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Edited Transcript of INW.MI earnings conference call or presentation 5-Nov-19 5:00pm GMT

Nine Months 2019 Infrastrutture Wireless Italiane SpA Earnings Call

TORINO Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Infrastrutture Wireless Italiane SpA earnings conference call or presentation Tuesday, November 5, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Balzarini

Infrastrutture Wireless Italiane S.p.A. - Head of Administration, Finance and Control & Business Support

* Emanuela Martinelli

* Giovanni Ferigo

Infrastrutture Wireless Italiane S.p.A. - CEO & Director

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Conference Call Participants

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* Fernando Cordero Barreira

Grupo Santander, Research Division - Equity Analyst

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* James Edmund Ratzer

New Street Research LLP - Europe Team Head of Communications Services & Analyst

* Juri Zanieri

Kempen & Co. N.V., Research Division - Analyst

* Luigi Minerva

HSBC, Research Division - Senior Analyst

* Roshan Vijay Ranjit

Deutsche Bank AG, Research Division - Research Analyst

* Simon Alexander Arulraj Coles

Barclays Bank PLC, Research Division - Research Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentleman, good afternoon, and welcome to INWIT 9 Months of 2019 Financial Results Conference Call. Ms. Emanuela Martinelli, Head of Finance and Investor Relations, will introduce the event. Ms. Martinelli, please.

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Emanuela Martinelli, [2]

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Ladies and gentlemen, good afternoon. We apologize for the short delay and we welcome you to the 9 months '19 results presentation. As usual, our CEO, Mr. Giovanni Ferigo; and our CFO, Mr. Andrea Balzarini, will provide you with an update on our 9-month '19 operating and financial performance and will be available to answer to your questions.

As always, the presentation will be followed by a Q&A session.

Now, you can take note of our disclaimer policy that you should now see on Slide #2. Let me highlight that the reported data refers to the financial statement at September 30, '19.

Let me guide you through the presentation starting with the Slide #3. As you can see in this quick overview, the 9 months '19 report, the tenancy ratio increased up to 1.92x. Likewise, reported revenues grew by 2.9% compared to the 9 months 2018. The recurring EBITDA on a comparable basis, that is pre-IFRS 16 accounting principle, shows a 4.4% growth year-on-year. The reported EBITDA is strongly impacted by IFRS 16, and it is growing by 57.5%. Finally, recurring free cash flow reached EUR 136 million in the first 9 months with 8.2% compared to the same period of the previous year, confirming a solid growth trend of cash generation.

Now, I leave the floor to Mr. Giovanni Ferigo, who will guide you through the main highlights of our 9 months '19 results. As usual, a Q&A session will follow the result presentation. (Operator Instructions)

Giovanni, over to you.

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [3]

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Thank you, Emanuela. Good afternoon, everybody. Before commenting the quarterly results, I would like to give you an update on our integration project with Vodafone Towers. As you probably know, we have been collaborating since July with the European antitrust authority, providing clarification and additional information which was requested from time to time. We are engaged in a very constructive process, which however is still ongoing. For this reason, we decided together with the team of Vodafone to postpone by 1 month the previously agreed term in order to have enough time to receive the authority's feedback.

On the basis of such a feedback, we will assess the most appropriate path, also with reference to regulatory matters for completing the merger. What I can tell you is that I see no reason today to reconsider our expectation achieving the closing in the first half of 2020, as we stated back in July. While we are working on such things, we also began to focus on the design of the integrated company we intend to put in place from both an industrial processes -- process focused point of view and from an organizational point of view. I can't wait to actually get it going and the good thing here is that each day that passes is 1 day less in the count down to the closing.

Now to the 9 months results. Let's begin as usual from the revenues analysis on Slide #5. As you can see in the Slide, our 9-month '19 total recurring revenues account for EUR 287.3 million. And we can split it in 3 main clusters. Revenues from the Master Service Agreement with TIM related to the size inherited through the IPO, 1% up from '19 -- from 9-month '18 due to the inflection increase as laid down in the contract.

Second, revenues from other operators and others totaled EUR 73.1 million in this year, up 3.3% from last year on comparable terms. They derived mainly from all the tenants, our MNO and fixed wireless access customers. These figures don't include nonrecurrent fees, which amounted to EUR 3.9 million in 2018 and EUR 4.8 million this year.

The growth we have been able to deliver here, which has been driven mainly by an increasing fixed wireless access operator is more than satisfactory to me if we -- if put in the right context. In July, we have signed binding agreements with 2 of our main customers involved, which after closing, will enable us to start a new era of growth. But until then, are objectively posing some limits to the operational leeway as customary for M&A transaction of this sort.

Furthermore, Wind Tre optimizing its network with limited impacts on the latest as the next 1 or 2 quarters for us are largely anticipated. This has been and will be offset by the growth of affiliate PoPs, even if difference in timing can produce nonflat net results in a single quarter.

Third, revenues from new sites and new services amounted to EUR 16.4 million, showing a 21.4% growth year-over-year. We are talking about a very solid growth in the context I was describing before.

Summarizing, total revenues grew by EUR 7.3 million from the last year. That is 2.6% increase net of one-off revenues.

Going to Slide 6. You can find an overview of the structure of our operating expenses. Here, the effect of the adoption of the new IFRS 16 accounting standards is extremely clear. The trend can be better explained by breaking down the total amount in 3 components. The most important one is ground lease costs. EUR 8 million, all include the contract we terminate in 12 months' time, but considering the ground lease cost on the current comparable basis, removing the IFRS 16 impact, the trend is positive with a 2.1% reduction year-over-year. This has been achieved through renegotiation and land acquisition with the constant visible improvement despite the many renegotiation already completed.

Other operating expenses are growing in parallel with the growth of the new business, which with time, acquire greater relevance. The third component is personnel cost. The component has increased as a result of personnel expansion reaching almost 20% year-over-year.

Finally, the total for OpEx amount to EUR 34 million remaining basically flat year-over-year, plus 0.3% on a comparable basis pre-IFRS 16.

Moving to Slide 7. Let me illustrate the main industrial KPIs that explain our performance. First, we can focus on revenues on the left. The average revenues for site confirm a growing trend, reaching a 2% growth year-over-year, up 16% in 3 years. The point of presence, other than TIM, grew mainly thanks to the increasing the fixed wireless access component. The PoP has reached 10,550 and we estimate a stable growth, driven by the new related services and the growth of the new player, such as LinkedIn, Fastweb, AOL and other wireless local operators, Open Fiber, Public Administration, IoT operators.

Finally, the tenancy ratio has reached 1.92x, plus 0.02 versus June taking into account only the macro size. On the right, there is a detailed view of the cost saving showing the result achieved on renegotiation and land acquisition and their impact on lease cost per site. We have reduced our average lease cost per site below EUR 11,400 pre-IFRS 16. Since 2015, we have renegotiation about 5,500 plots.

Now going to Slide 8, I would like to recap our achievements in the new business deployment. We can clean grow in all the 3 business lines. We registered a 22% increase of new sites built in a year by deploying 100 sites over a 1-year period, reaching 550 built sites by the end of the quarter. We also registered an increase of, in excess of 50% small cell and thus deployed following network densification and indoor coverage needs. In 1 year, we have more than doubled the number of fiber building backhauling links, which offer our customer extra value.

It's worth mentioning one more time, the main factor that pushed our large access network densification in the near future as you can see them listed on the right-hand side of the slide. These trends are confirmed by the constant request for new infrastructure by telco companies we serve. We reiterate that our volumes are completed exquisite through pre-commissioning, thus reducing our business risk.

Now, I hand over to Andrea for the presentation of the financial aspect. Andrea, please?

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Andrea Balzarini, Infrastrutture Wireless Italiane S.p.A. - Head of Administration, Finance and Control & Business Support [4]

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Thank you, Giovanni, and good evening to you all. Let me start by reviewing our historical economic performance to date. As you can see, our EBITDA kept growing steadily even without considering the IFRS 16 effect. We've moved up from EUR 159 million in the 9 months of 2018 to EUR 165 million today, which means 4.4% growth year-on-year calculated on a comparable basis considering the EBITDA pre-IFRS 16 and excluding one-off items. Obviously, using the reported figure, we would have lower operating costs due to cancellation of rental costs and as a result, a higher EBITDA value. Our EBITDA margin constantly increased from 57.2% 1 year ago to 57.4% pre-IFRS 16 at the end of September of this year.

Moving over to CapEx. For the first 9 months, we note that we are in line with last year's figure, EUR 35 million. In terms of recurring free cash flow, we have reached EUR 136 million in the first 9 months of 2019, a growth of 8.2% year-on-year, pointing at efficient cash flow dynamics.

On Slide 11, you can see our 9 months reported net income, totaling EUR 98.9 million impacted by the high value of D&A. The adoption of IFRS 16 is apparent in almost all items, OpEx, EBITDA, D&A and interest, but on a comparable basis, the trend is linear. In the 9 months '19, D&A stood at EUR 97.8 million, while P&L taxes totaled EUR 40.6 million with an implicit tax rate of 29.1% and interest charges pursuant to IFRS 16 accounting principle amounted to about EUR 18.5 million. The higher EBITDA value led to an EBIT margin at a remarkable 55%.

On Slide 12, you can see our cash flow at the end of September. During the first 9 months, we achieved a recurring free cash flow of roughly EUR 136 million, rising out from better EBITDA year-on-year in the comparable business analysis. As for working capital, the trend was typically fluctuating. This time, it was positive for roughly EUR 19.2 million, EUR 1.1 million pre-IFRS 16. In the first 9 months, the financial expenses are just below 1% of gross debt of EUR 170 million.

Moving to cash flow to equity. We register a EUR 100.1 million result influenced by development CapEx.

On Slide 13, the last slide, you may find an overview our balance sheet at the end of September. The effects of the enforcement of IFRS 16 led to an increase in fixed assets for the registration of the right of usage for EUR 678 million, since the present value of lease cost is treated as an asset. And a corresponding increase in the value of financial liabilities, which pushed up the debt by about EUR 658 million. As a consequence, at the end of this quarter, our net financial position amounted to EUR 731 million, which means EUR 73 million pre-IFRS 16 application. This means a net debt-to-EBITDA ratio of 2.1x on a reported basis, equivalent to 0.3x net debt to EBITDA pre-IFRS 16, leaving our financial flexibility intact.

Lastly, despite the general dividend distribution in April '19, the fully distributable reserves stand at EUR 801 million at quarter end, corresponding to approximately EUR 1.3 per share.

And Emanuela, back to you.

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Emanuela Martinelli, [5]

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Giovanni and Andrea, thank you. We can now open the Q&A session, where our CEO, Giovanni Ferigo; and our CFO, Andrea Balzarini, will answer your questions. Please remember that one single question per person is allowed so that everyone may speak. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) This question comes from Mr. Juri Zanieri from Kempen.

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Juri Zanieri, Kempen & Co. N.V., Research Division - Analyst [2]

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Actually, just on the deal time line, if you could provide some color. Can you confirm that the next financial meeting will take place before year-end, while, of course, like the deal closing will be expected before H1? Any additional color would be much appreciated.

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [3]

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We expect all the Board of Directors meeting for the approval of the merger in a couple of weeks and Extraordinary Shareholder Meeting by the end of this year. Today, we see no reason to revise our expectation of reaching the closing the first half 2020.

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Operator [4]

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Next question comes from Mr. Simon Coles from Barclays.

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Simon Alexander Arulraj Coles, Barclays Bank PLC, Research Division - Research Analyst [5]

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Can I just get a clarification on the time line as well? I was wondering is there anything to read into the delay that we're seeing by a month? And then if the deal is still going to close by the end of the year or early 2020? What's the expected time line for the special dividend potentially being paid to the shareholders?

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Emanuela Martinelli, [6]

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Simon, this is Emanuela. As Giovanni just mentioned, yes, we confirm the meeting for the end of this year. And this question has been already answered by Giovanni just a second ago.

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Simon Alexander Arulraj Coles, Barclays Bank PLC, Research Division - Research Analyst [7]

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And on the special dividend time line?

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Andrea Balzarini, Infrastrutture Wireless Italiane S.p.A. - Head of Administration, Finance and Control & Business Support [8]

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It's Andrea. The special dividend time line is linked to the closing of the transaction because it is going to be paid to shareholders following closing and following merger. So obviously, at the moment, we can stick back to what Giovanni already told. We have no more precise indication because at the moment, we have no elements which would enable us to be more precise.

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Operator [9]

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Next question comes from Mr. James Ratzer from New Street Research.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [10]

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Sorry, the third question around merger time line. This is essentially quite a critical issue, but it does mean I think the other people and myself are asking this question because I'm assuming that the inferences the EC had some kind of pushback around the transaction, that's (inaudible) since why the time line is being delayed by 1 month. Can you let us know then what the EC is discussing with you about the deal? Can you help to give us more comfort on why the time line has been delayed as such?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [11]

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Okay, it's Giovanni. We have not absolutely received any pushback from the authority. We are working with them to clarify any point that have to be clarified, any other issue about this. Okay?

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [12]

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And what point is that, that they would like clarifying, please?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [13]

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You know perfectly the dynamic on -- with the antitrust commission. So these are some details that, let me say, about the business, the joined company and some -- nothing more than some clarification that they want to know better.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [14]

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I'm just wondering, are they looking at concentration of certain towers in very localized geographies. I mean, you help to understand kind of what extra information they're trying to scrutinize here, please?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [15]

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Let me say, it's a normal process. There is very important, let me say, operation with 2 major companies in Italy of tower. There are some details that they want to know going deeply, let me say, acknowledge, and nothing more than some defined details and many other.

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Operator [16]

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Next question comes from Mr. Stefano Gamberini from Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [17]

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Can you talk a little bit more about the special dividend? The level of debt-to-EBITDA is 6x, is this the maximum amount that you can payout? Or this could be the actual level of leverage you expect after the deal? Or on the other side, is the amount of EUR 801 million of distributable reserves, the reference for this dividends or after the merger, this amount could be even higher?

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Andrea Balzarini, Infrastrutture Wireless Italiane S.p.A. - Head of Administration, Finance and Control & Business Support [18]

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No. I'm afraid that by providing the answer, I should be disappointing at least you, but I would like to clarify the framework for the special dividend. We are not paying 6x leverage as a special dividend. 6x is the maximum leverage we will reach out of executing the transaction, which, as we disclosed back in July, includes a cash payment for minority's stake of Vodafone in the region of EUR 2.14 billion. So the 6x is yes. The maximum leverage that according to the agreements which were signed, we are going to reach executing the transaction. The special dividend is just one of the ingredient, which is going to contribute to that maximum leverage.

Finally, you should read no special link between the available reserves and the special dividend to be paid. Reserves that were being accumulating since the company was created, were accumulated out of the organic business and the results which were delivered in the first few years of life of the company. They represent no reference for the special dividend amount.

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Operator [19]

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Next question comes from Mr. Henrik Herbst from Crédit Suisse.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [20]

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I was just wondering if you could give us some detail on how much ability do you have to sort of prepare for closing of the merger? I guess you're seeing very little growth at the moment as neither Vodafone or TI is giving you much new business. I mean can we expect once the deal closes a bit of sort of that coming through quite rapidly? Or as you sort of prepared, I guess? Also and when it comes to small cells, are you sort of out there already negotiating with landowners, et cetera? How much can you basically prepare for the deal closing already? And how much access do you have to sort of talking to Vodafone and looking at their towers, et cetera?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [21]

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Okay. Let me state that the growth is not so little in the, let me say, new business. We are pushing a lot. Clearly, the closing of the merger, we'll have to ask to do both, to a strong acceleration of our, let me say, revenues. But at the moment, I think that I am very, very convinced that we are doing the right things in the right way. We are pushing the small cell and thus development the indoor coverage, sure, will be, let me say, an item of the future. And the backhauling too. And so we are preparing for the, let me say, [radio] of the future that is waiting for us in the new company.

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Operator [22]

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Next question comes from Mr. (inaudible) from Goldman Sachs.

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Unidentified Analyst, [23]

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Do you think that operator perception of the numbers of access point, so needs to deliver 5G is increasing. Do you kind of also have any date points, which give us an indication of the acceleration in the organic growth of tenancy ratios?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [24]

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Okay. You know perfectly that in Italy, the tender for the 5G, the 5G auction has been very, very expensive. So the Vodafone, TIM (inaudible) Iliad they went to, they have to capitalize this kind of investment. I think that with the 5G we were starting and will help -- we will manage the infrastructure for the 5G network and this will pass to start in the acceleration that I said before. The 5G is the key that will help us to start for new opportunities and new business.

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Operator [25]

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May I go ahead with the next question, sir?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [26]

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Yes.

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Operator [27]

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Next come from Mr. Ranjit Roshan (sic) [Roshan Ranjit] from Deutsche Bank.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [28]

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I guess, I should have one on your operational dynamics this quarter. I think on the call, you mentioned, progress being made with Iliad. If I look at the revenues from OLOs, there isn't a material increase quarter-on-quarter. I think the reports yesterday that Iliad had achieved 1,000 activated sites in Italy. Can you just explain how your discussions with Iliad are going? It looks like if that would fall outside of the ongoing discussions with Vodafone and the deal?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [29]

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Yes. We signed contract in January of this year with Iliad. We start to define the possibilities to give them hospitality. We are doing this, let me say, along in terms of times process. We are doing interesting increases with Iliad. And I think that in the next quarter, we will see something interesting with them. Let me say from the moment -- usually you spent 4, 5 months to install a new (inaudible) in our tower. So, let me say, you have to keep in mind this time before to see the concrete results. There are interesting issue in fixed wireless operator. In Italy, Open Fiber, for example, is one of this; Fastweb that built the frequency for Tiscali that now is new, let me say, player in the market but always under the consideration that I did before that we need time to host a new, let me say, tenant in our towers. And these are the principle moments. Okay, that's all.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [30]

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Okay. I'm talking to follow-up these interesting things that you referred to, have they increased in recent weeks, because I get the sense that Iliad are quite keen to accelerate the role of a network. Have you sensed an increased urgency from them?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [31]

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You have to consider that we are very -- let me say, we are happy to host Iliad, but it's Iliad that has the need to accelerate to build their own network. They -- I think that they have a huge problem having the roaming only with Wind. And so they -- we, both in with Iliad, we are accelerating the process to host, they run tenant in our sites.

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Operator [32]

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Next question is from Mr. Fernando Cordero from Santander.

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Fernando Cordero Barreira, Grupo Santander, Research Division - Equity Analyst [33]

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Just a follow up on the current growth trends. I would like to understand which extent you have already suffered the whole impact from the Wind Tre network rationalization process? And if in that sense, we should not expect any further negative impact from that in your organic growth.

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [34]

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Unfortunately, no. You know perfectly that Wind, not only is rebuilding their network, but they are evaluating a new company of towers in Italy, too, not only in Italy. And so let me say this is another, let me say, item that you have to consider. I think for another 2 quarters, we will have this, let me say, problem to manage, or item problem -- is not a problem because finally -- it's an issue to manage with them.

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Operator [35]

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The last question comes from Mr. Luigi Minerva from HSBC.

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Luigi Minerva, HSBC, Research Division - Senior Analyst [36]

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It's just going back to the time line and the process. Should we assume that it's now Brussels that will do the whole process or is there still an opportunity for the review of the transaction to be transferred to the local antitrust in Rome?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [37]

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Giovanni, it is. The antitrust authority evaluating the operation is the European one. And really, in theory, the Italian authority can claim jurisdiction, okay? So we have to wait for the European Commission evaluation.

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Luigi Minerva, HSBC, Research Division - Senior Analyst [38]

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May I ask, when this initial phase from -- of the European Commission evaluation is expected to end?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [39]

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Okay. As you can read in our, let me say, press release, we moved in -- of one month because we are waiting the, let me say, the European Commission, which is okay, it's 1 month more. Okay?

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Emanuela Martinelli, [40]

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So. Thank you. This was the last question for this 9 months '19 results presentation. Thank you all for joining us and for your interest in our conference call. And as usual, feel free to contact us for any additional questions. Thank you again, and enjoy your evening. Bye.

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Operator [41]

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Ladies and gentlemen, the conference is over. Thank you for calling INWIT.