Promotora de Informaciones, S.A. (PRS) Earnings Call Transcript & Summary

Good afternoon. This is Pilar Gil speaking, Head of IR. Welcome to PRISA's first quarter results conference call. Today, we have on the call Manuel Mirat, our CEO; and Guillermo de Juanes, our CFO, who will be explaining in detail the result release. Following our presentation, we will open the floor for Q&A, and the people on webcast will also have the chance to put their questions. With that, I will now hand it over to our CEO, Manuel.

Thanks, Pilar. Hello to everybody, and thanks all of you for attending this conference call. The presentation is going to -- divided in 3 main parts. We'll cover, first of all, the highlight of the period, the first quarter of this year; secondly, by explaining the group's results; and lastly, we are going through the business unit detailed evolution. On Slide 4 and 5, you have the key highlights throughout the period. First, we have to highlight the results have been impacted by COVID. All of you know that it's having an unprecedented impact on the economy, damaging industries and business across the world. In PRISA, the media business is one of the industry, which is suffering the most, while the Education business it -- at the moment, proving to be more resilient. Total EBITDA in the period reached EUR 56 million, which means a decrease is 19% in euros and 7% in local currency compared to last year. During the period, the increased focus in growth in digital subscription and digital advertising is reflected on the Digital business, already representing 1/3 of the total revenues of the company, increasing its contribution by 20%. If we cover now business by business. Education shows a solid performance with 5% revenue growth, plus 15% in local currency, with 36% of total revenues coming from subscription models. Highlight, the number of students in subscription models, which increased by 25% to reach 1.7 million students. The overall performance of the business in the quarter is supported by a strong growth in subscription model revenues, which grew by 23%, and by the public sales performance on the back of the Brazilian public sales. The traditional business declined by 25%, affected by the transition in the subscription model and by the lockdown impacting the distribution chain in some countries in the southern area. I would like to point it out that the COVID is representing a fundamental change in education, accelerating the shift toward digital in schools, teacher and student. This is, in my point of view, an amazing opportunity to steal growth on the subscription model. In the media business, Radio and news shows a weak performance, with revenues declining 21% and 15% respectively, on the back of the Advertising and circulation declines, both affected by COVID. The Radio has progressed on its strategy of developing new audio digital. It is amazing what we have as a figure for the streaming consumption and the podcast downloads in the period. And regarding to the Advertising performance in the period, both national and local advertising experienced similar declines. Going forward, on the back of the lockdown measure, we expect that the local advertising will be recovered. If we go through the news business. Operations have been also affected by COVID, both in Advertising and circulation, but it's relevant to highlight that this had -- take a step forward on its new strategy with the launching of the digital subscription model in EL PAÍS at the beginning of this month. It is too early to talk about evolution with only 27 days on the track record, but the expectation so far are promising. We will provide by the next communication on the market, the evolution of the subscriber, but we will need more visibility on the evolution in the short term. The focus is growing subscription revenues will allow to consolidate the news digital business developed over the past year, becoming more robust and scalable. As you know, today, 37% of total news revenues are already digital. And finally, we have in the group over the period an FX impact in revenues of EUR 18 million and in EBITDA of EUR 8 million, mainly explained by the weak current evolution in Argentina, Brazil and Chile. Secondly, the company has sold a 30% stake in Media Capital to Pluris Investment for a total amount of EUR 10.5 million. The implicit valuation of the transaction is -- of an enterprise value of EUR 130 million based on the financial position of Media Capital as of the closing of the third quarter of this year. This is the first step in the [ best ] investment of the asset that we have already mentioned to you in other calls as a nonstrategic for the company and allows to focus the company on the Education and the Spanish media. Maybe, Xavier, can you provide us a view of what is going on through the legal situation with Cofina and what is going on with [indiscernible] in Portugal. Xavier Pujol is the General Secretary of the Board of PRISA Radio and PRISA [ Noticias ].

Good afternoon. As you may know, the Portuguese authorities had a preliminary ruling last week in relation to the voluntary withdraw of the mandatory takeover for Media Capital launched by Cofina. The authorities have requested more evidence to Cofina to confirm whether Cofina did everything to complete or not the mandatory offer. We are, at this stage, very cautious, but also confidence in the SPA we had with Cofina, plus the takeover public announcement made by Cofina to the market were very clear. And we expect that the rule of law shall prevail in benefit of all Media Capital shareholders. If this is confirmed, we will wait and see what Cofina does. And of course, we will continue working on a number of legal actions to recover the initial payment, the damages and other legal actions for a breach of duties and confidentiality by Cofina.

Okay. [indiscernible] presentation. We'll go through -- we have to also to highlight the third bullet, of the measures that have been taken for the point of view of the company to preserve the liquidity. At the end of the quarter, liquidity was reinforced with a position of EUR 265 million in cash after drawing EUR 99 million on revolving lines. Four, in this first quarter, COVID has estimated a negative impact in revenues of EUR 25 million and EBITDA of EUR 21 million. As you can imagine, it is very difficult to predict about this pandemic and its economic impact going forward. Given that, the company withdraw the outlook for 2020 report on the last result presentation. Our performance in Advertising is expected with resilience in the Education business. After the first half results, we'll provide you with more visibility for the end of the year. And lastly, the company has decided to put in place a contingency plan to mitigate the negative impact of the current price. The plan amount EUR 40 million from March to December and includes cost reduction in all business. As a whole, I will summarize the operating performance by saying that the Education business had a solid performance, boost by subscription model growth, while media business were impact, but Advertising decline with progressing in the developing of digital advertising, subscription model and audio content. The contingency plan in place will mitigate the expected negative impact from pandemic. I will hand it over now to Guillermo who will explain in detail the consolidated number and the evolution by business segment.

Thank you, Manuel. If we move to Slide #7. We have the main operating figures of the group for the period. Total revenue amounted to EUR 263 million and EBITDA reached EUR 56 million, which means a decrease of 19% in euros or 7% in local currency. On the bottom left-hand side of the slide, we can see the negative evolution in the EBITDA coming from Spain due to the advertising declines in the media business and a positive evolution of LatAm supported by the good performance of Santillana. On the right-hand side of the slide, you can see the negative FX impact, both in revenue and EBITDA, which is largely explained by the weakness in currencies, mainly in Argentina, Brazil and Chile. On Slide #8, we have the evolution from EBIT to net profit. Consolidated net result for the quarter was negative EUR 26 million. Net results were impacted by the impairment related to Media Capital 30% disposal, which has already been registered in Q1 results. Comparable net profit, excluding this extraordinary impact, reached EUR 2.6 million. Let's move on to explain cash flow generation and net debt evolution in the period on Slide #9. Cash flow before operations in the period reached EUR 1 million in line with the same period last year. The lower operating performance was compensated by working capital, lower redundancy in Spain and lower taxes. On the bottom hand side of the slide, we see the net debt evolution in the quarter. Net debt reached EUR 1,067 million, including IFRS 16 effect. LTM net debt-to-EBITDA ratio stands at 5.3x. It is important to highlight that the company has taken measures to preserve liquidity of the company, ending the period with a cash position of EUR 265 million after having grown EUR 100 million of revolving lines. Let's now move to quickly review the business units' performance. If we move on to Slide #11, we can see the main operating figures for Santillana. Total revenue in the period reached EUR 178 million with an EBITDA of EUR 62 million. The business showed solid performance despite the impact of COVID-19 with lockdown of the supply chain in some countries of the southern area and the weakness of the LatAm currencies. Santillana's result show growth in local currency of 15% in revenue and 7% in EBITDA, demonstrating the strength of the business. On Slide 12, we have the evolution of Santillana education revenue broken down by the 3 main segments: private LatAm sales, public sales and Spain. These 3 segments follow different dynamics, and following its different evolution helps to better understand the overall performance of Santillana. Firstly, private LatAm education sales reached EUR 138 million, representing 77% of total revenues, an 8.4% decrease compared with the same period of 2019, flat evolution in local currency. As you know, Santillana is fully focused on accelerating its Digital transition and migrating students from traditional schools into subscription models. The evolution of the private LatAm sales confirmed this focus. Subscription model reached EUR 65 million, showing a very strong performance with growth of 23% in euros or 33% in local currency, and traditional sales declining by 25%, mainly explained by the lockdown of the supply chain affecting some countries of the southern area. Second, public education sales reached EUR 38 million, representing 21% of total sales and growing by 150% in euros. The performance of public sales in this quarter mainly reflects the remaining sales of Brazil's 2019 public program that have been recorded this quarter as expected. And in third place, Spain education sales represented 1% of total revenues as the campaign takes place in the second half of the year, and therefore, the figures are not representative for this work. Solid performance overall supported by the strong growth of subscription model and the good evolution of public sales in Brazil, which offsets the traditional business performance affected by the lockdowns in some of the countries of the southern area. On Slide 13, we can review the key benefits of subscription models, the evolution during the quarter and the expectations for 2020 based on contracts already signed. The key benefits of this new business model, as you know, are the following: more revenue visibility. We signed contracts for an average time between 3 and 4 years; average revenue per student higher than the average price per student on the traditional model; higher profitability with a gross margin above 80% higher than the traditional education one; average renewal rate of such systems in the area of 90%; and a fully invested scalable platform with high growth potential. On Q1 evolution, the plans for revenue and number of students were reached, growing number of students by 25% to surpass 1.7 million, with a revenue growth of 23% in euros, 33% of local currency, reaching EUR 65 million. For 2020, the objective is to reach 1.75 million students, a 20% growth in number of students versus 2019, and a similar growth in revenues in local currency is expected. On Slide 14, we have further details on the number of students by type of systems and countries. As you can see, all main countries show a significant growth compared to the same quarter of 2019. Brazil growing by 40%, Colombia by 25%, Mexico by 6% and the rest of the countries by 20%. It's worth highlighting that in Brazil, Santillana has grown ahead of all of its competitors. In the context of the exceptional circumstances caused by COVID-19 with a temporary closure of schools, Santillana has guaranteed its customers the school activity in total normality through its platform and digital resources. Interactions in its education system have increased by more than 480% in the subscription model, such as Compartir and UNO. 29.5 million of content have been downloaded between March and April. As Manuel said before, COVID-19 is representing a fundamental change in education, accelerating the digital transition of both students and teachers. Let's move on to Slide 15 to explain the Radio evolution. The Radio business was affected by the declines in advertising market, both in Spain and LatAm due to COVID-19. But at the same time, the group reinforced its strategy of developing new digital content, which has been reflected in a large increase in the consumption of streaming hours of our radio, reaching a total of nearly 62 million hours, and in the podcast downloads, which reached 25.5 million in total. Revenue in the period decreased by 21%, 18% in local currency with an EBITDA of EUR 0.7 million. In the period, Spain represented 71% of total revenues. On Slide 16, we have the evolution between Spain and LatAm Radio. In Spain, revenues decreased by 21% from EUR 42 million to EUR 34 million, while EBITDA was reduced from EUR 8 million to EUR 2 million compared to the same period of 2019. As mentioned before, these impacts are due to the declines in advertising, mainly during the second half of March. LatAm followed the same trend of Spain, and revenues decreased by 23% in euros, 30% in local currency from EUR 18 million to EUR 14 million. As a result of this, there was a EUR 1 million negative EBITDA. Let's review the news business on Slide 17. On the operating side of the news business, we can see that the revenue evolution has been affected by COVID-19 with a decline in Advertising of EUR 4 million and circulation of EUR 2 million. The period ended with revenues of EUR 42 million, which means a decrease of 15% compared to the same period of 2019. Despite the decline of revenues, we could highlight that digital advertising continues growing its contribution compared to the same period, the previous year. EBITDA in the period was EUR 6 million negative compared to EUR 3 million negative in the same period the previous year. On Slide 18, we can see the main digital indicators of the news business. Digital advertising revenues decreased by 7%, reaching EUR 13 million in the period, but continues growing at a higher rate than traditional advertising, which gives good prospects for the future when digital advertising represents already 66% of total Advertising revenues. We would like to highlight and further explain the launch of digital subscription model on May 1, 2020, of EL PAÍS. The first step was taken in July 2019 where the registration model was implemented, a critical step for the successful implementation of the subscription model. Since the reading under registration initiative, the number of registered readers has experienced strong growth, reaching 2.4 million readers as of March 2020. During the first quarter of 2020, 891,000 readers have navigated EL PAÍS in an identified way and consuming 11% of total pages view on a monthly average. The next step taken has been to launch of a metering subscription model on EL PAÍS, more flexible than a rigid payment model, whether the site is let open for all users and if they have read 10 articles -- 10 free articles per month. The main value bet of this model is unlimited access to content. The launch price is EUR 10 per month with a promotion during the first month of EUR 1 for the monthly -- per month and with a 20% discount for the annual subscriptions. I will now hand it over back to Manuel who will be concluding and explaining first quarter's summary.

Thanks, Guillermo. Total remark, very briefly, I would like -- the following. PRISA is focused on the growing on expansion of the digital subscription model. That is the key focus for the company and the digit advertising and audio content. The first quarter results, evolution was impacted by COVID, especially on media business, with a solid and resilient performance in Education business. The response for the -- of the company have been affected first by guarantee the continuity of this activity; second, by implementing a contingency plan of EUR 40 million; third, by reinforcing the liquidity of the company; and finally, by reaffirming its -- social committed. Thanks a lot, and let's move to our Q&A session.

[Operator Instructions] And the first question comes from the line of Ivón Leal Macia.

Just maybe 3 questions for me or 3 set of questions. The first one is on the Santillana business, which has been very strong. So to understand on the news situation, what we have usually -- and we've referred to Brazil in previous cycle, when there is a macro downturn, there is a movement back of private students to public students. But now it looks like there's an increased trend to digitalization. So I don't know how you think about the education market in Brazil, in Latin America for, let's put, 2020, 2021 as a whole. I mean are you concerned about [ disruption ] of the market or you're seeing an opportunity?

Ivón, that's your first question. You said you have 3.

Yes. Yes. Maybe let's go one-for-one, and that's going to be easier for you and for me, probably.

Okay. Now, listen, for us, I think the results we're showing -- demonstrate that the transition to the subscription model is the focus of the company at the moment, and it's an opportunity. Having said that, it's obvious that if you have a recession during a long period of time, you make it or you may suffer somehow in your private education site. Now I can say that it's true that for this campaign and also Brazil have been very strong. And also [indiscernible] Ivón, the addressable market that we still forecast for the future in the subscription model give us a view, an optimistic view on that sense for the future coming.

Okay. But you don't have yet the feeling -- probably too soon about how private schools are addressing the situation at this point. So -- because I wonder whether the guys, which have not gone digital, are willing to accelerate that.

Yes. I think it's too early. I mean I think about the -- so the school, they are closed. That means that we have to wait a couple of months to understand better what is going to happen.

Okay. Okay. The second one, you're mentioning EUR 40 million savings target, okay? I wonder what part of that is going to be a temporary saving and what part is expected to be there forever. And eventually, what is the upfront cost in order to reach that?

Sure. Listen, this is a contingency plan that we've put together for this year. It's EUR 40 million. Basically, there's not an upfront cost, okay, to reach savings. Now, obviously, what we will do is evaluate the situation on a quarter-to-quarter basis, seeing how -- what's the evolution of the business, and we will have to monitor it closely. Think about also the 50% of the cost cutting in the program came from cost saving related with personnel saving that we have implemented from May to December. That means that we'll have to see what -- going on in the next month in the company.

Okay. Okay. And we -- finally, can you give us an idea of how the advertising is performing at this point? I don't know, maybe it has changed or it should have improved significantly during the last week, I guess, at least in Spain.

Well, listen, definitely, advertising is, in April and May, is performing better than the second half of March. Having said that, Advertising is performing as the market is saying, no? I think for us, it's below -- it's around 50% below last year, having said that. So May is probably -- April and May have been the 2 worst months, I would say, with the lockdowns -- full lockdowns, especially in Madrid and Barcelona, which are the 2 main places in Spain regarding Advertising. And we expect a better June also with the start of the sports competition. And I think we expect also a different summer than other years. So we have to wait. We have to see. We think the worst has gone. And we also expect, again, once the lockdowns are phasing out, it's closely moving towards a normality, I would say, also local advertising, which, as you know impacts the Radio business, will come back.

Okay. And I guess we're going through the worst at this moment in Colombia, no?