Nine Entertainment Co. Holdings Limited (NEC.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nine Entertainment Investor Conference Call. [Operator Instructions] Media can contact Nine's Director of Regulatory, Public Affairs and Communications, James Boyce, for more information. [Operator Instructions] I would now like to hand the conference over to Nine's Chief Executive Officer, Matt Stanton. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining such short notice. I'm here today with our CFO as well, Martyn Roberts. During this briefing, we will work through the presentation we released to the ASX earlier, and I'll guide you through the individual pages as we go. So today is a defining moment for us as we accelerate our Nine 2028 transformation. Our goal is clear: to be Australia's leading digital-first connected media business. We are transitioning away from legacy structures and leaning aggressively into structural growth areas. So I'll kick off on Slide 2, which is the growth assets to contribute more than 6% of growth revenue to say we've announced a series of transactions that will accelerate Nine's transition to a growth-focused media company in a way which demonstrates our commitment to enhancing shareholder value. These initiatives reflect Nine's focus on optimizing our portfolio of structural growth assets across streaming and broadcast, publishing, marketplaces and now Outdoor. We estimate these growth assets of streaming through 9Now and Stan digital publishing, including Drive and Outdoor, will contribute more than 60% of our group revenue and around 70% of our group EBITDA going forward. Turning to Page 3, which is a summary of the transactions. I'd say we're announcing the acquisition of a leading digital Outdoor business, QMS, coupled with the sale of the Nine Radio business and the restructure of Nine's regional television business in Northern New South Wales in Newcastle, NBN. In total, a net cash of around $600 million is being deployed, which includes around $180 million of cash tax benefits. This will offset much of the capital gains tax previously calculated at $254 million from the sale of Nine's stake in Domain. So let's turn to Page 4. And we are buying 100% of QMS Media from Quadrant Private Equity for $850 million. The business does come with around $32 million of cash tax losses, which we intend to offset against the gain from the sale of Domain. Based on forecast EBITDA, inclusive of lease costs of around -- will be $105 million in CY '26, plus an expected $20 million in pro forma cost synergies. This equates to an EBITDA multiple of circa 6.5x. So now on Page 5, QMS, a leading digital player in Outdoor. The acquisition of QMS is a high conviction move for us. QMS is a leading player in Outdoor media in Australia and New Zealand. This they have successfully digitized their premium metro footprint with more than 95% of Australian revenue now digital, well ahead of both its local peers and global comparables, resulting in market share growth from 8% in 2019 to 15% today. As you can see, Out-of-Home is a standout performer in the Australian market, growing its share of total agency media spend to record levels. Outdoor as an advertising segment in Australia has grown strongly over the past 10 years and now attracts an estimated 18% of Australia advertising market revenue. This has been underpinned by the increasing digitization of key assets, but also as measurement and accountability has improved by the relatively attractive pricing and hence, return on investment of the platform. The rollout of Move 2.0 later this calendar year is expected to provide the industry with significantly more granular data across all major formats, including greater geographic coverage, and hour-by-hour breakdown. This is expected to further improve the segment's proposition to agencies and advertisers. We also retain a view supported by industry experts and global peers that Outdoor is expected to remain more resilient to the impacts of global platforms and the disruption of AI. So as we look at Page 7, which starts with more than 80% of QMS's revenue is sourced, QMS assets are concentrated into metro areas with more than 80% of the group revenue from Australia and 75% of that sourced from premium Australian assets. QMS has gained significant momentum over the recent years, winning key contracts, most notably the City of Sydney contract for Street furniture, the Auckland Transport contract as well as a number of landmark digital signs around both Melbourne and Sydney. Across the group's Australian portfolio, less than 20% of the group contracts are due for renewal prior to December 2028. On to Page 8, creating a unique cross-platform digital media proposition. This is -- we find QMS is a highly complementary asset to the Nine business. I mentioned cost synergies of circa $20 million previously. This is underpinned by the consolidation of back-office functions and procurement efficiencies. It also includes the continuing opportunity to focus more Nine marketing spend on owned assets and the case of outdoor utilize vacant sites. Across all of Nine, we currently spend around circa $70 million on external marketing, of which more than 20%, mainly Stan, utilizes Outdoor. It would be reasonable to assume the weighting of this Outdoor spend would now migrate to QMS in the future. In addition, Nine's marketing spend could be further augmented by the utilization of excess inventory with sell-through rates at the QMS currently around 70% to 80%. Moreover, this creates a unique Sofa to Street advertising ecosystem. By combining QMS with Nine's premium video publishing and data assets, we offer advertisers a cross-platform reach that global platforms cannot replicate. We have had consistent feedback from our advertising partners that they would view such a bundle positively, and our sales teams are confident such an offering will gain traction in the market. There are expected to be similarly important opportunities to amplify Nine's news and sports content, particularly through the increasing important events. We are also excited about the future prospects of our self-service Nine Ad Manager business, with the opportunity to extend both the data applied to -- and distribution of advertising messaging across the Nine ecosystem. A great example of this could be utilization of postcode-based marketing both through 9Now and Outdoor, a potent combination. So to Slide 9, we move on to Radio. As we focus our business on structural growth, we have further announced the sale of Nine Radio to the Laundy Hotel Group at an enterprise value of $56 million with a tax benefit of around $50 million. We are confident that the Laundy Group will prove a positive outcome for both the Radio business and its staff. I've been really impressed with the Laundy's during the sale process, and they have been clear about their ambition for the Radio business. They see the acquisition as a long-term investment and have immense confidence in the medium. I am pleased that under the ownership of the Laundy's, Radio will remain a long-term partner of Nine through initiatives, including the utilization of Nine News on Radio and Stan through the Laundy venues, promotion and ad sales collaboration for Nine as well as the expectation of an increased ad spend by the group onto the Nine properties. Nine continues to remain committed to other digital audio opportunities. We retain a strong presence in podcast and digital streaming via mastheads and 9Now. And thirdly, turning to Slide 10, on broadening of the Nine affiliate agreement to include NBN. We have finalized an agreement, which will result in the conversion of NBN, Northern New South Wales, from a business wholly owned by Nine to an affiliate operated by our long-term regional partner, the WIN Network. As WIN is also our major shareholder, this element will also require shareholder approval. We expect the deal to complete in the June quarter. We believe that the WIN is best placed to operate NBN going forward, continuing to access Nine's content and national sales in return for an ongoing affiliate fee of circa 50% of the NBN revenue, consistent with the other WIN properties. In addition, Nine will receive $15 million in cash with a further cash tax benefit of around $95 million relating to the transaction. So Slide 11 is there to sort of the combined financial impact summarizes the impact of these 3 transactions. In total, Nine will outlay around $780 million in cash before the benefit of around $180 million in cash tax benefit losses -- sorry, cash tax losses, which will offset much of the previously calculated domain tax bill of $254 million. We have already paid the majority of this tax. The benefits associated with these transactions are expected to offset the tax installments payable over the remainder of FY '26 and result in a tax refund in early 2027. On an FY '26 pro forma basis, we expect the transactions to result in a combined positive EBITDA impact of circa $80 million pre-AASB basis. In terms of EPS, on an FY '26 pro forma basis, including the full run rate synergies in combination, these initiatives are expected to be accretive to earnings per share in the low double-digit percentages. As at the end of June, we would expect the Nine's net leverage ratio will increase to around 1.8x. However, this will quickly wind back to our stated comfort range of 1x to 1.5x with the benefit of the tax losses augmenting Nine's enhanced cash flow post-transaction. We should also point out that by virtue of the special fully franked dividend we paid in September and the subsequent tax offsets, there will be an impact on our franking account position, meaning that we are now expecting our FY '26 interim and final dividends and likely our H1 FY '27 dividend to be unfranked. Notwithstanding, we remain committed to our 60% to 80% payout ratio. So finally, turning to Page 12. This marks a significant step change at Nine and one that we are very excited about. Our goal is clear: to be Australia's leading digital-first connected media business. We are confident that the transactions we have announced will accelerate Nine's transition to a digitally focused, structurally growing media company in a way which demonstrates our commitment to enhancing shareholder value. We are moving from a traditional media-based business to a data-driven integrated digital media powerhouse. This is the right move for our people, our advertisers and our shareholders. I'll now turn the call over to Q&A. Operator, do we have our first call?

[Operator Instructions] Your first question comes from Eric Choi from Barrenjoey.

Congrats on the deal. Sorry, just maybe 2 for me and a bit off the cuff given short notice. But maybe a numbers question first. You've sort of said the transaction is marginally EPS accretive pre-synergies and it's going to be double-digit EPS accretive post-synergies. And then you've sort of said synergies of $20 million pretax, which is kind of $14 million post-tax. But I guess if the difference between no EPS accretion and 10% plus EPS or NPAT accretion is $14 million, you're kind of guiding to an FY '26 base NPAT number, which is kind of $140 million or less. So I was just wondering if that logic is broadly correct. Should I go with the second question, Matt, or let you go with that one.

Eric, let's maybe just take that one. We might take on notice, but I'll just hand over to Martyn just quickly. Maybe you can give some light on that.

Well, I think the fact we haven't, Eric, given you specific numbers is we don't want to give you specific guidance on the NPAT number. So it's directional. But your logic is correct, yes.

And then the second question...

Sorry, away from the numbers, but -- and sorry, I got to dust off the outdoor hat now, but -- and apologies if I've missed it. Have you given any sort of CapEx guidance? Because I guess I remember many years ago when QMS won the City of Sydney contract, it probably had some pretty sharp terms in terms of CapEx investment and who owns the assets. Maybe I'm remembering that wrong. But I guess, yes, if you could give us a flavor for CapEx and CapEx requirements going forward, that would be...

Yes. Thanks, Eric. Yes, I mean what we picked up actually, which we're very pleased. There's a lot of capital being invested in this business already, especially you think about the investment in the City of Sydney, which is hundreds of millions of dollars. That's actually in the ground now and spent. So we're looking forward on the CapEx stuff. Martyn, I know the run rate going forward...

Yes, Eric, the CapEx for QMS is probably going to be about circa $50 million per annum, certainly in the first year or 2, and that's slightly below where the depreciation is, which is between $55 million and $60 million.

Your next question comes from Tom Beadle from Jarden.

Congrats on the deal. I've got 3 questions, please. Just the first one on leverage. Just, I guess, a couple of things around that. Just that FY '27 guide is obviously fairly wide, sorry. I mean, can you just talk to some of the assumptions you're making to get to that outcome? And it's probably fair to say as well that, that's probably a bit higher than your comfort range. So do you have any medium-term leverage targets that you can share?

Yes, sure. We'll take this one at a time, okay. So maybe, Martyn, do you want to take that one?

Yes. So Tom, it's Martyn. So the way to think about it in terms of leverage, so obviously, we got up to 1.8x because of the main capital gains tax and obviously, the additional cost of the acquisitions, the gross outlay. We won't -- so we'll go through the -- we paid $200 million of the $254 million capital gain tax in the first half this year. We'll complete that in the second half. And then we'll get circa $160 million of the $178 million as a refund in December or January, could be 1 of the 2. And then further $18 million will flow through our normal tax returns. And so you can see the 1.8x gives you a good indication of what leverage would be absent those tax benefits. And those tax benefits are about 0.4 turns on the leverage. So it goes up at the end of FY '26, and then it will come down. Clearly, we're guiding you between the 1 and 1.5x because we don't want to give you any kind of guidance on our FY '27 base EBITDA. I think you probably appreciate that's appropriate.

Yes, yes, I completely understand that. That's helpful. Just a second question, just QMS has obviously got that small New Zealand business. I mean, do you see this as core? Or might you look to sell that at some stage?

Yes. Thanks. Look, it's a business that just acquired through and just growing. So a great business. It's growing really rapidly and working well. So yes, it's a part of the group got through. Obviously, we haven't actually completed yet on this. So it's a good part of the business, albeit you're right, it's in New Zealand, but there's no plans to change that at this point.

Great. And just a final question. Just does the sale of the Radio business include any formal partnership with the Laundy Group just to spend across Nine's properties and to use your talent? And if so, just how long do these agreements go for? And is it just possible to give us a feel for the materiality of them?

Yes. No, I wouldn't say it was super material, but it is a strategic partnership that we've agreed to. Is it formalizing a document signed and sealed? No. Is it written down? Yes. It's probably -- it's at least 3 years. And I think both parties feel like it will endure way past that. Very strong relationship we've developed with Craig and the team there. So I think it's complementary, right? So for us, the opportunity to work with them if we need to around any ad sales collaboration, whether we are in market with -- and Radio is key to a proposal and vice versa on the Radio side. The Laundy Group, a very impressive hotel group, active conversations around Stan being implemented into those areas. We've got to work through some of the technical details on that. And there is an agreement for them to spend marketing money on our assets. So you can imagine some of the spend at the moment, we've got 9Now is a digital business that is down to postcode that we can basically promote for them. They see that as very attractive. There's a number of contracts that we've got to sort out post this. And so it's a good relationship. We haven't put a lot of money to it, obviously. So I don't want to call out as material, but I think it's a great step going forward.

Your next question comes from Entcho Raykovski from E&P.

My first question is just around QMS and the revenue estimate of $400 million that you put in the presentation for calendar year '26. I mean I wonder if you're able to give us a little bit more color around your assumptions, whether you're expecting this to be driven by the Out-of-Home market, continued market share gains? And I suppose what's your level of visibility given it's -- I mean, it's very much a cyclical market or a cyclical sector as well. So presumably, there is a level of variability around that number. I'll run another couple, but maybe I'll stick to that one first.

Sure. It was a bit hard to hear everything you just asked. So I think you said you asked around the revenue growth, what we're expecting and how they're achieving that. Is that right?

Yes, correct. I think you've put in -- sorry, hopefully, you can hear me better now. I think you've put in a number of $400 million expected for calendar year '26 for QMS -- and a question of what you think will be the driver, whether it's the Out-of-Home market or further share gains and level of visibility?

Yes. Okay. So I think probably where we see it, there's 3 main drivers to that. We believe that the market will continue to grow on outdoor. That's the first driver. I think the outdoor market is in good growth and continue to be very resilient in some of these tough [ areas ]. So we see continued growth there. We see that QMS will continue to take market share. So there will be a share area as well for the nature of the digital assets that they've got. And thirdly, we think that the -- well, we know that the new contracts that they've got in place that they've won are actually coming up to speed now. So that will be from contract wins as well. So it's threefold is the revenue that we've worked through.

Can you -- sorry, Matt, to press you specifically on this, are you able to quantify the new contract contribution?

No, we can't do that on -- yes, we can't do that at this point. We're not ready to disclose that.

Okay. And did -- as part of this process, did Quadrant run a competitive sale process for QMS. I mean, I'm assuming that would have considered plenty of options for monetization. And I suppose, is there -- and part of the reason why I ask is often people will view purchases of assets from private equity fairly skeptically. Do you have any concern that as you're buying from a sponsor, this may well require increased spend down the track? You've obviously given the synergy targets, but I mean, is there -- I guess, you would have done sufficient due diligence and any, I suppose, areas of concern around the asset.