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 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Andrea Moretti, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon to everybody, and welcome to our first half 2024 results presentation. Today's speakers will be our CEO, Roberto Cecatto; our CFO, Adalberto Pellegrino; and Giancarlo Benucci, our Chief Corporate Development Officer. The presentation will cover results as of the 30th of June 2024 as well as an update about the projects included in the Industrial Plan that we presented last March. Let me therefore hand the call over to Mr. Cecatto. Please go ahead, sir.

Thank you, Andrea, and good afternoon to everyone. As usual, I will briefly comment on the main highlights of the period, while immediately after, Adalberto will run you through the details of our financial performance. Economic and financial results for the first half of the year confirm the trajectory and growth trends observed in the first quarter. Revenues grew once again mainly driven by CPI full contribution from broadcast services to regional broadcaster and positive dynamics in tower hosting volumes. In particular, the latter segment benefited from the contribution of customer categories such as fixed and wireless access and radio broadcast, also thanks to the extension of private DAB operators coverage. As for the OpEx trend, apart from the benefit already observed in the first quarter resulting from higher personnel capitalization, the rationalization efforts on several items more than offset the rising startup cost for diversification initiatives and the absence of the electricity incentives that have characterized the first half of 2023. Overall, therefore, adjusted EBITDA was up 3% in the half year with an absolute growth recorded in the second quarter that on an underlying basis has been never better than in the first one. Capital expenditures were basically in line with last year, consistent with the guidance, while looking at the development component alone, more than 50% was related to diversification projects. I am referring in particular to the completion of the first 5 edge data center. The net financial position stood at EUR 146 million, mainly reflecting recurring cash generation of EUR 64 million, up 3.5% versus 2023 and EUR 86.5 million (sic) [ EUR 86.4 million ] in dividend payments. Numbers aside, during the presentation of the business plan, we had emphasized the focus we would place on execution. I repeat, the place -- the focus on execution. And also, we have indicated the priorities. We are trying to keep our promises, and the first 7 months have proven particularly intense and fruitful. Starting from one of the key enablers, we have profitably revamped Rai Way's organizational structure on which Slide 5, if you see, focuses. We create 3 divisions consistently with the markets in which the company operates, media distribution and digital infrastructure, with an increasing focus on the latter items. The first division, broadcasting and media includes broadcasting networks, TV and radio, but also CDN and transmission network. The second division called infrastructure includes power and real estate. The third division will manage our data center network. In addition, if you see, we have established what we have named operational structure, which include field force regional level as well as control -- central control and security -- let me say, cybersecurity specialty centers. And we provide the cross-functional support to all the 3 divisions. Thus, we have moved from a functional model that was ideal for a [ mono ] business to a divisional model, which we believe is more focused and effective to support an increasing opening to new markets and new customers, and so to create value. Indeed, the new model identifies specific responsibilities and improved commitment to reach the planned targets, assigning all the relevant levels to the divisional managers. Finally, the reorganization allow internal people to grow and to free up resources to be redeployed in support of diversification. But please, going back to an overview on Slide 4. Let's now turn to the several updates related to the development initiatives. For the strengthening of the traditional business, the main drivers envisaged in the plan are those related to the further [ relaxation ] of the managed network, particularly radio, and the better utilization of existing assets like backbone and lens and the improvement, operational efficiency also through the optimization of the real estate footprint. On the first point, we are already working on a project for the first extension of the DAB network in order to improve coverage of highways and major province. We are now developing the project and deepening the technical configuration to be shared with Rai, but the initiative at the sites are in line with the assumption of our plan. On the real estate front, we are already actively working on the optimization of the real estate footprint in all the territory, starting also with the selection of the new headquarters hopefully to be finalized soon. On the diversification initiatives side, the successful delivery of the first 5 edge data centers in Milan, Turin Venice, Genoa, Florence took place just in the last few days. Let's have an in-depth look, thanks to Slide 6. The inauguration of the 5 facilities met the time line indicated in the plan, making the first 1.6 megawatt of IT load ready for commercialization. As you can also appreciate from the pictures, they are extremely modern data center interconnected through the Rai Way proprietary backbone and are so smaller in size. They were a bit expecting high standard of security and redundancy meeting the Tier 3 standard. From the commercial point of view, as you may have seen, we have announced the collaboration with Oracle. Precisely because of the proximity, security and quality of our assets, Oracle has selected Rai Way as a data center provider to propose to its customers in order to start their edge cloud solution and artificial intelligence services. At the same time, Rai Way will be able to reach each co-location offering by making Oracle AI and cloud solution available to customers. So let me say, it's not a sales contract, but it's a collaboration and what we might call a co-marketing agreement. This demonstrates the appeal of our assets ever for relevant players in the world of cloud services. In addition, this agreement is fully in line with our business strategy, which, as you may recall, included indirect channels such as private cloud providers or system integrators to address the prospects as a corporation and public administration. From the implementation point of view, in the coming months, we will work on the extension of the network with the design of new edge of data center covering Central Southern Italy. And talking again about the data center, let's not forget the hyperscale project. In relation with the permitting front, the latest contacts with the relevant authorities make us optimist on the target of getting the final green light within the time frame assumed in the plan, meaning end of this year. We change subject, CDN. On the CDN-related activities, we are also fully on track at the moment with the functional trials that have started in the recent weeks and we involved all the major content providers in Italy. The performance test will follow starting from September. In terms of expectation for the full year in light of the results and the progress just described, we can only confirm the indication of growth of our adjusted EBITDA compared to 2023 as I will explain more in detail at the end of the presentation. Going now back to the first semester performance. On Slide 7, you will find a summary of the main figures. I will skip it as I've already briefly commented on them, and I will leave the floor to Adalberto, the CFO, for a closer look to results. Please, Adalberto, go ahead.

Thank you, Roberto. As anticipated, the main results are fully in line with our expectation. On Slide 8, we discuss revenues. As usual we are up 1.2%, reaching EUR 137.6 million in the first 6 months of the year with both business lines, media distribution and digital infrastructure, on a positive trend. Media distribution segment revenues increased 1.2%, more than CPI, whose contribution was 0.7% thanks to the full effect of the new regional DTT networks for our regional broadcaster customers as well as some positive impact from new services drive. Digital infrastructure currently means tower hosting, waiting for upcoming contribution from data center where revenue, I'm referring to tower hosting business, generated a grow by 1.1%, which turns into a plus 3% if we scrap nonordinary effects. The same higher performance can be seen in the old revenue breakdown that we keep on providing. Third-parties revenues registered plus 2.9%. In both cases, the business has been pushed forward by fixed wireless access and radio equipment hosting. Moving to OpEx on Slide 9. We have a decrease of cost of 2.7%. And looking closer, our personnel is still impacted by the high level of capitalization that we first recorded in Q1, as we commented. This effect has been reabsorbed only in a limited way in the second quarter, so it still weighs on the first half figures. Net of it, personnel costs are stable year-on-year. Other operating costs are also down, minus 2.3%, benefiting from rationalization across different lines, such as fiber rental, thanks to the switch to our new proprietary backbone and intercompany service internalization. And then we have some other benefits from other costs such as the travel and lodging that reduced semester-on-semester. On the other side, energy costs are up vis-a-vis last year first semester figures. As we can see in the details table we put on the right side -- you may see the chart on the right side of the slide, the lower raw energy price, EUR 106 per megawatt in 2024 compared to EUR 142 last year. And this lower price is more than compensated by the lack of incentive and by an increase in other tariff components. This translates into an average total energy price of EUR 201 per megawatt vis-a-vis EUR 188 last year. In light of a slight increase in consumption, Rai Way's energy costs are up by 6.9% or EUR 0.4 million in the first 6 months of the year. Let's now move on the following slide, Slide 10, to comment the other lines of the profit and loss below the adjusted EBITDA that, as we have already seen, reached EUR 93.5 million with a 68% margin, 120 basis points above the first half 2023 level. A very notable increase, which reflects on reported EBITDA, too, because we don't have significant one-off components that we recorded last year in relation to HR expenses for EUR 3.6 million. D&A and financial charge are increasing, respectively, because of our strong investment activity -- development investment activity and the interest rate effects. Also considering our stable tax rate, we recorded a net income level up by 5.2% from EUR 44.9 million to EUR 47.1 million (sic) [ EUR 47.2 million ]. As you know, that's a relevant metric for next year dividend. Moving to Slide 11. Let's have a look to the net financial position, including EUR 32.7 million of IFRS leasing. Net debt closed at EUR 146 million, remaining below 1x the adjusted EBITDA generated in the last 12 months. Compared to the end of 2023, net debt only increased by EUR 41.1 million despite EUR 86 million of dividend payment and EUR 12 million of development CapEx with cash generation, therefore, remaining very healthy. Free cash flow to equity stands at a remarkable EUR 64 million over the 6 months. As per the outlook of the second half of the year, let me turn the floor back to our CEO.

Thanks, Adalberto. Let me now conclude with the expectation for the full year recapped on Slide 12. As anticipated in the opening remarks, considering the results of the first half just presented, we are increasingly comfortable with the growth targets for the 2024. And specifically, CPI fully intact of regional refarming and the first contribution from DAB network station, driving the growth of adjusted EBITDA compared to the 2023. And though this growth is limited by the lack of energy tax credits and the new infrastructure cost, but broadly compensated by the reduction of other OpEx. Compared to the first semester, in the second half, the year-on-year growth will be somewhat mitigated by the realignment of personnel capitalization to the last year level, higher data energy type and rising start-up cost of the diversification initiatives. But it's also true that compared to the very initial expectation, we are seeing further support from some nonrecurring factors, such as better level of capitalized personnel or other revenues and the better cost management performance despite energy tariffs higher than old power futures. On the CapEx side, the maintenance CapEx are now expected substantially in line with the previous year with the reduction compared previous guidance due to slippage of some activities to next year, while the development components is still expected in line with the 2023 level with the larger majority related to the diversification and other third-party or internal project. That's all on our side, and we thank you for your attention and can now open the line for the Q&A.

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

Thank you for taking my question, which is related to the edge data center. You said they are now ready for commercialization. When do you expect to start? Eventually do you already have managed to have some conversation with potential customers? So if there is some color you can share with us?

Let me say that the edge data center has just become operational. I think this is an expectation that we confirm with the release just in time as planned. And our choice was to start the actual commercialization only after reaching the availability of the assets because we would like to be very sure that we have the asset properly functioning, certified and so on, mainly to provide certainty on timing. We already have some outstanding commercial offers that we have prepared, also through the agreement with Oracle, but not only. Actually, the first small contract has been signed just yesterday, but let's say, the commercialization activity starts now and the goal is also to finalize under indirect partnership in the next month to create a sort of ecosystems in particular to address small and medium customers. So we have started.

The next question is from Giorgio Tavolini of Intermonte.

Before doing the question, I mean, I hope your field operational staff are safe and well after yesterday's fire in Central Rome, which happened very close to your headquarter. Regarding the questions, on this year EBITDA guidance, you mentioned nonrecurring items. So I was wondering if you are referring to start-up cost reversal of personnel capitalization, the absence of energy incentives and so on? Regarding your business plan assumption on CPI for 2025, 2026, you assumed 1.5% inflation rate while the current CPI is steadily running below 1%, so around 0.6%. I understand you apply the final figure at the end of November, but I wonder if we should consider revising the CPI inflation assumption. The third question is on the first half breakdown within the media distribution revenues because I didn't see the contribution from regional broadcasting and CDN on top of the RAI contribution. So I was wondering if you can provide the granularity on the breakdown, please?

Thanks. For the first question, let me answer to the fire question. Yes, yesterday was quite a complex day because we were very near to the fire that was in the Monte Mario area. Then we say that we have a plan -- disaster plan, so we moved all the operative and offices in backup situation. We were able to grant the continuity on the service and also consider that yesterday there were also some council meeting for the committees, and we were able to move and manage absolutely smoothly all the events without any kind of problems. So we are very happy to manage the situation like yesterday we were able to do. For the other question, I leave the floor to Adalberto, to the CFO.

So as concern your first question on EBITDA guidance, you basically mentioned the main recurring impact on top on the ones you mentioned, we also will have -- we expect to have an additional impact from some penalties that will give and help to our growth. As concern the inflation rate, actually, yesterday, we -- the Istat just released the latest figures. And in order to understand which is the impact on our 2025 figures in term of potential indexation impact, if we see the increase of the Italian CPI vis-a-vis November, that is our key date for the indexation, we have an increase of 1.5%. So typically, figures are commented on a yearly basis. So if we look not at the yearly figures, but if we look at the increase of the Italian CPI vis-a-vis November, we are in line with our business plan guidance. Last question on media distribution revenues. Actually, the difference between media distribution revenues, and if you look at the chart -- the second chart that we include in Slide 8, you made the difference with the RAI new services and the RAI fixed consideration and recurring services, you may obtain the amount of the revenues related to broadcasting -- regional broadcasting customers that amount EUR 5.8 million in the first 6 months of the year with an increase of EUR 0.5 million vis-a-vis the last semester.

The next question is from Stefano Gamberini of Equita.

I have 3 of them. The first, regarding the hyperscale data center. If I understood correctly, you expect the final authorization by year-end. That's good news. So could you elaborate a little bit more about what is the procedures for the procurement when -- if you already signed the contract or you're close to sign the contract for the construction of the hyperscale data center and when we could expect that this should be up and running? Clearly, we know what are the targets in the business plan, but I would like to have more color of what is the situation about, not only the authorization, but all the other steps that you need to have it up and running. The second, if you can help us a little bit more about the strategy on the edge data center because, if I understood correctly, you want to move to small entrepreneurs. So it means that you need a commercial network or am I wrong about it? And I do not understand why you still need the final technical approval before going ahead with the commercial strategy. Probably it should start immediately, we can say, the full operation the day after. And also what are your, we can say, strategy about the growth in the South? So what is the visibility that you have in the existing 5 edge data center in order to going ahead with the construction of the new centers in the South. The third, if you can help us to understand the situation with towers. I know that clearly, it is not in your hands, but just to have an idea if we could expect that in September there should be some novelties starting from the green light -- sorry, not the green light, but on the appointment of the new Board of Director in Rai. What are, in your view, the following steps in order to go ahead as soon as possible with the consolidation in the tower business?

[Foreign Language] Stefano, I will take your questions. On the first one, the hyperscale, you are correct. We are optimistic to get the green light, let me say, in line with the time frame defined in the Industrial Plan. This is by year-end. I mean, you need to consider that this is a project that, when fully deployed, will amount hundreds of million euros of investments. And so also the design of a project like this, it's quite expensive. That's why we are basically waiting for the final approval before moving to the executive design, executive and final project while obviously in order to get the green light we have already presented the, what is called, preliminary design. So the preliminary design is already there and we are waiting for the final green light in order to get -- to move to the, what is called, the executive planning and executive project, then you can assume a few months, let's say, 6 months in order to have the project and the, let me say, the EPC contractor. And then as we have already said in the past, you can assume 12, 18 months in order to have the asset operational -- built and operational. When -- going to your second question on the edge data center, let's try to be very clear on this point in order to avoid misunderstanding. We are not waiting for the commercialization of the assets. We have waited till now because, as Roberto said, we just wanted to be -- to have full visibility on the availability of the asset, also because being, let me say, a newcomer in the sector, we wanted to preserve a good name and not to offer something that was not there. Now the assets are operational. And -- yes. Of course, also the prospects have started to visit our data centers. So the commercial activity now is up and running. Then they need to rely also on indirect channels. I mean, it's very simple because as an infrastructure company, we have, let me say, a sales force, a sales department that is, let me say, relatively limited. We have not commercial sales force distributed on data widely. And when you want to address the small and medium enterprises, you also need to rely on indirect channels like system integrators or private cloud operators. So it's something very, very common in the sector. While coming to your last question on the towers, I mean, I'm pretty sure that you monitor the situation very well. The appointment of the new Rai Board is underway and I think it's essential to carry on any discussions. So let's see.

Sorry, I may add because there was asked a question about the expansion on the Southern Italy. Consider that the Southern Italy is a market that is growing and need, more than the northern part of Italy, the presence of data center of high-quality, certified, especially in some regions like Puglia, Campania and Sicily. Consider that we are already defined, for instance, the purchasing of a field in the center of the industrial area of Bari, and we are looking for a similar situation in a very strategic position both in Sicily and in Campania. So we will trust on this move because in the panorama and the national panorama, we are moving in an area that need this kind of infrastructure.

Just a quick follow-up about this strategy on the edge data center. I understand clearly that you don't have your own sales force, but I would be interested to understand a little bit more how you are moving. What is the level of utilization that you expect by the end of the existing edge data center end at the end of '25. And the second, regarding this expansion in the South, the same. How you are moving also in this case on the commercial strategy? And if you can help us to, I don't know, have -- what are your main peers that we can probably follow to understand a little bit better the trend of this market?

The impact in 2025 is expected to be limited, we are talking really about few hundred thousand euros. As concerned, the fill factor, this is something that increase progressively. We do not expect to reach significant occupancy in 2025. We expect to reach a proper fill factor in 3, 4 years, and reaching a run rate level an average occupancy of between 80% and 90% depending from the data center. This is our plan and this is consistent with the figures that we disclosed in our Industrial Plan.

On the -- I don't know if I got your question correctly, it was the main peers operating in the southern part of Italy on the data centers. Let me say that there are a couple of players, of operators having a national presence, including South of Italy. But let me say, to be honest, that the quality of the data centers that we are deploying is, by far, higher compared to the quality of the assets of the already existing assets that are mainly all the telecommunication POPS that are conducted of a residual space for colocation. So a couple of players, but really different asset quality.

Gentlemen, there are no more questions registered at this time.

Thank you, operator. It's fine. And thank you for -- and thank you, all of you, for your participation and consideration despite a very busy week on the earnings side. We remain available for any follow-up questions, and we wish you a good evening. Goodbye.