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Edited Transcript of RWAY.MI earnings conference call or presentation 30-Jul-19 3:30pm GMT

Half Year 2019 Rai Way SpA Earnings Call

ROMA Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Rai Way SpA earnings conference call or presentation Tuesday, July 30, 2019 at 3:30:00pm 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

* Juri Zanieri

Kempen & Co. N.V., Research Division - 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 First Half 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. 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 first half 2019 call. As usual, I'm here with Aldo Mancino, CEO; and Adalberto Pellegrino, CFO of the company.

Before moving to our presentation, let me just remind you that, as you already know, starting from this year, we are adopting the new IFRS 16 accounting standard, which impacts some of the KPIs we usually share with you. Therefore, for purposes of comparison and in order to provide a better representation of the company's performance, we present the first half 2018 economic figures also on a pro forma basis, meaning restated to simulate the impact of the abovementioned 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, and good afternoon to everyone. Today, I will start our presentation of the first half 2019 financial results with opening some opening remarks and key takeaways, then Adalberto will run you through the details of our performance. And at the end, we will welcome your questions.

From an operational standpoint, the first half of the year showed a positive growth of the many metrics: revenues, EBITDA and net income, even considering that the first half 2018 was positively impacted by the una tantum related to the new services to RAI, and we will into more details on our financials in a while.

Concerning development of 700 megahertz refarming process, the recent release of the road map by the Ministry of Economic Development confirmed all the main deadlines and technological upgrades. In particular, first, the transitory period to move to the new configuration starting from September 2020 until June 2022, with a switch of activities organized in 4 graphical areas and 3 different phases; and secondly, switch from MPEG-2 to MPEG-4 recording standard by September 2021; and third, switch from the DVB-T to DVB-T2 transmission standard in the last phase of June 2022. And by the next milestone, should be the frequencies assignment to national operators by the Ministry, the result recognition, and the definition by AGCOM of the criteria that will regulate the auction of the extra capacity, which should take place in the last quarter of this year.

So let me comment that so far, the outcome is in line with both our and sector expectations, and this is positive both in relation to the ongoing negotiation with RAI. As you may easily understand, this represents relevant projects not only for us but also for our customer, RAI, involving technology standards and coverage of the future network's configuration. And from second executive, there are still some regulatory items that are to be defined. So it takes time to consider all the technical and financial aspects, but we remain confident that we will reach a positive agreement soon.

In the meantime, also in light of the recent document issued by the authorities, we do reaffirm our confidence on how the Rai Way business model will help to mitigate an impact, preserving the value of the company.

Looking at the business with third-parties, we are pleased with the performance of the segments different from MNOs, confirming and even improving the positive trend already seen in the first quarter. In particular, revenues from segments recorded a low double-digit growth, also benefiting from a renewed and more effective commercial approach. Here, as we mentioned, the positive contribution of tower hosting to radio and TV broadcasters, fixed providers and corporate segments and from the transmission services related to the signal transform for the Italian football league, Serie A.

Bottom line, the first half results allow us to reaffirm our guidance for the full year 2019 as presented back in March.

And now let's look in more detail at our performance in the first half of 2019, moving to Slide #5. As anticipated by Giancarlo, here on this slide you can see for adjusted EBITDA, net income and cash conversion, the restated 2018 figure that simulate the impact of IFRS 16 on last year's performance.

Core revenues, which are not affected by IFRS 16, reached EUR 110.4 million, so 1.3% higher than the first half last year. But if you exclude from the comparison the una tantum components, the components that positively impacted the first half 2018 figures, the year-on-year increase was approximately 2%. The main contribution -- the main growth drivers of top line that are -- have been the CPI contribution and, as I mentioned before, revenues from third-parties. Pressure from M&A was more than offset by rising activity with other customers.

Let me remark that excluding the above-mentioned una tantum components reported in 2018, also the contribution from new services to RAI continued the steady growth.

Then the adjusted EBITDA increased by around 3% to EUR 65.6 million driven by the higher top line and the usual cost control with profitability approaching 60%, including the benefit from IFRS 16 application.

Moving to the bottom line. The net income was up approximately 6% year-on-year to EUR 32.6 million. And on financial side, CapEx in the first half amounted to EUR 7.4 million, broadly in line with last year's level, although with a difference and more favorable mix of lower maintenance and higher development activities driven by preparatory activities for refarming.

Next, the recorded net financial position as of June 30, amount is EUR 46.5 million, reflecting 3 different components. First, the strong cash generation of the periods, the dividend payments of almost EUR 60 million and the impact of IFRS 16 for approximately EUR 50 million. So excluding the impact of IFRS 16, we would have reported positive net cash position of around EUR 2 million.

Finally, cash conversion remains strong at 95%. As usual, a very high level in the first half, reflecting the seasonality of our maintenance activities, both activities on OpEx and CapEx.

And now I will hand over the floor to Adalberto to provide you with details on the main items of our results. So 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 and good morning from local matters on the state. In the first half, as commented by Aldo, the overall performance of the company was in line with expectations given progresses of the first quarter. But let's go to Slide 6 where we see our core revenues that were 1.3% higher, reaching EUR 110 million with both RAI and surpasses growing vis-à-vis the first half 2018 figures.

Let's enter into some more details. RAI, as we commented in the first quarter, we had a benefit from the 1.4% Italian CPI that impacted on the fixed consideration, see the blue component of the chart, reaching EUR 90.2 million. As Aldo said, this is meaning an increase of EUR 1.3 million compared to the performance of the semester -- the first semester 2018.

Let's now focus on the trend of the new services from RAI that is impacted by significant una tantum fees recorded, as already recalled by Aldo, in June 2019 in relation to the MUX coverage extension project. And excluding the impact and the one coming from the minor una tantum fees, revenues from new recording services increased by EUR 0.5 million with a growth of almost 20%, so confirming the positive trend commented in the first quarter results mainly due to the process of the tidying up of the radio links in the 3.6, 3.8 gigahertz band and thanks to the rollout of the DAB+.

Let's now move on commenting our third-parties revenues that went up, reaching EUR 16.8 million with a growth of 1.8%. And here, if you can see that in the last quarters, we always had a reduction, we are showing that now a good improvement thanks to the lower decrease of the revenues from MNOs and overall to a double-digit growth, as already highlighted by Aldo, of the other segments.

Let's now give a look to our OpEx, and let's go to the following slide, Slide #7. Let me again remind you that due to the adoption of the new IFRS 16 accounting standard from January 1, on OpEx, you will also see the 2019 performance, we used -- simulated the impact of the IFRS 16 also on the 2018 financials.

As you may deduct from the 2018 figures in the chart, the impact of the IFRS 16 being on our range amount approximately EUR 4.7 million, no longer accounted for in our OpEx.

If you compare the first half 2018 pro forma figures with the first half 2019 ones, the overall cost base decreased by EUR 0.3 million, meaning 0 -- minus 0.7% with personnel costs that increased by 0.6%, approximately 2% if we exclude the impact of the capitalization as a consequence of the same items comment that we made during our last call. As you may recall, from one side, we had the hiring of new personnel in the context of the reprocess in the early retirement plan we implemented over the past year, and the key impact of the new collective agreement. As concerned, at the other OpEx, we see an improvement of 2.1% vis-à-vis the pro forma figures with the higher maintenance and utilities cost that has been more than offset by further efficiencies on intercompany and other costs mainly in relation to local taxes.

Now let's move to Slide 8 on the profit and loss. You may see how the higher revenues and efficiencies on the costs mentioned before led to a higher adjust EBITDA that reached EUR 65.6 million, up by 2.8% compared to last year. The EBITDA margin at June 2019 reached 59.4% with an increase of about 80 basis points compared to last year. The higher growth on the EBITDA by 3.2% is driven by the absence of one-off expenses compared to the first semester 2018.

Let's now give a look below the line of our EBITDA. We have a decrease of D&A of EUR 1.2 million that is mainly related to a one-off release of provision for risks and charges that amounts EUR 1.5 million.

Net financial expenses are broadly half of the amount recorded in the first 6 months 2018 due to the prepayment of the term loan we did last year.

The decreasing trend of the D&A and of the net financial expenses is partially offset by the higher tax also due to a higher tax rate in 2018 at 28.5% compared to 26.5% of the first half 2018, that, as you may recall, was positively impacted by a one-off deferred tax.

Finally, our net income reached EUR 32.6 million, up by almost 6% from EUR 30.8 million on a pro forma basis.

Let's now comment our cash flow generation, Slide 9. At the end of June 2019, we recorded a net debt of EUR 46.5 million entirely related to the financial debt arising from the IFRS 16.

Without considering the impact of the IFRS 16, we recorded in the first half 2018, as we show in the slide commented by Aldo, a positive net cash position of about EUR 2 million, while at the end of 2018, we had a net cash position of EUR 16.6 million.

First half figures, as you know, are impacted by the distribution of dividends for around EUR 60 million. Let me just recall that in the first half 2018, we had a net debt of EUR 13.1 million. So compared to 12-month ago, we had an improvement of about EUR 15 million on a yearly basis.

Lastly, Slide 10 on our balance sheet. You see our net invested capital that reached almost EUR 200 million with the equity book value amounting EUR 153 million and the net debt, as we already commented, reaching EUR 46.5 million.

Thank you. And now I will leave the floor to Aldo to comment on the last slide.

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

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Thank you, Adalberto. So to conclude, the results of the first half and the expectation for the rest of the year allow us to confirm our guidelines for the full year, a further improvement of the adjusted EBITDA and a maintenance CapEx on core revenues substantially in line with 2018.

And we will now welcome your questions. 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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Congratulations for the results. The first one is on third-party revenues, which admittedly came out ahead of expectations. So what we should expect for the second part of 2019 is the first question. The second one is if there are new customers in your -- in the business, which then justify the trend? And the final one is if the better trend could also be explained by maybe less-relevant-than-expected decline from MNO? Final question refers to the potential consolidation processing in this space. I was just wondering if there is any update you can share with us on this point.

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

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Commenting the third-parties revenues, the most relevant part of our revenues is always coming from the same customers or -- and talking about the customers different from MNOs. We are working very well with the fixed wireless asset play, with broadcasting play, basically almost all the segments of customers different from MNOs. We also had some positives from some new customers. So I would say that the favorable trend is due both from the existing customers that represent the majority of our third-parties revenues different from the MNO, but -- and also for a huge part from new customers.

Having said that, looking at the run rate level and the 2019 yearly figures, our guidance already incorporate the trend of our third-parties revenues where we are seeing a decreasing trend vis-à-vis the last year. This also was for sure finally a good half in terms of results. But we expect to continue to see pressure in the next months and -- from the MNOs, and our work is to try to do our best to offset and mitigate these reduction trends with new business from the other segments.

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

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Fabio, Aldo, in relation to the broadcasting segment and your question about consolidation, let me say that I can simply confirm this transactional consolidation, but for the time being no particular update to share.

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Operator [5]

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Your next question is Juri Zanieri with Kempen.

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Juri Zanieri, Kempen & Co. N.V., Research Division - Analyst [6]

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Just only one on my side. I was wondering if you -- by any chance, you can share some thoughts about the refarming process as we are getting closer to some deadlines. Maybe you could inform market about any feelings or any update.

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

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About the refarming process, the -- you can say that the refarming process is absolutely on time. And currently, I do not see, at least as of today, a particular or a specific update. You probably know next steps would be the assignment of the frequencies to the broadcasters and the definition of the criteria for the option for extra capacity that we expected for the end of the year.

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Operator [8]

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(Operator Instructions) Your next question is from Stefano Gamberini with Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [9]

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Just a quick follow-up on this item. Could you share with us if -- are there some risks regarding the possibility that broadcaster could challenge the decision from the Minister regarding the new assignation of the frequencies as well as regarding the tenders? And what could happen in this case? Do you see the risk of postponement of all process? Or in our view, at the end of the day, the solution could be on the table?

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [10]

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Of course, there is always this possibility. But the overall deadline is the one that is shared also by the European Union, so I do not expect a delay. We -- the authorities should be able to manage any potential issues. But we don't see any delay on the final deadline that is 2022.

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Operator [11]

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(Operator Instructions) Mr. Benucci, gentlemen, there are no more questions registered at this time.

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Giancarlo Benucci, Rai Way S.p.A. - Head of IR [12]

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Okay. Thank you.

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Adalberto Pellegrino, Rai Way S.p.A. - CFO [13]

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Thank you all.

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Aldo Mancino, Rai Way S.p.A. - CEO, MD & Director [14]

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Thank you.

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Operator [15]

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