Rai Way S.p.A. (0R40.L) Earnings Call Transcript & Summary

Good afternoon. This is the conference operator. Welcome, and thank you for joining the Rai Way 9 Months 2025 Results Analyst Web Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Andrea Moretti, Head of IR for Railway. Please go ahead, sir.

Thank you, operator, and thank you all for attending our conference call. The call will be held as usual by our CFO, Adalberto Pellegrino; CEO, of course, Roberto Cecatto; and our Chief Corporate Development Officer, Giancarlo Benucci. Please, Mr. Cecato, go ahead.

Thank you, Andrea. Good evening to everyone. Let's start. In Slide 4 -- okay. In Slide 4, we summarize the main achievements of the period, both in terms of financial results and in terms of operating activities. The first 9 months financials were particularly solid, even better than our beginning-of-the-year expectation, and showed a clear continuity with the already strong result that we posted at the end of June. Revenue growth even accelerated to basically 3% in the third quarter compared to the plus 2% recorded in the first half. Both business segments grew faster compared to the CPI-linked contribution. In fact, media distribution services benefited from the expansion of DAB radio coverage for Rai, representing around 85% of the increase in the revenues from new services to Rai. But also the radio broadcaster also pushed the Digital Infra division because of the rising needs of towers to extend private operators' DAB networks. And let's not forget the initial contribution for diversification initiatives, namely data center and CDN, though still limited as I will elaborate more in a while. Moving to profitability. Adjusted EBITDA rose by 2.8%, supported by positive underlying trends in the traditional business, also helped by careful cost control and some non-core items. These non-core benefits benefited both other revenues, including government incentives on new tech projects, and proceeds from land sale and mailing cost. But please note that we actively pursued them in this period in order to mitigate the temporary impact of the start-up stage of the new initiatives. Alberto, the CFO, will discuss how all these moving parts impacted on the recorded EBITDA level. Once again, net income was in line with last year's after taking into account a higher level of depreciation and amortization, which is a consequence of our continuous investment activity. Speaking of which, in the 9 months, we recorded almost the same amount of CapEx than 1 year before, slightly above EUR 25 million, but with a different mix. The majority is indeed represented by maintenance activities, which included some planned exceptional nonrecurring activities on some big towers. There was also a seasonality effect involving certain high-level cybersecurity IP network investments. The development CapEx in the 9 months were equal to EUR 11 million, therefore, below last year level, consistently with the guidance updated in July. In particular, the reduction compared to the expectation at the beginning of the year is the result of 3 main factors. The first one is the slight shift to 2026 of some investment for Rai DAB network extension, but let me say, to be fully recovered the next year, being orders already placed and installation planned. Therefore, there will no impact on subsequent years. The second phenomenon impacting our development CapEx is the length of the approval process for some land interested by the photovoltaic project. This is essentially leading to a 1-year shift in the investment plan now expected in '26-'27 instead of '25, '26, and the contribution to P&L with full impact now expected in 2028. Finally, we are planning a different phasing of the rollout of new edge data center. We have projects land and expertise. It is mainly a matter of setting the right moment of construction in order to match a better level of edge demand and improve returns. Let me clarify that this is definitely not a change in the strategy. The consensus of the need for assets distributed across the territory is more relevant than ever. This is a concept also reiterated, for example, by the government, the Italian government strategy to attract investment in the edge data center, if you see the July document of the minute. Generally speaking, so at least a European level, not just ours, edge infrastructure are currently experiencing lower uptake due to delays in 1 of the 2 areas of demand. In fact, while enterprise demand for regional capacity is present and growing, fragmented, the demand for edge networks resulting from the spread of low-latency services is proving at the moment slower. As I will explain shortly, we are improving the effectiveness of our commercial activities in the enterprise segment, primarily by identifying the right demand aggregators. Meanwhile, the need for low latency and local data processing could accelerate significantly following the rising interest for AI application and the AI cloud architecture that require a low latency inference phase. Also consider that there are several AI cloud providers that have already started rolling out their infrastructure using third-party data center. Let me say that it's only a matter of time before these 2 levers justify or require the addition of further edge nodes. But at that point, we will be very quick and flexible. To conclude on financials, let me also underline the strength of our recurring free cash generation, which accounted for approximately EUR 94 million despite the seasonality investment, bringing down the net debt compared to the end of June levels. Now we have to speak about the operational perspective. In the traditional business, the main project for our client, namely the station of coverage of the DAB network, is proceeding largely as planned as evidenced by the revenue growth of new services. As already said, the approval process for some of the photovoltaic projects is taking longer than expected, but also in this case, it is a matter of time later the feasibility or returns. Moving to diversification initiatives. We are focusing on commercial levers to enhance revenue contribution. On the edge data center within the context outlined before, currently, the target market is enterprise, driven by the off-premises relocation of servers and even more the deployment of private cloud environments. This demand is growing, but fragmented. Therefore, we try to address, and we are addressing it through aggregators such as private cloud operators and system integrators. The latter also through an expansion of our offering to IAS services, infrastructure as a service approach. This new approach, this different targeting, is now operational is already in place and starting to show more effectiveness and fit with our partners, hopefully leading to improved results in the coming months. Furthermore, we are talking about a market with some local assets, for example, those held by private cloud operators, which, in many cases, are largely underutilized and could be consolidated and rationalized as a way to enhance the growth profile. Speaking regarding the CDN, in collaboration with some larger clients, and our technology partners, we are fine-tuning certain very sophisticated technical aspects and above all, building a good track record of performance that will encourage customers to gradually move a larger portion of their traffic to our network. Regarding the hyperscale data center project near Rome in the [indiscernible] municipality, although we have hoped to arrive at this call with final authorization, updates are not lacking. The process called [indiscernible] step ended positively as all the other administrative issues inside the administration of [indiscernible] municipality. The conclusion of the process is now linked to an exemption that arisen only in the last few days from an authority, the hydrogeological Bazin authority, but we are working on it and aim to obtain it with a reasonably short time frame. To sum up, the reestation part is proving to be more gradual, both for market and authorization reason. But with regard to 2025, we aim to see an initial improvement in contribution in Q4 2025. So the last part of the year. On the other hand, we have nevertheless been able to modulate the fixed cost of these initiatives according to the revenues, essentially entirely offsetting at EBITDA level, the more gradual top-line contribution. While looking at the big picture, what I would like to stress is that we are creating a platform that combines high-performance connectivity, centralized data center, distributed data center, and traffic accelerators such as CDN, together with the characteristic of sovereign, neutrality, and quality. Let me say that this platform is among the most fitting and interesting national infrastructures to enable the next technology shift. We believe to be well positioned to size future opportunities, and certain feedback we get from market operators and potential prospects seems to confirm this. Moving now to the outlook. The results achieved in the first 9 months allow us to comfortably confirm the 2025 guidance, especially referring to expected increase in adjusted EBITDA slightly above the July expectation, driven by the performance of the traditional business and the nonrecurring benefits. Still in terms of outlook, we would also like to provide, to the extent permitted, a brief update on the status of the activities related to the possible broadcasting tower sector consolidation. As already told in the past call, the industrial analysis was substantially completed at the end of July. Since then, while we worked on, of course, on refining our internal evaluation, let me say that our parent company is still reviewing other aspects within its own responsibility, which are evidently necessary for future discussion with counterparties. Of course, this, together with some initial procedural complexity that we told in the past calls is leading to longer timelines, and this was confirmed by the extension of the terms of the MOU announced by the shareholders. So at present, it's therefore difficult to make prediction either on timelines different from those recently updated in MOU or on the outcome. Please, Adalberto, now the floor is yours.

Thank you, Roberto, and good evening to everyone. We are now on Slide 5 that was already commented by Roberto. So I will skip it and go straight to the details of each metric, starting from Slide 6, where we can see how the Media Distribution segment grew by 2.2%, outperforming inflation, which contributed about 1.2%. The growth was supported by the extension of Rai's network coverage included in the new service for Rai up to 20% -- in the Digital Infrastructure segment, revenues reached EUR 24.6 million, up 3.4% compared to the figures reported last year. This growth was mainly driven by the tower hosting business, which particularly strong volumes from radio broadcaster customers. We continue to see the initial contribution, of course, from the commercialization of our edge data center on the overall figures. Moving to OpEx on Slide 7. We have a 1.8% increase in cost, landing at EUR 67.2 million. Breaking down the OpEx, we noticed that personnel costs were up 8.5%, impacted by the negative effect of the lower capitalization level. This trend is a trend that is fully consistent with what we have planned in our industrial plan. If we look only at the traditional business, the increase is just 5%, mainly represented by the renewal of the collective labor agreement, while the diversification initiative led to an increase of only EUR 0.3 million compared to EUR 9 million last year. Other operating costs decreased by 5%, landing at EUR 31 million, benefiting from some non-core benefits. as we have already seen in the first half result. Diversification-related OpEx are highlighted below the chart. And as you can see, they more than doubled year-on-year to EUR 3.3 million, as basically we planned. If we strip out this diversification cost as well as the before mentioned non-core benefits, we arrive at a stable underlying cost base for the traditional business. Such result is driven by -- from one side, a slight increase in energy tariff. And on the other side, we have some optimization across other cost items. In order to emphasize the healthy trend in traditional business in Slide 8, we show the detail of the 3 components impacting the EBITDA growth. In particular, we can see the positive evolution of the adjusted EBITDA related to the traditional business that continue to grow, plus EUR 2.4 million. This positive performance was partially offset by the increase in the start-up cost of the diversification initiative, which led to a negative impact on the EBITDA of EUR 1.4 million. Nevertheless, the company has sought one-off benefit to help to mitigate the ramp-up phase of the new initiative. I would also like to point out that the level of growth in the adjusted EBITDA linked to non-core items is similar to the impact that this line had already had in the first half. Therefore, the growth in adjusted EBITDA in Q3 is almost entirely attributable to the recurring components. This clearly illustrates how, despite a more gradual commercial uptake, EBITDA absorption from start-up of diversification initiative remained under control, mainly thanks also to a focus on the related fixed costs. We are now on the following slide, Slide 9, where you may see an increase in adjusted EBITDA that reached EUR 146.1 million with a 69.2% margin, impacted also by proceeds from asset sales and tax credit on development projects included in other income. Just below, we report nonrecurring costs as well as D&A and financial charge, while the D&A continued to grow due to increased CapEx, financial charge has slightly decreased, reflecting lower interest rates. So basically, same trend that we have already commented in the previous call. Moving to Slide 10. Let's have a look to the net financial position, including EUR 26 million of IFRS leasing. Net debt amounts to EUR 164 million. Compared to the end of 2024, the net debt increased by almost EUR 40 million, including EUR 90 million of dividend payment with cash generation, therefore, remaining healthy and broadly in line with the previous year. Free cash flow to equity stands at EUR 94 million over the 9 months. As per the outlook, let me turn the floor back to Roberto.

Thanks, Alberto. Let me conclude with the expectation for the last part of 2025. Confirming our full-year guidance for an increase in adjusted EBITDA driven by growth of the traditional business, even slightly above the previous expectation, mainly thanks to better cost control, partially offset by the anticipated absorption from the start-up phase of diversification initiatives and positive contribution from higher non-core benefits compared to 2024. As per the CapEx, we confirmed a higher level of maintenance investment following the mentioned extraordinary activities on towers and the seasonality on cybersecurity network refresh already visible in the 9 months. But let me say that over the industrial plan cycle, we obviously confirm our average maintenance CapEx or revenues ratio of 6.5%. In parallel, development CapEx will be below the EUR 40 million spent last year, as commented before. So that's all on our side. We can now open the line for the Q&A session.

[Operator Instructions] The first question is from Giorgio Tavolini of Intermonte.

The first one is on your development CapEx projection. I mean this should imply lower revenues or slower revenues ramp-up from diversification activities next year. compared to your assumption in the business plan. So I was wondering the consensus currently foresee some EUR 5 million revenues on the data center initiative and EUR 7 million in 2027. Then also in solar production, you should expect some few million revenues next year and up to EUR 5 million in 2027. So I was wondering if you do confirm the revenues under the new CapEx assumption. The second one is on the fact that in the recent days, there has been a considerable noise about the risk of MSA renegotiation across telecom towers, which has significantly affected the stock prices. We are currently negotiating a deal with EI Towers, which will, of course, involve the individual MSAs with your anchor tenants, RI Mediaset. So could you remind us what level of contractual protection your MSAs provide, for example, whether they include all of the closest preferred supplier for client provisions or other similar protection, and whether there are any legal terms governing the early notice for renewal discussions?

So let me take the first question, Giorgio. And yes, of course, the fact that there are some factors that could bring an impact on 2027 revenues, even if I would prefer to focus on EBITDA. But of course, the impact are the same one that characterize the dynamics on the first 9 months that we have commented. Let me just remember the main topics: the permit time lines for hyperscale, diversification dynamics referring to Edge and CDN with more gradual growth and consequent rephasing of some investment on new edge to improve alignment with demand and, of course, meet expected returns. Then I would also add the delay in the permits that we commented for some land involved in the photovoltaic project. So we -- let me elaborate more on these 3 topics in order to clarify the potential impact. And let me also add a few considerations on the traditional business that, of course, is, as you have seen also in the Slide #8 is continuing to give a positive contribution. So on the EP scale, the approval process is taking 1 year longer than we have originally assumed in the plan. But here, really the impact on revenues and adjusted EBITDA in 2027 is really negligible. Here, it is more a matter of a different distribution of investments. For the rest of the diversification initiatives, Edge and CDN, the fundamentals and the quality of the architecture remain, of course, solid. There is certainly more gradual uptake, but the catch-up could come both from the result of the more targeted commercial approach we have put in place and also from the contribution that could come theoretically from the AI. As I mentioned, a few words on the traditional business, albeit with various moving parts, less development such as MUS 12 that, of course, not depending by us, but better performance of the inertial business on tower hosting, and above all efficiency. So the traditional business is currently slightly above expectation and 2027 targets. Then last, with regard to photovoltaic project, that I'm treating separately from the traditional business. We -- currently, we are seeing a time lag of approximately 1 year in investment. Therefore, we do not expect major change in cumulative CapEx, only different yearly distribution during the business plan time horizon, but with full impact on EBITDA to start in 2028. So only a temporary gap. So I prefer to give you an overall view of all the impact, just to clarify that assuming, of course, no change in the macroeconomic assumption referring to CPI and energy price, we're talking about, all in all, a very limited risk in absolute number, low to mid-single digit on the EBITDA with a few tens of million of lower investment likely moved to the following year. However, we are already -- we are working and we have already identified alternative levers to mitigate the impacts and strive towards the announced 2027 EBITDA target, which remain, of course, our goal. Just to give you an example of some levers, greater internal efficiencies, contribution from potential nonorganic growth, and possible one-off from disposal of non-core assets. Just one second, we will have to answer to the following -- the second question for Giorgio. Just repeat the main -- the second question we did in relation to the--

I was wondering if your master service agreement foresee good protection, good contractual protection in the event of a renegotiation that are now on the table of some telecom tower cost. So if there are all or nothing clauses pre-supplier and for price provisions, or I don't know if there are legal terms governing the early notice for renewal discussion. I mean I ask this because you are renegotiating a deal with EI Towers that will involve your individual master service agreement with your anchor tenants.

You are referring to the MSA we have in place with Rai, correct?

Yes, exactly. Just a reminder because I can't recall all the stuff.

Okay. Listen, you mentioned some protection clauses that usually we see in the telco contracts. Let me say that when looking at our MSA with Rai, let me remind that we have a renewal closing in 2028, then followed by additional 7 years of contracts. We have exclusivity on new services. Let me remind also that we are today, the only operators able to guarantee a 99% population coverage that is required by law for the main multiplex of Rai. And then let me also add that Rai is and will remain according at least to the of the Prime Minister, not only the client, but also our shareholder. So in life and business, renegotiations are always possible, but there are all the elements that I mentioned to keep in mind.

Yes. And consider also what is written in the PCM that underline the strategic relevance of the governance by Rai of this kind of infrastructure. So it's something that is a little bit different in terms of relationship with our assets.

The next question is from Andrea Devita of Intesa Sanpaolo.

So a follow-up on Giorgio's question based on the current evolution vis-a-vis your targets for 2027 and your answer. So just to understand your focus will be it to protect the free cash flow 2027, the EBITDA 2027, or, let's say, the whole philosophy and target longer term in terms of total investments and the total worth of projects.

Almost all. I would say, of course, as I mentioned answering to Giorgio, we -- rather than focusing on revenues, we -- I mentioned we are giving an important effort in order to confirm the number that we include in our 2027 business plan as concerned the adjusted EBITDA. And then, of course, we will focus on all the key elements and all the key metrics in terms of cash flow and shareholder remuneration.

But I think that in the numbers, it is hard to square all of that -- so it's a kind of trade-off for 2027 because we are not making the investments in time to generate the related revenues, as I understand.

Yes. As I mentioned, we are seeing -- let me elaborate again on this. We are seeing a small gap in absolute number, low to mid-single digit coming from the different components that I commented talking -- answering to Giorgio. But again, of course, as I mentioned, this low to mid-single-digit potential gap on the EBITDA is coming with a few tens of millions of lower investments. But these are, as I commented, in part temporary effect. So as concerned, for example, the photovoltaic project, we have a delay of 1 year. So we will have the same investment even if the run rate level will be in 2028. So just a postponement. And in any case, in order to confirm the target for 2027, we are working on mitigation measures. As I mentioned, we, of course, as usual, have put a great effort in terms of internal efficiencies. We then can look at some contribution from nonorganic growth and although less relevant, also some one-off benefits, for example, from disposal of noncore assets. So this is the main impact that we are seeing and where we are working in order to confirm the key guidance that for us is the EBITDA -- but then, of course, we are taking under control the cash flow and the shareholder remuneration.

And just a very little question on Q3. So very interesting, the waterfall slide on EBITDA gap. Just wanting to understand the figure for the third quarter. So if more or less was organic growth was reported growth? And was it the case that the gap -- negative gap in diversification was offset by another positive contribution from nonorganic items?

The third quarter is basically the growth of the third quarter is all organic growth. I didn't get your last point. If you can repeat it.