Grupo Clarín S.A. (GCLA) Earnings Call Transcript & Summary

Good morning. My name is Nikki, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grupo Clarín First Half and Second Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is for investors and analysts only. Therefore, questions from the media will not be taken. If you are a member of the media and have questions, please contact i-advize following the call. I will now introduce our presenters. On behalf of Grupo Clarín, we have Mr. Agustín Medina Manson, Head of Investor Relations. Additionally, Ivana Severo Controller; and Marcelo Boncagni, Audit Manager, will also be available for today's Q&A session. The team will be discussing the results as per the earnings release distributed yesterday. If you did not receive the report or need any assistance during today's call, please contact i-advize in New York at (212) 406-3695 or the company in Buenos Aires at 54-11-4309-7215. Clarín has also posted a webcast presentation to follow that goes along with the quarterly results. This presentation can be found at www.grupoclarin.com/ir. Comments made by management may contain forward-looking statements about Grupo Clarín's future performance, plans, strategies and targets. Such statements are subject to uncertainties that could cause Grupo Clarín's actual results and operations to differ materially. Such uncertainties include, but are not limited to the effects of new or ongoing industry and economic regulations, possible changes in demand for Grupo Clarín's products and services and the effects of more general factors such as changes in general market, economic or in regulatory conditions. Grupo Clarín's earnings report, which is also available on the company's website also outlines the various factors that may affect forward-looking statements management may make during the session. Please refer to the disclaimer in the earnings report or presentation as well. It is now my pleasure to turn the call over to Mr. Agustín Medina Manson for this presentation. Please go ahead, sir.

Thank you, Nikki, and good morning, ladies and gentlemen. Thank you for joining us today. This is certainly an eventful and historical quarter for all of us. I would like to start the call by expressing my hope that you and your families are all healthy and safe in these uncertain times. Also, I want to thank coronavirus heroes like health workers, police officers and media workers and all of the workers who are at the forefront of the fight against coronavirus. Let me quickly outline the agenda for today's call. We will start with a brief macro overview, followed by the discussion of the company results and financial position. Later, we will review the current ownership structure of the company. Having gone through the agenda, please move to Page 4. During the second quarter of 2020, the Argentine economy continue to be immersed in a complex macroeconomic environment, marked by a strong fiscal and monetary imbalance, tightened controls on the foreign exchange market and high levels of uncertainty, especially derived from the results of the sovereign debt renegotiation process and the effect of the COVID-19, which impacted on the social and economic front, turning the world as well as the Argentine context more worrying and challenging. Regarding the economic activity, GDP [ plant ] during April of 2020, and it was worse than expected, mainly due to the mandatory lockdown effect. In this sense, a dip fall of around 16.6% and 19.6% is expected, as compared to the previous quarter of the same period of 2019, respectively. Quarterly inflation decreased to 44% on annual basis, while the monthly variation was 2.2% at the end of June 2020. It is important to mention that the deep recession in the economy, certain FX stability and the mandatory lockdown, decelerate the levels of inflation, which showed a 2.3% monthly average increase during the first half of the year. However, considering the monetary issuance that the Central Bank is carrying out, inflation is expected to range between 38% and 43% by the end of 2020. On the reference rate side, it stood flat at 38% at the end of June 2020, in line with the policy implemented by the Central Bank to promote both credit and the economic activity recovery. On the fiscal front, given the fall in tax revenues caused by recession and the increase in public expenditure due to the COVID-19 crisis, the deficit -- increase is expected to range between 7% and 9% of GDP by the end of 2020. In this sense, it is important to highlight that since the only way to finance public deficit is monetary issuance, the Central Bank is expected to close the second half of the year, increasing the reference rate. Lastly, it is important to mention that on August 4, 2020, the Argentine government reached an agreement with the debt holders, improving its previous software and so avoiding the change to go into default. Although the result of the debt renegotiation process have been positive, the Argentine economy continues to show difficulties. In this sense, the post pandemic challenges will not only depend on short-term measures, but also the structural reforms that allow the country to stabilize its economy and increase its potential growth. Having go through the macro overview, let me continue with the company performance. Please turn to Slide 6, so that we may briefly review some of the Grupo Clarín financial highlights for first half 2020 period. But first, to understand some consideration about the financial statement accounting, it is important to highlight that Argentine is a hyper inflationary economy and inflation adjustment has been applied by the management. Revenues for the first half of 2020 grew by 5% to ARS 9.7 billion in nominal pesos, lower than the 43% inflation. So with the inflation adjustment, revenue decreased by 29%, from ARS 14.3 billion to ARS 10.2 billion in real pesos, mainly due to the decline of the Argentine GDP during the first half of the year, affecting overall advertising investment. EBITDA in nominal terms, decreased by 34% to ARS 461 million, mainly driven by a worse performance in Broadcasting and Programming segment caused by the plants of the economy due to the pandemic and the lockdown. Taking into account the effect of inflation, EBITDA dropped 55%. Net income for the period attributable to equity shareholders in real pesos was negative and an amount -- amounted to ARS 230 million. On Page 7, revenues for the second quarter 2020 decreased by 11% to ARS 4.2 billion in nominal pesos and EBITDA increased by 26% to ARS 588 million in nominal pesos. We can see the inflation adjustment, revenue decreased by 39%, while EBITDA decreased by 11%. Net income for the period attributable to equity shareholder in real pesos was ARS 328 million. On Page 8, we show that cost decreased more than revenues, generating an EBITDA margin expansion in spite of the actions taken by the company to gain operational efficiency and manage its cost structure. The strong economy downturn costs by the pandemic and the mandatory lockdown had a hard impact on the income of all business segments. Additionally, thanks to the Emergency Assistance for Work and Production Program, APP, for its acronym in Spanish, launched by the government, the company has been able to reduce in ARS 200 million in salaries cost in the second quarter 2020. We will discuss the breakdown by segment shortly, but first, I would like to review the debt financial position. As per Slide 9, the total debt as of June 2020 decreased by 19% to ARS 1.6 billion due to lower bank overdraft and financial loans, increasing its net cash position to ARS 755.9 million. The company has an average debt cost of approximately 1.5% in dollars and 31.3% in pesos, and an average maturity of around 1.8 years. Approximately, 77% of our total debt is dollar-denominated, [ 51% ] of our cash and equivalents are in U.S. dollar. Overall, we continue to show a very healthy debt profile with no leverage. Moving on to the segment breakdown. We begin with the Broadcasting and Programming division on Slide 11. As we mentioned in our previous call, the economy downturn impacted on our company across all business segments, and this one was hit hard by the pandemic and the mandatory lockdown. Revenues decreased by 40% to ARS 2.3 billion in constant pesos in the second quarter 2020 compared to the ARS 3.8 billion of the last year. This was due to lower advertising revenues in constant pesos in Channel 13 and Radio Mitre that was partially offset by higher programming revenues. Cost of sales decreased by 45% to ARS 1.2 billion. The decrease was mainly caused by lower programming costs, salaries and taxes, duties and contribution. We were producing a soap opera since the beginning of the year. And due to the pandemic and the mandatory lockdown, we have been not be able to continue producing fictions. And all the episodes that were recorded but not broadcast generated a onetime cost in the first quarter of 2020. We continue in the second quarter of 2020 with our programming without any soap opera production, and this has generated a cost reduction as compared to the same period of last year. Costs were also reduced by the effect of restatement in salaries and programming costs for the second quarter '19 versus the second quarter 2020. Selling and administrative expenses decreased by 26% to ARS 477 million in the second quarter 2020 compared to ARS 642 million of last year. The decline was primarily the result of the greater effect of the restatement of the salaries and marketing expenses comparing second quarter '19 versus second quarter 2020, in order to be express in homogeneous currency as of June 2020. During the period, adjusted EBITDA was ARS 556 million, and the margin stood at 24.6%. On Slide 12, in terms of audience share, on Channel 13, the prime time and total time audience decreased by 27% and 11%, respectively. This was the result of a better performance of our main competitor, Telefe Viacom, mainly due to the fact that in this quarter, due to the mandatory lockdown, we were not able to continue producing fictions and launched the most watched show on TV, Dancing with the Stars. In spite of this, our audience performance has allowed us to reach a 36% of advertising market share, with a power ratio above 1, outperforming the industry. Now let's move on to Printing and Publishing on the next slide. Total revenues decreased by 35% to ARS 2.5 billion in the second quarter 2020, mainly as a result of lower circulation and advertising revenues in real terms. In spite of a solid customer subscription base, circulation revenue decreases in real terms because the price adjustment was lower than inflation. Additionally, during the second quarter of this year, advertising revenues in current pesos decreased by 41% and inflation was 43%. Cost of sales decreased by 43% to ARS 1.4 billion in the second quarter 2020 compared with ARS 2.4 billion of last year. The decrease was mainly the result of lower salaries and printing costs caused by the great effect of the restatement for the second quarter 2019. Also, there were some savings in printing costs due to the lower printing circulation caused by the mandatory lockdown and the economic downturn. Selling and administrative expenses decreased by 35% to ARS 1 billion in the second quarter 2020. This was primarily the result of lower salaries, marketing expenses and fee for services due to inflation adjustment effect in the second quarter of 2019. This segment also experienced salaries reduction, thanks to the government assistant with its ATP program. Due to the pandemic and the mandatory lockdown, the government paid approximately ARS [ 114 ] million in salary during this quarter. Please turn to Slide 14, where we show the key ratios for this segment. Comparing quarter, total circulation decreased to 220,000 average daily copies. This figure includes approximately 100,000 digital subscribers, while printing circulation market share stood at 46.7% and printing advertising share reached 51%. Regarding other segments on Slide 15. During the second quarter, net sales decreased by 41% to ARS 400 million, mainly due to the lower revenues at Grupo Clarín and Gestión Compartida, measuring constant currency. EBITDA resulted in ARS 13 million. To conclude, I will review the current capital structure on Slide 17. As of today, the shareholder composition is 80% owned by the controlling shareholder and a public float of approximately 20%. Regarding the composition of our float, currently as shown on the slide, approximately 42% is international, while 58% is local. That concludes our comments. We will be pleased to take your questions. Operator, we are ready for Q&A.

[Operator Instructions] And it appears that we have no questions over the phone. At this time, we will take the questions from the webcast. I will now turn the call over to i-advize.

We have one question from [ Mamet Bingo ] from Interior Capital. And his question is, what will be your thoughts towards initiating a dividend payout if your net cash position continues to strengthen and business remains cash flow positive?

Thank you for the question. Well, let me start saying that Grupo Clarín, entity has been getting negative net income in the last year, and they don't have reserved to distribute dividend. The company doesn't have reserve to distribute dividend right now. And then each business segment are different companies, and those companies are in complete different situation. For example, in the Broadcasting and Programming segment, some of those companies are cash flow positive and are able to pay dividend. While in the Printing and Publishing segment, those companies might need in the future assistance or will continue to need to be assisted by the parent company due to they are in very difficult situation. It is important to mention that this is the third year in which the economy will be reducing and remember that our businesses depends mainly on advertising, and advertising is highly correlated with the Argentine GDP. So the advertising pie has been reducing for the last 3 years. So it's hard for me to say, yes, the payout ratio of the company should be this one or that one. This will depend mainly on how it's going to be the recovery of the Argentine economy, and how that will impact the advertising market. And we believe that we are strong enough to capture the growth of the advertising market. But first, advertising market has to grow.

[Operator Instructions] And it appears that we have no further questions at this time. I would now like to turn the program back to Mr. Agustín for any closing remarks.

Thank you, Nikki. I want to thank you all of you for your attendance today. We appreciate your interest in our company and your questions. Please do not hesitate to contact us if you have any further questions. We look forward to speaking with you again next quarter regarding the result of the third quarter of 2020. Thank you. Have a great day. Bye-bye.

And this does conclude today's conference. You may disconnect your line at any time, and have a good day.