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 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giancarlo Benucci, Chief Corporate Development Officer of Rai Way. Please go ahead, sir.

Thank you, operator. Good afternoon, and thanks to all of you for joining us today for our first half 2021 results presentation. As usual, Aldo will begin to walk you through the key facts and figures of the period, while Adalberto will provide more financial details. At the end, we will be available for the Q&A session. Let me now hand the call over to Aldo. Please Aldo, the floor is yours.

Thank you, Giancarlo, and good afternoon to everyone. We are very pleased with the positive results delivered in the first 6 months of the year, which are fully in line with our expectations. In particular with revenues, which have grown even without the contribution of inflection, being driven once again, mainly by the expansion of the multiplex coverage. With EBITDA and profitability improving year-on-year despite a tough comparison with the previous year, due to the gradual fading of the COVID effects from which we have been benefiting, especially in the second quarter of 2020, as we had already anticipated in our previous touch points. With CapEx in line with our full year guidance for 2021, in particular on the development side, boosted by the refarming projects. On the operational front, good news came from the Ministry of Economic Development and the tendering process to allocate additional capacity with one of the well-known lots of half multiplexes awarded to Rai, thus confirming our confidence that we would manage 3 multiplexes for Rai. And I will come back to this in more detail in a couple of minutes. But as you know, refarming is not the only growth initiatives we are working on, as the development of new services and the expansion of managed infrastructure play a central and strategic role in the trajectory forecasted in our industrial plan. Here, I can say that things are proceeding steadily with a set of activities now almost completed on the 3 main lines, namely the hyperscale data centers, edge data centers and content delivery networks. We are now evaluating the most appropriate strategies in term of locations, authorizations and permits that for these kind of assets have a significant impact on the overall base case, business case. Indeed, this is why we have not yet got to the point of sharing more details. In the meantime, in order to be even more effective and focused on the upcoming implementation phase, we have created a dedicated organizational area, which have full responsibility for the development of this new infrastructure and services and is bringing in the necessary specific skills. And in this context, I'm also pleased to welcome Mr. Luca Beltramino as head of the new area. Luca, who joined the Rai Way team in July, has extensive international experience in data center and the edge data center sector, have led, among other things, the development in Italy of the assets of some of the principle U.S. operators. I think this is also indicative of the validity of our projects, and we are confident that his contribution will provide a boost to the implementation of our plans. Last but not least, let me also reaffirm as a result of the performance recorded so far, our guidance for the full year 2021, as we will see at the end of our presentation. Back, as promised, to the subject of refarming, it is worth taking a snapshot of the progress of the projects, where, as you know, we are engaged both at national and regional levels. And Slide #5 will guide us through this. In particular on the national side, the positive outcome of the tender for Rai is the best possible news on the regulatory front, as it confirms our expectation on the 3 multiplexes managed by the way, for Rai, removing most of the remaining uncertainties. As a result, the contract was a step-up in the fixed consideration paid by Rai, equal to EUR 15.8 million on a yearly basis, is effective from July 1 last, as provided for in the agreement with Rai. As you probably know, at the regulatory level, discussions are underway on the possibility to make the switchover process as smooth as possible for Italian households. And I am referring here for example to the possible [ remodulation ] of the transitory periods. Today, media talk about this concretive [indiscernible], and to the slightly postponement of the switchover to MPEG-4 and to DVB-T2 standard, but not without technical issues. In any case, from our and your point of view, we do not see risks to the deadline for the release of frequencies, as you know, June 30, 2022, and to the technical characteristics of the network after the transitory period. Therefore, considering that we are ready to deliver the new networks also with the current roadmap, we do not see -- do not foresee impacts on the agreement with Rai. Looking now at the operational front, the multiplex coverage extension project can be considered substantially completed. We have also installed the new MPEG-4 DTT platform here in Rome. In terms of the configuration of the new networks, namely the new MUX regionalized multiple X1 and the 2 national multiplexes, we are fully on track to meet the switchover deadlines in the various technical areas that have been sequenced. Let me remind you that as of today, we will see a first transition from MPEG-2 to MPEG-4, and the second transition from DVB-T to DVB-T2. All in all, roughly, EUR 65 million have been spent to date on these projects out of the approximately $150 million of planned development investments devoted to refarming. Finally, at the regional level, in May, we shared with you the assignment of tenders in 6 Italian areas joined in the second quarter by the award of local frequencies also in Veneto, one of the richest regions in Italy and with a compelling risk-reward profile. So having recorded in this way, 100% success rate in the areas where we competed, and we can definitely feel satisfied about the outcome of the tenders. Moving at Slide #6, you'll find the usual highlights for the first half. Let's start with core revenues that reached EUR 113.3 million, 2% higher than the first half of last year, thanks to the contribution of new services for Rai more than offsetting, along with a very good performance of fixed wireless access clients, the slightly negative CPI trend recorded in 2020 and the M&A dynamic. Then the adjusted EBITDA at EUR 69.8 million, up 2.8% year-on-year, confirmed the strong profitability at 61.6%, growing quarter-on-quarter as well. On the bottom line, the net income was up 1.3% year-on-year at EUR 33.2 million, benefiting from EUR 1 million one-off tax relief related to COVID-19 already recorded in the first quarter, which offset the expected increase of D&A resulting from the development investments. In fact, development investments were relevant also in the second quarter, bringing the figure for the first 6 months to EUR 23.7 million from the EUR 60 million in 2020. On top of that, maintenance CapEx also accelerated up to EUR 6.2 million in the first half, doubling the lower than usual value recorded in 2020, also as a result of a material project for the extension of our internal and monitoring and control network. As a result, also including the higher maintenance CapEx level in the period, cash conversion remained very high, above 90%. And lastly, net debt at June 30 came out at EUR 84.5 million, reflecting the development investments, the EUR 63.9 million dividend payment that occurred in the second quarter and the usual solid recurring free cash flow generation. And with this, I'll hand over to Adalberto to provide you with details on the financial performance. Please, Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. Let's dive deeper into the first half financials, starting from Slide 7. Here, you find core revenues up by 2%, closing the period at EUR 113.3 million, driven by the Rai component. With the contribution from new services, still materially growing at EUR 7.7 million, EUR 4.2 million out of which coming from the MUX coverage extension project already mentioned by Aldo that by far offset the negative impact from 2020 CPI on fixed consideration. You may recall that the relevant index recorded in November 2020 that is applied on the revenue, on the 2021 revenue, was negative, minus 0.3%. Let me then again remind you that the mentioned increase of EUR 4.2 million in the first half 2021 related to the MUX coverage extension will be factoring the annual step-up of EUR 16 million in the fixed consideration that will impact for approximately EUR 8 million in the second half 2021. On the third-party segment, the expected headwinds from the MNOs rationalization continues during the second quarter, too, in line with the industrial plan trends, resulting in a drop of 3.1% at the end of June, only partially balanced by the strong double-digit performance of fixed wireless access customer, bringing the overall figure to EUR 15.7 million. Let's now go to Slide #8. On OpEx, I would like to underline, in turn, the tough comparison with the same period of 2020 when, in particular during the second quarter of 2020, most of the positive, but temporary, COVID effects had materialized. Just to give you an example, variable components such as business trips and overtime, saving in general expenses and so on, resulting in the lightest second quarter cost base recorded since the IPO. As anticipated by Aldo, overall costs are now trending back to the more familiar levels made up of other operating costs growing above 5%, just below EUR 21 million, mainly impacted by higher maintenance activities and personnel costs at EUR 23.2 million, apparently down 1%, thanks to a temporary headcount reduction, but with a stable underlying trend. All in all, total OpEx came out at EUR 44 million in the first half, up 1.8% semester-on-semester. Now moving to the profit and loss on Slide 9, the bottom line shows our net income at EUR 33.2 million, 1.3% of increase despite the rising D&A trend coming from the investment activities, development investment, and mainly benefiting on the other side from the high profitability that reached 61.6%, 50 basis points higher vis-a-vis the previous semester. And the softer tax rate at 26.3%, enjoying the EUR 1 million one-off tax relief on the tax called IRAP, related again, to COVID measures already accrued in the first quarter, and then the absence of any nonrecurring costs, which were recorded on the contrary 1 year ago in relation to the early retirement plan. Turning now to the page on cash generation, we see the usual net debt bridge. And you may see how our leverage is progressively and organically building up as expected in our industrial plan, with net debt at the end of June after the payment of about EUR 64 million of dividends and EUR 30 million of CapEx standing at EUR 84.5 million compared to the EUR 46.1 million at the beginning of the year and broken down into IFRS 16 components for more or less EUR 34 million, bank loan for approximately EUR 56 million and cash for the remaining EUR 6 million. The recurring free cash flow to equity amounted to approximately EUR 48 million, pretty in line with the same figure of 1 year ago, meaning, again, a solid cash generation, notwithstanding the already mentioned challenging comparison vis-a-vis first half financials, the first half 2020 financials, and the higher spend in maintenance CapEx recorded in the half, in line with the guidance provided so far, on top of the EUR 23.7 million development CapEx already commented. That's all on my side. Please, Aldo.

Thank you, Adalberto. And moving now to the expectation for the current year for 2021. The results of the first half allow us to confirm the guidance for the full year already provided, as I mentioned before. Please note that the reference to the assumption of the 3 multiplexes managed for Rai is no longer mentioned, having become a reality after the outcome of the tender. Going in detail, based on the current visibility of the pandemic emergency, we expect adjusted EBITDA to be slightly above the 2020 reported level, meaning that when excluding the COVID-related reduction recorded in 2020 that we expect to be lower in 2021 and the slightly negative CPI, the underlying growth would be more markedly driven by first, the step-up in Rai contracts, starting from the second half '21, partially offset by lower contribution from third parties in line with the trend and the level anticipated in our industrial plan; higher network costs, following the coverage expansion and before the savings expected in 2022 from the switch of 2 multiplexes for Rai; and finally, some minor temporary costs related to the transition period. Looking at investments, both the development investment and the maintenance investments are expected to be above 2020 level. And this is all on our side. So your questions are now welcome.

[Operator Instructions] The first question is from Fabio Pavan of Mediobanca.

Congratulations for the results. Actually, I have 2 questions. The first one is on the consolidation -- potential consolidation process. We finally had the appointment of a new board for Rai. I was wondering if you share the view that this may lead the consolidation process, and if some talks have already started. The second question is clearly on the announcement you have made today on this new unit for data center. Clearly this increases visibility on the plan. You already pointed out that this is not part of your plan, but I was wondering if you can share with us some numbers maybe on what could be the commitment in terms of new investments in the midterm? Or eventually, if you can tell us when you think some more color on these initiatives could be provided.

So you have 2 questions, and the first question about the consolidation process and the new board of Rai is obviously positive. Personally, I have already had a meeting with Rai's new CEO, and the impression was definitely positive. In particular, on the awareness of the various opportunities that Rai Way has in front of it, so from the refarming process to the diversification to service diversification in the media segment, also to the expansion of our assets, so the expansion of the asset portfolio. So awareness, let me say, of all the opportunities and not only those that are directly addressing the customer, Rai. We have a very busy agenda in the near future. And I am convinced that Rai Way can be a source of satisfaction and reward for all its shareholders, including of course, the majority shareholders, so Rai this is. So this is about your first question. The second question is about the new -- our new organizational area that is focused on data center, edge data center and new services, in particular, on the content delivery, the development of the content delivery network. And as already I highlighted during the presentation, things are progressing on all fronts related to both the development of new infrastructure, so namely hyperscale data center or edge data center and the introduction of new services on the broadband platforms. So the setting-up phase, including the definition of the business model, offering, go-to-market, operating model, scouting also of tech providers, so architectural design and the selection of internal assets that is synergic with the development of the new infrastructure; so sites, land, for hyperscale and so on, feasibility studies have been completed. At the same time, we proceeded with an organizational update, so the creation of this new dedicated structure with full responsibility on the deployment that will also be able to acquire key competencies to attract additional resources, specific resources for this new business for Rai Way and higher focus on implementation. So now activities are mainly focused for hyperscale data center, on the authorization and permitting process that, as I said in my introduction, it's the key activities. So -- and we confirm that the chosen location and some alternatives. For the edge, we are starting to build our first data center at our flagship site in Turin, which would be then replicated on other selected sites, distributed throughout Italy, on which we are carrying out detailed feasibility analysis at the moment. So edges, that would be the -- our infrastructural component at the base of the implementation also of CDN network, for which we have already shortlisted the best technological partners for the service. Then you asked also about numbers and the numbers, sorry, but not satisfy your curiosity, but we will not be providing numbers today. As I said, we prefer to wait for a while before sharing details, as preliminary figures have to be fine-tuned, in particular, depending on authorization, as I said, and permitting process on various locations, so we identify to develop these assets. In general, this is about magnitude. And the magnitude might prove to be material. Size of course is bigger for hyperscale assets than for -- smaller for edge data center. But the overall project could amount to hundreds of million euros.

The next question is from Giorgio Tavolini of Intermonte.

I have a few technical questions, one regarding the final breakdown of the 12 national MUXes. I guess, 3 are from Rai, 3 for Mediaset, 3 for Persidera, and one for, if I understood correctly, Cairo. And the other ones are they split? The second question is on the IFRS 16 impact. I saw that you had some lower impact, and I was guessing if there is a lower level of lease costs in the second quarter compared to first quarter or prior quarters. So did you manage to reduce lease costs over time? And the third one is on the lease activities -- these new activities, I guess if there was any opportunistic acceleration in light of the possibility to participate with the projects related to the recovery funds? And do you see any initial costs for this activity? And what is the time frame of the EUR 200 million project CapEx?

Right. Okay. Let's start from your first question. You are correct. The breakdown of the 12 multiplexes is 3 awarded to Rai, 3 to Mediaset, 3 to Persidera, 1 to Cairo. And then you have one multiplex that will be shared by -- as already announced by the parties, by [ H3G and Primatavou ]. And the other multiplex as of today, there are 2 of multiplexes that have been awarded through the comparison of the multiplex to the 2 smaller operators that before they switch off, add one single multiplex. Then -- can you please repeat your question?

Yes, the second is on the IFRS 16, if you reduce the lease costs? And the third one on the recovery fund and the new activities.

Okay. In terms of recovery fund, I mean, generally speaking, if you refer to the impact that the recovery fund could have on our business, as we already commented in the past, of course, we see a positive impact from the recovery funds at least in 2 perspectives. First one on the tower ramp-up side, because all the incentive to 5G. As far as we know, we are talking of around EUR 1 billion dedicated to coverage of failure areas in order to enable 5G and machine-to-machine and IoT verticals and also to fixed wireless access. And in this case, I'm referring to the portion of the almost 4 billion that have been allocated to the 1 gigabit society, so the rollout of the fixed broadband network. So all of these incentives will bring a faster deployment of 5G and fixed and wireless access networks, and this process will likely -- we will likely benefit in terms of higher volumes. Then, of course, also in terms of new digital infrastructure, there are funds allocated to the development, have rolled out of the so-called [Foreign Language]. That is basically the national strategic hub. This is the cloud, the private cloud infrastructure the public administration will use in the future. The only thing here, I mean, the recovery funds define many pillars, define the -- they confirm the need to rationalize the low-quality data centers currently used by public administration, reserve the funds specifically to develop infrastructure, defined some time lines and milestones. But at the same time, it states that the new infrastructure of the national strategic hub will be managed by a technology provider, so not an infrastructure provider, but a technology provider, selected through a European standard. While, as you know, our focus is not on technology, it's not on the services on the cloud platform and so on. But it's more focused on infrastructure and on the deployment of centralized and distributed data center. So it's key to understand how the tender process mentioned in the PNRR will be structured and if the infrastructure component will be part of it, or will be separated from the tender. But all in all, we are very positive on the new business. PNRR will -- so the recovery fund will, let me say, boost the opportunities. But it's fair to say that all the opportunities we included in our plan makes sense also without the public administration opportunity and the recovery fund, because the growth drivers of these opportunities are many and various. Then on your last question -- the second question on the IFRS 16.

Yes. The trend is a decreasing trend, but this is not related to, to be clear, to a decrease of our yearly amount of our lease that more or less is always the same, which is just an accounting impact that depends from the overall expiration date of each relevant content. Anyway, yes, there is a trend, a decreasing trend, but this trend, just to be clear, is not related to change in the overall amount of our leases.

And what is the level of the leases in this quarter, the usual, let's say, EUR 2.5 million, EUR 2 million?

Yes, yes, yes, yes.

The next question is from Jakob Bluestone of Credit Suisse.

I had 2 questions, please. Firstly, I mean, now that you've -- now that the MUXes have been awarded as expected, I'd be interested to hear from your point of view, where do you now see the biggest risks in terms of the realization of your business plan. I mean, clearly, things have played out exactly as you called it, but where do you think the sort of main risks or uncertainties are from here? And then I guess my second question is, as your confidence grows in the ability to hit this business plan, does that change any of your thinking around optimal leverage for the business? So as you gain greater confidence that you're going to hit exactly the targets that you set out, how does that impact your thinking on what leverage the business can sustain.

So as concerned your first question for sure now we have full visibility after having a clear scenario on the number of MUXes on -- generally speaking, on -- also on the frequencies that we will have to manage. So let me say, for us, this was already base case scenario, so we didn't see here a risk. So for us, the big -- the main risk in relation to our business plan to our industrial plan, I refer to the improving effort in having more efficiency in doing activity, doing our activities as well as diversifying our portfolio of customers, trying to -- as you know, trying to give an important focus on all the upside opportunity that we have in terms of diversification of our infrastructure that we manage as of today. And this -- just to be clear, this is an important challenge that we have to manage in the next year, that, to be clear, is not reflected in terms of number in our business plan, as also Aldo mentioned before when we comment on the data center opportunity, just to be clear. So basically, these are the main challenges that we have.

The next question is from Andrea Devita of Banca Akros.

Yes. Again, back to the new business opportunity, so I was just looking back at your business plan presented in March 2020. And you already mentioned that the CDN opportunity, the hyperscale and the edge data center. So I understood it was a total CapEx envelope, including the original mix of EUR 80 million. So I would like to understand what has changed. So apart from the P&L error, from the initial thinking, you have in this business opportunities? And what should we expect compared to that initial plan? Maybe that was just at the beginning in, in initial time frame for faster development? And whether you have reconsidered the buy-versus-make option that you mentioned at that time.

Can you repeat the last part, sorry?

There was -- it was mentioned, the decision in terms of buy versus make. So I understand that the buy versus make is mainly related to the large data center. So it's something that, I mean, is much cheaper now [indiscernible] buy and now you think is better to make by yourself. So this is kind of thinking in 15 months after the release of the plan, you have now your [Audio Gap]

Okay. So in terms of financials in our original industrial plan, we approved in 2020, we had really a few -- a limited impact coming from the -- some opportunities, as you mentioned, the CDN is one of this opportunities. And then we have really a few million euros of investments in relation to other projects. The idea was to put some feet on the ground in order to verify if there is a possibility to enlarge the scale of our interest in some opportunities in order to increase the scale and launch new services. So we are now exactly at this -- we reach this important step because we decided to create this new unit inside the company in order to launch these new services. And the magnitude of these numbers, for sure, will be something different from the original assumption that we have included in our business plan. But as Aldo mentioned, we are now not in a position to disclose these numbers. But just to be clear, in our business plan, we had really a few million euros of investment in these opportunities and a really limited impact in terms of EBITDA revenue. So generally speaking, we have here an interesting opportunity that could have in the long term, a positive return. As concerned probably you also mention the regional refarming, if I'm not wrong?

No, the EUR 80 million, it was a total, including new opportunities and regional refarming. So I don't know what the split was, but I assume that also some tens of millions were committed to the 3 business lines, the 3 new business lines?

Yes, yes. The EUR 80 million are referred to several initiatives, both with third parties, both we try in terms of additional new services. And a part of this was also dedicated to the regional refarming as well as the CDN, as I mentioned before. So this is, let's say, a category of development investments that I refer both to third parties. And so also in relation to the new services that I mentioned and also in relation to the main customer, Rai, in relation to some new opportunities that we could have in order to offer new services to Rai, such as the DAB coverage extension.

And based on the situation as it is at this point, when do you think you will be able to present new targets or to update also on these projects on an official basis, like new business plan?

In due course, I will say, hopefully soon, as Aldo said before, we have to fine-tune some aspects that still can have a material impact on the numbers. Obviously, we have preliminary numbers in mind, but we want to share something with you. And to be very precise. So it's something that we plan to do as soon as possible, but Aldo already indicated the magnitude of the opportunity to be material coming back to the point and to the -- and to what Adalberto just said. Let me say that back at the time of the industrial plan and its presentation, we mentioned data center, edge data center as, let me say, opportunities to explore. We were optimistic back then. And so we mentioned it. And if today, we have set up a new organizational unit, it means that we are moving from a setup phase to an implementation phase. And so let me say that compared to 2 years ago, we are even more optimistic on the opportunities and on the benefits that these opportunities can bring.

[Operator Instructions] Gentlemen, at this time there are no questions registered, if you'd like to make some closing remarks? Ladies and gentlemen, I thank you for joining. The conference is now over, and you may disconnect your telephones.