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 2022 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 of Rai Way. Please go ahead, sir.

Thank you, operator, and good afternoon. Let me start by thanking all of you for joining us today, and welcome to our first half 2022 results presentation. As usual, Aldo Mancino, the CEO, will start with the highlights and figures of the period. Adalberto Pellegrino, the CFO, will then illustrate the financial details. And at the end, we will welcome your questions in the usual Q&A session. Let me now hand the call over to Aldo. Please Aldo, go ahead.

Thanks, Giancarlo, and good afternoon to all of you. Let me start by saying that we are very pleased with the performance of the first half of the year and with the developments in the initiatives we are carrying out. The development investments of the last few years in the traditional broadcasting business, both for RAI and for third-parties, are continuing to pay off and allow us today to present further tangible EBITDA growth in the second quarter, even in the context of an unprecedented, at least to my best knowledge, increase in electricity prices, which is one of our main cost items. At second quarter, that too also brings positive updates on operational activities, particularly with regard to business with third-party customers. Therefore, despite the usual attention we must give to certain elements such as the dynamics of energy market, the results for the first half of the year and the nature of our business model allow us to look to the future with optimism. In particular, the first half of 2022 showed a remarkable growth even slightly above our expectations, with revenues growing by 7%, benefiting from the contractual step-up relating to refarming for RAI, which began, as you may remember, in the second half of 2021; benefiting also from the inflection boost and the growing contribution from the new regional frequencies business which boost revenues from third-parties in the second quarter to a double-digit growth compared to the same period of last year. As expected, after the expiration of the fixed price contract at the end of March, in the second quarter, the growth in electricity prices started to have an initial significant impact on our P&L as well. Despite this, thanks to the growth in revenues just highlighted, tighter cost control that we started at the beginning of the year in order to mitigate the hike in energy prices and some nonrecurring benefit also on the cost side, we have been able to secure adjusted EBITDA growth of 8.5% in the second quarter, bringing the total over the 6-month period in absolute terms to more than EUR 8 million, above last year's level. In terms of investments, the level of development CapEx was basically maintained at the previous year's levels with a gradual reduction in activities for network upgrades, rebalance, but the increase in investments for third-parties, mainly for regional refarming but also with the first purchases related to the development of new infrastructure. From an operational point of view, after almost 3 years, refarming activities for RAI are nearing completion. Frequencies have been released throughout the territory. The new multiplexes are already operational in the DVB-T standard with national multiplex coverage now over 95% as a result of the extension project. We are now finalizing the upgrade of the last equipment of DVB-T2 technology, the macro regional multiplex already at 100% coverage. The 2 national multiplexes now at 80% in order to have T2-ready networks, ready for the time, starting 1st January, 2023, when the authorities have decided to start the switchover. But as anticipated, today's most interesting updates mainly concerns initiatives for third-party customers. First, at least as they have already begun to contribute to our numbers, the regional networks in the 7 geographical areas where the frequencies have been assigned to Rai Way are all now in operation. As you may recall, we focused on the areas that, based on our analysis, appear to have the greatest commercial attraction from a point of synergy with Rai Way infrastructure and local reliability. The results are proving us right with prospects even slightly higher than initial expectations. So capacity already expressed at full T2 is, in fact, close to 100% in all regions, with revenues gradually coming into full swing in a couple of years. In terms of activities with mobile network operators, the goal of our industrial plan is a progressive stabilization, as you know, trying to address the 2 main elements of pressure: pricing from one side and technical optimization of the network from the other side through a progressive realignment of tariffs, possibly through the activation of new POPs at incentivized rates and the further expansion of volumes also in view of the rollout of the new 5G networks. Exactly on these principles, negotiation with the most relevant MNO client are in a very advanced stage, and we should finalize the contracts renewal in the coming weeks. All in all, we expect a little bit of further pressure in the very short term but to reach, at the end of new contract period, revenues equal or above the current level. At the same time, last month, we finalized the framework agreement with Iliad. Iliad is already one of our customers, although on a still number of sites, considering that so far, their focus has naturally been on coverage of urban areas with higher traffic density. But the next phase will be to complete the network either in the areas, the rural ones most covered by our infrastructure, and so possibly using a decent number of our sites. This is the framework agreement with no commitment. But the level of interest in our portfolio gathered so far makes us confident that the client will contribute to the goal of stabilizing the business with MNOs. So broadcast business brought tower hosting. And let me conclude with new infrastructure services. In March, during our full year results presentation, we provided an update on the status of the major organic development initiatives we are putting in place to expand our infrastructure and service portfolio, diversifying the business and gaining exposure to higher growth segments, namely the edge data centers, the CDNs and the hyperscale data centers, along with the upgrade of the backbone that will be used both to offer connectivity and to our customers and to interconnect by fiber optics, all these new assets. We are happy to share with you today that in addition to the already ongoing rollout of the new backbone, after the design phase, we have started the procurement procedure related to the construction of the first set of edge data centers and the provision of technology components, hardware and software components, of the CDN, or the content delivery network. The initial set of the edge data centers, 5 to be precise, starting from the north part of Italy, will account for 1.6 megawatts of geographically distributed capacity and around EUR 20 million, EUR 30 million of estimated investment within 2023. As said, this is only the first part of a project that will progressively double the available IT capacity to around 3 megawatts by 2025. We will refine our projections with the outcome of the procurement phase, but we expect to return on deployed capital above the level of 10%. As for the edge CDN, the approach and scalability, of equal importance, estimated return on capital are more or less the same. We aim to have the first release based on a decent number of edge nodes by the end of 2023 and then progressively extend the capillarity and the quality to address Ultra HD linear video contents and gaming applications. For this project, CapEx for the setup of the network, of the CDN network, are expected at around EUR 20 million, of which up to EUR 10 million to be spent by next year 2023. In terms of expectation for 2022, the more than EUR 80 million growth adjusted EBITDA recorded in the first half, the target of adjusted EBITDA growth remains achievable, although more challenging, of course, limited in absolute value and dependent on mitigating actions on other costs. At the same time, however, these dynamics of electricity prices are also reflected in inflection, both directly on energy goods and indirectly through the impact on other products. And the link of the CPI included in almost all of our contracts will also allow us to recover, possibly more than recover in 2023, so only with a time lag, the headwinds that are in 2022. And I have already elaborated on Slide 5, 6 and 7, which graphically summarizes what I've just commented on, on the configuration of the new broadcast networks operated by Rai Way, following refarming and updates on new infrastructure and services. So before handing the floor over to Adalberto to give more details, I would move now to Slide #8 to summarize the key financials of the first half 2022. Let's start with core revenues that reached EUR 121.2 million, 7% higher than the first half of last year because of the already mentioned effects. While adjusted EBITDA grew by 11.9% to EUR 78.2 million, confirming as in the first quarter, the double-digit growth at bottom line where net income reached EUR 37 million. Investments at June 30 supported by refarming activities, both at national and regional levels, showed a recovery after delays in the first quarter that mainly affected maintenance CapEx, driving net debt at EUR 120 million, also factoring in the EUR 65.1 million dividend payment and the calendar shift to tax payments to July. Lastly, recurring free cash flow was strong in the period with cash conversion close to 95%. And with this, I'll hand over to Adalberto to provide you with details on financial performance. Please, Adalberto, the floor is yours.

Thank you, Aldo. Good afternoon to everyone. So starting from Slide 9. Core revenues continued the consistent growth that began in the first quarter, coming out above EUR 121 million, an increase of 7% compared to 2021 levels, so confirming the trend we have already commented in the last call. More specifically on the right component, we can see that the acceleration growth, plus 7.2% year-on-year, was driven by the anticipated refarming step-up, which I remind you has been effective since the 1st of July 2021, and then by the positive CPI dynamic as well. . A very good news from third-parties revenues, in our last call, you may recall that we commented a reduction of 2%, and we anticipated that we expected in the rest of the year a reversal of this negative trend. So now looking at the first 6 months, we may appreciate the trend reversal with revenues grew by 5.7% revenues from third-parties, reaching EUR 16.6 million, meaning more than 13% increase, a double-digit increase, just in the second quarter vis-à-vis the same quarter last year. And this was supported by the contribution from the regional refarming project already commented by Aldo and expected also to grow in the future. Moving now to the cost slide, Slide #10. You can see how we have headwinds arising from soaring electricity cost through tight cost control and leveraging also some nonrecurring benefits. As a result, total cost in the first semester came out at EUR 43.4 million, slightly lower vis-à-vis the EUR 44 million recorded in the first semester 2021. In particular, in the first half, excluding noncore items, personnel costs remain relatively flat with a stable head count. And the underlying other operating costs were up 4.4%, plus 12% only in the second quarter, boosted by an increase in the electricity bill in the second quarter alone, despite a significant double-digit reduction in consumption due to the new, more efficient network that we have now in place. As I said, strict cost control of consultancy, maintenance and other expenses, which allow us to limit the negative impact together with some one-off positive prior year adjustment. Now moving to the profit and loss, slide 11. Net income, as you may see, reached EUR 37 million, recorded a double-digit growth of 11.5% in the first half, mainly reflecting a higher top line. The strong profitability, close to 65%, up by 285 basis points vis-à-vis the previous period. Then we have higher D&A following the recent investment activity, and the tax rate back to normal levels, 28.4%. Last year, we had an extraordinary positive impact from certain COVID-related tax relief, and the tax rate was 26.3%. Moving now to the cash generation. Net debt, you may see our leverage is progressively increasing as expected in our industrial plan, with net debt at the end of June standing at EUR 120 million, EUR 36.8 billion, out of which related to the IFRS 16 after the payment of EUR 16 million dividend and EUR 26 million of CapEx, with the tax payout following this year in July. Recurring free cash flow to equity recorded a new historical high for the half, just a touch below EUR 54 million. Now before I turn the floor again to Aldo for the full year guidance, I would like to share with you some thoughts about the electricity spending trend for the rest of the year and eventually also beyond. So let's go to the following slide. My goal is to give you a comfortable picture of what lies ahead, on the one hand, going over the dynamics we have seen so far in terms of both electricity spending impacting on our cost and inflation also linked to the electricity prices, of course, and impacting on our revenues and, on the other hand, looking at the recent future level on energy prices which, I must point out, are as volatile as ever, as I'm sure you know very well. So taking as a reference the electricity bill of about EUR 12 million in 2021 that you may see on the left of this slide, we were still benefiting from the old fixed price contract in the first quarter of 2022, while the energy market were already overheating. I would like to highlight now, starting from April 1, as also we commented in the past, the price for the raw energy component continue to rise, averaging in the second quarter a level of more than 4x what we used to have and fortunately now, over well above EUR 400 per megawatt hour. There are, however, 2 pieces of good news: first, at company level, the already commented reduction in energy consumption, which will stand at around 75 gigawatt hour at the end of the year with a double-digit reduction and potentially decreased slightly more in 2023; second, at country level, the government cut in the other components of the energy bill linked to distribution and dispatching from EUR 75 per megawatt hour in 2021 to an expected level of EUR 45 in 2022 per megawatt hour which, it is assumed, will at least be confirmed going forward if the raw energy prices do not decrease pending potential tax credits not considered in this analysis. All in all, based on the assumptions highlighted in the slide, the total yearly electricity bill in 2022 is expected to reach about EUR 24 million, virtually twice as much as in 2021 and largely originated in the second half of the year, assuming an average price for the raw energy component of EUR 280 per megawatt hour, as I mentioned, positively impacted by the low level recorded in the first quarter. Estimating conservatively -- and in the hope of a return of prices to more rational levels, estimating a comparable level of spending even in 2023, you may see EUR 25 million on a yearly basis leads us to an overall negative impact vis-à-vis 2021 levels of about EUR 13 million on a yearly basis. However, if we look at the right of the slide, concerning the top line, considering the effect of such dynamics on inflation, we can note that the 3.6% price increase already accrued starting January 1 of this year will generate a gain in 2023 a benefit of EUR 8 million. To this, we should add the similar effect of the further price increase accumulated from November 2021 till today, amounting 5.9%, meaning additional EUR 14 million of potential impact on the top line. If we sum this contribution to the previous one, we reach about EUR 22 million on a yearly basis, which is likely to increase again consistently with a further increase in the electricity bill factored into the calculation for the second half of the year and which will presumably push the CPI up furtherly. If we compare the total benefit at revenue level expected in 2023 with the negative impact estimated at operating cost level, the balance is definitely supportive and confirms the viability of the CPI mechanism embedded in our revenue model that, although with a certain time lag, naturally hedge us against a truly extraordinary scenario. I hope this slide will help you to understand the energy prices impact on our financials. Of course, let me just underline that the exercise you find in this slide is for illustrative purpose only and the resulting figures cannot be intended to be turning the stone given the current degree of uncertainty. I leave now the floor to Aldo to conclude.

Thank you. As what Adalberto has just outlined in terms of impact and sensitiveness in relation to electricity prices is reflected in the expectations for full year 2022 and let me say also beyond. In fact, utility costs now represent a measure, if not the only point of uncertainty. Therefore, in terms of revenues, the mid-single-digit growth is confirmed driven by the full impact of the refarming related step-up in RAI already recorded in the first half, being the step-up effective from the second half of 2021; the CPI link; the contribution from capacity lease on new regional networks, which will also help us to reach the turning point of third-party revenues. For the adjusted EBITDA, based on the current level of our future for the rest of the year, the over EUR 400 megawatt hour mentioned by Adalberto, meaning a sharp increase compared to the level of our last call in May, and not assuming further incentives, we should still be able to deliver a little bit of growth, mainly thanks to, of course, the top line growth, the cost control already visible in the first half and some nonrecurring benefits, for example, a small penalty that will be paid by RAI in the second half for shutting down a minor service related to an old radio transmission technology. So should electricity prices return to a more rational level during the last month of the year, the growth will be more material. As pointed out earlier, in 2023, upon the next application of the CPI escalator, the dynamic of energy prices and resulting inflection will also be reflected in our revenues, reversing the headwinds affecting this year 2022. So lastly, at investment level, expectations are confirmed with maintenance CapEx in line with our industrial plan values and development CapEx in line with or slightly higher than 2021 values with the completion of refarming activities and the growing portion related to the implementation of new services. That's all 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 was wondering if there is any update on the sector consolidation front that you can share with us. And in particular, my question is, are you afraid about the fact that political crisis we are facing in Italy may risk to derail the consolidation process?

Fabio, in terms of the progress of activities, DPCM is in place, right, financial adviser is working. So the condition for discussion are there. The approval of the industrial plan, RAI industrial plan, of course, might slip slightly. But as you know, RAI has indicated that the process could go in parallel with the plan. So in the meantime, work can continue on the various aspects. And this is without considering that the industrial enhancement of an asset should make sense regardless of the specific plan. However, we are all aware that timing is crucial. And at the moment, I can confirm, as already said, we should see the second half of this year as a reasonable time window for discussions of all the parties involved in the process. About the political situation, so it's difficult to predict this with some certainty. However, in terms of process, the regulatory activity required to enable the combination was done with DPCM. So if the parties come to an agreement that is again consistent with DPCM provisions, no further political step should be necessary.

Next question is from Giorgio Tavolini with Intermonte.

I was wondering if you can elaborate more on 2022 projections on guidance, especially for EBITDA since you say you expect EBITDA growing, but I don't know you are pointing to a mid-single-digit growth or low single-digit growth. I don't know if it's correct to assume a 10% drop in EBITDA in the second half. This is the implicit figure that I get looking at the consensus. Consensus is forecasting 1% EBITDA growth in 2022. So it means that after the very good performance in the first half, we should see minus 10% in the second half. And the second question is on 2023. I was wondering, trying to understand what could be the evolution of your previous targets, looking at the current electricity prices and levels and CPI. So I was wondering if it's correct to assume the EUR 247 million revenues, I mean, is the evolution of energy prices and, on the other side of the CPI, it's correct to assume EUR 260 million revenues and for EBITDA just EUR 1 million more. So EUR 155 million, EUR 156 million, so in terms of EBITDA. I don't know if it's clear, my questions. So I tried to basically to understand what could be the 2023 targets revised in this new inflationary environment?

So in terms of guidance related to the EBITDA, the growth will be limited. It just may assume this. Of course, you may understand that if the price we highlighted in Slide 13 will be confirmed, we'll have to make an important effort to mitigate this increase. So let me just say that the growth of the EBITDA will be limited. Then giving a look also to the previous trend, of course, Rai Way is not a company that is going to deliver double-digit growth on a normal basis. So in this particular scenario, you have to consider that, fortunately, what we have done in the first half is something incredible. We are very happy with the growth that we had, and this is going to give a help on the second half. Having said that, on a yearly basis, probably the figures that you expecting in the second half in terms of EBITDA are okay because it should be consistent with what I said in terms of limited growth of the EBITDA. This is concerning 2022 guidance. Then looking at 2023, well, I understand and I agree with your thoughts, but we are not giving guidance today for 2023. However, clearly, the main moving parts are related to 2 factors, CPI and energy price. The final value of CPI to increase revenues will be the one recorded in November 2022. So let's see. Certainly, if energy prices keep going up, it is possible likely that there would be a further increase. Then the other element is how electricity prices will evolve in 2023, in particular, considering the time lag between the evolution of the energy prices and the application of the CPI link. In Slide 13 of the presentation, we point out that should electricity future for the rest of 2022 and for 2023 be confirmed, our electricity bill in 2023 would be only marginally higher than 2022, while the CPI contribution at June level, without considering further increases, would give us about EUR 14 million of additional revenues. To these values, we would then have to add all other changes, both positive such as, for example, the greater contribution from regional refarming, and negative such as, for example, the loss of some nonrecurring benefit that in 2022 help us to counterbalance the headwind from electricity cost in the first half. To say whether we will be above or below the plan's EBITDA target to 2023, let's wait more visibility on the 2 main elements, CPI and energy prices. Obviously, if we close with a CPI of 6% or more and energy prices fall, the probability of doing better, then the target increases.

The next question is from Stefano Gamberini with Equita.

I have 3 questions, if I may. The first regarding an update of the process authorizations regarding the data center investments. So when could we expect, say, some clear acceleration in your targets and mainly if you can give also additional in 2023 on these projects? The second question regarding the situation of OpEx, excluding electricity pricing. You underlined that with CPI locked today, you could get an increase of revenues next year in the region of 6%. So regarding all the other costs, currently you underlined that so far, the effort was very strong in order to keep the cost under control but with additional of inflation at 6% in 2022, what could we have? And what could you expect for the other costs next year? And the third is a clarification regarding your statement. If the parties have signed an agreement, the consolidation, the merger with El Towers could arrive in the second part of the year. So what do you mean in this case? That is between Rai and the shareholders of El Towers could close an agreement in the forthcoming weeks in order to go ahead with the merger by year-end even in the current situation of uncertainty regarding the political scenario.

Stefano, I'll take the first one on the data center investments. Let's split the projects in 2. As you know, we have a project that is the edge data center and a second project that is the deployment of a hyperscale data center. When you look at the first one, the edge data centers, there are no great or major authorization constraints. I mean we are going to build data center within our existing sites, so I would say no. And in this case, we expect to have at least the first edge data center of the 5 data centers that we mentioned in the presentation ready by the end of 2023. So to answer your question in terms of impact, to be honest, we expect impact from now to 2023 more on the investment side rather than on the revenue side. I would say that the commercial take cap will start beyond the investment plan. When you look at the other project, the hyperscale data center, that, of course, is the project that we could have the higher impact in terms of at least investments because we are talking of potentially hundreds of million euros of investment. In this case, the permitting phase is by far more, let me say, time consuming. We are, today, in negotiations. Basically, we are presenting the project to the relevant municipalities and the relevant authorities. And the permitting process is quite lengthy. So we expect, given that you mentioned 2023, maybe I would say that 2023 could be the year to get, hopefully, all the authorization and the permitting in place to start building the data center. Then you need to take into consideration at least 12, 18 months in order to build the assets. So in this case, again, 2023, it's the year of permitting and then the investments and the revenue contribution will be a very likely part of the next plan. Then I leave the floor to Adalberto for the other question.

So if we look at our total OpEx, let's focus on the last yearly figures that we have available, that are the ones of 2021, we had more or less EUR 75 million of other OpEx apart from electricity and personnel. With the same perimeter of services, I don't see here big increases linked to the CPI. What we see for the future, consistently also with our industrial plan projection, is an increase of other OpEx and personnel in relation to the new services on which we are working on. Of course, nothing incredible vis-à-vis our overall numbers, but I would say that, consistently also with our industrial plan for 2023, we may expect an increase that is linked by the new services that we expect to launch.

And Stefano, your third question about the consolidation and the clarification -- about the consolidation process. Yes, I spoke about discussions and not agreement, but discussions mainly, of course, among shareholders, also for the issue about governance but also with the support of our operating company, so with us and with El Towers, but mainly discussions among shareholders.

Just a quick follow-up, Giancarlo, if I may. Could you help us understand the main milestone on the permitting process where we are, when we expect the next steps, the most important one, at the beginning of '23 or even later, just to have a picture because '23, at the end of the day, is not so far. And second, regarding also the procurement for the project, for the investments, have you already moved also regarding this topic?

Well, on the authorization phase -- sorry, I need to go into details, but let me say that you basically now have to present projects to the municipality and a proposal of a sort of convention. It's like a concession agreement with the municipality. And then we'll start a process called preliminary service conference that will involve not only the municipality but also other authorities. It's difficult to say, but if everything goes smoothly, you can assume around 12, 18 months. That's why I was mentioning 2023 as potentially the year to get all the authorizations in place. And once you get the authorization -- and this is the second part of your question -- once you get the authorization, you will start, obviously, the procurement phase. Different when you look at the edge data center and the other project because in that case, we have already started all the procurement procedures. And as Adalberto and Aldo already mentioned during the call, we expect a decent amount of investments already in the second half 2022 and in 2023.

Okay. Just a quick clarification, so when do you expect that this project could be submitted to the local authorities for the upscale project, during 2022 or next year?

No, no, no, within 2022.

The next question is from Andrea Devita with Banca Akros.

Again, related to Fabio's couple of questions and looking at the CapEx side. Given your acceleration with the edge data center and being in a very preliminary construction phase for hyperscale and you have more or less completed the traditional business, the refarming, is it fair to assume that next year's CapEx will be significantly lower than this year? Or what's your view on that? Second, is this level of investment conditioned by energy prices? I suppose this new business are, let's say, not affected in terms of cost. They are, in general, energy pass-through, the new activities.

So in terms of CapEx spending, we are looking at all the development CapEx different from refarming, we expect to confirm in 2023 the overall spending of about EUR 80 million on a cumulative basis. So the line was bad, so I'm not sure I get your point. But if you were referring to the development CapEx, we expect to have still high level, for sure, lower than the one recorded in 2021 and expect in 2022. But the most important element is the different mix because the majority of the development CapEx will be mainly related to these initiatives. So I'm referring to the edge data center, to the CDN and, hopefully, the colocation data center. In terms of impact on our OpEx related to this new project on which we are working on, the most important impact in the short term for sure is in terms of CapEx. Then we'll have an impact in terms of a higher level of FTE because for sure, to start up this activity, we will have to work and we will need personnel to do so. So looking at 2023, for sure, we are not going to have any big impact in terms of OpEx, the main impact would be in terms of additional CapEx.

Sorry, my question was on rate. So is energy cost passed through?

Andrea, sorry, you mean generally speaking, in the business, I mean, in the data center, if the energy cost is a pass-through?

Yes. In general, the new activities, I suppose. And if you can confirm that both for edge and hyperscale. And I don't know whether for CPI, it is or not that energy is passed through, but just to be sure.

Yes, we can confirm.

[Operator Instructions] Mr. Benucci, there are no more questions registered at this time. I turn the conference back to you for closing remarks.

Okay. So thanks all for joining the call and talk to you soon. Bye-bye.

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