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Edited Transcript of RWAY.MI earnings conference call or presentation 14-Nov-19 4:30pm GMT

Nine Months 2019 Rai Way SpA Earnings Call

ROMA Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Rai Way SpA earnings conference call or presentation Thursday, November 14, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adalberto Pellegrino

Rai Way S.p.A. - CFO

* Aldo Mancino

Rai Way S.p.A. - CEO, MD & Director

* Giancarlo Benucci

Rai Way S.p.A. - Head of IR

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Conference Call Participants

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* Fabio Pavan

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Giorgio Tavolini

Intermonte SIM S.p.A., Research Division - Research Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Rai Way 9 Months 2019 Results Analyst Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Giancarlo Benucci, Head of Corporate Development and IR of Rai Way. Please go ahead, sir.

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Giancarlo Benucci, Rai Way S.p.A. - Head of IR [2]

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Thank you. Welcome to all of you, and thanks for joining our 9-month 2019 results call. As usual, I'm here with Aldo, CEO; and Adalberto, CFO of the company.

Let me remind you just before moving to our presentation that, as you already know, starting from this year, we are adopting the new IFRS 16 accounting standard, which impacts some of the KPI we usually share with you. Therefore, for purposes of comparison and in order to provide a better representation of the company's performance, we are presenting the 9-month 2018 economic figures also on a pro forma basis, meaning restated to simulate the impact of the above-mentioned accounting standard. Consequently, the year-on-year changes are calculated accordingly on a like-for-like basis.

Let me now hand the call over to Aldo. Please Aldo, go ahead.

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Aldo Mancino, Rai Way S.p.A. - CEO, MD & Director [3]

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Thank you, Giancarlo. Good afternoon, and let me thank you to everyone for joining us today. We would like to start sharing with you the main highlights of the period, while Adalberto will run you through the details of our financial performance. At the end, as usual, we will have a Q&A session.

So the third quarter 2019 has been marked again as -- by solid financial performances in line with our expectations. The top line benefited from new services to RAI progressively growing quarter after growing -- after quarter, and non-MNO customers' activities have been confirmed at a sound level. We will go more in details on our financials in a while. But let me just point out the further rise in profitability, with EBITDA margins exceeding 60% and net income at 5.6%.

On the industrial side, most of the refarming process milestones set by the 2019 budget will have now been completed, with submission capacity awarded to network operators during last summer through the conversion of the current right of use of frequencies, moving from 20 DVB-T to 10 DVB-T2 national multiplexes, applying the ratio of 0.5.

In particular, Rai has been granted 2 multiplexes, including the macro-regionalized one plus extra capacity equivalent to half multiplex, pending the outcome of the auction of the remaining 2 multiplexes or alternatively some form of agreement among operators that will fix the final network configuration.

The auction, originally expected by November 2019, might be slightly delayed, possibly in the first quarter 2020. And we're keeping the final switching of deadline as programmed for June 2022. As of now, we confirm the scenario with Rai Way managing 3 multiplexes for RAI as our base case.

As you know, we have been working with RAI in order to align the current contracts with the post-refarming configuration. The negotiations are taking slightly longer than we originally assumed. But as you may imagine, the refarming along with the coverage obligation arising with the RAI [stated] concession is a process, which materially affects network configuration both in the transitory period, bringing a relevant amount of activities to be carried out and once completed, requiring operations that firstly in some aspects will be even more complex considering, first, the usual coverage; and secondly, that the broad range of activity we perform to collect and deliver signals has only partial correlation with a pure number of multiplexes.

As said, the negotiations with RAI are progressing well. The fact that the outcome of the regulatory effects so far is in line with expectation is helping us. And we are working hard with RAI to reach a positive agreement in the weeks to come within the end of the current year.

Then as mentioned during the presentation of the first half 2019 financial results, once the agreement with RAI and refarming is achieved, the release of our new industrial plan will follow right after, bearing in mind that current line coverage is needed till the end of this year, of the current year. So this is a priority for us, also in order to restore the high level of predictability that since the IPO has been one of our pillars, of the pillars of our company.

In the meantime, we are not standing still. Indeed on top and in parallel to the activity on the refarming we are working on [all the lines] that will be incorporated in the new plan, so evaluating new initiatives to strengthen our core business and reassessing potential opportunities for growth, diversification and efficiency.

For the time being, focusing on 2019 in light of the above-mentioned performances and the additional details that we will provide soon, we can confirm the full year guidance set back in March. And now we -- let's dive deeper into our 9-month 2019 performance, moving to Slide #5.

Here on the slide, you can see for adjusted EBITDA, net income and cash conversion, the restated 2018 figures that simulate the impact of IFRS 16 for last year's performance. About core revenues, the revenues which are, not as you know, affected by IFRS 16 totaled EUR 165.7 million, so 1.5% higher than the first 9 months of the last year. But if you exclude from the comparison the una tantum of components that positively impacted the 2018 figure, the year-on-year increase could have approached 2%.

The top line has been driven, let me say, 2 sectors -- issues: one, contribution of CPI and progressive growth of new services on the RAI side, while on the third-party side, radio and TV broadcaster and fixed wireless access providers and corporate segment offset the pressures coming from the MNO or mobile operator.

Then the adjusted EBITDA reached EUR 100.6 million, around 3% up compared to the same period of 2018, resulting in an additional growth in profitability, which exceeded 60% after IFRS 16 and 90 basis points above the pro forma first 9 month [2018] figures.

Again, our efforts on OpEx optimization is continuing to bear fruit on top of the efficiencies already achieved in recent years. So on this bottom line, the net income increased by 5.6% at EUR 49.7 million.

On the financial side, CapEx in the first 9 months amounted to EUR 12.7 million, so broadly in line with the -- with last year's level. And as already seen in the first semester, confirming a more favorable mix compared to 2018 with a higher portion related to development CapEx mainly driven by the preparatory activities for refarming.

As of September 30, we recorded a net financial position of EUR 34.7 million resulting from the strong cash generation of the period and the dividend payment of almost EUR 60 million. So it's worth mentioning that excluding the impact of IFRS 16 of approximately EUR 50 million, we would have reported a positive net cash position of around EUR 13.5 million. In conclusion, cash conversion remains strong at 93%.

And now I will leave the floor to Adalberto to provide you with details of the main items of our results. Please Adalberto, the floor is yours.

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [4]

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Thank you, Aldo. Good afternoon to everyone. As anticipated by our CEO, Rai Way delivered a good set of results in the first 9 months of this year, so confirming the positive trends that we saw in the first half and broadly matching expectations.

If we look at Slide 6 of our presentation, let's start with the top line. Core revenues were 1.5% higher at EUR 165.7 million, with both RAI and third parties growing vis-à-vis the same period of last year. In particular, if we look at the chart on the left, RAI revenues from the fixed consideration amounted EUR 135.3 million, on the back of the 1.4% Italian CPI growth. You can see for this purpose, the blue component of the chart on the left of the slide. While the new services from RAI were still impacted, as also Aldo mentioned, by the una tantum related to the MUX coverage extension projects recorded in June 2018. So excluding these and other una tantum components, revenues from new services were up 20%, boosted by the release of radio link frequencies and the DAB+ network expansion, as already highlighted in the first half.

Revenues from third parties reached EUR 25.2 million, up 1.6% vis-à-vis the previous year values. Also thanks to the impact of noncore items. If we strip out this component, the performance would be basically aligned with the first 9 months of 2018. To be precise, the growth would be 0.2%. That is something positive if you consider that we offset the decreasing trend of the MNO's revenues through the rising activities with other third-parties' customers, including transmission services, TV and radio broadcasting, fixed wireless access player and corporate customers.

If we compare the third quarter figures with the increase recorded in the first half, the slightly softer performance is related to a milder growth on non-MNO customers. That is, by the way, due just to comparison effect, considering that the contract update started in the third quarter of 2018. In any case, they keep growing.

So let's now move to Slide #7. On the OpEx, it's worth recalling that following to the adoption of the new IFRS 16 account -- the new IFRS 16 accounting standard from the beginning of this year, we are here showing the 2018 figures on a pro forma basis. As you can see, we calculated the IFRS 16 positive impact on the first 9 months 2019 adjusted EBITDA in some EUR 7 million due to rents no longer accounted for as OpEx. If you compare the 2018 pro forma figures with the 9-month 2019 figures, the overall cost base declined by 0.6%, reaching EUR 65.2 million.

Let's focus on personnel cost that decreased by 0.4%. But if you exclude the capitalized component, they grew by 2%, following the same drivers commented for the first semester. And so the new hirings following the early retirement plan we implemented over the past years; and second, the impact of the new collective agreement.

Then other OpEx, they stood at EUR 32.5 million, resulting in a decrease of 0.7% of the pro forma fee, which is related to saving on intercompany and local taxes that have more than offset higher maintenance and energy costs. Please consider that Q4 2018 other OpEx figures already start to reflect our -- let's say, the majority of the impact of our efficiency initiatives. So in Q4 2019, the comparison will be [tougher]. And we expect that to offset the decrease recorded in the first 9 months mainly due to higher energy cost, but depending, of course, on the level of our consumption that is broadly stable.

Let's now move to the following slide, Slide 8, on the profit and loss. As you can see, the higher revenues and the continuous effort on cost control led to an adjusted EBITDA of EUR 100.6 million, meaning a growth of 2.9% vis-à-vis the previous year figures. The margin on adjusted EBITDA exceeded 60%, up by 90 basis points compared to the same period of 2018. The lower impact of one-off expenses in 2019 prompted EBITDA growth to 3.3%. While D&A went down to EUR 30.1 million, benefiting from release of provision for risk and charge that are approximately EUR 1.6 million.

Proceeding with the bottom line. Financial interest was EUR 1 million -- net financial interest was EUR 1 million, 40% down compared to 2018 figures as a result of the early repayment of the term loan we finalized last year. On the fiscal side, the overall tax rate confirmed the benefit from the positive one-off impact of the first tax recorded in the first half. And the resulting net income is EUR 49.7 million, 5.6% higher than 2018 figures, as Aldo already commented in the first slide describing our financials.

Moving now to the overall -- let's move now to Slide 9 on the cash flow generation. As you can see on the left of the slide, starting from EUR 16.6 million of net cash position at the end of 2018, we had EUR 49.4 million of impact due to the new leasing liabilities related to the application of the famous IFRS 16. Apart from the EBITDA and other margin contributors -- major contributor is the payment of the dividends for almost EUR 60 million. All these led to approximately EUR 35 million of net debt at the end of the period. That includes more or less EUR 48 million -- to be precise, EUR 48.2 million of leasing liabilities. So this means that we closed the first 9 months with positive cash for approximately EUR 14 million as a result of a strong predividend cash generation of approximately EUR 58 million.

Last slide from my side, Slide 10, on the balance sheet. At the end of September, net invested capital was EUR 205 million, including EUR 42.3 million of right-of-use for leasing related to the IFRS 16. Then the equity book value amounted EUR 170.3 million with EUR 34.7 million of net debt, as we commented in the previous slide.

So thank you. Aldo, please, if you -- thank you.

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Aldo Mancino, Rai Way S.p.A. - CEO, MD & Director [5]

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Thank you. Thank you to Adalberto. Just to take it by EBITDA, let me just confirm our guidance for the full year, made of further improvement of the adjusted EBITDA and maintenance CapEx on core revenues substantially in line with 2018, bringing the last 5-year average level at approximately 8%.

And we will now welcome your questions. We can start the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Fabio Pavan with Mediobanca.

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Fabio Pavan, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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The first one is a follow-up on your statement on the refarming process and the industrial plan. Could you recap just the timetable for us?

The second question refers to the trend we have seen in this 2019 so far. In particular, I was surprised about revenues from third parties when excluding MNO. This trend was expected by yourself. It is slightly exceeding your expectation. And what we can -- maybe how confident are you that this trend may follow also in the upcoming years? Clearly, there will be a new plan but just to have some headlines to discuss.

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [3]

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Let me start if I may, Fabio, with your last question on the third-parties' revenue. Let me start probably with -- helpful to recall that 2 very different trends we are seeing on our activity with third parties. As you know, the pressure from our MNOs, offset by high single-digit growth with non-MNO customers, in particular as I commented before, TV and all radio broadcasters, corporate customers, fixed wireless access player on the other side.

So looking ahead, the headwind from our MNO customers has probably not yet bottomed out. And we expect further decline before new opportunities like 5G deployment start to contribute. Keep also in mind that in the third quarter 2019, we have benefit from some slippage offsite, the commissions that are now expecting to be [decommissioned] in the next month.

On the non-MNO customers, we continue to see room for expansion, also thanks to the proactive commercial approach we have adopted in the last 3 years, although the comparison will be tougher, considering the strong growth already achieved as of today.

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Aldo Mancino, Rai Way S.p.A. - CEO, MD & Director [4]

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About your first question -- or your second question is about the refarming process and the state of negotiation with RAI. As said, negotiation with RAI are progressing well. We are not seeing as of today particular specific criticalities apart from the time required to regulate all the terms and conditions. In any case, our aim is to reach, and again, a positive agreement in the weeks to come and within the end of the current year.

The second part of your question, Fabio, is about your -- our industrial, the time line for the new industrial plan. As I mentioned before during my presentation, once the agreement to drive on the refarming is achieved, the release of our new industrial plan will follow, let me say, right after. So this is a priority for us, also because we feel that this sort of, let's say, reduced visibility, has penalized our stock. So -- and we want to restore the high level of profitability that since the IPO has been one of our pillars.

So -- but we are not -- as I said before, we are not standing still. And on top and in parallel to the activity on the refarming, we are working on all the lines, addressing all the lines that we will be incorporated in our new plan. So evaluating the consumer initiatives to strengthen our business, reassessing this -- the reassessment is something that we do on a recurring basis, reassessing potential opportunities for growth and diversification and about efficiency. Looking for ways to improve efficiency in particular, thanks to our digital transformation process.

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Operator [5]

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The next question is from Stefano Gamberini with Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [6]

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Two quick questions, if I may. The first, I didn't catch if in this renegotiation with RAI, you should have also the new contract. And what could be the length of the contract that you can obtain?

The second is regarding a possible deal with El Towers that have a [call with you]. Do you think that after this agreement with RAI, the conditions for a possible consolidation in the sector could be there? Or what are the other requirements that you think are needed for a possible consolidation in the sector?

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Aldo Mancino, Rai Way S.p.A. - CEO, MD & Director [7]

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About your -- the negotiation with RAI, I wouldn't -- not call it a renegotiation. The service contract with RAI started 1st July 2014 and has a duration, as you know, of 7 plus -- 7 plus 7 years. So the first expiration date of the contract will be June 2021 and then 2028. So it's fair to say that we are going to regulate the impact from the refarming process within the framework of the existing contract rather than signing new contracts.

And then with your second question is about connection between the renegotiation process and the consolidation. This is what we can say that is, as you know, the consolidation of broadcast infrastructure faces some constraints that are legislative and regulatory to be managed. So the stock directly impacted the new -- the contract with RAI for the refarming process.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [8]

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Just a quick follow-up, if I may. So if I understood correctly, the new contract -- sorry, the agreement on refarming, we should see an increase of the base contract? Or the additional revenue will be included in the new services? What is -- my target is to understand if the new revenues that will arrive are recurring forever or are we working more on new service or an increase of revenues that will disappear sooner or later?

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [9]

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We will show more -- disclose as soon as possible hopefully in the next weeks that consider that normally we -- since we will have a different configuration of our network, we will have a different recurring fixed consideration, generally speaking. Then more details will be disclosed at the proper moment.

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Operator [10]

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The next question is from Giorgio Tavolini with Intermonte.

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Giorgio Tavolini, Intermonte SIM S.p.A., Research Division - Research Analyst [11]

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Just a brief follow-up on the maintenance CapEx level. You have 8.5% in full year 2019, while you had a 4% CapEx to sale ratio in 9 months. So it's fair to expect to really a back end-loaded trend in Q4, something in the region of 20% of core revenues?

And the second is on cost cutting. It's reasonable to expect a lower cost optimization in Q4 given the tough comparison you were mentioning before and energy prices and whatever?

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [12]

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On the cost, we expect in the last quarter to offset, as I mentioned, the benefit that we were talking about, EUR 0.2 million, recorded in the first 9 months basically because, as I said, some synergies give already the positive impact on the Q4 2018 figures. And on top of this, we have higher energy costs. And this is something that not depending from our control, let me put in this way. And we will have this impact that is going to record -- expect to record higher energy cost on the last quarter 2019 vis-à-vis the last quarter [2018].

So as concerned, this is not just to try to address the question on the OpEx. And then on the CapEx, on the maintenance CapEx, yes. Basically, we confirm the guidance of approximately 8.5%, 8% of core revenues. So we expect, considering the lower level, if we look at the maintenance CapEx to core revenues in the first 9 months, we expect higher percentage in the last quarter, resulting in a CapEx level coherent with our [DNB] guidance.

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Operator [13]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [14]

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Okay. Many thanks to all of you for joining our call, and speak soon. Bye-bye.

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Aldo Mancino, Rai Way S.p.A. - CEO, MD & Director [15]

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Bye-bye. Thank you.

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Operator [16]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.