Rai Way S.p.A.

Good afternoon, this is the Coruscall Conference Operator. Welcome and thank you for joining the RightWay First Half 2020 Results Conference Call. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Giancarlo Benucci, Head of Corporate Development and IR of RightWay. Please go ahead, sir.

Thank you and good afternoon. Thank all of you for joining us today and welcome to our first of 2020 results presentation. As usual, Aldo will start driving you through the key facts and figures of the period, while Adalberto will present the financials more in depth. At the end, we will be at your disposal for the Q&A session. Let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thank you Giancarlo and good afternoon to everyone. Let's start with the key messages arising from the first six months of this exceptional 2020. As already pointed out, commenting upon the first quarter, luckily enough, our company's operating environment, although not fully immune, has been only softly affected by the COVID-19 emergency. In addition, Up to now, we have been able to react quickly and manage the impacts effectively and in line with the already anticipated expectations. Basically, with no material impacts on the broadcasting and hosting activity and contracts already in place and offsetting the more gradual deployment of certain development activities, due to the restrictions we had in March, May period, so during the lockdown. First, the more gradual supply, not only for revenues, but also for the OPEX associated to the development activities. And secondly, a temporary OPEX reduction resulting from the COVID or from the measures implemented to face the same emergency. such as the broad deployment of the agile work models. And lastly, the benefits coming from other more sustainable saving initiatives. As a result, in the first half 2020, performances came in line or in same respect even slightly ahead of our expectations. confirming the solidity and the resilience of our business. And showing, in particular, a growth at top-line level, supported by new services for RISE, despite the more gradual contribution for the multiple discovery extension project. And a 3.5% rise in of adjusted EBITDA with profitability improving by 170 basis points at 61% and the ramp up of development investments driven by refining that will fuel for our future growth. Again, on the refining front, to provide you with an update on the regulatory steps, it's worth noting that last July, on July 24th, the Italian Regulatory Authority, so the RGCOM, launched a 60-day consultation on the criteria governing the auction for the two additional national multiplexes split in four half-multiplex slots. as I remind you, will finalize the definition of the digital terrestrial network configuration after the refining process or post-refining. The consultation is expected to be completed by the end of August and then the final criteria will follow and after that the tender. Let me point out a few interesting points emerging from the very detailed proposal of the authority. So first, the tender will be based on a single offer with no possibility to increase it. Two out of the four lots will be reserved to potential new entrants, to network operators currently managing only one multiplex. And also on procedure, with minimum value of the offer set at around 4 million euros. On the remaining two lots, these are open also to the big network operators, to the national network operators, meaning Rai, of course, and Mediaset through Elettronica Industriale, with minimum value of the offer set at 7.9 million euros. The awarding will be based for 70% of the score on technical criteria. Technical criteria is continuity of the service, experience as network operator, capacity to ensure spectral efficiency, and again, quality of distributed contents and coverage. So technical criteria for 70% of the score. and for the remaining 30% on the economic offer. The authority proposed also a new cap, the new cap on the number of multiplex managed by a single operator that should be set at three. And you remember that the current number is five. And finally, The duration of the write or the frequency's write of use confirmed at 10 years and could be potentially so renewable. So overall, looking at these criteria, we remain confident with our base case of three multiplex managed for write. Okay, let me remind you that the decision to participate or not is up to Rai. Obviously, having more capacity will give benefits to Blocaster, to Rai, to Blocaster for supporting HD offering. But at the same time, the agreement we signed last December already regulate all the different scenarios is a very good reflection for right-way, also in case of two multiplex. As you know, the reframing process involves also the local TV. So on the local TV reframing site, the tenders to award the regional multiplexes have been started in some areas, particularly in the north of Italy, so in Lombardia, Monte, Val d'Aosta, and in Trentino Alto Adige, and are currently underway. In this perspective, we confirm the selective approach foreseen in our new industrial plan with the focus on those areas offering a compelling risk-reward profile. So moving now to capital allocation, as you may remember, the capital allocation and the shareholders remuneration strategy in our recent industrial plan included together with the usual 100% dividend payout, also a buyback program to be launched in 2020 for an amount of 20 million. through the use of our available reserves. Now, in line with the recent approval of the shareholders meeting and following the dividend payment, we are ready to start this program in the beginning of August. Then, Alberto will add some technical details later on. Lastly, the positive evolution of the business observed so far allows us to keep the guidance for 2020 adjusted EBITDA unchanged while lowering our expectations on maintenance capex. On this topic, I will come back in a few minutes. Moving now to slide number five, I will comment on the highlights of the first half starting with core revenues. that reached 111.1 million euros, so up 0.7% compared to 2019, mainly as a result of rising contribution for new services to RARI, offsetting the MNO-driven pressure on third parties. So, a performance on revenues that, let me remind you, has been achieved despite First, substantially zero CPI contribution, and secondly, some COVID-related slowdown in commercial uptake. On the opposite, adjusted EBITDA at 67.9 million euros came out significantly higher than last year, benefiting from the slightly higher revenues and mainly, as commented before, from the low level of operating costs, boosting profitability above 61%. At the bottom line, one-off expenses and higher DNA impacted the 32.8 million euros net income, however, slightly up year on year. On the financial side, CAPEX in the first half totaled 19 million euros, an amount materially higher than last year. Its development component reaching 16 million compared to the 4.1 million of 2019 and mainly driven despite the well-known restrictions by the multiplexes coverage extension, as you know, part of our reforming project. Maintenance capex remains steady at low levels, reflecting once again our traditional seasonality of the investment activity. Moving on, the recorded net debt post IFRS at June 30th amounts to 32.5 million euros but this figure already includes as debt the 63.3 million impact of the dividend paid on July 29th, so after the end of the first half, but approved by the shareholders meeting in June. So to conclude, the cash conversion remained strong at 95.2% exceeding the first half 2019 figure, And I think now, Alberto, I will now hand over to you to provide with more details on the financial performance. So please, Alberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. We are at slide 6. As underlined by Aldo, our fiscal financial, generally speaking, remains solid despite the tough macroeconomic scenario around us. Starting from the top line, as you may see, core revenues were up by 0.7%, reaching 111.1 million euro. With dry components growing 1.4%, despite the flat 2019 CPI dynamic, the figures were 0.1%, so close to zero, leaving the fees consideration steady at 90.2 million euros. But thanks to new services that were up by 50%, excluding Unatantum components, backed, as in the first quarter, by the digital terrestrial television MOOCs and DAB coverage extensions. And let me also highlight that even without considering the reforming project, the other new services are growing. Then, again on the new services, generally on the overall new services, I would like to stress the remarkable progression we have been reporting since 2016, with an average annual growth of almost 50%, excluding one-off and una tantum component, bringing the initial 1 million to the current 4.7 million euro on a six-month basis. On the other hand, revenues from third parties dropped by 3.6% at 16.2 million euro, showing an evolution in line with the trends anticipated in our industrial plan, with once again opposite dynamics from MNOs and non-MNOs, with the latter further growing. And expected headwinds on the MNOs resulting in a customer mix progressively more balanced. Moving on to cost, so to slide 7, good news here, with overall cost in the first quarter standing at 43.2 million euro, down 3.7% compared to 44.9 million euro in the first half of 2019. with personnel cost at 23.4 million euro, apparently growing but actually down by 0.6% compared with one year ago, if you exclude non-core items and capitalization impact, benefiting from the impact of COVID-19 on variable cost component. Other operating costs fell by 9.2%, below 20 million euro, Actually, excluding the adjustments made in 2019, the underlying figures become minus 7% as a result of a softer than expected ramp-up in the OPEX arising from the deployment of some development activities made more gradual by COVID-19 restriction. A temporary OPEX reduction connected again to COVID-19 postponement of certain activities and the consequent implementation of agile work models saving in general expenses. Then we also had some savings on utilities cost coming from the renewal of our energy contact at better conditions. All in all profitability reached 61.1% from the previous 59.4%. As you can see in the profit loss in the following slide, slide eight. Well, I would also like the one million euro one-off cost incurred in the first half in relation to a new early retirement plan that together with higher DNA also following the rising investment activity and the lack of benefits coming from the release of provision which on the contrary we recorded in 2019 probably you may recall for approximately 1.5 million euro of one-off impact all these elements brings the net income to 32.8 million euro slightly up vis-a-vis the 32.6 recorded in the same period of the previous year also reflecting the tax relief connected to coordinating government measures which resulted in a softer 27.2 tax rate thanks to a one-off benefit. Moving now to the cash generation, so slide nine, you can figure out how the 9.5 million euro net debt recorded at the end of December 2019 rose to 32.5 million euro at the end of June, including as also anticipated by ALDO, the debt for the dividend payment of 63.3 million euro on top of the 38 million euro IFRS 16 related debt. Looking at the cash flow dynamic, I will spot that materially higher CAPEX absorption of 19 million euro, out of which 16 million are connected to the development activities and in particular to the MUCSES coverage extension. and 8.3 million euro positive contribution from the change in networking capital resulting from the mixed effects of tax outlay just happened in July and the CAPEX cycle dynamics. If we strip out the FRS16 effect on the net debt figure, we would obtain a net cash position of about 5.5 million euro at the end of the first half, after the dividend payment. Balance sheet, lastly, if we go to slide 10, at June 2020 the company recorded net fixed asset of for approximately 229 million euro more or less the same amount we recorded at the end of last year including 30.8 million euro of rights of use for leasing under IFRS 16 while net invested capital totaled 186.2 million euro with equity book value at 153.7 million euro that's all on the financial Let me now conclude at slide 11 by providing you with some more color on the buyback program we are about to launch. First of all, I remind you that this buyback is consistent with the capital allocation goals set out by our 2020-23 industrial plan and of course compliant with authorization granted by the shareholders meeting held at the end of June. According to the AGM resolution, Starting from the next 5th of August the company will purchase its own ordinary shares on the regulated market managed by Borsi Italiana up to a maximum amount of 20 million euro to be drawn from the company's reserves available for distribution. The shareholder authorization has a maximum duration of 18 months from the day of the AGM's resolution, which means that the program must be finalized by December 2021. In addition, the program is subject to the terms and conditions specified by the legislative regulatory requirements in terms of price and volumes, as recalled by the press release, with updates on the progress to be disclosed on a monthly basis. That's really all on my side. I now leave the floor back to Aldo for the guidance. Thank you.

Thank you, Alberto, thank you. As far as the guidance for 2020 is concerned, as anticipated before, on the back of the operating evidence collected so far and on the information available today, We continue to feel comfortable with the profitability targets already confirmed in May, so the further organic growth of adjusted EBITDA with broadcasting and hosting services already in place, well protected, and the effect on top line of the more back-end loaded profile with the year of some development activities, for example, installation of the multiple extrovert extension offset by more gradual associated OPEX and other cost reductions as for the investment activity while concerning of course the higher level of development CAPEX consistently with the aim to speed up installations in the second half on the other hand We now expect maintenance capex on core revenues ratio below the 2019 figure, with the revision being the result of the rescheduling of certain activities and the positive impact of some efficiency actions. The long-term target for the maintenance capex level included in our recent industrial plan remains, of course, valid and unchanged. Needless to say, should the actual evolution, of course, of the emergency differ from what is foreseeable today, we will revise the outlook accordingly. So that's all on our side, and your questions are now welcome. Thank you.

Excuse me, this is the Coruscall conference operator. We will now begin the question and answer session. The first question is from Fabio Pavan with Mediobanca. Please go ahead, sir.

Yes. Hello, everybody, and thank you for taking my question. Actually, a very quick one. I think the profitability of the first half slightly exceeded expectations and so I was wondering if in your view we should expect similar trend also in the second half of the year or maybe when considering lockdown measures where we should expect slightly lower profitability for the second half. Thank you so much.

Hi, Faso. In terms of profitability, I would say looking at the adjusted EBITDA margin, the second quarter is strongly impacted by the reduction of OPEX that we had, and if you look at the Overall, other operating costs, excluding the personnel costs, we are at 9.2, 9.3 million euros on a quarterly basis. And this is really, really low, the lowest figure since the IPO, I believe. So in the future, for sure, we will continue to see some impact from the COVID-19, but our expectation is to have a cost trend more consistent with the past.

Okay, thank you.

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Once again, if you wish to ask a question, Please press star followed by one. The next question is from Yuri Zanieri with Kempen.

Please go ahead.

Hi, good afternoon, everyone, and thanks for taking my question. Only one about the CAPEX. I was wondering if you can give us a little bit more color Because I'm currently looking at the CapEx accomplished here today, and I assume that with the revision of the maintenance, a bit downwards, and consensus still expecting, we'll say, roughly 50 million of development CapEx for the whole year, I would expect to see a bit of ramp up in the second half. How comfortable are you in achieving such ambitious target? and callers will just be appreciated. Thanks.

It's correct. We will see an important trend in terms of accrual of capex in the last part of the year. Actually, typically, even if the total absolute number on a yearly basis was lower, typically, in the last quarter, we always see that the majority of our of our investments and even more this year, considering the COVID-19 that had some impact on the Q2 figures, we will have a more important impact in terms of CAPEX, but these are CAPEX that are mainly related to the reforming process and we are working in these days, even if you look at the first half figures compared to last year, notwithstanding the COVID impact, you will see a significant increase, and the same will happen in the following quarters.

Perfect, very clear. Just a follow-up. If we will assume to go through a second lockdown in, say, in the next few months, will you still be comfortable in achieving those targets?

I prefer not to assume this scenario, but even if some bad impact will happen in the second part of the year, I'm sure that Thanks to what we have seen and what we learned in the second quarter, we will try to do our best to keep and maintain the guidance.

I also hope not. Thanks very much for the caller. Thanks again. You're welcome.

The next question is from Stefano Gamberini with Equita. Please go ahead.

Good afternoon, everybody. Three questions, if I may. First of all, regarding the trend of new services and third-party revenues. New services, you reach this record in first half. Could we expect the same trend in the second half of the year? And so in order to understand the forthcoming growth for these new services also in 21, if you can give us some color also on this. On the other side, what is the trend of MNOs among the third-party revenues in the second part of the year that you expect a further deceleration of MNOs demand for your hospitality services or not? The second, regarding the auction on the frequencies, do you see the risk that some of these frequencies could be, MOOCs could be not asked by the main players, what is your feeling about this standard? What I mean is, could we see the risk that on one side, right, probably we'd go ahead with it off, but some other players could not in order to, considering that the demand and also the situation for free-to-air players in this moment is very weak. Advertising was down sharply during the first half of the year and so the risk in this case could be, I don't know, postpone some investments or just if you can help us to have a scenario on the underlying trend of demand of channels. And the third is my typical question regarding possible integration with eight hours. Something has changed recently. There are some rumors on the press that they could dispose their telecom towers. And on the other side, if you have also some callers from the political arena, something changed on this possible merger. Many thanks.

Ciao, Adalberto speaking. So, let me start from following your order. Your first question was on the new services from LINE, if I'm not wrong. And yes, you should expect a continuing positive trend in the second half and also in 2021, just because we have to consider that the project that is impacting on our top line as of today is the most important one is the extension of the MOOCs coverage. So this project implied installation of approximately 600 equipments in 600 sites. And these activities started last year and is going to finish by the first month of next year. So for sure, to the extent we will see a continuing rollout, a continuing increasing number of equipment installed, this will give a positive impact on our new service line. Then, your question on the MNOs, let me take it. The trend of third parties does not come as a surprise, of course, but it's in line with the assumption of our industrial plan. The slightly declining trend is the result of several drivers, in particular the Edwin related to the MNOs, something that we expect to continue for a while, as anticipated in our plan. Then, as you may remember, on the MNOs, you will see a mix of more retention-oriented pricings that will help to retain and even increase in the medium-term volumes and new services. But the phasing of the two levels is different, with pricing revision first, retention, and then upselling of new services. That's why we said that revenues will bottom out during the planned period. We are now working in particular on the design and implementation of new services as we would prefer to present the overall solution in order to offer a combination of new pricing and new services.

Giancarlo? On the MOOCs, on the refarming, on the tender, Let me say that it's difficult to predict what will be the demand for lots. Let me say that the soft advertising trend that broadcasters are experiencing today It's not positive, but it's also true on the other side that the upgrade to HD or Ultra HD should drive capacity demand from existing broadcasters. In terms, you asked about our investments, our capex, but let me say that obviously the activities on refarming for us is mainly focused on Rai. And let me say with the visibility provided by this consultation, we remain confident on the assumptions of the industrial plan. And so on the fact that we will manage three multiplex for our main customer. And I leave the floor to Aldo.

About the, Stephen, about your question on the consolidation. So no update for the time being. But what we highlight in our recent industrial plan remains, of course, absolutely valid. What you're saying, your question, probably you were referring to the potential disposal to the telecom towers by a tower. It seems to be a good way for the monetization of a nice asset in a segment, the mobile one. whose structure has rapidly changed. So, said that, when referring to a consolidation involving our company, the focus, the rationale and the benefits are always on the broadcasting assets and portfolio. So, maybe saying that the disposal of TowerTel could be, let me say, A trigger, it's a bit too much, but at least it's not negative.

Many thanks. Just a quick follow-up, if I may, regarding the topic on new services. You said that now there is the rollout of this service. new appliances on 600 sites that will finish at the beginning of 21. So could we expect a slowdown of new services when you will complete the rollout of these 600 appliances?

No, in our business plan we had, if I'm not wrong, 220 million euro of development CAPEX and 140 was referred to the reforming process, so we will have some growth also coming from the other projects that are, to be clear, the residual amount of development CAPEX are also referred to third parties, but something more than half of this residual amount is still related to rice so we will continue to see some positive impact from the new services also different from the refarming and this is thanks to our business model and thanks to the of the active component of the business together with the passive infrastructure.

Many thanks. Many thanks to everybody. You're welcome.

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Okay. That's all from our side as well. So thank you for joining and speak soon. Bye-bye. Thank you.