Rai Way S.p.A.

Good afternoon, this is the Corusco Conference Operator. Welcome and thank you for joining the RightWay 9-month 2023 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 RightWay. Please, go ahead, sir.

Thank you, operator, and good afternoon. Let me start thanking you all for joining us today, and welcome to our nine-month 2023 results presentation. Today with me, Roberto Ciaccato, CEO, who will share the highlights for the period, and Adalberto Pellegrino, CFO, who will take you through the financial performance more in detail. At the end, we will open the line to your questions in 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. The third quarter, and more generally the second part of 2023, are proving to be intense in terms of activity and satisfying in terms of economic results. Starting with the latter, the quarter consolidated the growth trajectory already recorded in the first half. In particular, looking at the overall performance for the nine months, revenues are up about of a factor of 10.7%, mainly benefiting from the link to inflation and the contribution of regional farming. Excluding, as you will recall, the one-off proceeds from RAI of 2 million in third quarter 2022, growth would be of 12%. confirming the ability of our traditional business to deliver net of non-recurring growth in line with all above inflation factors. Adjusted EBITDA is traditionally very strong in the third quarter, with margin close to 70%, to be precise 69.9%. Driven by revenue growth and, let me underline, strong cost control, despite the inflationary dynamics of the recent times. When compared to nine months 2022, the 20% growth also benefits from lower energy tariffs, especially when compared to the last year's third quarter. Investment. Regarding investment, the maintenance component is broadly stable at around €7-8 million, while the development component is, for the time being, down on last year due to the sharp reduction in the farming portion. In 2023, activities are limited to the completion of inventories. but awaiting an acceleration of the diversification project, which we expect shortly based on the updates I will share in a moment. Let me emphasize once again the great capacity to generate cash with the recurring free cash flow to equity after leasing, financial charges, taxes, and maintenance capex, exceeding 90 million, basically matching in nine months the level reached in the entire 2022. From an operational perspective, besides confirming the usual good performance of our broadcast networks for RAI, but not only for RAI, also for the third parties, and the good hospitality dynamics shown in particular by some categories of customers, such as FWA and radio operators, I'd like to update you on a few fronts. First, what I consider to be a key milestone for the company's development path. The green light received by our board on the main diversification initiatives, namely data center and content delivery network. As you know, the company has already done a lot of setup work under the current plan, also including the permitting, the procurement, and some construction activities. But let me say that the vast majority of investment, potentially amounting to a few hundred millions, will fall within the time frame on the next industrial plan. Therefore, the full board support was not only appropriate, but necessary. This board decision, while confirming the direction taken, marks the shift from the setup phase to the major execution of what, along with other initiatives, will represent the expansion process of the next industrial plan. There are several elements appreciated by the Board. The supply-demand balance of target markets, expected returns and risk-reward. Analogies with our current infra-business, such as customer reliability and concentration, contract duration, marginality, and so on. Synergy with railway distributed assets and personnel on the territory. the size of the product, but high modularity of the investment, allowing the expenditure to follow the commercial take-up. In particular, as you can see on slide 6, a cap spent or committed so far, meaning contracts already signed, amounts to around $40 million. mostly devoted to the first set of each data center and partially to CDN. From here on, with further 10, 15 million, which more or less have closed to be signed, we expect to complete the startup phase, slightly increasing the number of major edge data centers and reaching a ready-to-service CDN. All the remaining capex related to this project, meaning up to additional 50 million for the densification of both the networks, shall follow demand. On top of that, the hyperscale data center project, once the authorization has been obtained, the minimum starting investment, let's say for half of the first module, meaning 4-5 MW, will be around 780 million. I repeat, we face the project with a strong modularity. All the additional investment for capacity expansion, more or less 10-12 million per MW, will follow the order intake. But of course, the permission and the capability is for the full potential of the site. Obviously, the focus of the board, and this is very important, has now switched to efficient rollout and successful commercialization, being aware that these projects have the cash profile of a typical infrastructure. This means that investment first, then progressive returns. In terms of recent operating progress, the CDN technology partner has been finally selected and contract awarded. Therefore, once the network interconnection has been completed and the first service installed, we will start with the testing phase. For the edge data center network, the construction of the first five data centers is broadly on track with the progressive completion between end of 2023 and beginning of 2024. The construction of the sixth asset in Rome has been awarded. And equally, if not more importantly, in parallel, we are starting the commercialization, receiving first expression of interest for capacity on a couple of locations. For the hyperscale data center in the Rome area, as you know, the authorization phase is underway, and we are constantly interacting with the municipality to make the process as smooth as possible. Needless to say, all of these projects will have a greater visibility in the new long-term industrial plan that we are developing just in these weeks. Along with these new infrastructures and, of course, the announcement of traditional business, In the plan, we are addressing how to better capitalize some existing assets, how to extend our positioning in the media supply chain, and how to improve operational efficiency and especially capital structure. The aim is to finalize and present the new plan and the targets in the first part of the next year most likely with the disclosure of the first year 2023 or first quarter 2024 results. Another recent achievement was the finalization of the new 185 million euros financing. Let me say that the appreciation for our development projects together with the standards of the business model and increasing recurring cash generation enable us to successfully refinance our credit lines. Compared to the previous one, the new three-year loan provides an incremental availability of funds with a limited cost increase in terms of spread, in particular if we consider the very different market conditions from three years ago. Alberto Pellegrino, the CFO, will provide more details in a while. But let me say that the major development projects net of the hyperscale data center, which due to the size will likely require an ad hoc financing, can be considered fully financed through the already valid debt and expected cash generation. But let me underline even preserving distribution to shareholders. Before bringing you through the financial results, I am glad to anticipate that, in light of the performance accrued in the first nine months, and the visibility of the coming weeks, we consider reasonable to slight increase the adjusted everyday growth expectation from mid-teens to high-teens. Moving now to some details of the 9 million financial performance of slide 6. You could see that the revenues are up of 10.7%, or, as I told before, more or less 12%, excluding the €2 million one-off amount paid by Ray in the third quarter of 2022, mainly driven by indexation to the inflation, growing contribution of the new regional Maxis business, and a positive hosting activity with FWA operators and radio broadcasters. Adjusted EBITDA reached €138.4 million, with a margin close to 68%, up approximately 20% over 2022, as a result of revenue growth and operating leverage. reduction of electric tariffs, reduction in energy consumption, and limited underlying increase in other costs. Consider that the reduction in energy consumption is a target that we are implementing in each kind of investment in the broadcast area that give us the opportunity to use new technology to decrease the energy consumption. The below-adjusted EBITDA, after taking into account non-recurring costs, the same already occurred in the first half, DNA and financial charts, net income rose at 24.1% to almost €70 million. On CapEx, as mentioned before, The development component is impacted by the substantial completion of refarming for Rai and third parties, which amounts to around $80 million in the nine months 2023, compared to the $30 million expenditures in 2022. Investment in other initiatives has more than doubled, and now we now expect further acceleration. The net financial position, including IFRS leasing, closed at €134 million. Cash conversion remained steadily above 90%, with the recurring free cash flow generation exceeding €90 million. And with this, let me say I hand over to Adalberto to provide you with details on the main items of our results and on the new financing that we have obtained. Please, Alberto, go ahead.

Thanks, Roberto, and good afternoon to everyone. So let's now dive deeper into our profit and loss. starting from top line, slide seven, which reported core revenues coming out at 204 million euro in the nine months, vis-a-vis 184 million in the same period in 2022. More specifically, as concerns Rai, you may see 8.7% growth compared to the nine months 2022 figures, driven by the CPI indexation. The growth is slightly lower vis-à-vis the figures we commented in our last call on the first half results, because last year we had a 2 million one-off penalty related to the termination of the radio AM service that has been effective since the end of the third quarter 2022. On the other hand, acceleration in third parties' revenues continues also in the third quarter. We reach in the nine months a growth of 23.3%, pushed by the full contribution of the new regional MOOCs capacity that has been sold to local broadcasters as well as, to a lesser extent, to the performance very good related to the fixed wireless access operators and our radio broadcaster customers. Let me recall that in 2022 we had a progressive increase in the contribution of the revenues from the new regional MOOCs, still negligible at the beginning of the year, while in 2023 the services were fully effective since the beginning of the year. And this explains the good growth we are commenting now. Moving now to cost, slide number eight. Total cost in the nine months amounted to 66.1 million euro against 69 recorded in the same period last year. In particular, excluding non-core items, personnel cost increased by 4% against the seven reported. And on the other end, Other operating costs marked a 14% reduction, benefiting from lower utilities, while other OPEX items recorded a growth on a normalized basis of approximately 4%. Now we may focus on the profit and loss. Let's move to the following slide, slide 9. We have bottom line at 69.8 million euro recorded an overall 24.1% growth in the nine months, mainly reflecting the just commented EBITDA dynamic, lower DNA, as we already said in the past, following the termination of the useful life of the old DVBT equipment. Then we have higher financial interest due to rising interest rates. Stable tax rate at around 28.5% in coherence with the previous year. And that's all on this slide. Let's now focus on slide 10 with the net debt bridge. You can see how net debt after the increase recorded in the first half has slightly decreased during the third quarter, coming out at 133.6 million euros. In the nine months, there is an increase from the 105 million euros recorded at year-end 2022 to as a result of, among others, the strong EBITDA contribution, €135 million, about €20 million of CAPEX, €25 million net working capital absorption, and €28 million of tax. Last but not least, the dividend payment, delivering, all in all, a record recurring free cash flow to equity of roughly 91 million euro, almost reaching the level generated in the entire 2022. Let's now spend a few words on the new debt we have just closed a few weeks ago. We are at slide 11. Basically, the debt refinancing that we have signed in the past weeks allow for the full repayment of the pre-existing financial debt, whose maturity was the end of October. The transaction will contribute to ensure the financial flexibility needed to support the company's new development cap. The total amount equal to €185 million is made up of €143 million related to the term loan, of which €101 million drawdown at closing and €42 million of revolving facility to be drawn as needed upon right-way request. Lenders are Biper, Cassa Deposite Prestiti, Mediobanca and Unicredit. Both the credit lines have a tenure of three years and their terms include a spread, an interest spread of 110 basis points above Euribor, commitment fee at 35 basis points a 27.5 basis points upfront fee in addition to 7.5 basis points coordination one-off fee. And the financial covenant providing that railway has to maintain a net leverage ratio no greater than three times the EBITDA. That's really all on my side, so I now leave the floor back to Roberto for the closing remarks.

Yes, thanks, Alberto. Guidance. In terms of expectation for the full year, following the results of the first nine months, we are planning the guidance for 2023. Based on current level of power futures, the percentage growth of the adjusted EBITDA is now expected in the high-teams area compared to the previous mid-teams. The drivers that you see in the box in the right-hand side of the slide are unchanged, and their grade is mostly related to better performance of third-party customers, slightly lower electricity price, but I really underlined also better cost control. Say that, let me remind you not to just extrapolate the performance of the first three quarters as fourth quarter usually the weakest one due to seasonally higher personnel and maintenance costs, and higher electricity tariffs, considering higher raw energy futures and lack of tax credits. On the CAPEX side, maintenance is confirmed at the last year's level. Development is now expected slightly below the previous indication as some investments are slipping to the next year, mainly due to the phasing of the working progress reports based on which invoices are issued and some optimization in terms of asset design and rollout because we are viewing the project to keep the project more efficient and effective. But as commented before, in terms of already signed contracts and committed spending, activities are well underway and expect to accelerate further, especially after the Board decision to support fully this new project. That's all on our site. We can now open the line for the Q&A session and really thank you for the attention.

Thank you. This is the Chorus Call 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. One moment for the first question, please.

As a reminder, if you wish to register for a question, please press star and one on your telephone.

The first question is from Giorgio Tavolini in Termonte. Please go ahead.

Hi, good evening, and thanks for taking my questions. I was wondering if you can elaborate more on financial expenses for this year, I mean, and for the next year, given the recent refinancing. So I was wondering if it's fair to assume something in the region of between 4 and 5 million, so 4.5 million for... for this year and if it's something coherent with the higher financial expenses we should have in Q4 given the non-recurring component related to the refinancing and also the ongoing component. The second one is on the consolidation. I don't know if you have discussed during the strategy review the initiatives or if you had some contacts with RAI on the possible consolidation with the EI towers. And the very last one is on personnel costs. I was wondering if in the Q4 we should expect lower personal costs after the step-up we saw in the first nine months, or I mean also to take into account the... the exits you should add. So if it's possible to assume a lower personal cost for next year when compared to this year. Thank you.

So let me start with the first and the third question and then I will leave the floor to Roberto for the second one. In terms of financial expenses, our financial debt, the new financial debt, the overall amount is €185 million. So as of today, we have a drawdown €101 million. So in order to have an understanding of the potential impact of the interest in the last part of the year, the math is... quite simple, assuming the current Euribor, of course, and the spread of 110 basis points. We don't have yet any edging on the new debt. As concerns next year, again, starting from the net debt, from the gross debt, sorry, of 101 million euros we have as of today, We expect to have, as usual in the past, an increasing level next year with the peak funding in May with the payment of the dividend and one month later with the payment of the taxes. So for sure we will expect an increase vis-à-vis the overall amount that we will have in the 2023 profit and loss. As concern your question on the personnel, unfortunately, we cannot... I don't remember if you were referring to the fourth quarter or to the next year or... Both. Both. Okay. Let me... Let me explain the overall trend for both the figures. In Q4 2023, but let me say, generally speaking, each Q4, if you give a look to the trend of our Personal cost, unfortunately Q4 is an important quarter in terms of cost. So typically the best quarter is the third quarter because we have the positive impact related to the holidays, but in the fourth quarter, vis-a-vis the third quarter, we expect an increase. increase in the matter of million euros, just to be clear. But this is something that you may also see in the trend we had in the previous years. As concern next year, we will provide a proper guidance with the next call when we will comment the full year figures. We expect to have an increase in the overall FTE in relation to the new services so this is for the time being what I can say but again we will have optimization on the core business that could offset this impact.

Concerning the second question I If you remember in the previous call, I said that I will update you if there are any significant events. You know my personal position on the matter. Let me say that things are not standing still, but there are no substantial news to share today. But let me add a comment. I would like to make one point, tough. The consolidation story and the related industrial and financial benefits should be seen as a great opportunity for additional value creation to be seen on top to the absolutely positive current as evident from our numbers and prospective performance, as we will elaborate in the plane. But let me say today, however, ever looking at the stock performance totally unrelated to these results, it seems that consolidation has become a drag, a negative element. I hope things to return to the right perspective.

Okay, very clear. Thank you.

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

I turn the conference back to you for the closing remarks.

Okay. Apparently, the presentation has been quite clear and comprehensive, so thanks to all of you, and of course, we are available for any follow-up also offline. Thank you, and bye.