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 9 Month and Third Quarter 2020 Results Earnings Conference Call. [Operator Instructions] I will now introduce our presenters. On behalf of Grupo Clarín, we have Mr. Agustín Medina Manson, Head of Investor Relations. Additionally, Ivan Acevedo, 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 last Friday. 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 his presentation. Please go ahead, sir.

Thank you, Nikki, and good afternoon, ladies and gentlemen. Thank you for joining us today. 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 all 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. And later, we will review the current ownership structure of the company. Having gone through the agenda, please move to Page 4. During the third quarter of 2020, the Argentine economy continued to be immersed in a complex macroeconomic environment, especially marked by an increasing fiscal deficit, monetary imbalances, high pressure on the FX market and the negative effect of COVID-19, which hit every sector of an economy that is going through its third year of recession. Regarding the economic activity, GDP has shown signals of recovery, mainly fostered by some flexibilization of the lockdown measures and the partial normalization of activities. However, the economic activity still shows a weak recovery, and it's expected to fall around 11% on an annual basis by the end of the year. Quarterly inflation decreased to 39.9% on an annual basis, while the monthly variation was 2.8% at the end of September 2020. It is important to mention that the deep recession in the economy, restrictions on mobility, frozen utility bills and an overvalued Argentine peso have decelerated the level of inflation, which is expected to close at 37% year-over-year at the end of 2020. However, considering the monetary issuance that the Central Bank is carrying out and a bounce back in the activity, inflation is expected to increase for the next year. On the fiscal front, given the fall in the tax revenues caused by recession and foreign trade contraction and the increasing public expenditure due to the COVID-19 crisis, the deficit increase is expected to range between 8% and 9% of GDP by the end of 2020. The expectation about the Argentina economy continued to show many difficulties. Although the result of the debt negotiation process have been positive, the Argentine government also needs to reach a new agreement with the IMF and carry on its structural reforms. In this sense, the post pandemic challenges will not only depend on short-term measures, but also a clear long-term program to stabilize the economy and achieve a growth path. Having gone through the macro overview, let me continue with the company performance. Please turn to Slide 6, so that we may briefly review some of Grupo Clarín's financial highlights for the 9 months 2020 period. But first, to understand some consideration about the financial statement accounting, it is important to highlight that Argentine is a hyperinflationary economy, and inflation adjustment has been applied by management. Revenues for the 9 months of 2020 grew by 7% to ARS 16 billion, in nominal pesos lower than the 37% inflation. So with the inflation adjustment, revenue decreased by 29% from ARS 23.6 billion to ARS 16.9 billion, in real pesos, mainly due to the decline of the Argentine GDP during the ninth month of the year, affecting overall advertising investment. EBITDA in nominal terms stood flat at ARS 1.3 billion, mainly driven by the worst performance in the Broadcasting and Programming segment caused by the plights of the economy due to the pandemic and the lockdown. Taking into account the effect of inflation, EBITDA dropped 33%. Net income for the period attributable to equity shareholders in real pesos was negative and amounted ARS 709 million. On Page 7, we show that cost decreased more than revenues, generating an EBITDA margin expansion in the third Q 2020 compared with last year. In spite of these actions taken by the company to gain operational efficiencies and manage its cost structure, the strong economy downturn caused by the pandemic and the mandatory lockdown had a negative impact on the income of all business segments. On the other hand, thanks to the emergency assistance for work and production program, ATP for its acronym in Spanish, launched by the government, the company has been able to reduce in -- ARS 195 million in salaried costs in the third Q 2020. We will discuss the breakdown by segment shortly, but first, I would like to review the debt financial position as per Slide 8. The total debt as of September 2020 decreased 6% to ARS 1.6 billion due to lower bank overdraft and financial loans. The company has an average cost of approximately 1.5% in dollars and 31% in pesos and an average maturity of around 1.2 years. Approximately 77.8% of our total debt and 40% of the cash and equivalents are in U.S. dollars, respectively. 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 10. As we mentioned in our previous call, the economic downturn impacted on our company across all business segments, and this one was hit hard by the pandemic and the mandatory lockdown. Revenue decreased by 23% to ARS 2.9 billion in constant pesos in the third quarter 2020 compared to the ARS 3.8 billion in the third quarter 2019. This was due to lower advertising revenues in constant pesos in Channel 13 and Radio Mitre. Cost of sales decreased by 32% to ARS 1.7 billion. The decrease was mainly caused by lower programming costs, salaries and taxes, duties and contributions. 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 able to continue producing fictions. And all the episodes that were recorded but not broadcasted generate a onetime cost in the first quarter of 2020. We continue in the third quarter 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. Selling and administrative expenses increased by 3% to ARS 627 million in the third quarter 2020. The increase was primarily the result of salary increases, partially offset by lower marketing expenses and fee for services, expresses in homogenous currency as of September 2020. During this period, adjusted EBITDA was ARS 623 million, and the margin stood at 21.4%. On Slide 11, in terms of audience share, on Channel 13, the prime time and total time audience decreased by 22% and 4% 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 fiction, as we mentioned before, and launch the most wanted show on TV that is Dancing with the Stars. In spite of this, our audience performance has allowed us to reach a 37.5% of advertising market share with a power ratio above 1. So we continue outperforming the industry. Now let's move on to Printing and Publishing on the next slide. Total revenues decreased by 35% in real terms to ARS 2.7 billion in the third quarter 2020, mainly as a result of lower circulation and advertising revenues in real terms. In spite of a solid customer base, subscription base, printing circulation decreased by 34% and digital circulation growth wasn't enough to compensate this drop. Additionally, during the third quarter 2020, advertising revenues in current peso decreased by 30% and inflation was 37%. Cost of sales decreased by 33% to ARS 1.4 billion in third quarter 2020. The decrease was mainly the result of lower salaries and printing costs caused by the greater effect of the restatement for the third quarter 2019. Also, there were some savings in printing costs due to the lower printing circulation caused by the mandatory lockdown and the economy downturn. Selling and administrative expenses decreased by 39% to ARS 1.1 billion in the third quarter 2020. This was primarily the result of lower salary and marketing expenses and fee for services due to the inflation adjustment effect in the third quarter 2019. This segment also experienced salary reduction, thanks to the government assistance with the ATP program. Due to the pandemic and the mandatory lockdown, the government paid approximately ARS 114 million in salaries during this quarter. Now turning to the next slide. It is worth mentioning that our subsidiary, AGEA, owner of Clarín newspaper and the company Prisma have partnered under a joint venture and developed Bimo, an e-wallet, which combines the best of both companies. The capillarity of Clarín, particularly through its 365 affinity card program and its benefit and Prisma extensive financial services experience and its connection with the banking system. So both companies offer 2 key features for any e-wallet, a strong user base at the 2 ends of the process: Clarín, which is estimated 1 million 365 affinity card and Prisma with the 400,000 stores that use its payment transaction terminals. In addition, the e-wallet is intended for in first -- the first phase for bank people. Users may add all credit, debit and prepaid cards issued by any bank or fintech company of Argentina. We are really optimistic with this new launch and this new joint venture with Prisma. Please turn to Slide 14, where we show the key ratios for this segment. Comparing quarters, total circulation increased to 272,000 average daily copies. This figure includes approximately 167,000 digital subscribers while printing circulation market share increased to 43.2%. Printing advertising share reached 51%. Regarding other segment on Slide 15. During the third quarter of 2020, net sales decreased by 31% to ARS 553 million, mainly due to lower revenues at Grupo Clarín and Gestión Compartida measuring constant currency. EBITDA resulted in ARS 11 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 shareholders 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% local. That concludes our comments. We will be pleased to take your questions. Operator, we are ready for Q&A. Thank you.

[Operator Instructions] I will now turn the call over to i-advize.

We have a question from Javier Rodriguez from Proficio Investment. Two questions here. First, we can see that the EBITDA margin improved substantially in this last quarter to 14.4%. Can you shed a little bit more color on the expectations for 4Q and 2021 perhaps adjusting for the ATP? And his second question is in relation to debt. We see a sharp reduction in debt in these 9 months. What is your approach towards continuing the net debt reduction?

Thank you for your question. Well, to begin with some color about the EBITDA margin for the fourth quarter 2020, we believe that after the lockdown that Argentina was involved, the Argentine economy will start to recover a little bit. And as you know, the Argentine GDP and the investment -- the marketing investment the company has, any company has are highly correlated. So if the Argentine economy recovers, it is suspected that the investment -- the marketing investment will be recovered, the advertising investment will be recovered in the last quarter of the year. So -- and also with all the cost efficiencies in which we were working during the year and in previous year, trying to reach -- do the rightsizing for the different businesses that we have because we have different businesses, Printing and Publishing, that is more mature -- and Broadcasting and Programming. And in all businesses, we were working very hard to be the most efficient in terms of cost. So it is expected that we have a similar EBITDA margin comparing with this quarter, but also, it will depend on -- this is Christmas and New Year's Eve. And in this moment, advertising increased. So if this continue -- these trends continue, it is expected to have a better performance comparing with the third quarter 2020. And regarding to the debt, we are comfortable with the debt level that we have right now, and we believe we are going to continue with similar levels of debt in the coming -- in the current year and recurring -- in the years that are close to come. So the level of debt that we have right now, we are very comfortable with that. If you take in account that our net debt is negative. So we have more cash than debt in the company, in the whole company, in the group. So we are really comfortable with that also.

[Operator Instructions] We show no further questions at this time. I would now like to turn the program back to Mr. Agustín Medina Manson for any closing remarks.

Thank you, Nikki. I want to thank you all 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 year regarding the results for the fourth quarter 2020. Thank you very much, and have a great day, and a great Christmas and a great new year. Bye-bye.

And this does conclude today's conference. Thank you for your participation, and you may disconnect at any time.