Rai Way S.p.A.

Good afternoon. This is the Coral School Conference Operator. Welcome and thank you for joining the Raiway First Quarter 2022 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 Raiway. 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 first quarter 2022 results presentation. As per tradition, following the extensive call held just a few weeks ago on the full year results, Today we will try to keep it relatively short, focusing on a quick financial and operational update and leaving then room for your questions, which we believe will be forthcoming. Let me therefore hand the call over to Aldo Mancino. Please, Aldo, go ahead.

Thank you, Giancarlo. A good afternoon to all of you. As expected, the first quarter of 2022 showed a remarkable growth in line with our expectations with revenues growing by 6% benefiting from the inflation boost, the contractual step-up relating to the refarming for Rai, which began, as you may remember, in the second half of 2021, and whose impact will also be visible in the second quarter. And then the first contribution, still minor, from regional refarming, which is due to grow significantly in the coming quarters. Top-line growth was sustained by an exceptionally light cost base, the result of operating leverage, cost control, and an electricity bill that was still enjoying the fixed price contract that was still in place until the end of March. All in all, ABTDA was up 15.5%, with a record margin just under 66%, more than 500 basis points, higher than last year. On the operational side, refarming once again was the main driver of development investment. On the national front, the new network rollout being in line with the roadmap, Adriatic and southern regions have been completed, and we are now proceeding with the Tyrrhenian ones. On the regional front, the network activation in six out of the seven areas and the achievement of almost full capacity utilization following the commercialization phase, which has resulted, as of today, in more than 100 customers using our frequencies. Regarding the new services, the rollout of fiber optic backbone upgrade has started, while the design and procurement phase is continuing in the other projects. Now, before moving on to our usual financial highlights, let me reaffirm our confidence following the performance of the first quarter and the current market expectation on the evolution of electricity prices in the guidance for the full year provided last March, to which I will return in a moment, and of course, our full commitment to pursuing the opportunities included in our industrial plan. On slide five, you can see how in the quarter core revenues exceeded 60 million euros thanks to the aforementioned effects, while adjusted EBITDA matching EBITDA in the absence of one-off items jumped by 15% to 39.5 million euros. delivering a double-digit growth, even at bottom-line level, where net income neared €19 million. Investments in the quarter saw a temporary slowdown to €9.2 million, also due to some supply delays that mainly affected maintenance capex, already traditional low at the beginning of the year. This has helped net debt, which stood at just under 71 million euros, down from the year-end closing of around 88 million euros. And above all, cash conversion, which exceeded 98%. And with this, I'll hand over to Adalberto to provide you with details on the main items of our results, financial results. Please, Adalberto, the floor is yours.

Thank you, Aldo, and good afternoon to everyone. So, starting from slide 6, core revenues show a remarkable growth in the first quarter of the year, coming out above €60 million, an increase of 6.5% compared to the 2021 level. More specifically, in the right component, the acceleration in growth plus 7.9% quarter-on-quarter, Enjoy the anticipated contractual step-up related to the refarming and, as you should remember, effective from last 1st of July. Supported by the positive CPI dynamic as well. The CPI recorded in November that is the relevant value for the indexation of the majority of our revenue was 3.6%. To better understand the impact on Rai revenues when comparing the first quarter of 2021 and 2022, revenues from refarming activities and reclassified new services totaling roughly €2.1 million in the first quarter of 2021 have been restated in the chart from new services to fixed consideration. As a result, the 50.8 million euro recorded in the first quarter 2022 should be read against the 47 million euro in the first quarter 2021. Let's now spend a few words on the revenues from third parties that show a decrease of 2%, reaching 7.7 million, but If we strip out the impact from the expiration of some lower margin non-hospitality services, we can read a nice stabilization trend with pressure on MNOs offset by CPI link, fixed wireless access dynamic, and the initial but promising contribution from regional refarming. That, as a matter of fact, will flow in more materially along the rest of the year, finally reversing the overall trend on third parties' revenues. Let's now go to slide 7. OPEX's total cost in the first quarter amounted to €20.6 million, significantly lower vis-à-vis the €22.3 million recorded in the first quarter of 2021. On this point, however, I must hold back excessive optimism that may result in unrealistic expectations for the full year, given the record double-digit growth at EBITDA level. Indeed, in the first three months, personal costs, excluding non-core impacts, remained quite flat, while the record low of €9.4 million in other operating costs benefit from lower electricity consumption year on year, electricity prices in the Q1 still lock in at 2021 levels, and last but not least, let me say above all, the positive impact of the government energy bonus amounting almost 1 million euro in the first quarter. I must here remind that under the new contract in force since April 1st, raw electricity prices will no longer be capped and consequently we will see a spike in the electricity bill in the coming quarters that in any case, and as already anticipated, we consider absolutely manageable. Now, moving to the profit and loss on the following slide, slide 8. All in all, our net income enjoys, as Aldo mentioned, a double-digit growth, 11.7%, reaching €18.8 million, mainly reflecting a higher top line, the strong profitability at 65.8%, up by 513 basis points vis-à-vis the first quarter of 2021. reflecting also higher DNA following the recent investment activity, development investment activity, while the tax rate is now back to normal level from the 23.4% recorded in Q1 2021 due to the 1 million euro one-off tax relief related to COVID in relation to ERAP. Moving now to the Cash generation, slide 9, you can see how the company consistently with the seasonality where typically the first three months of the year record a good cash generation. In these three months, our net debt improved from 87.9 million euro at the end of last year reaching roughly 71 million euro at the end of March, as a result of, among others, strong EBITDA contribution, the unusually light impact of CAPEX totaling 9.2 million euro in the quarter, almost exclusively related to development investment, and then 7.5 million euro of P&L taxis. resulting, all in all, in a record recurring free cash flow of about 28 million euros. That's all on my side, Aldo.

Thanks, Alberto. Moving now to slide number 10. As anticipated in the opening remarks, let me now elaborate on the guidance for the full year 2022, confirming the indications already provided in March. Obviously, and unfortunately, the double-digit growth in adjusted EBITDA recorded in the first quarter will be gradually absorbed over the course of the year. In fact, although the effect of the CPI will continue and the contribution of regional refining will become increasingly tangible, on the other hand, the comparison will become more challenging. Step-up refining for very effective from second half of 2021, and above all, the impact of inflated raw electricity prices will come into play. While, as commented before, in the first quarter, we only benefited from the cuts in charges and the reduction in consumption. As a net effect, all of this, we therefore reiterate at the full 2022 level what we have already anticipated. namely in terms of revenues and mid-single-digit growth mainly driven by ECPI link, full impact of the step-up related to RAI effective refarming from the second half of 2021 with a benefit of additional around 3.5 million euros, and third-party regional refarming. Drivers that allow us to balance the postponement of some new services for RAI compared to initial expectations. And, on the other hand, to reach a turning point for third-party revenues, although through a more shared approach in the definition of stabilization paths with M&AOs as a mix of discounts and higher volumes at attractive fees. Adjusted EBITDA is expected to grow further, assuming a progressive normalization of electricity prices. On this specific point, let me recall what was indicated in March. As you remember, assuming a level of unit prices at around 250 euro per megawatt hour, which in March matched the future expected for the remaining nine months of the year, growth, in any case limited by the headwind, could have come through actions on costs and further government relief measures. While in case of progressive price reduction, the confidence in growth would have increased, becoming less dependent on actions on costs. And conversely, in a scenario with further prices increases, growth in 2022 would have been less likely, but we had been mitigated over time by, first, by CPI-linked revenue applied at the beginning of each year, secondly, progressive reduction in consumption, and the possibility to temporarily act on other cost items. So now what is the situation today after about two months? In terms of price trends, the average unit price paid in April was around 250 euros per megawatts per hour, and future for coming months, although still volatile, unfortunately, are at slightly higher levels. At the same time, the government has extended also for the second quarter 2022 the additional relief measures approved in December for the first quarter. And it is reasonable to expect further essential anti-pricis return to more rational levels. So the company has already identified some cost areas to act temporarily on in order to contain the effects. About bottom line, we are still within the base scenario that should allow us to guarantee a slight growth of our adjusted EBDA compared to 2021, even under these conditions. Moreover, in term of further perspective recovery, I could point out that the CPI accrued in April compared to November, which will impact 2023 revenues, is equal about 4%, of which 1.5% derives from the energy component. And lastly, at investment level guidance, maintenance capex is expected to to be in line with industrial plan values, therefore slightly higher than the recurring value of around 6% of revenues that we expect post-network upgrades. And about development, CAPEX is seen in line with or slightly higher than 2021 values with the completion of refining activities and the growing portion related to the implementation of new services. That's all on our side. We can now open the line for the Q&A session. Thank you.

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 their touchtone 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. We will pause for a moment as callers join the queue. The first question is from Fabio Pavan on Mediobanca. Please go ahead.

Yes. Hello, everybody, and thank you for taking my question. Just one on my side. I was wondering if... there is any update on the PCM and the potential sector consolidation that you can share with us. Thank you.

Hi, Fabio. About consolidation, since the last touchpoint in March, a few things have actually happened with regard to possible sector consolidation. The The DPCM published in the official journal, so namely the Gazette Officiale, for non-Italians, the Prime Ministry decree, which at the time of the Fulia results, so last March, was just a press rumor. After that, the hearing of the Ministry of Economic Development, so at at Rai Supervisory Committee and the notes of the Ministry of Finance at the same committee, which demonstrate a certain support of the government towards industrial deals to straighten the value and the positioning of our company of Raiway. After that, the The recent hearing of Rai's CEO, again at the same Rai supervisory committee, where he commented the DPCM as a measure that provides Rai the flexibility to support potential industrial operations to enhance the value of our company, of Raiway, consistently with our industrial plan, and not simply a way to extract cash. pointing out that the different options will be assessed in the context of the new RAI industrial plan currently under development and anticipating the upcoming selection of financial advisors to support RAI in this assessment. So, based on these events that I just tried to summarize, I am confident that conditions are being created to discuss solutions to meet the requirement of all parties. Of course, the requirement of, firstly, the requirement of the government, which we just set out in the PCM, with the retention of 30% in the hands of RAI, the preservation of RAI and public control of the infrastructure, and the confirmation of the listing of the company. And, of course, the requirement of all shareholders. And the governance of the combined entity will likely be the key, also with reference to antitrust topics. But this is, let me say, a topic which belongs mainly to shareholders and not to Rayway. But as... As the operating company that knows very well the sector, the operational and the regulatory, all regulatory aspects, and has analyzed this opportunity over time and also from different perspectives, we are certainly proactive in supporting the discussion and bringing our ideas forward. But, you know, since governance will be a key point, we cannot, of course, bypass or disregard the shareholders' engagement.

Thank you. Thank you, Fabio.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone. Once again, if you wish to ask a question, please press star and 1 on your telephone. The next question is from Giorgio Tavolini of Intermonte. Please go ahead.

Hi, good evening and thanks for taking my question. I was wondering if you could provide us a more granular update on on the key issues with the antitrust in the event of a combination between the right way and the powers. In particular, I was wondering if you could clarify the main obstacles regarding the horizontal and vertical integration, because I didn't actually understand completely what are the real missing conditions to proceed with this sort of combination. And in particular, I was wondering if you could clarify also the structure in the sense if it's, I don't know, the current structure of RAI controlling the infrastructure of the combined entity, if in the future could be an obstacle for the antitrust issues since eight hours would... bring competitors of RAI hosted on the infrastructure of the combined entity. So it was just to clarify what are the main missing points more in detail. Thank you.

Hi, Giorgio. So I start from the from your first question about antitrust issues. Antitrust issues are largely known because the sector, as all of you know, has been investigated several times by the Italian, the authority, the DGM in recent years. last time for the procedure of transactions. There are two different aspects. On horizontal integration, I think that the international experiences of a single operator should offer, in my opinion, a good benchmark. And The other, the aspect about the vertical, on the vertical perspective, it's clear that the, you know, the reduction, the reducing, the influence of vertical integrated players could help. This is for sure. But remedies, I think, could be, can be varied. So the important thing would be to evaluate these remedies and that they do not jeopardize industrial and financial rationale and the value creation of a potential DE. And about the second part of your question, I tried to elaborate but the decree requires to keep at least 30%. And so a level that already applied to other, as you know, public infrastructure companies to preserve the ownership of the asset. And keeping the control of the infrastructure in order to guarantee this is the continuity of of the public services we are providing. So, for example, one could potentially imagine governance solutions that preserve the ownership and the control of the infrastructure, also with 30% of sake, giving at the same time comfort to the regulator, reducing the influence of vertically integrated players on operating activities and access to infrastructure. So, you see, or perhaps also other types of remedies, of course. So, this, I think this could be Okay, thank you.

Just a follow-up. For the two different master service agreements, do you see any problem related to the different timeframes of both master service agreements of 8 hours and 3 weeks? And also on the fact that EI Towers doesn't have the ownership of the active equipment.

No, we don't see here any issue. Let me also say that theoretically we could also imagine some alignment in the context of a negotiation. But here, to be clear, I don't see... I don't see any issue, anything could be managed.

Okay, thank you very much.

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

Okay, thank you, Operator, and thank you for all of you, and speak soon. Bye-bye.