Rai Way SpA
MIL:RWAY
Earnings Call Analysis
Q3-2023 Analysis
Rai Way SpA
In the latest earnings call, the company reported a robust revenue increase of about 10.7%, which, excluding one-off proceeds from last year, indicated an even more impressive growth rate of 12%. This growth is primarily attributed to inflation adjustments and contributions from regional farming segments. Adjusted EBITDA, a measure of profitability, has shown significant strength, especially in the third quarter, with a margin close to 70%, indicating healthy growth driven by revenue increases and stringent cost control despite inflationary pressures.
The company has emphasized its capacity for strong cash generation, with recurring free cash flow to equity after accounting for all necessary expenses exceeding EUR 90 million, effectively matching the total achieved in the year prior within the first three quarters. A key milestone driving this performance is the green light from the Board on major diversification initiatives involving data centers and content delivery networks. The company has already made significant inroads regarding setup work under the current plan and plans to channel a few hundred million into these projects as they kick into the major execution phase over the next industrial plan period.
About EUR 40 million in capital expenditures (CapEx) have already been committed, mostly to the initial sets for data centers and partially to the content delivery network (CDN). An expected investment between EUR 10 and EUR 16 million is poised to complete the starting phase. Any additional CapEx, which could reach up to EUR 50 million, will be allocated based on demand for these services. The construction of the first five edge data centers is on track, with various stages of completion expected between the end of 2023 and early 2024, emphasizing the company's progress in infrastructure and commercialization efforts.
A new EUR 185 million financing has been secured, which management believes fully funds the major development projects aside from the hyperscale data center project. This reflects the company's successful refinancing at an increased fund availability with a limited cost spread. The focus is on maintaining shareholder distributions while supporting growth initiatives.
Adjusting forecasts based on the nine-month performance data and market conditions, the company has raised its adjusted EBITDA growth expectation from mid-teens to high teens, portraying confidence in the continued positive trajectory. The primary drivers for this improved outlook are third-party customer performance, energy pricing, and better cost management. Nonetheless, investors are cautioned that the fourth quarter could weaken due to seasonal cost increases and energy pricing factors.
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Good afternoon. This is the Chorus Call Conference operator. Welcome, and thank you for joining the Rai Way 9 Months 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference, over to Mr. Giancarlo Benucci, Chief Corporate Development Officer of Rai Way. Please go ahead, sir.
Thank you, operator, and good afternoon. Let me start thanking you all for joining us today, and welcome to our 9-month 2023 results presentation. Today with me, Roberto Cecatto, 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 9 months, revenues are up 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 EUR 2 million in third quarter 2022, growth would be of 12%, confirming the ability of our traditional business to deliver net of nonrecurring 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, a strong cost control, despite the inflationary dynamics of the recent times. When compared to 9 months of 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 EUR 7 million, EUR 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 EUR 90 million basically matching in 9 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, but also for the third parties, and the good hospitality dynamics show in particular by some categories of customers such FWA and radio operators. I'd like to update you on a few fronts.
First, what I consider to be a key milestones for the company's development part. 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 work, 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 Rai Way distributed asset 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, the CapEx spent are committed so far, meaning contracts already signed, an amount of around EUR 40 million, mostly devoted to the first set of each data center and partially to CDN. Following on with further EUR 10 million, EUR 16 million, which more or less has close to be signed, we expect to complete the starting phase, slightly increasing the number of major edge data center, reaching ready to service CDN. All the remaining CapEx related to these 2 projects, meaning up to additional EUR 50 million for the certification of both the networks shall follow demand.
On top of that, the average scale, data center project, once the authorization has been obtained, the minimum starting investment, let's say, for half of the first module, meaning for 5 megawatts, will be around [ EUR 780 million ]. I repeat, we faced the project with a strong modularity. All the additional investment for capacity expansion, more or less, at EUR 10 million, EUR 12 million per megawatt, 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, as now switch to efficient rollout and successful commercialization, being aware that these projects have the cash profile of a typical infrastructure. This means investment first, then progressive returns.
In terms of recent operating progress, the CDN technology partner has been finally selected and contract ordered. Therefore, once that the network connection 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 5 data centers is broadly on track. With progressive completion between end of 2023 and beginning of 2024, the construction of the fixed assets in Rome has been awarded. And equally, if not more importantly, in parallel, we are starting the commercialization, receiving first exploration 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. All this is 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 EUR 185 million financing. Let me say that the appreciation for our development projects, together with the farmers of the business model and increasing recurring cash generation enable us to successfully refinance our credit lines.
Compared to the previous one, the new 3-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 condition from 3 years ago. Adalberto 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 sites will likely require an ad hoc financing, can be considered as fully financed through the already available debt and expected cash generation, but let me underline, even preserving distribution to shareholders.
Before bringing you through the financial results, I'm glad to anticipate that in light of the performance accrued in the first 9 months and the visibility of the coming weeks, we consider reasonable to slightly increase in the adjusted EBITDA growth expectation from mid-teens to high teens.
Moving now to the -- some details of the EUR 9 million financial performance on Slide 6. You would see that the revenues are up of 10.7% or, as I told before, more or less 12% excluding the EUR 2 million one-off amount paid by RAI, in the third quarter '22, mainly driven by in exception to inflation, growing contribution of the new regional MUX business and the positive hosting activity with FWA operators and larger broadcasters.
Adjusted EBITDA reached EUR 138.4 million, with a margin close to 68%, up approximately of 20% over the 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 gives us the opportunity to use new technology to decrease the energy consumption.
The below adjusted EBITDA, after taking in account nonrecurring cost, the same already accrued in the first half, D&A and financial charge, net income rose 24.1% to almost EUR 70 million. On CapEx, as I mentioned before, the development component is impacted by the substantial completion of resuming for RAI and the parties, which amounted to around EUR 80 million in the 9 months 2023, compared to the EUR 30 million expenditures in 2022. Investment in other initiatives have more than doubled, and now, we now expect further acceleration.
The net financial position, including IFRS leasing, closed at EUR 134 million. Cash conversion remained steadily above 90%, with the recurring free cash flow generation exceeding EUR 90 million. And with this, let me 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 7, which reported core revenues coming out at EUR 204 million in the 9 months vis-a-vis EUR 184 million in the same period in 2022.
More specifically, as concerns RAI, you may see an 8.7% growth compared to the 9 months 2022 figures, driven by the CPI indexation. The growth is slightly lower vis-a-vis the figures we commented in our last call on the first half results because last year, we had a EUR 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 continued also in the third quarter. We reached in the 9 months, a growth of 23.3%, pushed by the full contribution of the new regional MUX capacity that has been sold to local broadcaster as well as, to a lesser extent, 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 moves, 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 #8. Total cost in the 9 months amounted to EUR 66.1 million against EUR 69 million recorded in the same period last year. In particular, excluding noncore items, personnel costs increased by 4% against the 7% reported. And on the other hand, 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 EUR 69.8 million, recorded an overall 24.1% growth in the 9 months, mainly reflecting, I just commented, EBITDA dynamics, lower D&A, as we already said in the past, following the termination of the useful life of the old DVB-T equipment. Then we have a higher financial interest due to the 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 EUR 133.6 million. In the 9 months, there is an increase from EUR 105 million recorded at year-end 2022. As a result of, among others, the strong EBITDA contribution, EUR 155 million, about EUR 20 million of CapEx, EUR 25 million net working capital absorption and EUR 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 EUR 91 million, 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 debt we have signed in the past weeks allow for the full repayment of the preexisting 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 CapEx. The total amount equal to EUR 185 million is made up of EUR 143 million related to the term loan, of which EUR 101 million drawdown at closing and EUR 42 million of revolving facility to be drawn as needed upon Rai Way request.
Lenders are BPER, Cassa Depositi e Prestiti, Mediobanca and UniCredit. Both the credit lines have a tenure of 3 years, and their terms include spread -- an interest spread of 110 basis points above Euribor, commitment fee at 55 basis points, 27.5 basis points upfront fee in addition to 7.5 basis point coordination one-off fee. And the financial covenant providing that Rai Way has to maintain a net leverage ratio not greater than 3x the EBITDA.
That's really all on my side. So I now leave the floor back to Roberto for the closing remarks.
Yes. Thanks, Adalberto. Guidance. In terms of expectation for the full year, following the results of the first 9 months, we have like upgrading the guidance for 2023. Based on current level of power futures, the percentage growth of the adjusted EBITDA is now expected in the high teens area compared to the previous mid-teens.
The drivers that you see in the box in the right-hand side of the slide are unchanged. And the upgrade is mostly related to better performance of third-party customers, slightly lower electricity price, but really underlined also better cost control. Say that, let me remind you not to just extrapolate the performance of the first 3 quarters, as fourth quarter is usually the weakest one due to seasonally higher personnel and maintenance costs and higher electricity tariff, considering higher low 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 investment are flipping to 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 it further especially after the Board decision to support fully this new project.
That's all on our side. We can now open the line for the Q&A session, and we thank you for the attention.
[Operator Instructions] The first question is from Giorgio Tavolini, Intermonte.
I was wondering, if you can elaborate more on financial expenses for the next -- 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 EUR 4 million and EUR 5 million, so EUR 4.5 million for this year. And if it's something coherent with the higher financial expenses, we should have in Q4, given the nonrecurring component related to 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 -- I don't know, the initiatives to -- if you had some contacts with RAI on the possible consolidation with 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 9 months? Or I mean, also to taking into account, the exits you should add. So if it's possible to assume a lower personnel cost for next year when compared to this year?
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 EUR 185 million. So as of today, we have drove down EUR 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 hedging on the new debt.
As concerned, next year, again, starting from the net debt -- from the gross debt, sorry, of EUR 101 million 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-a-vis, the overall amount that we will have in the 2023 profit and loss.
As concerned, your question on the personnel, unfortunately, we cannot -- I don't remember if you were referring to the first -- to the fourth quarter or to the next year or both? Both, okay. 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 personnel 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 concerned, 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 would have optimization on the core business that could offset this impact.
Concerning the second question, 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 evidence from our numbers and prospective performance as we will elaborate in the plan. But let me say today, however, and looking at the stock performance totally unrelated to these results, it seems that the consolidation has become a drag, a negative element. I hope things to return to the right perspective.
[Operator Instructions] 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 off-line. Thank you, and bye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.