Rai Way S.p.A.

Welcome and thank you for joining the RightWay 2021 Full Year Results Analyst Conference Call. As a reminder, all participants are 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. Please go ahead, sir.

Thank you, operator, and good afternoon. Let me start thanking all of you for joining us today, and really apologize for being a bit late, but we experienced some technical issues with our brand-new website. Anyway, as usual, Aldo will start with the highlights and figures of the period, and Alberto will then illustrate the financial details, and at the end, we will welcome your questions in the usual Q&A session. So thanks again, and let me now have the call over to Aldo. Please, Aldo, go ahead.

Thanks, Giancarlo, and good afternoon to all of you. As expected, the full quarter of 2021 continues on the same trajectory already stated in the third quarter, with the benefits of development activities, and in particular, for the time being, the ongoing refining for Rai, progressively reinforcing our growth. Growth now more visible, but we have gradually but steadily improved our results year on year, achieving around 30 million of higher recurring cash generation compared to the levels of 2014, the year of our IPO. From the financial perspective, 2021 performance has been satisfactory and even slightly above our expectations, excluding no recording items, Revenues increased 3%. In turn, adjusted EBITDA rose 5%, with the margin improving by 160 basis points, despite lower temporary savings from pandemic safety measures. And development investment. have increased to over 70 million euros, driven mainly by the reforming activities for Rai, but also by regional reforming and by the setup of the new infrastructures and services that are expected to support medium-long-term growth. These results enable us to propose to our annual general meeting the full distribution of the net profit equivalent to a dividend per share of 24 euros and 36 cents and the dividend yield of 4.5 percent based on yesterday closing price we are so also proud that as a result as a first result of the initiatives of our three-year sustainability plan The improvement in financial results came along with an enhancement of the company's ESG profile, recognized by leading international rating providers. The growth just described has not ended in 2021, and on the contrary, the revenues and ABTDA growth trend is expected to continue in 2022. finally supported also by a more tangible contribution from the CPI. Although considering the current environment, it's wise to keep electricity prices monitored too. Well, before moving to operational update, let me point out that 2021 also confirmed the role and resilience of the TV broadcasting. And looking at slide number six, After the peak resulting from the pandemic and the restriction to mobility, the audience of the digital terrestrial platform has returned as expected to the usual levels of around 10 million viewers on an average day. This is a value that is stable since years despite the well-known growth in the use of the OTT platforms as demonstrated by the increase in users of video-on-demand platforms, either subscription-based, as shown in the chart, or advertising-based, with the latter more typical of traditional broadcasters. But in addition to the audience level, we can confirm that viewers are coalescing around specific platforms based on the content they want to watch using on-demand for series and movies and real-time delivery for entertainment, news, sport contents, which backs of our view of the complementarity of the different platform and therefore of long-term sustainability of the digital terrestrial platform that moreover has shown to be efficient for certain contexts. On the bottom left of the slide, we have shown the viewing modes of the 2022 San Ramos Song Festival, the most popular event produced by our client, Rai. Without going into much detail about the numbers, I would like only to share a couple of messages. Entertainment remains a mainly, if not fully, linear content. 99.5% viewing was in real time. And this is true regardless on the platform, since even on the OTT platform, typically on demand, viewing was largely in real time, 80% of the total. So broadcasting today, digital, terrestrial television, remains the reference distribution platform for linear consumption. For Sanremo, Sun Festival, 98%. So it's hard to imagine what would happen if 98% of traffic moved to a fixed telecom network, both in terms of congestion of the network and in terms of distribution costs for the broadcaster. Conversely, to enable even a minimum of immigration, it would be necessary to make contents available geographically closer to end users, possibly at network access level, so avoiding the backbone. And this is exactly what we are planning through our EDGE CDN projects. Moving now to the update on operations. Let's start with the refarming project for RAI at slide number seven, which, as you know, is the main growth driver in the business plan horizon. By the end of 2021, we have received in excess of 100 million euro investment, which is about 70% of the total plant, equal to 150 million euros. Of the three macro projects to upgrade Rai Networks, the extension of national multiplexes coverage, other than the multiplex that already covers over 99% of the population, has been completed. These networks are now hosted on approximately 1,000 of our sites compared to the initial 400. On the other hand, with regard to the two technological upgrade projects, the new macro-regionalized multiplexing UHF band and the upgrade to T2 of old multiplex, the new head ends of the transition to MPEG-4 and HEDC encoding and the distribution network have also been completed. While the replacement of transmitters with new DVB-T equipment remains to be finalized, having, however, already reached completion rates between 70% and 80%, depending on the specific network. On 8 March last year, The switch from MPEG-2 to MPEG-4 standard took place in all Italian regions, enabling a recovery in efficiency on the standard definition channels and therefore the accommodation of more or less the same number of channels in fewer multiplexes. While the switch from DVB-T to DVB-T2 technology is planned for the beginning of next year, leading to an increase in available capacity and therefore to the expected improvement in channel quality from standard definition to high definition. So everything is moving on track. The opportunity offered by refarming is not, however, limited to right customer. The new distribution structure of regional content, which shares distribution capacity between several broadcasters, is opposite to the previous system where each broadcaster had its own network, has improved the sustainability of customers by reducing their distribution costs and ensuring affordable rates. So as you can see from slide number eight, Our focus has been in areas with greater appeal, both commercially, for example, higher turnover and lower customer risk, and technically, greater synergies in our existing infrastructures. So, good news here. 100% success rate in the seven areas where we beat in light of the compelling risk rewarding. The completion of the networks roll out in north and Italy, while the central and south areas we are proceeding in line with the roadmap. And an outcome of negotiation with customers that has achieved almost full occupancy of the available bandwidth. This is really an interesting opportunity for us, largely incremental considering the current limited exposure to this segment. with investments in the meetings range and margins and returns that benefit from synergies with existing infrastructures. Despite the material opportunities offered by our traditional business and platform, as you know, we are introducing new infrastructures, possibly in synergy with assets we already own, and evolving our media services also on the content distribution on broadband platforms, which, as anticipated, are becoming more and more complementary to broadcasting. You already know the main initiatives that we summarized on slide number nine. So first, the developmental network of edge data sent in our major sites, also in terms of size, that will host the servers of all those providers, offering increasingly low latency services. Second, the deployment of a capillary and career-neutral CDN content delivery network, mainly addressing the needs of high quality and live streaming. The deployment of an hyperscale data center since large centralized data storage, a market that we expect to be supply-demand unbalanced, given the increasing growth of cloud providers, OTT players, and so on, and the significant barriers to developing new quality assets in terms of spending, suitable land, and power availability. Last but not least, The capacity expansion of our national backbone, which in addition to the opportunity to offer connectivity to our existing customers, is an enable for the three previous projects, in particular for the Edge Network and the CDN. I won't go into detail by each individual project, but the sense I want to pass on to you is that activities are progressing. For example, with the start of the rollout of the new backbone, which will keep us busy for about a year. The final design for the seven major deep data center to be followed by the construction phase that will lead to the availability of the assets during 2023. The forthcoming selection of the technology partner for CDN, for the CDN. with the first commercial release of the service expected during 2023 and the subsequent capitalization to be coordinated with the availability of the edge data centers. And the submission of an hyperscale data center project to the relevant municipality and the ongoing permitting phase, which is probably one of the most delicate ones for this kind of assets. I remind you that we are talking about initiatives aimed at improving a company's positioning, which during the industrial plan period will mainly contribute in terms of cost and investment rather than margin, but with expected returns that will hopefully represent one of the drivers of our medium long-term growth. Consider that, overall, they account for several tens of millions of capital employed or in hundreds if you include the development of hyperscale data center with returns expected well excess the our cost of capital moving now to slide number 10 let me give you a brief update on the progress made by our company on the asg front during 2021 following the ongoing implementation of our first sustainability plan approved in march We can be extremely satisfied that about 50% of the initiatives included in the plan have been completed and eight of the original 14 quantitative targets have been already matched. Our 2021 non-financial statement contains all the details, but I would like to draw your attention here on just a few achievements. On the environmental pillar, we have achieved, or better confirmed once again, our targets of 100% green electricity supply, which is unique in the industry, allowing us to be well positioned on the path toward carbon neutrality by 2025. Moreover, the farming project with the 100 million euros green investment target already met. has started to produce benefit also in terms of reduced reduction of electricity consumption, which has fallen 3% since 2020 and should fall further. From a social point of view, let me highlight, firstly, the recent introduction following the trial during the pandemic of a structural agile working scheme for our employees, As well as confirming the attention even to people outside our company, they improved coverage of the DTT signal in over 1,000 Italian municipalities. Once again, in 2021, we paid particular attention to governments, reinforcing the ESG oversight at board and no-board level, and the engagement with our stakeholders, whether suppliers and shareholders. And two technological innovations as distinct in trait of our DNA with over 115 million spent since 2019 to bring the new generation digital TV into the homes of Italians and to start the digital transformation process of the company. Railways commitment has also been rewarded by the main ESG rating agency with significant upgrades from the recent evaluation of CDP, MSCI, and SOST Analytics on 2021 activities. Moving now to slide number 11, you'll find the main financial figures here for the full year 2021. So starting from core revenues, near 230 million euros, up 2.4% year-on-year on a reported basis, mainly as a result of the reforming related step-up on the right side, and more than offsetting the slightly negative CPI recorded in 2020 and the pressure on third parties which, by the way, we are expecting to reverse the trend very soon. Adjusted the BTDA came in at €42.9 million, more than 5% higher versus 2020, pushing profitability above 62% in the full year. At the bottom line, net income grew by 2.1% at 65.4 million euros, factoring in high DNA due to rising investments. On the financial side, CAPEX in the period grew up to 85 million euros, The materials step up vis-à-vis 2020, boosted by development activities again and maintenance capex, back to more recurring levels, around 6% on core revenues, after the drop recorded in 2020. And the resulting in 87.9 million euros net debt at the end of the year, when cash generation stood consistently close to 90%. I will now leave the floor to Adalberto for all the details of the financial performance. Adalberto, please, the floor is yours.

Thank you, Aldo, and good afternoon to everyone also from my side. So if we look at slide 12, Starting from the top line, core revenues were €229.9 million vis-à-vis €224.5 million in 2020. When I remind you, the figure was positively impacted by material prior year adjustment on third parties. Excluding non-recurring items, you should assume an underlying top-line growth of roughly 3% in 2021 vis-à-vis the 2.4% reported. More specifically, on the right component, the acceleration in growth, 4.1% year-on-year, enjoyed the anticipated step-up foreseen by the 2019 refarming agreement and effective from last 1st of July, more than offsetting the negative CPI dynamic. Same comment we had also in the last call. Then, just again to remind you, the full impact of refarming project on the fixed consideration amounts about €16 million on an annual basis that, according to the mentioned agreement and starting from 1 July 2021, has to be treated as core services, so no longer as new services. The same reclassification applies also to about €0.6 million of yearly revenues that will be moved from new services to core services. Let me also remind you that, again, starting from the 1st July, the €16 million 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 and amounted to €4.5 million in the first half of 2021. Consequently, the €19.4 million of new services from 4i that we recorded in 2021 are restated as shown in the right side of the slide, where the refarming contribution is split into the 4.5 million accumulated during the first half, that in 2021 is treated as new services, and the additional 8.3 million effective from the 1st of July, which are now factored into the fixed consideration. On top of that, the 6.6 million euro top layer represents the remuneration for new services unrelated to refarming, such as contribution net, DAF coverage extension, and so on, that will continue to be reported in a separate box on a standalone basis. So, on the third-party segment, 7.3% decrease recorded in 2021, totaling 30.8 million euros, has to be read as minus 4.7% when stripping out one-off impact on 2020 for approximately 1 million euro. The drop, as you know, is once again due to the expected pressure from MNOs and the expiration of certain lower margin hospitality services waiting for the upcoming contribution from the regional refarming to flow into revenues very soon and also supported fixed wireless access dynamics that will finally reverse the overall trend. Let's go now to the following slide. OPEX, as you can see, our full year cost base amounting 87.6 million euros substantially confirmed the nice declining trend already commented in the previous nine months, still benefiting from savings related to COVID and from extraordinary mitigation measures implemented by the government to address the sharp increase in energy prices. In particular, as we focus on other operating costs, fell by 2.5% at €42.5 million, with the underlying cost base down by 1%, benefiting from lower energy prices, resulting from the anticipated government mitigation measures and partially offset by higher maintenance. Excluding the electricity costs, the overall reduction of €0.9 million would become an increase of almost €1 million. Personal costs amounted 45 million euro, relatively stable both as reported and underlying basis when excluding capitalization, non-core items and temporary COVID related savings. Let's now move to slide 14. As the bottom line, you see our net income at 65.4 million euro, 2.1% of increase vis-à-vis the previous year, despite the materially rising DNA coming from investment activities and benefiting from higher profitability at 62.2%, up 160 basis points year-on-year. and benefiting from the still light tax rate, 26.3%, enjoying the €1 million one-off tax relief we recorded in the first quarter. Turning now to the cash generation, slide 15. You see how our leverage is progressively and organically increasing as expected in our industrial plan, with net debt at the end of 2021 after, among others, the payment of 64 million euros dividends and 85 million of CAPEX standing at 86.9 million euros, compared to the 46.1 million euros at the beginning of the year. and broken down into IFRS 16 components for 36.5 million euro, bank loans for 69 million euro, cash for the remaining approximately 18 million euro. Last but not least, in term of cash generation, if we go to the following slide, number 16, We reach a 93 million euro normalized free cash flow to equity, up 5% compared to 2020 figures, boosted by the higher EBITDA, of course. And to finance, developing capex for 71 million euro and, of course, our dividend. Keeping all this in mind, we are proposing to the next shareholder meeting the distribution of 100% of our net income as a dividend in the amount of 24.36 euro cents per share with an implied dividend yield of about 4.5% which confirms once again our strong focus on shareholder remuneration with around 422 million euro equal to 53% of the company initial market cap at the time of the IPO, of overall distribution since 2014, showing a material progression year after year. That's all on my side, so I now leave the floor back to Aldo for the closing remarks.

Thank you. Thanks, Adalberto. Moving now to the expectation for 2022, so slide number 17. In terms of revenues, we expect a mid-single-digit growth, mainly driven by CPI Link, the full impact of the step-up related to Rai effective refarming for the second half of 2021, with the benefit of additional around 3.5 million euros, and the third-party regional refarming. Drivers that allow us to balance the postponement of some new services for Rai compared to initial expectation, And on the other hand, to reach a turning point for third-party revenues, despite the progressive rationalization of M&Os, which, however, is showing a more shared approach through the definition of stabilization paths, envisaging a mix of discounts and higher volumes at attractive fees. Adjusted EBITDA level is expected to grow further assuming a progressive normalization of electricity prices. This means that at current level of unit prices, today the future for the rest of 2022 are at around 250 euro megawatt per hour growth. In this case, for a more limited amount, can come through actions on costs and further government relief measures. While the more price falls, the more our comfort on growth increases, becoming progressively less dependent on actions on costs. Conversely, in a scenario where prices continue to rise and remain persistently high, there are still factors that could help mitigate impacts over time, as Our CPI-link on revenues applied at the beginning of each year as energy swings are reflected in inflection. The progressive reduction in consumption ensured by the brand-new network built in the context of the reforming. And finally, the possibility to temporarily act on other cost items. At investment level, Maintenance capex is expected to be in line with our industrial plan values, therefore slightly higher than the recurring value of around 60 percent of revenues that we expect post-network upgrade. Development capex seen in line with our or slightly higher than 2021 values with the completion of refarming activities and the growing portion related to the implementation of new services. In the last slide, number 18 of our presentation, we have summarized the main growth drivers during and beyond the plan horizon. The link to CPI included in almost all our contracts, the upgrades of the broadcasting networks, the efficiency enabled by digital transformation, The new services initiatives reviewed before, the possible opportunities arising from PNRR, as well as external growth. Just a couple of remarks. With regard to the PNRR, in general terms, since we are waiting for the publication of the Italia 5G plan tender, we see two main areas that might provide nice support. On the one hand, the almost €4 billion Italia 1G plan could bring, even without a direct involvement of railway, an indirect benefit in terms of higher demand for fixed wireless on top to the current demand, more focus on wide areas coverage. And on the other hand, the 2 billion euros Italia 5G plan, based on two different initiatives, fiber connection of more than 1,000 sites that will lack fiber backhauling by 2026. And the second initiative, build new sites, or even better, the entire package of site plus radio link equipment plus fiber backhauling. to improve natural performance in certain areas, like rural areas or highway and rail galleries. So to assess potential role and returns, we need to see first how the tender is structured. Although on backhauling, even if not directly installed by the Tower Co., fiber availability increases the commercial appeal of the sites. On new sites, the necessity to also provide radio network and roaming services suggests the involvement of mobile operators. On growth by external lines, I guess the topic of interest today is the long-awaited DPCM, that in order to straighten railways development plans through a greater access to the market would reduce right shareholding limit from the current 51% to 30% while maintaining public control over the infrastructure. The decree has not been published in the official gazette, but according to what was indicated this morning by the Minister of Economic Development, it should take place soon. What can be highlighted today here is the government support for the development of our company, underlining in particular the know-how and the strategic relevance of the infrastructure we manage. Needless to say, the decree would give our parent company options and high flexibility to enhance the value of its stake in our company and no doubt it should be welcome as a necessary step to facilitate at least in terms of possible configurations to consolidation of broadcast towers sector which along with the parallel not alternative diversification into new areas in new infrastructures represent one of the pillars of our industry plan. It is normal that the outcome also depends on the requirements of several subjects, like governance, among controlling shareholders, regulatory aspects, and so on. Our role will be to gather all parties around an industrial project and the structure that maximizes value creation and protects the interests of all shareholders, including minorities. There is not much more that I could add at this time, so I apologize in advance, but we could not be in a position to comment further. That's all on our side. We can now open the line for the Q&A session. Thank you.

Thank you. This is the CORSCO conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Fabio Pavan with Mediobanca. Please go ahead.

Yes, hi, and thank you for taking my question. I would focus on the guidance we have provided on both the revenues line and the cost. So my questions are, it is fair to assume that given the contribution of regional farming and FWA, we may also have stable to slight growth for part of revenues. And moving to the BDA guidance, I was wondering if you can just provide some more color. So if I understood properly, your guidance right now is not assuming the same level of energy prices we are facing today, and that's kind of normal, I think. But the point is, the actions you may put in place through the year in order to face ongoing pressure on energy prices will allow you to protect the BDA also for 2022. Thank you.

Ciao, Fabio. So, as concern third parties' revenues, your assumption is Your assumption is correct, also because we should expect in 2022 good news from the local refarming broadcasting that will start to give the first contribution and then the full contribution will be visible in 2023. almost full, let me say, in 2023. And as concern the EBITDA guidance, let me say, despite the rational price dynamics of recent months, and in particular of the two, three weeks, as a result of the geopolitical tensions, I would like to remind the mitigants, and then I would elaborate more on costs, which are, generally speaking, the mitigants that we have. First, let's remember that the first quarter 2022 price is contractually locked at 2021 levels. Then, The raw material represents at 2021 prices less than 50% of the total energy bill that you see in our financial statement. So, therefore, increases in raw materials are reflected less than proportionally in the overall cost. The government, as also Aldo mentioned, has announced support measures to counterbalance the increase. mainly by reducing the other tariff component. Then we have also to consider that we are going to have a brand new network with more energy efficient equipment, allows a progressive reduction in consumption. Then, as mentioned, the CPI link to revenues provides, albeit with a certain time lag, a good level of protection in case of lasting increases in energy prices, which in turn are reflected in higher inflation. As concerns 2022 figures, we are monitoring day by day the situation because we, since the IPO, we had year after year a growth of our adjusted EBITDA and we will do, our effort will be focused to continue to deliver such results. This means that We are looking at some costs that we could have a one-off temporary reduction. Temporary because if we will have a long-term issue, this will be edged by the CPI and by the revenues. So consultancies, travel and lodging as concerned... not the operation, of course, that are focused on the activities on the ground, and other costs on which we have some discretionary possibility to manage it. Then, again, we have also the possibility to postpone a little bit some costs to 2023 when, again, in the case of energy prices that will remain at a very high level until the end of the year, again, a postponement to 2023 will allow us to use the increase in revenues to work on such increase. So the overall scenario of course is complicated but again we our commitment is on having on continuing to have a growing EBITDA and these are I try to describe what we can do in order to be consistent with this.

Extremely helpful and reassuring. Thank you.

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

Good evening, everybody. Three questions also from my side. The first is regarding, could you remind us what is the electricity consumption in 2021 and the average cost? You underlined that the raw material cost is then half of overall cost if you can divide also the fixed part to the variable one just to have on our side a sort of sensitivity of what could be the impact on 2022. The second question regarding the investment guidance, because if I'm not wrong, you expect development investment in line with 2021. Could you give us a breakdown? What I mean is what is the part referred to the refarming, because if I'm not wrong this should be end in 2022, or what is the remaining part of the refarming investment and related to the new services? and what are the return in terms of revenues from this second part of investments that you will go ahead during 2023. The last question is about the consolidation. I'm used to have a question on it. the situation is clearly improving right now. Could you just remind us what are the main synergies that you expect in terms of investments, OPEX or financial synergies that is also something that could be in my view relevant that we can work on in order to understand the potential upside or the advantages from the consolidation in the broadcasting tower sector.

Many thanks.

Let's start with the first question on energy. We had in 2021 89 gigawatts per hour of consumption. And considering the overall cost of approximately 12 million euros on a yearly basis, these means an overall average cost of approximately 135 per megawatt hour. Then, if you need a sensitivity on the change in the raw materials and the so-called PUN, More or less, each 10 euro of increase is going to give us a negative impact of 0.6 million euro in 2022. Considering that in 2022, this is going to be applied only to the last nine months. So I hope to have answered to your first question.

The classification on this topic, because 135 is clearly including also the fixed part of your bill, and you also hedge during 2021 because you already hedge also in the first quarter 22. So what is the price of hedge price that you have for the raw material cost?

Around 60, till Q1 2022. The second question was on the CAPEX. As you probably may see also in the first slide that we present, We will have to invest approximately 50 million euro to finish all the projects related to the farming. And then on top of this we have all the CAPEX that are related to the other initiatives. considering the regional refarming that will require more or less 10 million euro. Then we have all the topics related to the new initiatives. I'm referring to the Azure Data Center, CDN, the backbone for approximately 20 million and more. And these are more or less the key drivers of the guidance that we provide you in terms of CAPEX. Then last question was on the synergies. On synergies, having, we commented also in the past, for sure having A unique network would mean efficiency in managing this network, so we can have we can manage in a better way the overall size of the combined entity if to manage all this activity we will have only one company that we will have to manage this activity. So we are going not to imagine significant synergies like for the mobile tower operator where the most important synergy in terms of rationalization is coming from the commissioning and the reduction of the cost of the leases related to the infrastructure. In our case, we believe that for sure there will be Edrum also to work on this field. but above all in having a more efficient way to manage our network, manage the potential integrated network. So this would mean mainly synergies in terms of costs rather than capex, to be clear.

There are no more questions registered at this time.

Okay. Thank you all of you for joining the call and speak soon. Bye-bye. Bye-bye. Thank you.