Rai Way S.p.A. (RWAY) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Rai Way First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giancarlo Benucci, Head of Corporate Development and IR of Rai Way. Please go ahead, sir.

Thank you, and good afternoon. I thank all of you for joining us today, and welcome to our first half 2020 results presentation. As usual, Aldo will start driving you through the key facts and figures of the period, while Adalberto will present the financials more in depth. At the end, we will be at your disposal for the Q&A session. Let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thank you, Giancarlo, and good afternoon to everyone. Let's start with the key messages arising from the first 6 months of this exceptional 2020, as already pointed out, commenting upon the first quarter. Lastly, and as our company's operating environment, although not too immune, has been only softly affected by the COVID-19 emergency. In addition, up to now, we have been able to react quickly and manage the impacts effectively and in line with the already anticipated expectations. And basically, with no material impacts on the broadcasting and hosting activity and contracts already in place and offsetting the more gradual deployment of certain development activities due to the restrictions we had in March, May period, so during the lockdown through, first, the more gradual decline, not only for revenues, but also for the OpEx associated to the development activities. And secondly, temporary OpEx reduction resulting from the COVID or from the measures implemented to face the same emergency, such as the broad deployment of the Agile work model. And lastly, the benefits coming from other more sustainable savings initiatives. As a result, in the first half 2020, performances came in line or, in some respect, even slightly ahead of our expectations, confirming the solidity and the resilience of our business. And showing, in particular, a growth at top line level, supported by new services for Rai despite the more gradual contribution for the multiplex coverage extension project. And a 3.5% rise of adjusted EBITDA with profitability improving by 170 basis points at 61%. And the ramp-up of development investments driven by refarming that will ensure for our future growth. Again, on the refarming front, to provide you with an update on the regulatory steps, it's worth noting that last -- in July -- on July 24, the regulatory -- Italian regulatory authorities, the AGCOM, launched a 60 days consultation on the criteria, broadening the auction for the 2 additional national multiplexes, placing 4 1/2 multiplex lots. That's, as to remind you, we finalized the definition of the digital terrestrial network configuration after the refarming process of -- post refarming. The consultation is expected to be completed by the end of August. And then the final criteria will follow after that, and after that, the tender. Let me point out on a few interesting points emerging from the very [ routine ] proposal of the authority. So December 1 will be based on a single offer with no possibility to increase it. 2 out of the 4 lots will be reserved to potential new entrants, to network operators currently managing only 1 multiplex, and also Persidera with minimum value of the offer set at around EUR 4 million. On the remaining 2 lots, these are open also to the big network operators, to the national network operators, meaning Rai, of course, and Mediaset through Elettronica Industriale with minimum value of the offers set at EUR 7.9 million. The awarding will be based for 70% of the score on technical criteria. Technical criteria is continuity of the service, experience as network operator, capacity to ensure spectral efficiency, and again, quality of distributed content and coverage. So technical criteria for 70% of the score and for the remaining 30% on the economic offer. The authority proposal for new cap, the new cap on the number of multiplex managed by a single operator, that should be set at 3. And you remember that the current number is 5. And finally, the duration of the rights, of the frequencies rights of use confirm that 10 years and could be potentially also renewable. So overall, looking at these criteria, we remain confident with our base case of 3 multiplex managed for Rai. Okay. Let me remind you that the decision to participate or not is up to Rai. Obviously, having more capacity will give benefits to broadcasters, to Rai, to broadcasters for supporting HD offering. But at the same time, the agreement we signed last December already regulate all the different scenarios with a very good protection for Rai Way also in case of 2 multiplex. As you know, the refarming process involve also the local TV. So on the local TV refarming side, the tenders to award the regional multiplexes have been started in some areas, particularly in the north of Italy. So in Lombardia, Piemonte, Valle d'Aosta and in Trentino-Alto Adige and are currently underway. In this perspective, we confirm the selective approach foreseen in our new industrial plan, with the focus on those areas, offering a compelling risk/reward in profile. So moving now to capital allocation. As you may remember, the capital allocation and the shareholders remuneration strategy envisaged in our recent industrial plan included together with the usual 100% dividend payout, also a buyback program to be launched in 2020 for an amount of EUR 20 million through the use of our available reserves. Now in line with the recent approval of our -- of the shareholders' meeting and following the dividend payment, we are ready to start this program in the beginning of August. Then Adalberto will add some technical details later on. Lastly, the positive evolution of the business observed so far allows us to keep the guidance for 2020 adjusted EBITDA unchanged while lowering our expectations on maintenance CapEx. I will -- on this topic, I will come back in a few minutes. So moving now to Slide #5. I will comment on the highlights of the first half, starting with core revenues that reached EUR 111.1 million, so up 0.7% compared to 2019, mainly as a result of rising contribution for new services to Rai, offsetting the MNO-driven pressure on third parties. So in performance on revenues, let me remind you, has been achieved despite substantially 0 CPI contribution. And secondly, some COVID-related slowdown in commercial uptake. On the opposite, adjusted EBITDA at EUR 67.9 million came out significantly higher than last year, benefiting from the slightly higher revenues and mainly, as commented before, from the low level of operating costs, boosting profitability above 61%. At the bottom line, one-off expenses and higher D&A impacted the EUR 32.8 million net income, however, slightly up year-on-year. On the financial side, CapEx in the first half totaled EUR 19 million, an amount materially higher than last year. Its development component reaching EUR 16 million compared to the EUR 4.1 million of 2019 and mainly driven despite the well-known restrictions by the multiplexes coverage extension, as you know, part of the -- of our refarming projects. Maintenance CapEx remains steady at low levels, reflecting once again our -- the traditional seasonality of the investment activities. Moving on, the recorded net debt post-IFRS at June 30 amounts to EUR 32.5 million, but this figure already includes the EUR 63.3 million impact of the dividend paid on July 29. So after the end of the first half, but approved by the shareholders' meeting in June. So to conclude, the cash conversion remained strong at 95.2%, exceeding the first half 2019 figure. And I think now I will now -- Adalberto, I will now hand over to you to provide with more details on the financial performance. So please, Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. We are at Slide 6. As underlined by Aldo, our first half financial, generally speaking, remained solid despite the tough macroeconomic scenario around us. Starting from the top line. As you may see, core revenues were up by 0.7%, reaching EUR 111.1 million, with Rai component growing 1.4%. Despite the flat 2019 CPI dynamic, the figure were 0.1%, so plus 0. Leaving the key considerations steady at EUR 90.2 million. But thanks to new services that were up by 50%, excluding una tantum components, backed as in the first quarter by the digital terrestrial television MUXes and DAB coverage extension. And let me also highlight that even without considering the refarming project, the other new services are growing there. Then, again, on the new services, generally on the overall new services. I would like to stress the remarkable progression we have been reporting since 2016, with an average annual growth of almost 50%, excluding one-off and una tantum component, bringing the initial EUR 1 million to the current EUR 4.7 million on a 6-month basis. On the other hand, revenues from third parties dropped by 3.6% at EUR 16.2 million, showing an evolution in line with the trends anticipated in our industrial plan, with once again, opposite dynamics from MNOs and non-MNOs with the latter further growing and expected headwinds on the MNOs, resulting in a customer mix progressively more balanced. Moving on to costs, so to Slide 7. Good news here, with overall cost in the first quarter spending in the EUR 43.2 million, down 3.7% compared to EUR 44.9 million in the first half 2019, with personnel costs at EUR 23.4 million, apparently growing but actually down by 0.6% compared with 1 year ago if you exclude noncore items and capitalization impact, benefiting from the impact of COVID-19 on variable cost component. Other operating costs fell by 9.2% below EUR 20 million. Actually, excluding the adjustments made in 2019, the underlying figures become minus 7% as a result of a softer-than-expected ramp-up in the OpEx arising from the deployment of some development activities made more gradual by COVID-19 restriction. A temporary OpEx reduction connected again to COVID-19, postponement of certain activities, and the consequent implementation of Agile work models savings in general expenses. Then we also had some savings on utilities costs coming from the renewal of our energy contract at better conditions. All in all, profitability reached 61.1% from the previous 59.4%, as you can see in the profit loss in the following slide, Slide 8. Well, I would also highlight the EUR 1 million one-off cost included in the first half in relation to a new early retirement plan that together with higher D&A also following the rising investment activity and the lack of benefits coming from the release of provision, which on the contrary we recorded in 2019, probably you may recall for approximately EUR 1.5 million of one-off impact. All these elements brings the net income to EUR 32.8 million, slightly up vis-á-vis the EUR 32.6 million recorded in the same period of the previous year, also reflecting the tax relief connected to COVID-19 government measures, which resulted in a softer 27.2% tax rate, thanks to a one-off benefit. Moving now to the cash generation, so Slide 9. You may figure out how the EUR 9.5 million net debt recorded at the end of December 2019 rose to EUR 32.5 million at the end of June, including, as was anticipated by Aldo, the debt for the dividend payment of EUR 63.3 million on top of the EUR 38 million IFRS 16-related debt. Looking at the cash flow dynamic, I spoke that materially higher CapEx absorption of EUR 19 million, out of which EUR 16 million are connected to the development activities, and in particular to the MUXes coverage extension and EUR 8.3 million positive contribution from the change in net working capital, resulting from the mix effect of tax outlay just happened in July and the CapEx cycle dynamics. If we strip out the IFRS 16 effect on the net debt figure, we would obtain a net cash position of about EUR 5.5 million at the end of the first half after the dividend payment. Balance sheet. Lastly, if we go to Slide 10. At June 2020, the company recorded net fixed asset of -- for approximately EUR 229 million, more or less the same amount we recorded at the end of last year, including EUR 30.8 million rights-of-use for leasing under IFRS 16. While net invested capital totaled EUR 186.2 million with the equity book value at EUR 153.7 million. That's all on the financial. Let me now conclude at Slide 11 by providing you with some more color on the buyback program we are about to launch. First of all, I remind you that this buyback is consistent with the capital allocation goals set out by our 2020-'23 industrial plan. And of course, compliant with authorization granted by the shareholders' meeting at the end of June. According to the AGM resolution, starting from the next 5th of August that the company will purchase its own ordinary shares on the regulated market, MTA, managed by Borsa Italiana, up to a maximum amount of EUR 20 million to be drawn from the company's reserves available for distribution. The shareholder authorization has a maximum duration of 18 months from the day of the AGM's resolution, which means that the program must be finalized by December 2021. In addition, the program is subject to the terms and conditions specified by the legislative regulatory requirements in terms of price and products, as recalled by the press release with an update on the progress to be disclosed on a monthly basis. That's really all on my side. I now leave the floor back to Aldo for the guidance. Thank you.

Thank you, Adalberto. Thank you. As far as the guidance for 2020 is concerned, as anticipated before on the back of the operating evidence collected so far and on the information available, today, we continue to feel comfortable with the profitability targets already confirmed in May. So meaning further organic growth of adjusted EBITDA with broadcasting and hosting services already in place, well protected. And the effect on the top line of the more back end-loaded profile in the year of some development activities, for example, installation of the multiplex coverage extension offset by more gradual associated OpEx and other cost reductions. As the -- as for the investment activity, while confirming, of course, the higher level of development CapEx consistently with the aim to speed up installations in the second half. On the other hand, we now expect maintenance CapEx on core revenues ratio below the 2019 figure with the revision being the result of the rescheduling of certain activities and the positive impact of some efficiency actions. The long-term target for the maintenance CapEx level included in our recent industrial plan remains, of course, valid and unchanged. Needless to say, should the actual evolution, of course, so the emergency differ from what we -- what is foreseeable today, we will revise the outlook accordingly. So that's all on our side. And your questions are now welcome. Thank you.

[Operator Instructions] Your first question is from Fabio Pavan with Mediobanca.

Actually, a very quick one. I think the profitability of the first half slightly exceeded expectations. And so I was wondering if, in your view, we should expect similar trend also in the second half of the year. Or maybe when considering lockdown measures, where we should expect slightly lower profitability for the second half.

Fabio, in terms of profitability, I would say, looking at the EBITDA, adjusted EBITDA margin, the second quarter is strongly impacted by the reduction of OpEx that we had. And if you look at the overall other operating costs, so excluding the personnel costs, we are at EUR 9.2 million, EUR 9.3 million on a quarterly basis, and this is really, really low, the lowest figure since the IPO, I believe. So in the future, for sure, there will be -- we will continue to see some impact from the COVID-19, but our expectation is to be -- to have a cost trend more consistent with the past.

[Operator Instructions] The next question is from Juri Zanieri with Kempen.

Only one about the CapEx. I was wondering if you can give us a little bit more color because I'm currently looking at the CapEx accomplished year-to-date, and I assume that with the revision of the maintenance a bit downwards and consensus still expecting, I would say, roughly EUR 50 million of development CapEx for the whole year. I would expect then to see a bit of ramp-up in the second half. How comfortable are you in achieving such ambitious target? Any color would just be appreciated.

That's correct. We see an important trend in terms of accrual of CapEx in the last part of the year. Actually, typically, even if the total absolute number on a yearly basis was lower, typically, in the last quarter, we always see that the majority of our investments and even more this year considering the COVID-19 that had some impact on the Q2 figures, we will have a more important impact in terms of CapEx. But these are CapEx that are mainly related to the refarming process, and we are working these days. Even if you look at the first half figures compared to last year, notwithstanding the COVID impact, you will see a significant increase, and the same will happen in the following quarters.

Perfect. Very clear. Just a follow-up. If you will assume to go through a second lockdown in, say, a few -- well, in the next few months, will you still be comfortable in achieving those targets?

I prefer not to assume this scenario. But even if some bad impact will happen in the rest -- in the second part of the year. I'm sure that we -- thanks to what we have seen and what we learned in the second quarter, we try to do our best to keep -- maintain the guidance.