Rai Way S.p.A.

Good afternoon. This is a course called Conference Operator. Welcome, and thank you for joining the RyeWay First Half 2021 Results 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 Mr. Giancarlo Benucci, Chief Corporate Development Officer of Laiwe. Please go ahead, sir.

Thank you, operator. Good afternoon, and thanks to all of you for joining us today for our first 2021 results presentation. As usual, Aldo will begin to walk you through the key facts and figures of the period, while Adalberto will provide more financial details. At the end, we will be available for the Q&A session. Let me now hand the cover over to Aldo. Please, Aldo, the floor is yours.

Thank you, Giancarno, and good afternoon to everyone. We are very pleased with the positive results delivered in the first six months of the year, which are fully in line with our expectations, in particular with revenues which have grown even without the contribution of inflation being driven once again mainly by the expansion of the multiplex coverage. with EBITDA and profitability improving year on year, despite a tough comparison with the previous year due to the gradual fading of the COVID effects from which we had been benefiting, especially in the second quarter of 2020, as we had already anticipated in our previous touchpoints. With CAPEX in line with our full year guidance for 2021, in particular on the development side, boosted by the reforming project. On the operational front, good news came from the Ministry of Economic Development and the tendering process to allocate the additional capacity with one of the well-known lots of half multiplexes awarded to Rai, thus confirming our confidence that we would manage three multiplexes for Rai, and I will come back I will come back to this in more detail in a couple of minutes. But as you know, refining is not the only growth initiative you are working on. As the development of new services and the expansion of managed infrastructure play a central and strategic role in the trajectory for a custody in our industrial plan, here I can say that things are proceeding steadily with the setup activities now almost completed on the three main lines, namely the hyperscale data centers, edge data centers, and content delivery network. We are now evaluating the most appropriate strategies in terms of locations, authorizations, and permits that for this kind of assets have a significant impact on the overall business case. Indeed, this is why we have not yet got to the point of sharing more details. In the meantime, in order to be even more effective and focused on the upcoming implementation phase, we have created a dedicated organizational area which has full responsibility for the development of this new infrastructure and services and is bringing in the necessary specific skills And in this context, I'm also pleased to welcome Mr. Luca Beltramino, asset of the new area. Luca, who joined the REWEI team in July, has extensive international experience in data center and edge data center sector, have led, among other things, the development in Italy of the assets of some of the principal U.S. operators. I think this is also indicative of the validity of our project, and we are confident that his contribution will provide a boost to the implementation of our plans. Last but not least, let me also reaffirm, as a result of the performance recorded so far, our guidelines for the full year 2021, as we will see at the end of our presentation. Back, as promised, to the subject of re-farming. It is worth taking a snapshot of the progress of the project, where, as you know, we are engaged both at national and regional level. And slide number five will guide us through this, in particular. On the national side, the positive outcome of the tender for Rai is the best possible news on the regulatory front as it confirms our expectation on the three multiplexes managed by the way for Rai, removing most of the remaining uncertainties. As a result, the contract will step up in the fixed consideration paid by Rai equal to 15.8 million euros on an early basis is effective from July 1st last as provided for in the agreement with RAI. As you probably know, the regulatory level discussion are underway on the possibility to make the switchover process as smooth as possible for Italian households. I am referring here for example to the possible remodulation of the transitory period. Today, media talk about this concrete eventuality and lend to the slight postponement of the switchover to MPEG-4 and to the VBT-2 standard, but not without technical issues. In any case, from our and your point of view, we do not see risks to the deadline for the release of frequencies as you know, June 30, 2022, and to the technical characteristics of the network after the transitory period. Therefore, considering that we are ready to deliver the new networks also with the current roadmap, we do not foresee impacts on the agreement with RAI. Looking now at the operational front, The multiplex coverage extension project can be considered substantially completed. We have also installed the new MPEG-4 DTT platform here in Rome. In terms of the configuration of the new networks, namely the new macro-regionalized multiplex one and the two national multiplexes, we are fully on track to meet the switchover deadlines in the various technical areas that have been sequenced. Let me remind you that, as of today, we will see a first transition from MPEG-2 to MPEG-4 and a second transition from DVB-T to DVB-T2. All in all, roughly 65 million euros have been spent today on these projects out of the approximately 150 million of planet development investment devoted to refining. Finally, at regional level, in May, we share with you the assignment of tenders in six Italian areas, joined in the second quarter by the award of local frequencies also in Veneto, one of the richest regions in Italy, and with a compelling risk-reward profile. So, having recorded in this way 100% success rate in the areas where we competed, and we can definitely feel satisfied about the outcome of the tenders. Moving at slide number six, you find the usual highlights for the first half. Let's start with core revenues that reached €113.3 million, 2% higher than the first half of last year, thanks to the contribution of new services for RAI, more than offsetting, along with the very good performance of fixed wireless access clients, the slightly negative CPI trend recorded in 2020, and the MNOs dynamic. Then they adjusted EBITDA at 69.8 million euros, up 2.8% year-on-year, confirmed the strong profitability at 61.6%, growing quarter-on-quarter as well. On the bottom line, the net income was up 1.3% year-on-year at 33.2 million euros, benefiting from one million euro one-off tax relief related to COVID-19 already recorded in the first quarter, which offset the expected increase of DNA resulting from the development investments. In fact, development investments were relevant also in the second quarter, bringing the figure for the first six months to 23.7 million euros from the 16 million euros in 2020. On top of that, maintenance capex also accelerated up to 6.2 million euros in the first half, doubling the lower than usual value recorded in 2020, also as a result of a material project for the extension of our internal and monitoring and control network. As a result, also including the higher maintenance capex level in the period, cash conversions remained very high, above 90%. And lastly, net debt in June. came out at 84.5 million euros, reflecting the development investments, the 63.9 million euros dividend payment that occurred in the second quarter, and the usual solid recurring free cash flow generation. And with this, I'll hand over to Adalberto to provide you with details on the financial performance. Please, Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. Let's dive deeper into the first half financial, starting from slide 7. Here you find core revenues up by 2%. closing the period at €113.3 million, driven by the Rai component, with the contribution from new services still materially growing at €7.7 million, 4.2 out of which coming from the MUX coverage extension project already mentioned by Aldo, that by far offset the negative impact from 2020 CPI on fixed consideration. You may recall that the relevant index recorded in November 2020 that is applied on the revenue, on the 2021 revenue, was negative, minus 0.3%. Let me then again remind you that the mentioned increase of 4.2 million euro in the first half 2021 related to the MOOCs coverage extension will be factoring in the annual step-up of €16 million in the fixed consideration that will impact for approximately €8 million in the second half of 2021. On the third-party segment, the expected headwinds from the MNO's rationalization have continued during the second quarter too, in line with industrial plan trends, resulting in a drop of 3.1% at the end of June, only partially balanced by the strong double-digit performance of fixed wireless access customers, bringing the overall figure to €15.7 million. Let's now go to slide number 8. On OPEX, I would like to underline in turn the tough comparison with the same period of 2020. when, in particular during the second quarter 2020, most of the positive but temporary COVID effects had materialized. Just to give you an example, variable components such as business trips and overtime, saving in general expenses and so on, resulting in the lightest second quarter cost base recorded since the IPO. As anticipated by Aldo, Overall costs are now trending back to the more familiar levels, made up of other operating costs growing above 5%, just below 21 million euros, mainly impacted by higher maintenance activities, and personnel costs at 23.2 million euros, apparently down 1% thanks to a temporary discount reduction, but with a stable underlying trend. All in all, Total OPEX came out at 44 million euro in the first half, up 1.8% semester on semester. Now, moving to the profit and loss on slide 9. The bottom line show our net income at 33.2 million euro, 1.3% of increase, despite the rising DNA DNA trend coming from the investment activities, development investment, and mainly benefiting on the other side from the high profitability that reaches 61.6%, 50 basis points higher vis-à-vis the previous semester. And the softer tax rate at 26.3%, enjoying the €1 million one-off tax relief on the tax called IRAP, related again to COVID measures, already accrued in the first quarter. And then the absence of any non-recurring costs, which were recorded on the contrary one year ago in relation to the early retirement plan. Turning now to the page on cash generation, we see the usual net debt bridge, and you may see how our leverage is progressively and organically building up, as expected in our industrial plan, with net debt at the end of June, after the payment of about 64 million euros. of dividends and 30 million euro of CAPEX standing at 84.5 million euro compared to the 46.1 million euro at the beginning of the year and broken down into IFRS 16 components for more or less 34 million euro, bank loan for approximately 56 million euro and cash for the remaining 6 million euro. The recurring free cash flow to equity amounted to approximately 48 million euros, pretty in line with the same figure of one year ago, meaning again a solid cash generation, notwithstanding the already mentioned and challenging comparison vis-à-vis first half financials, the first half 2020 financials, and the higher spend in maintenance capex recorded in the half, in line with the guidance provided so far. on top of the 23.7 million euro development capex already commented. That's all on my side. Please, Aldo.

Thank you, Alberto. Moving now to the expectation for the current year, for 2021, the results of the first half of the year To confirm the guidance for the full year already provided, as I mentioned before, please note that the reference to the assumption of the three multiplex managers for RAI is no longer mentioned, having become a reality after the outcome of the tender. Going in detail, based on the current visibility of the pandemic emergency, we expect adjusted EBITDA to be slightly above the 2020 reported level, meaning that when excluding the COVID-related reduction recorded in 2020, that we expect to be lower in 2021, and the slightly negative CPI, The underlying growth would be more markedly driven by, first, the step-up in RAI contracts starting from the second half of 2021, partially offset by lower contributions from third parties in line with the trend and level anticipated in our industrial plan, higher network costs, following the coverage extension and before the savings expected in 2022 from the switch off of the multiplex for right. And finally, some minor temporary costs related to the transition period. Looking at the investments, both the development investment and the maintenance investments are expected to be above 2020 level. And this is all on our side. So your questions are now welcome.

Thank you, sir. Excuse me, this is the Coruscant conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on a touch-tone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question is from Fabio Pavan of Mediobanca. Please go ahead, sir.

Yes, good evening. Congratulations for the results and thank you for taking my questions. Actually, I have two questions. The first one is on the potential consolidation process. We finally had the appointment of a new board for Rai was wondering if you share the view that this may ease the consolidation process and if some talks have already started. The second question is clearly on the announcement you have made today on this new unit for data center. Clearly this increases visibility On the plan, you already pointed out that this is not part of your plan, but I was wondering if you can share with us some numbers, maybe on what could be the commitment in terms of new investments in the midterm, or eventually if you can tell us when you think some more color on this initiative could be provided.

Thank you. Hi, Fabio.

So, two questions. The first question about the consolidation process and the new board of RISE, obviously positive. Personally, I have already had a meeting with the RISE new CEO, and the impression was positive. definitely positive, in particular on the awareness of the various opportunities that Rayway has in front of it, so from the refining process to the diversification, to service diversification in the media segment, also to the expansion of our assets, so the expansion of the of the assets portfolio. So, awareness, let me say, of all the opportunities and not only those directly addressing the customer's rights. We have a very busy agenda in the near future and I am convinced that Raiway can be a source of satisfaction and reward for for all its shareholders, including, of course, the majority shareholders. So this is about your first question. The second question is about our new organizational area that is focused on data center, edge data center, and new services, in particular on the content delivery, the development of the content delivery network. And as already I highlighted during the presentation, things are progressing on all fronts related to both the development of new infrastructures, namely hyperscale data center or edge data center, and the introduction of new services on the broadband platforms. So the setting up phase, including the definition of the business model, offering go-to-market operating model, scouting also of tech providers, so architectural design and the selection of internal assets that is synergic with the development of new infrastructure, so sites, land for Hyperscale and so on, feasibility studies have been completed. At the same time, we proceeded with an organizational update, so the creation of this new dedicated structure with full responsibility on the deployment, that also be able to acquire key competencies, to attract additional resources, specific resources for this new business for railway, and higher focus on on implementation. Now, activities are mainly focused for Hyperscale Data Center on the authorization and permitting process. That's, as I said in my introduction, it's a key activity. We confirmed that the chosen location and some alternatives. For the edge, we are starting to build our first data center at our flagship site in Turin, which will be then replicated on other selected sites distributed throughout Italy. on which we are carrying out detailed feasibility analysis at the moment. So, edges, that would be our infrastructural component at the base of the implementation also of a CDN network for which we have already shortlisted the best technological partners for for the service. Then you ask also about some numbers, and the numbers, sorry, but not satisfy your curiosity, but we will not be providing numbers today. As I said, we prefer to wait for a while before sharing details as preliminary figures have to be fine-tuned. in particular depending on authorization, as I said, and permitting process on various locations. So we identify to develop these assets. In general, about magnitudes, the magnitudes might prove to be material. Size, of course, is bigger for IP scale assets than for smaller, for edge data centers, but The overall project could amount to hundreds of million euros. And so I think this.

Thank you. Thank you very much.

The next question is from Giorgio Tavolini of Intermonte. Please go ahead.

Hi, good afternoon and thanks for taking my questions. I have a few technical questions, one regarding the final breakdown of the 12 national EUPFIPs. I guess three are from Rai, three for Mediaset, three for Persevera, and one for, if I understood correctly, Cairo. And the other ones are the days split. The second question is on the ISRS 16 impact. I saw that you had some lower impact, and I was guessing if there is a lower level of risk costs in the second quarter compared to first quarter or prior quarters. So did you manage to reduce risk costs over time? And the third one is on the... these activities these new activities I guess there was any opportunistic acceleration in light of the possibility to participate to the projects related to the recovery funds and do you see any initial costs for this activity and what is the time frame of the 200 million euros project CAPEX thanks

Okay, let's start from your first question. You're correct. This breakdown of the 12 multiplexes is three awarded to Rai, three to Mediaset, three to Persidera, one to Cairo. And then you have one multiplex that will be shared by, as already announced by the parties, by H3G and Primative V. And the other multiplex, as of today, there are two half-multiplexes that have been awarded through the conversion of the multiplex to the two smaller operators that before the switch-off had one single multiplex. Then... Can you please repeat your last question?

Yes, the second is on the ISRS 16, if you reduce the list costs, and the third one on the recovery fund and the new activities.

Okay. In terms of recovery fund, I mean, generally speaking, if you refer to the impact that the recovery fund has could have on our business. As we already commented in the past, of course, we see positive impacts from the recovery funds, at least in two perspectives. First one on the tower rental side, because all the incentive to 5G, as far as we know, we are talking of around 1 billion euros dedicated to to coverage of failure areas in order to enable 5G and machine-to-machine and IoT verticals, and also to fixed wireless access. And in this case, I'm referring to the portion of the almost $4 billion that have been allocated to the one-gigabit society, so the rollout of the fixed broadband network. So all of these incentives will bring a faster deployment of 5G and fixed wireless access networks, and this process will likely benefit in terms of higher volumes. Then, of course, also in terms of new digital infrastructure, There are funds allocated to the development of the so-called Polo Strategico Nazionale, that is basically the National Strategic Hub, that is the private cloud infrastructure that public administration will use in the future. The only thing here, I mean, the recovery funds defined many pillars, confirmed the need to rationalize the low-quality data centers currently used by public administration, reserved funds specifically to develop infrastructure, defined some timelines and milestones. But at the same time, it states that the new infrastructure of the National Strategic Hub will be managed by a technology provider, so not an infrastructure provider, but a technology provider selected through an European tender. While, as you know, our focus is not on technology, it's not on the services on the cloud platform and so on, but it's more focused on infrastructure and on the deployment of centralized and distributed data center. So it's key to understand how the tender process mentioned in the PNRR will be structured and if the infrastructure component will be part of it or will be separated from the tender. But All in all, we are very positive on the new business. The recovery fund will, let me say, boost the opportunities, but it's fair to say that all the opportunities we included in our plan make sense also without the the public administration opportunity and the recovery fund, because the growth drivers of these opportunities are many and various. Then, on your last question, or better, the second question on the IFRS 16.

Yes, the trend is a decreasing trend, but This is not related, to be clear, to a decrease of our yearly amount of our lease that more or less is always the same. It is just an accounting impact that depends from the overall expiration date of each relevant contract. Anyway, yes, there is a trend, a decreasing trend, but this trend, just to be clear, is not related to change in the overall amount of our leases.

And what is the level of the leases in this quarter? The usual, let's say, two and a half million, two million?

Yes, yes, yes, yes.

Okay, thank you.

You're welcome.

The next question is from Jacob Bluestone of Credit Suisse. Please go ahead, sir.

Hi, good afternoon. Thanks for taking the questions. I have two questions, please. Firstly, now that the marks have been awarded as expected, I'd be interested to hear from your point of view, where do you now see the biggest risks in terms of the realization of your business plan? I mean, clearly things have played out exactly as you called it, but where do you think the sort of main risks or uncertainties are from here? And then I guess my second question is, as your confidence grows in the ability to hit this business plan, does that change any of your thinking around optimal leverage for the business? So as you gain greater confidence that you're going to hit exactly the targets that you set out, how does that impact your thinking on what leverage the business can sustain? Thank you.

So, as concerning your first question, for sure now we have full visibility after having a clear scenario on the number of MOOCs, on the, general speaking, also on the frequencies that we will have to manage. So, let me say For us, this was already a base case scenario, so we didn't see here a risk. So for us, the big The main risk in relation to our business plan, to our industrial plan, are referred to the improving effort in having more efficiency in doing our activities as well as diversifying our activities. our portfolio of customers trying to, as you know, trying to give an important focus on all the upside opportunity that we have in terms of diversification of our infrastructure that we manage as of today And just to be clear, this is an important challenge that we have to manage in the next year that, to be clear, is not reflected in terms of number in our business plan, as also Aldo mentioned before when we comment on the data center opportunity, just to be clear. So basically, these are the main challenges that we have.

Thank you.

Next question is from Andrea Vita of Banca Acros. Please go ahead, sir.

Yes, good evening. Again, back to the new business opportunity. So I was just looking back at your business plan presented in March 2020, and you already mentioned the CDN opportunity, the hyperscale, and the edge data center. So I understood that. It was a total capex envelope, including the regional books, of €80 million. So I would like to understand what has changed, so apart from the PNRR, from the initial thinking you have in these business opportunities, and what should we expect compared to that initial plan? Maybe that was just the beginning in an initial timeframe for further development. and whether you have reconsidered the buy versus make option that you mentioned at that time.

Can you repeat the last part, sorry?

It was mentioned decision in terms of buy versus make, so I understand that the buy versus make is mainly related to the large data center, so it's something that I mean, it's much cheaper now. So this kind of thinking, 15 months after the release of the plan, you have now more ideas and you have probably come to 30 levels.

Okay, so in terms of financials, in our original industrial plan we approved in 2020, we had really a limited impact coming from some opportunities. As you mentioned, the CDN is one of these opportunities. And then we have really a few million euros of investments in relation to to other projects. The idea was to put some seed on the ground in order to verify if there is the possibility to enlarge the scale of our interest in some opportunities in order to increase the scale and launch new services. We are now exactly at this, we reached this important step because we decided to create this new unit inside the company in order to launch these new services and the magnitude of these numbers for sure will be something different from the original assumption that we have included in our business plan, but as Aldo mentioned, we are now not in a position to disclose these numbers. But just to be clear, in our business plan, we had really few million euros of investment in these opportunities and a really limited impact in terms of in terms of EBITDA and revenue. So generally speaking, we have here an interesting opportunity that could have in the long term a positive return. As concerned, probably you also mentioned the regional refarming, if I'm not wrong.

Yes. Now, the 80 million, it was a total including new opportunities and regional reforming. So I don't know what the split was, but I assume that also some tens of millions were committed to the three business lines, the three new business lines.

Yes, yes. The 80 million euros are referred to several initiatives, both with third parties, both with RAI, in terms of additional new services and a part of this was also dedicated to the regional reforming as well as the CDN as I mentioned before. So this is, let's say, a category of development investments that are referred both to third parties and so also in relation to the new services that I mentioned and also in relation to the main customer we have Rai in relation to some new opportunities that we could have in order to offer new services to Rai such as the DAB coverage extension.

And based on the situation as it is at this point, When do you think you will be able to present new targets or to update also on these projects on an official basis, like new business plan?

In due course, I would say hopefully soon. As Aldo said before, we have to fine-tune some aspects that still can have a material impact on the numbers. Obviously, we have preliminary numbers in mind but we want to share something with you and to be very precise so it's something that we plan to do as soon as possible but although already indicated the magnitude of the opportunity to be material coming back to the point and to what Alberto just said Let me say that back at the time of the industrial plan and of its presentation, we mentioned data center, edge data center, as, let me say, opportunities to explore. We were optimistic back then, and so we mentioned it. And if today we have set up a new organizational unit, it means that we are moving from a setup phase to an implementation phase. And so let me say that compared to two years ago, we are even more optimistic on the opportunities and on the benefits that these opportunities can bring.

Okay. Thank you.

Gentlemen, at this time, there are no questions registered. Would you like to make some closing remarks?

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