Infrastrutture Wireless Italiane S.p.A.

Good morning, this is the Coruscall conference operator. Welcome and thank you for joining the second quarter 2024 Inuit Financial Results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Head of Investor Relations and Corporate Development of Inuit. Please go ahead, sir.

Good morning, everyone. Thanks for joining us. With me today are Diego Galli, Inuit General Manager, and Emilia Trulli, Chief Financial Officer. Before we begin, please allow me to draw your attention to the safe harbor statement on page two. Following the brief presentation we will open the floor to questions. Over to you, Diego.

Thank you, and good morning, everyone. Looking at Q2 results, I would highlight a continued solid execution of industrial operations with a high volume of new sites and real estate transactions, growing financials with MSA commitments on track, strong revenue growth in indoor coverage solutions, and a double-digit expansion in EBITDA after lease. In the quarter, we also delivered a compelling shareholder remuneration in the form of additional dividends and buybacks. More broadly, INWIC business model based on shared digital infrastructure investments continues to be resilient in the context of transformative year for the Italian telcos. We view the ongoing transition as positive. We can count on a strong and positive MSA. There is potential to improve market fundamentals and unleash additional investments. Investments needed to meet the need for digital infrastructure in Italy, which today is lagging behind European standards. This is a structural growth trend in which it is well positioned to capture it. Moving to main trends on the quarter of page 4. A few key numbers. 8% revenue growth on the back of inflation link, new pots, and new services. 11% growth in EBITDA after lease, with margin up by 2 percentage points. Recurring cash flow at €150 million. Net debt to EBITDA at 4.9 times, reflecting the increased shareholder remuneration. We reduced leverage by half a turn since a year ago, when excluding only the additional portion of dividends just paid and then buyback. Strong industrial delivery with more than 200 new sites across three programs. Nearly 1,000 new posts on track for the full-year target for a tenancy ratio of 2.3 times. Almost 400 real estate transactions are our main source of efficiency. In summary, Q2 and first half results show resilient execution with growth trends in line with targets. We keep on investing at accretive returns to expand our infrastructure assets. More sites, more indoor coverage locations, more land ownership. The industry context is one of transformation for many clients, which will be in a structurally different position from 2025 onwards. Now, I will turn it over to Emilia for a more detailed review of the results. Thank you.

Thank you, Diego. And good morning, everyone. On page five, new size. Consolidating the leadership in the Italian market, INWIT built 240 sites in Q2, and about 1,000 over the past year, in line with expectations. A steady delivery pace at high levels. Demand for new size continues to come primarily from MSA commitments and the Italy 5G Next Generation EU program, which we are pleased to say is progressing on track. The sites address coverage, capacity, and densification needs. With standalone 5G in Italy still being very limited, we anticipate a sustained demand for new sites in the long term. Moving to AnchorPop on page six. 400 additional POPs with Steam and Vodafone in the second quarter for a total H1 figure of just above 1,000. This is in line with commitment and coherent with full year expectations of approximately 2,000 new POPs. Quarter on quarter, we discount the phasing effect of new POPs activations on new sites, which we expect will normalize in H2. As mentioned in the past, in terms of mix, there is a growing proportion of new POPs from new sites, while the common grid optimization program reaches maturity. That's all on page seven. POPs with clients other than Team and Vodafone are up 13% year-on-year, further diversifying our client base. In-width microsites serve multiple client categories and technologies, in particular mobile, fixed-wireless access, and IoT. In mobile, we added new POPs with every major MNO. The SWA market seems to be stable at low levels of growth with no further deterioration, and IoT clients continue to be resilient, expanding smart grid applications. We added 520 new POPs in Q2, an improvement quarter-on-quarter, and consistent with full year expectations. Next, on page 8, we review new services. Quarter-to-revenue increased by approximately 40% year-on-year, reaching more than €16 million. Notably, this is nearly €2 million higher quarter-on-quarter. Growth was driven by the addition of 15 new locations served by indoor coverage solutions with dust and repeater technologies and tenancy ratio growth on the 520 locations we serve. The indoor coverage market continues to be dynamic with greater market acceptance and appreciation of dust technology. Location owners in a variety of different verticals related to improved indoor connectivity, which enables advanced services that have a direct impact on their business. Indoor coverage projects are becoming larger and more complex. Smart city-like opportunities, integrating multiple layers of managed infrastructure. We are actively approaching this market, and the Fiera Milano and Rome 5G project is recently announced, go in this direction. Next, we review the P&Ls. Revenue growth stood at 8.2%. The drivers were the inflation link with the average figure of 2023 applied to in-week MSAs, new tenants on new and existing sites with tenancy ratio up to 2.28, and a 40% growth in new services, as discussed. OPEX were only marginally higher year-on-year, while we continued to invest to support growth in indoor coverage solutions. OPEX in Q2 2023 were seasonally high, thereby providing an easier competition base. As a result, EBITDA margins went up to 91.6%. EBITDA after lease improved by 11%. with margins up by nearly two percentage points to 72.4%, one of the highest in the sector. This was supported by efficiency actions on these costs, with 400 real estate transactions in the quarter, the majority of which were land acquisitions. We're adding new sites and indoor locations to the cost base, along with inflation. HOWEVER, REAL ESTATE EFFICIENCY ACTIONS ARE EFFECTIVELY MITIGATING MOST OF THESE COST EFFECTS. D.N.A. INTEREST AND TAXES WERE FAIRLY STABLE PORTAL ON PORTAL, LEADING TO A 10.5% GROWTH IN ITS INCOME. MOVING TO THE CASH FLOW ON PAGE 10. RECURRING TO CASH FLOW WAS 159 MILLION EURO IN THE SECOND PORTAL FOR A 68% CASH CONVERSION and in line with the full year guidance. This is a 6% improvement quarter on quarter, mostly based on better list costs, net working capital, and financial charges, more than obsessing cash taxes, which were not present in Q1. The current cash flow is down year on year, only because 2023 seasonality net working capital, which was particularly positive in Q2 last year. Below the recurring line, we recorded 67 million euros in gross capex and other items, 451 million euros of dividend payments, and the continuation of the share buyback. Reported leverage stood at 4.9 times, slightly down, year on year. When excluding the additional dividends paid in 2024, 100 million euros, and the share buyback program, We reduced leverage by half a term in a year. Quite a material result. With this, I hand it back to Diego. Thank you.

Thank you, Emilia. A few more words on my side, starting from a comment on the current evolution in the Italian telco market. Discretion investments in mobile infrastructure have been limited to the minimum over the past few years. This is due not to the lack of demand, rather to the absence of appropriate returns for the operators in a very competitive market. The structural investments, however, cannot be postponed forever. As we can see here, Italy lags materially behind European peers. In 2024, we have seen transformational transactions being announced and executed in the Italian telco industry. with the potential to unleash higher investments. These transactions, and maybe others to come, are expected to have a neutral to positive effect on Inuit, both directly and indirectly. This is because the MSC is strong and protective, with all or nothing clause, and allows for extra fees in case of use of additional frequencies, as it is often the case when two MNOs combine In summary, INWIT delivers a resilient Q2 and can count on the best infrastructure assets and unique industrial capabilities, features that allow us to be well positioned to capture the structural growth trends in the digital infrastructure in Italy. With this, I thank you, and we are now ready for the Q&A session.

Thank you. This is the Chorus Call Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one now. In interest of time, we kindly ask you to limit yourself to one question at a time only. The first question is from Roshan Ranjit with Deutsche Bank. Please go ahead.

Great. Good morning, everyone. Thank you for the question. My question is on the OLO progression. And I think as you alluded to last quarter, we did see a pickup in the net ads. I guess my question is that didn't necessarily translate to a big boost in the revenue number in the quarter. I guess that's down to the IoT mix. So how should we think about that mix going into H2? Should we expect a further pickup in the net ads? Will that be driven by IoT? And anything you could say around the price in differential between an FWA pop and at an IoT pub, that would be very helpful. Thank you.

Yeah, thank you, Roshan. Yeah, I think that the quarter shows an encouraging sign with the 500S. This, as we shared, reflects the component of IoT. And overall, does not reflect yet the acceleration in fixed wireless access tenants. So overall, in terms of mix, we need to discount the fact that the IoT revenue per unit is at a lower price. Also interesting to mention that the other MNOs, the mobile MNOs, are overall progressing and we continue to do a decent, a good level of finance also with those. So in short, good progress, acceleration and fixer-less access still to happen.

Thank you. And if I could just follow up, do you still expect that FWA access FWA acceleration to come in the second half of the year, or is that now kind of pushed out to 25?

Yeah, I think it's rational to expect a trend which is slightly above to the current level. Okay, thank you.

The next question is from Andrew Lee with Goldman Sachs. Please go ahead.

Good morning, everyone. I had a question just on shareholder returns. Obviously, you haven't quite completed your buyback yet, but your net debt to the dire is running quite low and obviously goes well below the low end of your targeted range by the end of this year. I wonder if you could just comment on how you're thinking about capital allocation. My understanding is that inorganic or M&A investment opportunities are scarce, and if shareholder returns are the obvious way to allocate capital, how quickly will you make a decision on this, given it looks like the balance sheet is a bit underutilized as things stand? Thank you.

Thank you, Andrew. Yeah, let me take the opportunity to recap our approach and framework. We think, starting from the leverage, we think that we may support the structural leverage up to six times, considering the business profile. In the current context, given most of the cost of funding, we have been having a more prudent approach, defining the corridor as between five and 5.5 times. And overall, we believe that a leverage below five times will mean to have an inefficient capital structure. And this means that by 2026, considering our leverage trajectory, we have a financial flexibility which is about 1.5 billion. Then in terms of allocation, I think our priorities are clear. We clearly, we are focused on growth as well as shareholder remuneration. In terms of growth, The opportunities are related to large special coverage projects, running the service, active equipment, as well as a small regional edge data center. These are the adjacent businesses where we may see opportunities clearly on top to the more sites, more land, more dust as part of the organic investments. The market is fluid, clearly, is in a transformation say that at this stage we don't have in the pipeline projects of opportunity which have a particular material level. So having said that, and consistency with the path, we will continue to assess the opportunities in the market as well as assessing the opportunity to increase shareholder remuneration in the framework of, as I said, the market dynamics in the framework of the cost of funding, and consistent also with the finalization and execution of the current . So I think that in the next couple of quarters, we will continue to monitor the situation, and by no later than early next year, early 2025, we will have another round of capital allocation. Thank you.

The next question is from Stefano Gamberini with Equita. Please go ahead.

Good afternoon, everybody. And many thanks for taking my question. As we got the full year guidance, could we expect that the revenues could be in the low part of the range of 1 billion and 30 million and 160, considering this trend of holos that remains, if understood correctly, at low single digits in forthcoming quarters. And if you can elaborate a little bit also on 2025 expectations, considering that CPI probably will be close to 1% and what is, we can say, the upside for anchor tenants' contact commitment versus the CPI level. Could you elaborate a little bit about this? Thanks a lot.

Grazie, Stefano. Yeah, we... So far, we have been growing revenues high single digit, with Q1 stronger than Q2. Overall, in the half one, growth has been 8.6%. And we expect a similar trend for half two, which is consistent with the guidance range. Then, clearly, there are opportunities to work on the discretionary spend and to expect a little bit of further acceleration. With regard to the inflation, our base assumption is a 2 percent per year up to 2026. Current year in Italy is slightly below. It's about, I think, the consensus and 1.5%, we may remember that the impact of inflation is 1% of inflation means 5 million EBITDA. So in the framework of, let me say, 2026 targets, This is an element that clearly is well within our guidance range. Again, the consensus for 2025 expects coming back an increase of inflation at about 2 and 2 plus 2. So let me say, let's see how things will evolve. The impact is relatively small. And again, probably this range of the 2020 for inflation in Italy is lower than the general and the medium-term trend. Let me also say that clearly CPI has also to be a lower CPI and inflation under control overall in the microeconomic environment means lower interest costs and also for Inuit and in general a lower cost of capital.

Thank you. The next question is from Usman Ghazi with Berenberg. Please go ahead.

Hello, thank you for the opportunity. I just wanted to touch base on the anchor box, which, as you mentioned in the presentation, was a little bit below the 600 per quarter run rate. It was around 400, I think, in Q2. Uh, you mentioned there's some phasing elements there. Uh, so just wanted to confirm that, you know, you would expect this to get back up to, uh, kind of the 600 range through, through the second half. Um, and then just related to this, um, so you've mentioned that, you know, you would expect H since H one growth, 8.6%, that's a better proxy for how you expect to be doing in the second half. Then, then the Q2 run rate, which is, you know, in the low eights, um, Could you perhaps bridge, you know, the main kind of, you know, moving parts as to how you go from the Q2 kind of low H to, you know, H2, which is implying is going to be closer to the 9% in terms of revenue growth. Thank you.

Thanks, Osman. With regards to the anchor tenants, POPS, Yeah, Q1 is lower than the recent trend on the back of a very strong, sorry, Q2 is lower. and on the back of a very strong one. Overall, the half-year is well on track. It's 1,000 POPs, anchor POPs, and this is fully consistent with the full-year target of 2,000, which is confirmed and well within sight, considering the pipeline and the work in progress. So 1,000 half-one, 1,000 in half-two. and 2,000 in the full year, consistent with the target. With regard to the out-year revenue growth, yeah, there are clearly commercial levers we work on. Clearly, we have the big bulk, which is moving on track, and it's the committed growth underpinned by new sites and new tenants. We have new businesses which have been growing quite well and is confirming the opportunity in the market and the ability to capture this opportunity. And this is where we may see some further acceleration in the second half of the year. Holo, as well, as we said, featureless access has not yet shown the acceleration expected and can go a little bit better in the second half of the year. So it's about the discretionary investments from ANCORs and a little bit of Holos may support the second half of the year. steady, resilient, strong trend already embedded in half one with a little bit of potential acceleration in half two.

Thank you.

Welcome.

The next question is from Fabio Pavan with Mediobanca. Please go ahead.

Yes. Hi. Thank you for taking my question. I found the slide on the Italian digital inframarket quite interesting. I personally share your view on it for Italy to invest more on 5G infrastructure. My question is, In your conversation with TLC player, do you have the sense that this point is well taken and we may have an acceleration eventually, if not in the second half of this year, in the first part of next year? Thank you.

I think that the The market and all as well as reflected in all the different comparison and statistics show the need for better infrastructure and better connectivity and more investment to support the digitalization of the country. The demand is clear and there. The opportunity is to have a market structure which is more sustainable and therefore more able to support what has been postponed so far. the digitalization in the economic and social life, at least closer to European and international levels. So if we talk about, and there are some programs which have been supported by the state, such as the 5G, in rural areas, which are progressing, and I think that this will be also the trigger to accelerate in other areas, in market areas, where, again, talking about the opportunities in the economy, in the economic life, in the businesses, to leverage more on digitalization to save money as well as to provide a better service to customers as well as in the social life when whatever we do now a good smartphone connection is needed both indoor and outdoor or in the underground or on a train I think that the the structural secular trends I think there is no need to discuss about that and I think that it is very that this gap will be closed in the next year and a stronger market structure will support this trend. Thank you. Welcome.

The next question is from Giorgio Tavolini with Intermonte. Please go ahead.

Hi, good morning. Thanks for taking my questions. The first one is on the exercising of the five 51% option in Bolding Network. I understand this is a very, let's say, not a material project, but could be very significant for future cooperation with Bolding for other opportunities. And I was wondering if you had any further comment on this. The second question is on the Iliad remedies, if you got any update on the current situation. And the third one, very quickly, is on the electromagnetic limits. I was wondering if you see any change so far from your anchor tenant in the re-designation or optimization of their network architectures. Thank you.

Thank you, Giorgio. On the first one, yes, it's an interesting project, not particularly material, but it's interesting and fully consistent with our strategy on investing in key verticals such as transportation, And so it's an interesting opportunity. We are building the 5G metro in Milan. We will build the one in Rome. So it's, again, a further development on the microgrid, on the indoor solution, on top of the towers with an integrated approach supporting our customers. On the second point, Iliad, now good to see that we continue to do a decent level of business. No significant change compared to the past, but good progress. Also extended to DAS and to indoor coverage solutions. On the EMF, no, no significant change yet. We are, I think, all the operators and regulators and are indeed, let me say, still in the assessment study and approach, no impact, no change yet visible in the market.

Many thanks.

Thank you.

Mr. Ruffini, gentlemen, there are no more questions registered at this time. Thank you everyone for connecting.

Have a great day. Thank you.