Calnex Solutions plc

Good afternoon, everyone. My name is Juan Gaitán, CELNx Director of Investor Relations, and I would like to thank you all for joining us today for our Q2 2023 Results Conference call. In this occasion, I'm joined by our CEO, Marco Patuano, and our CFO, José Manuel Aiza, who will lead today's session. We will now share the main highlights of the period, how we are progressing on the targets of the next chapter of our equity story, and then we will open the line for your questions. As a reminder, if you wish to ask a question, please press star five in your keyboard. And without further ado, over to you, Marco.

Thank you. Thank you, Juan. And good afternoon, everyone. Thank you so much for being with us today. As you know, this is my first earning call as a CEO of Celnex. I'm very happy to be with you today. In reality, I may be told of this industry, so I know many of you. So thank you. Thank you for having me back. I look forward to interact with you, meeting you, building the usual strong relation, doing what I believe it's going to be a very exciting journey here in CELNEX. So let me start by reiterating the strategic priorities that CELNEX made very clear in stating its next chapter, which are not going to change under my mandate because of the board unconditional commitment to them. But even more importantly, because I truly believe that this is the path we must follow in the current environment in order to continue to create value. Just as a reminder, we are confirming all our short and medium term financial targets. We will aim our efforts at reducing our debt with the intention to become investment grade by Standard & Poor's by the end of 2024 at the latest. We will continue focusing on the maximization of cash flow through organic growth and efficiencies, and we will carry on with the ongoing assessment of strategic options for our portfolio of assets in order to crystallize the value and secure the path to investment grade. The moment we will reach this status and we will start generating cash flow above our CapEx commitments, when we become free cash flow positive, to be clear, We will balance the allocation of the capital between organic growth projects subject to the usual strict return criteria and a new distribution policy in order to maximize the value for our shareholders. So let's now focus on the business performance of this quarter. We are once again providing solid numbers showing that the whole organization is aligned and fully committed to the execution of our strategy. First of all, the period has been marked by an excellent commercial performance, consistent operational execution, POPs increasing 7.1% compared to the last year, revenues excluding pass-through increasing 17%, adjusted BDA and recurring levered free cash flow at 16% growth, while free cash flow reaching minus 130 million, which is more than 600 million increase. And it is expected to break even by the end of this year. In half one, we have also closed the first tranche of site remedies in France. And on the second tranche, we are progressing well and we are on track. We are also announcing two new organic growth projects with ANCO clients in France. First one is with SFR. And it consists in an investment of around $275 million. over a period of six years for the construction of a new site and, much more importantly, for the co-location of new POPs on existing sites. The organic growth to be created in this context will generate more anchor tenant revenues. The second project consists of an extension of our fibre-to-the-tower agreement with Bouygues Telecom. The project scope has been increased with an additional €275 million investment over six years for incremental EBITDA upon the completion of the works. We are therefore strengthening our relationship with our outdoor clients in France and meeting our clients' increased connectivity needs at a very attractive valuation without impacting our delivering targets due to this target profile of these investments. Finally, we are also announcing our intention to organize a capital market day in early 2024 In this occasion, we will provide you an update on our industrial proposition. And I mean, we will see how do we see the co-location going forward, the prospects for more BTS, the tower adhesion asset opportunity, and what else we can do from the lease management perspective. We will do a deep focus on value drivers, the different building blocks of our organic growth and how they contribute to our financial performance. We will set up a new efficiency plan after the deep dive analysis that we are undertaking, and there will be an updated financial outlook. Last, an update of our financial strategy, balance sheet management, capital allocation priorities and criteria, shareholder remuneration policy that I'm sure you're all interested in. Now, Jose Manuel Laiza, our CFO, will provide you more details on the period. So, Jose Manuel, the floor is yours. Thank you very much, Marco.

Since you already have the full presentation, I will just provide a few additional remarks on the period, our capital allocation priorities and our financial strategy. The quarter has seen again an excellent commercial performance. with Organo POPs growing at 7.1% compared to the same period last year. This is mainly due to the progress made on our B2C programs in France, Poland, the UK, and Italy, with 3% growth attributable to ETS, and the POP generated mainly in Portugal and Italy, with the rest of our markets also showing a steady performance. BOP growth linked to new co-locations has reached a very strong 4.1% this period. Excluding the impact from pass-throughs, revenues have increased 17% compared to the same period last year. EBITDA 16% and recurrent layer free cash flow 16%. Please bear in mind that this performance corresponds to H1, and when looking at Q2 only, our EBITDA has grown faster than our revenues compared to Q2 last year. In this context, just a quick comment on the deep dive analysis that CERNES is currently undertaking of its cost structure, and the conclusions we will present in our upcoming Capital Market Day. Now moving towards Frequent Flow, defined as Recurrent Level Frequent Flow minus Expansion CAPEX minus Virtual Surge CAPEX plus Cash Recipient Remedies. It has reached minus 130 million euros, more than 600 million euros increase compared to the same period last year. This is an important improvement and it is expected to break to get paid even by the end of this year. Going forward, our free cash flow generation will further accelerate as we reach the end of our B2C programs. And this will underpin our rapid delivering and will give us the financial flexibility to continue growing organically with our clients and to establish an attractive shareholder remuneration policy. In terms of balancing management, CERNES is constantly monitoring market conditions and assessing the benefits of different debt instruments in order to achieve an optimal capital structure and choose the most appropriate option to tackle near-term refinancing needs. As such, we are actively working to push debt maturities forward, considering a number of options which we hope we can present to you very soon. As Marco has already mentioned, we have made the unconditional commitment to maintain adjusted leverage consistently below 7 times VTA with the objective to become investment-grade by S&P, as well as to maintain our investment-grade status by Fitch. This commitment and its subsequent delivery should allow Zelnets to access a deeper debt market at compelling terms, while we are assessing strategic options for our portfolio of assets to continue crystallizing value and secure this deleveraging process. And with this, we remain now at your disposal to answer any questions. Thank you, Marco. Thank you, José Manuel. This question comes from Andrew Lee from Goldman Sachs. Please, Andrew, go ahead.

Good afternoon, everyone. Thanks for taking the questions. The results themselves are pretty straightforward and a great expansion of cotency growth. So I just wanted to ask a few questions around Outlook and I'm very wary that you may not be able to answer some or all of them. So just going to put them out there and just see what you say. Just firstly, you highlighted cost optimization and efficiency plan. I just wanted to clarify, particularly for investors in U.S. towers that have noticed a gap in efficiency between U.S. tower codes and European tower codes, that that cost optimization work that you're doing would be incremental to what you're doing already, i.e. the 90 to 100 million savings plan. So second question was on asset sales. There was some speculation yesterday on Danish and Swedish asset sales and obviously not going to ask necessarily specifically about that but one of the things it mentioned was a minority sale I wondered if you could give us any early insights into your proclivity for minority sales versus full asset sales that would be really helpful and then just finally just a clarification I think Marco you mentioned that you wouldn't consider shareholder returns before turning free cash flow positive. Is that correct? And if it is correct, what definition do you mean on free cash flow there? Thank you.

Yes. So the three questions, cost optimization. I think that if you look at any tower operator, cost structure is fairly straightforward. And the largest cost driver is on lease. So there is no magic in order to perform a stronger lease efficiency. There are two levels. One is renegotiation and the other is land aggregation. We're going to perform both. We are working on this. very actively working we have some some uh new uh possibilities that we are evaluating so uh for sure this is one lever the second lever uh we are working on all the cost structure uh we are making our structure linear especially At the headquarter level, I know that the cost of people is not the major driver of the optimization, but it drives a lot of complexity, so we are going to become leaner. Third, we launched an internal benchmarking process, so we are not always at the same level of efficiency all across our group. And we are going to work on this. Fourth, we have a very strong IT program in order to improve our plan. So there is a lot of things that we can do. If we compare ourselves with some of our peers, not always we are the most efficient of the group. So we have to understand how to become more efficient. Asset sales. Well, I don't want to speculate on rumors, but let me say that we like the idea of accelerating the investment grade and not having it at the end of 2024, but having it before. So is it minority or is it full asset? This quarter demonstrated that Being a pan-European group is a point of strength. We have growth coming from BTS from some countries. We have growth coming from collocation from other countries. So I think that trying to maintain a pan-European footprint is important. Now, two concepts. If you look at our delivering across the time, along the time, you will see that in coming years, inflows, free cash flow inflows are going to be very robust. And so the possibility of having some financial partners that have a day when they enter and a day when they exit can be a good opportunity. But If a country is not going or has not the possibility to reach the scale that make our operation efficient, we will evaluate eventually even a full asset sale in case there is not an industrial strategy that makes sense. So we are, let me say, driven by an industrial consideration. We want to perform, we want to stay pan-European, but we need the scale in order to be pan-European. Free cash flow, maybe that I wasn't clear. I think that first we have to concentrate on being free cash flow positive. And once we are solid with free cash flow positive, we will evaluate all the possibilities in order to give a return to the investors and to the shareholders without excluding any alternative.

So the next question comes from Akil Datani from JP Morgan. Please, Akil, go ahead.

Hi, good afternoon. Thanks for taking my questions. I've got a few, please. Firstly, Marco, you mentioned in your presentation that you're very much looking to support and endorse the strategy of the board, which obviously is good to see. But I guess it would be interesting to understand, as you've had experience of Cellnex as a chairman and obviously now as a CEO, how you think about routes to maybe enhance that strategy. I appreciate it's early days, but any sort of early thoughts you have in terms of where you see the greatest opportunities would be interesting. Second one is I was interested by the two new organic growth transactions that you've talked to today and you've announced and was keen to understand how those negotiations have gone. And I guess specifically what I'm trying to understand is, as we move into what is now clearly a higher rate environment, how is that altered the way the negotiations with counterparties work? And should we think about sell next now targeting higher IRRs than before to reflect your implicit high cost of capital? Um, and then the last one is just a very quick one just on consolidation. Um, You've got a slide in your presentation talking about the way in which you think you're well defended against consolidation. But inevitably, we always get a lot of questions about this from investors. Just as a very simple point, I wanted to understand if we think about Spanish and UK mergers that are currently pending, if both of these were to go through, can you talk us through what the near-term financial impact, if any, might be, assuming there are no remedies? If we take the most extreme scenario where there's no remedies, what would be the maximum financial impact?

Thanks very much.

Thank you. Thank you. Very interesting question. So where are the greatest opportunities? You know, if you look at us across the group, we are a fairly diversified group across the different countries. In some countries, we are a pure tower cult. In some other countries, we are a mixed-tower coal, where we make also fiber, and in other countries, we have active equipments like Poland. So the opportunity is, there are two opportunities. One is we have to increase our use of the invested capital. And these give me also the possibility to join in your question number one and your question number two. So we have deployed a lot of capital and a good part of our growth was CapEx driven. going forward, we will maintain all our commitments. We still have significant commitments that will give us a tailwind in the growth, but we have to increase the efficient use of our capital already invested. So this is on the revenue side. So we have to work on new revenue sources, low capital intensity. The second is, as our colleague of Goldman Sachs asked before, the cost optimization comes from lease. Not in all the countries we are efficient in lease, so we can increase our performance and we can increase our recurring free cash flow. both investing and renegotiating. There are adjacent opportunities. Yes, there are adjacent opportunities. In Poland, we are in the active equipment. I tell you the truth. We are conscious. We are cautelative. We will not jump in the dark in this. We will make the Asian business, especially if it requires significant capex, if the return on the invested capital is okay. So I don't consider... I don't consider higher IRR because of the increase of the interest rates only. We normally don't take the short-term interest rate as a reference, so we invest in infrastructure. We have to look at the long-term interest rates in order to set up our IRR. But it's clear that if we enter in more risky business, we need to increase the expected IRR. And this is what we are going to do. So we are going to be very prudent in this. You asked me about the negotiation level. What's the negotiation? This gives us a very good link between your first question and this question. The agreement we signed with SFR, is exactly, and I underlined that it's extremely important, the possibility of having more point of presence in existing sites. So the possibility of increasing our tenancy ratio goes also hand in hand with agreements and with negotiations that we can do with our partner. If you take France, we have already more than 25,000 sites. So when we discuss with our clients, first of all, we have to convince them that they can evaluate the possibilities. new tower to use an existing one, which can be cheaper for them and it can be valuable for us. BTS optimization is the word. BTS versus new pop, we can do a lot in this. What do I think about the merger of operators? So we have to be clear on short-term effect and long-term effect. The first thing that is important to us is that our clients are in good shape. To be a bit cynical, I want them to pay us, so they have to be in good shape. To be even more cynical, I want them to invest more, and so they have to be in good shape. In some markets, the over-competition is preventing a good level of investment. A good level of investment means densification of the network. Densification of the network means more sites, more small cells, more dust, more everything. Short term, every time there is a potential merge between two MNOs, what we have to be careful is not to be penalized on what we paid in the past in order to be there. So it has to be a fair negotiation. We can accept marginal deviation, but we cannot accept monster deviation from what we agreed and what we paid in the past. But these can be agreed in the context of a merge. And I think that from more solid customers and more solid MNOs, more investment, it's good for us.

Our next question comes from Georgios Yerodiakounou from Citi. Let's go ahead.

Good afternoon. Thank you for taking my questions. A couple of follow-ups, please. The first one, Marco, you discussed value crystallization and the fact that you would like to have some partners for a certain period of time during the investment phase. I was just curious if you can also perhaps elaborate a bit more as to how you are thinking about the mix because clearly in some of the more mature markets with multiple anchor tenants, you can have a better crystallization of value. But maybe in some other markets, you may require more investments to gain scale and maybe acquire assets locally. Okay. So curious between the mix of the two, what would be your preference? The second is just a clarification on the comments you just made about the SFR agreement. I was wondering if you can disclose perhaps how many of the sites are new and therefore built to suit versus co-locations, if you have an idea perhaps of the number of sites and also the mix between the two. That would be great. And then the final question is around the development we had recently in Italy with the spin-off of the network of one of the players, who's your main anchor tenant, and an infrastructure fund looking to acquire it. Is this a type of business that in the future you could consider to be a bit more active if the balance sheet allows you, conscious of the fact that in Poland you haven't gone fully that way, but you are already on the active side. So if you see this trend of telcos perhaps going a bit further in what they're willing to give up, if Cellnex will be there in these adjacencies or whether that is a step too far for you. Thank you.

Thank you. Thank you, Georgios. Belly crystallization. I think that every hypothesis has the perfect partner. There is not a perfect partner for everything because as you perfectly underlined, there are different market conditions, so different needs, and so different partners. You were referring to solid markets. mature markets. What is the preferred partner in this case is a partner with low cost of capital and with good interest of dividends and potentially a longer horizon. There are markets in which something will happen in the future. There has been speculation on the Nordic country. Well, the Nordic country is a place where something will happen in the coming years because Telia, Telenor, everybody is changing their approach to the market. So you need someone who is with a more entrepreneurial attitude. If there is more capital to put on the table, you need to have someone who can make a follow-on if the case. So there is not the single perfect partner. Every partner is good or bad depending on where you want to put the partner. Are we looking more to a situation where the market is very stable or a situation where the market is moving? I tell you that we are agnostic. There are situations where the value is has not really became very explicit because it's still a work in progress so where it is still a work in progress i think that we should leave on the table too much value in crystallizing uh the asset the asset evaluation in the hand of the partner a partner will say okay i want to be part of this work in progress. And I think that we have all the expertise and let me be a little bit proud of ourselves. Also, we have the money and I'm not sure that we need someone to make our job. So we are more than able to make our job. But there are situations where having a partner can be very helpful or the market is mature enough that we can open to someone. um i take uh uh the third because i leave uh i leave uh the second uh to one who has uh the the number so he's the the bean counter of the story so i live i leave him to to count the beans so network separation what i think what i what uh we are again in the in the in the story of the aviation of the aviation to investment so i give you two answers First, are we okay or are we against natural separation in Italy? We are neutral. At the end, the quality of... of the counterparty, having a net call or having an integrated player in this specific circumstance doesn't change at all. So we are fine and a problem will not come for us. Dan, is it a territory where we can play? There should be value creation. So in outsourcing a network, I think that the value creation from the pure outsourcing of a network is relative. Yes, we can do it. Yes, we can have a good return on the invested capital because we ask something directly. that could be, let me say, rub-oriented. I go and I ask a minimum return on my invested capital, and this can be a business model. But the real bingo comes if you can consolidate networks. In the network consolidation, there is a lot of synergy. There is a good service that you can provide to the operators that are consolidated in the network because their network will cost less. There will be a lower cost per giga. And running a network and selling it to MNOs can deliver extra boost in value. Is this a financial project? No, that's an industrial project. Consolidating networks is, from the engineeristic perspective, it's not walking in the grass in a moonlight. It's tough. It's complicated. You need a lot of stars to be aligned. Well, if the stars align, of course, we will be a good astronomic.

So, please. The second question, George. Basically, we are talking about an investment of 275 million in exchange for around 1,800 new POPs, all of them at anchor tenant fees. And the split OTs around all of these POPs should be generated from 1,000, around 1,000 new sites. And the raise is coming from an acceleration of intensification of the client.

All in all, if you make some math, you see that it's a great deal. So I congratulate our guys of the commercial brands.

Excellent. This question comes from Andrej Kvisek at UBS. Please go ahead.

Hi, thank you for the presentation and taking my question. I've got a couple as well, please. So just following up on the conversation between, you know, scale and presence that you were mentioning in terms of, you know, importance of having a pan-European footprint. what is the kind of balance that you would assess in markets where you are present today, such as the Nordics that have been mentioned, but also, for example, Austria, where clearly there is very little opportunity to consolidate and thus achieve scale because 100% of your competition is industrial and so forth. So what is kind of the approach here? Is it being in a place just for the sake of being there, or would, in a situation like this, the ability to scale up or rather the inability, in this case, of scale-up prevail. Then in terms of you talking about the optimization of leases going forward with rates continuing to creep up, I was just wondering if the ambition in this scenario would be to just kind of achieve the kind of guidance that you've given previously around $850 million for 2023 and then taking this number down to say $830 roughly by 2025. Or do you think that there is actually scope to do even more, despite the interest rate curve probably creeping up a bit further? And a third one, if I may, in terms of operating leverage. So you've highlighted that, obviously, even last quarter you said this was an exemption. And 2Q should see, or throughout the year, you should see operating leverage come through. So we are seeing this come through. but if you could explain to us the building blocks of that turnaround in terms of operating leverage and how you see this going forward, please. Thank you very much.

Okay. So you made two great examples in pan-European partnerships because you took two markets that represent really the extremes of the potential thoughts. Nordics is a place where everybody, every expert of the sector tells you that something will happen, but we don't know exactly in which order and when. Therefore, you need a partner, as I told you before, entrepreneurial, uh with deep pocket uh with good lateral thinking uh expert of the sector so you need someone uh who really wants to play the game uh together with us uh don't let don't get me wrong we are on the driving seat but uh it's important to have a sparring partner uh to to think uh in order to think together Austria is exactly the opposite. It's a block situation. So Austria, there are some big blocks. Some of them moved a few times ago. Some of them are not expected to move. So how to get scale there? Well, you get scale there if you find a way to unblock uh these uh these uh this scenario uh otherwise uh the risk is that you remain uh subscayed and remaining subscayed you cannot get synergies you know better than me the synergies are in-country synergy the cross-country synergies are very modest so you need to have in-country so you made Two very good examples, because the two examples drive you to what I was telling you before. There is not a one-fits-all. Every country, you have to see it, analyze it, and you have to make strategic thinking before taking the checkbook and understanding who has the right pen to sign the check. Your second question was about leases. So can we do more? This is exactly what we are working on in this moment, and this will be one of the drivers of our plan that we are going to present later on this year. My gut feeling is probably yes, if we're able to activate the proper levers that requires deep work. We have created an internal working group that is a multi-country working group that is working on this. We have a best practice in Italy, and we have several countries that can do significantly better, but we need to improve our performance. The last, I ask your pardon, it was a little bit bad, the reception. I think you were talking about operating leverage.

Yeah, maybe just one clarification on the second one. Just to clarify numbers, Andrej, so our 2023 guidance includes 850 million of leases. And then our 2025 guidance, close to 900 million, just to clarify the figures on our end. And maybe Andre, maybe we will need to ask you again about your third question, because we're not sure we got it. Apologies for that.

Sure, apologies. So in terms of the operating leverage, I was just curious if you could remind us, because obviously you had a situation in 1Q where there was negative operating leverage on the level of EBITDA, but you flagged that this would kind of change in the coming quarters. If you could explain to us, please, how exactly that played out and what do you expect for the future? for the rest of the year, perhaps.

Thank you. Absolutely. And thank you. It is true. It is true that in Q1, maybe operating leverage was not so evident because you could see that our revenues grew faster than our EBITDA. That situation, if you focus on Q2 only figures, the situation has reversed. So in this occasion, EBITDA has grown faster than revenues. And we believe that that is the sort of performance that you should be expecting in the coming quarters. I appreciate it. Thank you very much. Thank you so much. Next question comes from Luigi Minerva from HSBC. Please go ahead.

Yes, good afternoon. Thanks for taking my questions. I was wondering if we can do a step back, Marco, and perhaps you can tell us how you approached your first 100 days as a CEO of Celnex. you know, how are you organizing your time, your priorities, and perhaps you can mention, you know, three strengths and three weaknesses that so far you have seen in the company. And then perhaps a couple of more, you know, practical questions. The second one is about your As you approach portfolio management and potentially consider disposals, I'm wondering whether there is a valuation set of rules that the team has in mind. For example, that you wouldn't sell assets below sell next current trading multiples. And thirdly, in the path to get to investment grade, I wanted to ask if spreading the built-to-suit investment program over a longer period of time is also an option that you are considering. Thank you.

So the first 100 days have been a sort of incredible European rush. The first thing I did, I visited all the single countries I spoke with. I had a dedicated due diligence. Alex was with me. The head of human resources was with me. Most of the time, the CFO was with me. We had one day meeting with all of them, analyzing market by market, and in every single country, we met our most important clients. With some of them, we had to ensure that the strategy was not getting investment grade, just not performing the agreement we had with them. So it was operations first, uh customer hand in hand with operations and then we made a very strong due diligence on numbers So all the numbers that are in this group have been revised. It has been, believe me, a tough 100 days, not only for me, but also my colleagues had to, how can I say, to live with me. And so it was a tough couple of months. Just to remember, my 100 days lasted 60 days. So it's a bit unfair because my 100 days ends mid of September just for the love of arithmetics. So where we are very good, every single client I've been talking with told us that we are a good partner. This for me was a breath of fresh air. And this is extremely important. They were scared that we could be less engaged because of CAPEX constraint. And when we told them we would find a way to do both CAPEX and the leverage, they were relieved. Technically speaking, I found that all our guys at the operational level uh are particularly good uh so very well the third strength i would say that there is a spread knowledge of the financial metrics so every every time you speak with someone is well aware of the value driver and the financial value driver so there is a spread knowledge Three weaknesses. One is we have 12 countries and 13 operating models. So we can have more synergies if we standardize some of the things we do. There are always good reasons for being different, but sometimes there are even better reasons for being the same. And this is one element we can do better. Second, our IT can be improved. This requires a little bit of IT capex. No worries, the payback will be super, super duper short. And, well, I'm not in mind the third, so I stay with two. Disposals. What are the rules of the house in my head? We have premium asset. We want premium evaluation. You were mentioning not below the trading multiple of Selenex. You're very, very, very pessimistic. I would say not below the best of the market. So we are not talking about something that you can easily find in the market. We have backlogs that are billionaire. We have relations with the customer that are multi-country, and this is a strength there. We have operations in place. There is a scarcity factor. There are not so many good assets on sale. There is a side. All the countries, we are sizable apart, with the exception of a couple of countries. So we have premium assets. We don't sit at the table if there is not someone who wants to give us premium valuation. BTS, make it longer. I think exactly the opposite. I want my customer to have a strong 5G. But there is zero doubt that we will have to stay on the plan. So what we are doing, we created a capital allocation, quite severe capital allocation procedure. including at the board level, we created a capital allocation committee in order to be 100% sure that we will allocate our resources with a priority list that not only makes sense, but turns into value constantly. So I... It's not making the story longer that you get the result. It's putting the money with a clear priority. And I'm sure that if there is not a clear priority, everybody understands that it can be delayed. Hope I answered.

Yeah, thank you very much.

Thank you, Luis. Next question comes from Jacob Bluestone from Exxon. Please go ahead.

Hi, thanks for taking the question. I'll keep it to one. You talked earlier about how you wanted to find new low capital intensive revenue sources. And I was hoping you could maybe expand a little bit on what do you mean by that? What are some of these sort of additional revenue streams? I guess Celnex has probably been pursuing some of this already, perhaps through the Augmented Tower Co. So maybe if you can sort of particularly zoom in on what is it that you're going to do differently on the revenue side, that would be helpful. Thank you very much.

I was mostly referring to intelligent co-locations. uh once again the project we have signed in france is the type of project that we have to sit and discuss with our clients uh some time and uh the question that luigi made a second ago can be very very useful my client believes that building a new tower is faster for them uh to deploy that 5g network it's faster than than co-located on an existing tower we are going to demonstrate that this is not true that uh uh with the limited capex without the capex necessary to uh to reinforce an existing tower we can easily collocate their 5g uh and uh and we will save and we will save a lot of money in the case of france we save or less 800 bts going on new pops even if i have to reinforce the tower or what we call work and studies you can easily imagine that the cost of the work and study is well below the the capex required for a new for a new bts there are other business that are relatively low capex because they use existing infrastructures i make you a very concrete example we are winning tetra agreements the tetra agreement goes on existing tower so you just have to make some capex and then you have a beautiful new tenant that by the way you never expected because it's not an mno Who pays, of course, a little bit less than an MNO, but at the end is very good. In some countries, you have IoT, FWA, you have a lot of things that you can do. We are exploring opportunities with new entrants. For example, Portugal is building something like 3,000 new pubs on existing sites. I can talk with you about how we can explore broadcasting towers in order to deliver new services to the crowd. The list can be as long as you wish. Each program, each project is something different, something new. But what is important is that the more you ask to the countries to include these into their span of attention, uh the more you see that there is a multiplicative effect that is going to work so and and another thing we are creating at at a corporate level uh we are creating a sales excellence team that is going to transfer know-how from one country to another because for example spain is super strong in tetra and we can use this experience in other countries By the way, at the corporate level, we are decreasing the headcounts. Did you say ever the number? Yeah, 55, 60. So in order of magnitude of 20 to 25%. So we do much more with significantly less people.

uh yes please yes just gonna ask a follow-up just on as you described it sort of increasing smart tendencies so i guess i mean essentially there's a bigger focus on growing the number of tenants per site are there any particular markets which you would highlight where there's a particular opportunity for that um that you've identified all in every market all in every market because uh because uh

What we need is to put in the brain of our commercial guys that there is the possibility of doing more. There is. You know, the risk that I see is that we make the same mistake we were doing at the beginning of this century when we were talking about Internet. So everything was internet, and then we thought that nothing was internet. The truth is that we were just missing the timeline. Make an example. At a certain point, we thought that we would develop a gazillion small cells, DAS whatsoever. Now you take the business plan of everyone, there are no small cells. So they disappeared. So we are putting just wrongly on the timeline. I think that if you take the CapEx intensity of a huge small cell program, you will be surprised that the CapEx per node is relatively efficient. So we have to think differently. It's a matter of thinking differently. Sorry, I'm making very long, so please pardon me.

Thank you so much.

That's very helpful.

Thank you, Jakob. Next question comes from Fernando Coltero from Santander. Please go ahead. Hello.

Good afternoon, and thanks for taking my two questions. The first one is, at some extent, a follow-up on the previous one, and at which extent one of the organic growth levers that has been present in the story, particularly in assets and assets, will continue to be there. Now, in that sense, I don't know which extent you'll see investment images and assets, and you name small cells, but also talking about fibers to antenna, or edge computing, are fitting in this smart growth on low-invested capital. And in that sense, I would like to understand if your comments on this kind of organic growth should derive on a change on your views on the targeted organic expansion cap, which is currently at 10% over sales, and at which extent do you see some kind of change on this guidance? And the second question is on capital allocation and particularly on the basis that you were having already the investment rate whenever it takes. But what is your approach in terms of shareholder remuneration and what is the shareholder remuneration to represent part of the capital generation, as I said, whenever you get the investment rate? Thank you.

It starts to be a little bit difficult to continue to elaborate on organic growth.

But let me tell you, we have not to forget that we are partners of mobile networks. And I use the plural because it can be 4G, 5G, but it can be security network, it can be FWA, it can be a lot of things. It can be microwave becalling, it can be literally a lot of things. In some circumstances, Spain and France, for example, we're working on Fiber, uh which is not only fiber to the antenna we are buying also metropolitan metropolitan area networks so i think that it's important to to consider the the driver of the industry we are part of point number one new services are going to be deployed on higher frequencies higher frequencies need means smaller cells. Smaller cells means to have more dense passive infrastructure. Point number two, electromagnetic limit. We hope that it can be released, but permitting it still in urban areas is still a nightmare. This means that neutral networks are going to be deployed and forward-looking is going to be deployed. Third, forget about the fiber to the client, but the fiber to industrial premises is a growing business. There is a growing demand of wholesale fiber. And what we are building is a relation with our clients where we have significant spare capacity that we can sell wholesale. So what I want to tell you, Fernando, is there is an organic core and there is organic adhesion. And there is BTS. We are not saying that we are not going to make the BTS. We have contracts. We have contracts that we have to build another sort of 20,000 BTS. And we will do. We will respect all our contracts with all our clients. We will do it. But we have not to limit our growth to CapEx-driven growth. We have to add also more. Is it something that we can do tomorrow morning because I arrived the day before yesterday? No. It means that we have to push in this direction. It will take a little bit of time. It means that we have to organize in a slightly different way. We will do it. Considering if you're a believer, Bible says that the planet has been made in six days, so I don't pretend to make everything in one day. Capital allocation and shareholder remuneration. As I told you, I was not going to change the plans vis-à-vis the clients. Then words are words, facts are facts. Until the day before yesterday, I was an inmate, and so what we did was When we reached the target leverage, we said we go back and we better remunerate our shareholders. Words are words, facts are facts. So I think that I don't want you to believe my words. I want you to look at my facts.

Rino, thanks for the call. Marco, just a follow-up. What are your views regarding the broadcasting business in Spain?

Sorry, Fernando, the line is not fantastic. Can you please repeat?

Yes, sorry. Yes, I was already asking for Marco's view on the broadcasting business in Spain and at which extent you may think, what are your plans on that business? I know that there are some tax efficiencies coming from that segment, but also we know which are the long-term outlook.

Yes, I'm a cruiser of the poor broadcasting because I'm the defender of the faith of the broadcaster. The poor broadcaster is treated too badly. If you make the return on the invested capital of broadcasting, you will jump on the chair, because the capital allocated has been amortized since ages, and we are making very good returns. I think that we are looking to the broadcasting using the wrong parameter. If you ask to the broadcasting growth, of course you're not going to have growth. If you ask to have 90% EBITDA, uh you don't know the business so because it means that these requires more fte requires more more attention these slas are very strict the infrastructure but if you look at the right metrics which is the return on the invested capital in this business you will love it uh the same way i love it uh it's a it's a fantastic uh cash generator It pushed up our ROIC performance in Spain. And I'm proud of the guys who have a level of expertise incredible. By the way, their level of expertise is allowing us to create, and we are starting now to create, pan-European NOC, pan-European SOC. So we can use their experience in order to use their spare time in order to offer services to other countries where you have to have network control. I wish I had $1 every time that someone told me that broadcasting was dead, because I would have been a millionaire and I would not be here with José Manuel. But the truth is that the broadcasting is doing well. The Spanish government just said that they are going to launch ultra-definition 4K on their multiplex, which is super good news. because it extends the life of this service. So, happy to have it. Very clear.

Many thanks for the answer.

Thank you, Fernando. Next question comes from Roshan Ranjit from Deutsche Bank. Please go ahead.

Great. Thanks for the questions. Good afternoon, everyone. Just a quick follow-up on the extension to the SFAR deal in France, please. I think, just based on the headline numbers, it adds around 50 million euros of CAPEX a year as part of the bill to suit. Marco, you've been very clear around the scope for CAPEX efficiencies. I think you were outlining new efficiency plans At the CMD, is this a precursor to combining the build-to-suit in France? I think the previous guidance was around 1.6 billion of build-to-suit capex in 23. So can we see an upside risk to that number as a result of these efficiencies? And just a quick follow-up on organic growth, which you've got into great detail. 7% growth for the pop growth for H1. I know your guidance is greater than five, but given the way densifications go in, is there a kind of material upside to that number? Do you see? Thank you.

I don't know if I have followed well the first question. Your first question was about acquisition, big to suit, you have said, 50 million euros. I think you are talking about potentially acquisition of lands. that we have carried out. Just in case, if you could please repeat, just to make sure that we understand your question, Roshan. Sorry, please.

Oh, sure. It was with the SFR deal, the secure investment at 275 million. Yeah, and how that built into your existing Build2Soup program.

Yeah, yeah. That is essentially on top. So that is not what was initially contemplated. Also, bear in mind that that is not going to impact any guidance because of the nature of the process. It is a staggered time. Also, you shouldn't be expecting an immediate deployment of this project. Our expectation is that maybe the benefit is going to be more visible from 2026 onwards. You know that the run rate for this project is 2029. So I think that's something we can accommodate within our objectives. And when we are mentioning our intention to become free cash flow neutral by the end of 2023 and 2024, that is not going to be changed because of this project.

Yes, we can easily accommodate the 2023 and 2024 portion. We can easily accommodate... in a complex optimisation that we are designing internally. So no worries on this. I don't know if there was a second part in your question, Roshan?

Yes, sorry, it was just on the organic growth. You delivered 7% pop growth in H1 and in your previous guidance, you've said greater than 5%. And the way you've been talking around really driving the tenancy and the lease up and densification from requirements from the MNOs. Is there upside to this number now? Thanks.

Yeah, I think that if you look, we gave also the deployment of this 7% by country and you see that there is a very important contribution coming from Portugal, which is the acceleration, the DG, is asking us in order to deploy their network, envisaging the launch of the surveys. You know that the DIGI project is a strong project that is giving us extra boost. So I would say that part of this exceptional DIGI is It's pushing the 7%. Never forget, as per chart number six, that the 7% is sort of 3% is coming from BTS and a sort of 4% is coming from new locations. So the BTS is following a program. 2023 is a heavy number, is a heavy CapEx year. which means a lot because if we are able, and I believe that we will be able to be free cash flow neutral. So forget about recurring. Let's use free cash flow. If we are free cash flow neutral this year with the amount of CapEx we're going to do this year, 2024, which is lighter in terms of capex, you see that the trajectory of the 2024 is for a natural improvement in free cash flow. But to go to your question, so the 7% is given today by a 3% BTS and a 4% new colocation. The 4% of new colocation has a push from DG Portugal. Are they going to push all the time? Until when they push, we're happy. The day they will stop pushing, we will ask to some other country to do more. I think that the 7% has been something outstanding. So we're not going to change our target because of the 7%.

That's very clear.

Thank you. Thank you so much, Roshan.

So now to old friends.

Yes, as we are going past the hour, so the last question or questions will come from Fabio Papam at Mediobanca. Please go ahead.

Yeah, to be clear, I cannot not answer to Nick. So I will take Nick Delfos because otherwise he kills me. Since we know each other, I will never say for many years because it means that he's old. Fantastic. We have created more time. Please go ahead.

Fabio, are you there?

Yes, yes, I'm here. Hi, Marco. Welcome. Ciao, Fabio. we had uh discussed about almost everything just trying to join in some dot uh it seems you have in mind uh uh some some new business opportunities some disposer so one question could be what is the corridor for the leverage you would consider it fair for celnex and the other question is a new business opportunities again in the future um The big deal refers to edge computing, so do you think artificial intelligence could be much more source of new revenues, I'm thinking about cloud and edge, or it will have much more to do about options for efficiency and cost saving?

Thank you. I start from the first, which is the corridor for the leverage.

We said we are going to go below seven times. Maybe we can find our sweet spot a little bit lower than just below seven times. But I think that our industry and most importantly, our backlog, I never saw in my career such an impressive backlog as this company has. Sometimes I think we tend to underestimate the power of this backlog because if by chance we stop investing, we make so much cash that we will ask ourselves what to do with the cash. So I think that I don't see us going below six times. But let me say that if we just say below seven times, probably we can do a little bit more than below seven times. Your second question, I think that short term, The network virtualization is more an efficiency lever than a new source of revenues, because if you consider that this year we have more than 4 billion revenues in our forecast, okay, let's make the revenues without the pass-through, it remains well above 3.5. And so the contribution of artificial intelligence to my revenues is going to be nanometric. Not the same on the possibility of having interesting effects on the network topology, on the CAPEX and on the costs. Just to make you clear. If we go to a virtual RAN configuration or to a cloud RAN configuration, antenna will become much lighter and probably smaller, which means that you can host more antenna on the same tower and you can remotely control if you control the former MSC that tomorrow will be point of aggregation of virtual RAN. So, I think that our configuration in France is super interesting because we are buying this point of configuration and point of aggregation that can give us a very interesting possibility in this sense. So Fabio, I think it's more from efficiency or network design.

We no longer see Nick connected, so we will finish with Nick.

Otherwise, we end here. Okay. You can witness that I made, so if he complains, it's not my fault.

Fantastic. Then thank you so much.

Thank you. Thank you all. It has been a pleasure to be with you in this conference call. I hope to see you in person soon.