Rai Way S.p.A.

Good afternoon. This is the Cross-Call Conference Operator. Welcome and thank you for joining the RightWay 9 Months 2022 Results Analyst Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to 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 welcome to our nine-month 2022 results presentation. As usual, Aldo will start with the highlights and figures of the period. Adalberto will then illustrate the financial details. And at the end, we will welcome your questions in the usual Q&A session. Let me now hand the call over to Aldo. Please, Aldo, go ahead.

Thank you, Giancarlo. Good afternoon to all of you. Even after a quarterly heavily penalized by the dynamic of energy prices, we are pleased to present today economic results for the first nine months still largely up, despite our electricity bill increased more than 6 million euros in the third quarter 2022 compared to the third quarter 2021. This strong result has been thanks to four key drivers. Firstly, the indexation of our contrast to 2021 CPI. While the impact that rising energy prices are having on inflation this year will be reflected on our revenues in next year in 2023 as we will see later during this presentation. Secondly, the further increase in core revenues in total up by 7%. In particular, we have seen the full impact of the farming aggregates with rye, which in 2021 was effective only from the second half of the year. And we have had a new source of revenues thanks to the regional multiplex business. that led to third-party revenue growth of more than 9% in the nine months and more than 70% in the third quarter alone. The third key factor is the control of operating costs as an effect of the temporary actions to limit discretionary spending as a measure to mitigate rising energy prices. Again, some non-recurring benefits, in particular through a one-off contribution of €2 million, positively affecting our top line. As a result, revenues for the nine months are up 7.4%, while adjusted EBITDA is up 5.2% or €5.7 million compared to 2022. To give a better idea of the underlying trend and the contribution of new initiatives, I think it's worth noting that excluding the negative effects of energy prices and the positive non-recurring benefits, EBITDA growth could have been above 10 million euros, about 12 to be precise. In terms of investments, the level of development capex around 10 million euros lower than last year, reflects the gradual reduction in activities for rail network upgrades and rising investment devoted to initiatives for third parties, mainly the regional reforming investment for third parties that will materially increase once construction of new infrastructure begins. From an operational perspective, Refining activities reached the final stage, focused on the upgrade of the last equipment to DVB-T2 technology and on some network improvement of the new regional networks, both in terms of coverage extension and distribution radio links. When we met in July, negotiations were in advanced stage. Today, we are happy to confirm that the renewal for the next sixth year of the contract with one of our most important M&O customers has signed in recent weeks. This agreement is relevant because, as you know, this segment has been characterized in recent years by pressures on prices and on volumes. This agreement envisages a progressive average Tariff reduction through the activation of new POPs at incentivized rates. A little bit of further network optimization to be progressively recovered through new POPs and POP upgrade to 5G according to our contract framework. New technology and new frequencies are on top of the contractualized perimeter. So all in all, at the end of the new contract period, we expect to reach revenues above the current level, so totally in line with the targeted stabilization path for activity with M&Os. Again, in July, we provided an update on the start of the procurement procedure related to the first set of edge data centers and the provision of the technology components of the content delivery network. The contract for the construction of the 5G data center represented the most important location and about 1.6 megawatts of geographically distributed IT capacity, around half of the total capacity of the project, has been awarded and all permits secured with work starting early next year in order to have the assets available by the end of next year, 2023. Also, the anticipated capex figures of around 25 million for the first five years is broadly confirmed. In terms of expectation for 2022, several factors, including the recent cool down of electricity prices recorded in October, the additional government relief measures, the tax credit, and the effect of the mitigating actions on other costs should allow us to increase our target for BTDA growth, which is becoming more visible and even more significant. So let's now move to slide number six to summarize the key financial of the nine months. Starting with top line, core revenue reached 184.4 million euros, 7.4% higher than the first nine months of last year, driven by the already mentioned effects. Adjusted the BTDA grew by 5.2% to 115.7 million euros, with profitability impacted by energy costs, but still at a remarkable level, close to 63%. At net income level, growth stood at 6.6%. Maintenance capex, maintenance investments, as usual, are still relatively low, as mainly concentrated in the fourth quarter of the year, while development capex are once again supported by refunding, although with the rising contribution of initiatives for third-party customers. Net debt closed at €122 million, substantially stable compared to June, with leverage approaching the one-time ABTDA level as forecasting as an organic basis in our industrial plan. Cash conversion remained very strong, above 90%. And with this, I'll hand over to Adalberto to provide you with details on financial performance. Please, Adalberto, the floor is yours.

Good afternoon. Slide six, let's focus on core revenues. Core revenues, starting from, I would say that we reach 184.4 million euro in the nine months vis-à-vis 171.8 in 2021. Trends are similar to the one commented in the last call with some news. More specifically, on the right component, the 7% up compared with the restated figures for the nine months 2021 depends by the acceleration in growth driven by the reforming step-up already commented. The positive CPI dynamic already commented, and then we have the new 2 million one-off benefit arising from the collection from RAI of a contractual penalty related to the interruption of a minor service, the so-called medium wave AM radio broadcasting used for the vintage radio. Some of you may have noticed a slight reduction in the contribution from new services for Rai, basically due to the withdrawal of local broadcasting services in the context of regional refarming projects, which, on the other hand, continues to drive third parties' revenues up 9.4% in the first nine months, reaching 25.6 million euros, and by even 17% if we look at the third quarter alone, enjoying, among other things, lower pressure from M&O and good performance of other customers. Mainly, I'm referring to the fixed wireless access operator. You may then recall how in the recent past we used to comment on a negative trend, finally reversed as expected with even the possibility of some further upside going forward. Let's now go to the following slide, number seven. You can see the magnitude of the impact of the electricity cost headwinds on the operating cost base, which grew by more than 20% year on year. Our electric bill increased by an impressive 7.2 million euros over the nine months, out of which 6 million are recorded in the last quarter, in the third quarter alone. Already net of the significant relief measures arranged by the government in the past months mainly a 15% of reduction on the cost of the third quarter in the form of tax credit. And then we still have the cut of certain ancillary components of the overall bill. Then we also benefit from from a double-digit reduction in electricity consumption recorded so far, something quite impressive considering all the work we did to renew our network that is new from a technological point of view but also more efficient for this purpose. On the personal front, excluding non-core items and lower capitalization compared to 2021, HR costs remained relatively flat, proving to be not so strictly linked to the CPI. The same underlying trend applies to the other costs, whose reported figures were positively impacted by some non-recurring benefit and mitigating action on discretionary spending to counterbalance the energy headwinds already mentioned. All in all, total cost in the nine months exceeded 69 million euro, almost 11% up from 62.3 million recorded in the same period in 2021. Now, moving to the profit and loss on slide number nine. Bottom line, at 56.3 million euros recorded on overall 6.6% growth in the nine months, mainly reflecting the just commented a bit dynamic lower DNA following determination of the useful life of the old DNA DVB-T equipment, now replaced by the DVB-T2 equipment, and then tax rate back to normal levels, something more than 28% from the low level recorded last year that enjoyed, I remind you, a COVID-related tax relief of $1 million. Moving now to the following slide, number nine, cash generation. We see from our traditional bridge, we see that net debt reached €122 million, essentially unchanged from the end of June with the quarter cash generation absorbed by CAPEX, including €35 million of development investment and tax payment occurred in July. The average ratio below one time net debt to EBITDA is consistent with the industrial plan trend in the presence of very strong recurring cash generation amounting about 78 million euro at September 2022. Now, before leaving the floor again to Aldo, Let me just share some talk on the evolution of the two key drivers that are impacting our full year guidance and the expectation on our future performance, starting with 2023, which I remind you is the last year of our plan. In slide 10, we offer you an updated picture of inflation, CPI, and electricity prices dynamics. historical and forward-looking compared to the rather tricky situation commented earlier this summer. On the energy front, so the left part of the slide, our forecast discussing the same slide we presented in July for the raw component prices around 400 euro per megawatt-hour have been confirmed during the third quarter. Moreover, let me clarify that the figures here include the impact of the tax credit not taken into consideration in July because at the time the government had not yet approved such tax benefit on the second half. If you look at the latest forecast on the last quarter, we see some positive surprises First, today we have a renew and enhance tax credit by the government up to 30% for October and November from 15% in the third quarter, pending a possible extension on December as well that is now not included in the figures. Second, we are witnessing a downward trend in the current market prices and in the forward prices. For sure, we still have, we continue to have a lot of volatility in the market, but there are also 50 days left until the end of the year, so we have better visibility on the yearly figures on 2022. On the inflation front, on the right part of the slide, the further acceleration of prices in the last months brought the last detection by ISTAT above 11% year-on-year, which is likely to translate into a significant potential upside on our 2023 revenues, thus amplifying the natural edge effect typical of our business model. Once again, I would like to mention that even pending the CPI index detection at the end of November, relevant to our inflation link, the numbers shown in this slide are still subject to a great deal of volatility. However, again, as I just mentioned, the current visibility and the evidence acquired so far allow us to improve the guidance for 2022 with a good margin of confidence. On this, I leave the floor to Aldo. Please, Aldo, go on.

Thank you, Adalberto. And what Adalberto just outlines in terms of impacts and sensitivities in relation to electricity prices is reflected in the updated expectation for the full year 2022 and perhaps also beyond. Basically, compared to the indication given in July, nothing changed at the top-line level with growth expected at mid-single-digit level. While at ABTDA level, the reduction in electricity prices recorded since October, the current level of power future for the rest of the year, the government relief measures, and last but not least, the effect of mitigating actions on other operating costs, give us more visibility on the possibility and the magnitude of the EBITDA growth in 2022, now expected stronger compared to the previous indications. That said, it's also fair to keep some degree of caution in light of the high volatility, as Alberto mentioned, the prices and power futures continue to show. We are seeing swings of more than €100 megawatt hour in a couple of days. So this is a high volatility. And at the same time, however, the dynamics of the electricity prices are also reflect on inflation, both directly on energy goods and directly to the impact on other products. And the CPI escalator included in almost our contracts will allow us to more than offset in 2023. So just with the time lag, the energy headwind that is housing us. Lastly, at investment level, maintenance capex are confirmed in line with our industrial plan figures while considering slight delays from some suppliers mainly regarding inventories and therefore not affecting the continuity of the business. Development capex are now expected to be attached below initial expectation, roughly in line with last year's level. Moving now to slide number 13, our strategy and our strategy which is a mix of evolving our traditional business and diversifying through the development of new infra and new services remains valid. even the new scenario we entered in. And the validity, let me say, is due to the huge amount, the huge contract backlog provides visibility on revenues and cash generation on the business that in the past has already proven to be highly resilient also in a weak environment with the top line not linked to the economic cycle. The natural edge, or I would rather say net benefit from inflection. And the digitalization trend, one of the most evident trends supporting our investment case on the new in-front services we are developing. And an unchanged commitment to deploy the high amount of available capital. So that's That's all on our side. We can now open the line for the Q&A session. Thank you.

Thank you. 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 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Fabio Pavan with Mediobanca. Please go ahead.

Yes, good evening and thank you for taking my question. Actually, before asking my question, I would like to congratulate for the results we have managed to achieve in such a challenging quarter. Then, coming to the question, we have read about an NDA eventually signed between RAI and F2I sharing information on a potential tie-up between RAI and EI towers. I was wondering if you can share with us some comments on this. And the second part of the question is, have you managed already to discuss about the sector evolution with the new government representatives? Thank you very much. Okay.

Hi Fabio, thanks for the question. Let me elaborate a little bit on the topic of consolidation, trying to be as comprehensive as possible. In terms of activities, the dossier is open. The shareholders are working on it, on possible scenarios, that is must be compliant with the requirement arising from the new PCM that is now in place and, of course, from antitrust issues. In this respect, it appears you mentioned the NDA that was signed by the shareholders of Railway and Day Tower to start sharing some information about companies. And at the same time, it's fair to say that the appointment of the new government that, let me remind us, is the controlling shareholder of our parent company, make it appropriate also to get its stance, in particular on the governance of an asset that has been indicated as a strategic asset in the PCM. So in this perspective, the DPC-RAM sets out three clear requirements. So first, right way to remain listed. Secondly, right to keep at least 30% of the company in terms of the level of the stake. And third, right to keep control of the infrastructure in order to guarantee continuity of the public service. So this is what the DPCM requires. Then different or additional requirements, for example, control on vertical integration and so on, could come from antitrust, as we already know, or mainly from shareholders. But as you may understand, this is not fully in our hands. So as manager of the company, we have preferences in terms of strategy, operations, areas of investment, leverage, and so on. But when you refer to control or governance of the company, it's something not up to us, but to shareholders. And about your second question, no, not yet, from any interaction with the new governance from the right-wing side at the moment.

Thank you very much.

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

Hi, good evening and thanks for taking my questions. I had a few questions that may be boring because they are more on the modeling. I saw that you reported lower DNA following the termination of the useful life of the VBT equipment. I was arguing if it's fair to assume for this year 46 million euros rather than 50 million euros DNA given current consensus is at least $50 million. And what is the right level for 2020-2024, given you are investing in the refarming, the last cycle of investment? The other questions are on the third-party revenues, I see that the major driver of growth came from FWA and MNO, but I was wondering if you can provide a sort of a breakdown between this contribution and the new regional resigning contribution, because I guess there is an higher visibility. And the third question is on the data center business. What is fair to assume at this stage as early revenues? I mean, I don't know, two to three million from 2024, if it's a right guess for the initial revenues from this business. Thank you.

Okay. So... lower DNA you mentioned a number for 2022 let me say that the final number I believe will be closer to the one you mentioned we expect to have a reduction vis-a-vis the number recorded in 2021 and then after 2022 due to the new CAPEX on the new project, we should expect a progressive increase. As concerns the third parties' revenues, you know our work was to try to reduce the overall impact of coming from the pressure related to our M&O customers. What I may say here in terms of details is that the overall amount of revenues, third parties' revenues related to the MNOs are something less than 13 million euro in the first nine months. we clearly we are seeing clearly an important increase on all the other stream of revenues here we are going not to provide details but the positive impact is related as I mentioned to the regional refarming project and mainly regional refarming project and then from the fixed wireless access player. Sorry, your last question? Can you remind me?

The initial data center revenues in 2024, I guess, or 2023, but I guess 2024 more.

If you are referring to the impact in terms of revenues, we should... expect the first contact to generate a positive impact on our top line starting from 2024.

And could it be 1% boost on your sales or even more?

I expect more than 1% in relation to the capex that we expect to have. If you are referring to 2024, I would say it will be a single-digit impact, just to be clear. Low single-digit impact, because it's the first year where we will see some positive

on our top line.

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

Good evening everybody. Thanks for taking my questions. The first regarding page 10. If I understood correctly, the increase of costs that we could expect in energy in 2023 are around 13 million euros versus 2021 and the increase of revenues related to cpi update is in the region of 35 million so theoretically the additional abda is in the region of 22 million 23 to 21 only for this item so could we expect an increase of a bda more or less similar in 23 versus 21, so means 165 million euros. Am I very far from what we could expect next year? What are the other moving parts that could negatively impact the 2023, considering also the positive trend you have on regional refarming and other revenues? The second question regarding how related to inflation the other contracts, MNOs and regional networks. How these contracts will be updated for inflation next year? Should we expect 75% of the 11% of inflation that you will get from Rai or are there some other growth? And the third one regarding the data center investment in general you underline 25 million euros of investments and the first start of revenues in 2024 could you remind us when the contract and who are your clients for this for this business when the contract could be signed for the return on this investment or you already have some contact in your hands and the same if you can update us on the upper scale, where we are in terms of permitting, when we could expect an update also on this project, even in 2023, could we see some investment in the upper scale? Thanks a lot.

Thank you, Stefano. So let's start with your question on slide 10. The math is, I would say, as simple as it is correct, but let me make some clarification. As shown in slide 10 of the presentation, starting from the adjusted EBITDA, we will record in 2022, to be precise, net of the non-recurring benefits positively impacting this year. We should add... 27 million euro from CPI and deduct 3-4 million euro from energy headwind, obviously pending the CPI figure for November 2022. Of course, these are the major moving parts. Then, you should consider the further contribution from regional reforming, the efficiencies a slight further reduction from MNOs, the startup costs related to the implementation of new initiatives, and so on. In addition, keep in mind that electricity prices are still extremely volatile. We are seeing swings of 100 euro per megawatt hour in a couple of days. I'm referring to the last two days. Therefore, the 3-4 million additional energy add-in expected for 2023 and shown in slide 10 is only for illustrative purposes, but the actual number could differ materially depending on price evolution and possible extension of government measures that currently are not included in our simulation. Let me add a couple of considerations you should consider. I'd be proud of the ability of the company to respond to such a strong energy shock, because it's true that prices are coming down slightly, but the increase in 2022 in the cost for energy is still very material, around 9, 10 million euros. And we are managing to secure a tangible increase in our EBITDA. When excluding the delta, the variance compared to the original assumption of the industrial plan with reference to the energy prices, total accumulated CPI and one-off impacts, the underlying trend of our numbers towards 2023 is bang in line with the expectation presented almost three years ago. Ben, as concerns your question on the CPI in relation to the other customers, let me simply say that all, mainly the majority, almost all our contracts have a 100% link to the CPI. So this is true also for the local refarming companies. the local, sorry, broadcasting player. And you mentioned probably in your question the MNOs. So this is the situation. As concern your last question, I leave the floor to Ad.

That's two more questions. One is related to hyperscale data center. And we have the final designs of the project ready. and the draft agreement that is almost shared with the municipality. Basically, all documents needed to submit the application to officially start the permitting phase involving several different authorities. We have actually been ready to start the permitting phase for some time, but in the meantime, the city council has been reset, and this has led to a slight slippage in the timeline. But the goal is to start the process, the authorization process, in the coming weeks. Then we expect about one year to be in the position of perhaps 10, 12 months, so I think one year, to be in the position to start the construction, and an additional year to have the first megawatts available. So in general terms, the design includes a scalable asset, including four different modules of about 8 megawatts each, which can be developed progressively as demand, as commercial demand grows, for a total IT load of about 35 megawatts. It is, as you know, located in in the area near here, near Rome. Giancarlo, for the last question.

On the likely and potential customers, I mean, when Alberto mentioned 2024 as the year of first revenues coming from these new services was referring mainly to the edge data centers in and the CDN, not the hyperscale data center. In terms of main customers that we expect on these new services, on the CDN side, mainly content providers, so being both OTT operators not having a proprietary CDN, but also, and I would say also in particular, traditional broadcasters moving part of the linear distribution also on these new platforms, and gaming operators. In terms of edge, the edge data centers network, typical customers will be cloud providers, also MNOs for the 5G virtualization of the network, And generally speaking, all of the service providers of the so-called low latency services like video analytics, real-time monitoring, virtual reality, mixed reality, and so on. Then in terms of timing of the contracts, let me say that it's quite complicated and difficult to have a pre-commitment on these kind of assets. so contracts will follow when we will get closer to asset availability. But in the meantime, the discussion and talks that we are having with the potential future agents, CDI customers, let me say that are extremely positive as we are collecting a great interest in the assets and in the services.

Many thanks. Very clear. Thank you.

You're welcome.

The next question is from Pilar Vico with Credit Suisse. Please go ahead.

Hi. Good afternoon, and thank you for taking my questions. I have two on my side, please. So the first one is around the high interest rate scenario. So how would you think about the upcoming debt refinancing? What is the impact that we could expect in full year 23? And the second one is... Another one around the energy impact. So how likely will it be the government to extend these energy measures? And what would be the benefit in that case in full year 23? We have seen other governments like the German government and Telefonica Deutschland stating that the measure could be extended up to Q1 24. So how is this looking on your side? Thank you.

So let's start from the last question. Even in Italy, even if we do not have as of today any decree in place covering the period, covering 2023, there are several statements from the key component of the government saying that they will continue to support the companies in order to reduce the impact coming from such increase in the electricity prices. Let me also say that all this support by the government is important financed by the increase in the overall price of the bill that is giving more VAT. This is true for the electricity bill but this is also true generally speaking all the governments because of the CPI are seeing an increase in the income from the VAT and this is allowing the government like This is what is happening in Italy to extend all the measures in order to support the business of the company of the countries. This has concerned the energy cost and the government measures. Then you ask about... the potential impact coming from the expected refinancing that we expect to have next year. Clearly, in terms of spread, I do not see a big impact. Of course, as of today, we have more or less, if I'm not wrong, 50% of the overall debt that is hedged. And for sure, we will have a different price, a different rebate that will be taken into consideration in the new financing that we are going to have starting from 2023.

Thank you very much. You're welcome.

The next question is from Lampros Miles with Kemp & Co. Please go ahead.

Hi, good evening, and thank you for taking my questions. So I have two on my side. One, if you can give us some color on the adjusted EBDA that you expect to be higher than you previously communicated. So how can we quantify or think about this for this year? And then the second question, is on the Hyperscape data centers. If I remember correctly, the previous sort of guidance was for two units of 10 megawatt, but now you said earlier that you expect the total capacity or IT load to be around 35. Could you please give me some follow on that? Thank you.

Okay, so let's start from the last slide. Your last question, as concerned the dimension of our hyperscale data center. I would say, actually yes, in the past we talked about 10 megawatts per building. As of today, probably with the work we are more precise and for each building we expect to have 9 megawatts. And then in terms of overall amount, we expect to have the flexibility because of the dimension of our land to build during the time up to four buildings for a total capacity of 35 megawatts. So these are the figures as concerned today. the data center. Of course, in the next year, we expect to work on half of this overall capacity. And then, based on the demand that we will have, we will be happy to build also the other buildings because I remember this investment is a modular investment. Then you asked me about a quantitative guidance on the EBITDA. I'm sorry, typically here we have always given a qualitative guidance, but let me say that in July we guided for a limited EBITDA growth due to the Edwin from Energy Prices. Now, if you compare slide 10 with the same slide presented in July, this Edwin is now expected €3 million lower than what we presented in July. So, more or less, this is a number that you may take into consideration for your purpose.

Understood. Thank you. And if I can follow up on the edge data center capex, could we have an estimate of how much it would cost for all 15 of them? Thank you.

On the edge data center, we expect... I would... The construction capex per megawatt are a little bit higher than an IP scale data center. We should expect more or less in terms of construction capex about 15 million euro per megawatt.

Thank you very much.

Then on top of this, let me also add, sorry, apart from the construction capex, then we could have also some other costs, but the impact, of course, is going to be lower due to the connectivity, some IRU, and so on. But the proper figures that you may take into consideration is the one I just mentioned.

Okay, thank you.

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

All right, then. Thank you for joining the call and speak soon. Bye-bye.