Rai Way S.p.A.

Good afternoon, this is the Coral School Conference Operator. Welcome and thank you for joining the RightWay 9 Month 2021 Results Analyst Conference Call. As a reminder, all participants are on 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, Chief Corporate Development Officer. Please go ahead, sir.

Thank you, operator, and good afternoon. Let me start thanking all of you for joining us today, and welcome to our nine-month 2021 results. As usual, we will start with the key facts and figures of the period, and at the end, we will welcome your questions in the usual Q&A session. So let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thank you, Giancarlo, and good afternoon to everyone. From our perspective, the nine-month 2021 results are extremely positive and promising. This is not only in terms of pure numbers, but because, at last, the effects of various growth initiatives being implemented which until now had mainly impacted on investments, are starting to pay off and accelerate. Since the presentation of our plan in March 2020, the focus has been and will continue to be on the implementation of its guidance in an approach that is proving to be very valuable. At the beginning of this year, in the context of the 2020 full year's results, we recall the strengths of our business model, such as visibility, resilience, hedging against an inflationary environment. And now we recognize that we are on track to enter an above-average growth phase. Accordingly, the growth through and by development activities is starting to become tangible, and more will follow. The substantial amount of work done on the network upgrade for RAI has led to the materialization of the contractual step-up, which is starting to contribute to 2021 figures, but with its full impact in 2022. Next year, we will add to this benefit the contribution of the regional refining and the first impacts of the digital transformation of the operating model benefit that will continue into 2023. In addition, looking for beyond the plan's horizon, growth will not stop since we are confident and delivering on the new infrastructure and services we are working on. From a financial perspective, the third quarter performance has been satisfactory, bringing the nine-month results to some extent actually slightly above our expectations. In particular, When excluding the no core items mainly recorded in 2020, revenues grew by approximately 3% in the nine months, with an acceleration in the third quarter driven by this step up in the right contract effective from the 1st of July that is remunerating us for the reforming activities. Adjusted EBITDA came out by 5.2%. showing a sound improvement in profitability of 180 business points. And then Alberto will elaborate more on that in a moment. Investments accelerated during the third quarter with both development and maintenance CAPEX levels consistent with our full year guidance. And these figures do not entirely reflect the huge amount of activities and effort we are putting into the initiatives that, as I said, will contribute to our short- and medium-term performance. On the operational side, the activities related to the national refining are fully on track with the roadmap revised by the Italian Ministry of Economic Development in the first week of August. In October, as you know, we switched two rare thematic multiplexes to MPEG-4, and we are ready to switch to MPEG-4, also the main multiplex one, with a deadline yet to be defined by the government. The release of 700 megahertz frequencies will start on November 15th, so next Monday, in the Sardinia region, and this conclusion nationwide has been confirmed for June 2022, while the switch to DVB-T2 has been instead moved from June 2022 to January 2023. So all in all, since the start of the process in 2019, we have spent 85 million euros, out of which roughly 40 million was spent just in the nine months of 2021. Looking at the regional refarming, as you already know, we are entering the business of transmission capacity provider for local broadcasters. On this front, the Ministry of Economic Development has recently published, starting from the northern Italy, the ranking of content providers who will have access to the new transmission capacity in the most promising regions. as Lombardia, Piemonte, Veneto, Friuli, Venezia, Giulia are. We are waiting for the rankings, also for central and southern Italy, with Lazio, Puglia, and Sicily already awarded to our company to right away. On our part, we have started the rollout of the regional networks, while the outcome of the initial negotiation and agreements with clients suggests and almost full saturation of the capacity of our multiplex, which is a good news, considering that this business will have to support and potentially reverse the trend of third-party revenues next year. In terms of new infrastructure and services, the newly created unit is working hard on the setup of the initiatives, that will fuel the company's medium and long-term growth, so mainly beyond our current plan horizon. And about this, just to give you a bit more color, on the edge side, we aim to have data centers in a set of sites covering the most five, seven important cities distributed throughout the Italian territory, which will be ready progressively during 2023. And these will then be integrated by additional points of presence in medium cities following customers' demand. On the iPaceCare Data Center project, here we are evaluating two, three areas in Rome and Milan. These are two markets at different stage of development. As you know, Milan more advanced. Rome the next to be developed, but both commercially interesting. It's important to stress that the key consideration is the ability to obtain building permission, which is dependent on the responsiveness of municipalities and authorities. But once all the permits are in place, it's fair to say that the typical construction period is 12, 18 months to have a first capacity available with the possibility to further develop the asset according to customer demand, leveraging on the high modularity of this kind of infrastructure, obviously also in terms of investments. Lastly, looking at year-end guidance, we fully confirm the expected trends and drivers for 2021, even if in absolute terms, some of the temporary pandemic related safety measures are partially benefiting also 2021 with a smoother than expected return to the pre-COVID cost base. And now moving to slide number five, Let's now go a bit more in detail through the main highlights of the period. So financial highlights. Core revenues totaled 171.8 million euros, 2.2% up compared to 2020 on reported figures. But when excluding the no recurring impacts mainly affected the previous year, growth could be even more marked at about 3% or even above 4% in the third quarter. And it's benefiting, on the right side, from the already mentioned contractual reforming step-up, that more than offsetting the slightly negative CPI recorded in 2020 and the anticipated pressure on the third parties. Adjusted EBITDA reached 130%. and 10 million euros, more than 5 million above last year. If it's true, on the one hand, that this absolute value and, therefore, also margin benefit from few non-recurring factors, such as the continuation of certain savings deriving from pandemic safety measures, it is at the same time true that these assets were already present, even with a greater magnitude also in 2020. Therefore, the improvement of few million euros or 150, 200 basis points of marginality is in any case to be considered structural and result of higher revenues and cost control. Moving on the bottom line, net income grew by 3.8% at 52.8 million euros, with higher EBITDA more than offsetting the higher DNA. On the financial side, CAPEX in the period grew to 55.5 million euros. boosted once again by the farming project that brought development investment at 46.6 million compared to the 28 million of 2020. Maintenance capex accelerated as well, approaching 9 million in the first nine months of this year compared to the lower than usual value recorded in 2020, a trend consistent Again, with our guidance. Rising investments that, thanks to our flexibility, are, of course, entirely debt-financed, bringing net financial position to 98.1 million euros on September 30th, with solid cash conversion above 91%. And that's all on my side for the moment. I leave the floor to Adalberto to tell you more on financial performance. Please, Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. Let's now dive deeper into our profit and loss, starting from top line, so slide six. We have some details to discuss. to explain in this quarter. So reported core revenues coming out at 171.8 million euro in the nine months vis-a-vis 168 in 2020 when the figure was positively impacted by a material prior year adjustment on third parties. Tripping out this non-recurring item as already flagged by Aldo, you should assume an underlying growth of roughly 3% in the nine months and even above 4% in the last quarter in a scenario of negative CPI. More specifically, on the right component, the acceleration in growth plus 3.9% year-on-year is Enjoyed for the first time the anticipated step-up foreseen by the 2019 reforming agreement and effective from last 1st of July. More than upsetting, as I already mentioned, the negative CPI dynamic. The index was recorded at the end of last year that is relevant for the indexation of 2021 was negative and was minus 0.3%. Just to remind you, the full impact of the step-up in fixed consideration will amount to about €16 million on an annual basis that, according to the mentioned agreement, has to be treated as core services fixed consideration in the dark blue box starting from 1 July 2021 and not as new services. The same reclassification is now applied also to about 0.6 million of yearly revenues that will be moved from new services to the fixed consideration. Let me also remind you that, again, starting from the 1st of July, the 16 million euro of the step-up just described will also include the impact of the revenues related to the MOOCs coverage extension project that started some years ago, as you may recall, and amounting €4.5 million in the first half of 2021. So the €13.5 million of new services for Rai recorded in the nine months, as you may see in the chart on the right, are restated as shown in the box on the right. where the reforming contribution is split into the 4.5 million euro accumulated during the first half that in 2021 will continue to be treated as new services, and the additional 4.2 million euro effective from the 1st of July, which are now factored into fixed consideration. On top of that, of course, the 4.8 million euro block The one in grey, the one above, just to be clear, represents the remuneration for new services unrelated to refarming, such as contribution network, DAP coverage extension, and so on, that will continue, of course, to be reported in a separated box on a standalone basis. As concerns the third parties' revenues, the 7.2% decrease recorded in the first nine months, we reached 23.4 million euros of revenues, has to be read as a minus 3.4%, excluding the one-off impact for approximately 1 million euros. Once again, due to the expected pressure, the decreasing trend of 3.5% is coming from the pressure from the M&Os that we already commented in the previous call, waiting for the upcoming contribution from the regional refarming to flow into revenues very soon and finally reverse the trend. Let's now move to slide 7 on the OPEX, you see how our reported cost base amounting at 62.3 million euros show a nice declining trend, minus 1.9% year-on-year in the first nine months of the year vis-à-vis the previous period, still benefiting from part of the savings related to COVID, even if at a lower level, and from the extraordinary measures implemented by the government on the electricity dispatching cost to mitigate the increase of the raw electricity unit cost. In particular, in the nine months, as concerned the other operating cost, they reach 30.6 million euros Pretty in line with 2020 figure at minus 0.8%, also benefiting from the mentioned reduction of the electricity cost that is mainly due to the extraordinary measures just commented that has been implemented recently by the government. Excluding the electricity cost, the minus 0.8% would become about plus 4%. mainly due to higher maintenance costs, increased purchase of consumables, as well as a lower impact from positive prior year adjustment. Personal costs reached €31.7 million, down 3% on a reported basis, but just 0.5% if you exclude capitalization costs. and other non-core items, mainly reflecting the headcount reduction we are seeing and COVID-related savings on variable components, even, again, if lower than what we have seen in 2020. As concerns the energy cost, it is worth taking some time to show how the impact of rising energy prices that are hitting the market should be mitigated by our business model. So if we go to the following slide, here we try to explain with a very simplistic and theoretical calculation how the CPI link of our revenue provides a natural edge against the high energy prices we have been observing for some months now. First of all, I remind you that almost all of our revenues is linked to the so-called FOI, one of the CPI Italian indexes, recorded at the end of each year and impacting on the revenues of the following year, while OPEX, on the other side, are, broadly speaking, not directly impacted by CPI. Then, looking at the latest figures provided by ISTAT in terms of CPI, it is fair to assume a FOI growth of around 3%, 2% out of which is to be attributed to the energy components. Now, our electricity contract in place provides, fortunately, for a fixed price on raw energy. Until the end, until the end of March 2022, those protecting us until this date. But if you assume for the entire 2022 a new electricity contract based on the raw energy price currently expected in 2022 to be applied to our estimated consumption for 2022, you would end up accounting for more or less additional electricity cost of roughly 5 million euro on a yearly basis. This is not a guidance, of course, but it's just a theoretical calculation showing the potential impact. But the impact, the actual impact would be more than offset by the estimated impact coming from the increase of revenue due to the coming to the Italian CPI with the energy-driven inflation component alone counterbalancing the theoretical increase in the electricity bill. If on top of this then you consider that in 2022 we expect a lower energy consumption following the rollout of the new and more efficient network and the energy price for the first quarter is already fixed at a cheaper price, the impact on the profit and loss next year will be even more manageable. Let's now move to the following slide. with a full profit and loss till the net income. Slide 9 clearly shows the acceleration of the economic performance in the last quarter, resulting in a bottom line at €52.8 million at the end of the nine months, almost 4% higher than in 2020, mainly due to the, of course, increased adjusted EBITDA that that we commented, and so the increased profitability. And in addition to this, I would also spot on the other side the higher DNA, already recalled by Aldo, and the 1 million euro tax relief already commented in the previous quarter. Moving now to the cash generation on slide 10, my last slide. You may see our usual bridge, where you may observe how leverage is piling up quarter by quarter, following the almost 47 million euro development cap spent in the nine months, mainly related to the refinement project. The debt, at the end of September, approached the 100 million euro threshold, being made of about 70 million euro of bank loan. Cash generation in the period was particularly sound, with recurring free cash flow at 74 million euro, nearing in just nine months the almost 78 million recorded in the full 2019. Not so bad. That's all on my side, and I now leave the floor back to Aldo for the closing remarks. Thank you.

Thank you, Adalberto. In terms of guidance, for the full year, the qualitative trend for 2021 anticipated in the previous quarters are confirmed. And more in detail, adjusted EPTDA will keep growing, supported by higher revenues, more than offsetting the negative CPI, higher network costs due to the temporary overlapping of the old and the new multiplexes and the lower temporary savings. on OPEX due to the safety measures compared to 2020. On this last specific effort as anticipated before, it's fair to say that some of the measures continue to produce, although to a lesser extent, some reliefs on our costs, and therefore, looking at absolute terms, adjusted EBITDA may even slightly exceed our initial expectations. On the CAPEX front, we can reaffirm that both development and maintenance investment are expected to beat 2020 levels. That's all on our side. We can now begin the Q&A session. Thank you.

Excuse me. This is the Carlos Call Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone with a question may press star and one at this time. The first question is from Fabio Pavan of Mediabanca. Please go ahead.

Yes, good evening and thank you for taking my two questions. The first one is... given the results you were flagging on free cash flow in the nine months, what is the number we may expect for the full year? And the second question is, we're looking at next year, maybe it's too early to comment, but what are your initial expectations? The second question is related to the data center unit. I was just curious to hear if you can add something about what is going on since you announced the creation of this unit when, in your view, we should be provided with some more color on that plan.

Thank you. Okay, Fabio. Giancarlo speaking. On your first question, Let me say that when referring to free cash flow generation, the free cash flow generation has been very good also in the nine months. Use is slightly maybe higher than expected, but it's only related to some temporary effect on the working capital, the typical effect that we have in the third quarter with the tax payment and so on. But I will say for the full year, you will see definitely an increase in the recurring freakish flow generation, despite the higher level of maintenance capex, as you know how we define the recurring freakish flow. Then in the concerning expectation for next year, yeah, it's a bit too early. As usual, we will provide guidance with the full year results, but, I mean, we see several positive impacts that will allow us to continue our growth pattern. I mean, the full impact from the contractual step-up with Rai related to refarming, the first impact from the Regional refarming, as Aldo already mentioned during the presentation, is an area where we are seeing good demand and potentially good numbers coming starting from next year. Then first impact from efficiency measure and, I mean, several in the CPI. that it's quite promising in terms of numbers and impact on our P&L. I mean, all impacts that will allow us to hopefully more than offset some negative factors, mainly on the cost side with the reduction of the COVID-related benefit and so on. So generally speaking, the acceleration in growth that he witnesses in the third quarter will continue also next year. Then I leave to Aldo for the second question.

The second question, hi Fabio, about the similar color in the economics about the RF. data center activities. I totally understand, of course, your curiosity, but apart from the indication I provided during my presentation, particularly on possible timing, we still need to wait a while before sharing comprehensive details on economics related to these new projects. Of course, we have We have preliminary figures in mind, but to be fine-tuned, mainly depending on the, as I mentioned in my initial speech, on the authorization and permitting process for all the various locations of our mini data center and edge, and particularly for IPS-scale data centers. As for some P&L contribution impact, we start to be more tangible beyond our current industrial plan.

Thank you so much.

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

Yes, hello to everyone. Just to be sure, I want to understand what is the level of new services to arrive which are left out of the scope which we can expect for next year? Just this question. What is the ballpark amount?

You should... You should take as reference the amount, if you take slide 6, the new services that are not reclassified, the 4.8 million euros.

Of course, this is the amount related to the first nine months, so you should make a proportion to have the yearly figures. And as concerns just 2021, you will have to take into consideration just for the first half the 4.5 million euro that we accrued during the first six months of the year for the refarming project, mainly related to the project of the coverage extension of the MOOCs on which we started to work some years ago. Yes, but this one will disappear. Yes, in 2022 will be... Sorry? Anyway, the amount that I mentioned, yes, is going to disappear in 2022 because it will be included in the in the blue box, the fixed consideration that will include the refarming impact starting from the 1st of July this year. So you are correct if this is what you are referring to.

And yes, my question was whether there was any other service autoscope that could make up for these revenues that are going to disappear as it comes. So we had 11 million in 2018 In 2020, we will have zero in 2022, more or less. This was simply my question.

Andrea, if it's okay with you, we will come back on this point offline.

Yes, take into account this is one of the most important things for people to model and to understand how consensus revenues will be eventually reached next year. So it's not trivial, but anyways.

Thank you. Okay.

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

Good afternoon, everybody. Two questions also from my side. The first regarding the potential impact of inflation on 2022 figures. On one side, we have an upgrade of revenues in the region of 3% for rye component, which means more or less 6 million, if I made a good math. So this could offset the increase in energy costs. Could you elaborate a little bit about the other costs? What are the risks that you see of higher operating costs due to inflation? The second is my typical question regarding what are the steps ahead in a possible deal with 8 hours. But in particular, in this case, last call, you underlined that you started to have the first touch with the new top management in Rai. What happened in these three months and what are, in your view, the main challenges elements that could accelerate the process to a potential deal that seems natural in this sector.

Thanks a lot.

So, starting from your second question, starting from the consolidation At this time, the answer is easy. We have no particular updates to date on this topic, apart from confirming, of course, and stressing it's possible our commitment for this purpose, but no news as of today. So, Rai... Rail management is currently, let me see, defining its key strategic pillars over the next few years. And so there is, again, let me see, there aren't any significant changes compared to our last call.

So as concern your question on slide 8, the impact you see on the left in terms of revenues is related to all our revenues, just probably this was not clear, is not referred to the right component of our revenues, but is related to all our revenues. This is why we have approximately 7 million euro. And as concern, of course, then let me Let me highlight that the 5 million euro is not a guidance because of the reasons that I explained during my comment on this slide. As concerned the other cost, clearly there is not a link, a direct link with the Italian CPI, so the cost should be the component that is expected to be under control. Of course, we expected progressively not to have the positive impact from COVID that could justify an increase in the OPEX as concerned the other OPEX. And then as concerned the personnel, probably as of today, we reach a very low level of that count and we expect to to increase a little bit the number in the following months.

Thank you.

As a reminder, if you wish to register for a question please press star and one on your telephone. Once again, if you wish to ask a question please press star and one on your telephone. The next question is from Yuri Zanieri of Kemplen. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my question. Just a follow-up on the data center unit. Of course, we understand that you're still in a bargain phase to get the building permission, but I was just wondering if you can give us a bit of color on the timeline Can we expect some news in occasion of full year's results if you are intent to present the new business unit by a capital market day or anything, just to have an idea about timing and what we could expect in the next month?

Thanks. Absolutely, yes.

We will, of course, update the market and provide guidance. But as you correctly said, given the size of the potential development of an upscale data center, obviously we prefer to have more visibility on the timing before sharing precise details. Although already give you some indications, let me say not a guidance, but preliminary indications mainly on the timing. Let me say that within the current plan period, so up to 2023, you will see mainly the investments. while very likely the revenues and the contribution from this new business will begin to be more tangible beyond 2023. So let me say we'll provide the continuation of the growth also beyond the current plan, where within the current plan, The growth is already, I would say, secured and fueled by the initiatives that we put in the industrial plan, like the national refarming, the regional refarming, hopefully the stabilization of the MNO strands, and finally the digital transformation and the efficiencies.

Thank you very much, very clear.

You're welcome. If I may, sorry, just to come back to the question from Andrea De Vita, that probably we didn't understand that we just have a clarification. If it was concerned the potential increase, if your question was referred to the potential increase of the new services that will remain to be treated as new services, according to our industrial plan, if we look to the coming years, we expect to have some growth in relation to some initiatives connected with the development cap, the component that was separated by the refarming, of course. A part of the 80 million euro that we included in our industrial plan was referred to to the possibility to make and offer new services to Rai, mainly related to the DAB coverage extension and connectivity.

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

Hi, good evening and thanks for taking my questions. Just a few points on my side. I was looking at the working capital. I saw some working capital absorption that was particularly significant in the third quarter. So I was wondering if there was some specific reason. issue behind. And the second one is a follow-up on your expectation for 2022. I appreciate it's a bit early to provide the guidance on next year. But I believe we have now high visibility on the indication on the CPI, and also on the energy cost impact. So looking at your consensus for 2022, is it fair to assume revenues trending towards 245, 247, and similar in the same level of EBITDA in absolute terms, because there is this offset in terms of revenues and costs? So a potential margin compression in the 58% area. Is that correct or is it too early to elaborate on this? Thank you.

Of course, the second you said that will probably give some more color on the trends we expect. Of course, the guidance for the following year will be will be given when we will approve the full year 2021 results. But according to the figures that we have as of today, we may absolutely confirm the trend that we have in our industrial plan, where you may recall that starting from 2022, we should start to have an interest in growth vis-à-vis the past thanks to the several initiatives that we start to contribute positively to our top line. I mainly refer to the farming, of course, but not only the national refarming for rye, but also the local refarming and the other initiatives. So, In terms of guidance for 2022, I just may confirm the trend that we have in our industrial plan. As concerns the working capital trend, figures are impacted by seasonality, strong seasonality that we have, where the The Q1 and Q3 are typically negatively impacted by higher trade receivable. We have about 18 million euros at the end of September this year. But if you give a look to the past, you may see that in the third quarter, we always had quite a high level of trade receivable vis-a-vis the other quarter, vis-a-vis the year end and mainly the second quarter. Just I'm looking at Q3 2020 when we had 15 million euro of trade receivable and in 2018 20 million euro. 2018 was lower to be frank but This is due to the fact that the terms of collection, a lot of invoices are due in the last days of Q3, and so sometimes the payment is going to be collected in the following weeks, in the following months.

Thank you. You're welcome.

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

Okay. Thank you. Speak soon. Bye-bye. Thank you. Bye-bye.