Catena Media plc (CTM) Earnings Call Transcript & Summary

Thank you, and good morning. This morning, we sent out the press release about the refinance activities we have been working on for a long time. And in order to -- for you and the market to get a good understanding, we are running this call today. I will go through a quick update about the current situation and a bit of the strategy we work from the business point of view and, in the future, also understand why these refinancing part are very important to us. And then I will hand over to Project Manager, Erik Edeen, who has been working on this since August last year, to give you the more details in the structure. We also have our advisers with us today that if the technical -- question becomes too technical, we can also give you the expert answers to those. But first of all, let me start to run through a couple of slides about the business as such. So can I kindly ask the operator to shift to Slide 2, please? Obviously, our industry as all the other ones are being heavily impacted by COVID-19. It's -- the past month has been extremely busy in the way to try to understand how that is impacting us and especially how they impact our core customers, meaning the operators in the world. A big part of the operators' revenues are being related to sports, and a lot of sports events being canceled or trade reduced, their revenues are very negatively impacted. They are facing losses, and we see some smaller operators actually shutting down because of this. So because of this, our work in this space is to see what the traffic we have, how can we support the operators to maintain the business as good as possible, and by doing so also securing our business. That's where our expertise comes in as an affiliate to basically try to transfer the traffic normally showing up at sports sites and transfer them on to what is easier to use today. There are, however, some sports events going on around the world and those are heavily marketed, and we work very closely with operators to understand what those are, so we can let the customers, when they search out there for events, to understand what is possible to bet on. But obviously, all these events are not enough to compensate at all for what normally business looks like. Hence, the casino business comes in. And casino, obviously, is reported from many operators out there actually to be booming now, but also products like poker seeing rebirth with a very strong demand now as that is something that people like to do when they cannot do much other things from home right now. So with that said, I think our key thing here is to basically source the traffic we get in to the operators in the best possible way for them to maintain as high revenues as possible. And if you do that right, we will maintain sufficient business going forward. So I would like now to shift to Slide #3. Our company's positioned in a good way to actually manage this situation because 70% of our profit is generated by casino which was what we reported in -- for the first 2 months this year. This means that, yes, if sports that relates about to 1/3 or less than 1/3 of the profit generating in the company goes down, yes, we need to compensate that with other things. However, sport does not entirely go down to 0. There are events going on in there. But also casino has seen a dramatic increase on traffic and demand by operators. And our way of doing that is basically not significantly increase our price, but rather make sure that we send the right customer to the right operator so that their lifetime value is maximized, and by that, also how our revenue is being maximized. I will come back to our focus on how we work with operators a bit later in the presentation. But thanks to the increased demand of casino traffic and the high profitability in that segment, plus also about the financial services, that is a small part, but it's also doing very good due to the high volatility in the market, we managed to maintain revenues at the level that we're very happy with, considering the current outbreak of COVID. Next slide, please. So if you look into these specifics that we have done that we also mentioned before, of course, as a company and an employer, we need to make sure that we follow the authorities' recommendation not to breach. We've also done a lot of things here that we follow also the requirements from the operators not to put marketing activities out there to benefit from search further on COVID-19 or anything. So we're cleaning the sites, clean from search traffic on those things in very close cooperation with operators to maintain good and ethical business during this time. We have taken several measures. We're now in the fifth week of working completely remotely in the company. And we're measuring that very strong to -- ensure that the staff is well taken care of and are in a mode to generate good business. And in fact, we have reached top operational performance numbers of staff efficiency since this started. So the way how we set up works extremely well from an operational point of view. We don't travel, meaning that we want to keep staff safe, but also, that also means that we can put those costs into profit as we don't need to spend cost more time on traveling. The strategic measures taking is that, of course, we normally spend some of our costs into performance-based marketing activities. We keep on doing so where we can see profit, but of course, we don't invest in search words, et cetera, where you cannot transfer that into a bet because of sports not being up and running, so we see cost savings in those during this time. The increased casino offerings have, of course, helped to mitigate the sports volumes. As already mentioned, so that actually helps us to increase the profitability from casino segment. On top of that, we're doing a lot of other cost-saving activities, so we don't need to do -- think of all events as -- that's currently going on virtually instead of traveling and, et cetera, and you can actually put a lot of cost savings into your P&L these days. I think the most important thing here is that we need still to maintain a good business. We know that COVID will disappear or being reduced. And we know that the business will go back to normal someday. So what we're doing now also is to keep staff [ working ] to make sure that we constantly improve our products because when it's over, we need to be in our peak, and we're preparing for that, both what's going to happen in the second half, but also what's going to happen, for example, in U.S., a year from now on, that work is maintaining without any change. So I think the key thing here is how we work with operators. As I mentioned, we don't try to benefit short term on this. What we're trying to do is to benefit long term. When operators are in need of a good partner, we want to be that one because when it turn around, we will benefit from those agreements we have set now as we've been setting a lot of long-term agreements in place during this time, to help operators to bring up rather short term, but together then have a very good long-term business together. And it has proven very, very well. We have renewed a lot of agreements out there, and we have signed a lot of new deals out there, thanks to this approach, and it seems to be very appreciated by the market or the operating part of the market. The last one, of course, and the reason for this call is that we also are managing our financial risk a lot. We are, of course, very conscious about the cash on hand and make sure that we maintain that. The current business is generating cash for us. So we don't see a large risk in that, but also, of course, the debt instruments we are working with and the unsecured bond, of course, we are finding ways now to amortize that a bit and to roll it forward, and that's what this call is about a bit later. Next slide, please. Slide #5. A couple of just words about our strategy going forward. I think it's really important to see that as a company we haven't changed focus on strategy whatsoever. Mid-2018, we started to walk away from doing massive amount of acquisitions and focus on driving the assets we do have into organic growth mode. In 2019, it was a tough year because a lot of those assets were not performing well with the historical actions, so we have to change that. And the first shift we do was to start to improving the casino business, which is now growing that we could report in the trading update earlier this quarter. The next step we want to do was to take care of sports, especially the legacy part of sports in Europe, which I'll come back to a bit later. The change in that strategy, I mean, that we have used the cash that we have to actually start and also were needed to pay off the intangible assets we've bought and basically to pay for the earn-out obligations. When we entered into this year, we had close to EUR 82 million of earn outs that needed to be settled, and when we finished February, we had EUR 6.9 million left to those. So then, of course, we used our financing tools in place to do that, combined with cash flow and as little dilution as possible and as the agreement had to make us do that. I think the new strategy is really important to us. It's -- it helps us to integrate the assets we have into the business and improve them and make use of the fact that we have a large operation going and to benefit from those synergies to gradually then start to increase revenues again and improve margins, which we could see January and February could prove off to do. Next slide, please. Slide #6. In this case, this is just to repeat that what you see in front of you is what we've shown in the last quarter report. It has actually overview of the strategy and nothing of this is slowed down. Everything progressed in full force forward because, as I said, there is a day tomorrow as well. And we want to be on top and continue to be the largest affiliate out there. So therefore, we are doing this. Due to this, we've also reorganized the management team as well. We have new people since beginning of the quarter in charge of the sports segment. We have new people in charge of the casino segment also joining in first quarter. We also have a new management team, where both the head of AskGamblers and the head of U.S. are included into the team to make sure that we take fast and swift actions and making those very efficient going forward. So I think with that said, basically, the company proceeds, the basic of the company proceeds as always. We are working very hard on our cost control. We are investing in our future strategy by cutting cost in the legacy business, so basically increasing a lot of investments into new markets, U.S. being one of them, by not increasing the total cost as we -- the investment is being [indiscernible] by cost savings and other parts of the business. And we're trying to strengthen our core hero products out there like AskGamblers, where we're adding languages to get more local reach, et cetera. So all in all, the normal business of the company proceed as is and are progressing well. On top of that, we have applied this COVID-19 activities to really make sure that we can operate as healthy as possible during this time until we return back to normal. With that being said, I would like to hand over to Erik Edeen, who's going now to talk us through the current refinance that we just launched this morning. Thank you very much.

Thank you, Per, and good morning. We look into Slide #8, please. I will guide you through some of the ideas around the refinancing structure that we presented here this morning and to give you a little bit more details on the ideas behind the transaction. For those of you who have followed us for quite a while, we've been quite M&A-driven in the past. And as Per mentioned, we have had several announced deals that have been settled primarily during last year 2019 but also partial now during 2020, and at end of February, we have a smaller amount left. We have financed the acquisitions with a senior unsecured bond of EUR 150 million outstanding and due in March 2021, and that has a position and fair value amount of EUR 142 million as per first quarter 2020. And in an effort to reduce the debt and to refinance, we have, over the past year, approximately looked into several different refinancing solutions both on the equity side and the debt side, trying to find a solution that gives a good fit for the company. Evaluating these different options, we have concluded that best fit for the company and its shareholders will be a rights issue of units together with -- then divided into warrants and hybrid capital that will be used, and I will come back to that later to explain how that works a little bit further. In conjunction with the rights issue, the granted right tissue, we also seek to amend the terms on the outstanding senior unsecured bond with amendment that will include an expansion of 12 months. If we move to Page #9, please. The refinancing structure as such will consist of 2 different sections. A, a fully granted right issue of units to a level of about EUR 63 million, or in SEK, SEK 684 million, together with B, amended terms of the outstanding bond of EUR 150 million. And to do this a little bit high level as an explanation, I want to say that we are moving -- we are using the capital we will get in from the units, the right issue of units to reduce the debt. So all in all, looking at the financing package and the cost from a company perspective, we currently have an interest of 5.5% plus Euribor on the current bonds in unsecured bond with the new terms, on an interest level, that would remain the same for the remainder of the [ quarter ] will be left on the bond after we have amortized on that bond. And we will have an interest related to the unit solution of 8%. So the weighted interest rate for the company will be about 6.5%, meaning an increase of 1% in the structure. So looking into the leverage and as such, the instrument, the rights issue instrument, the hybrid, will be treated as equity from an IFRS perspective, meaning we will have a reduction of our senior debt LTM EBITDA based on numbers we provided in the trading update, rolling 12 in February, given the fact we have been given now to around this transaction that would reduce the leverage down to about 1.9x. If we move to Page #10. To give you a bit further overview of the transaction of the rights issue of units, we intend to raise approximately EUR 63 million in a rights issue that will consist of hybrids and warrants. And the units will be offered with preferential rights to the existing shareholders through right issue. The transaction is fully granted by subscription undertakings and guarantee undertakings where the CEO and certain members of the Board represents about EUR 1.3 million. Existing shareholders, including Oresund and Ruane, Cunnif & Goldfarb has an undertaking of about EUR 35.6 million and external guarantors of about EUR 25.9 million. The new capital raise on this -- related to these instruments will, as I said, be approximately SEK 684 million. The insurance and the hybrids will be treated as 100% equity in the accounting and the issuance of warrants will be able to -- will be possible to convert to ordinary shares in Catena Media as an underlying asset in that instrument. And the proceeds from the rights issue will be used to reduce the current bond and the amount that we intend to amortize is EUR 49.5 million. So if we move to Page #11, structure of this right issue of units and how that will look like. Now it becomes a little bit technical, but I'll try to explain this as simple as possible in how this instrument works. 1 share, if you have 1 share today that will generate 1 subscription right -- 1 unit subscription right, and you need 9 unit subscription rights to -- that will come with the price of SEK 100, and that gives the shareholder 1 unit. So 1 share will generate 1 unit subscription right, you'll need 9 units subscription rights to be able to get 1 unit to price of SEK 100. And the 1 unit includes 1 hybrid, and 6 warrants. And 1 unit is equal to 1 hybrid with the nominal value of SEK 100 that will give an interest from the company point of view over 80% on a yearly basis. And the 6 warrants will be able to -- will be possible to strike to ordinary shares in Catena Media at a strike price of SEK 18.9. And following the right issue, the hybrid and warrants will be listed to enable trading on the instruments, each separately on the NASDAQ Stock Exchange. If we move to Page #12, please. Around the transaction and the amendment of the existing bonds, we seek to extend returns for additionally 12 months. We will do a partial prepayment of 33% corresponding to EUR 49.5 million, meaning the debt in terms of the bond will be reduced compared to today's amount of EUR 150 million down to SEK 100.5 million. It will enable interest payments under the hybrid as a new term. It will be -- it will not be possible to pay dividends on the ordinary shares during this extended period while we expand the bond. However, do remember that there will be an interest for the ones participating in the rights issue of 8% on the value put in the units. Now there will be an inclusion of transaction security from January 2021, end of January. We won't be able to add any additional bank debt under the new terms. And some other terms as you can see here in the slide that will be also be adjusted in terms of the new structure. But that are -- on the key main terms. The interest level will remain at the same level as today, 5.5% for the remaining part of the bond going forward. And we have received voting undertakings from the bondholders, representing 58% of the outstanding senior unsecured bonds to vote in favor for these amendments and that is proposed in a written procedure process. For the amendments to be effected-- accepted, at least 20% of the bondholders must be represented in the voting and 2/3 of the votes needs to be in favor for the amendment. So with that explaining the capital structure and summarizing this exercise is how I started off with here, it will consist of 2 instruments. Basically, we are intending to move debt-to-equity as a total for the company, the interest will increase somewhat in relation to this transaction. On the other hand, the interest will go to the shareholders of the company. So we see that as -- we hope that will be seen as positive from a shareholders' perspective. So with that, I'd like to stop and let us move over to the Q&A session, whether there are any questions around this structure.

[Operator Instructions] Okay. There seem to be no questions from the phones at this time. [Operator Instructions] And there seems to be no questions come in for at this point.

There is another question from [indiscernible]. Can we move on with that one?

Yes. Please go ahead.

Well, [indiscernible] says can you comment on the warrant strike price, one, higher price and then in line with current share price? [ Hellberg ], that's the first one.

Yes. We can have some comments around that. The price is, of course, something that we've discussed together with our advisers in this transaction and as well as in discussion within the Board of the company and we concluded on the price put together pretty much in the discussions we have had. And then most of the banks wants to comment any further on the price schedule that we've decided.

Okay. Thank you. The second one is, could you comment on the current volumes in sports-related revenue? We're hearing from other companies in the sector that it's down around 50% to 70%. Do you expect a similar drop in sports?

Well, we are currently concluding the numbers for the first quarter. I cannot comment at this stage on the levels. But I would say we are not unique below anyone in the business today, I would say.

Okay. The third one is, how do you see U.S. development, potential license states, like licensed sports or some pace as before? Or same pace as before?

We see no change in the pace in U.S. What we're now trying to understand is whether this current situation potentially could speed up some, considering that the states would like to have further tax incomes given the tax or the cost they have in the society right now. But what we learned so far, it's very difficult to do that. What we know is the next state coming up is Colorado, that is due to launch on May 1. Other than that, we see no real change in the time lines. Definitely no decrease in or some negative impact in the speed moving forward for new states to regulate.

Again, also, I can clarify my answer a little bit around the strike price on the warrants, just to give a little bit more light on that one. And then the strike price was certainly lower. We looked at the closing -- closing track price a day before the announcement of the rights issue, and that led to the strike price of SEK 18.9. So that was used in the transaction, just to give an explanation of why that number was set.

There still seems to be no questions from the phones. [Operator Instructions] I see there's still no questions from the phone lines.

And no question from you or from viewers also?

There is no more questions.

Okay. Then I will hand back to the -- indeed, I'll hand back to you for the closing comments.

Thank you very much for attending today's presentation. We understand it's a quite complex tool to understand, but we are always available to help you guide through if some questions should come up at a later stage. So thank you very much for today, and see you all on the quarter report presentation on May 20. Thank you.

Thank you.