CJ ENM CO., Ltd. (A035760) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Kay Choi of CJ ENM IR team. I deeply thank the shareholders and analysts for taking part in our meeting despite their busy schedules. Now we will begin the Q4 2021 earnings presentation session of CJ ENM. Please note that the financial and management results presented today have yet to undergo an independent auditor's review and could be subject to changes upon such review. Here with us are CEO, Ho-Seong Kang; Deputy President, [indiscernible] and Heads of different business units. We have Chun Kyu Park, the CFO; and [ Yoo Jin Lee ], EVP ; [indiscernible] for IP Distribution, Seong-Hak Lee from Content Solution, [indiscernible] from Commerce; and Hyun Soo Kim from Music; and [indiscernible]. First, CEO, Ho-Seong Kang, will present on the company's long-term vision and strategy.

[Interpreted] Good afternoon. This is CEO, Ho-Seong Kang, of CJ ENM. Despite tougher competition in 2021, CJ ENM recorded record operating profit. This was a result of continued strengthening of outstanding content and product competitiveness. The company will continue its business growth in 2022 as well with superior content production and brand appreciation. First, we will focus on digital transformation based on premium content. Media digital revenue will go beyond 30% in 2022, and the number of TVING subscribers is to double, cementing our position as a content platform player. With sustained TV and brand strategy, commerce GMV is to grow over 8% focusing on digital and mobile commerce. The company will extend its multi-studio strategy and earnestly expand our global business this year. Premium IT and convergence content production will see a powerful expansion this year. The acquisition of U.S. Endeavor Content has been completed, and our global content fortification strategy continues. Through the establishment of new studios, CJ ENM will put a greater distance between us and the others when it comes to content. We will always think of our shareholders in our growth path. The company will attentively listen to and increase communication with our shareholders. The BOD has resolved today on KRW 2,100 per share cash dividend totaling KRW 43.5 billion, which is an increase of 31%. CJ ENM will aim for over 20% payout ratio in 2022 as well. As a member of society, we will further enhance our ESG management activities on human rights and environment. I deeply thank the shareholders and analysts for their continued interest. CJ ENM, as a representative Korean company will grow further in the global market in 2022. I wish for the best for all our shareholders and their families in this new year. Thank you.

Now we will hear from, Mr. Chun Kyu Park, the CFO.

[Interpreted] Good afternoon. This is CFO, Chun Kyu Park. I will briefly go over our yearly business plan. The consolidated revenue guidance for 2022 is at KRW 4.3 trillion, which is a growth by 21%, with operating profit of KRW 270 billion. EBITDA is expected at KRW 885.0 billion, which is steady growth. Top line will grow with expanded content production. And with our content growth domestically and initially, our business fundamentals will get stronger. As was mentioned, the company aims to deliver over 20% payout ratio this year. I will give you more details with superior content fortification in 2022, the company aims to increase our revenue, market share and business competitiveness. We aim for 100% revenue growth for TVING by securing over 4 million subscribers. Based on our media mix and solution capabilities, the company aims to grow our ad revenue by over 10%. With increase in content production, sales revenue [indiscernible] positive. The company's overseas content sales revenue growth is at over 20%. So the planned new media content for channel that we receive is at total of 2,500 hours. This is an increase of over 30% over the previous year. And with it, the company will continue to win more market share. Production budget including national TV channels is planned at KRW 850 billion. TVING will [ ascertain ] over KRW 200 billion in terms of original CapEx and through that, aggressively secure more subscribers. The company will focus on gaining more market share and business growth through content in year 2022. This concludes the presentation on business outlook, and we will now continue to talk about our fourth quarter numbers.

[Interpreted] Yes, now on our results presentation. Please note that our quarterly and yearly results are on K-IFRS consolidated basis. Now we will hear the business results for Q4 year 2021.

[Interpreted] Good afternoon. This is [indiscernible] from CJ ENM Finance division. Q4 consolidated revenue at KRW 995.0 billion grew 5.4% y-o-y, while operating cost at KRW 29.6 billion decreased 66%. This was mainly due to incentive payments related one-off costs. Media and picture business unites recorded [indiscernible] with stronger growth in Japan. Beauty business unit recorded the best ever quarterly operating profit with KRW 19.2 billion. For year 2021, as a whole, the company set a new operating profit record. Revenue was at [ KRW 3.55 to KRW 4 trillion ] with operating profit of KRW 296.9 billion. Entertainment recorded an operating profit of KRW 176.8 billion, with commerce at KRW 120.1 billion. With continued COVID in 2021, live revenues inevitably decreased, but this was offset by the rapid growth of digital revenue. Even with more content production, the company maintained its profitability. CJ ENM will continue to enhance our market share through top line growth in 2022 as well. As for business unit wise details, please refer to the presentation deck. Thank you. Now we will brief you on the management results of Studio Dragon.

[Interpreted] Good afternoon. This is CFO [indiscernible], from Studio Dragon. I will brief you on Q4 and yearly results from 2021. '21 Q4 revenue increased 7.2% YoY at KRW 147.9 billion. Due to selling concerns over revenue growth, we delayed the revenue share of Jirisan, operating profit recorded KRW 6.3 billion. With decrease in the number of titles served, the early revenue for 2021 decreased 7.3% Y-o-Y at KRW 487.1 billion. But with enhanced profitability, operating profit saw a 7% improvement Y-o-Y at KRW 52.6 billion. Now our new CEO [indiscernible] will give our year 2022 outlook.

[Interpreted] Good afternoon. This is CEO [indiscernible] of Studio Dragon. Following our 2021 business results presentation, I will brief you on our 2022 strategy. Production environment has become tougher with COVID, part with cooperations with global OTTs and with strong key drama, where there are more opportunities out there for key studios. In year 2022, we will once again cement improve our position as the market leader focusing on growth, expansion and global. We will make it a year to prove that we are a strong dragon. There will be more than 32 titles strong lineup and distribution rose over 60% compared to the previous year, leading to a top line growth. This is the most number of titles that we have harbored to introduce for the new year. We have many big titles that are currently being readied or are in production, and we have already in place relationships with the various OTTs. And with that, we have secure platform for our creation and with all these activities in place, we will be securing our profit with our businesses. And if I make some of the renowned creators that are going to work with us, we are going to work with the [indiscernible] and also [indiscernible]. And we're also going to work with [indiscernible]. And we're also going to work on realizing the global universe of [indiscernible], and we also have had to work with [indiscernible]. And we have also a subsidiary that gearing up to introduce to you new content. And with all these activities, we are going to introduce to our audience how we are entertaining new content. We have added more details to our global partner last year, and that has given us tangible results that will prove to be another engine going for added growth. We have The Big Door Prize being aired for Apple TV, and we are readying ourselves to supply to additional Hollywood OTTs. We are also [indiscernible] studio models to markets such as Japan, where there is an established industry basis for drama. With our accumulated differentiated capacity and experience, Studio Dragon will strengthen key drama and in doing so, become a global studio.

[Interpreted] Now we will be entertaining your questions. Due to time constraint, please restrain your questions to 3 each centered around the core issues.

[Interpreted] [Operator Instructions] The first question will be given by [indiscernible] from Beijing Securities.

[Interpreted] The first question is for Studio Dragon. Well, it's a general talk in the market that the number of titles that you provided to OTT, the original drama OTTs were somewhat one thing in year 2021. And you, in your presentation mentioned 32 titles to be created this year and off the 32, how many are bound for OTT? So that is my question. Could you please mention some of the titles that you're currently working on? And now with the appointment of the new CEO, what would be your management focus? Is it top line growth or is it continued profit improvement? So I would like to know about the directionality of your management focus. That was the first question that for Studio Dragon. Now my second question goes to TV. Well, in the presentation, it was mentioned that KRW 200 billion will go to be set for your investment in 2022. And you've mentioned before that until year '23, your accumulated investments in TVING somewhere around KRW 400 billion. So is the KRW 200 billion included in the KRW 400 billion figure that you previously mentioned, or is it an increased number? So I would like to hear more clarification on that. And to the third question, I believe that we have secured a stable profit source for a quarterly basis. And in the presentation, it was mentioned that you had lot of spending were one of costs in the fourth quarter. And you've given us a guidance number of KRW 270 billion. I think this is a slight increase from the previous years. So going forward, do you expect to see continued one-off factors that is in the fourth quarter? So that would be my question.

[Interpreted] So the first question was Studio Dragon will be addressed by CEO [ Kim ] of Studio Dragon. The second question for TV would be addressed by CEO [ Young ] of TV. And now the third question will be addressed by CFO, Park.

[Interpreted] Yes. Well, this year, we have planned to introduce at least 13 titles that are bound for the OTT platform. If you compare it with the titles that went to the OTT platform last year, it's an increase by 5 to 6 titles. And then as to the second part of your question, well, with increased titles, of course, there will be increase in production. But in 80% to 90% of our production cases, so we already secured our basis to recoup what we have spent in production. So with top line growth, we also do have expectations or better margin. So it would be going towards 2 elements at the same time, both for quantitative growth and also qualitative growth.

[Interpreted] Yes, this CEO [ Young ], addressing your question, that is about -- that was for TV. Well, we did mention to you in earlier part of year 2021 that we have seen a threefold growth when it comes to paying subscribers. And based on that confidence, our target, it was -- '22 number of subscribers is also very aggressive. And accordingly, we will be making investments in commerce to get that goal -- or get that number of subscribers. And as was mentioned, we are aiming to increase our paying subscriber basis by twofold. And that will give us about 425 million paying revenue from paying subscribers. [indiscernible] a bit more aggressive than the KRW 200 billion that was previously mentioned. But once again, with aggressive expansion goals for our subscribers, we do not foresee any glitches on the way. Yes, as mentioned in our guidance presentation, we have set our goal [indiscernible] in terms of revenue and KRW 270 billion in terms of operating profit. For revenue, it's increased by 22%, but as for OP, it's downward move by about 9%. It's because we want to spend for future growth, especially the TV and also the production. But as was mentioned in the presentation, we will continue to sustain our EBITDA growth going forward. And as for our 4Q results, well, the one-off element, it was mainly due to incentives and also one-off investment loss related to U.S. movies. But these are non-repeat items. And as was mentioned, well, we would be going by the mentioned cost structure for each quarter, and that will take away any volatility.

[Interpreted] Yes, I would like to hear more details on the previous answer related to the one-off spend. And I would also like to hear more about the operating profit. Well, you've mentioned incentive and also one-off spend related to your activities in the press. Could you please tell us in a long terms how big they are? And well, if you exclude Dragon numbers, well, would you be seeing where these numbers with the -- in your books? And the second question is related to TVING. Well, I would like to know more detail about your ARPU and the subscriber base. And I would also like to hear more about your membership cooperation with [indiscernible]. This was the second question that related to TVING. And then the third question is for Studio Dragon, again. In your presentation, you've mentioned your global plans and also the initiative that you're going to take in Japan. So aside from that, could you tell us more detail about the projects?

[Interpreted] So If I may give you more details on Q4 numbers, well, there was added reflection with the incentive that is more on incentive payment. And with TVING original well, our production cost has also seen a rise. And if I may give you a yearly number, the incentive payment was KRW 56.2 billion, and it's quite difficult to give you a business unit wise breakdown of this number, but as you're well aware, the media business unit has the largest contribution to our numbers. And so the incentive payment is, I think, proportionate to the contribution level. And as for TVING original, with more TVING original, we have seen a rise in our production cost and increasing channel bound investment with production while 4Q number is at KRW 20 billion thereabout. And your last question, will we be seeing rising numbers should we exclude Studio Dragon numbers from our numbers. But I think that's a bit too excessive. Well, if you look at our '21 numbers, well, we did have some one-off elements in Q4. But if you look at our media business unit operating numbers, we recorded the best ever operating profit for our media. The same could be said for the company wide operating profit numbers as well. And this year, our guidance of operating profit number was KRW 270 billion, well, that a 9% squeezed over the previous year. But as usual, we are giving here a very conservative guidance for your information. And with more content production and competitiveness, we will be seeing our top line growth. And as we see the top line growth progressing throughout the year, we will be engaging in a more delicate balancing activity. Yes, please understand that we do not disclose our ARPU numbers nor the number of subscribers, same subscribers. But I can safely say that TVING is with balance growth both for tope line number and for profitability. And with that said, we are working very hard to improve our ARPU number as well. And as for your question on Naver membership, well, starting this year, we are going to provide the original TVING content to higher tier subscriber. So this will induce the subscribers to upgrade their viewership of membership. And the results so far have been quite positive. So TVING goes by fee structure of 2 premium and standard, and we are continuously engaging promotion to update the tier or a membership that is being held by our paying subscribers. And we also do have a relationship with the [indiscernible] company. So with their TV product, we try to offer our users easy to use convenience user experience in the U.S. And with that, we are also learning or inducing our subscribers to move to more premium subscription basis. And as for your question, our relationship with Naver, they are also TVING shareholders and our relationship back in '21 produced very good tangible results. And so with that, the 2 OTTs are in a good long run. And last year, we've seen both our external site flows and as well as an ARPU improvement. So both the partners are quite satisfied with this relationship. This is [indiscernible]. You wanted to know about our global initiative. Well, our titles, our Studio Dragon drama titles, they proved to be a big hit from -- in Japan. And with that, we are getting a lot of love calls for potential Japanese partners. We were the first to create a drama studio model in Asia, and we hope to bring our expertise to Japan and has it translated to a local production there. So we're in the process of choosing the optimal strategic partner there. And I believe things will see more [indiscernible] at which point we could disclose to you in more details. And now on our activities in other regions, mainly Hollywood U.S. well, the Korean IPC are getting a lot of attention now day from Hollywood in the U.S., and they have taken interest in our library title as well. So we are thinking of various ways to approach this, whether it would be through coproduction or remake of our IP. We are looking a lot inbound inquires to use our IP. And while we have made investments in many OTTs there, too. And we are also thinking of how to optimize or IP in that market, whether to go for remake or to engage in co-development activity. So we are currently developing and pitching various type in that market as well. And I believe we will be seeing tangible results for 1 or 2 of our initiatives within the year.

[Interpreted] I have 3 questions actually. First is related to TVING and Studio Dragon. The second question is related to ENM and Studio Dragon. The third question is mainly versus ENM. Now into my first question. Well, you're taking regional. What -- where does the IP ownership lie? Does it lie with Studio Dragon, is it the TVING or do you have co-ownership with IP? And what is the profit model with these activities? So I would like to know that. Is there the production cost plus guarantee or partial recoup plus the sales of copyright. So I would like to know about the profit model with TVING. And my second question. [Foreign Language] So once again back to the second question. Well, year 2021 was a good year for Korean content and Korean garment. The environment was really good for Korean content. However, Studio Dragon's performance back in year '21 was a bit lackluster. Is it because of Studio Dragon's relationship with TVING? So how much of an influence does your tie with -- Studio Dragon's tie with TVING have on your performance? Well, I expect, for example, HBO's relationship with the Game of Throne and also Disney would limit supply of their contents to Netflix before they launch their own OTT. So are you bound by such relationships, and it will -- with Studio Dragon, the increase in their title supply to TVING, whereas decrease their relationship with Netflix. So that's my other question. And now on the average selling price side. I see that your ASP has become a little bit more smaller. Is it because of influence with your relationship with TVING? Well, does the relationship with TVING affect the ASP or Studio Dragon? And does it hinder your negotiation with other OTTs? So this was my second question related to Studio Dragon's relationship with TVING? And now on to the third question for CJ ENM. I do believe that we have an in-house content division and I did hear something about you separating this division out. And there must be issues in sharing program channels world. So is there much pressure on this programming? And while does sharing channels act as a burden on whether it be formatted or non-scripted format? And I would like to know about the slot conflict. So these are my 3 questions.

[Interpreted] Yes. Now on your IP related question, basically, the IP ownership like TVING, and there are some cases in which ENM and Studio Dragon has joint ownership of IP. Yes, it may seem that our supply to Netflix for the original titles have seen a decrease last year. It's not because we have increased our supply to TV. Well TVING is one of our clients, and we have a big contract in place with Netflix. And in the contract, the minimum number of titles to be supplied to Netflix is set there. So we move according to that contract. And we look at the nature of the content and deciding whether to go through a global OTT platform or a domestic platform. So it's really dictated by the nature of the content. So we do have a good relationship with TVING. But we also have multiple various good relationships with international OTTs including our Netflix. And well does that supply to TVING influence our profitability? No, we go by market standards and entering into these terms. Yes, that was mentioned in my presentation of year 2022 strategy. We are at the brink of entering into a tangle agreement with international OTTs other than Netflix. So that is why we have plans to introduce the most number of titles this year and that was the answer. And now before we take the third question, I would like to add my remarks. Well, if you look at the viewership pattern, it's really fragmented now a days. People view content on various multiplatforms. And well, ENM Studio Dragon and TVING in programming, channel programming and streaming, we are mixing various formats and experimenting to maximize the benefit to the company. So we do look at the possible spinoffs and we look at convergence content. So the content that is aired on TVING with some time lag to see program and aired on channels. And this is a strategy that cannot be duplicated by global OTTs such as Netflix and Disney. So well, this is some benefit that we can enjoy. And all the global OTTs are really following our suit. They release their content in small chops on a weekly basis. So this is a strategy that they are going with to do what we are doing. . So when it comes to pushing up our average selling price, we are engaged in various categories to maximize our ISP. And if I may take the last part of your question on the multi-studio structure and the possible profit that it could bring? Well for OTT and transmedia platform, we will be mainly going with them to expand our non-captive content. And well, with its influence the captive revenue of Studio Dragon, I think this is being a bit too of a concern of a very minimal possibility. So we will be going for a multi-studio strategy when it comes to OTT and transmedia. And with that, we will see more coproduction.

[Interpreted] The following question is by [indiscernible] from [ Case Investment Securities ].

[Interpreted] My first question is the relationship between TVING and Naver, and the relationship taking it to Japan and using it for your promotional purposes, and with this collaborative promotional plan in mind, is this what makes you more confident about having 65 million prescribers? So this is my first question. And my second question is related to the spin-off. Of course, in your previous disclosure, you said you would be taking different stances and that statement really pushed up your share price, but I would like to know more about your future rationalities when it comes to Studio goals.

[Interpreted] Yes, this is the answer provided by TVING. Well our relationship with Naver, we are talking with various potential international investors on how to take our business to the global space. We are currently talking and discussing with [ Paramount ] and other global studios and many other companies. So when these projects or initiatives take on more flash, we will be delivering the message to you. And as for the mentioned 4 million to 5 million subscriber basis, this does not include global audience. Once again, if things become more concrete, we will be making sure to update this information to you.

[Interpreted] The second question will be addressed by CEO, Kang, of CJ ENM.

[Interpreted] I guess, as you're well aware, there were a lot of interest from involved parties on the possible spin-off of second studio. Well, the spin-off were contemplated in order to add more efficiency to our IP business and also to enhance the efficiency when it comes to production. So that with that, the company has talked about spinning off the second studio to add efficiency to our content production and to have a swifter and quicker decision-making. And well, there have been press reports as you're well aware, for a possible spin-off in May last year, 2021. And with that report, we did receive a lot of questions in the market on whether this was going to aspire or not. And that is why we have to address that question. And on November 19 last year, we have a disclosure on the spin-off of the second studio. But after that announcement, we did receive a lot of concerned voices from the shareholders. And as you're well aware, the regulations concerning spin-off saw very rapid changes last year. And we have to address all these changes, all these rapid changes and also the voices of our shareholders. So we're thinking of previous directions on how we could defend the shareholder value and also to meet the fast-changing regulations. So once we get things ready and once we finalize the direction at BOD, we will be sure to deliver the message to you.

[Interpreted] [Operator Instructions] Currently, there are no participants with questions.

[Interpreted] So we did receive a question by fax, and it was related to endeavor content on post integration and their content lineup. So our Deputy President [ Lim ] will be addressing that question.

[Interpreted] This is Deputy President [indiscernible]. Well, after the deal closing, we have prepared [indiscernible] is currently underway. And we are currently focusing on the fitting process because there are differences when it comes to U.S. and Korean production systems and also there are cultural differences. So that is why we're basing on fitting and we're concretely working on the lineup strategy as well. As of today, we believe that we will be releasing about 15 to 20 titles of TV series and pictures. And in the near future, by the end of February, [ Kill Heel ] season 4 will be aired on BBC. And in the second quarter, [indiscernible] Season 3 is to be released on Apple TV and as for the pictures, The Lost Daughter that was released on Netflix and it was nominated for an Academy award and [indiscernible] award winning content is to be aired on Apple TV as well. So continuously, we will be working on strengthening content production and planning capabilities to enhance our global results even further. Thank you.

[Interpreted] So I see no further questions. And if there are no further questions, we hope to end the session here. Are there any further questions?

[Interpreted] Currently, there are no participants with questions.

[Interpreted] Again, I thank everybody for participating in 2021 CJ ENM earnings release session. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]