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Cellnex Telecom, S.A. (CLNXF) Q3 2022 Earnings Call Transcript

Cellnex Telecom, S.A. (OTCPK:CLNXF) Q3 2022 Earnings Conference Call November 11, 2022 5:30 AM ET

Company Participants

Tobias Martinez Gimeno – Chief Executive Officer

José Manuel Aisa Mancho – Chief Financial Officer

Juan Gaitan – Head of Investor Relations

Àlex Mestre Molins – Deputy Chief Executive Officer

Conference Call Participants

Sam McHugh – Exane BNP Paribas

Andrew Lee – Goldman Sachs

Akhil Dattani – JPMorgan Chase & Co.

Jakob Bluestone – Credit Suisse

Jerry Dellis – Jefferies Group LLC

Ottavio Adorisio – Societe Generale

Georgios Ierodiaconou – Citigroup Inc.

Nick Delfas – Redburn

Luigi Minerva – HSBC

Fernando Cordero – Santander Group

Fabio Pavan – Mediobanca

Juan Gaitan

Good morning, everyone. My name is Juan Gaitan, Cellnex’s Director of Investor Relations. And I would like to thank you all for joining us today for our Q3 2022 Results Conference Call.

As always, I’m joined by our CEO, Tobias Martinez; our CFO, José Manuel Aisa; and our Deputy CEO, Àlex Mestre, who will lead today’s session. As you have already seen in our presentation release this morning, we have made the most of the opportunity presented by our quarterly results to provide a strategic update. We will now share that my conclusions reached after the strategic review process, and then we will open the line for your questions. [Operator Instructions]

And without further ado, over to you, Tobias.

Tobias Martinez Gimeno

Good morning, everyone. Thank you, Juan Gaitan, and thank you so much for your time today. Let me please start this session highlighting that Cellnex acknowledges that the current environment creates a new factor to be taken into consideration in our decision making process, that we listen to the market and that we have always been rigorous in our decisions. Therefore, we would like to share today the next chapter of our equity story, which will be focused on execution and clear capital allocation framework with an unconditional commitment to investment-grade.

This chapter will show the following characteristics. A commitment to our financial guidance, a clearer capital allocation framework with a more conservative financial risk profile, and increased focus on organic growth, both from activities that require limited CapEx as well as new greenfield growth opportunities with our clients. Focus on free cash flow generation within the context of securing investment-grade as the overarching priority. Any excess cash will be deployed in a manner consistent with maximizing long-term shareholder value.

Our continued progress on the crystallization of efficiencies and synergies to make sure that our OpEx and lease base grows below inflation. The integration and consolidation of existing platforms as well as the maximization of the long-term relationship with our clients, an organization fit for the future, fostering a culture of innovation, talent rotation and streamline processes.

And last but not least, we are presenting today a solid set of results. The period has been marked by a consistent operational and commercial execution with revenues increasing 46% compared to the same period last year. Our adjusted EBITDA, 45%; and our recurring leverage free cash flow, 46%.

And, I will now hand over to our CFO, José Manuel Aisa, who will provide more details on our new capital allocation framework.

José Manuel Aisa Mancho

Thank you, Tobias. As Tobias has already mentioned, the main highlight of this strategic update is our commitment to reaching investment-grade status. We have made unconditional commitment to maintain adjusted lever consistently below 7 times with objective to become investment-grade by S&P, as well as to maintain our investment-grade status by Fitch. This priority will determine the amount of resources we can deploy in the future for alternative uses in a manner consistent with maximizing long-term shareholder value. Shareholder distributions in the form of dividends or buybacks and, of course, greenfield projects with our clients under a strict return and payback criteria.

Finally, I would like to remind you a very few important characteristics of our debt and cash flow generation profile. First of all, defining free cash flow as recurrent levered free cash flow minus build-to-suit CapEx, minus expansion CapEx. We are expecting to become free cash flow positive from 2024. Our free cash flow generation will then accelerate as we reach the end of our current build-to-suit programs. This strong free cash flow generation will support our rapid de-levering in the coming years. In Cellnex, we constantly monitor market conditions to the site, the most appropriate way to tackle near-term refinancing needs, although, we can always use already available undrawn credit lines.

Going forward, generating cash flow will substantially exceed debt maturities. And our commitment to investment-grade should allow Cellnex to access a deeper market at compelling terms. Since you already have the full presentation, I will not go through the details of the period. We remain now as you complete disposal to answer any question you may have.

So let’s please open the line for the Q&A session.

Question-and-Answer Session

A – Juan Gaitan

Thank you, José Manuel. First question comes from Sam McHugh. Please, Sam, go ahead.

Sam McHugh

Good morning, guys. I’m not going to ask you about capital allocation. I think, it’s super clear. Two questions, though. On lease costs, this year, you’re saying they’ll be below €800 million. I wonder if that was just related to kind of phasing of payments on Hutch UK, like just not have many Hutch UK payments, because that’s a bit below consensus expectations. That’s number one.

And the second question is on Portugal. I noticed that the NOS BTS program hasn’t actually started yet. Is there any delay there? On the other side the co-location growth is excellent. Are we seeing any contribution from Digi already? Or is the Digi contribution still yet to come? Thanks very much.

Juan Gaitan

Thank you, Sam. On the first one, the original expected contribution from Hutch UK in the leases was not meaningful. So, I guess that what we are seeing this quarter is basically the result of our efficiencies. I mean, all-in-all, you know that we have been sharing some figures with you for the full year 2022, and something that we are reiterating is that or at least clarifying this quarter is set up for full year 2022, we will be paying leases below €800 million. So we want to clarify the expected impact of UK Hutch on the leases. It’s for 6 months. It was €11 million. Is that correct, José?

José Manuel Aisa Mancho

That’s correct.

Juan Gaitan

This is the impact. So, obviously, I think that this is a part of the better performance, but the performance is significantly driven by the good management of the company in terms of inflation, cash advance, and acquisition of lands. So in this case, the perimeter of consolidation of Hutch UK does not take into account a high lease component as well.

José Manuel Aisa Mancho

So clearly, Hutch UK plays a role. But I would say that in general, our impression is that, it’s mostly the result of our efficiencies put it on in place. Now, on Portugal, we are not really seeing a delay in the build-to-suit CapEx, at least compared to our expectations. This will ramp up in due course. And as you very well mentioned, the organic growth that we’re seeing this quarter generated in Portugal is mostly related to Digi. That’s correct.

Sam McHugh

Thanks so much. Very clear. Thanks very much.

José Manuel Aisa Mancho

Thank you, Sam.

Juan Gaitan

Now, the next question comes from Andrew Lee. Please go ahead, Andrew.

Andrew Lee

Yeah, good morning, guys. I’m going to ask capital deployment, if you don’t mind, two questions. Firstly, just on the timing or your anticipated timing of getting to investment-grade, I think you’ve mentioned 2025. But, I guess, a few investors have pointed out, does that look a bit kind of conservative? I wonder if you could talk through the kind of timing of reaching investment-grade. And just when you get there, if M&A is still not compelling, is it more likely dividend or buyback that you’d be thinking about?

And then second question was on just organic capital deployment from here. I wonder if you could just lay out what your priorities on that front, you laid out the spread you’re looking for. But just where do you think the focus is going to be on organic capital deployment over the next couple of years? Thank you.

Juan Gaitan

Thank you, Andrew. Yeah, thank you a lot for your question. I will take the first one. Regarding the answer to your question is between 12 and 24 months. This is the information that you can see in the research update that this morning S&P has released to the market. And you can see there that there are very clear time framework for Cellnex to get this – to what somehow to be finally upgraded into investment-grade. I do think that the company can do it. You look at in Graph 7, you know perfectly well that we are a prudent company. We are reaching that 7 times net EBITDA at the end of this 24 months. But again, we are being prudent. And also S&P introduced some language, saying that this could happen even before than 24 months.

The second question, Àlex?

Àlex Mestre Molins

Yes, good morning. In relation to the priorities in the adjacent assets, basically, I think there is one page in the presentation, which is Page 11, where we’re identifying the 3 main assets, where we believe we should be devoting discussions with our clients. And those, specifically, the fiber-to-the-tower, the brand sharing and data centers. So the fiber-to-the-tower is something that as we – I think have mentioned in the past, there is around 50% of our sites that we believe will require in the future fiber. Today, we are having roughly mid-north of 25% of the site with fiber.

and why this fiber is going to be necessary, specifically, because 5G. 5G, as you know, is demanding a lot of bandwidth to be distributed by each one of the sites, and to bring that bandwidth into each one of the towers will need fiber. Radio links are sometimes not sufficient. So that will be priority number one, and we believe that there is a type of project that will probably last till 2025, 2027 to have that rollout of fiber.

Then, there are the other two types of assets that we believe will take a bit longer to start deploying more massively, which is the active sharing, so utilizing active agreement on one side, and the other one is data center, which is very much linked also to the 5G infrastructure. So that’s how we see, it’s quite simple, it’s not very sophisticated. And we believe that there is a clear path in discussions with our clients in this domain.

The business case is always our like. So visibility of cash flows, having an anchor, et cetera, et cetera. So, in that sense, it’s more of the same.

Andrew Lee

Thank you. That’s really helpful. Can I just ask a quick follow-up on the fiber-to-the-towers, you gave a kind of endpoint when that fiber-to-the-tower will be deployed? When does it really kick off, because we obviously had the Bouygues contract, but not much else since. So when do you think we’re going to start to hit kind of full flow of those contracts being signed up?

Àlex Mestre Molins

Yes. So in the case of Bouygues, yes, this is massive, because it’s the totality of the network of Bouygues. But we have already started in Spain, for instance, with Telefonica. I think recently, we have announced that we are around 2,000 towers, let’s say, fiber acquisition in that case has been, but we are preparing those assets to be ready to also have more tenants as we do with the towers now. So this is something that will go step by step. There are some clients that may think that this is part of their wholesale business. So there is an area there where we need to have, let’s say, a different discussion, which each one of the clients.

But at the end, the towers will require a fiber, and that fiber will be – because we deploy it, because we commercialize it being the fiber maybe not ours, but the fiber is going to be built in any case.

Andrew Lee

Thank you.

Operator

Thank you. Now the next question comes from Akhil Dattani. Please, Akhil, go ahead.

Akhil Dattani

Hi, good morning. Thanks for taking the questions. Can I start with capital allocation, please? I guess, I was just keen to understand, we’ve had the Vantage towers process in the last week or so conclude. I wonder if you could comment on whether you were involved in that process or not? And, I guess, part of the reason for asking this is just to understand, had you have been involved in that, and how do you have completed that deal? Would that have been consistent with this pivoting strategy? Or would that have led to another route? So just we can sort of understand the sort of thinking and the evolution to getting to where you’ve got to. So that’s the first piece.

And then the second bit is just some very small questions around the quarter. So if I look at this quarter, Italy seems to have been very strong quarter-on-quarter, there’s a very strong uptake. So I wonder if you could maybe just give us a bit of color on what’s driven that Italian growth improvement this quarter. And then the other one is just on price increases, obviously, we’re almost at the end of the year. I don’t know how easy or difficult this is to do. But I wondered if you could give us some flavor of now where we are, what that sort of means your blended price hike into next year. Thanks a lot.

Juan Gaitan

Sorry, Akhil, would you mind repeating your third question? I apologize.

Akhil Dattani

Yeah, sure. So on the third question was just on the price escalators into next year, you’ve obviously helped us in the past, giving us a breakdown of fixed versus variable. And I was just wondering now we’re in November, where they’re able to give us some sense on what the blended price escalator is into next year? I know it’s difficult, because there are so many contracts. But just to have some sense of what the blended average price escalator is, if that’s possible?

Juan Gaitan

Yes, absolutely. Apologies for that. I think that for next year, you are not going to see a massive changes compared to the contribution in 2022. You know that now we are living in a very high intellectual environment. And well, also you know that the vast majority of our contracts with anchor tenant, they have a cap in the current environment that all of these caps apply. So, I guess, at that for 2023, you should be expecting positive impact from inflation in our top-line of around 3%, 3.1%, but no more than that, because again that is the result of applying our caps, which is a performance very similar to the contribution that we’re seeing now in 2022.

On Italy, very quickly before – on Italy, it’s mostly the contribution agile from utilities. If you look at the P&L provider for Italy, you will see that utilities, the utilities line has increased, and also that has an impact on the revenues. So that is the impact of the – mostly of the pass through, okay. It is true that organically, we continue to perform very well. We continue to make progress on build-to-suit, organic growth generation. But we’re also seeing this quarter a quite significant contribution from the utilities, electricity pass-through. On [indiscernible] the team.

Tobias Martinez Gimeno

Well, just to tell you that we are always obliged to look at any opportunity we may have. But our criteria and discipline is always above all of these potential opportunities. So nothing else, I mean, past is past, if I may say, in a way.

Juan Gaitan

Is that your question, Akhil?

Akhil Dattani

Well, the only question was I just wanted to understand, had you have done – I mean, it’s more of a general question, which is how do you have done a deal like that? Obviously, there was speculation and deals, and I appreciate you don’t want to get into the details. But just to understand, would that still – if you were to do a deal like that, do those sorts of deals have the ability to be consistent with your new framework? Or is this implicitly saying those sorts of deals just not likely anymore?

Tobias Martinez Gimeno

Look, I think that is very difficult to answer the question, and there are many elements that have to reconsider now. The key the key point for Cellnex is to improve the business risk profile in the long-term, and this has been what we have done in the past. So, now we have a new capital – we have been listening to you. We have been listening in the market. The market has been clear. We need to have a new capital allocation framework. We need to be more, if you want, taking into account, how we are in terms of deals of our bonds, in terms of inflation, in terms of many elements that have changed from before.

So, if there were to be an opportunity that matches all every single point that matches that we’re going to become investment-grade, because we improved the business risk profile is good, because somehow give us inflation driven also, because the financing is in good terms also, and if – as we are seeing the presentation, we could do it. But there are priorities, and the priorities that we are seeing to you is first investment-grade, it is first to get the 24 – we’re talking 12, 24 months outcome. Then the other priority is to be with our clients, and also to implement in due course, our remuneration policy to our shareholders. This is our commitment, Cellnex has listened to you. And obviously, we have adapted not to the new circumstances.

Àlex Mestre Molins

But just to maybe to reinforce that we have to double check that we are not missing something, you know what they mean. So I think it’s our duty as well to assess properly, so we did in the past, and that’s it. And I think anything else not from our side. It’s not just about an industrial or a potential interest or just a few financial impact, it’s everything matters now. And as José Manuel said earlier, it’s 360-degree assessment and at the end of the day, well, we were not in a position to go ahead. That’s it. No regrets. No. Thank you.

Akhil Dattani

That’s very clear. Thank you.

Juan Gaitan

Thank you so much, Akhil.

Tobias Martinez Gimeno

Thank you.

Juan Gaitan

Next question comes from Jakob Bluestone. Please, Jakob, go ahead.

Jakob Bluestone

Hi, thanks for taking the question. I had a question regarding your BTS phasing, which we can see on Slide 6, and I appreciate I could just get a ruler and try to measure it. But could you maybe give a little bit of guidance on what sort of BTS we should expect in 2023 and 2024? It does look more frontloaded than what we can sort of calculate from the spreadsheet. So it does look like the peak is obviously now in 2024, I think previously, it was 2023. So any color you can give on the size of the BTS for the next couple of years would be helpful?

And then just secondly, just to clarify, I mean, your previous call, you talked about that buybacks as one of the possible sources of use of cash, is it fair to assume that that’s now off the agenda?

Juan Gaitan

Okay, Jakob, I will take maybe that first one. Well, I guess that we have been transitioning in terms of how we’re having guided market in terms of modeling build-to-suit. Every time that we have announced a M&A transaction that has ability we should put on attach. I guess that our initial reaction was to say, okay, this is going to be backend loaded that was our original expectations. And also model intentions with analysts, with investors, I guess that what we have been saying is, look, just to make it easy, please assume this CapEx to be linearly spread.

And then maybe the third element, the most recent element is what we are seeing today, you might have seen that 2022 and also our expectation for 2023 is that we will be making a substantial progress on build-to-suit. So we see a certain acceleration, and that is what we are trying to reflect on this slide, 2023, 2024 maybe you might be expecting more CapEx, more build-to-suit CapEx compared to the alternative, which is maybe a linear modeling. But again, I mean, this is just timing also that out of the many, many build-to-suit programs that we have in place, a good portion of them, they need to finish by 2025. So it is, yes, for sure that not all of them finish by 2030.

The first one that we signed is to be completed earlier and then maybe between 25% and 30%. What you should be expecting is a sort of a long tail, because until 2025, we need to complete a good portion of our digital commitments.

Tobias Martinez Gimeno

Regarding the second question, and if I have follow you well. In the Slide #5, Jakob, you will find the criteria, I mean, there are two green parts, a commitment to investment grade; and then, obviously, we would like to explore greenfield projects, and for sure not to see the dividends and buybacks, how to implement them once we achieve this investment grade. So this is everything. I mean, there is no other element on the agenda. I think that your question was about buying our own debt. It seems that we are more focused on getting investment grade, just with the projections that we have shown you. And you will find some further language in the S&P documentation that says that Cellnex can became investment grade in up to 24 months, maybe even before, but it is not through the acquisition of debt. It is maybe for the good performance of the company that would have always shown to the market and we will continue to deliver.

Jakob Bluestone

Thank you. If I can just ask a follow-up just on the BTS, I think, 1.5 years ago, you guided for around €900 million of BTS in 2025. Is that still kind of the ballpark or from your comments about front loading maybe 2023, 2024 BTS is higher and 2025 is below €900 million. Is that right?

Tobias Martinez Gimeno

That’s still valid, Jakob. Yeah.

Jakob Bluestone

Okay. Thank you.

Juan Gaitan

Thank you so much. Next question comes from Jerry Dellis. Please, Jerry, go ahead.

Jerry Dellis

Yes, good morning. Thank you for taking my questions. I have two questions, please. One referring back to Slide 11, please, and the adjacent service opportunities that you’ve outlined here. Would you be able to talk to us please about how capital intensive some of these opportunities might turn out to be? And to what extent is related CapEx on these sorts of projects already accommodated within the cash flow projections on Slide 6?

And then my second question is, I suppose that one of the obvious ways of driving efficiency through the existing platform is in relation to lease up, your tenancy ratios outside of Spain and Italy, currently averaging about 1.3 times. Are you able to talk to us about what assumptions you’re making in relation to getting those tenancy ratios up over the forecast period? Thank you.

Juan Gaitan

Thank you, Jerry. Àlex, do you want to take that one?

Àlex Mestre Molins

Yeah, happy to take that first one, Jerry. So in relation to the type of assets that we are here picturing all of them going to be always into the same, as we said, our like profile of the business case. So the topic is being required will be commensurate with the case. And very much in line on the capacity and firepower that is generated as we go in the future as pictured it on Page #7. So that’s the commitment that we are taking today. And in any event, the capacity of firepower will not be, let’s say, going above what we are setting in Page #7.

Juan Gaitan

Jerry, do you mind repeating your second question, please?

Tobias Martinez Gimeno

Do you mind repeating your second question please?

Jerry Dellis

Yes, it was just in relation to tenancy ratio projections outside of Spain and Italy. I think your tenancy ratio today is about 1.3 times, getting that up is a way of driving operating leverage, be interested in what you think might be achievable in relation to getting this tenancy ratios higher?

Juan Gaitan

[So level is for that] [ph]. No, I guess that – I mean, clearly, when – because of the nature of how we are implementing these – our platforms in the markets, typically initial thing that tenancy ratio seem to be very low. I would say that maybe the average initial tenancy ratio are of our most recent transactions, maybe it’s 1.1. Also bear in mind that there is a dilutive effect in the context of our build-to-suit program. So even if we inherit an initial platform, and we made progress increasing the tenancy ratio on these existing towers, every time that we build a new tower, typically that tower comes with a tenancy ratio of one.

So, I guess, that maybe temporarily will be difficult to see tenancy ratio increase, because again, tenancy ratio increase from the existing platform will be diluted by the contribution from build-to-suit. Going forward, I don’t think that we are seeing any of our markets in structurally different from what you are seeing and maybe most mature markets, as you mentioned the Spain and Italy. So, it will be a matter of, again, integrating initial platform, making a progress on the build-to-suit. There is a process that will take maybe I would say depending on the duration of build-to-suit product between 5 and 7, 8, in some cases 10 years. But after that, you should be expecting co-location grade very similar to what we are generating in our most mature markets.

Jerry Dellis

Thank you very much.

Juan Gaitan

Thank you. Next question comes from Ottavio Adorisio. Please, Ottavio, go ahead. Ottavio, I’m not able to hear you? If not, then we will go to…

Ottavio Adorisio

Can you hear me?

Juan Gaitan

Yes.

Ottavio Adorisio

Sorry, I was on mute. So, yeah, three questions on my side. The first one, it’s on the new emphasis you have on the credit side, and that’s positive. That has been a pretty good impact on your yield. So, therefore, the question is on your debt refinancing strategy. In the chart, you show that you will be able to cover maturity between 24% and 26%, thanks to the credit facilities you have. So the question is, consider what the yields are now after the announcement, how is your debt refinancing strategy will look like over the next 2 or 3 years? Are you happy to basically be reliant on credit facilities? Or given where the yields are, you’re happy now to go to the credit market? And on the credit facilities, could you tell us any restrictions, in particular, if it’s possible for the bank to withdraw these facilities?

Second one, it’s on expansion CapEx. Now, when I look at the Slides 6, it looks at the expansion CapEx is guided to be stable to low increase for the next 10 years. Now, considering expansion CapEx projected to be a recurrent item, I was wondering if you’re not be the case that should be included in the definition recurrent leverage free cash flow.

And the third one is on inflation. You provided in the slide, it’s a pretty good granularity about how inflation is going to impact your revenues going into 2023? But you only give a number, how it’s going to impact OpEx and the number is around 2%. So, the question is, could you give a bit more granularity among all the different at least the main components of your OpEx and leases, how this will project to increase going into next year? Thank you.

Juan Gaitan

Okay, Ottavio. José, do you want to take?

José Manuel Aisa Mancho

Yeah, Ottavio, I will take the three of them. I start with a third one, Ottavio, the OpEx as we are saying in this presentation, we are being able to absorb the OpEx or the inflation significantly. I mean, significantly. And we do expect that for the year 2022, this absorption, this mitigation, it will be even better off. So I think that the company is performing very well in terms of OpEx, very well. It is true that there is some item like the utilities, which are a pass through that, obviously, for us are a pass-through, so I’m not taking here into account, obviously, because we have the same revenues, if the OpEx goes up, revenues goes up. Okay. This is one thing.

Second, within the other items, obviously, not all of them can be managed in the same way. That’s obvious. However, if I were you from a just financial perspective, our commitment with you is clear is that the total OpEx base without pass-through will grow significantly less than inflation. We have more headroom with leases. Yes. Do we have less headroom with personnel? Of course, that’s normal.

So we manage a total base of OpEx that in the long-term and in the median-term is given us very, very prudent and reduced increases, if inflation is low and if inflation is high, which is the case right now. That’s very important. So let’s go to full year 2022 just to confirm this element, I’m pretty sure will happen. You will see that one of the key elements for the market, which was the behavior of our leases, is going to be just great.

So regarding the second question, which was the expansion CapEx 10%? Yes. In this graph number – the Slide #6, we are factoring 10% of our revenues as expansion CapEx. This company has different alternatives, one of these that we were just talking was to do – is to do cash advance programs. And this is just to follow the same conversation.

The third question, and this requires CapEx also we have other deployments that will require expansion CapEx. So their growth also their current level of free cash flow, which in the long-term is driven by 5G rollout is driven by HTTP and FTP, obviously, somehow is also factor in the gray area, a column called expansion cash out.

Tobias Martinez Gimeno

Yes, so to briefly complement. I’m sorry, José. I think also – I mean, I totally get your point, Ottavio, is that this has been a recurring item. And maybe that is also the reason why in this presentation, you might be see also the company transition towards free cash flow, including expansion CapEx rather than our previous definition of record free cash flow. We take your point, and that is also a reason why we are also internally transitioning in terms from a reporting perspective. Sorry, José.

José Manuel Aisa Mancho

No. Not at all. And then the credit – I mean, the credit question, there were two questions within your first question about credit. And as we have already said at a corporate level, we have no hedge, no pledge, no guarantee, no covenant, I mean, all our financial life credit lines are long term. We do have all the flexibility, we have been super consistent, Ottavio, we can withdraw these lines with no excuse. So we can take it to the extreme, I think these lines are credit, but it’s also an asset to the company. And it’s an asset, when we present to you the graph in Page #8, what we are writing here is that we could, we might use and we can cover these maturities with credit facilities and cash flow generation.

And, obviously, I’m answering the other question, we are presenting to you a company there is going to be investment grade in the next 12 to 24 months. And, therefore, I’m pretty sure that the 2024 refinancing will be done with a Cellnex that will be at that time investment grade. And then the bond market will be more friendly for us. And then other pockets of refinancing will be more friendly for us, for instance, to issue bonds in dollars and to swap back into euros, which is a market we opened last year and can give us longer tenures and a very commensurate, very prudent, very low coupons, because there is arbitrage from time to time between dollars and euros.

So what we try to represent here is, in these lines is a – in a stress case scenario, do not worry, Cellnex is very well equipped to pay all our debt back. And on top of that, we should begin investment grade in the next month and refinancing should be friendlier than today.

Ottavio Adorisio

Perfect. Thank you.

José Manuel Aisa Mancho

Thank you, Ottavio.

Juan Gaitan

Next question comes from Georgios Ierodiaconou. Please go ahead, Georgios.

Georgios Ierodiaconou

Good morning. That was perfect actually. Two questions from my side. The first one is around capital allocation on a gross basis. So what I’m trying to understand is clearly there’s a lot of other players in our industry, from the private side that have a different return profile than you do. Are you having any thoughts of taking advantage of that? And perhaps you spoke in the past about opening some of the country shareholdings for minority stakes in order to have some flexibility to maybe consolidate the few markets you haven’t fully consolidated yet, because that way, perhaps you’ll be able to have some operational benefits, while speaking to our investment grade goal.

And my second question is kind of a clarification on a question on ground lease. Firstly, just wanted to make sure the lower than 3% inflation you’re showing, I believe, on Page 10. Does not include the benefit of ground lease acquisitions? And then the second element of that, just understand in this particular situation we’re in now, I know, you have expansion CapEx flat over a period, whether it’s more attractive to go after ground lease acquisitions, given higher inflation and higher yields against the prices may not have moved as much as inflation, a little bit there? Thank you.

Juan Gaitan

Okay. Georgios, I will try second and third, and maybe of José will take the first one. On the second question, the answer is, yes. So, we are also including the benefit of land acquisitions and cash advances, but I will say that directly impact is not meaningful. What is really benefiting us, in terms of managing our leases and avoiding significant increases in the context of high inflation environment? Is the straighter negotiation, the direct approach to a landlord and asking them to maybe to reduce the fees, or to stop the application of the inflation escalator? So, the answer is yes. We included the benefit. But again, the majority of efficiency, the majority of the benefit for Cellnex is coming from this straight negotiation.

And if I understand your third question properly, also the answer is yes, I mean, we lease of 10%. We are including anything that improves the correlated cash flow. So, that could be installation services, adaptation costs on a tower to host a new PoP, because the resource associated CapEx with that activity. And of course, any OpEx efficiency or anything that improves our correlated cash flow, because it reduces our leases, that is other activities was included in our expansion CapEx.

José Manuel Aisa Mancho

Regarding the third question, and correct me, if I have not follow you well. When you are talking about the Slide #11 and we have to look at also Slide #7 at both, no. So, you can see in the Slide #7 that from 24 hours, there is like a triangle, which is wide. And this triangle wide, it’s because the company deliveries really quickly, and you can see that in 2034, there is no debt. Obviously in 2029, Cellnex will be much better than BBB minus by S&P and Fitch. We could be talking about a company, which is maybe A. So, I do think that this is not what we are talking today to become A, where we are talking today that we would like to become investment-grade by S&P. And, therefore, this wide area will be devoted to shareholder remuneration and will devote it to help to support to work with our clients in terms of deploying the Slide #11. Everything has to be balanced, Georgios. You cannot say now, we stop this, we start the other not.

But we have tried to do here is to give you a full ecosystem, which is coherent. And this coherent with first of all being investment-grade, then a strong commitment with free cash flow generation, therefore, deleverage; and therefore, shareholder remuneration and clients, and clients’ needs. So we try to keep put everything, because we’re an industrial company at the end of the day.

Georgios Ierodiaconou

Very clear. If I can follow-up just on the ground leases. I just wanted to just clarify my question. It’s more whether there is higher incentive for you now to use ground leases given inflation like whether it makes it the returns better to acquire the leases, or to do this long-term contract extension?

José Manuel Aisa Mancho

No. Sorry, because initially we didn’t understand that. It’s really important your question and we – yes, we are agnostic in terms of it is an acquisition or if it is a cash advance. As we only pick up the best project deploy that gives us better returns for you. So we do not close the door to both actions in the lease market. It is just driven by IRR concept. Okay.

Georgios Ierodiaconou

Thank you.

Juan Gaitan

Next question comes from Nick Delfas. Please, Nick, go ahead.

Nick Delfas

Yeah, thanks very much, indeed. Two questions. First of all, could you just sighs roughly the impact of floating interest rates for 2023, assuming that rates stay around here versus 2022, so how much extra interest? Yeah, I think you’ve got 23% of your debt with floating rates. And then the second question is around just sort of core industrial growth, obviously, in the markets where you have a new entrant Italy, Portugal, things go pretty well. But in terms of industrial growth from improving data usage, those numbers seem very, very low at the moment, maybe 1% or 2%, some of that will be government mandated coverage. When do you think significantly higher tenancy growth might kick in, because the mobile networks become full?

In other words, if, let’s say, a lot of the towers are currently only 10% or 20% utilized, when do you think that the operators are going to have to have a really significantly higher rates of tenancy growth to increase the density of their networks? Thanks.

Juan Gaitan

Thank you, Nick. Àlex, do you want to take?

Àlex Mestre Molins

Thanks, Tobias. With the last one, so I think the point is well taken that certain point as well the projections of data usage are exploding, the MNOs will require, you say, more tenants or more tenancy hear, the densification is where it comes. So the level of data that one station can deliver is sometimes limited could be limited by the spectrum availability or by the radiation limits. So – and by the amount of users concurrently connected to that site, in order to sort it out and mitigate that issue, this is where the build-to-suit comes. So many of the build-to-suit that we are having is precisely for that. So, I think, that need to cover the massive data demand is not only being projected by a tenancy ratio increase by a more towers to be built. And the ultimate element of that is small cell. The cells will come later down the road when the macros are fully squeezed, and there is no capacity to be more towers.

But the build-to-suit is the alternative way in order to cope with the demand that MNOs are having, besides going to tenancy ratio. So, I think, we need to look a little bit more broadly digest tenancy ratio. So build-to-suit is also a result for that demand.

Nick Delfas

Obviously, build-to-suit is a much higher capital and lower return on capital way of improving your financials than just getting an extra tenancy. So – and one also see it in the tenancy growth. So really, the question is, at the moment speaking to the operators, they seem to have a lot of capacity. When do you think they might start to really feel the squeeze in the 20% to 30% of towers that are very heavily there in the dense areas of European countries?

Àlex Mestre Molins

Well, it’s difficult to answer, because at the end here is what technology also allows us to do, because it’s about coverage. So the requirements of – and that is build-to-suit not the only solution is solution alongside with the increase tenancy ratio, it’s both of them. What is happening on the top of that, and I think this is something that also we’ve already commented in the past, is that the new frequencies being available higher and higher. So when you look at the spectrum auctions, the latest one which is basically how 5G has started is 3.5 gigahertz. Now you’re starting to see many countries are starting to auction 26 gigahertz. The higher is the frequency, the shorter is the range. And this is also one way to cope with the massive demand. So having higher frequencies, because you can transmit more bandwidth, but then you have shorter range. So I think it’s a combination of both. Yes, a build-to-suit requires more complex than just having a new tenant on a tower, but the engineering coverage requirements is what actually is leading to the topology of the network.

Tobias Martinez Gimeno

Okay. So regarding your third question, which was about the financial expense expected for 2023 and the impact of floating rates, just to give you a first answer, if we go to Slide 17 of the presentation, we can see that as of Q3 2022 the total net payment of interest as account for €220 million, so far, so good. These €220 million obviously for full year 2022. We will be below €300 million, okay. You will see in full year.

So, your question was about 2023. We expect that for the same perimeter of consolidation, instead of being below €300 million of net payment of interest for full year 2023, we will be in €300 million, €320 million in that area, €320 million of total financial expense. We do not see a big impact yet, because of our finance – of the floating part. It is true also that is being very helpful. Some elements that we have also cash. And the cash is also remunerated with more money. So when you talk about the floating part, please take into account that we do have cash in our balance sheet.

So everything comes so far, so good. And I think that we will be able to deploy the recurring free cash flow and the free cash flow on a free basis as we are saying to you no problem at all.

Nick Delfas

Great. Thanks very much.

Tobias Martinez Gimeno

Okay, Nick.

Juan Gaitan

Next question comes from Luigi Minerva. Please go ahead, Luigi.

Luigi Minerva

Yes, good morning, and thanks for taking my 2 questions. The first one is on portfolio management. Now, if I look on Slide 5, your risk adjusted returns target of 6% to 8% above the risk-free rate. I’m wondering if you contrast this target with your existing portfolio. Are there any assets that are not delivering these targets, perhaps, I’m thinking those that have a very strong inflation cap? And if so, does this give you an opportunity to rethink about your existing portfolio and considering some disposals?

And the second question is on the Augmented TowerCo model. I noticed from Slide 11, that you – it’s not there, and also you’re kind of de-emphasizing it. And again, I’m wondering whether the reason may be that – you don’t think that the Augmented TowerCo model can deliver on that 6% to 8% risk adjusted spread of a risk-free rate? Thank you.

José Manuel Aisa Mancho

Thank you, Luigi, and actually thank you for pointing that out. I am to blame. I did that slide and Augmented TowerCo should be there.

Tobias Martinez Gimeno

In fact it is the best rent-sharing, when we talk about rent-sharing, we are talking about Augmented TowerCo.

José Manuel Aisa Mancho

It is totally agree. But it is that – I mean, we are not changing our priority the Augmented TowerCo concept should be maybe more clear. And we are making extremely good progress on the integration of our operations in Poland, where we are providing this service for other company [ph] for the first time. We are having very active conversations in that country in that market with a number of players that are sold we are trying to extrapolate that model across Europe. So maybe that will have a different maturity process, because whereas mobile operators in Europe or used to outsource towers and also there are some already to outsource other parts of the digital infrastructure value chain, maybe the active equipment will crystallize a bit later. But we are extremely active trying to crystallize opportunities around the Augmented TowerCo.

Tobias Martinez Gimeno

So if I may simplify may be just as definition, admit [ph] that our company is a tower company plus adjacent assets as simple as that. So what we have on Page 11, I think it was no. So those three elements are part of the Augmented TowerCo concept.

In Poland, when we acquired Polkomtel, we have data centers, we have fiber and we have active equipment. So all this concept is what we put in addition to the traditional tower company has Augmented TowerCo Company. So, yes, it is on the slide, even though it’s not specifically mentioned.

José Manuel Aisa Mancho

Regarding your first question is – so far, so good. I mean, we’d have been able to get through on our different investments, the returns that were expected, or even more. One of the key elements or key driver has been that that Cellnex is very well equipped to absorb the inflation impact on our OpEx ratio. That’s important. We do have synergies. We have efficiencies, economies of scale. So this plays us in our favor.

And that’s, that’s very important, we’re talking about returns. And I’m finally, I think, you were suggesting disposals, we can be open to that, but there might be a meaning, there must be a justification, there must be something that’s changed. So we are pragmatical. And so far, if we get all the deliveries profile as we want to get, maybe we do not need to sell any asset, if we were to need it, I’m pretty sure that we will do it. But so far, we are much more focused on performance and operations on keep it this inflation under control on growing organically done in selling assets, do we have it?

Luigi Minerva

That’s great. Thank you very much.

José Manuel Aisa Mancho

Thank you, Luigi.

Juan Gaitan

Next question comes from Fernando Cordero. Please, Fernando, go ahead.

Fernando Cordero

Hello, good afternoon. Three questions from my side. The first one is on organic growth profile and the focus on organic growth that you have been given your strategic guidelines. And particularly in the Slide 9, you are guiding to an organic growth between 10% to 12% activity on a recurring free cash flow. In that sense, I just would like to understand, which are the underlying assumptions particularly on inflation, on particularly on the contribution of new growth projects, particularly greenfield on top of the currently announced the two brands that are already in your plan.

And the second question is regarding, it’s follow-up on one of the investment criteria for new projects, you are now moving from an absolute internal rate of return target to a relative one based on the spread that will be risk-free rate. Just we need to understand first, the risk-free rate that you will be assuming is come to – risk-free rate is not a European maximum.

And the second one is – at which extent of the turns continue to be levered, and not unlevered. And the final question is just, let’s say, a detail on the third quarter revenues. I’m a little bit surprised on the material jump in number of posts in Spain in the third quarter, almost 20% quarter-on-quarter, particularly after seeing in the second quarter a drop in number of PoPs. Is there any reason for that? Many thanks.

Juan Gaitan

Thank you, Fernando, I will take one and three, and I will leave José Manuel for the second. No, on the Spain, or any performance no particular reason, I mean, it’s a positive surprise. It is true that also we are coming from maybe to a couple of our very quiet quarter’s performance. So, yeah, I will catch up. We didn’t really know to which extent this is going to represent a pattern going forward. So yeah, I mean, no particular reason. I guess that we are coming in from our very quiet situation. So this is welcome. And let’s see what happens in the coming quarters.

On Slide 9, you mentioned, I guess, that the main intention behind this slide is to provide an indication of how to model organic growth for Cellnex, it’s maybe more – it has a didactic intention rather than to provide an accurate guidance. Here, what we’re trying to illustrate after different building blocks in terms of inflation contribution on the top-line, contribution from secondary PoPs, contribution from build-to-suit. Also our intention to keep OpEx and leases under control in a very high inflation environment and then how everything combined should be translated into organic revenue growth, adjusted EBITDA and recurring free cash flow, okay. So, again, it’s more of a reminder of things to be taking into consideration in terms of a modeling Cellnex, without the contribution from change of perimeter.

José Manuel Aisa Mancho

And regarding your [second or] [ph] first question, I don’t remember. But in terms of Slide #5, and when we talk about risk-free rate we are signaling the interest rate swap 10 years, the 10-year interest rate swap. This interest rate swap, it is also the key element when we issue a 10-year bond, for instance, is the reference for bond holders. And obviously, we should use that reference as a long-term investor to want to do the assessment of the visibility of these projects not. So it’s everything must be coherent. And here we are referring to interest rate swap 10-year.

Fernando Cordero

Okay. Many thanks.

José Manuel Aisa Mancho

Thank you.

Juan Gaitan

Thank you, Fernando. And the final question comes from Fabio Pavan. Please, Fabio, go ahead.

Fabio Pavan

Yeah, good morning all, first of all, many thanks for having shared with us such a detailed presentation, I guess, was very helpful. Two questions. One on the sector evolution, you said, you don’t see M&A – significant M&A as likely. I was wondering if we may consider as an option or some bolt-on acquisitions. And the second part of the question is, how do you think the other players will evolve? So do you think the sector will continue to consolidate in Europe? And the second question refers to the business. Do you have any sense that European telecom operators are finally accelerating implementing their 5G strategy? Or do you think when looking to the coming quarters inflationary pressures may result in MNOs postponing investment in this part of their business? Thank you.

Juan Gaitan

Thank you, Fabio. Maybe José Manuel, do you want to comment on the first one?

José Manuel Aisa Mancho

Yeah, well, the first one, Fabio, is we were saying before, I mean, it’s Slide #7, we have to combine Slide 11 and 7 together and the priorities are so clear. So, first of all, to became investment grade, and then there is – that is somehow, I mean, significant capacity for the company that must be shared between shareholder remuneration or so, as you are saying, bolt-on acquisitions or talking to our clients and investing with them. Look, what we have learned as that from signing to close in this industry takes up to 2 years, you have seen that UK Hut. So that’s good for us, because the company in 2, 3 quarters has changed significantly in terms has changed significantly in terms of net debt to EBITDA evolution. So we must be we must take a balanced view of the different factors. We cannot rule out it. But Slide 7 also has clear no clear [guidelines] [ph].

Àlex Mestre Molins

Yes, Fabio in relation to your question. While it is true, not 5G is just still lagging behind. This is what we were all initially expecting. And I think there are probably 2 reasons: one is in relation to not being able from our clients to actually port the cost of the 5G deployment into a higher ARPU. And this is one of the elements that is making our clients to really think on, which is the best efficient way to deploy 5G. And the other reason is that among 5G, we have other types of activities going on in our towers, which is like vendor swap. So there is an activity in relation to that, which is quite heavy in some countries, which is also affecting the deployment of 5G. However, so far no plan has been cancelled from our clients is just a matter of characterization of the projects.

Fabio Pavan

Thank you very much.

Juan Gaitan

Excellent. We have now reached the end of the session. Thank you so much again for your time, for your questions, for your attention. And have a great weekend. Thank you. Bye-bye.

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