Good afternoon. This is the conference call operator. Welcome, and thank you for joining the Rai Way Nine Months 2022 Results and Earnings 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. Please go ahead, sir.
Thank you, operator, and good afternoon. Let me start thanking all of you for joining us today, and welcome to our nine-month 2022 results presentation. As usual, Aldo will start with the highlights and figures of the period. Adalberto will then illustrate the financial details, and at the end we will welcome your questions in the usual Q&A session. Let me now hand the call over to Aldo. Please, Aldo, go ahead.
Thanks, Giancarlo. Good afternoon to all of you. Even after the quarter heavily penalized by the dynamics of energy prices, we are pleased to present today's economic results for the first nine months still largely up despite our electricity bill increased more than EUR 6 million in the third quarter 2022 compared to the third quarter 2021. This strong result has been thanks to four key drivers. Firstly, the indexation of our contracts to 2021 CPI, while the impact that rising energy prices are having on inflation this year will be reflected on our revenues in next year, in 2023, as we will see later during this presentation. Secondly, the further increase in core revenues in total are up by 7%.
In particular, we have seen the full impact of the refarming agreement with Rai, which in 2021 was effective only from the second half of the year. We have had a new source of revenues thanks to the regional multiplex business that led to third-party revenues growth of more than 9% in the nine months and more than 70% in the third quarter alone. The third key factor there is the control of operating costs has been that. As an effect of the temporary actions to limit discretionary spending as a measure to mitigate rising energy prices. Again, some non-recurring benefits, in particular a one-off contribution of EUR 2 million, positively affecting our top line.
As a result, revenues for the nine months are up 7.4%, while Adjusted EBITDA is up 5.2% or EUR 5.7 million compared to 2022. To give a better idea of the underlying trend and the contribution of new initiatives, I think it's worth noting that excluding the negative effects of energy prices and the positive non-recurring benefits, EBITDA growth could have been above EUR 10 million, about 12 to be precise. In terms of investments, the level of development CapEx around EUR 10 million lower than last year reflects the gradual reduction in activities for Rai network upgrades and rising investment devoted to initiatives for third parties, mainly the regional refarming investment for third parties that will materially increase once construction of new infrastructure begins.
From an operational perspective, refarming activities reach the final stage, focused on the upgrade of the last equipment to DVB-T2 technology and on some network improvements of the new regional networks, both in terms of coverage, expansion and distribution radio links. While, when we met in July, negotiations were in advanced stage. Today, we are happy to confirm that renewal for the next six-year of the contract with one of our most important MNO customers has been signed in recent weeks. This agreement is relevant because, as you know, this segment has been characterized in recent years by pressures on prices and on volumes. This agreement envisages a progressive average tariff reduction through the activation of new PoPs and incentive-based rates.
A little bit of further network optimization to be progressively recovered through new PoPs and PoP upgrade to 5G according to our contract framework. New technology and new frequencies are on top of the contractualized perimeter. All in all, at the end of the new contract period, we expect to reach revenues above the current level, so totally in line with the targeted stabilization path for activity with MNOs. Again, in July, we provided an update on the start of the procurement procedure related to the first set of edge data centers. The provision of the technology components of the continuity network.1
The contract for the construction of the 5G data center represented the most important location and about 1.6 MW of geographically distributed IT capacity, around half of the total capacity of the project, has been awarded and ultimately secured, with work starting early next year in order to have the assets available by the end of next year, 2023. Also, the anticipated CapEx figures of around EUR 25 million for the first five each is broadly confirmed. In terms of expectation for 2022, several factors, including the recent cool down of electricity prices recorded in October, the additional government relief measures, the tax credit, and the effect of the mitigating actions on other costs, should allow us to increase our target for EBITDA growth, which is becoming more visible and even more significant.
Let's now move to slide number six to summarize the key financials of the nine months. Starting with top line. Core revenue reached EUR 184.4 million, 7.4% higher than the first nine months of last year, driven by the already mentioned effects. While Adjusted EBITDA grew by 5.2% to EUR 115.7 million, with profitability impacted by energy costs, but still at a remarkable level close to 63%. At net income level, growth stood at 6.6%. Maintenance CapEx, maintenance investments as usual are still relatively low as mainly concentrated in the fourth quarter of the year, while development CapEx are once again supported by refarming, although with the rising contribution of initiatives for third party customers.
Net debt closed at EUR 122 million, substantially stable compared to June, with leverage approaching the 1x EBITDA level as forecasted on an organic basis in our industrial plan. Cash conversion remained very strong, above 90%. With this, I'll hand over to Adalberto to provide you with details on financial performance. Please, Adalberto, the floor is yours.
Good afternoon. Slide six, let's focus on core revenues. Core revenues, let's start from, I would say that we reach EUR 184.4 million in the nine months vis-a-vis EUR 171.8 million in 2021. Trends are similar to the one commented in the last call with some news. More specifically, on the right component, the 7% up compared with the restated figures for the nine months 2021 depends by the acceleration in growth driven by the refarming step up already commented, the positive CPI dynamic already commented.
We have the new EUR 2 million one-off benefit arising from a collection from RAI of a contractual penalty related to the interruption of a minor service, the so-called medium wave AM radio broadcasting used for the vintage radio. Some of you may have noticed a slight reduction in the contribution from new services for RAI, basically due to the withdrawal of local broadcasting service in the context of regional refarming project, which on the other hand, continues to drive third parties revenues up 9.4% in the first nine months, reaching EUR 25.6 million and by even 17% if we look at the third quarter alone. Enjoying, among other things, lower pressure from MNO and good performance of other customers. Mainly, I'm referring to the fixed wireless access operator.
You may then recall how in the recent past we used to comment on a negative trend. Finally, reverse as expected, with even the possibility of some further upside going forward. Let's now go to the following slide, number seven. You can see the magnitude of the impact of the electricity cost headwinds on the operating cost base, which grew by more than 20% year-on-year. Our electric bill increased by an impressive EUR 7.2 million over the nine months, out of which EUR 6 million are recorded in the last quarter, in the third quarter alone. Already net of the significant relief measures arranged by the government in the past months, mainly a 15% reduction on the cost of the third quarter in the form of tax credit.
We still have the cut of certain ancillary component of the overall bill. We also benefit from a double digit reduction in electricity consumption recorded so far, something I think quite impressive considering all the work we did to renew our network that is new from a technological point of view, but also more efficient for this purpose. On the personnel front, excluding non-core items and lower capitalization compared to 2021, HR costs remained relatively flat, proving to be not so strictly linked to the CPI. The same underlying trend applies to the other costs, whose reported figures was positively impacted by some non-recurring benefit and the mitigating action on discretionary spending to counterbalance the energy headwinds already mentioned.
All in all, total cost in the nine months exceeded EUR 69 million, almost 11% up from EUR 62.3 million recorded in the same period in 2021. Now moving to the profit and loss, on slide number eight, sorry. Bottom line at EUR 56.3 million recorded on overall 6.6% growth in the nine months, mainly reflecting the just commented EBITDA dynamic, lower D&A following the termination of the useful life of the old DVB-T equipment, now replaced by the DVB-T2 equipment, and then tax rate back to normal levels, twenty-something more than 28% from the low level recorded last year that enjoys, I remind you, a COVID-related tax relief of EUR 1 million. Moving now to the following slide, number nine, cash generation.
We see from our traditional bridge that net debt reaches EUR 122 million, essentially unchanged from the end of June, with the quarter cash generation absorbed by CapEx, including EUR 35 million of development investment and tax payment occurred in July. The average ratio below one time, net debt to EBITDA, is consistent with the industrial plan trend in the presence of very strong recurring cash generation amounting about EUR 78 million at September 2022. Now, before leaving the floor again to Aldo, let me just share some talk on the evolution of the two key drivers that are impacting our full year guidance and the expectation on our future performance, starting with 2023, which I remind you is the last year of our plan.
In slide ten, we offer you an updated picture of inflation, CPI, and electricity prices dynamics, historical and forward-looking, compared to the rather tricky situation commented earlier this summer. On the energy front, so the left part of the slide, our forecast discussing the same slide we presented in July for the raw component prices, around EUR 400 per megawatt hour, have been confirmed during the third quarter. Moreover, let me clarify that the figures here include the impact of the tax credit not taken into consideration in July because at the time, the government had not yet approved such tax benefit on the second half. If you look at the latest forecast on the last quarter, we see some positive surprises.
First, today, we have a renewed and enhanced tax credit by the government up to 30% for October and November from 15% in the third quarter, pending a possible extension on December as well that is now not included in the figures. Second, we are witnessing a downward trend in the current market prices and in the forward prices. For sure, we still have, we continue to have a lot of volatility in the market, but there are also 50 days left until the end of the year, so we have better visibility on the yearly figures on 2022.
On the inflation front, on the right part of the slide, the further acceleration of prices in the last months brought the last detection by Istat above 11% year-over-year, which is likely to translate into a significant potential upside on our 2023 revenues, thus amplifying the natural edge effect typical of our business model. Once again, I would like to mention that even pending the CPI index detection at the end of November relevant to our inflation link, the numbers shown in this slide are still subject to a great deal of volatility. However, again, as I just mentioned, the current visibility and the evidence acquired so far allow us to improve the guidance for 2022 with a good margin of confidence. On this, I leave the floor to Aldo. Please, Aldo, go on.
Thank you, Alberto. What Adalberto just outlined in terms of impacts and sensitivities in relation to electricity prices is reflected in the updated expectation for the full year 2022, and that's also beyond. Basically, compared to the indication given in July, nothing changed at the top line level with growth expected at mid-single-digit level. While at EBITDA level, the reduction in electricity prices recorded since October, the current level of power for the rest of the year, the government relief measures and last but not least, the effect of mitigating actions on the other operating costs give us more visibility on the possibility and the magnitude of the EBITDA growth in 2022, now expected stronger compared to the previous indications.
That said, it's also fair to keep some degree of caution in light of the high volatility, as Adalberto mentioned. The prices and power futures continue to show just we are seeing swings of more than EUR 100/MWh in a couple of days. This is a high volatility. At the same time, however, the dynamics of the electricity prices are also reflected in inflation, both directly on energy goods and indirectly through the impact on other products. The CPI escalator included in almost all our contracts will allow us to more than offset in 2023. Just with the time lag, the energy headwind that is hitting us.
Lastly, at investment level, maintenance CapEx are confirmed in line with our industrial plan figures, while considering slight delays from some suppliers, mainly regarding inventories and therefore not affecting the continuity of the business. Development CapEx are now expected to be a touch below initial expectation, roughly in line with last year level. Moving now to slide number 13. Our strategy, which is a mix of evolving our traditional business and diversifying through the development of new infra and new services remains valid, even in the new scenario we entering in.
The validity, let me say, is due to the huge contract backlog provides visibility on revenues and cash generation on the business that in the past has already proven to be highly resilient also in a weak environment, with the top line not linked to the economic cycle. The natural edge, or I would rather say net benefit from inflation. The digitalization trend, one of the most evident trends supporting our investment case on the new infra and services we are developing. Unchanged commitment to deploy the high amount of available capital. That's all on our side. We can now open the line for the Q&A session. Thank you.
Thank you. This is the conference call operator. We will now begin the question and answer session. If anyone 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. The first question is from Fabio Pavan with Mediobanca. Please go ahead.
Yes, good evening and thank you for taking my question. Actually, before asking my question, I would like to congratulate for the results you have managed to achieve in such a challenging quarter. Coming to the question, we have read about an NDA eventually signed between Rai and F2i aimed at sharing information on a potential tie-up between Rai Way and EI Towers. Was wondering if you can share with us some comment on this? The second part of the question is, have you managed already to discuss about the sector evolution with the new government representatives? Thank you very much.
Hi, Fabio. Thanks for the question. Let me elaborate a little bit on the topic of consolidation, trying to be as comprehensive as possible. In terms of progress of activities, you know, they just say it's open. The shareholder advisors are working on possible scenarios that must be compliant with the requirements arising from the new DPCM that is now in place, and of course from antitrust issues. In this respect, it appears you mentioned the NDA that was signed by the shareholder of Rai Way and EI Towers to start sharing some information about the company.
At the same time, let me take the floor to say that the appointment of the new government that, let me remind you, is the controlling shareholder of our parent company, makes it appropriate also to get its stance, in particular on the governance of an asset that has been indicated as a strategic asset in the DPCM. In this perspective, the DPCM sets out three clear requirements. First, Rai Way to remain listed. Secondly, Rai to keep at least 30% of the company in terms of the level of the stake. And third, Rai to keep control of the infrastructure in order to guarantee continuity of the public service. This is what the DPCM requires.
Different or additional requirements, for example control on vertical integration and so on, could come from antitrust, as we already know, or mainly from shareholders. As you may understand, this is not fully in our hands. As managers of the company, we have preferences in terms of strategy, operations, areas of investment, leverage, so on. When you refer to control or to governance of the company, it's something not up to us, but to shareholders. About your second question, no, not yet, from any interaction with the new governance from Rai Way side at the moment.
Thank you very much.
The next question is from Giorgio Tavolini with Intermonte. Please go ahead.
Hi, good evening, and thanks for taking my questions. I had a few questions that may be boring because they are more on the modeling. I saw that you reported lower D&A following the termination of the useful life of the DVB-T equipment. I was wondering if it's fair to assume for this year EUR 46 million rather than EUR 50 million D&A, given current consensus is at least EUR 50 million. What is the right level for 2023, 2024, given that you are investing in the refarming in the last cycle of investment. The other questions are on the third-party revenues stream.
I see that the major driver of growth came from FWA and MNO. But I was wondering if you can provide a sort of a breakdown between the old contribution and the new regional refarming contribution, because I guess there is a higher visibility. The third question is on the data center business. What is fair to assume at this stage as early revenues, I mean, from, I don't know, EUR 2 million from 2024, if it's a right guess for the initial revenues from the business. Thank you.
Lower D&A, you mention a number for 2022. Let me say that the final number I believe will be closer to the one you mentioned. We expect to have a reduction vis-a-vis the number recorded in 2021. After 2022, due to the new CapEx on the new project, we should expect a progressive increase. As concerns the third-party revenues, you know our- ... work was to try to reduce the overall impact of coming from the pressure related to our MNO customers.
What I may say here in terms of details is that the overall amount of revenues, third party revenues related to the MNOs are something less than EUR 13 million in the first nine months. We are seeing clearly an important increase on all the other stream of revenues. Here we're going not to provide details, but the positive impact is related, as I mentioned, mainly to the regional refarming project, and then from the fixed wireless access player. Sorry, your last question, can you remind me?
The data center. The data center revenue should be initial data center revenue in 2024 as opposed to 2023, but I guess in 2024.
If you are referring to the impact in terms of revenues, we should expect the first contract to generate a positive impact on our top line starting from 2024.
Could it be 1% boost on your sales or even more?
1%, no. I expect more than 1% in relation to the CapEx that we expect to have. If you are referring to 2024, I say it will be a single-digit impact, just to be clear.
Okay.
Single-digit, low single-digit impact, because it's the first year where we will see some positive on our top line.
The next question is from Stefano Gamberini with Equita. Please go ahead.
Good evening, everybody. Thanks for taking my questions. The first regarding page 10. If I understood correctly, the increase of costs that we could expect in energy in 2023 are around EUR 13 million versus 2021, and the increase of revenues related to CPI update is in the region of EUR 35 million. Theoretically, the additional EBITDA is in the region of EUR 22 million, 2023 to 2021, only for this item. Could we expect an increase of EBITDA more or less similar in 2023 versus 2021, so means EUR 165 million. Am I very far from what we could expect next year? What are the other moving parts that could negatively impact the 2023, considering also the positive trend you have on regional refarming and other revenues?
The second question regarding how related to inflation, the other contracts, MNOs and regional networks, how these contracts will be updated for inflation next year? Should we expect 75% of the 11% of inflation that you will get from Rai or are there some other growth? The third one regarding the data center investment in general, you underline EUR 25 million of investments and the first start of revenues in 2024. Could you remind us when the contract and who are your clients for this business, when the contract could be signed for the return on this investment, or you already have some contract in your hands?
The same, if you can update us on the hyperscale, where we are in terms of permitting, when we could expect an update also on this project, even in 2023, could we see some investment in the hyperscale? Thanks a lot.
Thank you, Stefano. Let's start with your question on slide 10. The math is, I would say, as simple as it is correct, but let me make some clarification. As shown in slide 10 of the presentation, starting from the Adjusted EBITDA, we will record in 2022, to be precise, net of the non-recurring benefits positively impacting this year, we should add EUR 27 million from CPI and deduct EUR 3 million-EUR 4 million from energy headwind, obviously pending the CPI figure for November 2022. Of course, these are the major moving parts. You should consider the further contribution from regional refarming, the efficiencies, a slight further reduction from MNOs, the startup costs related to the implementation of new initiatives, and so on. In addition, keep in mind that electricity prices are still extremely volatile.
We are seeing swings of EUR 100 per megawatt hour in a couple of days. I'm referring to the last two days. Therefore, the EUR 3 million-EUR 4 million additional energy headwind expected for 2023 and shown in slide 10 is only for illustrative purposes, but the actual number could differ materially depending on price evolution and possible extension of government measures that currently are not included in our simulation. Let me add a couple of considerations you should be proud of. Ability of the company to respond to such a strong energy shock, because it's true that prices are coming down slightly, but the increase in 2022 in the cost for energy is still very material, around EUR 9 million-EUR 10 million. We are managing to secure a tangible increase in our EBITDA.
When excluding the delta, the variance compared to the original assumption of the industrial plan, with reference to the energy crisis, total cumulated CPI and a one-off impacts, the underlying trend of our numbers towards 2023 is bang in line with expectation presented almost three years ago. As concerns your question on the CPI in relation to the other customer, let me simply say that mainly the majority, almost all our contracts have a 100% link to the CPI. This is true also for the local refarming, broadcasting player. You mentioned probably in your question, the MNOs. This is the situation.
As concerns your last question, I leave the floor to Aldo.
Sure. Let's add two more questions. One is related to hyperscale data center. We have the final design, so the project ready, and the draft agreement that is almost shared with the municipality. Basically, all documents are needed to submit the application to officially start the permitting phase involving several different authorities. We have actually been ready to start the permitting phase for some time, but in the meantime, the city council has been reset, and this has led to a slight slippage in the timeline. The goal is to start the process, the authorization process in the coming weeks.
We expect about one year to be in the position of perhaps 10-12 months. I think one year to be in the position to start the construction, and then additional year to have the first megawatts available. In general terms, the design include the scalable aspects, including four different modules of about 8 MW each, which can be developed progressively as commercial demand grows for a total IT load of about 30 MW-35 MW. That is, as you know, located in the area near Rome. Giancarlo, for the last question.
On the likely and potential customers. I mean, when Alberto mentioned 2024 as the year of first revenues coming from these new services, was referring mainly to the edge data centers and the CDN, not the hyperscale data center. In terms of main customers that we expect on these new services, on the CDN side, mainly content providers, so being both OTT operators not having a proprietary CDN, but also, and I would say also in particular, traditional broadcasters moving a part of the linear distribution also on these new platforms, and gaming operators.
In terms of edge, the edge data centers network, typical customers will be cloud providers, also MNOs for the 5G virtualization of the network, and generally speaking, all the service providers of the so-called low latency services like video analytics, real-time monitoring, virtual reality, mixed reality and so on. In terms of timing of the contracts, let me say that it's quite complicated and difficult to have a pre-commitment on these kind of assets. Contracts will follow when we will get closer to asset availability. In the meantime, the discussion and talks that we are having with the potential future edge and CDN customers, let me say they are extremely positive as we are collecting a great interest in the assets and in the services.
Great, thanks. Very clear. Thanks.
You're welcome.
The next question is from Pilar Rico with Credit Suisse. Please go ahead.
Hi, good afternoon, and thank you for taking my questions. I have two on my side, please. The first one is around the high interest rate scenario. How would you think about the upcoming debt refinancing? What is the impact that we could expect in full year 2023? The second one is another one around the energy impact. How likely would be the government to extend these energy measures? What would be the benefit in that case in full year 2023? We have seen other governments, like the German government and Telefónica Deutschland, stating that the measure could be extended up to Q1 2024. How is this looking on your side? Thank you.
Let's start from the last question. Even in Italy, even if we do not have, as of today, any decree in place covering the period 2023, there are several statements from the key component of the government saying that they will continue to support the companies in order to reduce the impact coming from such increase in the electricity prices. Let me also say that in some of these all these support by the government is financed by the increase in the overall price of the bill that is giving more VAT.
This is true for the electricity bill, but this is also true generally speaking all the governments because of the CPI are seeing an increase in the income from the VAT, and this is allowing the government like this is what is happening in Italy to extend all the measures in order to support the business of the company and the countries. This has concerned the energy cost and the government measures. You ask about the potential impact coming from the expected refinancing that we expect to have next year. Clearly in terms of spread, I do not see a big impact.
Of course, as of today, we have more or less, if I'm not wrong, 50% of the overall debt that is hedged. For sure, we will have a different price and different that would be taken into consideration for in the new financing that we are going to have starting from 2023.
Thank you very much.
You're welcome.
The next question is from Lampros Smailis with Kepler Cheuvreux. Please go ahead.
Hi, good evening, and thank you for taking my questions. I have two on my side. One, if you can give us some color on the Adjusted EBITDA that you expect to be higher than you previously communicated. How can we quantify or think about this for this year? The second question is on the hyperscale data centers. If I remember correctly, the previous set of guidance was for two units of 10 MW, but now you said earlier that you expect the total capacity or IT load to be around 35. Could you please give me some color on that? Thank you.
Okay. Let's start from the last, your last question. As concerns the dimension of our hyperscale data center. I would say, actually, yes. In the past we talked about 10 MW per building. As of today, probably, with the work we are more precise and for each building we expect to have 9 MW IT load. And then in terms of overall amount, we expect to have the flexibility because of the dimension of our land to build during the time up to four buildings for a total capacity of 35 MW. This is, these are the fields as concerns the data center. Of course, in the next year we expect to work on half of this overall capacity.
Based on the demand that we will have, we will be happy to build also the other business, because I remember this investment is a modular investment. You ask me about a quantitative guidance on the EBITDA. I'm sorry. Typically, here we have always given a qualitative guidance. Let me say that in July, we guided for a limited EBITDA growth due to the headroom from energy prices. Now, if you compare slide 10 with the same slide presented in July, this headroom is now expected EUR 3 million lower than what we presented in July. More or less, this is a number that you may take into consideration for your purpose.
Understood. Thank you. If I can follow up on the edge data center CapEx, could we have an estimate of how much it would cost for all 15 of them? Thank you.
On the edge data center, the construction CapEx per megawatt are a little bit higher than a hyperscale data center. We should expect more or less in terms of construction CapEx about EUR 15 million per megawatt.
Thank you very much.
On top of this, let me also add, sorry. Apart from the construction CapEx, we could have also some other costs, but the impact of course is going to be lower due to the connectivity, some IRU, and so on. The proper figures that you may take into consideration is the one I just mentioned.
Okay. Thank you.
Gentlemen, there are no more questions registered at this time.
All right. Thank you for joining the call and, speak soon. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.