Infrastrutture Wireless Italiane SpA
MIL:INW
Earnings Call Analysis
Q3-2023 Analysis
Infrastrutture Wireless Italiane SpA
The company reported a modest decline in its net financial position to EUR 4.3 billion, marking a step towards reducing its leverage. Net debt to EBITDA improved from 5 to 4.8, a 0.6 improvement compared to the previous year, reflecting a sound and option-rich balance sheet. Leverage is targeted between 5 and 5.5, offering room for capital deployment at attractive returns. The existing debt profile is efficient, with a low cost of debt at 2.5% and a significant portion fixed, providing stability against market fluctuations.
The updated assumptions for 2023 align with the 2026 business plan targets, which remain confirmed. The company is on track but anticipates revenues on the lower end of its guidance range due to selective investments from operators and slower development in fixed wireless access. Despite these market dynamics, INWIT has managed a robust EBITDA and EBITDAaL margin, growing by over 2 percentage points year-over-year and operating cash flow at the higher end of its guidance range. The strategic focus on cost control and efficient capital expenditure reinforces the company's solid performance. With an eye towards 2026, INWIT is on course to achieve a striking 76% EBITDAaL margin.
INWIT maintains a resilient and inflation-proof business model, supported by towers' demand trends independent of the economic cycle. The company continues to invest in asset growth, such as site expansion, DAS (Distributed Antenna Systems), and land ownership, which is projected to yield double-digit IRR. These strategic investments maximize sharing economics and fortify INWIT's leadership stance. Furthermore, the company actively returns value to shareholders through a new dividend policy and a share buyback plan, keeping a balanced financial position with leverage currently trending down below 5x.
Fixed wireless access is considered a formidable option to fiber in rural areas, experiencing a temporary decline due to operators' refocus on corporate strategies. Nevertheless, an uptick is anticipated in the ensuing years. Meanwhile, 5G investments have been sluggish, chiefly because of the financial pressures and budget constraints in the industry. However, the company expects a forthcoming surge in investments to expedite 5G rollout and the quality of connectivity, leveraging 5G's efficiency in managing rising data consumption. These anticipated investments in digital infrastructure present a favorable market outlook with the potential to stimulate revenue growth.
While inflation has placed constraints on the discretionary spend of operators, INWIT remains shielded from its impact, thus supporting its growth trajectory. The company also expects that a potential reduction in inflation could free up more resources for operators to invest in network enhancements. Additionally, regulatory processes such as the possible raise of environmental electromagnetic frequency (EMF) limits may encourage the accommodation of more tenants on existing sites, beneficial to INWIT's tenant addition strategy.
INWIT remains vigilant and prepared to capitalize on industry opportunities, consistently assessing scenarios to boost growth either organically or through acquisitions. The investment policy demands a minimum threshold of double-digit returns, ensuring commitments to capital efficiency that bolster organic growth prospects. With these efforts, INWIT upholds its readiness to respond to shifts in the competitive landscape, always considering the potential for further shareholder remuneration in the absence of compelling investment opportunities.
INWIT recognizes that while the trajectory of new site additions aligns with current coverage obligations, this sits below the ideal number required to deliver superior 5G standards throughout Italy. The company acknowledges that further acceleration in infrastructure build-out may be necessary for operators to meet their 5G coverage commitments and offer superior connectivity, indicating potential for greater collaboration and revenue opportunities in the future.
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Good afternoon, this is the Chorus Call conference operator. Welcome and thank you for joining the INWIT Third Quarter 2023 Results Conference Call. [Operator Instructions]At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Head of Investor Relations and Corporate Development at INWIT. Please go ahead, sir.
Thank you. Good evening, everyone. Thank you for joining us. With me today are Diego Galli, INWIT's General Manager; and Emilia Trudu, Chief Financial Officer. Before we begin, please allow me to draw your attention to the safe harbor statement on Page 2. Following a brief presentation of the quarterly results, we will open the floor to questions.Over to you, Diego.
Thank you, Fabio and welcome, everyone. Third quarter results show continued progress in industrial and financial metrics as we execute on 2026 targets. Anchor MSAs with committed growth and CPI protection are confirmed as the main growth driver. Indoor coverage projects are on track to expand 50% year-over-year.Cost efficiency supports margins and cash flow and a balanced financial position allow us to manage the current rate environment. A resilient performance in a scenario for Italian telco industry, which is still challenging and in continuous evolution and presents strong long-term potential for infrastructure players.Demand for new sites intensification of the network is solid and there is a growing need for connectivity, outdoor and indoor. At the same time, clients look for greater efficiency in OpEx and are mindful of discretionary investments. This can be an opportunity for us to leverage our model of deploying CapEx at attractive returns based on sharing economics. When doing so we have a clear advantage in 2 Anchor clients and a growing role of [ neutrals ].Execution so far in the year, when looking at 2023 targets, implies that revenue growth is at the low end of the range, discounting market dynamics. Margins are slightly better than expected and cash flow is trending towards the high end of the guidance range.Moving to the key figures of this quarter on Page 4. We are growing at a consistent pace since the beginning of the year. Revenue in Q3 are up in the low teens. Anchors up nearly 13%, OLOs slightly up with resilient volumes offset by lower-added services year-on-year and a mixed focus on IoT. New services are up materially at plus 40%, with DAS gaining material scale. OpEx and lease continuously optimize, leaning EBITDA and EBITDA after lease to a further expansion and we are on track for a 76% EBITDA margin by 2026.Cash flow generation was solid. We reduced leverage by more than half a turn year-on-year. INWIT is one of the most balanced tower companies in terms of capital structure, with no near-term refinancing needs. From an industrial delivery perspective, the rollout of new sites was strong, at more than 200 new sites in the quarter across 3 BTS programs, MSA, Next Generation EU and Open Fiber.New PoPs continue to be above 1,000 per quarter, with the majority being from Anchors. Real estate transactions were nearly 500, confirming our focus to increase land buyout. So a quarter of further progress along the trajectory of the business plan and of a resilient performance in an evolving market context.Now I will turn it over to Emilia for a more detailed review of the results. Thank you.
Thank you, Diego and good evening, everyone. On Page 5, in site activity, demand is solid. The Italian market needs to complete coverage and improve densification, both in urban and rural areas. As for our business plan, we expect a market opportunity of about 8,000 new sites by 2026. 2023 is a significant ramp-up for INWIT, where we are delivering MSA commitments and initiating 2 new BTS programs, the 5G Next Generation EU and Open Fiber.Q3 confirmed a rate of more than 200 new sites per quarter. We added nearly 800 new sites over the past 4 quarters, growing our network by 3% for a total of nearly 24,000 sites as of today. A very effective use of capital because of 200 PoPs committed to every new MSA site and a double-digit IRR. Supportive demand and consistent ability to deliver allow us to improve our target for new sites in 2023 from about 800 to about 850, more than 10x the new sites we delivered in 2020.New site activity directly supports Anchor PoPs development, which we can review on Page 6. 620 new PoPs with TIM and Vodafone in the first quarter for a total of more than 40,000 and 7% growth year-on-year. This is in line with contractor commitments based on an industrial need to upgrade to 5G and drive industrial synergy with network sharing and optimization. We added about 2,700 new PoPs over the past year, in line with expectations. Even in the current industry context, mobile infrastructure investments are a priority and penetration of standalone 5G keeps on growing.Moving on to OLOs, on Page 7. Hospitalities with other clients are up 15% year-on-year to more than 13,000. We added 400 new PoPs in the quarter, which is a satisfactory level in the current market environment, but still below the expected run rate. INWIT's business model is based on hospitality services to multiple client categories and technologies, from mobile to FWA and IoT. MNO volumes are limited by the ongoing remedies dispute at European level. FWA demand is still soft, but the structural coverage needs of rural areas are coherent with a positive future growth outlook.IoT clients show a good trend, in particular the utilities segment, where towers are used towards gateways to monitor real-time consumption data. In short, a fairly resilient performance, although with mixed focus on IoT.Next, on Page 8, we'll review net new services. New services were up 40% year-on-year in the quarter to nearly EUR 12 million. This line of business is expanding rapidly. We are on track to more than double its revenues in 2 years, from EUR 20 million to about EUR 45 million expected for 2023. Key driver is the increasing penetration of the indoor coverage market through DAS, Distributed Antenna System and highway tunnel connectivity. We can count on the best assets in the market, nearly 8,000 remote units and 1,000 kilometers of road tunnels.Multitenant solutions set provide connectivity and capacity in indoor and high traffic locations across multiple verticals. So far in 2023, we have extended our help sets to important locations, in particular in the hospitality, leisure and public admin sector. There is also growing opportunity in urban transportation with new or upgraded metro lines. Location owners see a clear opportunity with us, better performance, user experience and security as compared with Wi-Fi. Operators in this market context are investing selectively, but nevertheless, they were an important driver of the results so far in 2023.Moving on to the tender on Page 9, quarterly revenues were up to EUR 242 million, plus 12.6% year-on-year and more than EUR 4 million as compared with the previous quarters. The top line was supported by CPI leans of the MSAs and new services being up materially as mentioned.As for the previous quarters, on a year-on-year basis, we booked fewer other revenues, such as installation, maintenance and technical services, which limited the overall trend in our second revenue reporting round.With regard to costs, OpEx were about stable year-on-year, despite high revenue growth. This reflects a comparison base in Q3 2022, which included one-off severance costs and the expected phasing of maintenance during 2023. EBITDA margin was above 91% improving year-on-year. Below the EBITDA line, we booked higher D&A in line with our CapEx cycle, higher interest driven by the variable portion of our debt position and lower taxes in line with the phasing of the tax units.Net income growth was in line with EBITDA at more than 13% to EUR 85 million. [Indiscernible] costs were only marginally higher despite a growing asset base and inflation. As efficiency efforts continue, our EBITDA after lease margin is expanding to about 72%, slightly better than initially expected.On Slide 10, we discuss cash flow. Cash flow generation in the third quarter continued to be solid, with recurring free cash flow at about EUR 154 million. We had limited recurring CapEx and no taxes besides an efficient risk-free state and another quarter of positive working capital due to ongoing efficiency actions. Financial charges discount the expected timing of coupon payments, a slightly higher debt position year-on-year and higher costs for the valuable portion of debt. CapEx cash-out was more than EUR 50 million in the quarter, up year-on-year in line with expectations and mostly focused on new sites.In Q3, we also brought back approximately EUR 56 million worth of shares in line with expectations. Our business model is structurally highly cash-generative because of solid and visible revenue provision, margin expansion, efficient management of CapEx and net working capital. This allows us to have greater visibility into the current free cash flow generation on the full year 2023. We do expect to reach the high end of the guidance range of EUR 605 million.Next, a review of net financial position and leverage on Page 11. Net financial position was slightly down for second quarter to EUR 4.3 billion, supporting leverage reduction. Net debt to EBITDA came down from 5 to 4.8, or 0.6 better year-on-year.INWIT balance sheet presents a relevant optionality. Our target leverage range between 5 and 5.5 implies material for power. In the coming months, we will continue the buyback program and look for opportunities to deploy more CapEx at attractive returns. INWIT's debt profile continues to be efficient. Cost of debt is low at 2.5% and more than 75% of debt is fixed.The first material refinancing need will be a 2026 bond for EUR 1 billion, given that the term loan expiring in 2025 is a floating-interest rate assumption, so the current markets are not a material heavily.With this, I thank you and I leave the floor to Diego.
Thank you, Emilia. On Slide 12, our updated assumptions for 2023 in the context of our 2026 business plan targets which are confirmed. We are executing at pace on all fronts. However, market dynamics in terms of more selected investments by operators and slower development of fixed wireless access mean we are tracking in line with the lower end of our revenue guidance range for 2023. Cost-control continues to be effective resulting in a better-than-expected EBITDA and particularly EBITDaL margin, which is growing by more than 2 percentage points year-over-year.At cash flow level, we are executing consistently with the high end of our guidance range, for which we have a good visibility. EBITDA expansion, lease cost control, low recovering CapEx and a positive net working capital are the main drivers of a target improvement. In summary, a solid performance built on the activation of several growth levers, both on revenue and costs.Next, on Page 13, a few final thoughts from my side, just over a year into the new job, highlighting the strength of our business model also in the current scenario. Towers are largely not impacted by the economic cycle and can count on protection from inflation and strong and structural demand trends.INWIT has distinctive features in its best assets and MSAs, which mean a growing and visible cash flow generation. We invest a double-digit IRR to grow our asset base in terms of more sites, more DAS and more land ownership all well on track, maximizing sharing economics and strengthening our leadership position.Also, in the new business plan, we have a clear focus on shareholder remuneration, executing the new dividend policy and the buyback plan in the framework of a balanced financial position. On top of all this, we have optionality from balance sheet deployment, prioritizing investments in organic growth.Towers are an increasingly digital infrastructure with a compelling growth profile, and INWIT has distinctive features and capabilities that position us well to continue leading the market.With this, I thank you and we are now ready for the Q&A session.
[Operator Instructions] The first question is from Patrick Maurice of Barclays.
If I could just pick up on a couple of the points which you highlighted in the presentation. I mean, you talked about the slower FWA growth. I think in the past you have linked some of the slowness around FWA to maybe uncertainty around the timing of the Telecom Italia NetCo, ServCo, but your wider thoughts in terms of do you think that fixed wireless access demand will come back?Or if it's more slower, maybe for longer? And just linked to that, please, do you think we'll see any change in terms of the behavior of Telecom Italia, ServCo and its investing in 5G now they've got the likely sort of closing of that or clarity around that transaction? I think in the past you've hinted maybe there were some uncertainties in terms of their desire to invest before knowing how that would land.
Thank you, Maurice. On the first question, fixed wireless access, actually, we have been thinking going through a phase where most of our customers have gone through corporate or strategy refocusing and that has slowed down their investment plans. We think it's mostly timing, because structurally, fixed wireless access remains a strong alternative to Fiber, particularly in the rural areas, so we do expect an improvement in the coming years.With regards to 5G, yes, overall, let me say, the 5G investments in Italy have been relatively slow. The industry is clearly under pressure in terms of return and we said there have been some budget constraints. We do think that it's rational to believe in a scenario where there will be an acceleration of investments, a catch-up and yes, more investments to accelerate 5G, to accelerate the quality of connectivity, to support the constantly increasing data growth. We have also to remind that 5G is a more efficient manner for operators to manage and support the increasing data consumption. So we keep for a positive view for the market in terms of increasing investments in the future.
As sort of a related question, do you think the delay in the Telecom Italia, NetCo, ServCo and the disposal there has held back some of the market participants in making investments over the past few quarters?
I mean, we have seen also the share of CapEx investments dedicated to mobile, which has been limited in the past. So yes, I think that there is clearly room and opportunity to significantly increase investments in 5G and network and network quality. When thinking about companies, focus service companies from Telecom Italia as well as from other operators more focused on service, on connectivity, on customer satisfaction, enabling more balance sheet room to invest, then we -- yes, we do believe in a scenario where investments will grow.Fair to say that the Anchors never stopped to invest, actually, we are growing with them revenues by 13% and that this has happened even in this context, so actually there is room to be more positive for -- even more positive for the future.
The next question is from Jakob Bluestone of BNP Paribas Exane.
I've got 2 please. Firstly, just sticking on the guidance and following on from Maurice's question, just first of all, if you can help us understand a little bit better whether you're expecting a further slowdown in MNOs, new PoPs, into next year, given we're sort of in mid-November now. There's not much left of this year, but do you think there's a risk that that could sort of go below the 400 per quarter that we've been seeing in the last few quarters?And then maybe if you can also help us understand on the margin side where it seems like you've had better margins to sort of offset the revenue weakness. Is there anything particularly you would call out there? Is it better lease optimization or what exactly do you think is driving the offsetting factors at the EBITDA level? And then maybe just finally if you can just give us an update on EMF limits. What's the latest that you can share with us?
Thank you, Jakob. Yes, on the PoPs, let me highlight again that on with regards to Anchors, the performance is good, in line if not slightly better than expected. The real current challenges with the other customers where we -- what we do see, we do see, honestly, starting from the MNOs, we keep on doing business with Iliad, but we would like and we think there will be the opportunity to do more and the fixed warless access to slow down, I talked before, just to summarize again, corporate and strategy refocus, which has been slowing down the demand in a market which we do think is still structurally with high potential.So actually, with regards to OLOs, we don't expect further slowdown in the future. Actually, we do expect some recovery and some improvement. And you did mention the EMF limits, which we don't consider as a game-changer, but we do think will be -- will help, will facilitate and will support an improvement on OLOs' new tenants.With regards to cost and margins, I have to say that INWIT have a strong track record on efficiency. We have a very lean organization. Our OpEx is just 9% of the revenues. And we have an excellent program on ground rist cost optimization, which keeps on performing well. And therefore, we keep on optimizing margin.And as I said before, we are well on track to achieve a 76% EBITDAaL margin by 2026, which actually summarizes the 2 key strengths of INWIT. One, which I just said, efficiency and the ground risk cost optimization, but also the other one, which is maximizing the revenue per tower as a result of our tenancy ratio and adding 2 Anchor tenants. So the 2 strengths combined allow us to have the highest margin, I guess, in the industry and always improving margin per tower.
The next question is from Roshan Ranjit of Deutsche Bank.
I've got 2, please. Just going back to the land lease optimization, Diego, you said that's going very strongly and you guys obviously have confidence there. Can you give us any details if you are kind of, I guess, see scope for something which you did in Q1 where you bought out 200 sites from, I think, TI. Does that give you -- does that potential opportunity or further opportunity give you that confidence on the EBITDAaL margin? So anything you can say there would be good, please.And secondly, you mentioned balance sheet optionality and we've seen a good continued pickup in the new services. Can you give us some color around the opportunity for these bolt-on deals which you have done in the past, such as the Vodafone Tunnels deal and opportunities around DAS systems in the metro? Does that provide a big growth opportunity to '24?
Thank you, Roshan. On land acquisition, yes, we have a sort of double lane. On one side, we keep on doing a run rate of, how can I say, single deal, taking benefit of a hugely fragmented owner base. But at the same time, there are still opportunities to do more material deals, basically with our Anchors, so yes, there are still opportunities that we are pursuing and working on.On new services, yes, the current -- actually, the current growth is the result of some bolt-on acquisitions, such as the tunnels we did acquire from Vodafone 2 years ago as well as constant rollout of new DAS, basically. And this is what we will continue to do in the future, capturing some small bolt-on opportunities we can find in the market. Nothing big, nothing material, but there are some small bolt-ons we are working on.
That's helpful. If we were to kind of look at the new services on an underlying basis, so strip out the Vodafone Tunnels and the Metro deal, what would that look like, please?
Yes. See, let me say that overall, these kind of deals the way is in a range of 20%, 25% of the overall revenue. Though let me say that in my mind it's not a -- how can I say, split which we look at because at the end either we build or we buy and upgrade something which is already in the market, does not make a big difference, actually. What is important which is that we keep on expanding the perimeter of the assets we own and we manage. The bolt-on is basically a way to accelerate revenue growth. But from an industrial perspective and a market perspective, it doesn't make a big difference. They are both with equal value and both with equal growth opportunities.
The next question is from George Ierodiaconou of Citi.
I have 2 quick ones. The first one is around working capital and it would be very useful if you remind us the reason why you are benefiting this year, but also you can give us perhaps some commentary about the trends we should be anticipating in the coming years given the phasing of CapEx and other factors?And the second question is around -- is a follow-up on the previous answer you gave around PoPs demand, particularly around the fixed wireless access players. I'm just curious if you think it's a matter of time before you see some action coming back in the market from particularly in the rural areas as you highlighted, any indications you can give us, especially now that you are rolling a bit more actively in those areas, that would be very useful.
Well, I'll take the one about net working capital, move pretty strong in 2023 and it was linked mostly to accelerated recovery of legacy items, as we announced in Q2 and the ongoing optimization activities. So the result of several actions with multiple clients. For going forward, we do expect not any reversal in 2023. And for 2024, we do expect the net working capital to remain neutral to slightly positive.
Yes, with regards to fixed wireless access, yes, we believe and we see some signs of potential improvement, particularly in the rural areas where, again, fixed wireless access is a valid and efficient alternative to Fiber. And we are very well positioned to capture this demand, because we have the best assets in the market as well as we keep on investing and we keep on building new sites.By the way, we have the ongoing program with Open Fiber in rural areas, building new sites as well as we keep on building sites also for the Next Generation EU program. So considering our existing infrastructure, the new developments, we are very well placed to capture the acceleration of demand that we do expect for the next year.
And if I could ask a very quick follow-up on the second element of the answer. I mean, you've already started rolling out some of these sites. Historically, there was always some delay to make it available to other players and in case of connection as well. Are you seeing demand on those sites, is something that as soon as the Open Fiber contract gains some scale, we will see collocations going in those sites fairly quickly?
Let me say, the base, the business is well-structured where actually we have a good return also with one tenant and then the opportunity to build on top of that. And similarly, the Next Generation EU funds is clearly strongly, by the way, subsidized. We honestly, we have started, we do see a good take-up, but too early to call out about the speed for the second and third tenant on that.Those structurally, we do see from many fronts the demand for better coverage in rural areas for connectivity as well as for additional services and considering the smart rural IoT monitoring and this kind of stuff, which we do expect will go on top to the traditional mobile and fixed wireless access tenants. So we are happy for the opportunity to have business cases which are solid with the base case, but with opportunities for the medium-long term to build on top of that through fixed wireless access or other services such as, as I said, IoT.
The next question is from Fabio Pavan of Mediobanca.
Two questions. The first one is, on the ongoing process, which is supposed to be the [indiscernible]. So finally, we have something concrete to comment that was [indiscernible]. If you can share with us something on that process ongoing? And the second question is moving away from FWA and dollars. On new services, the trend remains solid. What are your expectations for next year? Where do you think the demand should come from?
Thanks Fabio. I'll take the first one on the MS limits. So in terms of process, as you know there was an amendment presented to the competition bill, which is being discussed. We think the discussion between the 2 chambers could finish by year-end.And then this would open up a window of 120 days for a more in-depth discussion of the new limits. But if no new proposal would emerge from this discussion in the time window of 120 days, then the new limits would apply, the default sort of new limits would apply. So basically, moving from 6 volts to 15 volts per meter.So basically, this means sometime in basically spring 2024, at least not earlier than that. As Diego mentioned earlier, this would facilitate our job in welcoming demand from our clients. It will facilitate the execution of the plan, but yes, it will not be a total game-changer financially speaking.
Yes, on fixed wireless access, let me confirm that we do expect an improvement on next year on the basis of fixed wireless access in grey and white areas, so in rural areas, picking up.
The next question is from Andrew Lee of Goldman Sachs.
I had 2 questions. Firstly, was just on the macro effect on your business process. I wonder if you could talk to when you, if you've got any visibility on when that can come back. And if there's any other parts of your business where you're seeing macro headwinds either in new services, pipelines, or whatever it maybe [Technical Difficulty] and the core service part of your business is pretty much macro-proof? And then the second question and just following up from Maurice's question around the Telecom Italia, NetCo, ServCO [Technical Difficulty].
Apologies. Andrew, this is Fabio. The line is pretty poor. We lost the most part of both of your questions. If you could please repeat, let's try again.
Yes, sure. I'll try again. If it doesn't work, I'll take it offline. I just had first question was on macro effects on your business. You talked about fixed wireless access being held back. I wondered if you could talk about when fixed wireless access actually comes back to full force, if you've got any visibility on that.And if there are any other parts of your business impacted by macro pressures outside of your clearly macro-proof core services? And then the second question was just on the TI, NetCo, ServCo split following on from Maurice's questions. Are there any other ramifications of that split for your business that we might not have thought of?
Yes. Let me say on the macro environment, clearly INWIT is fully protected from inflation and this is a support and it's been supporting our growth profile, fully protecting the business and increasing our revenue growth and EBITDAaL growth profile. If we think about the evolving macro scenario and a scenario where actually energy prices are going down and inflation as well going down, honestly, there is the other side of the coin, which means that we could expect more discretionary spend available for the operators to invest and to catch up or accelerate a little bit their plans.On the split, no, nothing else to think about. As I said, our view is that, yes, the NetCo focused on service and customers and growth and with a more balance sheet to invest is a positive as in general having a more sustainable industry in Italy with the more solid returns is clearly for the medium-term an important positive and it's rational to think that this gradually will be the scenario which will emerge in Italy.
The next question is from Luigi Minerva of HSBC.
There are actually follow-ups on Andrew's questions. Just looking at macro and inflation perhaps from a different perspective, I guess the inflation that we've had and obviously it remains, even if the historical numbers remain, from the perspective of the mobile operator it means that they -- for the same money, eventually they will be able to deploy less sites.So I'm wondering if this has an impact on the non-contracted part of your business over the medium term or whether you see any sign of it already? And on the NetCo, ServCo split, your answer was very clear, but just to go back and clarify that the ServCo split does not trigger any room to renegotiate the MSA in any way? It would be nice to hear it. And if I may go back to an old topic where we haven't talked for a long time, the Iliad Remedies, where do we stand on the process? And do you see any timeline there?
Luigi, thanks for the question. Starting from the macro environment, yes, actually, the inflation on our cost as well as in general for the operators and the energy, the spike of energy costs in the last year clearly put additional pressure on the returns and profitability of the operators. And then we have seen discretionary spend more volatile and discretionary investment managed in a more tactical-tactical manner.And despite that, we have grown with the Anchor tenants by 30% and with the other customers as well. Despite that, we have been growing double digits. Therefore, thinking about in the future a more, it's a different scenario where inflation goes down and energy costs down. This creates the scenario where there is more flexibility for our customers to invest more, to accelerate the improvement in 5G and network optimization as well as to catch up.So one of the reasons we share today of some being on the low end of the revenue guidance is specifically related to discretionary spend, particularly from the OLO customers in this case, but clearly, as I said, the current environment has put some pressure there and is honestly, in my view, is a potential upside for the future.With regard to the second question, the answer is quick. There is no room for any change. With regard to the NetCo split and the MSA, the contract stays as it is.The third question was related to the Iliad case. Yes, no news from a process, let me say legal process point of view. But let me take the opportunity to reiterate our approach to that, which is not legal focus, but is business focus and industrial focus. So we keep on doing business with Iliad and we keep on working to exploit and assess and identify ways to do more business with them, trying to optimize the space on the towers. That's what we are working on and we hope that we will be in the condition to increase the number of additional tenants from Iliad.
The next question is from Stefano Gamberini of Equita.
I also have 3 main questions. The first, coming back on this topic of Iliad and the change of the limits in magnetic pollution. Considering these changes, probably you have more room in the so-crowded towers where Iliad couldn't enter, couldn't be there and consequently you can easily [ hospitate ] Iliad also in these towers that are clearly in the urban areas.If I'm not wrong, you expect something in the region of 1,500 of hospitalities that could arrive from Iliad. The second question regarding the financial charges, the cash financial charges in the Slide #10, which were in excess of the financial charges in the P&L. Could we expect also the same trend in the first quarter?And what we could expect next year on this financial charges figure? Because this year will be offset by the trend of working capital, but what could happen next year? And still regarding guidance, if you can give us a split of the higher sites that you expect, 50 higher sites, what of these sites is related to the Anchor tenants?Finally, as regards the update of your business plan, in March '23 you started with a new business plan. Will you update the business plan in March '24 or when you expect to do it?
Stefano, thanks for the 4 questions. The first one is on...
Sorry.
No, it's a pleasure. The first one is on Iliad and yes, no, you're right. We think that the work we are doing, as well as the potential raise of the limits, should facilitate the accommodation of additional hospitalities, additional tenants on existing sites.On the third one, related to the sites, the additional sites are mostly related to the MSA, so to the program with the Anchor tenants. And let me say -- let me take the opportunity to say we are satisfied, I think we have taken really good pace on the delivery of new sites and we are really pleased with the solid, reliable performance all the technical colleagues are delivering. On 2023, sorry, on the fourth question, in February or beginning of March, we will have a longer session showing and sharing clearly the full year results as well as strategic deep-dive.On the second question, Emilia, for you.
Yes, I'll take it. About financial charges, so as said, the cash-out for financial charges discounted the expected timing of the [ support ] payment. And for next year, we do expect slightly higher debt -- gross debt linked to the funding of the capital allocation and a slightly higher cost of debt linked to the variable portion of our debt.
The next question is from David Guarino of Green Street.
Sticking with that last comment you made with rising interest costs on your floating rate debt, can you just talk about INWIT's philosophy on capital allocation and how you evaluate if the best decision is to prioritize share buybacks or to reduce that floating rate debt?
Yes, let me -- probably the way to answer to this question is to recap a little bit what we did in February this year, when actually we fine-tuned or updated our approach. And first of all, we updated a little bit the leverage corridor. We confirmed our view that structurally a company such as INWIT can bear leverage up to 6x. But at the same time, in the current environment, we have taken a little bit more cautious approach, defining a leverage call return between 5x to 5.5x.Secondly, we increased CapEx. We increased CapEx to support growth and actually support our investment plan, basically building more sites and more land buyout. Organic growth is still the lowest risk, higher returns way to invest our money.Also, reflecting the higher revenue profile and the upgrade of the plan, we have lifted and improved the dividend policy. We increased dividend by EUR 100 million and we confirmed the year-on-year growth by 7.5%. And then we recognized that we were not an opportunity to invest inorganically, we were not accretive or compelling opportunity, therefore we gave back to shareholders EUR 300 million actually, with the implementation, execution and decision about the first buyback of the company which we decided in February and will be executed by 2024.After all this, we retained financial flexibility because the leverage will keep on going down below 5x. And that's important for us to retain the financial flexibility because, as we discussed, I think the market is fluid, the industry is fluid, it's evolving, it's changing. And we do believe we need to be ready to capture opportunity as they emerge and to have the financial firepower ready to build or take, capture the opportunities which we believe will gradually emerge in the industry.That's the logic we did follow in February. And I think this is the way we'll keep on thinking, prioritizing organic investments and assessing if there are opportunities to accelerate growth through inorganic moves. And then, if not, we will consider additional shareholder remuneration. If there is a structural improvement, it will be dividend. If it is, let me say, a timing tactical element, it will be share buyback.
Okay. That's helpful. And then on the organic growth opportunities, maybe kind of leading into the next question I have. So we saw a European tower transaction a couple of weeks ago that implied multiples have come down a bit for tower assets across the continent. And I know INWIT's not actively pursuing large-scale M&A, but could you maybe comment on how underwriting has changed for small cell and DAS projects you're looking at? I guess, specifically, as your underwriting shifted, maybe you're expecting higher returns now given the decline in multiples, versus the expectations you had at the start of the year?
We have an approach policy, where we do have investments with double-digit returns, double-digit unlevered IRR. And so this is the minimum threshold which we do achieve on the back of 2 tenants, basically. So particularly for new businesses, when we talk about DAS, it's important to have 2 tenants to achieve double-digit returns.Otherwise, returns could be only high, high-single-digit. So clearly, the organic investments, being the new businesses as well as, clearly, towers are the area where, as I said, investments are clearly lower risk and higher returns. When we do invest, most of the cases, the CapEx, the returns, the revenues are already committed, so it's very low risk. And that's why we push hard on a new business as well as we keep on investing on a new land, which is another investment which puts the company in a stronger position for the long term and we do it as well at good returns.
The next question is from Usman Ghazi of Berenberg.
I've got 3 questions, please. The first one was just on the small cell and DAS nodes kind of net additions in the quarter dropped to 0. I was just wondering whether there is a timing there or if you can explain what has happened? The second question was just looking at the Anchor PoP net additions.So your site, the net additions have obviously gone up from the BTS with the Anchors and the contract with Open Fiber and EU Next Generation. However, the Anchor PoP net additions haven't yet followed that step-up in site additions. So I guess, the question is, is it that the tenancies on the BTS are coming through with a bit of a lag?Or is it that the tenancies on existing sites, there's a bit of a slowdown there? So that was the second question. I hope that's clear.And then the third question was, just looking a bit further out, I mean, the MNOs, when they bought the spectrum, they obviously have coverage obligations through to 2027 for 99.4% PoP coverage with 5G and coverage on rail and road transport routes, et cetera, et cetera. So I mean, based on the current kind of trajectory of site additions that you're doing, do you see the MNOs fulfilling those requirements? Or do you see that there will need to be an acceleration on the infrastructure build-out for the MNOs to meet those requirements that they're committed to?
Well, thanks for the question, Usman. So starting from the first one, yes, it's related to the remote units and DAS basically. And that's, honestly, for DAS, what we consider the main driver is revenue growth for DAS and new businesses, in particular because the delivery of remote units is a little bit lumpy, because the business clearly has been transformed from, let me say, a small location to bigger, bigger projects which don't have a regular pace quarter-by-quarter.So in this quarter, actually, the delivery has been extremely limited on the back of a strong Q2 and a better Q4, which is in the pipeline. But on uncaught PoPs, there is nothing structural there. We see a little bit the impact of the Next Generation EU sites, which actually at the beginning have just 1 tenant, but as I said, nothing structural and the correlation between the 2 is as we expect and there will be a little bit of consistency between the 2 going further.On the third one, on MNOs and coverage, yes, we think that the current trajectory is consistent for the coverage obligation. In broader terms, though, we do think that the number of new sites we have embedded in our plan is, yes, based on the demand that we do see and we -- yes, we see from the operators, though it's not the taking to the ideal number of sites which would be needed in Italy to deploy 5G at good or good plus standards. So as we shared in last February business plan review, Italy in theory has the need of additional 8,000 sites by 2026. And the trajectory in the numbers we have in our plan are not fully consistent with that, are slightly lower.
Can I just check this...
There is a little bit of...
Sorry, I just wanted to check. So I guess, is it fair to characterize this as the operators are doing the minimum required in order to meet the coverage obligations and that is embedded in your plan? But if they wanted to deploy 5G of the highest quality, then you need more. Is that fair?
Yes, that's our view. It's back to the acceleration of investments and the discretion of spend. So yes, there is a scenario where there could be an acceleration, further acceleration of new sites to bring the coverage standard to the good and good class level.
The next question is from Fernando Cordero, Banco Santander.
The quick 3 questions. The first one is related with -- sorry, also, with the core tenants and PoPs performance. And in that sense, I would like to know to what extent the Common Grid project is close to be completed or how is the process -- the progress of that project between Telecom Italia and Vodafone as it has been a clear driver on the MNOs -- oh, sorry, on the core tenants performance in terms of new PoPs?The second point is, on new services, we have seen an acceleration in backhauling units. Are you seeing any kind of change of the economics to increase investments in backhauling, or is that, let's say, a single project that has been in the numbers during this last quarter? And the last question is, we are close to ending the first tranche of the share buyback that you have already approved for EUR 300 million, the first tranche of EUR 150 million plus to be completed. How are your current thoughts on when do you expect to launch the second tranche?
Fernando, this is Fabio. Apologies, we couldn't get your second question. I think it was around new services, but if you could please repeat.
Yes, of course. Regarding new services and particularly backhauling, the number of units in new backhaulings have increased in the third quarter. Just willing to understand if that has been doing by better economics in that investment project, or is it just a single project that you have been running? Just to understand if there is any change in your views on the profitability of investing in backhaul?
Yes, with regard to the tenants and the core business, Common Grid has been evolving in line with the expectation. But you are right, gradually the problem will get to an end. Let's highlight that in the current fiscal year we have been doing almost 700 tenants per quarter.In our plan, the expectation, the target for the next 3 years is significantly lower, is, if I remember well, slightly higher than 300. And this embeds the slowdown and then the end of the common grid process. So fully embedded in our plans.The second question is related to backhauling, which is a line of business we manage tactically as the opportunity comes. So in the quarter, yes, we did some backhauling and we will keep on doing, let me say, on a tactical basis. It's a business which is core -- close to the core business. It's fiber to the tower, so it makes sense to do it when it comes and with returns, let me say, slightly lower than the rest of the business. That's why we do it on a tactical and let me say, ad-hoc basis.On the third one, share buyback, share buyback is proceeding fast. The current, the first tranche was supposed to be, let me say, end by March, is going faster, probably will be over by December and then it's up to the Board to decide for the second tranche. The overall program has been approved by EUR 300 million to be deployed in 18 months.
Gentlemen, there are no more questions registered at this time.
Thank you, everyone. Good evening.
Thank you.
Bye.
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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.