Infrastrutture Wireless Italiane S.p.A.

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

Good evening. Welcome, everyone, and thank you for your attendance. Our CEO, Giovanni Ferrigo, and our CFO, Diego Galli, will provide you with an update on our business and operations in Q3 2020, as well as an update on our business plan with a particular focus on the first three years from 2021 to 2023 and the connection to the 2026 guidance. As usual, the presentation will be followed by a Q&A session. You can book it by pressing star one. In order to let everyone take part of the Q&A session, you will understand that we are going to take only one question per person. Please take note of the disclaimer on slide number two. I leave the floor to Giovanni, who will guide you through the presentation. Giovanni, it's over to you.

Good evening to you all. Today, I would like to leave you in no doubt that ING is on the right trajectory, in line with expectations set out in the past. Specifically, we delivered a step change in growth during Q3. We have a long-term plan which is in line or better than the one from July 2019. We are well-placed to capture the opportunities that this attractive market presents and we will continue to drive strong growth organically. Today, we will go through our Q3 results and we will give you an update of the business plan with focus on 2021-2023. reviewing the market dynamics, strategic pillars, and financial targets. So, let's go to slide number five. Okay. Let's start by looking at our Q3 results, where the business has significantly accelerated, as you see on slide five, as I said. Now, clearly, we are working in unprecedented times. With regards to our operations, we continue our activity without disruption and we have not registered at this time any significant impact on our business due to the pandemic. In fact, The business has significantly accelerated in line with our expectations and, as we said, in July. Revenues were up by 2% year-over-year on an organic basis compared to about 1% in the previous quarter. Moving to the operations, we delivered more than 500 additional tenants, more than 600 new remote units for DAS and also more than 800 renegotiations and land acquisition to optimize the cost base further. All of these are clear evidence of a material change of pace. Also, from a commercial point of view, We made important steps. I'm pleased to say that we won the contract to enable 5G on the new M4 underground in Milan. Another example, Winding, the contract for dust coverage of the Philip Morris plant near Bologna, supporting their drive to industry 4.0 with automation enabled by sensor and robotics. We also joined forces with teams to develop 5G, thanks to small sales starting from Milan and Genoa. And finally, reinforcing the market support for our business, we were able to issue two successful bonds for 1.75 billion, which were four times oversubscribed by primary investors. Q3 showed a real step change in pace across all the dimensions of our business, as you see on slide number six. In particular, we delivered 210 POPs for our anchor tenants, who are at the start of the delivery of the common grid following the standstill period related to the merger process. And we delivered another 300 pots for other tenants, highlighting the attractiveness of our towers portfolio to fixed wire access operators. So we deliver a good part of the more than 1000 tenants we expected by second half of 2020. We also met the antitrust requirements by making 150 locations available to other wireless operators to date. Finally, in Q3, we executed 800 new regulatory negotiations and land acquisitions, proof of the strength of our real estate department in optimizing the ground lease cost. As we said in July, the Q2, we completed several operational steps. And now, in Q3, we have stepped up another new level, which sets the new baseline for the future. So, Diego, over to you.

Thank you, Giovanni. Good evening. As Giovanni said, we had a significant step up in our operational performance. as well as an initial improvement in our financials. Looking at our numbers in detail, in Q3, total revenues were $186 million, an increase of 0.9% quarter-on-quarter, or an annualized run rate above 3%, which sets us up well for the future. Compared to the quarter 2019 pro forma, The organic growth is 1.9% year-on-year, which is an improvement when compared to the organic 1% growth in Q2. The main revenue growth driver was the MSA revenues, offsetting the lower other revenues. From a profitability standpoint, EBITDA stands at 173 million, with a 93% margin, and our EBITDA EBITDA margin stands at 65% on revenues. These positive results allow us to improve our previously communicated guidance on reported basis. Revenues to the top of the range and EBITDA and EBITDA slightly above the ranges respectively of just over 600 million and 400 million respectively. Now moving to cash, on slide 8, we continue to deliver strong cash convert. The cash flow stood at 56% of EBITDA or 97 million euros, favorably impacted by no tax payment in the quarter. We are upgrading our recurring free cash flow guidance as well to slightly above our previously communicated range to over 265 million euros. In the quarter, the net financial position also improved to 3.76 billion, pushing down financial leverage to 5.5 times, calculated as net debt on pro forma EBITDA 2020 guidance. Let me now talk about shareholder remuneration. As you know, the shareholder agreement sets a minimum payout ratio of 80% of net income. With the board of directors decision based on the industrial plan, growth expectation, and cash flow generation, rating consideration in strategic options available. The Board updated the policy, agreeing a dividend per share of €0.30 per share to be paid in 2021 on year-end 2020 results, growing at 7.5% annually thereafter. As Giovanni said, we are pleased with the progress we achieved in Q3, which will accelerate further in Q4, giving us the right momentum for the start of 2021. Let's move now to the business plan 2021 to 2023 update. Before Giovanni talks about the attractive market we operate in and our strategy, I want to set out the key financial metrics underlying the industrial plan. We expect to deliver revenue between 920 to 960 million euros by 2023, implying a 7.8% CAGR at the midpoint of the range. We expect EBITDA to grow in line with revenues, with margin remaining broadly stable. And we expect to deliver an EBITDA CAG double digit of over 12%, powered by our lease optimization cost initiatives. This will support a recurring free cash flow of 560 to 600 million euros by 2023, implying a cargo of 23%. Let me clarify that this number includes the annual benefit coming from the Goodwill tax scheme. This recurring free cash flow represents a key milestone considering we are close to achieve our recurring free cash flow 2026 target, three years ahead of the previous plan. Also, as you will see later, the financial progression to 2026 is in line or better than the previous guidance given in July 2019. Please note that the margin and CAG reflect the midpoints, and the 2020 guidance is pro forma based on the reported guidance given in July this year. Moving now to the capital allocation, the plan over three years will generate 1.4 billion of cumulative recurring free cash flow. And this will support 500 million of growth capex 320 million for the upfront payment of the tax scheme, and 900 million of dividends. During the period, the continuous EBITDA improvement will allow us to deliver it to 4.6 times, well below the target of a leverage of six times. This gives us up to 1 billion as headroom to capture growth opportunities beyond the plan or increase shareholder remuneration. In conclusion, we are pleased with our Q3 results. Our plan is set for us to grow revenue, generating significant cash, which in turn will allow us to invest for growth, reward shareholders, and create headroom to capture further opportunities beyond our plan. Giovanni, please, back to you.

Okay. Let me talk to you about how we see the industry evolving, what the role of Tower will be, and how Inuit will capture the market opportunities and growth. Looking ahead, we think that 5G will drive the deployment of complementary technologies and will push the creation of the overall ecosystem. This will provide extensive connectivity at high capacity and low latency, with millions of devices connected in a variety of ways. In the 5G ecosystem, fiber will cover mainly mid- to high-density areas. while fixed wireless access will provide ultra-broadened coverage in the low to mid-density areas. DAS will provide denser coverage and support bandwidth density, enhancing available connectivity in high-footfall venues, particularly indoors. Small cells will be the way to achieve massive capacity and ultra-low latency. mainly outdoor in crowded locations such as squares and high streets. Small cells will develop mostly over the 3-6 year term. Finally, high quantity of data and the need of low latency will drive the spread of distributed computing power close to the final user, growing from hundreds to thousands of edge nodes over time. The 5G ecosystem will serve new digital use cases across multiple verticals. For example, the smart healthcare application, such as remote surgery, requires seamless connectivity and computing power. In the education sector, we will have remote universities with remote students, remote lessons, remote lessons and interviews. We are seeing this already due to the pandemic. Industry automation will reshape manufacturing in the context of industry 4.0 with robots and machineries, which will be served through dedicated networks. Another interesting business is related to drones developed to support video surveillance and other mission-critical services. So, 5G will be the game changer for tower costs, as you see on the next slide. So, what role will our tower play beyond just hosting? Simply, we will have a key role. Why? Three simple reasons. First, our towers are everywhere, and this is the key for many of these applications. Second, most of our towers are connected with fiber, and many of these new applications will require the ultra-low latency and high throughput that only fiber can bring. Third, Our tower towers are fully equipped with the necessary power, cooling systems, and security that this new application will require. So our towers will have several network elements across these new applications, so evolving from passive to digital infrastructure enablers. In this context, INWIT is very well placed as we can see on slide 15. Inuit is the leading wireless infrastructure player in Italy, with about 48% market share, with the best asset quality as the most incumbent and Vodafone the fifth challenger. And they designed the network selecting the best locations. Today, we have more than 22,000 towers more than 41,000 tenants, and about 70% of sites are connected by fiber, and 1,100 with our own fiber. We are also leading in the space of special projects, both indoor and outdoor, through small cell DAS, where we are securing important locations, including hospitals, train stations, museums, stadiums. For example, the main train station in Rome, Florence, and Venice, and 15 hospitals across the country. So let's recap looking at page 16. We see an acceleration of digitalization driven by 5G and a positive environment for investments, underpinned by government and European funds. Inuit is best positioned to capture a fair share of the market growth opportunity. This includes densification by MNOs, increased fiberization of towers, fixed water access growth, the development of grass and small sand market, and development of IoT edge ecosystem and smart cities, among others. Before going into our four strategic pillars, let me share with you a video that brings our towers to life. Please, to the video.

towers have always stood at the center of our cities, Italian landmarks that stay still in ever-changing skylines. Within their courtyards belong thousands of eyes, dreams, and possibilities to a country that's always evolving. InWID, the first Italian operator of a wireless technology infrastructure, is part of that evolution, with more than 22,000 sites reaching across Italy and thousands of DAS and small cells Just like our icons once did, our towers play an important part in everyday life. They gather data, giving us the power to move, understand, find and communicate. But that's not all. Today, InWit is preparing to reach new heights with next generation solutions. New towers becoming hubs for distributing signal and the latest services from telecommunication operators. A digital evolution that goes above and beyond all expectations, enabling our habits to develop through technology. When we say InWated One Step Ahead, we mean we're already working on the digital infrastructure to enable 5G and the latest emerging technologies for the future of everyone.

Okay, we have a clear strategy for growth underpinned by four pillars. First, partnering with our own containers to support the evolution to 5G. Second, serving the other wireless operators in the market as neutral hosts. Third, scaling DAS's small cell networks. And finally, piloting innovative services to grow other sources of revenues beyond the core overtime. These four growth pillars are supported by four enablers, including the refreshed plan to build a sustainable business, our operational plans for digital thirst, resource optimization initiatives, and our people. Looking at each of our growth pillars in more detail. Starting with the fifth pillar, partnering with our anchor tenants for their 5G evolution. We have very attractive long-term contracts with Tim and Vodafone, our tier one anchor tenants. You could say that our contracts are never-ending, as they have eight years revolving terms with an all-or-nothing mechanism. The MSAs are 100% CPI linked, with the floor at 0%. The MSAs include three revenue components, set out on the slide from the left to the right. First, the fixed fee, which covers the installed base. It's worth about 650 million euros, pro forma in 2020. This is a highly secure and predictable revenue stream. Second, we deliver contracting services for our anchor tenants, which include the deployment of 4,800 additional POPs on new sites, 7,900 additional POPs on existing sites. This means that in total we will have 12,700 new tenancies from Vodafone and team in support of the realization of the common grid and the rollout of 5G. Of these, 11,000, or about 90%, will be delivered by 2023. The committed service includes 1,700 new small cells and DAS, and 800 fiber backhauling links. Under the MCA, a different mix of committed services is allowed, but granting to Inuit the same value of NPV. These slight changes reflect the needs of our anchor tenants. The third revenue component is related to additional revenues INWIT will provide to TIM and Vodafone as their preferred suppliers. There are ongoing commercial discussions for identifying opportunities and contracting additional services. For example, we have just finalized an agreement with the team to deploy small cell to support 5G rollout in two important cities, Milan and Genoa. Inuit is a neutral host with the flexibility and clear strategic focus to provide services to all operators in the market, including Wintree, Iliad, and FastWeb, as well as two fixed wireless operators, such as Linkem, OpenFiber, Erlo, and IoT operators. We expect to provide about 12,000 to 15,000 new POPs by 2026. Eight 10,000 of them by 2023, capturing a meaningful share of the market growth, considering the quality of our assets. A lot of this will come from fixed water access operators. Let me remind that the team with the team and Vodafone have committed to the European Commission to make available to other operators 4000 sites over the next eight years. I like now to move to the third growth pillar. That small cell, as you can see on page 21, As I explained before, we're seeing strong potential for this business, as Molselle and us are key to providing denser indoor coverage and outdoor high capacity, low latency. The business will develop at scale in the second part of the plan, following the progress of the rollout of 5G macro coverage. Our plan will deliver 8,000 remote units by 2023, underpinning the overall ambition of the plan, reaching 24,000 remote units by 2026. We expect local government and European funding to support this particular growth vector. To capture the opportunity, we have launched a new commercial organization that is focused on dedicated offers to the different location owners. As leaders, we will continue to drive the growth in the exciting small cell and thus opportunity in Italy. And we are supporting the operator with the installation of repeaters particularly in retail and bank branches. To conclude, on our GROW pillar, we will also pilot a number of innovative services across IoT, edge computing, and drone infrastructure, as we see significant potential in GROW beyond the core of towers, wall cells, and dust. In blue, on slide 22, you may appreciate the part of the value chain where we can and we want to make the difference. We are just at the beginning of this journey, but we do expect to go over the second phase of the plan. Domestic inorganic moves into adjacent business may support the acceleration of growth. Moving to sustainability, which is a key area of focus and to which this team is committed to, as we feel that we need to do more and to do better. It's worth mentioning that our business is naturally linked to the United Nations Sustainable Development Goals for industry, innovation and infrastructure, and smart cities that are fully consistent with our role to make Italy digital. We improve the sustainability plan committing to the carbon neutral by 2025 to help achieved this target, we will install 1,600 solar panels and 1,300 high-efficiency transformers. To conclude, we summarize here on page 24 our very clear KPIs on which the management is incentivized. Let me just mention that we will add about 20,000 tenants by 2023, taking us to about 60,000. This means that our tenancy ratio will increase to about 2.1 with MNOs only. So, Diego, now to you.

Thank you, Giovanni. The four growth pillars that Giovanni just described will underpin a best-in-class revenue growth, as you can see on page 26. We will deliver a revenue CAG of almost 8% in the next three years, which will continue also in the second part of the plan. In absolute terms, revenue will increase by 190 million by 2023. The main growth contributors will be the new macro tenants on contractualized services with TIM and Vodafone. The overall contractualized services, including also small sales, DAS, and backcalling, will account for about 100 million of the total growth. The other important driver will be the POPs from other operators, both Fixed Wireless Access, MNOs, and IoT as well. In this context, the contracted revenues from our anchor tenants will decrease from 90% of revenues in 2020 to 80% by 2023. Also, small cell and DAS will contribute significantly, though the growth will be more material in the second part of the plan as the market accelerates. Finally, the innovative business will start contributing to the top line at the end of the period. And looking at the margins now, we can move to page 27. EBITDA will grow at a similar pace to revenue as we see OPEX gradually increasing, starting from a very low base, due to the increase in commercial costs. At EBITDA level, we expect accelerated growth as we continue optimizing our list cost, which is our largest expense item, through the continuous renegotiation and land acquisition. This will drive EBITDA margin through 70% by 2023 and to 75% by 2026. The strong revenue margin growth are supported by a significant and focused investment plan of 600 million in the period 2021 to 2023 and rising to over 1 billion by 2026. Going to more detail, the pie chart shows the indicative breakdown of the capital expenditure for the period 2021 to 2023 and show how the new site constructions, the land buyout and the small cell and dust equipments play a central role in our strategy. It's also worth mentioning that the maintenance capex will continue to represent less than 2% of the revenue. Moving to our ability to generate significant cash on page 29. The current free cash flow show a 23% CAGR in the period. achieving the range between 560 to 600 million euros by 2023. This means that we will achieve in 2023 a recurring free cash flow very close to the guidance of more than 600 million recurring free cash flow targeted for 2026 in July 2019 plan. Let me remind you that we benefit from the goodwill tax scheme which drives about 150 million lower cash in 2023. The main elements of the tax scheme are an upfront payment of 320 million in 2021 in exchange for an annual cash benefit of around 150 million euro for the following five years. The IRR of the transaction is more than 22%, with more than 160 million NPV. On our previous recurring frequency flow guidance for 2026 of more than 600 million, that guidance is therefore improved to about 700 million. On the right-hand side of the slide, you can see the bridge from EBITDA to recurring frequency flow using the average figures related to the period 2021 to 2023. shows that EBITDA converts to recurring free cash flow at a rate of 60%. With the following bridging items, 6% cash taxes, 7% interest, 2% maintenance capex, and 25% lease cost cash payment. As a result of our ability to generate significant amount of cash, we will be able to deliver it quickly, as you see on slide 30. Our leverage is expected to decrease to 4.6 times by year end 2023 and to 3.4 times by 2026. In 2021, our leverage increases to 5.6 times due to the goodwill tax scheme cash out of 320 million we just mentioned. We confirm the target leverage of max six times and that we want to maintain the current ratings And within this framework, we will have the flexibility to finance further growth, either organically or the M&A, or if there are no accretive opportunities, we can return cash to shareholders. As Giovanni said at the beginning, we are also proud that Inuit issued two successful bonds between July and October for the total amount of 1.75 billion euros. four times oversubscribed by primary investors. So we achieved the full refinancing for the bank loan during 2022. And we have no financing needs expected ahead of 2025. The refinancing sets the cost of the debt at 1.8 and extends the maturity, the average maturity, to 5.8 years. Finally, I'm pleased to share on slide 31 that the plan improves the July 2019 guidance. As you may see, all the metrics are in line or better than the original guidance, thanks to the steady and strong revenue growth all across the plan period, coupled with our lease optimization programs. Giovanni, over to you.

Okay, so in conclusion, we have delivered the acceleration in Q3 as we promised to you in July. We are in a strong position to capture digitalization opportunities driving by 5G. We are focused on execution to deliver strong organic growth. and we are committed to a plan which will deliver an attractive shareholder return, as Diego said. In terms of numbers, we will deliver about 8% growth in revenues, generating 1.4 billion of recurring free cash flow, Distributing 900 millions of dividends while keeping a billion of financial flexibility. We believe that there are no doubts. Join us and be part of this new Inuit.

Giovanni Diego, thank you. Before opening the Q&A session, in line with the COVID-19 safety instructions, we now need to pause a few seconds to allow a switch of interpreters in the booth.

The Q&A session is now open. You can register for your question pressing star followed by 1. First question comes from Mr. Andrew Lee from Goldman Sachs. Mr. Lee, your question, please.

Yeah, good evening, and thanks for a very clear presentation. I guess the key questions now are on the predictability on what you've laid out. So two questions from me. One, towers will be great because of visibility, and your slides on 2019 slide 19 and slide 20 are really helpful. But how much of your overall guided growth is already contracted and how much relies on your commercial execution, i.e. to what degree of visibility and confidence do you have on the midterm guidance? Secondly, as you said, your targeted net debt to EBITDA implies €1 billion of further dividend remuneration or inorganic pursuits. What would those inorganic opportunities include? Are they all domestic? Just any kind of visibility you could give us on that would be really helpful. And will you determine that on a year-by-year basis? And maybe if you don't mind, just a third question. Your ex-tax RLFCF guidance of $600 million by 2026, looks a little conservative relative to the mid-term outlook. Is that fair? Any color on that would be great. Thank you.

Okay. Let me start from the first. Let me say that the likely more than 50 percent is, let me say, the share of the growth that is already contracted. The remaining bit is related to the opportunities with third parties for which we see a tangible demand, and we feel, honestly, quite good. And the third element is related to the plan services, mostly related to small cell and DAS, and with Vodafone and team, for which, similarly, There are ongoing discussion negotiation projects to move from the plan to the, how can I say, the definition. And the recent agreement with Tim is a testimony of the opportunities that we have in front of us. So if I may, just to recap, slightly more than 50 percent already contracted. the other components with tangible pipeline and initiatives which make us feel comfortable and good about the opportunities and the achievability of these targets.

The second one. About inorganic, okay. Let me take the opportunity to highlight again the strong cash flow generation. And this is by the plan, 1.4 billion recurring free cash flow in three years with Almost 700 annual cash flow in 2026. We are totally concentrated now in delivery of the pipeline, but we will be sure interested in exploring opportunities that may arise in Italy. Let's say a small-tower portfolio or business. Let me say, this is the issue. IoT, as I said, drones, edge collecting, and all computing. Let me say, let me remark, as usual, our strong financial discipline in addressing external growth. Double digit IRR will remain a key priority for us alongside six times leverage and current rating. So this is enough.

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

Yes, apologies. I hadn't heard that you said just to ask one question, so apologies for asking three. The question was just that with your mid-term growth outlook that you've laid out, the ex-tax RLFCF guidance of £600 million you're guiding for 2026 just looks a bit conservative. Is that a fair conclusion, or is there something we're not seeing involved in that?

No, I would say it's a fair reflection of the cash generation that we do expect and the structure we do expect going forward. It means 600 million at the end of the period, basically, that is fully consistent with the guidance of revenues that is higher than the 1100. Thank you. I wouldn't say it's conservative. I think it's quite balanced. Thank you.

Next question comes from Mr. Sam McHugh from Exane. Mr. McHugh, your question, please.

Thanks very much. I'm sure I understand a little bit how things have changed in the new business plan. I guess I just want to ask if you'd like to characterize it as you're now planning a bit more pop growth on macro sites near term, and maybe the small-cell growth is a bit more deferred beyond 2023. And I guess in that context, what gives you the confidence on the 8,000 to 10,000 OLO pops that you can add by 2023? And I wonder how much you've taken into consideration the CellMax and Hutch news this week. I mean, does that impact your view at all? Thanks very much.

Yeah, let me take, yes. I think your view is correct. There is in the initial part of the plan growth is driven clearly by the committed and the common grid with Vodafone Intim, as well as the third parties. The confidence comes from the pipeline that we see in front of us, from the demand that we see, from both MNOs and honestly strong growth related to fixed wireless access. We think that structurally we've got, as Giovanni said, a very strong network where everybody wants to deploy a network with high quality as to depend and to rely on. So based on the visibility we have today, the tangible order book and pipeline, and on clearly market assumptions for the medium term, we have a solid degree of confidence, this is very reasonable. I think this was the first part of the question, right, or?

Correct, yeah. And then would a Selmex and Hutch deal change? Because obviously that would give them more of a national footprint as well.

Yeah, the HDIL, again, we, I think that the, again, we came back to the structure and quality of our network and the fact that an operator has win three, they have already restructured their network with the merger. So we don't expect a significant change in the shape of the market.

If I can complete, Diego, Wintry has just finished to redesign all the network based in our tower, so I think enough difficult the theme of re-patriots in the sense that the, let me say, the hospitalities of wind will migrate to the Hutchinson Tower. So always the point is that we have the best positioning, the well-structured towers in Italy, and so this is, let me say, we have a really key role for the deployment of the network, okay?

Okay, thank you very much.

Next question comes from Mr. Giorgio Fierodiacono from Citi. Mr. Fierodiacono, your question, please.

Yes, good afternoon, and thank you for taking my questions. It's actually one question in two parts, and it's around the use of additional cash flow flexibility, the 1 billion euros that you highlighted. So my first question is, when do you plan to make a decision on whether to return that to shareholders? Is it something you will be doing on an ongoing basis? every year, or is it something we should expect to be relatively back and loaded, probably in 2023? And then, as part of that, one configuration I wanted to have is related to the land acquisitions that you highlighted, the $6,000 renegotiation and acquisition target for the next three years. You do show in slide 28, around 150 million, I think, of CARB-X will be used for that. I was just curious whether that could be anything additional beyond these 150 million that you may use, and whether that will come out of this 1 billion HETRO that you highlighted. Thank you.

Yeah. On the $1 billion, clearly the headroom up to $1 billion will emerge gradually, actually starting already by the end of 2021. As we said, there will be in the middle of 2021 the impact of the upfront payment related to the tax goodwill scheme. We have just, the Board has just decided a new dividend policy that we expect that will cover the three years of the plan. So I think that the final decision will be, as you said, at the back end loaded as in sequence, quarter by quarter will be visible the achievement of the the synergies and the results on the organic plan we will assess as Giovanni said domestic opportunities in adjacent businesses and this gradually will take us to be in the right position to assess also other opportunities or eventually return to the return to increase the return to shareholders so in short yes we do expect this decision to be made at the end of the three years horizon

About, let me see, site lease market, okay, we spoke about we are very focused on rental cost optimization and we have a dedicated team of about 30 FTEs supported by 15 agencies recently renewed dealing with real estate. Our real estate chief was in charge of real estate at Vodafone before merger and was very successfully in ground lease cost reduction. As we demonstrate by the 800 land acquisition renegotiation in Q3, we keep on optimizing the rental cost through our purchase of land. which represent an important amount of our CapEx, contract renegotiation, offering cash advances or extending duration. So we set operations that took, as all the companies, let me say, the step change in Q2, and we set up also the organizational structure that has been able to pick up big numbers and lands buyout. So this is the results, okay?

Next question comes from Mr. Simon Coles from Barclays. Mr. Coles, your question please.

Hi, thanks for taking the question. You mentioned that commercial costs are going to pick up to drive the sort of acceleration in the business. I was just wondering Are these sort of, say, temporary over the next sort of three to six years as you try and drive this acceleration in revenues due to going after third-party demand? And could this be something that then starts to disappear in the future, or should we assume that it stays at that sort of rate in the long term? And then if I can just ask one more thing, as everyone else has, obviously we're going to see a very big acceleration in tenancy deployments. Could you just talk about how you secured sort of construction capacity and the workforce to do that, seeing as it's going to be quite a material acceleration to what you've necessarily done in the past? Thank you.

Sorry, I'll take the first part of the question that is related to the acceleration. The way the plan is envisaged is actually, yes, the We do expect the acceleration on the tenants in the first part of the plan in the next three, four years, both on the anchor tenants and on the other players, while then the second part of the plan, the accelerated growth will be driven more by the micro coverage driven by small cell and dust. So the first three years is focused on macro coverage, additional macro tenants, and fixed wireless access. Second part of the plan, the growth on tenants will slow down and will be substituted by the acceleration of growth on small celled dust. With regard to the capacity to deliver the step-up.

In the meantime, we are, let me say, we launched a new organization about this. We dedicated the Salesforce that finally looks for the right locations to anticipate the 5G small cell adoption. to increase the number of Remos units and to push the business as we want and we put in this presentation. It's very, very important for us.

And also from the operational point of view, we are an organization that is quite small actually. We are a team of 200 people. But we manage an ecosystem, a portfolio of partners that, by the way, we are refreshing and renewing at high speed in these days to really set the portfolio of key partners that will allow us to deliver this step up in terms of capacity. The fact that the company relies on a structure that is already developed strongly, let me say, outsourced really allow us to increase the capacity very, very quickly as demonstrated by Q3 where the step up in both the delivery of new tenants as well as the renegotiation has been achieved in a relatively So relying on this, on several partners across the regions and the different regions of Italy really give us a lot of flexibility and clearly in the last month we have worked together to define the medium and long-term plan and we have seen already the partners scaling up, giving us full reassurance that we will be able to deliver at this faster pace.

That's great, thank you.

Thank you. We need to pause again a few seconds just to allow interpreters to change over. I'm sorry.

Okay, come on. Thank you.

We are ready to continue. Please, operator.

Next question comes from Mr. Roshan Ranjait from Deutsche Bank. Mr. Ranjait, your question, please.

Great evening. Thanks for the questions and thanks for all the data points. On the ramp-up, if I could just break down into a bit more of the operational side, because if I think back to Q2, we were thinking about maybe 75 pops per month growth. Now looking at slide number five, sorry, number six, you're looking at around 100 new pops from third parties. Now, so we expect that number to continue to accelerate because, I mean, you've upgraded your first year 20 guidance, your midterm guidance, and obviously your longer term guidance. So, you know, that demand is clearly driving quite material upside to the I guess, new pot growth. Is that fair to say? And secondly, just circling back to some of the previous questions, on the land optimization, again, we've seen quite a ramp up this quarter on some of the cost efficiencies you've been able to extract on the number of sites you're addressing. Now, if I look at the synergy target, you're still right into this 200 million EBITDA synergy target by 2026. So is it fair to say that these savings aren't necessarily coming from the Vodafone sites you've got access to, you've just been much more efficient in your existing sites? Or is there something else going on there? Thanks.

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

really demonstrating the power of the teams, following again a Q2 where we set up the operations. You may see on page 24 that where on the bottom right of the graph we talk about for the plan of about 10,000 renegotiation land buyout that somehow set the pace across the different years. So we will continue broadly at this level. And this is key for us to deliver the EBITDA margin at 75% at the end of the time, because this is a key lever to contain and reduce rental cost, offsetting, more than offsetting, the impact of inflation, the impact of new sites through these specific programs, where actually we are, as Giovanni said, we are leveraging on the experience gained by the Vodafone Towers team in the past, and we are replicating and extending the same approaches. The synergies, the 200 million synergies, were mostly revenue-driven. and are confirmed, as they were, mostly driven by revenue and by business development with the two anchor tenants. The least cost of the negotiation and optimization were part of the, let me say, organic opportunities considered already in 2019 plan to deliver the incremental EBITDA.

Okay, great. That's helpful. Thank you. You're welcome.

Next question comes from Jacob Bluestone from Credit Suisse. Mr. Bluestone, your question please.

Thank you and good evening and thanks for taking the questions. I had a question regarding slide 31, so just trying to understand what is it that's changed in your business plan update versus the original guidance. I mean, I guess it's sort of two parts. What is it that's given you the confidence to raise the guidance for revenues by about 100 million? And then secondly, I didn't quite understand why the free cash flow guidance excluding the tax effects doesn't go up. So what else is it that's, what other cost is rising given the higher revenues doesn't translate into sort of higher free cash flow extra tax effects? So if you can maybe just clarify what's changed in your new and old business plan.

Thank you.

So the revenue and the story about the revenue and the confidence about achieving more than 1.1 billion is related to the multiple layers of growth that we have in our plan. where on top of the contractualized services, we are factoring in this plan the strong opportunities that we see from the spread, the expansion of fixed wireless access in the market, as well as the demand that we see on other M&O operators. this is a growth engine that is going to be very strong in the first three years and and then when in the second part of the plan a little bit later than the original plan but it will come in the second part the strong growth coming from small cell and dust accumulating on top of the other two layers so contractualized services and third parties and then the the third wave will come with small cell and dust these three layers of growth that we see the first two very tangible for a little bit more of the short term, but also the second one, Molsel and Das, coming after the initial focus on the macro coverage from the operators. So this, we see tangible opportunities for these three layers of growth to accumulate at the end of the plan, allowing us to achieve the ambition of more than 1.1 billion. On the free cash flow, the free cash flow at the end of the plan, the recurring free cash flow at the end of the plan, will be particularly high anyway, in the sense there will be 600 million cash generation out of the 1.1, which implies an EBITDA margin in line, basically in line with today, and a reduction in this cost, which is a reduction in absolute terms as a result of what we said before. The original business plan did include a further expansion of EBITDA. And that at this stage, we think is really what we have embedded in our plan is really the highest level that can be reached with a good degree of confidence.

Great. Thank you. Welcome.

The next question is from Mr. Stefano Gamberini from Equita. Mr. Gamberini, your question, please.

Good afternoon, everybody. Just a quick question regarding sensitivity from the impact of small cells both on 2023 targets and 2026. If I remember well, the original plan was for 35 small cells and a BDA in the region of 60 million euros at the end of the plan. Could you give us a sensitivity, what is the contribution that you expect from these 8,000 small cells in 2023 and in 2026? And just a curiosity regarding the range of 2023 targets that you supplied, what are the main differences between the upper level and the lower level of this range.

Thanks a lot.

Okay. Let me say we have considered the market request of today. Sorry, I'm an engineer, so no one is perfect, but I have to say something. We now are considering only the indoor and the outdoor small cell through 3.7 GHz frequency that we did an evaluation. That starts from considering that there are in our portfolio about 6,000, let me say, important towers in densified area where there will need high capacity to, let me say, to manage the data growth. In this, we consider the start with about five small cells. So, let me say, our item is about 30,000 small cells. We need sometimes more to consider the arrival in Europe, in Italy too, of the millimeter wave small cells, 26 gigahertz frequency. that are very, very dense, and the numbers are huge. Let me say, in an outdoor environment, you have to install about one small cell with this frequency, each 150-200 meters. So, now we did a prudential, let me say, target, We believe in these numbers. Now, we are not the United States for the users of millimeter waves in Europe. We are at the beginning of the sub-5 GHz frequencies. The millimeter-waves, small cells, will push in a very, very consistent way the market. But at the moment, in a very transparent way, we have not considered this item because we have to wait for the real market needs. Okay, Diego, as you told us something about the economics, but okay.

Yeah, in terms of volume, I think there is the indication on the development of small cell on slide three, where we There is an addition of 24,000, so we get up to 28,000 in 2026. The growth will continue also after 2026, and we will achieve more than 30,000 in 2028. That is not far away, the original guidance. Having said that, on small cell and dust, there is a different timing. the number is lower in 2023. And also, let me say that if I may, I think it's helpful to give also an indication in terms of pricing, where we think that the development of market based on the current experience, probably prices will be slightly lower than originally assumed. We are in the range of around 10 percent. So I guess that this may help to give a sense of the opportunity in terms of revenue. In terms of margin, we do expect an EBITDA margin still high, around 75 to 80 percent.

Just to understand the level of pricing, you said it's 10 percent lower than the previous So could I realize that the EBDA 2026 will be lower than the 60 million euros you expected in the pre-use plan?

Yes. Yes, I guess so. Yes. Yeah. Not materially, but slightly below. Thanks.

Next question comes from Mr. Luigi Minerva from HSBC. Mr. Minerva, your question, please.

Yes, good afternoon. Thanks for taking my question. The first one is, I was wondering if the 5G equipment that you will gradually place on your towers will allow you some form of pricing power, the reason being that the equipment is normally going to be larger and heavier. So I was wondering if the MSA allows you to charge more for a 5G piece of equipment and whether this is a part of your business plan. And the second question is on the small sales project which you announced this morning. I think it's 100 small sales in Milan and Genoa. So maybe can you take us through Practically, how are you thinking about this project? How do you prioritize, together with the operators, where to deploy? Just to give us an idea of how you imagine developing such a project. And very lastly, just a clarification of like, twenty nine, just to make sure I get it right. So, of the five hundred and eighty million of recurrent free cash flow in twenty, twenty three. Is it one hundred and fifty coming from the goodwill tax scheme? Thank you.

Thank you. About the Milan and Genova, according to the team, as you know, the team announced within the year that 95% covered 5G of the population. and Genova tool, and so this is the real our test to understand which are the needs in terms of capacity, not coverage because coverage is a team of the macro sites. So with the team for the fifth time in Italy, we start to deploy with them in the towers where there is a high density population and high request of data consumption to install with all our, let me say, portfolio solution. As you know, we can install the small cell underground with the manual that is the antenna. We can, let me say, install in the right place where it is not, let me say, a problem for the artistic point of view. And this is a very, very interesting experiment.

Starting with the low numbers, but that will give to us the right trajectory for our business plan And with regards to the other questions yes, there is something in the MSA, but we don't related to the 5g and increase the Space occupancy, but we don't expect a material any material amount across across the plan and On page 29, let me clarify that the impact is 115 million euros. Thank you.

Next question comes from Mr. Fernando Cordero from Banco Santander. Mr. Cordero, your question please.

Thank you for taking my question, in fact, too. And my first question is regarding pricing that you have considered into your business plan, particularly on the hospitality services for secondary tenants. I would like to understand what kind of a scenario are you already pricing once you have the pricing already set for the MSA, obviously, just willing to understand what scenario you are expecting for the secondary tenants hospitality services. And the second question is, I assume that you have considered in your plan that there is no change on the electromagnetic emissions regulation. I just would like to understand what would be the impact if we see any kind of convergence of the Italian regulation towards the European benchmark and what would be the impact in your financials in case we see this change of the regulation. Thank you.

Okay, starting from the first question, okay, the pricing, the average price is between 10 and 12,000 euros yearly for the mobile operators, and for the fixed-level access is about one-third of the mobile operators. All our, let me say, prices depend from... physical space and the power electromagnetic space that they have. But this is the average price that we do to the field parties. Let me say about the change of the layers, about the electromagnetic emission limits. Starting from the consideration that I'm waiting this from 20 years in Italy, but I think that is very, very difficult that will happen in a few years. If this limit, let me say, will permit to... uh let me say to finally if the the limit will increase okay for for us is an opportunity because we can host more let me say off in our towers because the electromagnetic space increase and let me say there is a so a strong demand of hospitality both in the city that in outdoor that with the digitalization i think that we will not have a significant impact about this okay many thanks next last question is from giorgio tavolini from intermonte mr tavolini your question please

Hi, good evening and thanks for taking my question. I was interested in understanding better the dividend policy. You're talking about 30 euro cent dividend per share for 2020. Assuming a 90% payout, is it fair to assume an adjusted net income in the range of 260? Are you calculating the adjusted net income excluding the PPA, 100 million per year, and the fairer taxes related to the goodwill substitution tax that is basically paid in 2021 Just understand what are the main moving parts in the bottom line, in the adjusted bottom line that we should look at. Thank you.

Thanks for the questions, which allows me to clarify better. The new dividend policy actually fixes an amount, a fixed amount of dividend per share, and then an increase for the following years of 7.5%. somehow delinking or removing the strict link to the percentage of net profit. And this is consistent with the current policy or the previous policy whereby the link of the 80 percent, the approach, the policy of 80 percent of the net profit was setting a minimum and then was up to the board to decide according to the, as we said, as I said before, to the growth opportunity, cash flow generation, and the long-term growth opportunities. So, the two things are not strictly correlated anymore. Clearly, there is a correlation between the perspective of cash generation and the numbers that we did disclose, they do share that we basically the recurring free cash flow, sorry, the cash flow to equity generated in the three-year plan will be broadly in line with the 900 million dividends that this dividend policy will drive as dividend payout. So just to summarize, the link between the percentage of net profit and dividend is not driving anymore the payout. The payout is based on a fixed dividend per share amount plus a fixed growth for the next three years. Clearly, as I said, we did consider carefully to find the right balance between cash generation availability of resources to support the growth, to reward the shareholders, as well as to keep on creating headroom to allow the company to capture further opportunities along the time.

Okay, thank you very much.

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

Thank you. Bye-bye. Bye. Thank you very much. Bye.

The conference call is over. Thank you for calling.