Rai Way SpA
MIL:RWAY
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Rai Way SpA
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Rai Way First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giancarlo Benucci, Head of Corporate Development of Rai Way. Please go ahead, sir.
Thank you, welcome to all of you, and thanks for joining our first quarter 2018 results conference call. As usual, I'm here with Aldo Mancino, CEO; and Adalberto Pellegrino, CFO of the company. Let me now hand the call over to Aldo. Please, sir.
Thank you, Giancarlo. Good afternoon to everyone. It has been just 1.5 months since we presented our 2017 results, so I keep my opening remarks relatively short. On the back of the good 2017, the year started with a good pace, from an operating perspective, and the results are in line with our expectations. Given the context of limited top line growth, our profitability showed, once again, a notable increase year-on-year, bringing the adjusted EBITDA margin close to 55%, and that's with the continuous improvement over the entire cost base. Then also, our net results continued growing and it was -- and was up 8% year-on-year.
Looking at the commercial activity at RAI, you may recall that back in March, we said that the renewal of the RAI-Government Service Agreement had already started to unlock additional services. And we are now pleased to share with you the recent signing of 2 additional contracts, leading to an overall investment of approximately EUR 11 million for the further rights of the DAB network, mainly over the Italian highway, Salute!, from Turin to Trieste and from Milan to Rome and Naples and Palermo.
And the -- and for the refarming of the 3.6 GHz, 3.7 GHz radio links that are around 50 microwave links of our backbone, which completes the one already signed for the 3.7 GHz, 3.8 GHz band.
As already said, those contracts will start supporting our top line in 2018, but with a more tangible contribution in the following years.
Then, as far as the 700 MHz refarming process is concerned, between the end of March and the beginning of April, the activity for the upcoming deadline has been officially kicked off. In particular, the Italian regulator, the AGCOM, has started 2 processes, the first one for the new planning of the assignment of national frequencies 2018, the so-called [ indiscernible ] 2018. That is expected by the end of the month, or the end of May, with preliminary activities, including consultation. Then the second process is the definition of the criteria to convert the current cycle use of national frequencies into the right of use of [ routing ] capacity under the new framework, and the deadline is the end of September, September 30.
Another important process is what the -- that is the definition for -- for the definition for the road map. The Ministry of Economic Development is working on that, so they will give the frequencies and for the visualization of multiplexer 1. Basically, indicating time frame for groups of vision, aggregating in [ 4 process ] and consultation with industrial operators are ongoing and the final document is expected to be published by the end of June 2018.
As we said, we expect from the outcome of these processes, more clarity and more visibility on how the refarming will potentially impact the overall system and let me say, ultimately pass at Rai Way.
In conclusion, the results achieved so far gives us confidence, and we're affirming our guidance for the full year 2018, as presented in March.
Now we can move to Slide #6, and let's look in more detail at our performance in the first quarter 2018, starting from our core revenues that reached EUR 54 million and growing [indiscernible] compared to the first quarter last year, as a result of higher revenues from RAI, driven -- mainly driven by CPI contribution and new services; and lower revenues from third parties, which are impacted by some headwinds [ we had due ] just to coming off segment, a reduction already expected and factored in our full year guidance. Discussion with MNO clients are, let me say, ongoing, and aimed at finding a mutually beneficial solution.
Then adjusted EBITDA increased by around 5% -- 4.9%. That's almost EUR 30 million, helped by higher revenues and overall 4.6% reduction of operating cost, with a profitability that reached a remarkable 54.9%.
Moving back to net income, so to the [ chart on the right ], the net income was up 8% year-on-year at EUR 14.9 million. And from financial side, in line with our CapEx, in line with our usual investments distribution throughout the year, with the first quarter being the -- usually the weakest. Our CapEx amounted at EUR 0.8 million lower compared to first quarter of 2017, but by the way, included the approximately at EUR 7 million related to Norba in the beginning.
And then we had the -- we have been able to record in our balance sheet a net cash position of almost EUR 25 million, also benefiting from a positive contribution from the working capital, which Adalberto will elaborate later.
And finally, cash conversion remains very, I would say, very strong at 97.9%.
With this, I'll hand over to Adalberto to provide you with more color on the main items of our results. Please, Adalberto.
Thank you, Aldo. And good afternoon to everyone, and good morning for those that are connected from the States.
So in the first quarter, we saw the overall financials continuing in the right direction, and confirming, once again, the strong focus of the company on execution and efficiency.
Starting from the top line, Slide 7, core revenues were 0.4% higher, reaching EUR 54 million in the first 3 months of the year, with the RAI component growing 1.2%, driven by the fixed-consideration that finally benefited from the Italian CPI recorded at the end of last year that was equal to 0.8%. And we also have a positive impact from the new services that were EUR 0.2 million higher compared to last year's performance. And here, the main contributor, looking at the overall amount that we reached in the first quarter, the main contributor is still the upgrade of the contribution network and the HD channels, broadcasting and satellite platforms. And if we look at the increase that we recorded in the first 3 months of the year, vis-à-vis last year figures, we saw the contribution of some contracts signed during 2017. For example, the tightening up of frequencies for one of the Mux we manage -- we manage for RAI in relation to some selected areas.
On the other hand, revenue from third parties were down 3.8%, reaching EUR 8.4 million. As already anticipated by Aldo, they were impacted by the continuing pressure we are seeing in the MNO segment, which were partially offset by the higher activities for other customers, just to give you a name, Norba and the fixed wireless access players, but also some corporate customers.
Let me also highlight, in order to give you all the proper figures to analyze our performance, that in 2017 first quarter figures included a contribution of only 1 month from Telenorba, from the Norba deal, since as you may recall, the acquisition of Sud Engineering has been closed on March 1, 2017.
And on the other hand, it's important to highlight that last year in the first 3 months, we had a higher positive impact of approximately EUR 100,000 from non-recurring items related to prior-year adjustments.
So moving now to cost. Let's go to Slide #8. Overall cost in the first quarter were EUR 24.4 million, almost 5% lower than the EUR 25.6 million of the first quarter 2017, with both the components that benefited from the positive aspect of efficiency and cost control initiatives. Personnel costs declined by something more than EUR 0.5 million, meaning about 5%, as a result of a reduction of our headcount, the continued optimization of variable components of salary and some lower impact of other non-recurring costs.
As concern the other operating costs, they amounted EUR 12.7 million, vis-à-vis the EUR 13.2 million in the first 3 months of last year, meaning a reduction of almost 4%, driven by efficiencies in all cost items, with the biggest savings in rent and intercompany, thanks to the reduction of the provision reserves, the [ increasing ] of some [ activities ] and some other efficiencies that will be the -- that progress in the last year. You saw how these allowed other to improve for the -- our profitability.
So let's go to the following slide. Profit and loss and the net income. Well, you may see that our net results stood at almost EUR 15 million, up 8%, vis-à-vis the figures recorded in the first quarter 2017, when the net income was almost EUR 14 million. And this trend has been mainly driven by the higher adjusted EBITDA.
And commenting the lines below the EBITDA, they are definitely in line with the last 2 years. Except for the D&A, where the decreasing trend has been, as you know, accelerated vis-à-vis the business plan assumptions, thanks to the reduction of maintenance CapEx, also due to a postponement of the development or some development CapEx. And 2018 figures are now very close to the level reached last year.
Let's move to the following slide, which is Slide 10, on the cash flow generation. We recorded an outstanding EUR 25 million net cash position, almost EUR 30 million better than the net debt recorded at the end of last year, that was equal to EUR 5 million. The main drivers here are, on top, of course, the EBITDA contribution, the CapEx, that is in line with our usual investment distributions throughout the year, stood at almost EUR 1 million.
And you should remember that last year, we add EUR 8.9 million in the first -- of CapEx in the first 3 months of 2017, but they included also the financial CapEx for the acquisition of Sud Engineering, about EUR 7 million.
So again on the main driver of our strong performance in terms of cash generation, let me spend a few words on the working capital, that in the quarter contributed positively for EUR 8.2 million, on the back of first, lower trade receivables, after the recovery of the temporary buildup recorded in the last quarter last year. And that's thanks to the payment, the collection, we had at the very beginning of the year, and -- actually some, we had some important collection in the first weeks of January, on which we have already commented back in our last call on March, commenting the full year 2017 results. Secondly, we have the usual tax cycle that affects the amount of Q1 payables.
We are now on Slide 11, on the balance sheet. You may see our net invested capital that reached EUR 166 million and the net cash position that we already commented in the previous slide.
So to conclude, Aldo, will comment our last slide on the outlook.
Thank you, Adalberto, to conclude, the results of the first quarter and the visibility we have on the rest of the year, lead us to confirm our expectations for the full year. Thus, we're affirming the guidance for adjusted EBITDA to keep growing organically and the maintenance CapEx in the range of 9% for core -- of core revenues.
And with that, we will now welcome your questions. Thank you.
[Operator Instructions] The first question is from Fabio Pavan with Mediobanca.
Yes, thank you for taking my 2 questions. The first one refers to the top line evolution. What concern new services contract, from RAI, but also third parties, what is the evolution we should expect for the remaining 3 quarters of this year? Could we expect a trend similar to the first one? The second question is on the cash conversion, which clearly was expanding in this first quarter of the year. Could you share with us your assumptions in terms of cash conversion on a full-year basis?
So let's start with your first question on the evolution of the top line. Yes, of course, you may use as proxy, you can project the [indiscernible] the first quarter figures in order to have an idea of the yearly impact of our top line. The main [indiscernible] here are on the third-party revenues. There is a reduction trend which we are working through a lot of commercial effort also with non-MONO customers. And talking about RAI, this year, you are going to see just a little part of the EUR 2 million impact of the slide with the new services commented previously by Aldo. So as you know, the positive impact from the new services depends on the timing of the activation, and that's the case. Obviously, there is an impact of the CPI that is positive, and that sits on the top line. On the second question, on the cash flow, if you can again summarize your question?
It's just -- thank you for that, answering the first one. The second question was on, which kind of cash conversion we should expect on a full year basis? Clearly, we have seen a very important improvement in Q1, also because of some working capital impact. So what's the expectation for -- your expectation for the full year on cash conversion?
Talking about cash conversion, of course, the first figures are impacted by our seasonality. And so figures have really close to 100%. Of course, full year figures will be lower, more similar to the figures recorded at the last -- at the end of last year. Probably a little bit lower in the context of the guidance that Aldo mentioned on our maintenance CapEx. That should be -- that should reach a higher level, vis-à-vis the figures we had in 2017.
The next question is from Albert Pranger with Kempen.
Gentlemen, I was just wondering on your OpEx figures. Obviously, some of the decline was anticipated by the, let's say, the effect of the voluntary leave plan. Are there -- should we assume that this number, the 4.6% decrease, is a proxy for the rest of the year? And my second question would be, is there anything you can share on the current status of the Persidera, what -- let's say, project you were chasing after late last year?
So let's start with your question on the personnel. We see an important benefit in the first quarter. This should be progressively offset by the increasing of our headcount that we expect to have in the following quarter, also in order to partially replace our employees that accept our initiative. So I believe that if you look -- if we look at yearly figures -- as you know, we do not disclose guidance on our -- at the level of detail that you ask for, but generally speaking, looking at the personnel, if you look at the figures according 2017, more or less this will represent a good proxy of the figures that we should be able to record at the end of last year. On the other question, Aldo will give you more there.
About this Persidera, this Persidera deal, our understanding from the interactions with the seller is that the process is not over. We have recently confirmed our interest and desire to work in a collaborative manner and we are now waiting for further details on how they want to manage the process. But let me say, difficult to make any assumption about -- on timing.
Your next question is from Ricard Boada with Morgan Stanley.
From my focus, just like a couple of very high-level questions. On one side, obviously, we have like a lot of like discussions on what the future might bring, especially in the broadcasting industry, as the spectrum reallocation process approaches. Is there a case for an upgrade to the DVB-T2 and like more modern compression standards, to bring incremental revenue opportunity that is not a part of the plan? And then separately, we -- it's been now been like 3 years, since the consolidation, the consolidation, like talks started in Italy. I understand that you probably like made a lot of comments in -- regarding this topic. But what does it really take for this process to be resolved in the coming months as opposed to in the midterm future?
Okay, so talking about opportunities coming from the spectrum reallocation, and my understanding is that you are referring particularly to the DVB-T2 opportunity. Of course, these could be something on which we should work with RAI. And so it could theoretically represent an opportunity. Generally speaking, we saw some opportunities, several opportunities, coming from the spectrum reallocation, some -- the technological changes that may happen in the near future. And as we discussed also in the last call, commenting that we previously, on March this year, last March, and we believe that this opportunity for sure will offset the negative impact coming from the potential reduction of the Mux. And then, let's see if there will be also an opportunity on top of this, but it's too early to give some more precise figures on this.
About the question on consolidation. We think our -- our position on consolidation, our commitment, of course, has not changed. About timing, timing is, I can say, obviously, been the million-dollar question since, I think, 2015. And there has always been something missing. So our opinion is that we are approaching, let me say, a [ suitable ] window that we reduce uncertain things on one side and maximize the potential benefit on the other. And this is a window starting from when the impact of refarming process will be clearer to the beginning of the activity to upgrade the network, management of the job, could maximize benefit, reducing cost.
And if I may follow up on this. Just from a, again, like a very high-level perspective, how does the entry of Elliott into Telecom Italia and the fact that now we have like the Italian government much more actively involved in the telecom landscape through the sovereign wealth fund, affect a potential deal taking place? Obviously, one of the options considered in the Telecom Italia disposal plan is [ in written ] and obviously, there is some moving parts and some combinations that could end up in a scenario which could facilitate a broadcasting merger. So how do you see all that like shaping out in the next few months, on your end?
So Ricard, just to be sure, you're referring to the impact on Persidera? Or more in general, only with the...
I think more in general like on the possibility of consolidation like at being Persidera, but like more interestingly, on the big deal to reemerge. Obviously, like -- there's like -- there's some -- like much more movement around the strategic environment now.
To be honest, it's a bit difficult to say, also because it impacts the company. That is not our company, this is Telecom Italia. So let's see what will be the mood and the approach of the new board of Telecom Italia, on the [indiscernible]. It's not really up to us to comment on the potential impact of the entrance of CDP in Telecom Italia.
The next question is from Domenico Ghilotti with Equita.
Just a couple of questions, and the first is a clarification on the top line for this year. I'm trying to understand if there is any possibility to get some contribution from the new services that you are closing today and you are signing up today, the latest months already in the second part of this year? Or should this contribution is more likely to be fully visible only starting from next year? And then as a -- a question on tax rate. I saw that you ended up slightly -- slightly below 30%. I wondered if this is a sustainable level for the full year.
So talking about the new initiative on which we commented. This year, the contract we [indiscernible] included some [indiscernible] and some of the projects, of course, are starting, are going to start the following month, and there will be impact, but just a limited impact. We mentioned [ RAI ] a run rate level of about EUR 2 million in term of EBITDA. I believe in the year, we will be able to reach 15%, 20%, of these run rate level.
And talking the tax rate, the first quarter, there could be some little change vis-à-vis the previous figures, but I -- the profit tax rate is the tax rate that we record at the end the year, where there is a little bit of normalization of the trend coming from the deferred tax rate that may impact of some [indiscernible] the overall tax rate.
And just to follow up on the previous comments. So you started with the mid-single-digit organic EBITDA growth. Do you think this is sustainable? Or too challenging? Because you are talking in general in the guidance about organic growth without providing specific target?
Can you repeat your question? At the beginning, the line was not so...
I mean, the 4.9%, you started with EBITDA growth very close to, say, mid-single-digit. Do you think that this still -- is something sustainable for the full year? Or -- because you are talking, in general in the guidance, about the organic growth in adjusted EBITDA without providing specific guidance. Should we say -- well, start of the year was very encouraging but difficult to maintain on the full year basis?
Let me see. I would convert the percentage figures in absolute numbers. But for [indiscernible], sorry. But just to look on the performance of the first quarter, we add the more or less, almost EUR 1.5 million of improvement vis-à-vis last year. I believe here there are some seasonality impact. There are some efficiencies, of course, on the cost. There are also some cost that should increase in the next months. So let's say that they -- projecting these figures, we should reach our best performance ever, and it's a, I believe, it's not a good proxy. So you should not use the increase that we recorded in the first quarter in terms of EBITDA vis-à-vis last year. You should not take this as proxy of the full year growth. There will be, in the growth of the EBITDA, as commented by Aldo in our guidance, that this low to mid-single-digit.
And if I may, I have another question on the revenue from third party. In particular, I'm trying to understand, if the current contribution from MNOs is, say, the bottom of cycle, so you -- if you think that the current level is sustainable going forward? Or if you are still bearing some renegotiation, some price pressure from this -- on these revenues?
No, for full -- this is an important change vis-à-vis the figures reported last year. We are still in negotiation with our commercial partner. I would prefer to comment overall on the third parties, because on the third parties, there are several impacts. Of course, the negative one is coming from the [ ones ] that you mentioned, but there are also some positive impact coming from the good performance from all the non-MNO customers, that I just highlight in this call. We are at the growth of 10%, of course, quarter-on-quarter. Of course, there is also the impact of Norba, that is non-organic. But even excluding this impact, the growth was 5% from all the other customers different from MNO. So commenting, generally speaking, the third-party revenues, we believe that the level we record -- we will try to do our best to maintain this level as the bottom level.
[Operator Instructions] Gentlemen, there are no questions registered at this time.
Okay. So let us thank all -- all the participants and see you soon.
Thank you and bye-bye.
Bye-bye. Thank you.
Ladies and gentlemen, thank you for joining the conference. It's now over. You may disconnect your telephones.