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

Good afternoon. This is Pilar Gil speaking, Head of IR. Welcome to PRISA's Q3 results conference call. As you know, we have published this modeling during the Q2 and Q3 set of results. We will focus our presentation today on Q3, as they already include Q2 evolution, and you have all details. The presentation will be led by Manuel Mirat, our CEO; and Guillermo de Juanes, our CFO, who will be explaining in detail the results 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.

[indiscernible] everybody, and thanks a lot for attending this conference call. Our presentation is going to be divided in 3 main parts. First of all, we are going to cover the key highlight of the period. Second, we are going to spend the details of the third quarter's results. And lastly, we are going to review the business unit evolution. If we move to Slide 4. With regard to the key highlight of the periods, as all of you know, last week, we announced 2 really relevant agreement on the company that accelerate the company's strategy transformation and reinforce the flexibility of the company and the financial strength. With regard to the debt refinancing agreement reaches, it is allowed or allowed to the company to reduce the net debt by over 30%, extend the maturities until March of 2025 and improve -- provide the sufficient liquidity for the execution of the company road map. The company will have around EUR 275 million to meet its liquidity needs and develop its strategy business plan, setting the framework for a future effective separation of the business of the education and media. The disposal of Santillana Spain for a enterprise value of EUR 465 million, crystallized value at a really attractive asset multiple and allow Santillana to fully focus on the Spanish subscription model in LatAm and enable PRISA to achieve a more sustainable capital structure. The combination of both agreement that were communicated last week, represent a significant step going forward for the company roadmap, allowing the management of the company to fully focus to unlock value in the tech business in LatAm, with particularly focus on the subscription model and to reinforce the digital offering and the subscription model on its media business. If we move to Slide 5, we have this [indiscernible] of PRISA after the disposal of Santillana Spain, a company that we believe it is optimally positioned to start building its future. As you all know, we have a strong leadership franchise of assets, where in education, we have the leading Ed-Tech platform; and in media, the top high-quality Spanish language multiplatform company. The strategy priorities in the education business basically include the acceleration of the subscription model growth in LatAm, the focus on market share improvement in key countries in the Private LatAm Education and to maximize the result of LatAm public tenders. In media, the strategy priorities include the reinforcement of the digital offering and to accelerate the subscription model in the media. Now the company has the flexibility to focus on the management and effacement of its 2 business, education and media on a frame and sustainable basis. We are quite convinced that both business has a higher potential if they are managed with differentiated teams focused on their specific charts and circumstances. Both division have different strategy and will need to be positioned to attract necessary resources and capital for each of them. We move to Slide 6. We have the key operating highlight we have throughout the period, and I'd like to highlight the following. First of all, this set of result have been impacted by COVID-19. EBITDA reached EUR 82 million versus EUR 165 million of last year, that mean 47% less in local currency. We are facing one of the most important crisis across the world, with all companies suffering an important environment -- economic environment. And in our case, the media business is suffering the most, while the education business is currently providing to be more resilient, despite the fact that the company had been affected by the difficulties on the environment, where school in most of the countries where we operated have been not just started their face-to-face activity. Second, within this environment, the company put in place a contingency plan to partially mitigate the impact from the pandemic. The third quarter results shows a strong cost reduction in all business unit, complying with the contingency plan mentioned that we will elaborate later. And third, during the period, the increasing focus in growth and expansion of the digital subscription model and the development of digital advertising, and now the content is reflected on the digital business. Santillana increased its number of student in the subscription model by 20%. EL PAÍS reached 71,000 digital exclusivity subscriber, and radio increased quite a number of streaming and podcast downloads. If we move to Slide 7 -- 6, sorry. By business unit, the education business saw resilience, with margins maintained in a difficult environment, impacted by COVID-19, where I said before, school in most of the country where we operate have not yet opened a face-to-face assistant. Revenues fall in local currency by 6.5%, 14.9% in euros, with digital revenues representing 26% of the total and 53% of the total private sales in LatAm. The number of students on subscription model grew by 20% in the 9 month of the year, reaching 1,726,000 students. The good behavior of the subscription model and the public sales, mainly in the Brazilian market, partially offset the fall in Latin American -- the rest of Latin American countries in the didactic business that they are affected by the difficulties on the environment. And also in Spain, that -- as you know, this year had not significant novelties. Highlight in the period. The maintain of margin despite the fall in revenues and the performance of Brazil, which increased its EBITDA by more than 4x. The media business have been particularly affected by COVID-19, saw a fall in revenues over the period of 37% in radio and 26% in news, in line with market declines in both advertising and circulation. Declines improved in the third quarter compared with the second quarter, and both companies, radio and press had implemented a strong cost reduction throughout the period. If we move to Slide 7. Just to point it out that during the period, media capital is accounted at -- as discontinued activity. The company has agreed to sell the remaining 64% of media capital stake to a group of Portuguese investor for an amount of EUR 36.9 million, and we expect to materialize this deal before the end of the year. Santillana Spain, in the other hand, will be in a discontinued activity by October of this year. On the cost control side, as I said before, and as we announced in the first quarter results, the company put in place EUR 40 million contingency plans to reduce the negative impact of COVID-19, will include cost reduction in all items. By September of this year, over 80% of the plan have been executed, and we expect that by the end of the year, the savings plan will surpass the EUR 40 million committed. For 2021, the company is currently working on the definition of an additional cost reduction plan. The size of the plan will be conditioned by the evolution of the current circumstances. But our aim is to adjust our cost structure to the market behavior to compensate any potential revenue deviation. For the point of view of the FX that has had negative effect on revenues of EUR 40 million and on EBITDA, EUR 5.4 million. The net result of the group had been affected mainly by noncash impairment. Basically, the sale of Media Capital and all the outstanding (sic) tax credit impairment in Spain and also impairment in radio asset in Mexico and Chile And finally, the net debt at the end of the period. It was EUR 1.1 billion compared with EUR 1,061,000,000 as December of 2019, which mean a net debt EBITDA ratio of 7.8. With the pro forma of Santillana Spain that we announced last week, the sell, the ratio will be 6.7x. Let's review on the Slide 8, the estimated negative impact of the COVID in the third quarter results and the outlook for the last quarter of the year. COVID-19 had estimated negative impact in revenues of EUR 166 million and on EBITDA of EUR 119 million. Consequence for the group future operation continue to be uncertain and will be depend on the extent on the evolution and spread on the pandemic in the coming months. For the last quarter, it is expected that media advertising will continue with declines similar to the advertising market, and the education will be affected by the lack of novelties in the public purchase of Ensino Medio in Brazil, that will be delayed to 2021 by the slow beginning of the South campaign, which be -- might be affected by the lack of face-to-face activity in school, as well as by FX evolution. As a whole, I will summarize that the operating performance by saying education business had a resilient performance, while media business were impacted by EBITDA and sheet decline, while progressing in the development of its digital strategy. The contingency plan in place is fully -- is being fully partially mitigate the expected negative impact from the pandemic. I will hand it over to Guillermo, who will explain in detail this consolidated number and the evolution by business unit.

Thank you, Manuel. If we move on to Slide #10, we have the main operating performance figures of the group for the period. Total revenue amounted to EUR 616 million and EBITDA reached EUR 82 million, which means a decrease of 50% in euros and 47% or 45% in local currency. On the bottom left-hand side of the slide, we can see the negative evolution of the EBITDA, both from Spain and LatAm, mainly impacted by the worldwide lockdowns and the advertising declines in the media business. 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 Mexico. On Slide 11, we have the evolution from EBIT to net profit. The main highlight of the period is that the net profit result was impacted by noncash tax and asset impairments carried out mainly as a result of COVID-19. Impairments include, as Manuel mentioned earlier, EUR 77 million from the sale of Media Capital, EUR 65 million for the outstanding tax credits in Spain and approximately EUR 22 million corresponding to radio assets in Chile and Mexico. Comparable net profit, excluding this extraordinary impact, would be EUR 45.6 million. Let's move to explain cash flow generation and net debt evolution in the period on Slide #12. Cash flow before operations in the period reached a consumption of EUR 22 million compared to EUR 26.6 million in the same period last year. The lower operating performance was compensated by a temporary positive impact in working capital, lower redundancies and prices as well as higher dividends received. On the bottom hand side of the slide, we see the net debt evolution in the quarter. Net financial debt reached EUR 1.1 billion, including IFRS 16 effect. Net debt-to-EBITDA ratio stands at 7.8x, which pro forma for the announced debt refinancing in Santillana Spain and Media Capital proceeds, which stand at 6.7x. It is important to highlight that the company took measures to preserve liquidity on the company -- of the company ending the period with a cash position of EUR 230 million, including almost EUR 100 million of drawn revolving lines. Let's now move to review business unit performance. If we move to Slide #14, we can see the main operating figures for Santillana. Total revenue in the period reached EUR 392 million with an EBITDA of EUR 110 million. The business shows a resilient performance with margins maintained in a difficult environment, where with most of the schools are physically closed, impacting most of the countries of the South and North areas and the weakness of LatAm currencies. On Slide 15, we have the evolution of Santillana education revenue by the 3 main segments: private LatAm, public LatAm and Spain. These 3 segments follow different dynamics and following its different evolution helps to better understand the overall performance of Santillana. Private LatAm education sales reached EUR 166 million, representing 50% of total revenues, being 14.9% lower in euros and 6.5% lower in local currency compared with the same period of 2019. As you know, Santillana is fully focused on accelerating its digital transformation and migrating students from didactic, all traditional into subscription models. The evolution of the private LatAm sales confirms these costs. [indiscernible] showing growth of [ 1% ] in euros of 15% in local currency, with didactic sales declining by 40%, explained by the transition of students to subscription models and the sales of some countries in the South and North area that have been affected by the difficulties of the environment with most schools still physically closed. Public education sales reached EUR 68 million, representing 17% of total sales and growing by 44% in euros and -- or 75% in local currency. The performance of public sales mainly reflects the sales of Brazilian 2019 public program that have been recorded in the first quarter and the repositions registered this year in Q3, while last year, they took place mainly in Q4. And in third place, Spain education sales representing 32% of total revenue, and the performance was driven by the lack of significant novelties in 2020 in line with expectations. Resilient performance overall, supported by the strong growth of subscription models and a good evolution of public sales in Brazil, which offset the didactic private business performance affected by the transition to subscription models and the difficulties of the environment and by Spain due to the lack of significant novelties in 2020. On Slide 16, let's review the key benefits of the subscription models, the evolution during the first 9 months of the year. The key benefits of this new business model are the following: more revenue visibility with signed contracts for an average time between 3 and 4 years; average revenue per student higher than the average price per student on subscription and model, higher profitability with a gross margin above 80% superior to the traditional 1 average renewal rate of such systems of 90% and a fully invested scalable platform with high growth potential. On the 9-month evolution, the plans for revenue, a number of students were reached, growing number of students by 20% to surpass 1.7 million students with a revenue growth of 15% in local currency. On Slide 17, we have further details on the number of students by type of systems and by country. As you can see, all main countries show a significant growth compared to the same period of 2019, with Brazil growing almost 40%, Colombia by 20%, Mexico by 5%, and the rest of the countries by 10%. It is worth to highlight that in Brazil, Santillana has grown the most in students in 2020 compared to its main competitors, going from 427,000 students in 2019 to almost 300,000 in 2020. Santillana has achieved in the first 9 months of 2020 growth of students of 20% to reach 1.7 million students since April. As a result of the impact of the crisis -- that the crisis is having in all economies, we have seen a drop in enrollments in schools, link [indiscernible] subscription models of Southern campaigns of approximately 4% and in Northern campaigns of approximately 10%, with a special emphasis in the preschool education. This drop is already reflected in the figure of 1,726,000 (sic) students reported. Let's move on to Slide 18 to explain the evolution of the radio evolution. Radio results for the 9 months -- for the first 9 months of the year have been affected by COVID-19, as there have been significant drops in the advertising market, the main source of revenue of the radio business. Revenues in the period amounted to EUR 122 million, a fall of 37.6% in euros, 35% in local currency. Radio continues to progress in its strategy of creating new digital audio content, multichannel distribution and product innovation, which is having its reflection in the growth of the consumption of streaming hours and podcast downloads reaching, on September, 61.2 million and 25.4 million, respectively. EBITDA was EUR 6.2 million negative compared to EUR 41.8 million positive in the same period of the previous year, a fall of EUR 48 million, EUR 49 million in local currency. In the period, Spain represented 73% of total revenues. On Slide 19, we have the evolution split between Spain and LatAm radio. In Spain, revenues dropped by 32% from EUR 130 million to EUR 88 million, while EBITDA was reduced from EUR 13 million to EUR 2.8 million compared to the same period of 2019. As mentioned before, this impact -- these impacts are explained by the declines in advertising due -- mainly due to COVID-19. In LatAm, declines were larger than in Spain, with revenue drop of 49% in euros, 42% in local currency from EUR 66 million to EUR 34 million. As a result of this, there was a negative EBITDA, both in euros and local currencies. Adjusting for small asset disposal in 2019, revenue decrease would have been 46% in euros -- in LatAm, 46%, 38% in euros. We can review the news business on Slide #20. On the operating side, the news business, we can see that the revenue evolution has been affected by COVID-19, with a decline in advertising of EUR 20 million and circulation of EUR 10 million negative. The period ended with revenues of EUR 113 million, which means a decrease of 26% compared to same period of 2019. Despite the declines of revenues, we would highlight that digital advertising continues growing its contribution compared to the same period last year. EBITDA in the period was EUR 17 million negative compared to EUR 1 million positive in 2019. On Slide 21, we can see the main key highlights of the paywall model. We would like to highlight the launch of the digital subscription model on May 1, 2020 of EL PAÍS. EL PAÍS [indiscernible] for a launch of a metro subscription model, more flexible than a hard paywall model where the site is left open for all users until they have read 3 articles per month. EL PAÍS has reached 71,000 digital exclusive subscribers, with an ARPU close to EUR 9. From the 71,000 subscribers that we currently have, we could highlight that 78% are Spanish based, while 22% are international and that 28% have chosen an annual subscription, while 22% subscribers prefer the monthly model. Since the reading under registration initiative, the number of registered readers have experienced strong growth, which are 3.1 million readers in September 2020. During the period, 2.4 million people have navigated through EL PAÍS in an identified way, consuming 14% of the total page views on a monthly average. We believe the paywall is a step forward in the new press business model at EL PAÍS, which will help to consolidate and enlarge the digital business developed in the past year. The paywall is demonstrating to be a business model, which works and with strong potential for further development. I will now hand it over back to Manuel, who will be concluding on today's set of results.

Thanks, Guillermo. As closing remarks, very briefly, I would like to say the following. First of all, the agreement reached on refinancing of the [indiscernible] Santillana España. This provides flexibility and liquidity to implement the company road map that is focused. As I mentioned before, we unlock the value of the Ed-Tech business in LatAm with a focus on the subscription model to reinforce the digital offering and the subscription model on the media business. Second, the company is fulfilling the contingency plan in place to mitigate the negative impact from the pandemic. As I stressed before, a new plan for 2021 will come shortly, and we'll communicate it to the market. Third, digital boost with a strong growth in subscription model for 9-month result evolution impacted by COVID-19, with resilient performance education and media business being impacted by advertising and circulation decline in line with the market performance. And lastly, PRISA set the framework for a future separation of the business of education and media. Let's move now to the Q&A session, please.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And now our first question comes from the line of James McKenzie from Fidentiis.

Just a couple. One on the media business and the outlook for Q4, and then I wanted to ask on Santillana. Firstly, on the media businesses. I wonder if you could give us an idea, firstly, on the outlook for advertising in Q4, how it compares to what you've seen so far in the year? Secondly, I mean, looking at the -- your cost control, I wonder of the cost control we've seen so far, how much has been temporary and how much is permanent? So I guess, looking to look at the operating leverage if the sales line would recover? And then on Santillana, could you just discuss a little bit more in detail what the closure of schools means? I mean, presumably, it means parents still need to buy their books because the kids are studying at home? Or does it mean that the actual campaign has been stopped dead because of the school closure?

Sure. James, thank you for the questions. With regards to the media outlook for Q4, I mean, our expectation is to be in line more or less with the market, as we've been so far. I mean we anticipate a quarter that should be better than the one we're seeing, still to be in line with market, look at different sources. I think, for radio. Overall, for the year, we see declines of 25%, and for the press, just below that. So we should be in line with market expectations. With regards to cost controls, I think some of them were temporary. But I think, as Manuel said, and we reiterated what we have -- what we're going to be looking now is to align teams and instructors to the perimeter, and we have to work hard on those cost controlling measures to make them permanent. And with regards to Santillana, well, the traditional business when schools have opened, it's true that, in some cases, I mean, what is that books are up in both. But in other cases, what we see is an increase of Ws or basically, our use of books, and that's something that is impacting strongly the traditional model, and that's why you see those decreases in that segment.

What -- I mean if you look at the school closures, is that going to have an impact on your ability to grow digital systems going into 2021?

No. We are seeing digital systems for 2021. In fact, as we mentioned in the call, we do see some students that are migrating, obviously, because of the crisis that we are seeing in LatAm countries. But for the campaign of the South campaign, we are currently working, what we see is additional schools wanting to migrate to the subscription -- digital subscription model. So all in all, overall, I think as of today, what we can say is that the number of students we have currently enrolled should remain flat, perhaps slightly above what we currently are showing. So definitely what we see in the market is, yes, I mean, schools, there's a double movement, I would say, has a movement, you're going to lose some students because of the situation, the macro situation. But also it's great into learning systems precisely to continue being able to do their teaching, right?

Yes. But I mean -- so I should -- in that case, I mean, the absolute number of students in subscription models that you think it's going to be flat this year? Or sorry, 2021?

Well, it will be flat to slightly positive.

Okay.

Yes.

And the next question comes from the line of Salik Ishtiaq from Citi.

So just the first one, just to follow up on the cost control side. So just to confirm, the EUR 40 million includes a number of temporary cost savings that you've achieved this year. So is it possible to kind of guide to how much of that is permanent and how much of that will be temporary?

Not really. I mean, I would say that at least half of it was linked to temporary cost salary reductions. So basically, that we need to work on for next year. And as of the rest, there's a part which is permanent and part which is temporary.

Understood. That's helpful. Just a second question. On Slide 16, under the revenue evolution for the subscription models for Santillana, the EUR 142.3 million number that you're showing in 2019, is that adjusted for currency? So is it constant currency? Or is it versus 2018? Or is that the actual number?