CLLNY - Cellnex Telecom S.A. (CLNXF) Q3 2023 Earnings Call Transcript
2023-11-10 13:07:05 ET
Cellnex Telecom, S.A. (CLNXF)
Q3 2023 Earnings Conference Call
November 10, 2023 9:00 a.m. ET
Company Participants
Juan Gaitan - Director of Investor Relations
Marco Patuano - Chief Executive Officer
Conference Call Participants
Andrew Lee - Goldman Sachs
Akhil Dattani - J.P. Morgan
Jakob Bluestone - BNP Exane
Maurice Patrick - Barclays Capital
Ottavio Adorisio - Societe Generale
Emmet Kelly - Morgan Stanley
Georgios Ierodiaconou - Citi
Fernando Cordero - Santander
Fabio Pavan - Mediobanca
Luigi Minerva - HSBC
Roshan Ranjit - Deutsche Bank
Presentation
Operator
You are now in the main conference.
Juan Gaitan
Good afternoon, everyone. My name is Juan Gaitan, Cellnex Director of Investor Relations, and I would like to thank you all for joining us today for our Q3 2023 Results Conference Call. Today I'm joined by our CEO, Marco Patuano, who will share the main highlights of the period, our targets for the next-half, and our strategy. And then, we will open the line for your questions. [Operator Instructions]
So, without further ado, over to you, Marco.
Marco Patuano
Thank you, Juan Gaitan. Good afternoon, everyone, and thank you so much for your time today. So, let me begin by reiterating that we maintained an unconditional commitment to the target we set out in November 2022. This has not changed as a result of our new leadership team over the most recent macro environment. If anything, as interest rate remains high, we are even more committed to driving free cash flow growth, and the leveraging. Our business performance, we are once again providing solid numbers, showing that the board organization is aligned and fully committed to our target.
This nine-month period has been marked by excellent commercial performance and consistent operational execution, with the point of presence increasing 6.8% compared to the last year. Revenues excluding pass-throughs increasing 16%, and our adjusted EBITDA up 16%. Our recurring levered free cash flow up 21%, and our free cash flow reaching €436 million due to the disposal of site in France. And once again, we are confirming all our short-term and medium-term financial target, with an improvement of our free cash flow guidance for 2023, compared to our previous expectations.
We are in the environment where interest rates could remain higher for longer, which for most of the companies result in a potentially more expensive refinances process. However, this is not the case for Cellnex. We already have the cash to repay our 2024 maturities, and our 2025 maturities can be repaid with the cash from asset disposals, in addition to the free cash flow generation. As just mentioned, we are already working on a number of scenarios. As we understood that external factors, so such a high interest rates are impacting our stock, we have recently entered into a derivative contract in order to gain exposure to our shares, but without compromising our deleveraging objectives as this type of agreement avoids the need to buy the [auto] (ph) shares.
It is important to highlight that only as small portion of our debt is variable. From 2027 onwards, our free cash flow generation will allow for rapid deleveraging. So, taking all the elements into consideration, we will be in a position to keep our average cost of debt under control at the stable level below 2.5%. As a reminder, we have also repaid the 2026 convertible bond by issuing a new one that allow us to extend maturities, increase its conversion price and, most importantly, reduce dilution in terms of free cash flow per share. With regards to our objective of reducing debt, we have already made good progress thanks to the cash proceeds from the disposal of sites in France, and the [recent] (ph) deal in the Nordics.
And we have also sold our private network company, Edzcom, as a part of the process to devote management bandwidth to core activities only. Our intention to become investment grade by the S&P, by latest end of 2024, remain unchanged. And we are assessing strategic options, so for our portfolio of asset, to crystallize value, and to secure this path to investment grade. We will be pragmatic, and open to all option, from the sale of minority stakes to full disposal of countries.
The moment we reach investment grade and we start generating cash flow above our CapEx comments, when we become free cash-flow positive, we will balance our capital allocation between growth project, subject to strict return criteria, a new cash return policy in order to maximize value for our shareholders, which we will discuss at our forthcoming Capital Market Day.
Finally, we are introducing a new organizational model that will enable commercial and operational excellence. Our organic growth depends on delivery in each and every country. We have, therefore, set out a new organization model that reflects this new way of working, the managing directors of the main markets who will report directly to the CEO. We have created two new roles, the Chief Strategy Officer and the Chief Operating Officer who will also report directly to me and will be part of the company's executive committee. The CSO will lead on the company's strategy what I call Where to Go. The COO will be responsible for the How to go. And the CFO will determine whether we are on track or not. I look forward to working closely with Vincent Cuvillier, with Simone Battiferri in their new roles of CSO and COO respectively.
I also look forward to welcoming Raimon Trias, our new CFO, when he will join us in December. Raimon is a 20 years experience man with private equity backed industry group, who will bring a new perspective and a deep understanding on value creation in both financial and operational context. This organization structure is fit for our next chapter, one of accelerated free cash flow growth. I will now provide you a few additional remarks on the period and our financial strategy. This has been another period of excellent commercial performance with organic PoPs growing at 6.8% compared to the last year. This is mainly due to the progress we made on our BTS program in Italy, France, and Poland with 3.2% growth attributable to BTS, and through the PoP generated mainly in Portugal and Italy with the rest of markets also showing a steady performance. Point of Presence growth linked to new collocation has reached a strong 3.6% this period. Excluding the impact from the pass-throughs, revenues increased 16% compared to the same period last year. EBITDA 16% and recurring levered free cash flow 21%. Please bear in mind that this performance correspond to nine months. And when looking at Q3 only, our EBITDA has grown faster than our revenues compared to Q3 last year.
Now, moving to our free cash flow, let's define the free cash flow as recurring levered free cash flow minus expansion CapEx, minus BTS CapEx, plus cash received from remedies. It reached €436 million, around €1.2 billion increase compared to the same period last year. And with €566 million only this quarter mainly due to the disposal of sites in France for €631 million.
Free cash flow is expected to stay positive between €100 million and €150 million this year. And, this is an improvement compared to our previous guidance where free cash flow was around breakeven by the end of the year. In a second, I will provide you a few more comments on our updated guidance for the year 2023. Going forward, our free cash flow generation will further accelerate as we get closer to the end of our BTS programs. And, this will underpin our rapid deleveraging that will give us the financial flexibility to continue growing and to define an attractive shareholder remuneration policy.
On our updated '23 guidance, just a few comments, we are updating our revenue guidance mainly due to the lower electricity prices which we pass-through to our customers. However, core revenues remain the same. And there is, therefore, no impact on the rest of our financial objectives, including EBITDA and recurring levered free cash flow which we reiterate. On free cash flow, we are increasing our guidance, which is now positive between €100 million and €150 million by the end of 2023.
Let's now take a closer look to our debt maturity profile which is on slide 13 and our CapEx deleverage. As I mentioned earlier, we are not planning to refinance our 2024 and 2025 maturities. We already have the cash that will allow us to repay 2024 maturities. And, we are working on asset disposal that will give us the option to repay 2025 maturities and expensive credit lines linked to Euribor. Only 25% of our debt is variable. So, any cost increase would be manageable.
From 2027 onwards, we will generate significant free cash flow that will provide us with substantial deleveraging capacity, something that you can see on slide 14. We have made the unconditional commitment to become investment grade by Standard Poor's, as well as to maintain our Investment Grade status by Fitch. We have very high visibility of future cash flows due to the size of contracted revenues, for a total of €110 billion. And, if we choose to, we can repay all our debit with our cash flow in a short period of time. Of course, this needs to be balanced against the optimal long-term capital structure we marketed for Cellnex's topic that we will further elaborate at our Capital Market Day.
If we move now on slide 15, we are well-protected against interest rate increase, given that we don't need to face significant maturities in the short-term, and 75% of our debt is fixed rate. Our average cost of debt will only marginally increase until 2025 due to debt repayments. And we can further reduce it if we successfully sell assets at attractive valuation.
Finally, on slide 16, I would like to highlight the speed at which we are progressing with deleveraging thanks to the well-executed asset monetization at premium valuation. You can see here the details of our last two transactions in France and in the Nordics that have allowed us to reduce, not only our debt, but also to crystallize value due to the attractive associated multiples in a challenging environment.
With this, we remain at your disposal to answer your question. I think that being concise is a value. So, more time for you to making all the questions. So, please, look forward to it.
Juan Gaitan
Thank you so much, Marco.
Question-and-Answer Session
A - Juan Gaitan
The first question comes from Andrew Lee at Goldman Sachs. Please go ahead.
Andrew Lee
Hi, good afternoon, everyone. I had -- apologizes, given you were so concise, I had three questions, but I they are all very quick. They are all on asset sales, interested to see your comments on slide four about additional monetization opportunities. So, three quick questions, firstly, what are the pace of discussions with buyers right now? How likely is it that we see these [own further] (ph) sale in the next three to six months? Second question was Stonepeak appears to have preferred to be a financial, rather than strategic investor in your Nordic assets. Is that a broader trend from private suitors, and therefore what is more likely in terms of sales from here if full disposals or partial sales? I know you said that you'd be open to either. And finally, just you talked a lot about different ways you think about preferences for what assets you sell. But I just wondered if you could answer if there are any sacred cows that you just wouldn't sell at any cost or any price, should I say? Thank you.
Marco Patuano
Thank you, Andrew. As I said, we're going to be very pragmatic. So, we made our portfolio review based on an industrial analysis, so what are the asset that are contributing less to our strategic story. And then, we have made the point if it would be preferable to have a full monetization or to have a partial monetization. I think that pragmatism says that if in certain market you are not big enough and you don't have a possibility for having further growth, the fully monetization becomes a real and concrete possibility. And so, we don't exclude it. And this explains you, also because in Stonepeak case and the Nordic case, we went for a partial monetization.
We consider that in the Nordic market, the market is very fragmented, and there are possibility, I can't tell you when, but in the future there could be. And so, having a partner could have been a good idea. So, what assets? I tell you, assets where we are sub-scaled and where we don't see possibility for further consolidation or for further growth in the market. Next three, six months, well, the portfolio analysis has been completed. Now, we will move to the execution. So, I can't tell you if it is going to be three months, six months, or nine months, but the process of making it happen already started in our house.
And I think I answer to al your questions, Andrew.
Juan Gaitan
Thank you, Andrew. So, the next question comes from Akhil Dattani from J.P. Morgan. Please go ahead.
Akhil Dattani
Hi, good afternoon. Thanks for taking the questions. Maybe I can start with the first question on leverage. Marco, you've mentioned that the ambition or target is to redeem the debt that's due '24 and '25. I guess I was just looking to more of a holistic view as to how you think about leverage going forward? I guess the historic message from Cellnex has been to go to investment grade and, obviously, therefore get meaningfully below seven times. And I think in prior calls you've mentioned maybe somewhere in the, let's say, mid-six level makes sense. I guess if I look at the numbers, if you're saying that you're going to redeem '24 and '25, implicitly, by the end of 2025, your leverage would be five-and-a-half times, so lower than those previous sort of numbers. So, I appreciate, obviously, you'll have a Capital Markets Day, and you'll give us more flavor then, but can you maybe just talk us through, at a high level, how you think about the ranges of what does and doesn't make sense given what you said is, obviously, a higher-for-longer rate environment. So, that's the first question.
The second one was on the CFO, obviously you've announced a CFO hire. And I guess it would be great for us to understand better the thought process in terms of the hire of that individual. I guess the questions we get a lot are the expectation might have been it could have been someone from public market or some with an info background. As you said, this is someone slightly different. So, obviously, very keen to understand what are the credentials that for you mean that that individual will bring to the table that you think will help Cellnex's journey going forward? Thanks a lot.
Marco Patuano
Thank you. You know that our target when we said that it has to be below seven times the overall environment was different. And in an environment where interest rates are still very high, I think we have to be more prudent. So, a more prudent capital structure goes in the six or eventually even below six, then between six and seven. So, let me say that, of course, it will depend what happens in these -- in end of 2023 and 2024. But I think that, in any case, a more prudent capital structure is -- fits better for this overall market environment. Again, we're going to be pragmatic. I have not the magic number, but we will adapt with the secure pragmatism to the situation. If high-for-longer, we're going to go lower than what we expected all these months ago.
The CFO, yes, the choice was made after a deep diving in the corporate culture of Cellnex. As everybody knows, we have a very strong finance department, except -- so even if we don't consider our former CFO that you all know, he was a talented guy. Behind him, you know [Juan Jose] (ph), but there are other very good professional in finance. [Indiscernible] is our Head of Finance, Tobias Schwender is our Head of M&A; we have a very strong finance team. I think that introducing a mentality coming from a strong controlling, where -- with people who have been working with private equity in environment, where a strong controlling culture is the rule of the game, can be extremely productive for us. This means that we are going to leverage on our point of strength. Our guys are -- our team is a team, it's not just a one-man show. Behind a very good CFO there was a strong team. And this allow us to work on some of the element where we could improve, and to maintain our point of strength.
Juan Gaitan
Thank you. The next question comes from Jakob Bluestone at BNP Exane. Please go ahead.
Jakob Bluestone
Hi. Thanks for taking my questions. I've got two, please. Firstly, could you maybe just talk us through the slowdown in your co-location growth as you're showing at slide nine in the presentation, you went from about 1,300 co-locations last quarter to 600. And you lost tenants in Spain. So, maybe if you can expand a little bit more [technical difficulty] -- going on there? And then just secondly, could you maybe just expand a little bit more on the thinking behind the equity swap and if that will impact your conversations with credit rating agencies? Thank you.
Marco Patuano
Sure. Well, the slowdown is partially a slowdown, partially is also the fact that, in Q1 and Q2, we performed particularly strong in a couple of countries. Q3 is where we expected to be. And therefore we are doing in Portugal. In Italy and France, we are doing what we expected to do for this quarter. The negative of Spain is a process of rent sharing that, again, we had agreed with our clients, so nothing unexpected. It's something that we had in our plan. So, the real point is not if this quarter is weaker than our expectation. No, it's in line with our expectation. The topic is let's look forward. So, what we do expect is something closer to what we did this quarter, is more closer to what we did in the previous ones. I would say that, going forward, the managerial focus is growingly on new co-locations. The market has to be analyzed country-by-country. And therefore, let me say that we are where we expected to be. But forward-looking, this becomes one of the total metrics for our management team.
The equity swap; the equity swap, we all know that the reasons behind the price of our shares are somehow performance independent, where they are not linked to our performance. And when we saw -- by the way, me personally, and the Board consider our proposal, we consider this price as non-responding to what we consider the core value of our shares. So, I made a personal investment. You can consider it big or small, but it's personal money that I put in. And the Board gave the same message, it's a message. The message is we are convinced there is deep value in our shares. Since it is cash settled at the end of the contract, there is no impact for the rating agencies. So, this was disclosed, and there is no problem with the rating agencies.
Jakob Bluestone
Thank you, very helpful.
Marco Patuano
Thank you so much.
Juan Gaitan
Thank you so much. Next question comes from Maurice Patrick from Barclays. Please go ahead.
Maurice Patrick
Yes, thanks, guys. Thanks for doing the call and taking the questions, just a couple on my side. The first one is just the outlook for lease costs for 2023 and 2024, if you can help us navigate the path of increasing inflation in your base lease costs with more sites, but also the site actions that you're making to reduce that. So, some clarity in terms of what we should be thinking for lease costs for 2023 and 2024. And if I could just link to a quick follow-up on Jakob's question just now around the PoP growth, how strong is your visibility for PoP growth across the various markets you have? I'm sure your clients give you reasonable sort of forward notice, is it a couple of months, is it a few quarters, and as such, which do you see other than Portugal as the main drivers for co-location growth in the coming quarters? Thank you.
Marco Patuano
Thank you. So, let me start from the lease cost and you will pardon me on 2024. I will be a little bit shy because it's going to be a core part of the Capital Market Day, but what I can tell you is that it's so evident that the lease costs are the cost item by far number one in our P&L, that it will become the center of gravity of our attention in terms of an efficiency program. So, our target for this year and even more importantly for the coming years is to be able to counteract the two forces that you were mentioning. So, the growth of the number of sites and the growth of the inflation, how to do this? Well, there are not so many metrics. One is you sit, and you renegotiate. There is another one that you have to be very efficient in terms of the new co-location you have to put, then the new location. So, you have to put the site in a place where it is highly efficient.
And the last is that land aggregation. So, acquisition of land or cash advance for rooftops becomes highly important as the return on this investment is particularly good, especially in Europe where we have very long contracts with our tenant. So, that the target is to try to stay flattish and/or to have a modest growth, well below the growth that is inertially driven by the growth of the number of sites and the amount of -- and the amount of the inflation.
Growth in terms of PoP and visibility, look, what we have a good visibility is the demand that we receive from the MNOs. So, they give us a list of requests. And then, what we have to work is that the mortality rate of this list of requests stays as low as we can. There are a gazillion reasons why you have a request and you cannot satisfy the request because in some countries, because of the electromagnetic limits in some countries, because of the agreement you have with the owner of the land, et cetera.
So, today, what I want to tell you is that we have a bit high mortality rate vis-à-vis the funnel of potential co-location we have. This is particularly true in some countries. So, allow me not to elaborate on the single countries. And therefore, this is an area of improvement that on which we are working and it's particularly important going forward.
Maurice Patrick
Great, thank you. Just a quick follow-up, so when you say flattish on leases, is that because you are up €60 million in the first nine months? Is it flat year-on-year in fourth quarter or what sort of a number?
Marco Patuano
That's on the 2024 compared to 2023.
Maurice Patrick
Thank you.
Marco Patuano
Thank you, Maurice.
Juan Gaitan
Next question comes from Ottavio Adorisio from Societe Generale. Please go ahead.
Ottavio Adorisio
Hi, thank you for taking the questions. So, I've got a couple on my side. The first is basically on a renewal. Cellnex has been pretty active on buying towers directly from the operators. The main exception was in the U.K. where you bought a TowerCo [Activa] (ph) where most of the contracts were already in place, you've been negotiating the renewal on the country with CTIL, the renewal for next year and that coincide with the Vodafone Hutch merger, so just wondering if you can update us what's going with the negotiations? How big is the contract and if there could be any risk of any PoPs being lost?
Then move to the second one, it's as part of your plan to refinancing, of course, the use of the credit facilities in the short term, but it looks that beyond next year you are focusing on improving the cash and then using your organic -- generate cash to refinance the debt. Now the two main components, it's what you booked below the recurrent leverage free cash flow line, so the BTS and expansion capital expenditures. If you want the expansion CapEx the main -- the moment is the fact that you are strengthening the towers that you bought from the operators, so and that's something that it's very likely is going to pick this year because you've done a lot of M&A the previous year. If you can give us a bit of an idea where we are going to land? I know that you're going to talk a lot during the CMD, but it will be good to have a bit of a trend into next year.
And the second one of the BTS, we've been hearing so many times in the call about the efforts to optimize a lot of these contracts that they overlap particularly in France. I guess, that you probably know personally but I believe that management has been engaging clients for quite a while if you can give a little bit of an update and if the fact that the BTS CapEx this year, it starts slowing down at least from what the market was expecting, if that comes from the fact that you delayed some of the CapEx or you're basically saving some of the CapEx. Thanks.
Juan Gaitan
Let me take maybe the first one.
Marco Patuano
Please.
Juan Gaitan
On the CTIL contract Ottavio, the magnitude -- so the size of the contract is around €60 million a year, so that would be -- that would be the size and in terms of the process what we can say is that we are in the process of talking to both operators, so I guess that the philosopher here is that we today there is a contract between [Activa] (ph) and CTIL, so what we are trying to do is maybe to translate that contract into maybe Cellnex standards knowing that in the terms of the duration renewals, but also the fact that we will be signing independent contracts with both O2 and Vodafone, so instead of one, it will be separate contact with them. As of today, we are making progress, if anything changes we will let you know, but with the information we are not expecting any impact compared to what we have today.
Marco Patuano
Yes, so let me add one word on top of what was -- what you said. In principle, we are not against the possibility that in market consolidation happens, so having a healthy counterparty which can invest more which can do the identification of the network is something that long term is good. So, what we are discussing with the parties who are involved in those deals is that contracts are contracts and not only when we have to pay our investment contracts are contracts every time. And therefore, this is a relatively simple business. If you ask me to renounce something today, you have to give me something with perfect visibility tomorrow and it's a relatively easy DCF calculation that everybody can do. So, we are negotiating -- we are renegotiating. Our objective is not to have impact even in the short-term, but what I can tell you, is that what I am sure is that not to have impact as in terms of the value that we have in some contracts.
Expansion CapEx and BTS CapEx, expansion CapEx have been in the 10% area. Let me say that if we exclude for one second the energy revenues, it would have been something between 11 and slightly above 11%. So, what we see in the short term, being the short term, the end of '23 and '24, is that this number will not change very significantly. And going forward, as it is important for all the CapEx, it is going to be optimized. What is important is not only how much, but also where you spend the money. And I think that this is the prioritization of the CapEx based on a very strict control on the return, on the investment, on the capital that you are located. So, CapEx prioritization is key.
BTS, does it come from optimization or simply from delay? It comes partially from optimization. There are at least two countries where it starts to have the first early signal of CapEx optimization. One is France, where we have been able, with some anchor client, to start showing them that transforming a new site in co-location is possible and this is happening. Of course, when you transform a new site in a co-location, all the economics have to be revised and in terms of CapEx, it is significantly more efficient. The same happened in Portugal, we just had one case in Portugal, it's sort of a 150 sites that can be managed through a mix of new sites and co-locations. So, this new phenomena start happening. If you ask me, if in this last part of the 2023 is already material, I would say no, it's not so material, but it's not neither negligible. So, we started to have evidence that this model is possible.
Ottavio Adorisio
Thank you.
Marco Patuano
Gracias Ottavio.
Juan Gaitan
Next question comes from Emmet Kelly from Morgan Stanley. Please go ahead.
Emmet Kelly
Yes, thank you very much, Juan. Good afternoon, everybody. So, yes, I just have a couple of questions. Firstly, just following up on Maurice's question on annual lease costs, can you maybe just give us a quick update on the U.K. market? I know you've got some revisions to the electronics code and electronics communications code in the U.K., that could trigger significant lease cost savings, so could you just say a few words about that, please? And then my second question was on the PoPs growth that we're seeing, so the co-location growth. Could you say a few words about what's driving that PoPs growth? Is it being driven by operators looking to cover gray spots and white spots, or is it due to 5G densification requirements? Thank you.
Marco Patuano
Yes. So, the U.K. lease cost, what is commonly called is a very material decrease in the lease costs. Just to give you an idea, as a percentage of the revenues, if you look at how much of the lease, how much is the weight of the lease cost in as a percentage of the revenues. Let's say that you normal countries say a normal country is where you can apply normal conditions. It's a sort of, let's say, 25% countries very expensive Switzerland, Austria, it can go up to 40%. While, in the U.K. it goes down to something below 15%. So, it's tremendously impactful in terms of the impact of the P&L on the tower company. I hope that these order of magnitude are helpful in your modernization. The PoP growth comes from both -- both are 5G densification and white spots. It depends if we are talking about urban or rural.
In case of rural, the 5G is normally linked to big programs that can be with the sponsorship of the government or not. Like, Italy, Spain, they had huge programs sponsored eventually even with a recovery fund that have pushed the 5G in rural areas. But normally the 5G, you see in urban areas or in suburban areas and the rural, the semi-rural is often white spots.
Emmet Kelly
Great. Thank you very much.
Marco Patuano
Thank you, Emmet.
Juan Gaitan
Next question comes from Georgios Ierodiaconou from Citi. Please go ahead.
Georgios Ierodiaconou
So, good afternoon. Thank you for taking my questions. And the first question is on financial expenses. And thank you for providing the slide with also the outlook for the coming year, it's very useful on Slide 15. I just wanted to clarify, I believe, I missed on my numbers a 2.2% for 2023, slightly higher than the soft guidance that was provided in the previous call. I think something around 330 was the number that was kind of highlighted in the previous call. Curious if you can just give us a bit more precise guidance as to what we should expect for this year. I'm getting something like 380 with this number, but my math may be wrong. And also, if you can also comment a bit on taxation, it's a hard line for us to predict. So, if you can make some comments both for this year and going forward.
And then the second question is just a very quick clarification around the co-location impact you have in Spain this quarter. I think, Marco, you answered the question earlier, but I'm not sure, I understood correctly whether this is the last of this run optimization or whether there could be impact like this in future quarters? Thank you.
Juan Gaitan
Thank you. I can maybe take the first one. It is true, Georgios, that maybe our initial estimate was low. I guess at that time, we were hoping that we could manage this cash item during the year. And also, it is true that when we provided a figure. Also, we were assuming asset disposals with a cash-in in 2023. So, in order to reduce our debt and therefore to reduce our interest expenses. So, I guess that there has been some lag between when we have been able to materialize that deal in the Nordics compared to the previous expectations. And that also has impacted our leverage figure. So, yes, also to clarify and also so that everyone has the same information. Our most updated figure, and this is a number that I have shared with you this during the morning, is €380 million of interest expenses for 2023.
Marco Patuano
Yes, sorry. You don't need to justify anything. But I think that the fact that the process -- and I was there. So, the process of the change of the CEO has been even a bit longer than what everybody expected. So, the original plans have been reviewed. And we've been working since day one of the new management team in trying to make happen everything quickly. But yes, the most updated is this. And what is in reality our -- what is really important to us in this chart, Georgios, is that we want to make clear that we are fairly rigid in terms of exposure and volatility of our cost of debt to further increase, eventual further increase of the free risk rate.
In this moment, it seems that further increase are not foreseeable immediately. But we understood that prudence is utmost important. And so, we wanted to give you a clear visibility that our cost of financing can remain stable, and we can work to decrease as soon as we are able to divest more prepaying some variable credit lines that today are linked to Euribor and so ultimately are more expensive than the fixed rate bonds that we issued a time ago. Really, pardon me, on co-location, I didn't catch your question. So, can you repeat me the question for one second?
Georgios Ierodiaconou
Yes, it was regarding this run sharing in Spain that impacted co-locations in the third quarter, whether that program, in your understanding, is now done or whether there is any more disconnection that may come in the coming quarters as part of the run sharing agreements in place?
Marco Patuano
The Spanish case is very interesting. Because on one hand, you have this run sharing agreement, on the other hand, there was a big debate about a possible remedy taker in Spain, which is a company that has a very strong and good relation with us in other countries.
So the run sharing is going to have a modest impact going forward. We are discussing with the parties that there are some further impacts. Yes. Are they extremely significant? No. What we expect is that if there is any decision on a remedy taker, we should consider that the market for the co-location in Spain can re-expand.
Georgios Ierodiaconou
Okay. And maybe one clarification on the first question around financial expenses, and I appreciate what you just mentioned about making some adjustments to your facilities to reduce future interest costs. What strikes me as interesting is my understanding from the refinancing you've done on the convertible is that, that would have increased your financial expenses because you had an annual coupon this time around and did not have that in the past. So, are the savings you are extracting from this action so significant, so as to offset all of this going forward, because obviously our guidance is very encouraging for the future year. So, I just wanted to clarify on that.
Marco Patuano
Well, just to be clear, the new convertible bond has been issued with an interest rate of 2.125, so it's not misaligned in terms of pricing vis-à-vis the average cost of debt. So, I think that, and thank you for introducing the topic of the convertible, the underlying idea was to have -- to catch several opportunities at once. So, the maturity has been extended. So, the 2026 maturity has been moved to 2030. The dilution has been materially decreased from 3.8 to something in the region of 2.3. And with the conversion price, which is significantly higher from €29 to €71, and with a cost with an interest rate that remains in the ballpark of what is our cost of debt. So, when we gave you the 2.2, this include the new convertible bond.
Georgios Ierodiaconou
Very clear. Thank you.
Marco Patuano
Thank you.
Juan Gaitan
Thank you.
Juan Gaitan
Next question comes from Fernando Cordero from Santander. Please go ahead.
Fernando Cordero
Hello, good afternoon. Thanks for taking my two questions. The first one is some kind of follow-up on the discussion on how you are going to tackle your maturities 2024 and 2025. In that sense, I again would like to understand if you are targeting certain volume of disposals that will cover those maturities? Or you are hoping to have the size of the potential disposals above the required amount for any maturities? And particularly, [indiscernible] a potential capital allocation which is in the excess [indiscernible] already pointing out with the return equity swap content that you have announced.
The second question is with the small construction that you are now responding regarding the better network business. In that sense, we're saying we need to understand the potential because it is not a big deal. But we have to understand the strategic rational in the disposal of your revenue [indiscernible]. Thank you.
Marco Patuano
With pleasure. No, the disposals are not particularly linked to the repayment of the maturities. As we said we want to be prudently in the investment grade so -- then it will end with a sixer or slightly below or slightly above. We will see. We will judge based on the market -- on the macro dynamics. But, it's likely that an excess of resources can be used comparing the return of industrial investment with the return coming from potential buyback for let me say from a financial use. It will depend clearly on the price of our share. It will depend on many circumstances. But, we will be driven by the value creation. And, we will not invest just for investing in industrial project. If they do have the -- it the return is not there or if the return to the shareholder value coming from a possible operation on our equity, we will go for that.
Well, thank you because you perfectly addressed the topic. So, what is the strategic rational? Because it's clear that €30 million doesn't move the needle. When the company invested in 5G private network which was some time ago, 5G private network was considered a search of gold pot that could materialize soon. Because it would have driven the order book, satisfy the need of some large clients. And it would be something material in the coming future. The truths are demonstrated to be different. The business despite the fact that the team is a maximum team, never got the scale, and it became sort of something not core and using part of the several attention on the management team in something that was really not very material.
Last, we almost every time that we are bidding for something in 5G private network, we are competing with our core tenants. And, I say the truth. It's not the best way to have a good relation with core tenant either for a €500k contract. You create a massive problem with your -- the relation with core tenants. The buyer who made as an offer -- by the way bought for €12 million. So, even if it is small, we made a small capital gain. The buyer has a different market strategy from the one we have. And, therefore, we ended with a different strategic view. This does not change our view on active which means DAS and small cell remain a line of business that we consider core. And in Poland, we are in the active equipment and we consider it core.
Fernando Cordero
Very clear. Many thanks, Marco.
Marco Patuano
Thank you, Fernando.
Juan Gaitan
Next question comes from Fabio Pavan from Mediobanca. Please go ahead.
Fabio Pavan
Yes, Marco, two questions if I may. The first one is we have been talking a lot about efficiencies and other options to identify cost cutting. I was wondering if in countries where consolidation in the tower space is not feasible, you may eventually explore some option to corporate with the other existing players? And the second question is on the European telecom sector in general. We have been hearing from many CEOs that telecom operators are struggling to fund investments needed to digitalize Europe in the current regulatory framework. So, do you believe TowerCo may help in some way? And if so, how TowerCo in particular may provide some touch? Thank you.
Marco Patuano
Well, on the efficiency, we have a long history of working on efficiencies. So, this is a uncharted story. Yes, you are right. When you cannot do the efficiency by yourself, have to sit with your neighbor next door. And, you have to see if you can do something working together. I think that this is something important. We identified some key areas where we are working. Before we mentioned that the lease now that I could mention is operation and maintenance. So, there are several areas where we should work in order to find efficiencies. But, yes, cooperating with existing players is definitely one option, especially in markets where there has been more consolidation. It's easier to cooperate with someone who is another professional large tower player and who shares your same view, your same processes, and your same mindset.
On the European telecom sector, while the European telecom sector is shrinking and shrinking in terms of cash generation, and this is due to the over competition they have that has been stimulated by the regulator -- by the European regulator. We can help them basically -- we can help them in several different way. One is helping them to find intelligent way to consolidate their networks. Network consolidation should be possible without penalizing neutral operators as we are. And, these can be feasible. We should lobby together. There are too many countries where the electromagnetic limits are too low. And so, we can increase the network densification at a very reasonable cost if we work together on the regulation.
Some areas can be covered using small cells or DAS. I think more DAS than small cells is very efficient terms of network densification for the MNOs because they can have a turnkey solution that is CapEx-light for them. And, can give them very good coverage in specific areas with good traffic print. So, we can do many things. And in general, what we are doing is that we are not preventing the telco -- the telco operators from searching more efficiency. It's clear we pay, therefore, for our portfolio. And so, we are not very flexible in giving away our rights on what we paid. If we can cooperate on new areas of business, most welcome.
Fabio Pavan
Thank you.
Marco Patuano
Thank you.
Juan Gaitan
Next question comes from Luigi Minerva from HSBC. Please go ahead.
Luigi Minerva
Yes, good afternoon. Thanks for taking my question. It's about the way you see shareholder distribution as part of the equity story. Marc, obviously you're navigating Cellnex towards a new phase of the equity story. So, how important is shareholder distribution if the investment grade rating is in sight by the end of '24? Can you use the February Capital Markets Day already to announce a shareholder distribution? And what's your view between the dividend and share buyback, given where the share price is currently? Thank you.
Marco Patuano
I start from the last. Given the share price, we already demonstrated that we consider this share price very convenient for taking exposure to the equity. I made personally and the company made -- and the board and the board decided whether, as we say, not very big. It's 150 million, but it's an important message that we pass to the market. To answer more broadly to your question, I think that the first stage of Cellnex has been all about growth and the growth has been executed brilliantly because it has been executed fast. It has been executed with a mix of existing sites or BTS. Now, we are questioning if those BTS are expensive or not. But I think that we have to consider that these commitments are fairly important when you look at the long term and the bonding that you have with your clients and with their strategy -- the strategy of your clients.
The second phase is if you want. It's not a disruption, but it's a movement from growth to yield. So, I think that in the nature of every tower operator, there is that at a certain point, the tower operator starts generating abundant cash. It brings in the capital structure in the zone, in the comfort zone that will be the one that depending on the macro evidence. But at a certain point, it becomes a return to shareholder story. Are we going to say something at Capital Market Day? Yes.
In terms of what we consider appropriate, and if you ask me, if we will already take the very commitment we are discussing internally. So, I cannot anticipate it to you because we have not made the decision yet. We have to discuss with the board. So, it's probably we have still some months in front of us, which will be also important to see where the market is going. The market is much more volatile than what we used to do to expect. But for sure, there will be some return to shareholder going forward it becomes an important and important metric. Dividends or share buyback. For sure, there will be a dividend policy. A dividend policy gives a predictable base to the investors, especially to the long investors. And this is important. This is important for every company. We cannot be different from the rest of the sector. And every time that the share buyback will create value. The board will be very open minded as it demonstrated right now. And at the current price, it's a no-brainer. And the current price, if we were investment grade, it would have been a very easy decision. Unfortunately, in this moment, we have to be disciplined. We promised to the market, we promised to the investment rating agencies. So, we stay on our promise.
Luigi Minerva
Very clear. Thank you, Marco.
Marco Patuano
Thank you, Luigi.
Juan Gaitan
Next question comes from Roshan Ranjit at Deutsche Bank.
Roshan Ranjit
Great. Afternoon, everyone. Thanks for the questions. Got two, please, I'll be really quick. Just on the lease-up growth, that was a bit slow in this quarter, as you highlighted. But if I look at the organic growth by stripping out the Build-to-Suit on the inflator, that growth is quite high. I think it was the highest this year in the quarter. So, could you just give us some indication what's happened, if anything around pricing and the pricing of those new co-located PoPs, please?
And secondly, Marco, just going back to some comments you made around BTS, and you said that there is scope for some savings there. You'd previously given a -- or Cellnex had previously given a Build-to-Suit CapEx envelope of around €4.5 billion to €5 billion out setting 2030. Is there scope to revise that number with the synergies that you are alluding to? Thank you.
Marco Patuano
You know that what is interesting, that there is something interesting when our industry reports on co-location, because it really depends on how you count the PoPs. There are -- if you take, for example, a PoP of Internet of Things, the price is €200 per year. And if you count it one, of course, you can grow the number of PoPs as much as you want. We count the PoPs only in terms of PoPs whose revenue per PoP is in line with our average revenue per PoP. So, in our case, making the math is relatively simple, because you take the number of PoPs and you multiply by the average revenue per PoP. It's not the case all across the industry. Some other tower player, believe me, I'm not making any negative comment, I'm just saying that metrics are not always the same.
Juan Gaitan
Yes. Just one quick comment, Roshan, and maybe we can discuss your numbers offline. But in any case, in terms of our pricing, we haven't really identified that change in trends.
Marco Patuano
Exactly.
Juan Gaitan
Yes, we remind that in terms of organic growth innovation we are providing the great finishing very similar to those of H1. So, in this case, for the nine months it's been 9.5% of organic growth, where maybe the moving blocks are also very similar to H1, so around 3% inflation/escalator and Build-to-Suit, and 2.5% co-location. So, trends very similar to H1, but again we can discuss your numbers offline.
Marco Patuano
Yes.
Juan Gaitan
And on Build-to-Suit, the second?
Marco Patuano
Yes, on Build-to-Suit, we are making the number on the back of the envelope for the time being given the magnitude of the program, which is still another €5 billion down the road. We are not moving materially. But as you can easily imagine, a relatively small efficiency, let's say 5%-6%, and with big numbers, so we have to understand that how palatable is the -- if this new way that we are offering to our client. I was with a -- and through in Italy, and they were very excited about the possibility of increasing the number of BTS that they can transform in co-location in case we get more electromagnetic space. So, for the time being, I would suggest you to keep your model as is, but believe me that as soon as we have good news we will loud and clear in making you know.
Juan Gaitan
Excellent. And with this signal we have reached the end of the session. So, we just want to appreciate your interest and your time. And thank you so much. Have a nice weekend. Bye-bye.
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Cellnex Telecom, S.A. (CLNXF) Q3 2023 Earnings Call Transcript