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

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference of the Fiscal Year 2023 First Quarter Earnings Results by CJ ENM. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2023 first quarter earnings results by CJ ENM.

[Interpreted] Good afternoon. This is Kay Choi from CJ ENM's IR. I thank the shareholders and analysts for taking time out of their busy schedules to attend our earnings release session. We will now begin the earnings presentation of CJ ENM for Q1 2023. Please note that the financial and management results have yet to undergo an independent auditor's review, and could be subject to changes upon that review. Here today with us we have our CFO, Deuk-su Hwang and heads of different business divisions. So we have CFO, Deuk-su Hwang with us; EVP, [ Hoo-Kyung Lee ]; CSO Jey-Hyun Kim; and Yoon Sang Hyun from Media platform. From Pictures & Drama, we have Chang-Gun Koo. From Music we have Chang-Bin Song; and from Commerce, we have [indiscernible]. And we have heads or CEOs from our subsidiaries, including Ms. Kim Jey-Hyun from Studio Dragon; Jieul Yang from TVING; and [indiscernible] from CJ ENM studios. And we also have Steve Chung, who heads the Global Business. First, we will be hearing from CFO, Deuk-su Hwang on our reorganization.

[Interpreted] Good afternoon once again. This is CFO, Deuk-su Hwang. CJ ENM underwent a business restructuring process in January to give more business responsibility to clear business units and also set up a cooperative process that will strengthen synergy between different business units and our subsidiaries. In line with this restructuring, our business-wise profit and loss classification has been changed from the previous Media, Pictures, Music and Commerce to Media Platform, Pictures & Drama, Music and Commerce to give more clarity to our profit numbers. Media Platform includes TV channels and OTT platforms that deliver our content to the customers and also TV ads, subscription and TV businesses. The company is going to enhance platform competitiveness by increasing synergy between linear channels and OTT. Pictures & Drama is comprised of diverse content productions, pictures, performance and content distribution business through our multi-studios. This multi-studio system will fortify our content competitiveness and enhance cooperation through joint planning and production, allowing global distribution of content. As for Music, Mnet related business numbers that were previously included in the Media business were brought in to show the entirety of the business. Commerce remains the same, with sales classification for TV commerce and digital commerce. The economy slowdown that began in the second half of last year continues to decrease the ad market and dampen consumption. With that, the business is facing a very difficult environment, as is illustrated by the slower growth in OTT subscription. However, through our organization reshuffle, CJ ENM will add efficiency and productivity to our business and is doing our best to restore our competitiveness. The overlaps in organization operation has been reorganized, centering on core R&R, and we are focusing on our business competencies. We will address the fast-changing market conditions and expand domestic and international results. Thank you. Next is the results presentation. The quarterly and yearly results presented by CJ ENM are based on K-IFRS and on a consolidated basis. Y-o-Y comparisons are given on a pro forma basis. The business division-wise operating numbers have not eliminated internal transaction numbers. Now, we will hear the management result presentation of the Company for Q1 2023.

[Interpreted] Good afternoon. This is [indiscernible] from Finance. Consolidated revenue in Q1 recorded KRW 949.0 billion, which is a 0.9% decrease Y-o-Y, with operating loss of KRW 50.3 billion. Entertainment recorded revenue of KRW 632.9 billion, with operating loss of KRW 67.8 billion. Commerce recorded revenue of KRW 316.1 billion, with operating profit of KRW 17.5 billion. The operating number decrease from entertainment was mainly due to sluggish TV ad business and FIFTH SEASON delivery absence, and increase in production. Commerce showed improved profitability with high profit portfolio programming. The business will strengthen distribution in Q2 centering on premium content and focus on profitability recovery in commerce portfolio strategy that centers on megabrands. [indiscernible] TV ads and expand TV subscriber base. International drama distribution will be enhanced with Tale of 9 tailed 1938 and Family. The company will increase delivery to FIFTH SEASON. And DXTEEN will be making their debut, and our in-house artists, including JO1 and INI will increase activities and concerts continuing their growth. Based on one-platform strategy, Commerce will enhance programming of high profit products to restore profitability. Please refer to the documents for details of different businesses.

[Interpreted] Good afternoon. This is CEO, Jey-Hyun Kim of Studio Dragon. I will brief you on the Q1 management results. 2023 Q1 revenue increased by 74.4% at KRW 211.1 billion. With increase in simultaneously [indiscernible] titles and OTT originals, sales revenue grew 113% Y-o-Y, continuing our fast growth. Our operating profit recorded KRW 21.6 billion, with sales to Netflix and Disney+ and also with added efficiency to regional sales. In particular, our content recorded 33.2% of watchtime for non-English TV series on Netflix. Our first local US drama, The Big Door Prize, was launched successfully and the confirmation of Season 2 is an encouraging result. The company has around 20 projects in queue, including Hotel Del Luna, Crash Landing On You, The Pluses and Mastermind. We will be delivering tangible results throughout the year. Starting from Q2, we will further enhance our growth potential by bringing in marketing for our production process. So Tale of 9 Tailed 1938 will be aired simultaneously on Amazon and tvN. And the company will enhance hit ratio of our titles by engaging in marketing activities together with these platforms from the planning stage onwards. Encouraging results from the new platforms will lead to enhanced partnership and sales of new and library titles, which in turn will improve productivity and profitability, leading to a virtuous cycle. Thank you.

[Interpreted] Now, we will be entertaining your questions.

[Interpreted] [Operator Instructions]. Currently, there is no participant with questions. [Operator Instructions] The first question will be given Ms. Kim So-Hye of Hanwha Investment & Securities.

[Interpreted] Yes, I have 1 question. The company [indiscernible] communicating about [indiscernible] and also [indiscernible]. And when will see the actual results coming from these efforts?

[Interpreted] Yes, it's true that the company has been engaging in reshuffling measures since the beginning of last year -- end of last year, and that we also underwent a restructuring. So it was to eliminate any inefficiencies and to add more -- and to streamline our decision-making process. So it was possible to add [indiscernible] decision-making. And in the wake of that, we had to do some restructuring as well. And the focus was not on short-term cost-cutting measures but on longer-term business efficiency enhancement. So through all these activities, we wanted to enhance our overall performance. And as was mentioned during the presentation, with the economy slow down, we are also making added efforts to decrease our cost. And I believe that there could be some tangible results out in the second half of this year.

[Interpreted] The following question is by Ms. Shin Eun Jung of DB Financial Investment.

[Interpreted] Yes, I have a question for CJ ENM and a question for Studio Dragon. The first question that goes to CJ ENM is as follows. Could you please give us more detailed loss numbers regarding your business in FIFTH SEASON and TVING? And could you also tell us about the subscriber growth trend at TVING? And I would like to see some more color on your Q2 delivery to FIFTH SEASON. Are there any fixed titles that are [indiscernible] in Q2? And you've [indiscernible] 24 to 28 titles on a yearly basis. Do you still stick to your original position of delivering 24 to 28 titles? And my next question that goes to Studio Dragon, well, [indiscernible] numbers we were briefed on. Well, the operating margin [indiscernible] match the growth in your topline. Could you please tell us why?

[Interpreted] Yes, the first number-wise question on the loss associated with the FIFTH SEASON and TVING, well, coincidentally, the number is quite similar at minus KRW 40 billion for Q1 and the loss has seen an increase on a Y-o-Y basis.

[Interpreted] Yes, this is CEO Yang of TVING, addressing your question. [indiscernible] we do not disclose the actual subscriber numbers, but I could give you the growth trend. So Q1 subscriber growth rate on Y-o-Y basis, it grew by 65.2% but on a Q-o-Q basis, it was a growth of 4.4%. There are 2 reasons behind that. First is the illegal streaming sites and second will be [indiscernible] I may give you more color on our [indiscernible] amounting to KRW 40 billion. Well, our key content was concentrated in Q1. Duty After School will -- that began airing on March 31. The cost [indiscernible], so leading to our loss numbers.

[Interpreted] So we will now give you the answer from Studio Dragon followed with the answer on FIFTH SEASON.

[Interpreted] Yes, in Q2 there was heavy sales -- first window sales concentration in Q1, so -- and also if I may talk about last year's Q1, there was a heavy library contract with new platforms in Q1, but now the library sales, it's well disbursed throughout [indiscernible]. So things are back to normal. And with that, we will be seeing an average of OP margin around 10%.

[Interpreted] Yes, this is Steve Chung, heading the Global Business. For accuracy sake, I will deliver my answer in English. So for FIFTH SEASON, I think there were 2 questions, one was sort of our expectations for Q2 delivery and also if -- what our remaining forecast is for number of titles delivered for this year. So on the first part, for Q2, we do expect to be delivering one TV series, 3 film titles and numerous documentary outputs and so that will round up 2Q expected delivery. In terms of the full-year delivery titles, we remain unchanged in our expectations to deliver 24 titles to 28 titles, as you had cited.

[Interpreted] Currently, there is no participant with questions. [Operator Instructions] The next question will be given by Mr. Choi Yong Hyun of KB Securities.

[Interpreted] Yes, I have 3 questions for CJ ENM. First is on your investment. If your investment is to be on par with what you invested last year, I believe the company will require [indiscernible] to receive investment. So how are you balancing your growth and business efficiency? This is the first question. And my second question goes to TV. Well, [indiscernible] invest the same amount that you did in 2022 [indiscernible] more capital injection or you would have to also resort to borrowings or -- so what is your funding plan? This question is for TVING. And my third question is related to assets and consolidation. [indiscernible] holdings and also real estate, is there a possibility that you can think of selling some of your business units?