Rai Way S.p.A.

Good afternoon. This is the Coruscall Conference Operator. Welcome and thank you for joining the RightWay 9-month 2020 Results Analyst Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Giancarlo Benucci, head of corporate development. Please go ahead, sir.

Thank you. Good afternoon to all of you, and welcome to our 9-month 2020 results presentation. As usual, Aldo will start with the key facts and figures of the period. Adalberto will then illustrate all the financial details. And at the end of the call, we would welcome your questions in the usual Q&A session. Let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thank you, Giancarlo, and good afternoon to everyone. The third quarter performance has been satisfactory and in line with our expectations, with an acceleration of the development activities in particular, but not only related to the reforming process. The period was also important for all the work that allowed us to reap the benefits in October with the new financing for the awarding in the context of the reforming of regional frequencies in some of the few areas we consider, in the north of Italy, we consider interesting. Obviously, the hope now is that the worsening of the pandemic trend will not derail the economy from the recovery path, although, as you will see later, we continue to see an impact on our business as extremely limited. Let's now go a bit more in detail through the main highlights of the period and the recent events impact our sector and therefore our company and summarize on slide number four. The nine-month results confirmed the resiliency of the business and the trends already anticipated. Very limited impact from the pandemic emergency, both from an operating and a financial perspective, with the marginally smoother profile of the new initiatives offset by a level of expenses favorably affected by the temporary safety measures and more sustainable cost savings. Looking more specifically at the third quarter performance, even when excluding some one-off items, the underlying growth at adjusted EBITDA level remains satisfactory at around 4%, supported by slightly accelerating top dynamic and an OPEX level that, although still favorably impacted by COVID-related measures, is moving back to more usual and recurring levels. The acceleration in the deployment of the development activities is also reflected in a level of related investment that is increasing quarter after quarter. Looking now at the main initiatives in the broadcasting segment, namely the reforming, the reforming process, while the operational activity for Rai progressing with the T2 ready extension in the thematic multiplexes, almost doubling the number of sites and gradually increasing populates coverage, the last few weeks have brought some interesting updates. At the national system level, where the last missing element is awarding of the four hubs multiplexes, Algicom has defined the criteria that will regulate the tender, with the final rules that largely reflect the document placed for consultation during the summer. Now, it's the Ministry of Economic Development's turn to define the timing of the auction. Just to remind you the main elements emerging from the criteria. The tender will be based on a single offer for each of the four lots with no possibility to increase it. The minimum value of the offer is set at 7.9 million euros per lot with payments in installments to be defined by the Ministry of Economic Development. The tender for one lot is reserved to potential new entrants and network operators currently managing one multiplexing DVDT with minimum value of the offer reduced to around 4 million euros. The tender for the second lot is reserved to the same players plus percedera as a compensation measure for the disadvantage at the time of the analog to digital switch off. and the minimum value of the offer, again, that's around 4 million. The tender for the remaining two lots is open also to the other big network operators, meaning Rai and Mediaset, with minimum value of the offers at 7.9 million euros. The awarding will be based for 80% of the score on technical criteria and for the remaining 20% on the economic offer. The new cap of the number of national multiplex managed by a single operator should be set at three from the current number is five. Finally, duration, the duration of the frequency's right of use that is confirmed at 10 years and potentially renewable. So overall, the criteria look consistent with our base case of full multiplex management for RISE, although it's fair to remind you that the decision to participate or not participate is up to RISE. At the regional system level, looking at the outcome of the tenders close to date, Raiway has been awarded with frequencies in two regions of Italy, so Lombardia and Piemonte, that are the two of the most interesting regions in terms of risk-reward considering the decent level of transmission capacity demand is expected from local broadcasters and the investment required for the network rollout. Let me also say that this outcome is fully in line with the assumptions of our industrial plan. While we speak, tenders are progressing in other regions and we confirm our extremely selective approach. As for the other initiatives of our industrial plan, the setup and the operating activities could be unbated. And now, no more on the financial side. As you know, back in August we launched a 20 million euros buyback program, under which at the end of September we have purchased 1.4 million shares for a total consideration of 7.7 million euros. As already disclosed in our monthly update including October total acquisition exceeds 12.5 million euros. And we are also pleased to share with you that in October the company has secured a 170 million euros loan that will cover all the financial needs related to the organic initiatives included in the industrial plan, in our industrial plan 2020-2023. So, Adalberto will provide you with technical details in a few minutes. Lastly, expectation for the rest of the year, we expect new national restrictions to have limited impact on the full year and therefore the company's expectation for for 2020 are confirmed. Now moving to slide number five. You find the usual snapshots on the financial highlights of the nine months. Core revenues total 168 million euros, up 1.4% compared to 2019. and this mainly as a result of the progressive growing contribution from new services for RAI in presence of reflective CPI and the stable level of third-party revenues although positively impacted by one-off items in the third quarter. As a result adjusted EBITDA reached 104.5 million euros a 3.9% increase compared to 2019, also benefiting from the low level of operating costs reported mainly in the second quarter, with a strong profitability at 62.2%. Moving on the bottom line. on one-off expenses and higher DNA resulted in 50.8 million euros net income up 2.3% year-on-year. And on the financial side, CAPEX in the period grew to 34.2 million euros boosted by the refining project and in particular by the multiplex coverage extension speeding up and pushing development capex at 28 million compared to the 5.8 million 2019. As anticipated in our call in July, maintenance capex figure is slightly behind 2019 level, a touch above 6 million euros. Net-debt post IFR assisting at September 30th amount to 40.6 million euros and include the effect of buyback executed from August till September. Lastly, recurring cash conversion remains strong at 93.6% exceeding the first half 2019 figure. That's all on my side for the moment. I'll leave the floor to Adalberto to tell you more on the financial performance. Please, Adalberto.

Thank you, Aldo, and good afternoon to everyone. As highlighted by Aldo, our nine-month financial remains as solid as expected, even in the presence of a macroeconomic scenario still uncertain in the background. Starting from the top line in slide 6, core revenues came out at €168 million vis-à-vis €165.7 million in 2019, with revenues from Rai growing by 1.6% despite the flat CPI dynamic. The CPI index in Italy grew by only 0.1% in November 2019. But thanks to the 52% growth in new services, excluding one-off and one-attempt component, along the nine months. Core revenues are also supported in the first half above all by the DAB radio coverage extension and by the further progression in the third quarter of the new installation for the MUX coverage extension project totaling 7.5 million euro contribution at the end of September. On the other end, revenues from third parties were flat at 25.2 million euro benefiting from the positive impact of non-recurring items with the underlying performance down minus 3% in line with the anticipated trends on MNOs and other third parties customers. Let's move now on the slide number 7 on cost. You see how our cost base amounting to 63.5 million euro minus 2.6% year-on-year has been favorably impacted by the COVID-related measures also in the third quarter. However, if you look at the underlying trend in the third quarter, you can notice a progressive normalization path back to 2019 cost levels, especially vis-à-vis the material drop recorded in the second quarter this year. In particular, personnel costs reached 32.7 million euro and were basically flat. even declining by minus 0.9% when excluding non-core items and capitalization. Other operating costs fell by 5.2% at 30.8 million euro, thanks to the COVID-19 impacts and the saving on utilities and rents. All in all, profitability stood at 62.2%, still expanding from the 60.7% recorded one year ago, as you can see in the profit and loss at slide 8. Here I will just remind you that 1.1 million euro one-off cost already anticipated in the first half and the link to a new early retirement plan that together with the higher DNA also following the rising investment activities and the lack of benefits coming from the release of provision, which, on the contrary, we recorded in 2019, brings the net income to almost €51 million, 2.3% higher vis-à-vis the €49.7 million of the nine months 2019, still benefiting from the COVID-related tax relief. Moving now on the cash flow generation on slide 9 you can see how our net debt has slightly increased during the last month coming out at 41.3 million euro at the end of September compared to 9.5 million euro at the end of 2019. Looking at the cash flow dynamic of the nine months, I would underline that the relevant capex outflow of 34.2 million euro, 28 out of which are due to development activities and mainly related to the MUCSIS coverage extension. We have then 6 million cash absorption working capital level resulting from the mixed effect of tax payment in July and the other is the working capital cycle dynamics and then we have a 7.7 million euro cash out related to the buyback problem if we strip out the IFRS 16 effect on the net debt figure we would obtain a net debt position of about 5 million euro at the end of September. Of course, after the 63.3 million dividend payment. Lastly, in the balance sheet represented at slide 10, at the end of September the company recorded net fixed asset of 264.2 million euro including €32.3 million of rights of use for leasing under IFRS 16, while net invested capital totalled €205.3 million with equity book value at €164 million. To conclude, Let's go to slide 11. We would like to share just a few points on the new financing we have signed in the past weeks that will ensure the full coverage of the whole funding needs of our industrial plan. The total amount equal to 170 million euro is made up of a 120 million euro term loan to be drawn as needed upon right way request and the 50 million revolving facility. Lenders are Mediobanca, BNL or BNL, Casa Deposita e Prestiti and Unicredit. Both the credit lines have a tenure of three years and their terms include an interest spread of 75 basis points above Euribor with floors set at zero, a commitment fee of 35 basis points for the term loan and 30 basis points for the revolving line, a 20 basis point upfront fee in addition to 10 basis point coordination one-off fee, and a financial covenant providing that Rayway maintains a net leverage ratio no greater than 3.75 times the EBITDA.

that's really all on my side i now leave the floor back to aldo for the closing remarks thank you thank you thank you alberto and let's go to slide number 12 in terms of guidance for full year as anticipated before we are confident in reaffirming the expectation for the full year 2020 Obviously, the pace of the acceleration trajectory seen in the third quarter depends also on the evolution of the pandemic emergency and the extent of possible safety measures. However, based on the current visibility and on the back of the good resiliency shown in particular in the March-May period, we expect new restrictions to have limited and manageable impact on the full year and therefore the guidance is confirmed. This means a 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 gradual development activities offset by more gradual associated OPEX and other cost reductions. While investment will see a further slowdown in the maintenance capex on core revenues ratio compared to 2019 levels due to the already anticipated rescheduling of certain activities and the positive impact of some efficiency actions, coupled with increasingly higher development capex driven by the funding. So that's all on our side. We can now begin the Q&A session. Thank you.

Thank you. This is the Chorus Call Conference operator, and we will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. To remove yourself from the question queue, please press star and 2. we kindly ask to use handsets when asking questions. Anyone who has a question may press star and one at this time. The first question is from Stefano Gamberini with Equitasim. Please go ahead.

Good afternoon, everybody. Two questions from me. The first regarding this auction that should arrive with these four slots for... national MOOCs. Could you remind us what is the assumption in your business plan of the number of lots that should purchase rye and the sensitivity if they do not reach this target? The second question related to this one is are there some other assumptions related to these standards in your business plan, I refer to, I don't know, this loan by the payment areas where new contracts should arrive for you or not, just to understand how important these tenders are related to your business plan. The second, if understood correctly, that the buyback reached 7.7 million euros at the end of September but around 12 million euros at the end of October. So could we expect, considering the current trend, that you will finish the buyback by first quarter 21?

Thanks a lot.

On the last one, we can assume to finalize the buyback program by the end of this year. We are seeing the volumes that are higher, so the shares that have been acquired are higher than expectations, so we can assume to finish it by the end of the year.

Hi, Stefano, about your question on the criteria in the auction. On the multiplex, in terms of assumption of our industrial plan, the 2023 industrial plan, as I said before, the criteria defined by AGICOM do not give us reasons to change our As you remember, our base case is for three multiplexes managed by Rai. Considering the relevance of the technical criteria on the final score, 80% of the final score is based on technical criteria. The new cap in terms of maximum number of multiplexes is set at three. Thirdly, the price that looks affordable together with the possibility to pay it in installments of 7 or 9 million euros, as I said before. And more, the fact that having more capacity gives benefit to the customer, of course, to write, for example, for for supporting HD, offering HD content. So, said that, the decision to participate or not remains, as I said, in Rai's hands. However, let me remind you that the agreement on reframing signed with Rai in December last year already regulates the different scenarios. If Rai participates in the auction and gets the exclusive third multiplex, this is exactly the base case that is included in the industrial plan. Should Rai for any reason remain with two multiplexes instead of three, the impact let me say for a way is absolutely negligible. So on the value of the company has already been defined. So 6 million lower from revenues, even less at the bidder level considering lower OPEX and 25 million lower CAPEX on Rayway. So, and finally, should I not get the additional half multiplex, but share the capacity on third multiplex with the partner, so another network operator, we consider this not a possibility, but the possibility for a way to manage the third multiplex for this consortium is absolutely reasonable, considering the low additional cost coming from the, and then in this way we come back to the first scenario. So about the other question on the auction for on the network operator on regional basis, we are not going to participate in all the regions and even where we participate the strategy can vary from region to region aiming the the first of the second level of multiplex that, as you know, implies different coverage and different investments. So generally speaking, we remain sticky with our usual approach that is a selective approach to the local television. So we are prioritizing regions based on market size, the client's solidity, and of course the level of investment for the network rollout. Keeping in mind that the new configuration should make this market a bit more sustainable, avoiding network duplication and providing affordable price for the capacity. Obviously, the outcome will also depend on the level of competition in the regions and how they are positioned with respect to the tender rules. As for what is included in the industrial plan, We have not disclosed contribution at single region level, but in total we assume a low single digit contribution in terms of revenues and less than 10 million euros of development capex related to this business, to regional refinement.

Thanks.

The next question is from Andrea De Vita with Banca Acros. Please go ahead.

Yes, hello. Just a couple of questions, please. One is, I see your development capex, probably due to pandemics and other factors, is beyond the curve. So I wonder whether and how much of development capex you are postponing from one year, from 2020 to... to the next couple of years compared to your original plan that I suppose was already partially back-end loaded. And the second question is, apart from the MOOCs acquisition, if TRY is going through a spending review, a new budget, potential cuts in the number of channels or other moves, is there something that can change the volumes of your business with the right in terms of a new service is not not not not touching the the the base the base contract here the SMA MSA sorry so let's start we with your question on on capex I would say that

Typically, the most important part of our capex are always accrued in the fourth quarter, so we don't see a major impact in terms of potential increase of our development capex vis-à-vis the business plan target, so we are almost in line with that figure. Nothing major, no major variance vis-à-vis the assumption of our business plan, considering, as I mentioned, that we will expect to have an important part, an important component of our development capex in this last quarter.

About your second question, to be honest, we do not see huge risks on the activities and services to Rai. We have included in the plan. Remember that the contract with Rai is not linked to the number of channels. So the fee of Rai is related to the number of multiplex and not on the number of channels. The majority of the services we provide to Rai is mission critical and they can hardly be canceled or reduced with the agreement of the farming recently signed last December 2019. Also the contract has been renewed with no change in the scope and in the perimeter of the services we are providing. In the plan, apart from the key farming project, the size of new services exclusively for Rai is relatively limited. And on the reforming, the 2022 deadline is coordinated at the European level and the MNOs are already paying for availability of the 700 MHz band by mid-2022. So keep in mind that also the advertising collection represents a portion of Rai revenues that are lower compared to to other broadcasters considering the role of public service and the license fee.

Mr. De Vita, have you got any other questions? No, it's fine. Thank you very much.

Thank you. Thank you. The next question is from Yuri Zanieri with Kempen. Please go ahead.

Good evening. Thanks for taking my question. Only one left. In your industrial plan, you have hinted that you might look for diversification and looking into co-location data center market. I was just wondering if you can enlighten us a bit on how it's progressing. I can imagine that now it's not your first priority, but just wondering if there's something that is happening behind the curtain. Thank you very much.

No, no, let me say that it is absolutely important and it's a priority. You are right, data centers are a kind of infrastructure asset that we mentioned in our industrial plan that is an option that we like, so not too far from our core business as we see areas of similarity and possibly also some synergies. Just to give a bit of flavor, data center is an infrastructure market. You rent space, racks, energy, conditioning, security to customers. So there are in our view similarities with our business and at the same time compared to a typical infrastructure we see higher growth and we like it of course but also lower barriers to entry and higher commercial effort to put but these factors become less relevant when focusing on certain kinds of assets so it's it's not easy to to elaborate on size and timing but but also we can but it also depends on the opportunities offered by by the the market but potentially we are we are talking on sizable options to pursue both on an organic or inorganic basis.

Just one follow-up, if I may. Would you be more keen in developing one from scratch or acquiring? Because considering the high movement of the business, there are going to be trading. I was also wondering if you can have a scope for not overpaying.

Yuri, let me say that both the opportunities are under assessment from our side. On the organic front, we can potentially leverage on some assets that we already have in our portfolios. While on the non-organic front, I mean, we know the assets in Italy that match the key requirements in terms of addressable customers, quality, location, and so on, to successfully enter this market. And when they will come to the market, we will be ready to pursue the opportunities. I mean, asset spin-off and outsourcing, is an industry trend. It will take some time, but hopefully we will get to that point exactly as we have experienced and seen in the tower sector.

Extremely clear. Thank you very much.

As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and 1 on your telephone. Mr. Benucci, gentlemen, there are no more questions registered at this time.

Okay, that's all done. Thanks again for joining the call and speak soon. Bye-bye. Bye-bye.

Thank you.