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 2021 Full Year Results Analyst Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. 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 really apologize for being a bit late. But we experienced some technical issues with our brand-new website. Anyway, as usual, Aldo will start with the highlights and figures of the period. And Alberto will then illustrate the financial details. And at the end, we will welcome your questions in the usual Q&A session. So thanks again. And let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thanks, Giancarlo, and good afternoon to all of you. As expected, the fourth quarter of 2021 continued on the same trajectory already stated in the third quarter with the benefits of development activities, and in particular, for the time being, the ongoing refarming for RAI, progressively reinforcing our growth. Growth, now more visible, but we have gradually but steadily improved our results year-on-year, achieving around EUR 30 million higher -- of higher recurring cash generation compared to the levels of 2014, the year of our IPO. From the financial perspective, 2021 performance has been satisfactory and even slightly above our expectations. Excluding nonrecurring items, revenues increased 3%. In turn, adjusted EBITDA rose 5% with the margin improving by 160 basis point despite lower temporary savings from pandemic safety measures. And development investment had increased to over EUR 70 million, driven mainly by the refarming activities for RAI but also by regional refarming and by the setup of the new infrastructures and services that are expected to support medium-, long-term growth. These results enable us to propose to our Annual General Meeting the full distribution of the net profit, equivalent to a dividend per share of EUR 24.36 and a dividend yield of 4.5% based on yesterday's closing price. We are also proud that as a result -- as a first result of the initiatives of our 3-year sustainability plan, the improvement in financial result came along with an enhancement of the company's ESG profile, recognized by leading international rating providers. The growth just described has not ended in 2021. And on the contrary, the revenues and the EBITDA growth trend is expected to continue in 2022, finally supported also by a more tangible contribution from the CPI, although considering the current environment, it's wise to keep electricity prices monitored, too. Well, before moving to operational update, let me point out that 2021 also confirm the role and resilience of the TV broadcasting. And looking at Slide #6. After the peak resulting from the pandemic and the restriction to mobility, the audience of the digital terrestrial platform has returned as expected to the usual levels of around 10 million viewers on an average day. This is a value that is stable since the years despite the well-known growth in the use of the OTT platforms, as demonstrated by the increase in users of video on-demand platforms, either subscription-based, as shown in the chart, or advertising-based, with the latter more typical of traditional broadcasters. But in addition to the audience level, we can confirm that viewers are coalescing around specific platforms based on the content they want to watch using -- they preferred using on-demand for series and movies and real-time delivery for entertainment, news, sport contents, which backs of our view into the -- of the complementarity of the different platform and, therefore, of long-term sustainability of the digital terrestrial platform that moreover has shown to be efficient for certain content. On the bottom left of the slide, we have shown the viewing modes of the 2022 Sanremo Song Festival, the most popular event produced by our clients, RAI. Without going into much detail about the numbers, I would like only to share a couple of messages. Entertainment remains a mainly, if not fully, linear content. 99.5% viewing was in real time. And this is true regardless on the platform since even on the OTT platform typically on-demand, viewing was largely in real-time 80% of the total. So broadcasting today, digital terrestrial television, remains the reference distribution platform for linear consumption, for Sanremo Song Festival, 98%. So it's hard to imagine what would happen if 98% of traffic moved to fixed telecom network, both in terms of congestion of the network and in terms of distribution costs for the broadcaster. Conversely, to enable even a minimum of migration, it would be necessary to make content available geographically closer to end users, possibly at network access level, so avoiding the backbone. And this is exactly what we are planning through our edge CDN projects. Moving now to the update on operations. Let's start with the refarming project for RAI at Slide #7, which, as you know, is the main growth driver in the business plan horizon. By the end of 2021, we have received in excess of EUR 100 million investment, which is about 70% of the total plan, equal to EUR 150 million. Of the three macro projects to update RAI networks, the extension of national multiplexes coverage, other than the multiplex that already covers over 99% of the population, has been completed. These networks are now hosted on approximately 1,000 of our sites compared to the initial 400. On the other hand, with regard to the two technological upgrade projects, the new macro-regionalized multiplex in UHF band and the upgrade to T2 of all multiplex, the new head ends of the transition to MPEG-4 and HEVC encoding and the distribution network have also been completed, while the replacement of transmitters with new DVB-T equipment remains to be finalized, having however already reached completion rates between 70% and 80%, depending on the specific network. On 8 March last, the switch from MPEG-2 to MPEG-4 standard took place in all Italian regions, enabling a recovery in efficiency on the standard definition channels and, therefore, the accommodation of more or less the same number of channels in fewer multiplexes, while the switch from to DVB-T to DVB-T2 technology is planned for the beginning of next year, leading to an increase in available capacity and, therefore, to the expected improvement in channel quality from standard definition to high definition. So everything is moving on track. The opportunity offered by refarming is not however limited to RAI customers. The new distribution structure of regional content, which shares distribution capacity between several broadcasters is opposite to the previous system where each broadcaster had its own network, has improved the sustainability of customers by reducing their distribution costs and ensuring affordable rates. So as you can see from Slide #8, our focus has been in areas with greater appeal, both commercially, for example, higher turnover and lower customer risk, and technically greater synergies in our existing infrastructures. So good news here: 100% success rate in the 7 areas where we beat in light of the compelling risk-reward; the completion of the networks' rollout in Northern Italy while the Central and South areas, we are proceeding in line with the road map; and an outcome of negotiation with customers that has achieved almost full lockup occupancy of the available bandwidth. This is really an interesting opportunity for us, largely incremental, considering the current limited exposure to this segment with investments in the mid-teens range and margins and returns that benefit from synergies with existing infrastructures. Despite the material opportunities offered by our traditional business and platform, as you know, we are introducing new infrastructures possibly in synergy with assets we already own and evolving our media services also on the content distribution on broadband platforms, which, as anticipated, are becoming more and more complementary to broadcasting. You already know the main initiatives that we summarized on Slide #9. So first, the development of network of edge data centers in our major sites, also in terms of size, that we host the servers of all those providers offering increasingly low-latency services. Second, the deployment of a capillary and carrier-neutral CDN, content delivery network, mainly addressing the needs of high-quality and live streaming. Third, the deployment of hyperscale data centers since large centralized data storage, a market that we expect to be supply-demand imbalanced, given the increasing growth of cloud providers, OTT players and so on, and the significant barriers to developing new quality assets in terms of spending, suitable land and power availability. Last but not least, the capacity expansion of our national backbone, which, in additional to the opportunity to offer connectivity to our existing customers, is an enabler for the three previous projects, in particular for the edge network and the CDN. I won't go into detail by each individual project, but the sense we want -- I want to pass on to you is that activities are progressing. For example, with the start of the rollout of the new backbone, which will keep us busy for about a year, the final design for the 7 major deep data centers to be followed by the construction phase that will lead to the availability of the assets during 2023; the forthcoming selection of the technology partner for CDN -- for the CDN with the first commercial release of the service expected during 2023 and the subsequent capillarization to be coordinated with the availability of the edge data centers; and the submission of an hyperscale data center project to the relevant municipality and the ongoing permitting phase, which is probably one of the most delicate ones for this kind of assets. I remind you that we are talking about initiatives in improving company's positioning, which during the industrial plan period will mainly contribute in terms of cost and investment rather than margin. But with the expected returns that will hopefully represent one of the drivers of our medium-, long-term growth. Consider that, overall, they account for several tens of millions of capital employed or hundreds if you include the development of hyperscale data center with returns expected well access our cost of capital. Moving now to Slide #10. Let me give you a brief update on the progress made by our company on the ESG front during 2021, following the ongoing implementation of our first sustainability plan approved in March. We can be extremely satisfied that about 50% of the initiatives included in the plan have been completed and 8 of the original 14 quantitative targets have been already matched. Our 2021 nonfinancial statement contains all the detail. But I would like to draw your attention here on just a few achievements. On the environmental pillar, we have achieved, or better, confirmed once again our targets of 100% green electricity supply, which is unique in the industry, allowing us to be well positioned on the path to our carbon neutrality by 2025. Moreover, the refarming project with the EUR 100 million green investment target already met has started to produce benefit also in terms of reduced -- reduction of electricity consumption, which has fallen 3% since 2020 and should fall further. From a social point of view, let me highlight: firstly, the recent introduction following the trial during the pandemic of a structural agile working scheme for our employees; as well as confirming the attention even to people outside of our company; the improved coverage of the DTT signal in over 1,000 Italian municipalities. Once again, in 2021, we paid particular attention to governance, reinforcing the ESG oversight at Board and non-Board level and the engagement with our stakeholders, whether suppliers or shareholders. And technological innovations is a distinct trait of our DNA with over EUR 115 million spent since 2019 to bring the new-generation digital TV into the homes of Italians and to start the digital transformation process of the company. Rai Way's commitment has also been rewarded by the main ESG rating agencies with significant upgrades from the recent evaluation of CDP, MSCI and the Sustainalytics on 2021 activities. Moving now to Slide #11. You'll find the main financial figures here for the full year 2021. So starting from core revenues, near EUR 230 million, up 2.4% year-on-year on a reported basis, mainly as a result of the refarming-related step-up on RAI's side and more than offsetting the slightly negative CPI recorded in 2020 and the pressure on third parties, which, by the way, we are expecting to reverse the trend very soon. Adjusted EBITDA came in at 152 -- EUR 142.9 million, more than 5% higher versus 2020, pushing profitability above 62% in the full year. At the bottom line, net income grew by 2.1% at EUR 65.4 million, factoring in high D&A due to rising investments. On the financial side, CapEx in the period grew up to -- or EUR 85 million with a material step-up vis-à-vis 2020, boosted by development activities again and maintenance CapEx back to more recurring levels, around 6% on core revenues, after the drop recorded in 2020. And resulting in EUR 87.9 million net debt at the end of the year, but cash generation stood consistently close to 90%. I will now leave the floor to Adalberto for all the details of the financial performance. Adalberto, please, the floor is yours.

Thank you, Aldo, and good afternoon to everyone also from my side. So if we look at Slide 12, starting from the top line. Core revenues were EUR 229.9 million vis-à-vis EUR 224.5 million in 2020, when, I remind you, the figure was positively impacted by material prior year adjustment on third parties. Excluding nonrecurring items, you should assume an underlying top line growth of roughly 3% in 2021 vis-à-vis the 2.4% reported. More specifically, on the right component, the acceleration in growth, 4.1% year-on-year, enjoyed the anticipated step-up foreseen by the 2019 refarming agreement and effective from last 1st of July, more than offsetting the negative CPI dynamic, same comment we had also in the last call. Then just again to remind you, the full impact of refarming project on the fixed consideration amount, about EUR 16 million on an annual basis, that according to the national agreement, and starting from the 1st July 2021, has to be treated as core services, so no longer as new services. The same reclassification applies also to about EUR 0.6 million of yearly revenues that will be moved from new services to core services. Let me also remind you that, again starting from the 1st 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 and amounted EUR 4.5 million in the first half 2021. Consequently, the EUR 19.4 million of new services from -- for RAI that we recorded in 2021 are restated, as shown in the right slide -- right side of the slide, where the refarming contribution is split into the EUR 4.5 million accumulated during the half that in 2021 is treated as new services and the additional EUR 8.3 million effective from the 1st of July, which are now factored into the fixed consideration. On top of that, the EUR 6.6 million top layer representing the remuneration for new services are related to refarming, such as contribution network, DAB coverage expansion and so on. That will continue to be reported in a separate box on a stand-alone basis. So on the third-party segment, 7.3% decrease recorded in 2021, totaling EUR 30.8 million, has to be read as minus 4.7% when stripping out one-off impact on 2020 for approximately EUR 1 million. The drop, as you know, is once again due to the expected pressure from MNOs and the expiration of certain lower-margin hospitality services waiting for the upcoming contribution from the regional refarming to flow into revenues very soon and also support the fixed wireless access dynamics that will finally reverse the overall trend. Let's go now to the following slide, OpEx. As you can see, our full year cost base, amounting EUR 87.6 million, substantially confirm the nice declining trend already commented in the previous 9 months, still benefiting from savings related to COVID and from extraordinary mitigation measures implemented by the government to address the sharp increase in energy prices. In particular, let me focus on other operating costs, fell by 2.5% at EUR 42.5 million with underlying cost base down by 1%, benefiting from lower energy prices, resulting from the anticipated government mitigation measures and partially offset by higher maintenance. Excluding the electricity cost, the overall reduction of EUR 0.9 million would become an increase of almost EUR 1 million. Personnel costs amounted to EUR 45 million, relatively stable both as reported and underlying basis when excluding capitalization, non-core items and temporary COVID-related savings. Let's now move to Slide 14. At the bottom line, you see our net income at EUR 65.4 million, 2.1% of increase vis-à-vis previous year despite the materially rising D&A coming from investment activities and benefiting from higher profitability at 62.2%, up 160 basis point year-on-year, and benefiting from the still light tax rate, 26.3%, enjoying the EUR 1 million one-off tax relief we recorded in the first quarter. Turning now to the cash generation, Slide 15. You see how our leverage is progressively and organically increasing as expected in our industrial plan with net debt at the end of 2021 after, among others, the payment of EUR 64 million dividend and EUR 85 million of CapEx spending, at EUR 86.9 million compared to the EUR 46.1 million at the beginning of the year and broken down into IFRS 16 components for EUR 56.5 million, bank loans for EUR 69 million, cash for the remaining approximately EUR 18 million. Last but not least, in term of cash generation, if we go to the following slide, #16. We reached a EUR 93 million normalized free cash flow to equity, up 5% compare to 2020 figure, boosted by the higher EBITDA, of course, and to finance development CapEx for EUR 71 million, and of course, our dividend. Keeping all this in mind, we are proposing to the next Shareholders' Meeting the distribution of 100% of our net income as a dividend in the amount of EUR 24.36 per share, with an implied dividend yield of about 4.5%, which confirms once again our strong focus on shareholder remuneration, which around EUR 422 million, equal to 53% of the company initial market cap at the time of the IPO overall distribution since 2014, showing a material progression year-after-year. That's all on my side. So I now leave the floor back to Aldo for the closing remarks. Thank you.

Thanks, Adalberto. Moving now to the expectation for 2022, so Slide #17. In terms of revenues, we expect a mid-single-digit growth, mainly driven by CPI link. The full impact of the step-up related to RAI effective refarming for the second half of 2021 with a benefit of additional around EUR 3.5 million and the third-party regional refarming, drivers that allow us to balance the postponement of some new services for RAI compared to initial expectation and, on the other hand, to reach a turning point for third-party revenues despite the progressive rationalization of MNOs, which, however, is showing a more shared approach through the definition of stabilization path, envisaging a mix of discounts and higher volumes at attractive fees. Adjusted EBITDA level is expected to grow further, assuming a progressive normalization of electricity prices. This means that at current level of unit prices today, the future, for the rest of 2022, are at around EUR 250 megawatt per hour growth, it's -- in this case, for a more limited amount, can come through actions on costs and further government relief measures. While the more price fall, the more our comfort on growth increases, becoming progressively less dependent on actions on costs. Conversely, in a scenario where prices continue to rise and remain persistently high, there are still factors that would help mitigate impacts over time as our CPI-linked revenues applied at the beginning of each year as energy swings are reflected in inflection, the progressive reduction in consumption assured by the brand-new network built in the context of the refarming and finally, the possibility to temporary act on other cost items. At investment level, maintenance CapEx is expected to be in line with our industrial plan values, therefore, slightly higher than the recurring value of around 60% of revenues that we expect post network upgrade. Development CapEx, seen in line with our -- or slightly higher than 2021 values with the completion of refarming activities and the growing portion related to the implementation of new services. In the last slide, #18, of our presentation, we have summarized the main growth drivers during and beyond the plan horizon: the link to CPI included in almost all our contracts; the upgrades of the broadcasting networks; the efficiency enabled by digital transformation; the new services initiatives reviewed before; the possible opportunities arising from PNRR; as well as external growth. Just a couple of remarks. With regard to the PNRR, in general terms, since we are waiting for the publication of the Italia 5G plan tender, we see two main areas that might provide nice support. On the one hand, the almost EUR 4 billion Italia on 1-giga plan could bring, even without a direct involvement of Rai Way, an indirect benefits in terms of higher demand for fixed wireless on top of the current demand, more focused on white area coverage. And on the other hand, the EUR 2 billion Italia 5G plan based on two different initiatives: fiber connection of more than 1,000 sites that we lack fiber backhaul in by 2026; and the second initiative, build new sites or even better, the entire package of site plus radio-linked equipment plus fiber backhauling to improve network performance in certain areas, like rural areas or highway and rail galleries. So to assess potential role and returns, we need to see first how the tender is structured. Although, on backhauling, even if not directly installed by the towerco, fiber availability increases the commercial appeal of the sites. On new sites, the necessity to also provide radio link -- radio network and the roaming services suggest the involvement of mobile operators. On growth by external lines, I guess, the topic of interest today is the long-awaited DPCM, that's in order to straighten Rai Way's development plans through a greater access to the market, would reduce RAI's shareholding limit from the current 51% to 30% while maintaining public control over the infrastructure. The decree has not been published in the official gazette. But according to what was indicated this morning by the Ministry of Economic Development, it should take place soon. What can be highlighted today here is the government support for the development of our company, underlining in particular the know-how and the strategic relevance of the infrastructure we manage. Needless to say, the decree would give our parent company options and higher flexibility to enhance the value of its stake in our company, in Rai Way. And no doubt, it should be welcomed as a necessary step to facilitate, at least in terms of possible configurations, to consolidation of broadcast towers sector, which, along with the parallel, not alternative diversification into new areas, in new infrastructure, represent one of the pillars of our industrial plan. Then it is normal that the outcome also depends on the requirement of several subjects, like governance among controlling shareholders, regulatory aspects and so on. Our role will be to gather all parties around an industrial project and the structure that maximize value creation and protects the interest of all shareholders, including minorities. There is not much more that we could ask -- that I could ask at this time. So apologize in advance, but we could not be in a position to comment further. That's all on my -- on our side. We can now open the line for the Q&A session. Thank you.

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

I would focus on the guidance you have provided on both the revenues line and the cost. So my questions are it is fair to assume that, given the contribution of regional refarming and FWA, we may also have a stable to slight growth for third-party revenues? And moving to the EBITDA guidance, I was wondering if you can just provide some more color. So if I understood properly, your guidance right now is assuming same level of energy prices we are facing today. And that's kind of normal, I think. But the point is the actions you may put in place through the year in order to face ongoing pressure on energy crisis would allow you to protect EBITDA also for 2022.

So as concern third-parties revenues, your assumption is correct, also because we should expect in 2022, good news from the local refarming broadcasting that will start to give the first contribution. And then the full contribution will be visible in 2023, almost full, let me say, in 2023. And as concern the EBITDA guidance, let me say, despite the irrational price dynamics of recent months, and in particular, of the 2, 3 weeks as a result of the geopolitical tensions, there are -- I would like to remind the mitigants and then I would elaborate more on cost, which are, generally speaking, the mitigants that we have. First, let's remember that the first quarter 2022 price is contractually locked at 2021 levels. Then the raw material represents, at 2021 prices, less than 50% of the total energy bill that you see in our financial statement. So therefore, increases in raw materials are reflected less than proportionally in the overall cost. The government, as also Aldo mentioned, has announced support measures to counterbalance the increase, mainly by reducing the other tariff component. Then we have also to consider that we are going to have a brand-new network with more energy-efficient equipment, allows a progressive reduction in consumption. Then as mentioned, the CPI link to revenues provides, albeit with a certain time lag, a good level of protection in case of lasting increases in energy prices, which in turn are reflected in higher inflation. As concern 2022 figures, we are monitoring day-by-day the situation because we -- since the IPO, we had year-after-year a growth of our adjusted EBITDA. And we will do -- our effort will be focused to continue to deliver such result. This means that we are looking at some costs that we could have a one-off temporary reduction. Temporary because if we will have a long-term issue, this will be hedged by the CPI and by the revenues, so consultancies, travel and lodging as concerned, not the operation, of course, that are focused on the activities on the ground and other costs on which we have some discretionary -- the possibility to manage it. Then again, we have also a possibility to postpone a little bit some costs when -- to 2023, when again, in the case of energy prices, that will remain at a very high level until the end of the year, again a postponement to 2023 will allow us to use the increase in revenues to work on such increase. So the overall scenario, of course, is complicated. But again, we -- our commitment is on having -- on continuing -- continue to have a growing EBITDA and that these are -- I try to describe what we can do in order to be consistent with this.

The next question is from Stefano Gamberini with Equita.

Three questions also from my side. The first is regarding could you remind us what is the electricity consumption in 2021 and the average cost? You underlined that the raw material cost is then half of overall cost. If you can divide also the fixed part to the variable, one, just to have, on our side, a sort of sensitivity of what could be the impact on 2022. The second question, regarding the investment guidance. Because if I'm not wrong, you expect development investment in line with 2021. Could you give us a breakdown? What I mean is what is the part referred to the refarming? Because if I'm not wrong, this should be end in 2022. Or what is the remaining part of the refarming investments? And with -- related to the new services, and what are the return in term of revenues from this second part of the investments that you will go ahead during 2023? The last question is about the consolidation. I'm used to have a question on it. But the situation is clearly improving right now. Could you just remind us what are the main synergies that you expect in term of investments, OpEx or financial synergies that is also something that could be maybe relevant that we can work on in order to understand the potential upside or -- yes, the advantages from the consolidation in the broadcasting tower sector?

So in order to -- let's start with the first question on energy. We had in 2021 89 gigawatt per hour of consumption. And considering the overall cost of approximately EUR 12 million on a yearly basis, this means an overall cost -- average cost of approximately EUR 135 per megawatt hour. Then if you need a sensitivity on the change in the raw materials and the [indiscernible], this is called [indiscernible], more or less, each EUR 10 of increase is going to give us a negative impact of EUR 0.6 million in 2022. Considering then in 2022, this is going to be applied only to the last 9 months. So I hope to have answered to your first question.

A clarification on this topic, because EUR 135 is clearly including also the fixed part of your deal, so -- and you also hedged during 2021 because you already hedged also in the first quarter '22. So what is the price of -- hedge price that you have for the raw material cost?

Around EUR 60, until...

EUR 60, okay.

Yes, until Q1 2022. And on -- the second question was on the CapEx. As you probably may see also in the fifth slide that we present, we'll have to invest approximately EUR 50 million to finish the project -- all the project related to the refarming. And then on top of this, we have the -- all the CapEx that are related to the other initiatives. Considering the regional refarming, that will require more or less EUR 10 million. Then we have all the CapEx related to the new initiatives, I'm referring to the edge data centers, CDN, the backbone, for approximately EUR 20 million more. And that these are more or less the key driver of the guidance that we provide you in terms of CapEx. Then last question was on the synergies. On synergies, having -- we commented also in the past, for sure, having a unique network would mean efficiency in managing this network. So we can have -- we can manage in a better way the overall size of the combined entity if -- to manage all this activity, we will have one -- only one company that we will have to manage these activities. So we are going not to imagine significant synergies like for the mobile tower operator or where the most important synergy in term of rationalization is coming from, the decommissioning and the reduction of the cost of the leases related to their infrastructure. In our case, we believe that, for sure, there will be headroom also to work on this field, but above all, in having a more efficient way to manage our network -- manage the potential integrated network. So this would mean mainly synergies in term of costs rather than CapEx, to be clear.

There are no more questions registered at this time.

Okay. Thank you, all of you, for joining the call, and speak soon. Bye-bye. Bye-bye. Thank you.