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

Good afternoon. This is the conference operator. Welcome, and thank you for joining the Ria Way 9-month 2021 Results Analyst Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Giancarlo Benucci, Chief Corporate Development Officer. Please go ahead, sir.

Thank you, operator, and good afternoon. Let me start thanking all of you for joining us today, and welcome to our 9-months 2021 results. As usual, we will start with the key tax and figures of the period. And at the end, we will welcome your questions in the usual 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. From our perspective, the 9-months 2021 results are extremely positive and promising. This is not only in terms of pure numbers, but because at last, the effects of various growth initiatives being implemented, which until now had mainly impacted on investments are starting to pay off and accelerate. Since the presentation of our plan in March 2020, the focus has been and will continue to be on the implementation of its guidance, an approach that is proving to be very valuable. At the beginning of this year, in the context of the 2022 year's results, we recall the plans of our business model, such as visibility, resilience, hedging against an inflationary environment. And now we recognize that we are on track to enter an above-average growth phase. Accordingly, the growth fueled by development activities is starting to become tangible and more with [ Salute! ]. The substantial amount to work done on the network update for Rai has led to the materialization of the contract of step-u , which is starting to contribute to 2021 figures, but with its full impact in 2022. Next year, we will add to this benefit the contribution of the regional refarming and the first impacts of the digital transformation of the operating model benefit that will continue into 2023. In addition, looking forward beyond the planned horizon, growth will not stop since we are confident in delivering on the new infrastructure and services we are working on. From a financial perspective, the third quarter performance has been satisfactory, bringing the 9-month results, to some extent, actually slightly above our expectations. In particular, when excluding the noncore items mainly recorded in 2020, revenues grew by approximately 3% in the 9 months with an acceleration in the third quarter driven by this step up in the right contract effective from the first of July that is remunerating us for the refarming activities. Adjusted EBITDA came out up to -- by 5.2%, showing a sound improvement in profitability of 180 basis points and then Adalberto will elaborate more on that in a moment. Investments accelerated during the third quarter, with both development and maintenance CapEx levels consistent with our full year guidance. And these figures do not entirely reflect the huge amount of activities and efforts we are putting into the initiatives that, as I said, will contribute to our short- and medium-term performance. On the operational side, the activities related to the national refarming are fully on track with the road map revised by the Italian Ministry of Economic Development in the first week of August. In October, as you know, we switched 2 Rai to market multiplexes to MPEG-4, and we are ready to switch to MPEG-4, also the main multiplex one with the deadline yet to be defined by the government. The release of 700 megahertz frequencies, we start on November 15, so next Monday, in the Sardinia region. And this conclusion nationwide has been confirmed for June 2022, while the switch to DVB-T2 has been, instead, moved from June 2022 to January 2023. So all in all, since the start of the process in 2019, we have spent EUR 85 million, out of which roughly EUR 40 million was spent just in the 9 months of 2021. Looking at the regional refarming. As you already know, we are entering the business of transmission capacity provider for local broadcasters. On this front, the Ministry of Economic Development has recently published, starting for the Northern Italy, the ranking of content providers who will have access to the new transmission capacity in the most promising region as Lombardia, Piemonte, Veneto, Friuli-Venezia [indiscernible]. We are waiting for the rankings, also for Central and Southern Italy with Lazio, Puglia and Sicilia, already awarded to our company, to Rai Way. On our part, we are -- we have started to -- the rollout of the regional networks, while the outcome of the initial negotiation and agreements with clients suggest and almost full saturation of the capacity of our multiplex, which is a good news considering that this business will have to support and potentially reverse the trend of third-party revenues next year. In terms of new infrastructure and services, the newly created unit is working hard on the setup of the initiatives that will fuel the company's medium and long-term growth, so mainly beyond our current plan horizon. And about this, just to give you a bit more color. On the edge side, we win to have data centers in a first set of sites covering the most 5, 7 important cities distributed throughout the Italian territory, which will be ready progressively during the 2023. And this will then be integrated by additional points of presence in medium cities following customers' demand. On the IT scale data center projects. Here, we are evaluating 2 key areas, in Rome and Milan. These are 2 markets at different stage of development, as you know, Milan is more advanced. Rome, the next to be developed, but both commercially interesting. It's important to stress that the key consideration is the ability to obtain building permission which is dependent on the responsiveness of municipalities and authorities. But once all the permits are in place, it's fair to say that the typical construction period is to have 18 months to have at first capacity available with the possibility to further develop the asset according to customer demand, leveraging on the high modularity of this kind of infrastructures. Obviously, also in terms of investments. Lastly, looking at year-end guidance, we fully confirm the expected trends and drivers for 2021, even if in absolute terms, some of the temporary pandemic-related safety measures are actually benefiting, also 2021 with a smoother-than-expected return to the pre-COVID cost base. And now moving to Slide #5. Let's now go a bit more in detail through the main highlights of the period. So financial highlights. Core revenues totaled EUR 171.8 million, 2.2% up compared to 2020 or reported figures. But when excluding the nonrecurring impacts mainly affected the previous year, growth could be even more marked at about 3% or even above 4% in the third quarter and is benefiting on the right side from the already mentioned contractual refarming step-up but more than offsetting the slightly negative CPI recorded in 2020 and the anticipated pressure on the third parties. Adjusted EBITDA reached EUR 110 million, more than EUR 5 million above last year. If it's true, on the one hand, that this absolute value and forward the margin benefit from a few nonrecurring factors such as I said, the continuation of certain savings deriving from pandemic safety measures, it is at the same time true that these assets were already present, even with a greater magnitude also in 2020. Therefore, the improvement of few million euros or 150, 200 basis points of marginality is, in any case, to be considered structural and result of higher revenues and cost control. Moving on the bottom line. Net income grew by 3.8% at EUR 52.8 million with higher EBITDA more than offsetting the higher D&A. On the financial side, CapEx in the period grew to EUR 55.5 million, boosted once again by the funding project that grow development investment at EUR 46.6 million compared to the EUR 28 million of 2020. Maintenance CapEx accelerated as well, approximately EUR 9 million in the first 9 months of this year compared to the lower-than-usual value recorded in 2020, a trend consistent, again, with our guidance. Rising investments, that thanks to our flexibility are, of course, entirely debt financed, bringing net financial position to EUR 98.1 million on September 30, with solid cash conversion above 91%. And that's all on my side for the moment. I leave the floor to Adalberto to tell you more on financial performance. Please, Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. Let's now dig deeper into our profit and loss, first starting from top line. So Slide 6, we have some details to explain in this quarter. So reported core revenues coming out at EUR 171.8 million in the 9 months vis-a-vis EUR 168 million in 2020 when the figure was positively impacted by a material prior year adjustment on third parties. Tripping out this nonrecurring item, as already flagged by Aldo, you should assume an underlying growth of roughly 3% in the 9 months and even above 4% in the last quarter in a scenario of negative CPI. More specifically on Rai component, the acceleration in growth, plus 3.9% year-on-year enjoy for the first time the anticipated step-up foreseen by the 2019 refarming agreement and effective from last -- first of July, more than offsetting, as I already mentioned, that the negative CPI dynamic, the index was recorded at the end of last year that is relevant for the indexation of 2021 was negative and was minus 0.3%. Just to remind you the full impact of the step-up in fixed consideration will amount about EUR 16 million on an annual basis, that according to the mentioned agreement has to be treated as core services, fixed consideration in the dark blue box, starting from the first of July 2021 and not as new services. The same reclassification is now applied also to about EUR 0.6 million of yearly revenues that will be moved from new services to the fixed consideration. Let me also remind you that, again, starting from the first of July, the EUR 16 million of the step-up just described will also include the impact of the revenues related to the MUX coverage extension project that started some years ago, as you may recall, and amounting EUR 4.5 million in the first half 2021. So the EUR 13.5 million of new services for Rai recorded in the 9 months, as you may see in the chart on the right, are restated as shown in the box on the right, where refarming contribution is split into the EUR 4.5 million accumulated during the first half, that in 2021 will continue to be treated as new services and the additional EUR 4.2 million effective from the first of July, which are now factored into fixed consideration. On top of that, of course, the EUR 4.8 million block, the one in gray -- the one above, just to be clear, represents the remuneration for new services and related to refarming, such as contribution network, debt, coverage expansion and so on. That will continue, of course, to be reported in a separate box on a stand-alone basis. As concerned, the third parties revenues, the 7.2% decrease recorded in the first 9 months. We reached EUR 23.4 million of revenues as to be right as a minus 3.4%, excluding the one-off impact for approximately EUR 1 million. Once again, due to the expected pressure, the decreasing trend of 3.5% is coming from the pressure from the MNOs that we already commented in the previous call, waiting for the upcoming contribution from the regional refarming to flow into revenues very soon and finally reverse the trend. Let's now move to Slide 7 on OpEx. You see how our reported cost base amounting EUR 62.3 million show a nice decline in trend, minus 1.9% year-on-year in the first 9 months of the year vis-a-vis the previous period. Still benefiting from part of the savings related to COVID, even if at a lower level, and from the extraordinary measures implemented by the government on the electricity dispatching cost to mitigate the increase of the Rai electricity unit cost. In particular, in the 9 months, as concerned, the other operating costs, they reach EUR 30.6 million pretty in line with 2020 figure at minus 0.8%, also benefiting from the mentioned reduction of electricity cost. That is mainly due to the extraordinary measures just commented that has been implemented recently by the government. Excluding electricity cost, the minus 0.8% would become about plus 4%, mainly due to higher maintenance costs, increased purchase of consumables as well as a lower impact from positive prior year adjustment. Personnel costs reached EUR 31.7 million, down 3% on a reported basis, but just 0.5% if you exclude the capitalization and other noncore items, mainly reflecting the headcount reduction we are seeing and COVID-related savings on variable components, even again if lower than what we have seen in 2020. As concerned the energy cost, it is worth taking some time to show how the impact of rising energy prices that are hitting the market should be mitigated by our business model. So if we go to the following slide. Here, we try to explain with a very simplistic and theoretical calculation how the CPI link of our revenue provides a natural hedge against the rising energy prices, we have been observing for some months now. First of all, I remind you that almost all of our revenues is linked to the so-called FOI, F-O-I, the CPI Italian -- in one of the CPI Italian indices recorded at the end of each year and impacting on the revenues of the following year, while OpEx on the other side are broadly speaking, not directly impacted by CPI. Then looking at the latest figures provided by e-stat in terms of CPI, it's fair to assume a FOI growth of around 3%, 2% out of which is to be attributed to the energy components. Now our electricity contract in place provide, fortunately, for a fixed price on low energy until the end of March 2022, those protecting us until this date. But if you assume for the entire 2022, a new electricity contract based on the low energy price currently expected in 2022 to be applied to our estimated consumption for 2022. You would end up accounting for more or less additional electricity -- gross electricity cost of roughly EUR 5 million on a yearly basis. This is not a guidance, of course, but it's just a theoretical calculation showing the potential impact. But the impact -- the actual impact will be more than offset by the estimated impact coming from the increase of revenue due to the -- coming -- to the Italian CPI with the energy-driven inflation component alone counterbalancing the theoretical increase in the electricity bill. If on top of this then, you consider that in 2022, we expect a lower energy consumption following the rollout of the new and more efficient network and energy price for the first quarter is already fixed at a cheaper price. The impact on the profit and loss next year will be even more manageable. Let's now move to the following slide with the full profit and loss in the net income. Slide 9 clearly show the acceleration of the economic performance in the last quarter, resulting in a bottom line at EUR 52.8 million at the end of the 9 months, 3 -- almost 4% higher than in 2020, mainly due to the, of course, increased adjusted EBITDA that we commented and so the increased profitability. And in addition to this, I'd also spot on the other side, the higher D&A already recorded by Aldo in the EUR 1 million tax relief already commented in the previous quarter. Moving now to the cash generation. On Slide 10, my last slide from -- you may see our usual bridge, where you may observe how leverage is piling up quarter-by-quarter following the almost EUR 47 million development CapEx spent in the 9 months, mainly related to the refarming project. Net debt at the end of September approached the EUR 100 million threshold being made of EUR 70 million, about EUR 70 million of bank loan. Cash generation in the period was particularly sound with recurring free cash flow at EUR 74 million, nearing in just 9 months. Almost EUR 78 million recorded in the full 2019, not so bad. That's all on my side, and I now leave the floor back to Aldo for the closing remarks. Thank you.

Thank you, Adalberto. In terms of guidance for the full year, the qualitative trend for 2021 anticipated in the previous quarters are confirmed and more in detail. Adjusted EBITDA will keep growing, supported by higher revenues more than offsetting the negative CPI, higher network costs due to the temporary overlapping of the old and the new multiplexes and the lower temporary savings on OpEx due to [indiscernible] measures compared to 2020. On this last specific effort, as anticipated before, it's fair to say that some of the measures continue to produce, although to a lesser extent, some reliefs on our costs and, therefore, looking at absolute terms, adjusted EBITDA may even slightly exceed our initial expectations. On the CapEx front, we can reaffirm that both development and maintenance investments are expected to meet 2020 levels. That's all on our side. We can now begin the Q&A session. Thank you.

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

I have 2 questions. The first one is given the results you were flagging in our free cash flow in the 9 months, what is the number we may expect for the full year? And the second question is when looking at next year, maybe it's too early to comment, but what are your initial expectations? The second question is related to the data center unit. I was just curious to hear if you can add something about what is going on since you announced the deterioration of this unit when, in your view, we should be provided with some more color on that plan?

Okay. Fabio, Giancarlo speaking. On your first question, let me say that we're referring to free cash flow generation. The free cash flow generation has been very good also in the 9 months. You see slightly maybe higher than expected debt but it's only related to some temporary effect on the working capital, the typical asset that we have in the third quarter with the tax payment and so on. But I would say for the full year, you will see definitely an increase in the recurring free cash flow generation despite the higher level of maintenance CapEx as how we define the recurring free cash flow. Then in the concerning expectation for next years, yes, it's a bit too early. As usual, we will provide guidance with the full year results. But I mean, we see several positive impact that will allow us to continue our growth pattern. I mean the full impact from the contract of step-up with Rai where the refarming, the first impact from the regional refarming, as Aldo already mentioned during the presentation, is an area where we are seeing good demand and potentially good numbers coming starting from next year. Then first, the impact from efficiency measures and I mean, several -- the CPI that is quite promising in terms of numbers and the impact on our P&L. I mean all impacts that will allow us to hopefully more than offset some, I mean, negative factors, mainly on the cost side with the reduction of the COVID-related benefit and so on. So generally speaking, deep acceleration in growth that you witnessed in the third quarter should and will continue also next year. Then I leave to Aldo for the second question.

The second question, Fabio, about the -- some more color and economics about our data center activities. I totally -- I understand your -- of course, your curiosity. But yes, apart from the indication, I provided during my presentation, in particular, on possible timing, we still need to wait a while before sharing comprehensive details on economics related to these new projects. Of course, we have preliminary figures in mind, but to be fine-tuned, mainly depending on the -- as I mentioned in my initial speech on the authorization and permitting process for all the various locations of our mini data center and hedge, and particularly, for rising scale, for [indiscernible] scale data center. So as for some P&L contribution impact, we start to be more tangible beyond the -- our current industrial plan.

The next question is from Andrea Devita of Banca Akros.

Just to be sure, I want to understand what is the level of new services to Rai, which are left out of the scope, which we can expect for next year?

[indiscernible] this question...

[indiscernible] services and what is their ballpark market?

You should take as a reference the amount -- if you take Slide 6, the new services that are not reclassified EUR 4.8 million. Of course, this is the amount related to the first 9 months. So you should make a proportion to have the yearly figures. And that's concerned just 2021, you will have to take into consideration just for the first half, the EUR 4.5 million that we accrued during the first 6 months of the year for the refarming project, mainly related to the project of the coverage extension of the MUX that we start -- or which we start to work some years ago.

Yes. But it is one or [indiscernible] .

Yes, in 2022, 20...

[indiscernible] Next year. EUR 1 million.

Sorry?

The slide...

Anyway, the amount that I mentioned, yes, is going to disappear in 2022 because it will be included in the blue box, the fifth consideration that will include the refarming impact starting from the first of July this year. So you are correct, if this is what you are referring to.

And yes, my question was whether there was any other service out of scope that could make up for these revenues that are going to do this year. So we had EUR 11 million in 2022. We will have a billion in 2022, more or less. This was a simply my question.

Andrea, if it's okay with you, we will come back on this point off-line.

Taking into account, this is one of the most important things for people to model and to understand how consensus revenues will be even for the [indiscernible] next year. So it's not ideal, but anyways.

The next question is from Stefano Gamberini of Equita.

Two questions also from my side. The first, regarding this -- the potential impact of inflation on 2022 figures. On one side, we have an upgrade of revenues in the region of 3% for Rai component, which means more or less EUR 6 million, if I may [indiscernible]. So this could offset the increase in energy costs. Could you elaborate a little bit about the other costs? What are the risks that you see of higher operating costs due to inflation? The second is my typical question regarding what are the steps ahead in a possible deal with EI Towers? But in particular, in this case, last call, you underlined that you started to have the first touch with the new top management in Rai. What happened in these 3 months and what are, in your view, the main elements that could accelerate the process to potential deal that seems natural in this sector?

So second -- so your second question, starting from the consolidation this time, the answer is easy. We have no particular updates to date on this topic apart from confirming, of course, and stressing, if possible our commitment for this purpose. But no news as of today. So Rai management is currently, let me say, defining its key strategic pillars over the new -- the next few years. And so there is, again, let me say, there aren't any significant changes compared to our last call.

So as concerned, your question on Slide 8. The impact you see on the left in terms of revenues is related to all our revenues just probably this was not clear -- it's not refer to the Rai component of our revenues, but it's related to all our revenues. This is why we have approximately EUR 7 million. And that's concerned -- of course, then let me highlight the EUR 5 million is not a guidance because of the reasons that I explained during my comment on this slide. As concerned, the other cost, clearly, there is not a link, a direct link with the Italian CPI. So the cost should be the component that is expected to be under control. Of course, we expected progressively not to have the positive impact from COVID that could justify an increase in the OpEx as concerned, the other OpEx. And then as concerned, personnel, probably as of today, we reached a very low level of debt count, and we expect to increase a little bit the number in the following months.

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

Just a follow-up on the data center unit, must be -- you understand that you're still in a bargain phase to get the building permission. But I was just wondering if you can give us a bit of color on the time line, can we expect some news in occasional full year results if you intend to present the new business unit via Capital Market Day or anything just to have an idea about timing and what we could expect in the next month.

Absolutely, yes. We will, of course, update the market and provide guidance. But as you correctly said, we -- given the size of the potential development of an at-scale data center, obviously, we prefer to have more visibility on the timing before sharing precise details, although I already gave you some indications, let me say, not a guidance, but preliminary indications, mainly on the timing, let me say, that within the current plan period. So up to 2023, you will see mainly the investments while very likely, the revenues and the contribution from this new business will begin to be more tangible beyond 2023. So let me say, we'll provide the continuation of the growth also beyond the current plan where within the current plan, the growth is already, I would say, secured and fueled by the initiatives that we put in the industrial plan, like the national refarming, the regional refarming. Hopefully, the stabilization of the MNOs trends and, finally, the digital transformation and the efficiencies. If I may, if I may, sorry, just to come back to the question from Andrea Devita that probably we didn't understand that we just have a clarification. If it was concerned, the potential increase -- if your question was referred to the potential increase of the new services that will remain to be treated as new services according to our industrial plan, if we look to the coming years, we expect to have some growth in relation to some initiatives connected with the development CapEx that the component that was separated by the refarming, of course. A part of the EUR 80 million that we included in our industrial plan was referred to the possibility to make an offer new services to Rai mainly related to the DAB coverage extension and connectivity.

The next question is from Giorgio Tavolini of Intermonte.

Just a few points on my side. On -- I was looking at the working capital. I saw some working capital absorption that was particularly significant in the third quarter. So I was wondering if there was some specific issue behind. And the second one is a follow-up on your expectation for 2022. I appreciate it's a bit early to provide guidance for next year. But I believe we have now high visibility on the indication on the CPI, so probably and also on the energy cost impact. So looking at your consensus for 2022, if it has to assume revenue standing towards EUR 245 million, EUR 247 million in similar and the same level of EBITDA in absolute terms because there is -- this offset in terms of revenues and costs. So a potential margin compression in the 58% area. Is that correct? Or is too early to elaborate on this?

Of course, the second you said -- we probably give some more color on the trends we expect. Of course, the guidance for the following year will be given when we will approve the full year 2021 results. But according to the figures that we have as of today, we may absolutely confirm the trend that we have in our industrial plan where you may recall that in -- starting from 2022, we should start to have an interesting growth vis-a-vis the past, thanks to the several initiatives that we start to contribute positively to the -- to our top line. I mean we refer to the refarming, of course, but not only the national refarming for Rai, but also the local refarming and the other initiatives. So in terms of guidance for 2022, I just may confirm the trend that we have in our industrial plan. As concerned, the working capital trend figures are impacted by seasonality, strong seasonality that we have where the Q1 and Q3 are typically negatively impacted by higher trade receivables. We have about EUR 18 million at the end of September this year. But if you give a look to the past, you may see that in the third quarter, we always set quite high level of trade receivables vis-a-vis the other quarter vis-a-vis the year-end and mainly the second quarter. Just I'm looking at Q3 2020 when we had EUR 15 million of trade receivable. In 2018, EUR 20 million. 2018 was lower to be frank. But this is due to the fact that depends of collection, a lot of invoices are due at the -- in the last days of Q3. And so sometimes the payment is going to be collected in the following weeks -- in the following months.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Okay. Thank you, and speak soon. Bye-bye.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.