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 2022 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 of Rai Way. Please go ahead.

Thank you, operator, and good afternoon. Let me start thanking all of you for joining us today, and welcome to our 2022 full year results presentation. As usual, the CEO will start with the highlights and figures of the period. 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 Mr. Mancino. Please Aldo, go ahead.

Thanks, Giancarlo, and good afternoon to you all. 2022 represented a challenging year, but it growth considerably, satisfying results. Just when -- due to external factors, our second largest cost item increased by more than 70% with a headwind of more than EUR 8.5 million. Not only did we manage to remain on the development trajectory, but we recorded the highest growth in our operating margin since the IPO to date and achieved the industrial plan target in terms of net income one year in advance. All these without considering that the majority of the protection provided by our business model against the 2022 headwinds, namely the linked to inflation will have more effect during 2023 but going in order. From an economic perspective, the adjusted EBITDA growth of 5.7% or EUR [ 8 ] million and was driven by the benefit from inflection with an escalator in 2022 equal to 3.6%. Contribution from development activities in the traditional TV broadcasting business, for example, the full impact of refarming of Rai and the first impact of the new broadcasting capacity business at regional level, which enabled us to record a double-digit increase in our third-party revenues. A strong focus on OpEx that also as a result of some temporary mitigating actions, implemented when the price of energy had exploded to over EUR 500-megawatt per hour, enabled us to keep all costs other than electricity substantially stable. The recurring cash generation of EUR 93 million to EUR 94 million is further approaching the target of about $100 million set in 2020 for the next year for 2023 and allows us, while the preserving strong financial firepower on the one the hand, to invest in development initiatives over EUR 60 million spent in 2022 with an increasing portion directly to business with customers other than Rai. And on the other hand, to remunerate our shareholders with the proposed distribution of the entire profit generated equivalent to a dividend yield of about 5%. From an operating standpoint, the activities of upgrading Rai digital directors networks, television networks and for the rollout of the new regional networks, has been substantially completed, totally in line with the budgeted time frame and costs. The implementation of the new digital infrastructure data centers and services such as the content delivery network continues unbased. Since the last update in November, standard processes are ongoing for the construction of 3 additional edge data centers on top of the 5 edge data centers already under construction. And the application for planning permission for the construction of the hyperscale data center in Rome area has been officially started, and I will come back on this project shortly. Regarding the current business with third party in addition to the contribution of regional refining in the Tower Rental segment, we note a continued sustained demand from fixed wireless operators. In addition, the renewal of the contract with our most relevant mobile operator customer, the free work agreement with the new entrant and the start of the 5G rollout also in rural areas, remember that we are paid per space rented on the site and not per site put us in the right direction towards stabilizing the business with mobile operators. The good financial and operational use is not limited to 2022. Full recovery from the energy headwind experienced in 2022 through CPI link, energy price goes down and further contribution from development initiatives led us to expect a double-digit growth in the mid-teens in adjusted EBITDA in 2023. In the same 2023, we will also keep investing in the new infrastructure network with the digital and transition process, the evolution of telecommunication networks and the expected uptake of new low-latency services supporting and strengthening our optimism on an investment basis. Moving now on Slide #6. You will find a synthesis of a digital trust networks operating by Rai Way following the upgrade activities in recent years. And so 3 Rai multiplexes, the macro regional one, entirely new UHF bandwidth and with coverage above 99% of the population and the 2 national multiplexes with the coverage extended to over 95%. The 7 regional multiplexes on which we lease capacity to over 140 channels with occupancy close to 100%. Investment in recent years have been significant, around EUR 140 million for Rai and EUR 50 million for the regionals. But it's clear from the evolution of our numbers well remunerated -- fairly remunerated. In 2023, we foresee the last final pieces of investment which will complete the equipment inventories, and this will bring us to the total amount of investment initially estimated. Moving to Slide #7. As you know, in addition to its traditional business of digital terrestrial broadcasting, Rai Way has undertaken an expansion of its managed infrastructure focusing mainly on the creation of network or a network of data centers. These initiatives will drive growth beyond 2023 and projections will be detailed in the next industrial plan. But in addition to the usual update on the operational progress of the various projects, we would like to share with you today a flavor of the huge potential we see for these infrastructures. Existing supply is limited and highly concentrated in one area in the country, in the North area, while at the same time, the forecasted growth in demand supports our conviction of the risk rewarded on these initiatives, 5G, IoT, private networks, more private fixed networks and the resulting digitalization process that will involve business and customer and consumers are driving us into the so-called fourth phase of the Internet. This digitalization transition will be based on a wide range of use cases, some of which mentioned in this slide, such as industrial automation, content delivery network, high-quality streaming, intelligent -- artificial intelligence, predictive analytics that will require complementing the centralized cloud computing with decentralized and distributed computing, therefore, edge computing to match the requirements in terms of low latency and throughput. As a result, enterprise data process at the edge will only but increase dramatically, obviously, requiring an appropriate infrastructure component for storage and computing. While this is true globally, it's even more in a country like Italy with its orography and up till now limited data center availability when correlated to the GDP produced compared to that of other European countries. Moving to Slide #8. With our project, we are addressing this infrastructure precisely through a unique proposition based on a network of high-quality, Tier 3 also at the edge. Distributed and interconnected data centers that enables continued computing with centralized storage and low latency at the regional edge. So a carrier-neutral infrastructure, interconnected, independent, based on an architecture, possibly comprising an hyperscale data center and around 18 distributed regional data centers. So 2 projects, the hyperscale data center and the edge data center that make absolute sense even separately, but represent an either great proposition when combined under the same offering. Infrastructure is going to eventually leverage the launch of the new platform and services such as our edge video delivery network that will meet the needs of linear and high-definition streaming. So as mentioned earlier, we have recently started the tendering process for the construction of an additional 3 edges in Bologna, Rome, in the Rome area and Palermo that will be added to the first 5 already under construction and expected to complete between late 2023 and early 2024. Therefore, we are extending the footprint to Central and Southern Italy and increasing distributed capacity to 2.3 megawatt with an investment of further EUR 10 million to EUR 15 million to be added to the approximately $25 million devoted to the first 5 assets. These assets will be interconnected through over 5,000 kilometers of the upgraded Rai Way proprietary backbone in fiber optics which require around EUR 10 million investment in 2022 and with a similar amount planned for 2023. On the hyperscale in the Rome area, which in terms of size represents the largest and most scalable projects after finalizing the design and the draft agreement with the municipality, we have officially submitted the planning application, the so-called confidential disability aimed at involving the various relevant authorities and which, if no critical issues arise, could be concluded by the end of the year. In the following slide, Slide #9, we recall the typical cash profile for a greenfield or a brownfield infrastructure project. That is -- it's also valid for our edge network and data center hyperscale projects. There will be an initial construction phase that will require some start-up costs, but mainly heavy CapEx. For the hyperscale the rollout will be progressive in order to follow demand model by model or even data hold within the same module, and we start once authorization is obtained. For edge, construction has already started for the first 5, as I mentioned before, and we'll continue with the others. So once construction is completed, investments will turn to the maintenance level, not too different from towers. We are talking about while low single-digit CapEx revenue ratio, while the gradual increasing capacity utilization and sales will first bring the asset to breakeven by covering fixed costs and when fully utilized, will deliver a marginality that can be estimated within the 40% to 50% range. So cash profile that we'll still grant an expected project unlevered IRR about 10%. As you may easily guess from my tone, we are extremely excited by these projects in terms of potential, the interest they are generating amongst potential customers, capital deployment opportunity and value creation. Moving to the improvement of our ESG profile. Let me highlight that about 2/3 of the initiatives included in our sustainability plan that goes up to 2023, have been completed and that the vast majority of the quantitative targets have been already reached. Just to mention a few of the achievements in the last year 2022. On the environmental front, apart from being among the few companies to use 100% green energy, we have been able to reduce our energy consumption by 16% compared to 2020. On the governance side, we are pleased to have adopted the first sustainable supply chain policy that within the procurement rules, we must follow because of our public nature, we promote strict environmental, social and ethical standard for suppliers. On innovation and digitalization. While there is no need to stress once again our huge effort, I would remark the social benefit that such innovation bring to citizens, and local areas. For example, the extension of coverage of the national multiplexes or the new regional broadcasting networks. Moving now to Slide #11 and back to the financial figures for the full year 2022. Before leaving the floor to Adalberto for more details, I would just like to point out that all the economic indicators are moving upwards with the top line, up 6.7%, supported by contribution for development activities and CPI, relative stable EBITDA margin despite energy costs, net income up in double digits, an increase that will be also reflected in our dividend. Maintenance CapEx, well under control. And the notable amount of capital invested in development activities with a growing portion falling outside the refarming for Rai, mainly including regional refarming, new proprietary fiber optic backbone digital transformation enabling efficiencies and activities, mainly design and on data centers and CDN, content delivery network. And our usual sound recurring cash generation allows us to remain fully financial flexible when it comes to financing our growth initiatives. So please, at Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone also from my side. Let's now look closer to our profit and loss, starting from the top line on Slide 12, with reported core revenues coming out at EUR 245.4 million, vis-a-vis EUR 229.9 million in 2021. In detail, in 2022, the reported right component was 6% up compared with the restated figure for 2021. Benefiting from the full impact of the well-known refarming agreement step up, the positive CPI dynamic, and I already anticipated during our last 9 months conference call, EUR 2 million one-off contractual penalty collected from Rai related to the termination of the medium wave radio service, historically a lower margin activity. I remind you that the slight reduction in new services for Rai instead to the withdrawal from a local broadcasting service in the context of regional refarming, which, on the other hand, kept pushing third-parties revenues up 13.6% in 2022 to almost EUR 35 million, excluding nonrecurring items and online customers were up 12% with a material acceleration in the second half, enjoying mainly the rising contribution from the new regional MUXes capacity business and as a receivable portion, lower pressure from MNO and higher hospitality to other customers, mainly fixed wireless access operators and radio broadcaster. Just to give you a better idea of the impact of the new regional MUXes, we start to sell capacity to our new about 100 customers progressively during the previous year, starting from March. And in fact, in Q1, we didn't see any impact when third parties revenues. So you may recall, decrease 2% vis-a-vis the first quarter 2021. In the first half, we had a trend reversal with a plus 6% growth. Then in the first 9 months, we recorded a plus 9% of growth from our third parties revenues. And finally, we reached on a yearly basis, almost 14% of growth corresponding to an improvement of 27% on a quarterly basis in the last 3 months of 2022, not bad at all in terms of the impact on our financials. Moving now to the cost and to the Slide #13. OpEx, you can appreciate our effort on cost control to face the severe headwinds on electricity costs that push our operating cost base up by more than 20% at the end of 2022. As a matter of fact, the electricity bill increased by an impressive EUR 8.5 million over the year, although progressively shrinking in the last 2 months, with year-on-year growth in the fourth quarter of just EUR 1.4 million compared to the record increase of EUR 6 million of the previous quarter. These figures are net of the significant relief measures deployed by the government in the past months, mainly tax credits up to 45% in December and extended for the first quarter 2023 as well on top of other reduction confirmed on the ancillary component of the build. And benefit from the double-digit reduction in electricity consumption enabled by our brand new and more energy-efficient DTT network. Other cost items show a flat underlying trend, thanks to the actions on discretionary spending and same applies on the person -- the personnel cost that remained broadly stable, excluding noncore items and lower capitalization vis-a-vis 2021. All in all, total cost in 2022 reached EUR 95 million, more than 8%, up from EUR 88 million recorded in 2021 without the energy bill impact cost dropped by approximately 2%. Now moving to the profit and loss on Slide 14. As mentioned by Aldo, net income beat the EUR 73 million industrial plan target one year ahead of schedule with a remarkable double-digit increase, plus 12.7% vis-a-vis 2021. mainly reflecting the higher top line, the broadly stable profitability despite the sharp increase in energy bill and above all lower D&A following, as we commented in the last call, November, following the early termination of the useful life of the old DVB-T equipment that we replace. Turning now to our usual net debt bridge, Slide 15 from our ratio, net debt on EBITDA at 0.7x at the end of the year. You can see how our leverage is growing consistently with the industrial plan trend, mainly driven by development CapEx totaling EUR 62.8 million for the full year 2022. At the end of December 2022, Net debt reached EUR 105 million compared to EUR 88 million at the end of 2021. Cash generation proved to be strong throughout this year with EUR 93 million of recurring free cash flow to equity, better explained on the following slide, Slide 16. The cash flow made available for the development CapEx and for the distribution of 100% of our net income, I remember the number, EUR 73.7 million as a dividend, subject to the approval of our next shareholder meeting. The dividend proposal of EUR 27.45 per share implies a dividend yield of almost 5% at current market price and brings the cumulative distribution since the IPO at roughly EUR 0.5 billion, which confirms once again our strong focus on shareholder remuneration. That's all on my side. I now leave the floor back to Aldo for the closing remarks. Thank you.

Thanks, Adalberto. Moving now to the expectation for 2023. Considering that the fluctuations are still quite sharp. In early December figures were almost double those today of today, it's fair to note that the outlook we are providing is based on the most recent energy future prices for 2023, with an average level over the entire year, currently around EUR 150-megawatt per hour. So lower compared to 2022 and however, we let remind you, we still benefit in the first quarter from the around EUR 60 megabyte as a fixed price. Against with reference to the electricity bill, the guidance is also based only on the incentives already approved to date. 25% tax credit applied to Road Energy limited to the first quarter and confirmation of the 2022 incentives on the price components other than low energies or transportation, dispatch metrics, et cetera. Under these assumptions, we expect to deliver an adjusted EBITDA growth rate in the mid-teens area driven in addition to the aforementioned reduction in energy prices by CPI link equals to about 11%, rising contribution from regional refining, lower energy consumption, the start-up costs related to the new infrastructure being developed as I explained it before, and some negative compare results effect with 2022 and we benefited from nonrecurring items, such as the 2 million termination fee paid by Rai or some temporary cost actions to offset the energy peak. And on the investment side, we expect a relatively stable level for both maintenance and development CapEx. In particular, for the development components, the right third-party mix should be more skewed to our third party as a result of the rollout of the new infrastructure, mainly the edge data centers and the completion of the backbone upgrades, the fiber optic upgrade. So 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 from Mediobanca.

I would like to focus on the new infrastructure projects you have discussed with us. First question is, could you have been having understanding on how big could be investment for these projects? The second part of the question is if it's right to say -- correct to say that you already invested in these projects in 2022, something around EUR 20 million, if my calculation is correct. How much are you going to invest in 2023? So how much is captured by your guidance? And the third question, again, on these new projects is, have you, by any chance, already managed to discuss the potential clients about this edge could be in data center or hyperscale? And what's your flavor in terms of feedback from potential customers?

Hi, Fabio. So in terms of CapEx, we expect to have -- actually in 2022, we don't have a significant amount. We will appreciate the first impact in term of investment in 2023, mainly in relation to the edge data center initiatives and the CDN. Consider that, all in all, if you look the -- our guidance we gave for the industrial plan in 2020 for the period -- for the year 2020-2023, we should reach the same amount we disclosed, that was EUR 220 million. So taking into consideration the CapEx we had in -- this, of course, is related to all project we have in place, including the EUR 140 million of refarming. So you may understand that we should expect to have an impact in 2023 more significant. And then the big impact will come once we will have finalize all the permitting step with the relevant municipality as concerned the hyperscaler data center. So actually, here, if everything should go in a proper way, we should start to invest on this project in 2024.

Fabio, in terms of the discussion and talks, we have the possible future edge and CDN customers. And we can say that are extremely positive, and we are collecting believe me a great interest in the assets and in the services. And the prospects are those we be highlighted in the slide, about the customer for edge data centers by cloud operators, mobile operators for the virtualization of the 5G network, so regional data center support, as you know, the cloud ramp. All the providers need low latency and who want to provide low latency services. So the infra business is, of course, a B2B than our -- so our customer can provide B2C services or what they want or B2B services as the gain. And about the customers for hyperscale, considering the size that most of the capacity utilization will be secured by the OTT or cloud service providers. And the remaining part by -- remaining part by corporate, but mainly for the private cloud ecosystem.

Let me add on the CapEx side as concerned in 2022 in the year, you may see the impact of the fiber optic project that is something that is functional for both the new service but also the core business. And here, the amount is of approximately EUR 10 million of CapEx that you will see in 2022.

The next question is from Stefano Gamberini from Equita.

I have just recurring question regarding the update of possible consolidation in the sector. What is postponing any to -- or the possibility to go ahead with this project? And the second is considering that the timing is continuously postponing. Are you already scheduling when you can approve the new business plan considering the existing one expired this year. And so in order to have new targets, including all this investment in edge data center and at the scale.

But yes, just we -- regarding the first question about consolidation. Despite the steps forward in 2022 -- as you all know, under the PCM, the shareholder advisers has worked, NDA between shareholders signed. The consolidation project has not yet come into full swing. So a project that has known involves also actors that are other than Rai Way. I do not think there is a lack of will certainly in the towers. We remain convinced of the industrial rationale, the relevance of opportunity. Therefore, we will continue to support the possible creation of a large national broadcasting infrastructure player, pending the lining of all parties involved. And so at the same time, we will keep the push and commitment to all the rest of activities and diversification we were pursuing on which we are equally confident in terms of value creation and the best about the business plan.

On our business plan, we are planning to present a new industrial plan with the presentation of the 2023 year-end financials, so next year in March.

[Operator Instructions] The next question is from Pilar Vico from Credit Suisse.

I just have one on my side. It's regarding the debt refinancing that is upcoming this year. Is there any plan, any sort of structure -- or what are -- how are you managing this front?

Pilar, we are starting to talk with our main banks with our -- that the banks that are providing our financing and also with other banks. The maturity is October 2023. So before that date, for sure, we will have in place something new.

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

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

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