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Edited Transcript of INW.MI earnings conference call or presentation 9-Mar-20 1:00pm GMT

Full Year 2019 Infrastrutture Wireless Italiane SpA Earnings Call

TORINO Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Infrastrutture Wireless Italiane SpA earnings conference call or presentation Monday, March 9, 2020 at 1:00:00pm 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

Infrastrutture Wireless Italiane S.p.A. - Head of Finance & IR

* Giovanni Ferigo

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

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Conference Call Participants

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* Giles Thorne

Jefferies LLC, Research Division - Senior Research Analyst and Technology 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

* Stefano Gamberini

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

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Presentation

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Emanuela Martinelli, Infrastrutture Wireless Italiane S.p.A. - Head of Finance & IR [1]

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Thereafter, our CEO, Mr. Giovanni Ferigo; and our CFO, Mr. Andrea Balzarini, will provide you with an update on our full year '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 refer to the financial statement at December 31, 2019.

Now I leave the floor to Mr. Giovanni Ferigo, who will guide you through the presentation. 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 [2]

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Thank you, Emanuela. Good afternoon, everybody. Let me guide you through the presentation by starting with Slide #3. 2019 has been a fundamental turning point for INWIT, focused on building a deal that can transform our company into a prominent player in European power sector, more than doubling the value of its assets.

Let me drive you through the latter steps in this -- of this demanding journey that is nearing the merger. After signing the memorandum of understanding in the binding framework agreement on July 26, the shareholders meeting approved the deal through a whitewash procedure last December. As the last recondition to the merger execution, we now obtained clearance from the European antitrust authority proceed, subject to the warranty of certain remedies offered by TIM and Vodafone, aimed at certain opening hospitality services to all operators.

The shareholder meeting, scheduled for March 20, will appoint the new member of the Board of Directors that will take office upon completion of the merger, which is expected to take place by the end of March. Consistent with this path, the extraordinary dividend for the share of EUR 0.5936 will, therefore, be paid right after the merger.

Let me also add that INWIT has also proposed to another shareholder meeting to be held on April 6, the payment of 2019 ordinary dividend per share of EUR 0.132. The dividend per share amount already takes into consideration 360,200,000 new shares to be issued in order to serve the merger.

Moving to Slide 4. Coming back to the antitrust clearance. As you may have already read from our press release, TIM and Vodafone undertook with the European antitrust authority that INWIT would make available to market players, different from TIM and Vodafone themselves a fair, reasonable and not discriminatory condition 4,000 sites in 8 years located in the municipalities with more than 35,000 inhabitants.

The available sites will be disclosed by INWIT on a transparency register available on a website, accessible to a mobile operator and fixed wireless access operators and updated on a monthly basis. Commitment will start from the availability of the transparency register, which will be set up within 6 months from the merger. TIM and Vodafone will have to propose to the European and independent monitoring trustees that will ensure compliance with the commitment over time.

INWIT assessed that no negative impact will affect the combined business plan. The concessions go in the same direction of our combined plan, where we already factored additional tenancy from customer different from TIM and Vodafone. The remedies, at top, is expected, however, to significantly reach the planned execution as far as all hospitality revenues are concerned and provide further boost to new macro and micro coverage infrastructure deployment, which indeed represents the job we have proven we can perform very well.

We will perform and provide a total view of the plan -- on the plan, including guidance and updated prospects for the new combined entity, following merger execution.

Going to Slide 5. As you can see, in this quick overview on Slide 5, in 2019, the tenancy ratio increased up to 1.95. Likewise, reported revenues grew by 4.5% compared to full year 2018. The EBITDA, on a comparable basis that is pre-IFRS 16 accounting principle, show a plus 5.3% growth year-over-year. EBITDA is strongly impacted by IFRS 16, and it's growing by 62.4%. Finally, free cash flow reached EUR 157 million in the full year, up 1.4% compared to the same period on -- of the previous year, confirming sound cash generation.

Throughout 2019, all already witnessed by quarterly results previously released, operation reported slightly lower growth if compared to the previous years. The Vodafone Towers value exceeds any effort that we could make on a stand-alone basis and project us into a site that can count on an organic and inorganic growth of the business in the coming years on a large scale.

Now let's move and go into detail on the results obtained, commenting on the factor that have gradually contributed to them.

Regarding -- on Slide 7. Regarding the full year results, let's begin, as usual, from the revenues analysis. As you can see in the slide, our full year '19 revenues account for EUR 395 million, and we can split it into 3 main clusters. One, revenues from Master Service Agreement with TIM related to the sites inherited through the IPO, 1.1% up from full year '18 due to inflection increase as laid down in the contract. Two, revenues from other operators and others totaled EUR 106.3 million in this year, up 7.5% from last year on comparable terms. They derived mainly from all tenants, our MNO and fixed wireless access customers. These figures include nonrecurring fees, which amounted to EUR 3.5 million (sic) [EUR 3.9 million] in 2018 and EUR 7 million this year that represents the effects of indemnity provided by the current TIM MSA contract.

The growth we have been able to deliver here, which has been driven mainly by an increase in fixed wireless access operators and by an increase in MNO tenant is more than satisfactory if we consider the ongoing network rationalization of Wind Tre. In the fourth quarter, Wind Tre PoPs reduction was offset by the growth of affiliate PoPs, which are now pointing towards the 1,000 mark. This will be having more so in the context of the commitment undertaken with the European Commission.

Third, revenues from new sites and new services amounted to EUR 25.3 million, showing a 36.4% growth year-over-year. These figures include nonrecurring fees, which amounted to EUR 3 million this year, thanks to the aforementioned TIM MSA indemnity. We are talking about a very solid growth in the context previously described.

Summarizing, total reported revenues grew by EUR 17 million for last year. That is 4.5% increase year-over-year, including one-off revenues.

Going to Slide 8. You can find an overview of the structure of our operating expenses. Here, the effect of the adoption of the new IFRS 16 accounting standard is extremely clear. The trend can be better explained by breaking down the total amount into 3 components. One, the most important one is the ground lease cost. EUR 4.6 million only include the contracts we terminate in 12 months' time, considering the ground lease cost on a comparable basis. Removing the IFRS 16 impact, the trend is favorable with a 2.3% reduction year-over-year. This has been achieved through the renegotiation and land acquisition with constant visible improvement despite the many renegotiation already completed and a scant number of land acquisition.

Second, other operations expensing (sic) [operating expenses] are growing in parallel with the growth of the new business, which, with time, acquire greater relevance. Those costs also include EUR 5.3 million of negative one-off due to the costs attached to the merger transaction with Vodafone Towers.

The third component is personnel cost for an amount of EUR 10.6 million, which is 15.2% increase year-over-year. This component has increased as a result of personnel expansion, reaching almost 14% year-over-year, with a turnover rate of 27%.

Finally, the OpEx total amount to EUR 45.6 million, remaining basically flat year-over-year, plus 3.4% on comparable basis pre-IFRS 16.

Moving to Slide 9. Let me recap the main industrial KPIs that explain our performance. First, we can focus on revenues on the left. The average revenues per site confirm a growing trend, reaching a 4% growth year-over-year, up 18% in 3 years. The point of presence, other than TIM, grew mainly thanks to the increase of fixed wireless access component. PoPs have reached 10,900, and we expect a stable growth, driven by the new related services and the growth of new players, such as LinkedIn, Fastweb, AOL and other wireless local-loop operators, Open Fiber, Public Administration, IoT operators.

Finally, the tenancy ratio has reached 1.95x, plus 0.03 versus September, taking into account the macro sites only. On the right, there is a detailed view of cost savings, showing the results achieved for 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 renegotiated about 5,500 ground lease.

Now going to Slide 10, I would like to recap our achievements in the new business deployment. We can claim growth in all the 3 business lines. We recorded a 10% increase of new sites built in a year by deploying 50 sites over a 1-year period, reaching 550 built sites by the end of the quarter. We also recorded an increase in excess of 42% small cell and DAS deployed, following network densification in indoor coverage needs. 3,400 small cell and DAS represent the number of micro coverage built in Italy. The speed of further deployment will depend on how quickly 5G will spread in the country and how it will be perceived by users. For the time being, we can praise the coverage of great visibility venues and events, such as the last awarded contract for the Biathlon World Championships in Pustertal. In 1 year, we have increased by 50% the number of fiber backhauling links, which offer our customers extra value.

It's worth mentioning one more time that the main factor that pushed towards radio access network densification in the near future and you can see them listed on the right hand of the slide. These trends are confirmed by the constant request of new infrastructure by TLC companies that we serve. We reiterate that our volumes are achieved exclusively 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 [3]

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Thank you, Giovanni, and good afternoon to you all. Let me start by reviewing our economic performance in 2019.

As you can see on Slide 12, our EBITDA kept growing steadily, even without considering the IFRS 16 effect. We have moved up from EUR 215 million at the end of 2018 to EUR 227 million at the end of last year, which means plus 5.3% year-on-year, calculated on a comparable basis on pre-IFRS 16 EBITDA and including, both positive and negative nonrecurring items. Those results show solid EBITDA growth, in line with the one shown in previous quarters of 2019.

Our EBITDA margin increased from 56.9% at the end of 2018 to 7 -- to, sorry, 57.4%, always on a pre-IFRS 16 basis.

Moving over to CapEx. At the end of last year, we stood at EUR 65 million, slightly higher than last year's figures. In terms of recurring free cash flow, we have reached EUR 157 million, plus 1.4% year-on-year. This was affected by higher recurring CapEx for extraordinary maintenance as we will balance sheet later on.

Moving to Slide 13. You can see the reported net income totaling EUR 139.3 million. 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 pre-IFRS 16 terms, we can better appreciate the improvement in net income from EUR 141 million to EUR 147 million last year.

Back to reported numbers, in full year '19, D&A stood at EUR 130 million, while P&L taxes totaled EUR 56.3 million, with an implicit tax rate on EBT of 28.8% and interest charges, pursuant to IFRS 16 accounting start-up, amounting to EUR 24.2 million. And higher EBITDA value led to also a remarkable 56% EBIT margin.

On Slide 14, you can see our cash flow at the end of December 31, 2019. During the whole of last year, we achieved a recurring free cash flow of roughly EUR 156.6 million, arising from a better EBITDA in the comparable basis analysis. The performance is impacted by extraordinary maintenance CapEx since we started upgrading our passive infrastructure to host 5G antennas.

In full year 2019, the financial expenses are just below 1% of gross debt, gross debt standing at EUR 160 million.

Moving to cash flow to equity. We recorded EUR 98.6 million result, driven by development CapEx and net working capital of the same item, which showed a higher payment this last year, with net working capital at EUR 13 million in 2018 versus minus EUR 3 million last year. Having considered net income as well as cash flow performance, the Board of Directors proposed at the Annual Shareholders Meeting an ordinary dividend payment of EUR 126.7 million.

In Slide 16, the last slide, you may find an overview of our balance sheet at December 31, 2019. The effect of the enforcement of IFRS 16 led to an increase in fixed assets for the registration of the right of use for roughly EUR 660 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 640 million. Consequently, at the end of this quarter, our net financial position amounted to EUR 712 million. It would have been EUR 72 million pre-IFRS 16. This led to a net debt/EBITDA ratio in the area 0.3x pre-IFRS 16 or 2x reported with IFRS 16. In both cases, leaving our financial flexibility impact to support the forthcoming Vodafone deal.

Following the general dividend distribution in April '19, the fully distributable reserves stand at EUR 841 million at quarter end, corresponding to approximately EUR 1.4 per share. The EUR 570 million of the distributable reserves will be allocated to the extraordinary dividend to be paid right after merger completion.

We now completed the overview of the financial results, but there is one final very important point that we wanted to touch upon because for the first time ever, INWIT has approved its 3-year sustainability plan, proving its commitment towards a sustainable development and confirming its will to generate sustainable medium- and long-term value for all stakeholders. The 3-year plan objectives include a governance area with all employees taking part in skill development and training initiatives. Those include promoting employees' well-being, health and safety and the balance of personal and working life.

A business area with INWIT focusing on the modernization of the country's infrastructures, developing high-quality, technologically advanced infrastructure, such as DAS, small cells, fiber and sensors, with the view to reducing environmental impacts and ensuring reliability and resilience of its infrastructure.

Third area regards clean energy use with INWIT undertaking to improve energy efficiency, resulting to renewable resources and safeguarding the environment, activating mechanisms to compensate the direct emissions of greenhouse gases, ensuring the correct management of the waste produced.

And final area, sustainable procurement, with INWIT committing to purchase low environmental impact products with Verified certifications.

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Emanuela Martinelli, Infrastrutture Wireless Italiane S.p.A. - Head of Finance & IR [4]

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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. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) First 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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I was just wondering if you can give a bit more visibility on the new steps of the deal, confirming the closing date. And I'm not sure if I understood correctly, but did you say that you're going to update the plan once the deal will be over? So I will assume like in September, October, we can expect any presentation with an outlook eventually?

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Andrea Balzarini, Infrastrutture Wireless Italiane S.p.A. - Head of Administration, Finance and Control & Business Support [3]

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So yes, the closing date, we said, is going to take place by the end of March. Actually, we want to complete the merger by the end of March. So the closing could be a few days before in order to allow for the implementation also of the docs to be in place by the end of this month. So this is our expectation at the moment.

Regarding the plan update, you're right. We are going to provide one following merger completion. And obviously, importantly, following the -- starting of the works of the new Board of Directors, which is going to be leading the company. We don't have a precise timing in mind at the moment. But I would expect it to take place before the date you were mentioning of September, October.

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Operator [4]

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Next question comes from Mr. Stefano Gamberini from Equita.

Next question came from James Ratzer from New Street Research.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [5]

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Can you hear me?

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Emanuela Martinelli, Infrastrutture Wireless Italiane S.p.A. - Head of Finance & IR [6]

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Yes.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [7]

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Okay. Sorry about that. My question was just regarding future tenancy growth on your towers over the medium term, and how that can be achieved with electromagnetic radiation limits in Italy at the moment? Could you help to kind of guide us on what you think the maximum tenancy ratio you can achieve is, given the current rules that are in place in Italy at the moment?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [8]

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Okay. In this moment, I don't see any changement in the electromagnetic law in Italy. So we have to evaluate the, let me say, constant variables in this moment.

Okay. The electromagnetic space is a real problem because the, let me say, the mechanical space is solved with -- in the majority of the times, you can solve with some reforce of the site's matter. About electromagnetic issue, we have to manage with the operators. At the moment, we can think to gain in the future 2.5 tenants per site in the plan. Due to the fact that the operators can manage the power of electromagnetic electronic tools. And so there are another issue that is very important that the European Commission authority asked to Vodafone and TIM to reserve in the next 8 years 4,000 sites to install their antennas. And so Vodafone and TIM will have to manage in electromagnetic emission issue, this obligation, they will -- the potential in the electromagnetic power. And so this is our password to the future. We imagine 2.5 tenancy ratio in the future. Okay?

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [9]

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So those sites where you're going to be now bringing on a third-party as part of the merger concessions, these 4,000 sites. On those sites, will you be able to achieve a tenancy ratio 3, i.e., Vodafone, TIM and the third-party? Or does this mean, Vodafone or TI would need to come off those 4,000 sites?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [10]

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Yes, in some -- I mean in a subset of these 4,000 sites could be the total number. The tenancy ratio will be 3, depending on the demand of the other MNOs or third parties. And so theoretically, yes, 3.

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Operator [11]

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Next question comes from Mr. Stefano Gamberini from Equita.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [12]

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Could you hear me? Hello?

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Emanuela Martinelli, Infrastrutture Wireless Italiane S.p.A. - Head of Finance & IR [13]

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Yes, please.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [14]

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Hello, could you hear me?

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

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Yes, yes, we do, please.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [16]

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Okay. One quick question, if I may, regarding this target of 2027. You had a EUR 200 million EBITDA, of -- additional EBITDA from synergies, of which EUR 110 million committed by TIM and Vodafone. Could you confirm that even after this agreement for the remedies, this target is confirmed?

And in addition on that, in the target, there were around 12 to 15 new tenants from OLO and other third parties, what could be this target considering the new open of 4,000 sites after the agreement with EU?

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Andrea Balzarini, Infrastrutture Wireless Italiane S.p.A. - Head of Administration, Finance and Control & Business Support [17]

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Thank you very much because it's very down to the point, your question, and I take the chance to confirm the guidance. We talked about last July in the sense that we don't expect the remedies to have a negative impact on the business plan. As you very rightly said, we already had a number of additional tenants we are expecting to collect from the market in the plan. We are looking at the revenue structure as something which can materially contribute to the derisking, obviously, of the business plan. Because now on a portion of that, there's going to be a full mechanism in place in order to allow other tenants to join our towers. Beyond this very important derisking, we are now not envisaging other impacts. So the most important thing is that there is no negative impact on the business plan from the remedies structure.

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Operator [18]

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Next question comes from Mr. Roshan Ranjit from Deutsche Bank.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [19]

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I just want to follow up on the previous one. Is there anything you can say around pricing of these 4,000 additional sites? So will this purely be on commercial terms? Or has the EC actually to take anything there?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [20]

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No, from the commercial point of view, there is no difference with -- we have a, let me say, commercial algorithm that valorize our hospitality in our sites. So there is no changes in our commercial policy, okay? Then the European Community authority didn't say anything about the price, about the new hospitality to the third parties. Okay?

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Operator [21]

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Next question comes from Mr. Giles Thorne from Jefferies.

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Giles Thorne, Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst [22]

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It's a question on the remedy package piece. You're going to be offering access to the 4,000 sites in municipalities with more than 35,000 people. And then if I look at the agreement that was arrived between the EC and Vodafone and TIM for RAN sharing, they're going to be looking to RAN share only in municipalities with less than 100,000 people. So between the 2 remedies, there's going to be some overlap where you will have to offer access, while at the same time, your controlling shareholders are going to want to be sharing the RAN presumably for 5G. So in those sites, first of all, could you just quantify how many sites that could be? And then what is the dispute resolution mechanism, who gets the priority? Is it your controlling shareholders? Or is it the third-party M&A?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [23]

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Okay. The active sharing will be -- we are considering the active sharing only in the municipalities under 100,000 inhabitants. So all the territory of Italy -- of Italian territory, excluded their 40 most important cities. So from the -- first of all, so in the big cities, Vodafone and TIM will manage our towers, depending on the space and the electromagnetic power available. Under -- okay, under -- the remedies explained very well. Under -- the remedies are valid only for the municipality over 55,000 inhabitants and under 100,000. So -- and no, no, over. And so the TIM and Vodafone must do available the sites where we hosted the third parties. So there is no litigation about it because depending on the request of the MNOs and depending from the power that is available, we will manage the third party hosting request. So we will manage. There is a monitoring trustee that will observe all these password to the 5G deployment and so any other, okay? So there is no problem about first in, first out. So there are -- each 3 months, we have to do public the size available in the period. And then the third parties will ask -- to ask the hospitality, depending from the electromagnetic space and mechanic space.

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Giles Thorne, Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst [24]

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I'm so sorry, just to clarify. Using a worked example, if you have a site today where there is no -- obviously, there is no 5G-RAN sharing, because 5G-RAN sharing doesn't exist in Italy yet. But -- so you have a site today that has no 5G-RAN sharing, but Telecom Italia or Vodafone have identified the sites somewhere that they would like the 5G-RAN share. And presumably, that would involve putting up a very large array of antennas. At the same time, this site is part of the remedy package, so you have to offer it to a third party. So given the limits around electromagnetic pollution, presumably, the limits don't allow both a 5G-RAN share and a third-party tenant, who gets to win? Does TIM and Vodafone get to win? Or do you have to offer it to the third party in this example?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [25]

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Site per site, we will manage this issue. But let me say, the active RAN sharing will be managed only by TIM and Vodafone, okay? And TIM and Vodafone, after have designed the common grid, will do the site available to the market. We will do public this information, compliant with the remedies of the European Commission. And so site by site, we will manage this password to the 5G rollout in the country.

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Operator [26]

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Last question comes from Mr. Luigi Minerva from HSBC.

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Luigi Minerva, HSBC, Research Division - Senior Analyst [27]

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Maybe just a follow-up on the previous one. So if we think about these 4,000 sites, can you recap what is the situation on those sites? So I presume Telecom Italia is a tenant on all of them. And how many sites are currently used by Vodafone? And how many sites can accommodate a third tenant without TI or Vodafone having to dismantle?

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Giovanni Ferigo, Infrastrutture Wireless Italiane S.p.A. - CEO & Director [28]

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Okay then. There are 4,000 sites that have to be free for third parties, okay? This is a yearly number of sites, to gain 4,000 in 8 years, okay? We show in the Slide #4 or 3, I don't remember the line. So TIM and Vodafone would do in these 4,000 sites, TIM and Vodafone, they can occupy these sites with the RAN-sharing scenario and to permit to another to be hosted the potential electromagnetic power. And this is one part.

Another part could be dividing the power. In the other side, they can decide to do totally free the site. And so we can offer every MNO or fixed wireless access that asked -- to ask to be hosted. This is the path. So depending on the final design of the common grid for the 5G rollout that Vodafone and TIM are doing -- are completed, then we will manage the space in these 4,000 sites that is a remedy of the European Commission. And the TIM and Vodafone yearly and quarterly have to give to us the name and the geolocalization of the sites.

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Emanuela Martinelli, Infrastrutture Wireless Italiane S.p.A. - Head of Finance & IR [29]

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Thank you all. This was the last question for this full year '19 results presentation. Thank you for joining us and for your interest in our conference call. As usual, feel free to call us for any additional questions. Thank you, and good evening.

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Operator [30]

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The conference call is over. Thank you for calling.