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

Good afternoon. This is Pilar Gil speaking, Head of IR. Welcome to PRISA's conference call to discuss the relevant information release regarding the agreements reached on the refinancing and the disposal of Santillana Spain. Today's presentation will be led by Manuel Mirat, our CEO; and Guillermo de Juanes, our CFO. 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. As PRISA is currently in the middle of the silent period preceding its Q2 and Q3 2020 interim report release, which will be public next week, the presentation and Q&A session will focus only on the transaction announced and no other issues will be discussed during the event. With that, I will now hand it over to our CEO, Manuel.

Thanks, Pilar. Hello to everybody. And thank you first of all [indiscernible] call. As you know, the Board of Director of PRISA has approved the term for the refinancing of its debt with extended maturities until 2025 and strengthen the company liquidity. At the same time, we had agreed the sale of Santillana Spain to Sanoma for an enterprise value of EUR 465 million, implying a multiple close to 10x EBITDA. The combination of both agreements will enable PRISA to accelerate the digital transformation, which is basically focused on ed-tech learning system in Latin America and on the subscription model on its media business. We are going now to review the key terms for both transactions. If you move to Slide 3. We have there the key terms for the lockup agreement reached with approximately 80% of the PRISA creditors. The debt refinancing agreement means extending its maturity until March 2025 with an initial cost of 5.5% and an average total cost of 7% over the life of the contract. Total net debt will be reduced by more than 30% as a result of repayment of EUR 400 million of senior debt. With this refinancing, the company will have around EUR 275 million to meet its liquidity needs and develop its strategy business plan, [ stitching ] the framework for a future effective separation of the education and media business. Also the liquidity we'll also use for put in place efficiency plans on the education, media and the corporate holding. The lockup agreement has already been approved by 79.7% of the lender, and we will work to reach unanimity approval in the coming weeks. In any case, with the current majority, the company has the support to implement a scheme of [indiscernible] if not approved by unanimity. The refinancing, we hope to put in place by the first semester of the next year. If we move to Slide 4. You have over there the key transaction terms for the disposal of Santillana Spain. The price for the sale of Santillana Spain has been established at the enterprise value of EUR 465 million, which means a multiple of 9.7x the average EBITDA for the period 2017-2019. The price will be paid fully in cash on the closing date of the transaction after discounting the net debt at 30 of June 2020, estimated in EUR 53 million. The sale will generate a capital gain estimated of EUR 385 million at consolidated level with carve-out and cost of the transaction amounting roughly EUR 15 million. The closing of the transaction is just condition of the authorization of the antitrust authorities, the authorization of the PRISA shareholder meeting and the implementation of the refinancing. The disposal of Santillana Spain will allow Santillana to focus all the efforts on promoting ed-tech subscription model in Lat Am. If we move to Slide 5. You have over there a snapshot of PRISA after doing the deal of selling Santillana Spain, a company that we believe that is optimally positioned to start building its future road map. All of you are aware that we have a strong and leading franchise of assets where, in education, we have the leading ed-tech platform in Latin America, and in media, a top-quality language multi-platform company. The strategic priorities in education include: the acceleration of the subscription model growth in Lat Am, the focus on market share improvement in key countries in private Lat Am education; and to maximize the results of the Lat Am public market. Immediate strategic priorities include the reinforcement of the digital offering and the acceleration of the subscription models. The combination of the agreement announced today will allow the group to focus on the management and [ then placement ] of its 2 business, Education and Media. As already stated on our last general shareholder meeting, we are quite convinced that both business have a higher potential if they are separated. Both divisions have different strategy and will need to be positioned to attract the necessary resource and capital for each of them. If we move to Slide 6 to review the Santillana position and its priority going forward. Just to point it out that Santillana is the best-in-class and sole pan-Lat Am platform with present through the large and growing K-12 Lat Am market, which in private education account from 18 million students. A big transformation in the education development of all Latin American countries is taking place. Education is being transformed from the didactic traditional book sales model to a content and service sales through improvement technology that is the subscription model. This model provides business [ and placement ] to school and companies as well as educational improvement to students. Santillana has a scalable technology platform ready to benefit from the potential acceleration of the digital transformation. And in that sense, we have reinforced the technology capabilities and the operational model to ensure optimal service, especially during the COVID-19. I insist that Santillana is the only platform in education that operate in all countries in Latin America, where we have a unique position and a value proposition. We are only -- the only one international player to expand the subscription model to other markets outside Brazil. Currently, our subscriptions are providing 1 point million (sic) [ 1.7 million ] student in the region, having achieved an understanding 25% of growth in the last year. Following the sale of Santillana business, the company will focus all the effort on private education and more especially on promoting subscription model in Latin America. The private market represents approximately 70% of the revenues of Santillana being the key business focus and the public sale will represent 30%. If we move to Slide 7, we have details on Santillana position within the private market. As you can see, Santillana is the only player with pan-Lat Am platform that is present in all Latin American countries with undisputed leadership position in most of them and that is expanding the subscription model outside Brazil. In Lat Am, there are 18 million students in the private K-12 market, in which there is a little competitor overview in subscription model except in Brazil. Out of this 80 million students, 8 million are in Brazil and 10 million are in the rest of Latin American countries. Unlike our key competitors in subscription model, we benefit from our position that provides us a double opportunity. The potential to capture the huge addressable market, mainly outside Brazil and the potential to migrate our didactic student base to the subscription model. If we move to Page 8, these opportunities are [ structurally ] where we have to focus on the future coming. In one hand, we will focus on key capturing market share in the 17 countries where we are currently present. As you can see in the table, we have an understanding position in both didactic and subscription model with the room to keep growing. On the other hand, we have been consistently doing in the last year with a proven track record of growth. We will continue to be focused on the development of the subscription model platform, both in Brazil and in the rest of Lat Am, and on the migration of student from didactic to subscription, in order to benefit from the attractive economic of this model that is higher ARPU, profitability and early visibility. To conclude, we have on Slide 9 a key takeaway for today. With this agreement announced today by PRISA is building the pillar for the future, we get flexibility, we will put in place efficiency plan, and we get debt refinancing agreement that allow to reduce the net debt of the company by over 30%, extend maturities until 2025 and provide sufficient liquidity for the execution of the company road map. Second, the disposal of Santillana Spain crystallize value, but it is attractive as multiple at the right time for PRISA allowing Santillana to fully focus on the expanding subscription model in Lat Am and enable PRISA to achieve a more sustainable capital structure. And lastly, the combination of both agreements represent a significant step forward for the company allowing management and all the team focused on unlock value in ed-tech business in Lat Am and reinforce the digital offering of the subscription model in the media business. Thanks a lot, and we go to the Q&A session.

[Operator Instructions] And the first question comes from the line of James McKenzie from Visa.

I'm still in Fidentiis as far as I'm concerned. But first of all, I mean, many congratulations on the -- on the transaction. I think it must have been -- I think it has been very well negotiated and obviously very timely. Could you give us an idea of -- you -- in the past, you've reported EBITDA pre and post overhead -- or sorry, the central or corporate center costs. I think there were EUR 18 million of central costs last year. I wonder could you tell us what proportion of those central costs is being allocated to Santillana Spain, if any? Secondly, I just wanted your confirmation that you're still committed to the demerger process of education and media. And that -- well, any idea of the time frame on that, I think would be obviously very, very useful. Thirdly, in terms of the refinancing, I wanted to know, is -- are the guarantees that have been given by the companies -- is the debt allocated to one or other of the Media or Education divisions? And are there any cross guarantees on that debt? And then lastly, I suspect you won't be able to answer this, but any idea of sort of target net debt for the end of this year following the transaction?

Okay, James, I answer you the question related to the demerger of the split of the company. We are committed, as we pointed out in the last shareholder meeting. There is no timetable established nowadays for implemented. It is clear that with the refinancing of the company and the disposal of Santillana Spain, we have got -- we got more flexibility. And I think that is one of the idea to implement this 2 agreement to focus also on the possibility to split the company as we compromise in the last shareholder meeting.

With regards to the rest of the questions, James, basically out of the EUR 20 million or so net costs that are at Santillana Global. Just remind you that 50% plus of those costs are related to technology and development of learning systems, so that would pretty much stay. I would say that with Santillana Spain, very few of those costs will go with the asset and -- in that case, I think, as Manuel said, we will align teams and structures to develop the company's strategic road map in any case. With regarding to guarantees or pro guarantees, I think it's -- I mean there's nothing of that at the moment. We still need to develop the [ long-form ] documentation and see how to define the perimeter so that, that the merger is permitted in the contract. But at the moment, we cannot say more than that. And finally, with regarding to leverage. I mean the only thing we can say today is that as a result of this transaction and the media capital expected proceeds, we will have over EUR 400 million of net proceeds, out of which EUR 400 million will be for debt -- for the repayment. And I think what's important here is the flexibility that this refinancing provides us, the level -- we're comfortable with the level of net debt that we will keep in our balance sheet. And I think the refinancing will provide the flexibility needed to develop the company's road map, invest in the businesses and align teams and structures for the execution of our road map.

And also, James, as I pointed out on the beginning, I think the efficiency plan will [ come out to the company ] also in the [ education ] media sooner or later. Okay?

Sure. Okay. Can I just ask one follow-up on Guillermo on the -- I think you mentioned EUR 20 million of central cost, 50% of tax, are they going with Latin America. The remainder of the EUR 10 million, I mean, is that split 50-50 between the business you're selling and the business you're keeping?

No, no, no. Basically, the part of the headquarter that is related to Spain, it is not relevant. It is not relevant. I mean that that's why I pointed out to you that is required to have in place the company an efficiency plan coming from Santillana due to the sale of Santillana Spain and also on the media due to the -- we are facing on the economic and the sanitary pandemic that -- but that's the idea to look forward here to the end of the year to implement a [ contingency ] plan on Media and Education, also on the corporate.

And the next question comes from the line of Eduardo Riera from Taconic Capital.

So I have actually 3 questions. First is regarding the net cash impact of the Santillana transaction. You mentioned the EV, the equity value. And also you mentioned transaction costs, but I didn't really get what's the net cash impact? So that would be the first one. Second is, if you could provide a split of the EUR 275 million of cash and equivalents and also RCF lines that you mentioned in the presentation, just to have an idea here, you are including the EUR 110 million of new super senior basket or not? Or how is really the split? And the third question is regarding the transaction of Media Capital, if you could give us an update on that? And also, what are you going to do with the cash that you are supposed to receive when it closes, if it's 100% utilized to repay debt? Or you can keep it in your balance sheet?

Sure. With regards to your first question, net proceeds will basically be just above EUR 400 million pre-transaction costs and below EUR 400 million post-transaction costs. So basically you have the enterprise value of EUR 465 million, the net debt of EUR 53 million post -- that's pre-transaction cost pretty much the number we get. We estimate, again, as we said, around EUR 15 million of carve-out transaction costs. So that will just be the number just below EUR 400 million. With -- regarding to the EUR 270 million cash, that's pro forma, and that includes exactly the EUR 110 million of new liquidity. So basically, we see around EUR 200 million, including the RCF in Spain and around EUR 80 million in Lat Am going forward. And with regards to Media Capital proceeds, those are part of the EUR 400 million repayment. So all in all, basically with together the Santillana disposal plus Media Capital, as I mentioned, will provide proceeds above EUR 400 million and EUR 400 million of those will be used to repay debt.

Just a quick follow-up. So in terms of the RCF that you currently have available, do you have this EUR 110 million? And -- sorry, could you clarify what else do you have? And if it's fully drawn or not?

On which numbers, sorry?

No. I mean if you -- you mentioned all the credit liability, RCF you have available. You mentioned EUR 80 million -- EUR 110 million of the new super senior basket. Could you please explain again or give us again the split, so I can have an idea of...

Out of this over EUR 275 million, what we're saying is, in Spain, we will have around EUR 200 million, and that would include the RCF, okay, drawn and around EUR 80 million in Lat Am.

And the next question comes from the line of Manuel Lorente from Mirabaud.

My first question is regarding the line on Page 3, stating the commitment to reduce net debt levels below 4.3x by September 2023. Is this really a commitment? So I will ask a little bit of the indication of the rough moving parts to address this number because when I look at consensus estimates, right, if we take into consideration the cash consideration that you have stated with this deal, and with the EBITDA of consensus, we might reach to close to 3.4x 2023 net debt-to-EBITDA. So I don't know. I would like to have a feeling from your side regarding this. And another second issue is regarding the EUR 110 million additional liquidity, I don't know if I hear correctly, but did you say that part of this -- part of this amount will be taken into consideration regarding different cost-cutting plans? And whether you can give us an indication of -- on that front as well?

Sure. Thank you, Manuel. Well, on -- with regards to your first question, basically, what we have is a financial covenant to delever [indiscernible] by September 2023, that means 3 years from now. So basically, what we have -- the refinancing we have agreed to provides the company room and maneuver to reach those milestones, okay? With regards to your second question, yes, part -- a small part of those proceeds definitely will be used in our restructuring plans.

Okay. So just a follow-up on my first question. So when you are looking to your business for the next 3 years and taking into consideration that you end up 2019 with an EBITDA of EUR 240 million, it's a reasonable assumption to assume that you will reach that pre-crisis EBITDA level at some point in 2023? This is for something the best case scenario of the IMF for the global economy as a whole. So only my point here is trying to address whether you are assuming, let's say, the base case scenario of this recovery? Or do you see any reason why you can do a little bit better or a little bit worse than that?

Again, 2019 number you have, I mean, you have to deduct the EBITDA from [ Spain ] from that number. And basically, yes, what we anticipate is COVID to probably impact 2020 as it is, 2021 most probably as well, and then we will start seeing some recovery from 2022 onwards.

[Operator Instructions] And the next question comes from the line of Salik Ishtiaq from Citi. We will now pass to the next question and the next question comes from the line of [ Vivian Lang from CAD Life ].