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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good afternoon, and welcome to INWIT's Third Quarter 2018 Financial Results Conference Call.
Michele Vitale, Head of Investor Relations, will introduce the event.
Ladies and gentlemen, good afternoon. Welcome to the third quarter '18 result presentation. Together with our CEO, Giovanni Ferigo, here we have our CFO (sic) [ Head of Business Support ], Mr. Andrea Balzarini, who will provide you with an update on the third quarter '18 operating and financial performance. As usual, the presentation will be followed by a Q&A session.
Now you can take note of our disclaimer policy that you should now see on Slide 2. Let me remind that the reported data refer to the financial statement at September 30, 2018.
Let me guide you through the presentation by starting with Slide 3, where you can see that INWIT keeps following its growth path. Internal result, as you can see on this quick overview, the third quarter '18 find us on track on both the operating and financial spheres. The tenancy ratio increased up to 1.86x. Likewise, revenues grew by 8% compared to the third quarter '17, fully aligned with our mid-single-digit target. The EBITDA shows another positive step-up with a 14% growth in this quarter compared to the same quarter of 2017, again, aligned with our low teens growth target. Finally, recurring free cash flow reached EUR 28 million in the quarter, confirming a solid growing trend of cash generation.
Now I leave the floor to Mr. Giovanni Ferigo, who will guide you through the main highlights of our third quarter results. As usual, the Q&A session will follow the result presentation. [Operator Instructions]
Giovanni, over to you.
Thank you, Michele. It's a pleasure to be here to talk about our quarterly results.
INWIT keeps on being on track to deliver 2018 profitability performance, which will exceed expectation, which were commented just a few minutes ago, at the beginning of the year.
September has been the month of the 5G kickstart for Italy with operators setting a new world record in the frequency -- frequencies auction and now working with us on the design of the future deployment on their network. This will give us additional business opportunities in the near future, looking at the densification of the macro and micro coverage, edge computing and IoT.
What you can see in Slide 3 is that revenue and EBITDA trends are both fully aligned with our target. In fact, we have been able to deliver another quarter of positive results, and we positioned the company to be ready to benefit from both the 2 biggest trends in the sector: market consolidation and the 5G launch. Let me start from Slide 5 dedicated to the revenues trend. Another mid-single-digit growth, as such, the result is being delivered in a transitional period. After the auction, 5G became the top priority for the Italian mobile operators. Our customers are defining their 5G deployment plans, and consequently, they are rethinking the 4G network deployment.
As you can see in the slide, our third quarter 2018 total revenues account for EUR 95 million, and we can split into 3 main clusters.
Revenues from the Master Service Agreement with TIM related to the sites inherited through the IPO, 1% up from the third quarter of the last year, due to inflation increase as laid down in the contract. Revenues from other operators and others totaled EUR 25 million in third quarter. They derived mainly from OLO tenants, our MNO customers and fixed wireless access operators.
Here we had an expected negative impact from Wind Tre, since the merger of the formally separate Wind and Tre networks in a single, integrated infrastructure caused the loss of some contracts. But we also started to accrue revenues from the Portuguese experience as industrial partner in managing the asset. And so the company has once again demonstrated the ability to generate new revenues in order to counterbalance any negative downturn.
Revenues from new sites and new services amounted to EUR 5 million, showing a significant 4x year-over-year growth. This result is overall derived from new sites built and new business opportunities such as small cell and backhauling.
Summarizing, total revenues grew by EUR 7 million from the same quarter over last year. That is an 8% increase.
Going to Slide 6. You can find another view of the structure for our operating expenses. The total OpEx amounts to EUR 40 million, and its trend can be better explained by breaking down the total amount in 3 components. The most important one is ground lease costs. Its range show a cost on decrease ever since the IPO. This result has been achieved by reducing the ground lease costs through renegotiation and land acquisition despite increasing costs related to the newly built sites and [ small cells ]. Other operating expenses had a typical up-and-down trajectory. This quarter's was impacted by some costs related to the startup of DAS and some other minor costs, mainly falling within G&A. The third component is personnel costs. We are setting up a new organization to reinforce our commercial strength by acquiring or developing competencies to reinforce our ability to enhance our asset leveraging on our expertise and first-mover advantage. All in all, the OpEx amount is just a bit tighter than the same quarter of 2017. In fact, while lowering the lease costs, notwithstanding the increased number of sites and the costs related to new business, we have been able to reshape the company profile. Moving to Slide 7. Let me show the main industrial KPIs that explain our performance. On the left, you have revenues and the costs on the right.
Focusing on revenues. The average revenues per sites confirm a growing trend, reaching a sound 7% growth year-over-year or plus 23% since the IPO. The number of [ portfolio ] presence other than TIM grew once again. We grew mainly thanks to the increasing fixed wireless asset component. This trend is considered to remain stable over time, thanks to the growing demand for fixed and wireless asset services and the build of the new players. Consequently, the tenancy ratio further increased, reaching 1.86x in line with our full year target. In this regard, it's important to stress the entrance of Iliad among our tenants. To be precise, INWIT has not yet signed the total framework agreement to regulate the future collaboration with Iliad. But Iliad has already entered our customer base, thanks to the possibility of replacing Wind Tre tenants, as agreed between their 2 companies.
It has to be, however, noted that the full speed in the collaboration with Iliad is yet to be reached. And from 2019 onwards, we expect the economic impact to become visible in our balance sheet.
The charts on the right show the results achieved in terms of renegotiation and land acquisition and their impact on lease cost per sites. As you can see, we continued our renegotiation and land acquisition activity, reducing our average lease cost per sites below EUR 11.6 thousand. Even if it is becoming increasingly difficult, we are still succeeding in renegotiation contracts or acquiring plants. With the Slide 8, I would like to recap our achievements in the new business deployment. In terms of third quarter numbers, we can claim a triple-digit growth in all the 3 business. We almost doubled the new sites built in a year. We multiplied by 3 times the amount of small cell and DAS deployed and multiplied by 9 times the amount of backhauling links.
In term of new sites, we deployed more than 200 sites over a 1-year period, reaching 450 built sites and on track to reach the 500 sites built by the end of the year. The small cell KPI reflects our change in deployment strategy, focused on building multi-tenant 5G radio small cells instead of the current 5 -- 4G mono-tenant ones.
The increase, as you noticed, mainly derived from the DAS technology, which was already multi-tenant since the beginning. In fact, the tenancy ratio for the operating multi-tenant remote units today is already greater than 2x. On backhauling, too, we remain committed to our target. As usual, the majority of the effort is backloaded.
All in all, we can say that the reason behind our investment strategy are still there if not enhanced by the recent news. Continuous increase on mobile data traffic, driven by new application and video, growing up to 50% per year. Mobile operators are pushing data demand by increasing the bandwidth. Today, we have offers in Italy that includes 30, 40, or even 50 gigabytes per month.
Data traffic continues to be generating mainly indoors. More than 80% of the mobile traffic is indoor. Massive MIMO technology, not be able to enhance the spectral efficiency. And today, in 85% of cases or in the case of indoor coverage is managed by an outdoor antenna. With 900 megahertz can do, but with new 5G frequencies, it's very, very difficult.
So we can expect a fine-tuning of the outdoor macro coverage in term of the amount of tower, but towers will be lost 5G antennas. These are bigger and heavier, leading to revenues uplift.
Strong demand for mobile coverage, mainly in indoor environment with small cell and DAS. There are several studies on demand for it, estimating a number of small cell from 10x up to 25x the number of existing micro sites. This implies a big chance for a tower operator that is leader in Italy in small cell and DAS deployment.
Need of the advanced fiber optic connectivity [ recovering ] for 100% of the sites due to the fact that the RU link could not to be enough for the 5G. Slide 9. On Slide 9, before leaving the floor to the financial aspect of our third quarter results presentation, it's important to underline debt. First, we delivered the 14th growing quarter in a row. Getting used to it should not make us forget that such a result should not be taken for granted. Whatever happens around us, INWIT keeps on demonstrating its ability to deliver an outstanding profitability while keeping our leverage profile. Second, Portugal. Our approach in finding new business lines is now evident with the Portuguese experience, where we started monetizing our ability in managing tower costs also abroad. Third, strong financial periods. Fourth, we do confirm our planned guidance.
Finally, let me highlight how 5G deployment could provide positive impact on us. As everybody here knows, MNOs spent a relevant amount for the 5G spectrum auction and are now required to speed up the net deployment in order to have a return on investment. This will translate in more demand in existing towers due to the 5G upgrades of existing assets network with bigger and heavier antennas. Demand for new sites and small cell to meet densification requirements. Presence of 5G vertical use cases, generating new needs or even new customer asking to be also on our towers.
IoT. Today is just the beginning and expected to expand. Smart cities will take off. The drone industry is something we look at it with interest. Now before leaving the floor to Andrea for the financial aspects, let me highlight that while I see big opportunity for the future developments, we are focusing on keeping the leadership in our regions' organic business.
Andrea, please.
Thank you, Giovanni, and good afternoon to you all. To begin with, let me review with you the 9 months reported results and the main KPIs.
Revenues stand at EUR 284 million. And with OpEx at EUR 122 million, we reached a reported EBITDA of EUR 162.3 million. Net income amounted to EUR 105.7 million, and our investments in the quarter amounted to EUR 36.2 million. Regarding cash flow. The solid performance in EBITDA drove recurring free cash flow to reach almost EUR 130 million. In just 3 quarters of 2018, we did more than in the entire 2017 full year.
Analyzing this data more in detail, it is worth highlighting, first, our solid top line performance, with revenue increased at almost 8.5% year-on-year; secondly, OpEx decreased despite some expenses to develop new business lines and hire new people to add them, thanks to a 3.4% decrease in ground lease costs; further, a remarkable EBITDA increase of almost 17% year-on-year. Our reported net income for the period totaled EUR 105.7 million, which means 15% growth compared to 9 months in 2017.
Moving on to Slide 12. Let me show you our historical economic performance from 2015 to present day. As you can see, our EBITDA kept growing constantly. We moved up from EUR 108 million in 2015 to the current EUR 162 million, which means plus 50% since the IPO and, as we just said, plus 17% year-on-year.
Our EBITDA margin constantly increased from 45% in the first 9 months of 2015 to 57% now. The explanation is quite easy. Given that our cost structure mainly consists of fixed costs, revenues from new tenants directly become EBITDA, therefore allowing us to increase margins.
To better understand these achievements, let me highlight how strongly correlated our reported EBITDA margin and our tenancy ratio are. As shown in the ratio growth during our equity story, moving from 1.6x to the current 1.86x. These EBITDA achievements are due to strong commercial effort in both our traditional and in the new business. And this effort is visible in our investments, which increased from EUR 30 million in the first 9 months of last year to EUR 36 million in the first 9 months of 2018, with 91% of the CapEx dedicated to new business development. Obviously, the CapEx performance reflects a revision of the path for small cell deployment already announced while releasing the first half results back in July.
Looking forward, considering our plan and MNO's willingness to invest in the new 5G networks, I'm sure we will continue on our investment path. In terms of recurring free cash flow, in these first 9 months, we reached EUR 130 million, plus 58% year-on-year. It has to be noted, however, that such comparison also benefits of some [ export ] taxes, which were paid in 2017.
On Slide 13, you can see our 9 months reported net income, totaling almost EUR 106 million and showing a year-on-year increase of 15%. This increase in net income mainly stems from an 8% increase in revenues and 17% in EBITDA. 9 months EBITDA margin stood at class-leading 57%, and EBIT margin achieved a remarkable 53%. Concerning taxes and interest charges. As the slide shows, P&L taxes in the 9-month period totaled EUR 42 million with an implicit tax rate of 28%. And interest charges totaled about EUR 3 million.
On Slide 14, you can see our cash flow at the end of September. The CapEx rollout is in line with our investment plan. In these 9 months, we invested EUR 36 million, mainly dedicated to our expansion activities such as land acquisition, new sites, backhauling and small cells deployment. The largest share has been dedicated to land acquisition, while on small cells, part of the effort has been postponed to 2019 and 2020. In terms of cash taxes, we paid EUR 26 million.
Coming to working capital. We can see the typical fluctuating trend. This time it was negative for roughly EUR 4 million as it was also a year ago. In fact, the early trend so far can be confirmed as neutral. Thus, we delivered a positive cash flow to equity amounting to EUR 95 million, which means a 60% growth year-on-year. Finally, during this 9 months period, we achieved recurring free cash flow of roughly EUR 130 million, almost 60% more than a year ago, as we already noted.
On Slide 15, the last slide, we provide you with an overview of our balance sheet at the end of September. At the end of last quarter, our net financial position amounted to EUR 65 million, and the current situation leads to a net debt-to-EBITDA ratio in the area of 0.3x, leaving our financial leverage almost intact, which could play a positive role in case of M&A. Lastly, despite the generous dividend distribution in May, the fully distributable reserves stand at EUR 794 million at quarter end, corresponding to approximately EUR 1.3 per share.
Back to Michele for the next portion.
Andrea, thank you. We can now open the Q&A session with our CEO, Giovanni Ferigo; and our CFO (sic) [ Head of Business Support ], Andrea Balzarini, will answer your questions. [Operator Instructions]
[Operator Instructions]
First question comes from Mr. Simon Coles of Barclays.
First, on the tenancy ratio. And linking this back to the spectrum auction. Obviously, we saw a bit of a slowdown in the tenancy ratio earlier this year, but it started to pick up again in 3Q. I was just wondering, are you already having discussions with the operators about how to deploy some of the spectrum that they have won? And could that lead to a reacceleration in the momentum on the tenancy ratio?
Okay. As you said, the 5G auction in Italy is the most expensive worldwide. And now the MNOs are defining the priority of the development and the rolling of the new network. We are working with them to define the priorities and the launch of the first 5G services.
Next question comes from Mr. Fabio Pavan of Mediobanca.
Giovanni, you were talking at the beginning of your presentation about not just 5G but also M&A as potential driver in the space. And we have learned some press about Vodafone and Wind Tre potentially deciding to review the strategy on the tower. So my question for you is, do you have something to share with us? Do you think the profits may start in the near future? And eventually, as we have also learned, Wind Tre in particular may decide to sell a minority stake. Would you have an interest also for just a minority stake in this portfolio of towers?
Okay, thank you. I start from the last question. We are not interested to participate to the minority of the company of Wind Tre. We don't consider interest in this asset. For the other questions, okay, in Italy now, there is, let me say, a strange situation because we have 4 MNOs, finally, 4 tower operators that are INWIT, Cellnex, Wind and Vodafone. So the market will go through a consolidation and I -- underlying that, INWIT will be really -- a very important actor. And let me say, the Vodafone towers are really more and more interesting. We are very interested in it.
Next question comes from Mr. Albert Pranger of Kempen.
I was wondering, what is the current status with regards to the land acquisitions? Because in the slide, you do show that you currently have 4,800 sites renegotiated and acquired. I was just curious, what is the current split between sites you acquired and those renegotiated?
Okay. Let me say the answer is limited -- just not in the number, but cost reduction is and remains our daily obsession, [ nightmare ]. Land acquisition is one of the levers to take this, and it remains the policy of the company. So depending on the possibility, we manage this issue.
That I understand, but I'm trying to understand where you stand currently with regards to your 2020 goal of acquiring 1,500 sites.
I have to say that this aspect is part of a broader statement about us being in line with the guidance we gave to the market. So this aspect and the ongoing activity, which is bringing, I would say, visible results also in the third quarter keeps on being in line with the expectations and delivering the kind of contribution to cost reduction that we wanted it to have.
Next question comes from Mr. Guy Peddy of Macquarie.
Yes. Can you just elaborate a little bit more on your small cell strategy? You highlighted that it actually slowed down or is slowing or being deferred a little bit. Can you just expand on that and what that means for your CapEx and your targets going forward for small cells?
Okay. We are postponing the deployment on a lot of small cells because the small cell available in the market now are only mono-tenant and 4G-ready. Now in a few weeks, a little months -- a few months, will be available the 5G-ready and multi-tenant, multi-operator small cell. So let me say that pressure there is in Italy in the development of 5G services is, let me say, is very -- it's a very good opportunity for us to install the 5G-ready small cell for in the market to keep for -- as a first mover, this new opportunity that is coming out in the market. So in terms of CapEx, we are buying in this moment the first prototype of new small cell. We are testing it and we are ready to roll out depending on demand of the MNO.
Next question comes from Mr. Giles Thorne of Jefferies.
I wanted to come back to the question on consolidation, please. And I wanted to play devil's advocate for a moment. Has the fact that TI invested far more than they were originally anticipating in the 5G spectrum, basically now officially closed the idea, close the door for the idea of INWIT bidding for Hutchison towers or Vodafone towers due to leverage constraints? And if it does close the door to you bidding for those towers, does that then not close the door to INWIT participating in any form of industry consolidation?
No. Absolutely, no. We are looking for each interesting industry opportunities that are in the market, and Vodafone is one of that.
But if I could challenge that. The numbers that appeared in the public domain out of Hutchison was a EUR 1 billion figure, a EUR 1 billion figure for their towers. So do you have EUR 1 billion that you can spend on M&A? Do you have that mandate from TI?
Okay, let me say now, we are waiting for the, let me say, public offer of these opportunities. At the right moment, we will analyze these opportunities. That could be Vodafone or the majority of Wind tower. But of today, formally, we have not -- no news.
Okay. But you think TI will allow you to lever up to buy towers?
Yes. Absolutely, yes.
Next question comes from Mr. Bhavish Patel of Morgan Stanley.
The Italian government took EUR 6.4 billion (sic) [ EUR 6.5 billion ] out of the Italian wireless for 5G spectrum, what do you foresee the delay will be to Italian operators? And furthermore, how do you see 5G investments proceeding in Italy now?
Okay. Let me say that the Italian government kept the EUR 6.5 billion, not EUR 6.4 billion. So it's really a large amount of money. And this, let me say, will push, in my opinion, all the MNOs to start as soon as possible in the rollout of these new services, new network to gain the return on investment because, let me say, the use of the spectrum will be allowed for 19 years. So they have to.
Next question comes from Mr. Luigi Minerva of HSBC.
It's actually one question and one follow-up, if I may. The question is about the OLOs and others revenue. So in Q3, you delivered 23, but then if you exclude Portugal, it would be 21 from 22 last year in the same quarter. So can you maybe tell us a bit more how you see revenues coming in from this portion of the business in the coming quarters as Wind and Tre will integrate more and more their network? And so in other words, can you estimate the amount of revenue loss that you may be -- you may have in the coming quarters? And the follow-up is on the M&A front. You said you were not interested in having a minority stake in a theoretical newco that Wind Tre may create for those towers. I wanted to ask you, what about having a majority stake? So if you were to be the controlling shareholder in this newco, would you be interested?
It's Andrea speaking. I will take the part on the OLOs and other revenues and leave it to Giovanni for the rest of the question. First of all, I just wanted to toss a few numbers on the table. EUR 24.8 million is the figure for OLOs and others revenues in the third quarter, including Portugal. EUR 23 million is already net of Portugal, okay? So you shouldn't take another EUR 2 million of the EUR 23 million. So this, obviously, provides for a kind of trend which suffered from the issues Giovanni was describing regarding also the Wind network integration and what is going on with the new 5G deployment that operators will need to start thinking of, but leaves us on a trend, which is comfortable and that we expect to take up steam again in the near future, okay? So it's going to be just a transitionary effect. It will not be entirely limited to the third quarter, but there is nothing, I would say, worrying about the trend and nothing worrying about its ability to pick up steam.
About the Wind towers. Okay, we are interested in the majority of this asset because there are a lot, in my opinion, of synergies to be obtained. But let me say the Vodafone tower are more sexy, okay, from the industrial point of view.
Next question comes from Mr. Ben Rickett of New Street Research.
I just wondered if you could give any update on the CapEx guidance you've given for the next 3 years. You said EUR 300 million between 2018 and 2020. And currently, CapEx spend is quite a bit below that rate. So when do we expect CapEx to pick up? And can you give any reasons why it's been slow to pick up so far?
About CapEx. Okay, let me say, I underlined many times that the small cell, we -- let me say, we stopped the small cell and new DAS development and rollout because we are waiting from, let me say, the vendors of the new ones that are 5G-ready. So for the next year, the -- we will invest a lot of money in small cell and DAS and in optical fiber connectivity that will permit to our towers to be totally, let me say, compliant to the needs of the mobile operators in terms of data consumption. So we confirm absolutely our planned guidance in terms of CapEx.
Next question comes from Mr. Florian Henritzi from Bank of America.
I have a question around your tenancy yields. So in line with what you mentioned earlier, operators starting to talk more and also trialing new technology such as massive MIMO and 5G in general. Could you elaborate a bit more maybe with some broad numbers on the total opportunity you see in charging additional fees to your tenants as MNOs will likely increase the space and also the weight in your towers? Any thoughts around that? And maybe also potential time line will be appreciated.
Okay. The 5G antennas are bigger in area. The MIMO technology will oblige us to reinforce and to renew, let me say, our sites. Now in Italy, the mobile operator are defining the priorities in terms of coverage of the important sites to where to start the 5G network. And so we are, let me say, working with them to define and to understand the priorities. In term of business and services, I think that for the first half of next year, we will see the first installation and the new -- so the launch of the new 5G services. And I'm really convinced that more than the outdoor sites, we will be engaged a lot in the indoor coverage with the small cell and DAS. I think that in the first half, we will see really, and we will touch the 5G deployment and we will keep each opportunity that will come out.
Next question comes from Mr. Andrea Devita of Banca Akros.
Basically, I wonder whether with the new 5G equipment, apart from -- and the timing of the rollout, is there also any difference in terms of economics for the towers? So you used to say that the unitary CapEx was EUR 10,000 to EUR 20,000, and the unitary revenues was EUR 3,000 to EUR 7,000 per annum. So I wonder whether these are more expensive and can have also higher yield.
Okay. The -- let me say the new equipment for the 5G in terms of the outdoor environment needs more investment by us. And so normally, CapEx will need revenue. And so I think that the 5G will permit to us to gain some revenues more because we have some ideas that will renew totally the sites where the 5G network will be installed.
It was -- I was meaning the small cells. Sorry.
Oh, small cell.
Small cells. Yes.
Small cells, okay. About small cell. The indoor traffic always is growing up. The unlimited offers in Italy, there is a lot of unlimited in terms of data consumption, need some dedicated coverage in my opinion. The number of small cell that we will install, let me say, finally, will reduce the cost curve that -- now the cost of the 5G-ready antenna for small cell is higher, but when the quantity will be interesting, the prices will be the same of -- only 4G and mono-tenant small cell.
Okay, Andrea. Thank you. This was the last question. Thank you for your interest in this conference call. We were pleased to have you in this conference call. Have a great evening. Bye.
Ladies and gentlemen, the conference is over. Thank you for calling.