Rai Way S.p.A.

Good afternoon. This is the Coral School Conference Operator. Welcome and thank you for joining the RyeWave First Quarter 2023 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 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 2023 results presentation. Today, I have the pleasure of sharing the floor with Roberto Cecatto, the new CEO of Raiway. Despite only 10 days at the helm, Roberto is obviously pleased to introduce himself, share his first impressions and priorities, as well as the highlights of the first quarter. Afterwards, Alberto will take you through the financial performance in more detail to conclude with the usual Q&A session. Let me, therefore, hand the call over to Roberto. Please, Roberto, go ahead.

Thanks Giancarlo, and good afternoon to all of you. My name is Cecatto, Roberto Cecatto, and it's indeed a real pleasure to be here with you today for my first call. As you know, since April 28th, I have been appointed as the new CEO of Raway, and I take on this position, together with the rest of the directors, with great enthusiasm and sense of responsibility towards the shareholders and all stakeholders and towards the company itself and its team's employees. Let me spend a few words regarding my person. I am born as a tech engineer and I came back in a tech infrastructure company. Let me say it's the circle of life. For 18 years, I was the director of the largest Rai business unit, let me say a company inside the company, the TV production department. 4,000 people, considered that is more than six times the people of Rai. Lastly, in the past two years, I was director of regional and foreign production and also the director of real estate department. 1 billion euros of real estate assets, developing for the first time in Rai a 10-year plan to revamp and increase their value and rationale. But Raiway is not a stranger to me, because in the various roles held within the Rai group, I have often, and very recently, worked and cooperated with Raiway, always appreciating it for its expertise and quality. I'm taking the helm of a solid company, constantly growing over time, cohesive with clear strategic lines. Thanks also to the efforts spent of the former CEO, Aldo Mancino, my very good friend. And I believe it's a promising future. Let me add that I decide to accept this role because, believe me, I trust in this company. To put it very simple, we are in front of a company with, first point, an outstanding infrastructure, not replicable and with clear features in terms of location and uses. Second point, a core business referring to broadcasting and tower hosting, stable, but with excellent visibility in the medium term and significant cash generation. Third point, cash generation which, moreover, fuels a capital structure with very little debt and a large financial flexibility. Therefore, it looks reasonable to operate in On one hand, we will work to maximize as much as possible the value and the cash generated by the traditional business, whether it is through the feature of existing contracts, e.g. CPI Link, deeper efficiencies, new business opportunities. I speak about the possible rollout of DAB networks, hosting for 5G networks, understanding of transmission contribution services, and also possible industrial opportunities to generate synergies. The second direction is to use the cash generated and financial flexibility, this is very important, to invest in value-accretive diversification in new businesses on which railway can have a competitive positioning. Huawei, as I already mentioned, has already done a significant amount of work on this front. Obviously, the board and I, this is important to underline, just arrived, and we will now go through all the growth initiatives. But in general terms, it's fair to say that one of the macro trends to date, among the most visible and concrete, is the digital transition. Therefore, the plan to contribute to the creation of the infrastructure needed to enable digitalization processes and low latency services, I underline low latency services because it's a factor of differentiation about other subjects, while exploiting synergies with the current portfolio and expertise and assets, makes sense. And this is also the feedback we are getting from industrial and financial operators. It's not only a dream. Moreover, this infrastructure could also be leveraged to introduce new services for existing but also new media customers, for example, supporting more efficient content distribution on IP networks and platforms. As said, we already started to review internally all these initiatives in terms of opportunities and risk, from the waste positioning to where we are in terms of rollout to future commercial setup. And at the moment, there are no elements that differ from what the company has already shared with you in terms of rationale, timing, and results. Therefore, the messages I would like to share with you today are full awareness of the development path undertaken by the company, and I think this is fair considering the results recorded by the company in recent years, but let me say, last but not least, this last quarter, and the industrial interest gathered on new initiatives. And that's the focus of mine today. of the new board on the time management must be on rapid and effective execution. Of course in the execution I will bring my own methods and expertise. I have only been here ten days and have confidence in the work done so far by the company, but in my experience every change brings the opportunity to see things and organization in a different perspective. So there will be great focus on speeding up execution and seeking possible additional areas of optimization and efficiency. The mission is to push forward the initiatives with the best risk reward for the company and, where possible, accelerate the process to crystallize the existing value and to create new value by acting on clear operational and financial levels. And all this will fed into the elaboration of the new industrial plan and we will be working in the coming months also in view the aspiration of the current one that terminate on the 23. Coming now on the first quarter performance. The start of the year confirmed the strong growth path we expect for 2023, thus leading us, as we see later, to reiterate the full-year guidance. I think this is very important. In particular, revenues are up to 12.8%, mainly as a result of indexation of inflation typical of our contracts. and the growing contribution of the new regional multiplex business. These drivers, together with the nice trend in hospitality to fiber-to-wireless access operators and radio broadcasters, pushed third-party revenue growth to over 30%. As Adalberto will explain in detail below, Despite the progressively declining energy price in the first part of the year, electricity costs still suffer from an unfavorable comparison with first quarter and 22. Remember that when prices were contractually fixed at early 21 levels, with the negative impact related to the price effect of over 1.5 million euros in the quarter. Once energy price and other non-core effects are excluded, like level of personal capitalization on prior year adjustment, OPEX show a manageable increase, especially when compared to ongoing inflationary dynamics, demonstrating a cost control that we intend to continue in the future. As a result, ABTDA is up 12%. with marginality at 65.5%. Percentual growth that rise to 25% at net income level. Also considering the traditional lower level of investment on the first quarter, Cash conversion and recurring cash generation were strong at 97% and over 30 million, respectively. Net financial position, we include also the IFR leasing addend, stands at under 100 million. And with this, I give the presentation to Adalberto, to provide you with the details of the main items of our results. Please, Alberto, go ahead.

Thank you, Roberto, and good afternoon to everyone. Starting from slide six, as already mentioned, core revenues show a material growth in the first quarter of the year coming out at 76.8 million euro, an increase of almost 13% compared to 2022 levels. In more detail, on the right component, the roughly 10% growth reflects the CPI indexation. The relevant index reached 11.5%, as you may recall, at the end of November 2022. Only partially upset by the termination of the medium wave radio service, that you may recall from our previous touchpoint, has been effective since the end of the third quarter and resulted in a 2 million one-off penalty cashed in last year. On the other hand, acceleration in third parties' revenues was even stronger this exceeding the record level of €10 million per quarter, plus 34% quarter on quarter, pushed by the full contribution from the new regional multiplex capacity sold to local television broadcaster players, on which we elaborated during the recent full year result call, and that started to be progressively flowing since March 2022. The increase was, of course, also pushed by the positive CPI link that affects both RAI and third parties' revenues. And then we had good performance on the fixed wireless access operators and the radio broadcaster. Moving now to cost, let's go to slide 7. The total cost in the first quarter amounted to 23.7 million euro against 20.6 million euro recorded in the first quarter 2022. With other operating costs a touch above 11 million euro in the three months, negatively affected by the already anticipated by Roberto tough comparison on the electricity bill. On this, let me elaborate a little bit more. With the previous year figures still benefiting from the fixed price on the raw energy component agreed back in 2021 and effective, as you probably may recall, till the end of March 2022. All in all, consider that the first quarter 2023 average prices per megawatt hour, including all the components, were equal to twice the first quarter 2022 level, with the tax credit still in place, partially counterbalanced by lower incentive on ancillary costs. The comparison... according to the current energy unit prices, has been reversed in April and May, enjoying the downward trend we have been seeing since late 2022. On top, we also enjoy a double-digit reduction in consumption in the first quarter alone, brought about mainly by the brand-new equipment installed and the new network configuration. Consider that if you strip out the impact of the electricity prices and other non-recurring items, other operating costs were up by 5% in the quarter, with around half of this increase related to initiatives eligible for public grants, confirming the tight cost control we were able to carry out in such a strong inflationary environment. The same is The same applies to personnel costs that when excluding without taking into consideration non-core impacts and lower capitalization compared to the first quarter 2022 value grew by just 3.6% quarter on quarter against the 12% reported. Now moving to the profit and loss on slide 8. Our bottom line enjoys healthy 25% growth at €23.5 million, mainly reflecting a significantly higher EBITDA, lower DNA following the early termination of the useful life of the old DBBT equipment, and heavier financial charge because of rising interest rates, but with limited impact in absolute numbers. with a tax rate broader in line with the previous year. Moving now to the cash generation, last slide from my side, number nine. You can see how our debt slightly decreased in the first quarter in coherence with the seasonal effect, down to 92 million euros, from the €105 million recorded at the end of 2022 as a result of, among others, the strong EBITDA contribution, the €6 million CAPEX deployed in line with the historically low level for the first quarter, out of which €5 million were linked to development activities. the €13.5 million net working capital absorption and €9.2 million of taxes, delivering all in all a record regarding free cash flow to equity of roughly €31 million in three months. That's all on my side. I leave the floor back to Roberto for the guidance. Please, Roberto.

Excuse me, this is the operator. Maybe your line is on mute. Okay.

Thanks, Alberto, and thanks for your attention. In terms of expectation for the full year, as anticipated in the opening remarks, there are no changes from the guidance shared in mid-March. Specifically, in ABTDA level, the percentage growth is expected in the mid-teens area supported by CPI link, ramp-up of the contribution from regional refarming, and lower energy price compared to the last year, only partially offset by some negative comparison effect with 2022, which benefited from non-recurring items. On the energy assumption behind this guidance, compared to the call in March, the average raw energy price expectations are broadly stable, around €150 per megawatt-hour. Maybe in the future a little bit less, but we use these numbers. Tax credits have been extended to the second quarter although with a lower level of 10%, compared to 35% of the first quarter, because change, the government help on this factor from the industries. But on the other hand, incentives on the other price components have been largely reduced. The overall effect is slightly negative, but still leaving us in the range of the guidance communicated previously. No change also on CapEx, which remains substantially at last year's level, on both development and maintenance components. Let me say that, before welcoming your question, just a brief closing remark from my side. Although the last one is mainly a marketing slide on the way equity story, I find quite impressive results the strengths and opportunities, organic and by external lines, for value creation. There are the areas where we have to focus and work on, but also the ones supporting my enthusiasm and the optimism about the future. That's all on our side. We can now open the line for the Q&A session. Thank you so much.

Thank you. This is the school conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one under 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. The first question is from Fabio Pavan with Mediobanca. Please go ahead.

Yes, good evening. I would love to start with a welcome question for the new CEO. May I ask you about your view on sector consolidation? Thank you very much.

Good question. Let me say that I would like to avoid to repeat what is evident. It's really 10, 12 days, including some weekends, and I work on the weekends, that I was appointed to this role. I think that a question like that gives me the chance to say that is professional to answer in the proper way. Let me say that independently from this specific case, in general, in the whole infrastructure, potential asset consolidation is a level of industrial synergies and value creation. Consider that I have only been here for 10 days, but The consolidation file is one that I first checked, studied, and still analyze because I think it's very, very important. I am focusing my attention on that, and I committed to share with the board as soon as possible. Consider that the board is a new board. There is a lot of new members of the board. And I think that it is very important to give them as soon as possible all the information that I have found in the drop-down in a path of continuity with the past approach of the company. But let me add a very personal approach. I prefer to speak not so much but to do facts.

Thank you. The next question is from Stefano Gamberini with Equitasim. Please go ahead.

Good afternoon, everybody, and welcome to Mr. Ceccato. I have a question clearly now regarding the figures. If I'm not wrong in my math, the overall costs excluding... the energy costs, so including the personal costs, but excluding the energy costs that are not in the figures, my calculation should be up 14%. Am I wrong or not? And why there was such an increase of OPEX while during 2022 you were able to keep all the costs under control? And the second question is clearly what is the trend of OPEX that you expect for full year, excluding energy and one-offs? So in order to understand if the path of OPEX will be double-digit full year and what is the trend for the following years, more or less, in order to have a long-run trend. The second is regarding CAPEX. You confirmed the CAPEX while in the first quarter the figures were a little bit below our, my estimates we can say, and so if you can update us on development CAPEX, where is the situation, what do you expect in terms of new edge computing that should be installed during 2023, and what is the remaining CAPEX to finish the as the network that remains for 2024. Thanks a lot.

So, hi, Adalberto. So, in terms of cost, focusing on the cost in the first quarter, let's divide personnel from other OPECs. We have to remember we had a one-off last year in the personnel amounting to more or less half a million euros. So this is something that gives a benefit in Q1 because of the renewal of the contract in place with our employees. And, of course, such one is not replicable in Q1 2023. Then, again, on the personnel, we had a reduction, again, of almost, again, half a million euros coming from a lower level of... the component of the cost that has been capitalized. So these are the main impacts, the main elements that justify the variance in the personal cost apart from these, as I mentioned before. the overall increase is not so significant. And then, on the other operating costs, the increase in absolute number of the other operating costs, excluding, as you mentioned, the energy cost, is half a million euros in the quarter, and half a of this half of this reduction is of this increase sorry is due to some initiatives that will have a benefit actually they already have a positive impact in our other income line so nothing without any impact on the EBITDA so the residual increase is more or less 250,000 euros. So, again, nothing significant. In terms of overall figures that we expect to have by the end of the year, as you know, we focus on a guidance on the EBITDA. So, we are going not to give... precise details on the figures of our OPEX. Generally speaking, we will have a slight increase of our OPEX because of different components related to the new configuration that we have in place related to some, as you may recall last year, we talked a lot about some initiatives that we launched at the mid of the year in order to try to offset the increasing impact linked to the energy prices that finally at the end decreased. But anyway, we already have we already put in place at the time some action that give an impact, a benefit on 2022 and some negative impact on 2023. So again, something extraordinary. And then we expect to have some additional cost vis-a-vis last year due to the new initiatives on which we are working and that we start to to give a limited impact, but some additional cost will be recorded. And this is the overall situation on our OPEX, confirming in any way the guidance that we gave to the market with the full year results. So the EBITDA is expected to significantly grow according to the guidance also mentioned by Roberto commenting the relevant slide. Last question on CAPEX. As you know, we finished the refarming process, so the most important project on which we work in 2022 is finished. Now we expect to have more or less the same level of development capex recorded in 2022, same level should be reached also in 2023, but with a more important component linked to the new initiatives, so to all the investments in relation in particular to the development of the initiative of the EDGE data center. So the trend in the first quarter is but we expect, according to the plan which we're working on, to have an increase in the coming quarters. Thank you. You're welcome.

The next question is from Antonella Frongillo with Intesa San Paolo. Please go ahead.

Good afternoon and welcome to Mr. Cecato also from my side. I have a follow-up on your comment about the industrial plan that you mentioned that you are going to work on in the second half of this year. I read on the press that RAI is also going to elaborate its industrial plan and also will have to renew its service contract with the government. So my question is on the overall process. Could you help us understanding how you are going to work on your plan? Will it be in parallel with RAI work on the industrial plan? And if there is any connection between your industrial plan and also the service contract. So if the service contract is a precondition also for your plan.

Let me say that, broadly speaking, our plan will be independent from the process followed by RAI. Having said that, let's see what will be the requirements. of the new service contact to Rai to understand if there will be some additional opportunities for our company, for a way, for example, in terms of a rollout of the radio networks or other opportunities. I mean, we have already done a lot of work with Rai in the context of the refarming. So let's see. But coming back to your question, the two processes are, let me say broadly, unrelated.

Thank you.

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

Hi, good evening. Let me first congratulate with Mr. Checkup also from the side on his new appointment. I was wondering, back to Antonella's question, what level of commitment you have by Rai, new management, I suppose, on the data center opportunities, since they will, of course, imply higher leverage for Raiway and indirectly to Rai, especially given the current financial position of Rai Group. The second point, I was wondering if you can remind me the OPEX startup costs that you have in your guidance. You talk about the startup costs related to new infrastructure and services. I was wondering if you can elaborate more in order to help us to quantify the impact on these startup costs. And that's all from the side. Thank you.

As concerned the last question the impact is in the range of 1-2 million euro so nothing incredible for our overall figures and then on the other question I leave the floor to Roberto to give you some clarification.

Let me say that You see the news agency just this afternoon that was designated the new CEO of RAI, and the Assembly will close this role on the next Monday. give us some time to permit to the new AD that I know very well to recover all the job done by the right structure for the semi-worked industrial plan and to understand in the different ways independent and autonomous role of the two companies, what will be the eventual impact, interaction and so on. I think that there will be opportunity to find the best solution for the added value of the railway position. But this is my personal opinion. I usually am Not so much optimistic, but I have this perception just now.

Many thanks. Just a follow-up on the service contract. You were basically mentioning... Sorry, I hear some noise. On the service contract with Rai that we are going to renew back to the... previous question. I was wondering if you see any risks regarding the potential cap on inflation, such as the one that has been posed by Mediaset on its contract with the EI Towers. So a 3% cap or something like that. It is also applied to your

You referred to a negotiation that probably was referred to the contract between RAI and the ministry. Anyway, as concerns the contract we have in place with RAI, we already commented about this in the last call. Clearly, What we can say is that the content is very clear and stringent. It was renewed at the end of 2019 in the context of the agreement. As you may recall, we tried for the years 2021-2028. Then, yes, of course, we know very well that now the CPI was high, but if you look at the past, we also had in some years negative CPI, so the overall increase since the IPO is, if you take all the relevant index, is a little bit more than 2%, so something that makes sense. Finally, keep in mind that with reference to our main customer, we offer not just hospitality, but a tanky service providing the network. Therefore, the energy cost is not a pass-through, and the headwind reminds on our profit and loss. So this is the situation.

Okay. Many thanks.

You're welcome.

Mr. Benucci, there are no more questions registered at this time.

Okay. Therefore, I will say thank you to all of you and speak soon. Bye-bye.