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 9 months 2020 Results Analyst Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Giancarlo Benucci, Head of Corporate Development. Please go ahead, sir.

Thank you. Good afternoon to all of you, and welcome to our 9-month 2020 results presentation. As usual, Aldo will start with the key fact and figures of the period. Adalberto will then illustrate all the financial details. And at the end of the call, we would welcome your questions in the Q&A session. So let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thank you, Giancarlo, and good afternoon to everyone. The third quarter performance has been satisfactory and in line with our expectation, with an acceleration of the development activities in particular, but notably related to refarming, to the refarming process. This period was also important for the work that allows us to reap the benefits in October [indiscernible] finance for the awarding in the context of the refarming of regional frequencies in some of the few areas in considering the north of Italy, we consider interesting. Obviously, we hope now is that the worsening of the pandemic trend will not derail the economy from the recovery path. Although, as you will see later, we continue to see an impact on our business is extremely limited. Let's now go a bit more in detail if you begin the highlights of the period, and the recent event impact our sector and therefore, our company, summarized on Slide #4. The 9-month results confirms the resiliency of the business and the trends already anticipated. Very limited impact from the pandemic emergency, both from an operating and the financial perspective. The margin [indiscernible] with the profile of the new initiatives, offset by the level of expenses favorably impacted by the temporary activity measure and more sustainable cost savings. And looking more specifically at the third quarter performance, even when excluding some one-off items, the underlying growth at adjusted EBITDA level reading satisfactory at around 4%, supported by [ price ] accelerating top dynamics, and an OpEx level that, although is favorably impacted by COVID-related measure, is moving back to more usual and recurring level. The acceleration in the deployment of the development activities is also reflected in a level of related investments that is increasing quarter after quarter. Looking at the main initiatives in the broadcasting segment, mainly in the refarming and the refarming process. While the operational activity for Rai is progressing with the T2 ready extension in the market multiplexes, almost doubling the number of size and gradually increasing populous coverage, the last few weeks have got some interesting updates. At the national system level, where the last missing relevance is awarding of the full house multiplexes, AGCOM has decided the criteria that will regulate the tenders, with the final rules that largely reflects the documents placed for consultation during the summer. Now it's the Ministry of Economic Development who'll define the timing of the auction. Just to remind you, the main element emerging from the criteria, the tender will be based on a single offer for each of the 4 lots, with no possibility to increase it. And the mean value of the offer is set EUR 7.9 million per lot, with payment installments to be defined by the Ministry of Economic Development. The tender for 1 lot is referred to potential new entrant and network operators currently managing 1 multiplex in DVB-T is [indiscernible] value of the offer reduced to around EUR 4 million. The tender for the second lot is reserved to the same players plus [indiscernible], and the compensation measure for the [ disadvantage ] at the time of the analog to digital switch-off. And the mean value of the offer, again, at around EUR 4 million. The tender for the remaining 2 lots is open also to the other TV network operators in [indiscernible], with the mean value of the offer at EUR 7.9 million. The awarding with the base for 80% of the score on [indiscernible] criteria and furthering 20% of the economic offer. The [indiscernible] of the number of national multiplex managed by a single operator should be set to 3 from the current number required. Finally, duration, the duration of the frequencies, rights to use. It is confirmed at 10 years and potentially renewable. So overall, the criteria look consistent with our base case of multiplex [indiscernible] although it's fair to remind you that the decision to participate or not participate is up to Rai. And about the -- at the regional system level, looking at the outcome of the tenders closed to date, Rai Way has been awarded with frequencies into regional -- development [indiscernible]. We have these 2 of the most interesting regions in terms of risk-reward, considering the distant level of transmission capacity demand, what is expected from the local broadcasters, and the investment required for the network rollout. Let me also say that this outcome is fully in line with the assumption of our industrial plan. While we speak, tenders are progressing right now in the regions, and we confirm our initial active approach. As to the other initiatives of our investment plan is that to say we set up, and the operating activities for the [indiscernible]. And now more on the financial side. As you know, back in August, we launched EUR 20 million buyback program, and reached at the end of September. We have purchased 1.4 million shares for a total consideration of [ EUR 7.0 million ]. As already disclosed in our monthly update, including October total acquisition, exceeds EUR 12.5 million. And we are also pleased to share with you that since October, the company has secured a EUR 117 million loan that will cover [indiscernible] financially related to the organic initiatives included in the industrial plan -- in our industrial plan 2020-2023. So Adalberto will provide you with technical details in a few minutes. Lastly, expectation for the rest of the year, we expect new national [indiscernible] to have limited impact on the full year, and therefore, the company's expectation for 2020 are confirmed. Now moving to Slide #5. You find the usual snapshots of the financial highlights of the 9 months. Core revenues totaled EUR 168 million, up 1.4% compared to 2019. And this mainly as the result of the capacity growing contribution from new services for Rai, [indiscernible] of the [indiscernible] KPI, and the stable level of third-party revenues, although positively impacted by one-off items in the third quarter. As a result, adjusted EBITDA reached EUR 104.5 million, a 3.9% increase compared to 2019, also benefiting from the low level of operating costs reported mainly in the second quarter, with a strong profitability at 62.2%. Moving on the bottom line. On stock on one-off expenses and higher G&A resulted in EUR 50.8 million net income, up 2.3% year-on-year. And on the financial side, CapEx in the period grew EUR 34.2 million, boosted by the refarming projects and in particular, by the multiplex coverage expansion speeding up and pushing development CapEx at EUR 28 million compared to the EUR 5.8 million in 2019. As anticipated in our call in July, maintenance CapEx figure is slightly behind 2019 level, a touch above EUR 60 million. Net debt of IFRS 16 at September 30 amounts to EUR 40.6 million, and include the effect of buyback executed from August till September. Lastly, recurring cash conversion remained strong at 93.6%, exceeding the first half 2019 figures. That's all on my side. For the moment, I give the floor to Adalberto to tell you more on the financial performance. Please, Adalberto.

Thank you, Aldo, and good afternoon to everyone. As highlighted by Aldo, our 9 months financial remain as solid as expected, even in the presence of a macroeconomic scenario still uncertain in the background. Starting from the top line in Slide 6. Core revenues came out at EUR 168 million vis-a-vis EUR 165.7 million in 2019, with revenues from Rai growing by 1.6% despite the flat CPI dynamics, CPI index in Italy grew by only 0.1% in 2019 -- November 2019. But thanks to the 52% growth in new services, excluding one-off and una tantum component along the 9 months. Core revenues are also supported in the first half above all by the DAB radio coverage expansion and by the further progression in the third quarter of the new installation for the MUX coverage extension project, totaling EUR 7.5 million contribution at the end of September. On the other hand, revenues from third parties were flat at EUR 25.2 million, benefiting from the positive impact of nonrecurring items with the underlying performance down minus 3%, in line with anticipated trends on MNOs and other third parties customers. Let's move now on the Slide #7, on cost. You see how our cost base amounting to EUR 63.5 million, minus 2.6% year-on-year, has been favorably impacted by the COVID-related measures also in the third quarter. However, if you look at the underlying trend in the third quarter, you can notice a progressive normalization path back to 2019 cost levels, especially vis-à-vis the material drop recorded in the second quarter this year. In particular, personnel cost reached EUR 32.7 million, and were basically flat, even declining by minus 0.9% when excluding non-core items and capitalization. Other operating costs fell by 5.2% at EUR 30.8 million, thanks to the COVID-19 impact and the saving on utilities and rents. All in all, profitability stood at 62.2%, still expanding from the 60.7% recorded 1 year ago. As you can see in the profit and loss at Slide 8, here, I would just remind you that EUR 1.1 million one-off costs already anticipated in the first half and the link to new early retirement plan, that together with the higher D&A also following the rising investment activities and the lack of benefits coming from the release of provision reached on the contrary we recorded in 2019, brings the net income to almost EUR 51 million, 2.3% higher vis-à-vis the EUR 49.7 million of the 9 months 2019, still benefiting from the COVID-related tax relief. Moving now on the cash flow generation on Slide 9. You can see how our net debt slightly increased during the last months, coming out at EUR 41.3 million at the end of September compared to EUR 9.5 million at the end of 2019. Looking at the cash flow dynamic of the 9 months, I will underline that the level of CapEx outflow of EUR 34.2 million, EUR 28 million out of which are due to development activities and mainly related to the MUX's coverage expansion. We have done EUR 6 million cash absorption to working capital level, resulting from the mix effect of tax payment in July and the other working capital cycle dynamics. And then we have a EUR 7.7 million cash-out related to the buyback program. If we strip out the IFRS 16 effect on the net debt figure, we would obtain a net debt position of about EUR 5 million at the end of September, of course, after the EUR 63.3 million dividend payment. Lastly, in the balance sheet represented on Slide 10. At the end of September, the company recorded net fixed assets of EUR 234.2 million, including EUR 32.3 million right of use for leasing under IFRS 16, while net invested capital totaled to EUR 205.3 million, with equity book value at EUR 154 million. To conclude, let's go to Slide 11. We would like to share just a few points on the new financing we've signed in the past weeks that will ensure the full coverage of the whole funding needs of our industrial plan. The total amount equal to EUR 170 million is made up of EUR 120 million term loan to be drawn as needed upon Rai Way request, and a EUR 50 million revolving facility. Lenders are Mediobanca, BNL, Cassa depositi e prestiti and UniCredit. Both the credit lines have a tenor of 3 years, and that terms include an interest spread of 75 basis points above Euribor, with floors at 0. The commitment fee of 35 basis points of the term loan and 30 basis points for the revolving line at 20 basis points upfront fee in addition to 10 basis point of coordination one-off fee, and the financial covenant providing that [indiscernible] amounting to net leverage ratio not greater than 3.75x EBITDA. That's really all on my side. I now leave the floor back to Aldo for the closing remarks. Thank you.

Thank you, Adalberto, and let's move to Slide 12. In terms of guidance for full year, as anticipated before, we are confident in reaffirming the expectation for the full year 2020. Obviously, the pace of the acceleration in trajectory seen in the third quarter depends also on the dilution of it and emergencies and the extent of possible safety measures. However, based on the current visibility and on the back of the good resiliency shown in particular in the March-May period, we expect new restrictions to have limited and manageable impact on the full year, and therefore, the guidance is confirmed. This means a further organic growth of adjusted EBITDA with broadcasting and hosting services already in place well protected. And the effect on top line, of the more gradual development activities offset by more gradual associated OpEx and other cost reductions. While investments, we'll see a further slowdown in the maintenance CapEx on core revenues ratio compared to 2019 levels due to the already anticipated rescheduling of certain activities, and the positive impact of some efficiency actions, coupled with increasingly higher development CapEx driven by refarming. So that's all on our side. We can now begin the Q&A session. Thank you.

[Operator Instructions] The first question is from Stefano Gamberini with Equita SIM.

Two questions from me. The first regarding this auction that should arrive with these 4 slots for national MUXs. Could you remind us what is the assumption in your business plan of the number of lots that should purchase Rai, and the sensitivity, if they do not reach this target? The second question related to this one is, are there some other assumptions related to these tenders in your business plan, I refer to it, not this Lombardy and Piedmont [ ARS ] where new contracts should arrive for you or not? Just to understand how important is this spend related to your business plan? The second, if I understood correctly, that the buyback reached EUR 7.7 million at the end of September, but around EUR 12 million at the end of October. So could we expect considering the current trend that you will finish the buyback by first quarter '21?

On the last one, we can assume to finalize the buyback program by the end of this year. We are seeing the volumes that are higher, so the shares that have been acquired are higher than expectation. So you can assume to finish it by the end of the year.

Stefano, about your question on the criteria in the auction on the multiplex, in terms of assumption of our industrial plan, the 2020-2023 business plan, as I said before, the criteria defined by AGCOM do not give us reasons to change our base cases. As you remember, our base case is for 3 multiplex managed by -- for Rai, considering [indiscernible] because considering the relevance of the technical criteria on the final score, 80% of the final score is on -- based on technical criteria. The new cap in terms of number of -- maximum number of multiplexes is set up to 3. So thirdly, the price that looks affordable, together with the possibility to pay in installments for EUR 7 million or EUR 9 million, as I said before. And more the fact that having more capacity gives a benefit to the [indiscernible] of course, drive, for example, for supporting HD, offering HD content. So said that, the decision to participate or not remains, as I said, in Rai's hand. However, we -- however, let me remind you that the agreement on refarming with Rai in December last year already regulates the different scenarios. So if Rai participate the auction and get the exclusive third multiplex, this is exactly the base case that is included in the industrial plan. Should Rai, for any reason, remain with 2 multiplex instead of 3, the impact lessens, for away, it's negligible. So on the value of the company has already been defined. So EUR 6 million lower from revenues, even less at EBITDA level, considering lower OpEx and EUR 25 million lower CapEx on Rai Way. So -- and finally, should Rai not get the additional half multiplex but share the capacity on the multiplex with a partner, so another network operator, we consider this not a possibility. But the possibility for that is to manage the third multiplex for this consortium is absolutely reasonable considering the low additional cost coming from -- and then in this way, we come back from the first -- to the first scenario. So about the other question on the auction for -- on the network operation on regional basis. We are not going to participate tenders in all the regions. And even where we participate, the strategy can vary from region to region in the first or the second level of multiplex that, as you know, implies different coverage and different investments. So generally speaking, we remain sticky with our usual approach, this is a selective approach to the local to the local TV division. So we are prioritizing regions based on market size, the client solidity and, of course, the level of investment for the network rollout. And keeping in mind that the new configuration should make this market a bit more sustainable avoiding network duplication and providing affordable price for the capacity. And then obviously, the outcome will also depend on the level of competition in the regions and how we are positioned with respect to the use dependent [indiscernible]. As for what we see -- as for what is to include, your question in the industrial plan. We have not disclosed contribution at single region level. But in total, we're assuming a low single-digit contribution in terms of revenues, and less than EUR 10 million of development CapEx related to this business to regional refarming.

The next question is from Andrea Devita with Banca Akros.

Yes, just a couple of questions, please. One is, I see your development CapEx, probably due to pandemic and other factors, is beyond [indiscernible]. So I wonder whether and how much of development CapEx that you are postponing from 1 year from 2020 to the next couple of years compared to your original plan that I suppose was already partially better loading. And the second question is, apart from the MUX acquisition, if Rai is going through a spending review, a new budget potential cutting the number of channels or other MUX, is there something that can change the volumes of your business with Rai in terms of new services not attaching the base contract, the SMA -- MSA, sorry.