth. And whilst we recognize the commitments that you have from your 2 anchor customers, what can you say to us to suggest that it will pick up in '25? You highlight the need for investments but also the kind of budgetary constraints so you previously said '24, 2,000 anchor adds, PoP adds. Is there a number you could give us for '25, what number should we be looking to for '25? And secondly, if I just quickly ask on the lease costs, lease costs were down 3% year-on-year. I think it's the first time we've seen the lease cost down after a few quarters. That is despite you kind of having a low number for the site negotiations. So is there anything else going on there? Or is this now the benefits of having negotiated previous sites with the kind of inflation environment stepping down?

[Diego Galli, executive]

Yes, the -- clearly, we have the commitments with our anchor tenants, which are developing well. They are basically around new sites, in new tenants on new sites and also some on indoor coverage solution. The commitments are progressing well. We've got visibility on the progress and the development of committed revenue profile up to -- actually up to 2030. And this commitment, as I said, are underpinned by operational plan, basically around macro sites and new towers. And this is in the context where actually the commitments satisfies the minimum need of investments when it's clear that in the market and in the industry, there is need to additional investments to provide better connectivity, 5G and to satisfy the need of a digital economy and digital society.

So clearly, strong and as usual, visibility on commitment and commitment growth profile. And in the context where the investments so far have been at the bear minimum and we have gone through and the operators are being going to a transitional year, our key customers are both in clear in a particular year. And that's why we think it's rational and it's our sensibility to think that the trend will improve. Again, for industry market need for better digital services as well as the specific situation our 2 key customers are being going through.

[Emilia Trudu, executive]

Roshan, concerning the lease cost efficiencies actually this is a strategic driver of our EBITDA after leases improvement over the business plan, we continue to execute either through land buyout and renegotiations, and we are reaping benefit of it.

[Roshan Ranjit, analyst]

That's helpful. Diego, if I may push you a little how many kind of anchor PoPs should we be thinking about then? Should we see an acceleration from the 2,000 for '24 when we're looking at the number for '25?

[Diego Galli, executive]

Yes. We have a plan of around 5,000 new PoPs over the 3 years, '24 to '26, and we are well on track with that.

[Operator]

The next question is from Maurice Patrick of Barclays.

[Maurice Patrick, analyst]

A question on the OLO growth, please. I mean in your slides you helpfully showed the number of OLO PoPs and revenues, you say in the slides about how FWA is soft and you talk about some of the smart grid being positive. But can I just -- and in the text, you also talk about why the revenues are down 6% being a lower project and install work. But can I just check we're not seeing negative as in disconnections from FWA? Is it more FWA is flat and it's just the mix at all that the net adds are coming from smart grids, for example, rather than FWA actually reversing going negative. Can I check that, please?

[Diego Galli, executive]

Thank you, Maurice. Yes, the OLO is a combination of different elements. There are growth engines related to the fact that we continue to do business with Iliad and we do a few hundreds of new tenants, which are the most valuable. And this is a growth engine, together with the -- basically the additional tenants the high volume but also low value additional tenants in mostly in the, let me say, IoT business. These growth trends are offset by some negatives basically around the discretionary services, which actually are going down, and that's particularly visible in this last quarter. And then actually, fixed wireless access is basically, at this stage, almost neutral in the sense that we -- the development plan with Open Fiber are slow. And overall, the fixed wireless access market is still soft. So it's not adding a particular positive contribution. So this -- what you have seen in the quarter, again in the last few quarters is the result of the balance of these 3 components.

[Maurice Patrick, analyst]

If I could just maybe just ask as a follow-up to that. When you think about the next couple of years and the growth in the OLO. I mean, do you -- the things like the EMFs, the radiation law changes, does that maybe change how you think about the growth potential in OLO from other PoPs? Do you see this kind of strong growth out there for identification? Or is that demand still there? Just your thoughts in terms of maybe next couple of years for the OLO side would be helpful.

[Diego Galli, executive]

Yes. We think there are the conditions to improve and to do better on the OLOs. So this is what we think we are working on considering that fixed wireless access is a technology, which is relevant to complement the fiber deployment, considering that the EMF can help also on the most valuable mobile tenants. So yes, we think there is room for improvement. The question is when this improvement will be triggered. But for sure, there is room for -- and there is room and need for a better trend.

[Operator]

The next question is from Andrew Lee of Goldman Sachs.

[Andrew Lee, analyst]

Thanks, Diego and team in terms of helping us understand the kind of phasing and your confidence in the network operator demand coming back. I just wanted to follow up on your -- what's driving that confidence in terms of the commitments you're seeing from the network operators. So just to give us confidence that this is just a timing/phasing issue you're facing in terms of this -- the demand driving revenue. And there's not maybe some underlying slacking that demand for whatever reason? And then just as a follow-up question, could you just help us understand how confident you are in the timing of the reacceleration in demand, specifically pertinent to your 2026 guidance? Yes, give us a sense of your confidence that this is going to be coming back in the coming quarters and, therefore, not posing any risk to your 2026 outlook.

[Diego Galli, executive]

Thanks, Andrew. Yes. No, I think we need to, from my side, to share that on the commitment side, commitments are -- and the commitment profile is solid, is progressing very well. As I said, it's underpinned by the new sites rollout mostly. And the -- and that's a material contribution to our growth. And if we think to the next couple of years, what is the committed growth is, at this stage, more than 50% of the overall growth. Then there is an additional significant bit, which is -- for which we have a clear line of sight based on programs already visible with clients. But there is then the third layer of basically 20%, 25%, which is, at this stage, more discretion and are related to the discretionary spend of the of the operators, our anchor tenants as well as the other customers. So this is where we think 2024 has been particularly soft for different reasons. We discussed about fixed wireless access.

But in general, it's an year of transition for almost all of our key customers. And if we consider the transitional year and the structural need of better digital infrastructure in Italy, we think that the growth and the committed growth with our anchor tenants that can be strongly complemented and complemented and topped up by the additional growth levers as we have done so far. Let me take the opportunity to mention how new services have been growing and we reported this quarter, 60% year-on-year growth. And this is a constant trend which has brought the new service revenue line basically doubling in 2 years. And we think that, that -- this trend will continue over the next years. So actually, different growth levers, committed well on track, discretionary spend with the opportunity to be better than what we have seen in 2024.

[Operator]

The next question is from Ondrej Cabejšek of UBS.

[Ondrej Cabejšek, analyst]

I've got maybe a question also related to the [Technical Difficulty]...

[Fabio Ruffini, executive]

Ondrej, apologies we can't hear the question. Hello? Ondrej, hi, this is Fabio, sorry, we cannot hear your question. Can you please repeat?

[Operator]

Excuse me, Mr. Cabejšek, we cannot hear you.

[Ondrej Cabejšek, analyst]

Hello, apologies. I had a issue with my headset, apologies for this. Can I ask your question?

[Diego Galli, executive]

Yes, please.

[Ondrej Cabejšek, analyst]

Sorry about that. So I wanted to follow up on the kind of target discussion around 2026. So with respect to inflation, say, we're obviously tracking below in 2024 and then say this continues with inflation kind of below the embedded targets in your guidance, call it, 1%, then we're looking at a deficit of EUR 10 million to EUR 15 million from EBITDAaL and obviously, there will be some offset on the lease side. But just how confident are you that the 2026 guidance where consensus is already at the very low end, I guess, if we continue to track at lower inflation around current levels, how confident are you that there will be some offsetting factors or that you are able to generate new revenues that we will get to the guided range in 2026?

[Diego Galli, executive]

Thanks, Ondrej. Yes, inflation in 2024 has been -- is about 1% versus the expectation of about 2%, so 1% of inflation, it's basically EUR 5 million EBITDAaL impact. We and the consensus and researchers see inflation to be higher in 2025 and onwards and to be around the 2%, which is what we have in our plan. And let me take the opportunity to share other thoughts on 2026. Because clearly, we discussed so far about 2 headwinds that we have seen in 2024. One is inflation and the other one is the OLO performance. The low end of 2026 guidance implies at CPI up 3% as cumulative, so 1% in 2024 and then 2%. Clearly, the development of commitments as committed, the continuation of growth in new service and a slight improvement in OLOs. Clearly, as we said, we keep on working with our customers' operational plans to assess and develop further opportunities both in core and adjacent businesses.

[Operator]

The next question is from Fabio Pavan of Mediobanca.

[Fabio Pavan, analyst]

Just a follow-up on new service revenues. Clearly, there has been an acceleration in quarterly growth in 2024. What we should expect for next year? And eventually, you were focusing on the vertical transportation. Are there any projects already ongoing issues? If you could give us some more color on this.

[Diego Galli, executive]

Thanks, Fabio. Yes, as I said, the new businesses have been growing well despite the overall market and context environment, as we said, in budget operator's limitations. And this is happening because the market demand is huge, the quality of indoor coverage in thousands of locations is not up to standards, which allow to do digital transactions, payments, authentication or the usual activities which people and companies do within -- with mobile, through mobile connectivity. So there is a huge, huge demand, which is fueling our growth together with our ability to capture and develop this demand with the operators as well as with the venue owners, location owners. And I think important projects have been delivered, let me remind the new underground -- the finalization of the new underground in Milan with the 5G coverage from the airport to the city centers provided by INWIT to all operators, all 4 operators.

We are fully engaged with the new project in Rome, Rome Smart City which is a blend of not only the metro, the new underground as well as IoT, WiFi, small cells, so a fully fledged digital and smart city project. So -- and these are on the transportation vertical, but also interesting projects as the Milan Exhibition Center, which is actually a large campus so where we do see and we are developing opportunities in the transportation verticals as well as on the shopping malls, on hospitals, museums and large campus, including companies and universities. So growth will continue at this pace, and we are on track to achieve more than EUR 100 million revenues by 2026.

[Operator]

The next question is from Milo Silvestre of Equita SIM.

[Milo Silvestre, analyst]

I have a question concerning capital allocation. Here, if you can remind us what are the priorities between shareholder remuneration, let's say, external growth or also acceleration of investments, I think, about land payouts. And then if you are considering investments or M&As in new verticals such as maybe data centers?

[Diego Galli, executive]

Milo, welcome. Thanks for the question. And clearly, we keep on growing EBITDAaL and keep on deleveraging, we are on track for the 4.1x leverage by 2026, and we will keep on -- so we are creating the financial flexibility, which is -- will be assessed in the framework of our capital allocation framework and leverage corridor. So the trend of our leverage creates financial flexibility, which is bigger than EUR 1 billion, and we will use it in the most accretive manner. As I said, consistently with our capital allocation policy and with the intention of not remaining under leveraged.

And so using the financial flexibility in the most accretive manner means assessing, as we did in 2023, the opportunities for further growth investments in business, which may be closer or a little bit closer to us as well as clearly assessing additional opportunities for shareholder remuneration. In 2023, we balanced the 2, investing more in new towers and new land acquisition as well as increasing the dividends and launching the first buyback plan. We will keep on considering the same approach, and we will share the proposed approach in March 2023 in our Capital Markets Day -- sorry, I said 2023, it's in March 2025, of course.

[Operator]

The next question is from Luigi Minerva of HSBC.

[Luigi Minerva, analyst]

It's a follow-up on the previous one. And particularly, I wanted to check when it comes to your capital allocation decisions, given that the current shareholder distribution pretty much absorbs all the free cash flow generation, whether at current rate condition, you would -- it would make sense for you to issue a bond in order to leverage up? And then at that point, I suppose, depending on the cost of funding, how will you benchmark the returns on a share buyback versus the signaling benefits from a higher recurring dividend versus, yes, potential growth investments as you were suggesting in the previous answer?

[Diego Galli, executive]

Thanks, Luigi. Yes, clearly, when assessing the options, the cost of financing is an element we have considered and we keep on clearly considering in the form of the different elements we consider. And on this front, let me also say which -- that it's rational to think that the macro environment and to expect the macro environment will keep on gradually improving. Clearly, what we see and think is that the options to use capital, the balance sheet flexibility will still be accretive also the, let me say, the current macro environment and rate interest. Then making the decisions of the allocation, clearly, we consider -- and the different tools of allocation. We consider different elements, including liquidity, share price and generally, we consider the dividend policy as structural lever, the buyback more flexible and tactical. But as I said, we consider the different element as we did in 2023 and we are going to do again for the update of the business plan that we will share in March 2025.

[Luigi Minerva, analyst]

Okay. Diego, that's helpful. And perhaps as I have you on the line, can I ask you still a bond-related question, but on a -- with a different angle. And I just wanted to check whether the 2026 -- the bond maturing in 2026 has any change in control clause that would limit actions from your leading shareholders, so Vantage and Ardian? So just theoretically, whether a take private scenario is limited by the covenants in the 2026 bond?

[Diego Galli, executive]

Yes, on that bond, it was issued in 2020, if I remember well, there is a put option in case of downgrade and change of control, that's the terms.

[Luigi Minerva, analyst]

Okay. So it wouldn't limit the actions of your shareholders? There is a put option? Is this correct?

[Diego Galli, executive]

Yes.

[Emilia Trudu, executive]

Yes.

[Operator]

The next question is from Usman Ghazi of Berenberg.

[Usman Ghazi, analyst]

Just 1 quick one, please. In your capital allocation framework when you're assessing opportunities that are close to core, I mean would just be interested in how your view is evolving on what is actually close to core, if over the few months that you've been considering this if your view has changed on that front? And just related to that, this -- the transaction of Boldyn on the Roma project, do you have an understanding of how much that will contribute and in what time frame, please?

[Diego Galli, executive]

Thanks, Usman. Yes, in terms of the growth opportunities, clearly, there are smaller or bigger things. The smaller are related to more land or -- and/or energy self-production or DAS projects, bigger ones may be related to RAN-as-a-service or edge data centers. All opportunities are around our core business, our core mission of being a shared infrastructure player, which provide infrastructure as a service in the wireless and digital framework. So as we said in the past, land, energy self-production, DAS projects eventually RAN as a Service and edge data center. The -- with regards -- yes, and the Roma 5G project is actually -- is an evolution of our business model is doing a relevant business with basically our customers, traditional customers as well as the municipalities of Rome.

And this is a project will contribute with double-digit revenues by 2029. So it's an interesting project, which will see us involved not only for DAS project within the underground, but also providing committed revenues for WiFi services as well as the opportunity to preempt the small cell demand starting also complementing the macro towers within micro coverage through small cell. So fully fledged projects, which shows the opportunities also for the future to keep on developing similar projects and expanding a little bit our core assets and core business model around our adjacent businesses again with focus on shared infrastructure with our -- for our key customer, stack operators as well as some venue owners or municipalities.

[Operator]

The next question is from Fernando Cordero of Banco Santander.

[Fernando Cordero, analyst]

In that sense, I would like to ask about the behavior of 1 of your 2 anchor tenants, after exiting from the -- in the case of Vodafone, after exiting in Spain, we have seen how the new owners of the former Vodafone operations are challenging the contract with Vantage. Vodafone has also agreed to sell the operations in Italy. How comfortable are you with your current MSA with Vodafone or in other words, which extent the risk of this renegotiation of the MSA with Vodafone in Italy is under control? And the second one, really, let's say, detail, just to understand the performance of the ground leases. We have seen a material increase in leases cost due to the OpEx, EUR 5 million in the quarter. Just to understand if that is a reclassification of the ground leases into short-term contracts? Or what is the reason for this increase in order to have the whole view on the performance on ground leases.

[Diego Galli, executive]

So Fernando, thanks for the question. No, I'm very -- and we are very comfortable with the MSAs for 2 main reasons. One is the contractual construction which is built around the concept of -- what the concept is the legal terms of all or nothing, which means that our customer either will stay on the full estate, on the full infrastructure or will have to exit from the full infrastructure. And I think that our infrastructure is a key asset in the country, is a key asset for differentiation and business growth. The second reason why we are comfortable is that the industrial logic and the industrial value, which the MSAs with TIM and Vodafone has been and keeps on creating in terms of industrial and financial value. So the concept of sharing the deals, our infrastructure with 2 tenants is a model which creates synergies which create efficiencies, which have been and are shared based on the MSA between the 3 players involved INWIT, TIM and Vodafone. So there are strong and solid reasons, legal and industrial and financial to be fully comfortable about our MSAs.

[Emilia Trudu, executive]

Concerning the increase in the OpEx it was related to one-off of all the claims on the ground leases. So it's a one-off timing.

[Operator]

The next question is from Giorgio Tavolini of Intermonte.

[Giorgio Tavolini, analyst]

I have 3 follow-up on the major strategic initiatives. I was wondering on RAN as a service, I mean, without spoiling details of your upcoming Capital Markets Day, is it reasonable to exclude any upside or I mean any announcement on these initiatives given that TIM new business plan will be presented in mid of February and faster the Vodafone deal will be closed in Q1. So I would exclude any real news on this front? The second point -- the second question is on data center. We saw many telco players that are looking to expand into data center infrastructure and regional data centers. So I'm curious if there is enough space for new entrants in this sector in Italy, and what are the potential returns you may see? And the last one on the Roma 5G initiative. We recently read about building network interest to cover other major cities in Italy. So I was wondering if you expect to replicate a similar target in other cities?

[Diego Galli, executive]

Thanks, Giorgio. On rev sharing is -- from our perspective, is an opportunity in the industry when thinking as sharing agreements and focus on dedicated areas, and we think that makes logical sense for the medium, long term to create additional efficiency in the overall industry. With regard to the data center, we think there is an opportunity to work together with our clients and the model, the business model is consistent with our business model of investing in shared infrastructure, again, open neutral also to our customers. Returns are potentially consistent with the -- clearly, with our policies and so well above our WACC. So it's an area which is worthwhile to consider and we think that there is a potential opportunity in the medium term.

With regards to the smart city and potential, we are following approaches according to the specific situation. So for Rome, there was an approach as a fully fledged project. In other cities, we are following the other approach. Let me mention, Milan, where actually we have been investing already significantly, and we have been doing premium locations. We have been doing the exhibition center, the new underground and there are also other initiatives undergoing there. There is a different approach, which is more based on verticals. So we have the capabilities and the commercial strength to adapt and adjust the different approaches according to the different situation. For sure, what we do see is, again, the confirmation that there is need and demand for additional digital infrastructure in the country and we are satisfying already and there is -- clearly, we are well placed to do more on this front.

[Operator]

The next question is from Rohit Modi of Citi.

[Rohit Modi, analyst]

For guidance, to 2026 guidance. I understand you have around EUR 130 million of -- on the lower end you have EUR 130 million of revenue increase that translates into almost EUR 120 million of EBITDAaL increase based on the guidance but just want to understand what will be the other underlying factors given -- assume you have a positive exit for 2024 working capital if there's a phasing effect that could have a negative impact going forward, plus you might have higher taxes. So if you can just give a bit more color around what is the bridge from '24 to '26? And secondly, on the new services, can you confirm the profitability on the new services similar to your core infrastructure business?

[Diego Galli, executive]

Yes, let me start from the second question on new services. The -- basically are driven by DAS indoor coverage solution, and we -- the returns are consistent with our approach of double-digit returns, IRR unlevered, and that clearly requires 2 tenants on the DAS and so that's the kind of return. The contracts are lower than, let me say, traditional tower contract is between 9 to 12 contracts for standard DAS but yes, as I said, the -- we achieved the double-digit return for the business.

[Emilia Trudu, executive]

Rohit, well, concerning the current free cash flow for 2026, the growth will continue to be driven by EBITDA after leases growth and with fairly limited recurring CapEx and positive net working capital, even though to a lower extent year-on-year, higher taxes according to the growing earnings before taxes and the tax schemes -- the phasing of the tax schemes in place and finally, by higher interest charges in line with the gross debt.

[Operator]

This concludes the conference call. Mr. Ruffini, I turn the call back to you for your closing remarks.

[Fabio Ruffini, executive]

Thank you, everyone, for connecting. Have a great rest of the day.

[Diego Galli, executive]

Thank you.

[Emilia Trudu, executive]

Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.