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

Good morning. This is Pilar Gil speaking, Head of IR. Welcome to PRISA's First Quarter 2021 Results Conference Call. Today's presentation will be read by Manuel Mirat, our CEO; and by Guillermo Juanes, our CFO, who will be explaining in detail the results release. [Operator Instructions] With that, I will now hand it over to Manuel.

Hello. Thank you, Pilar. Hello to everybody, and thanks all of you for attending this Conference Call. As you already know, this is my last call with you as Chief Executive Officer of PRISA. I will start a new assisting period with PRISA as Secretary Chairman of Santillana. Now I am pleased to review with you today PRISA first quarter results. I will start explaining the key highlights of the period, and then Guillermo will review group and business unit and figures. If we go to the Page 3 we have the key operating highlights of the period, which confirmed a difficult start of the year as we anticipated in February when 2021 outlook was released. Let me remark the following. First, PRISA first quarter results at the EBITDA level, confirmed an amount of EUR 12 million compared with EUR 64 million in the first quarter of last year. The comparison between quarter is not homogeneous as the first quarter of last year was not really impacted by the pandemic, while the first quarter of this year, the operating performance of the business has been conditionated by the COVID-19 crisis, both in Santillana, with the South campaign mainly affected by the closure of schools and at Media by the impact of the crisis on the advertising market during January and February. Second, during the period, digital business has accelerated its growth with total digital revenues reaching 600 -- sorry, EUR 61 million, increasing its contribution by 26% and representing 39% of total group revenues. As a result of the increased focus in digital growth and expansion, Santillana increased number of students of subscription model by 5.2% to surpass 1.8 million students. El PAÍS reaches 145,000 subscribers, of which 101,000 are digital only. And Radio increased the number of our streaming consumer by 60% and post cash down loan by 32%. Third, the company operating cash flow in the period reached EUR 21 million versus EUR 8 million in the same period last year. And four, as announced at the beginning of the year, PRISA will have a new organizational structure to accelerate the operating split between education and media. The Board of Directors of PRISA has appointed Carlos Núñez as Executive Chairman of PRISA Media. Both Carlos and myself will sit on the Board of Directors of PRISA. On Slide 4, we have the key operating highlights by business unit. We have seen education business, particularly affected by -- in the Q1 of 2021 compared with the Q1 of last year, which was partly impacted by the effect of the pandemic. I would like to remark that still in the first quarter of 2021 school in the countries where Santillana is present remained unopened. Revenues in the period fell 42% in local currency, mainly due to the decline in the private didactic business and by the performance of the public sales in Brazil, whose comparative performance is conditionated by the record in the first quarter of last year of sales corresponding to the previous year. Subscription model continued to grow, proving daily strength in a very difficult economic environment, growing 5.2% in student to 1.8 million students. Revenues for subscription model fall in the first quarter by 60% in local currency due to a difficult pace in the campaign placement compared to the previous year, which will be corrected in the following quarters. The dictation for the subscription model in this year remained both in terms of revenues and student, based on the contract already signed. In the case of revenues, we expect for this year, with a slight growth in local currency in revenues compared with 2020. And in the case of students, we expect to reach approximately 2 million students, equivalent to a growth of 50% over 2020. At the same time, focus continues on leading the transformation of the K-12 education market in LatAm. With regard to Media business, radio and news have been particularly affected by the fall of the advertising market during the period. We continued to fall in January and February. PRISA Media advertising revenues fell in January by 22.7%, and in February, 22.8% and ended March, growing by 60%. Despite the fall of 9.3% in revenues in the quarter, cost control has enabled Media business to achieve a similar EBITDA at the same period of the previous year without taking into account several payments. On the cost control side, as announced on the full year 2020 results, the company has put in place a plan to reduce fixed costs by EUR 30 million in all business units, as marked saving of EUR 60 million has already achieved. During the period, FX has had negative impact on revenues, EUR 20 million and on EBITDA of EUR 6.5 million. And finally, the net debt at the end of the period stood EUR 660 million compared with EUR 679 million by December 2020, with a positive cash flow generation in the period of EUR 21 million versus EUR 8 million last year. As of the end of March, the company cash amounted to EUR 263 million with additional EUR 120 million often drove liquidity lines. I hand over now to Guillermo, who will explain in detail the consolidated number and the evolution by business unit.

Thank you, Manuel. If we move to Slide #6, we have the main operating performance figures of the group for the period. Total revenues amounted to EUR 159 million and EBITDA reached EUR 12 million, which means a decrease of 80.8% in euros or 70.7% in local currency. On the bottom left-hand side of the slide, we can see the negative evolution of the EBITDA, both in Spain and LatAm, mainly impacted by Santillana Southern campaigns performance where sales are still close and to a lower extent, advertising declines seen during January and February in the medium. On the right-hand side of the slide, we can see the negative FX impact, both in revenues and EBITDA, which is largely explained by the weakness in some currencies, mainly in Brazil, Argentina and Colombia. On Slide 7, we have the evolution from EBIT to net profit. Net profit for the first quarter reached a loss of EUR 13.8 million compared to a loss of EUR 26 million from last year. Excluding the one-off media capital impairment in Q1 2020, comparable net profit for Q1 2020 would have been EUR 2.6 million positive. During Q1 2021, the group recorded lower financial results as a result of lower interest payment and a positive PAT roll-in and a lower tax expense, mainly linked to Santillana performance. Let's move to explain cash flow generation and net debt evolution in the period on Slide #8. Cash flow before operations in the period reached EUR 21.2 million compared to $8.1 million in the same period last year. The lower operating performance at EBITDA level, ex severance expenses was partially compensated by a temporary positive working capital impact, contention at CapEx level, lower taxes and less interest from debt. We anticipate the positive impact at working capital level to reverse during the year and anticipate a normalized level of working capital investment of $10 million to $15 million at year-end. On the bottom hand side of the slide, we see the net debt evolution. Net financial debt stood at EUR 660 million at the end of the period compared to EUR 679 million as of December, mainly as a result of the positive cash flow generation of EUR 21.2 million in the quarter. It's important to highlight that the cash position at the end of the period stands at EUR 263 million, with additional liquidity lines undrawn amounted to EUR 120 million, EUR 80 million at PRISA and EUR 40 million at the business units. Let's now move to quickly review business units performance. If we move to Slide #10, we can see the main operating figures for Santillana. Total revenue in the period reached EUR 82 million with an EBITDA of EUR 23.2 million. The evolution of the education business performance is being conditioned by a non-homogenous comparison between quarters, mainly because South campaigns in Q1 2021 have been impacted by COVID-19, while in Q1 2020, campaigns were mostly close, but also because Q1 2020 recorded public sales from 2019 public PNLD program in Brazil. During Q1 2021, schools in most countries of the Southern area have remained physically close, impacting the private didactic business. Commercial teams have worked in a very difficult environment since they have not been able to visit schools. In the case of public sales, in Q1 2020, we registered public sales corresponding to the 2019 public Brazilian program, while in Q1 2021, public sales represent a normalized level for the quarter. Lastly, Q1 2021 has been impacted by a negative FX impact, mainly due to Argentina, Brazil and Colombia. On Slide 11, we have the evolution of Santillana Education revenue by segment, private LatAm sales and public LatAm sales. These 2 segments follow different dynamics since following its different evolutions, helps better understand the overall performance of Santillana. As explained in the slide before, operating revenues comparison is not a homogenous versus 2020 due the pandemic impact and the public sales evolution that took place in Q1 2020. Private LatAm education sales reached EUR 70.6 million, representing 88% of total revenues and being 37.5% lower in local currency, 48.7% lower in euros compared to Q1 2020. The evolution was driven by the performance of private didactic business affected by the comparison with a South campaign in 2020 that was partly affected by the pandemic, the fact that schools did not reopen physically, the difficulties faced up by the commercial teams in the sale of textbooks with schools closed and by the transfer of students from private and public schools. In the case of learning systems, revenues fell by 16% in local currency, 32.8% in euros to EUR 43 million. The evolution has been conditioned by the recording in Q1 2021 of a lower percentage of revenues over the total campaign than in 2020, 33% versus 48%. This has been a consequence of a different pace of campaign placement due to the pandemic, which will be reverted in the following quarters. In terms of ACV, to date, Q4 2020 plus Q1 2021, the total decline is lower, 6% in local currency. Therefore, the fall in revenues in the quarter is explained by the recording of a lower percentage of revenues and by the FX impact in the quarter that explains 50% of the decline. In terms of revenues for 2021, the expectations, as mentioned, Manuel, are to achieve a slight growth in local currency compared to 2020. The public sale education sales reached EUR 9.7 million, representing 23% of total sales and declined by 74.6% in euros or 64% in local currency. Although in the first quarter of the year, public sales are not relevant, the drop compared to the previous year is significant and is explained by the recording of public sales in the first quarter of 2020 from 2019, public Brazilian PNLD program. Without this nonrecurring sale, public sales revenues have increased by 14.9% Q1 '20 versus Q1 2020. For 2021, novelties in Ensino Medio in Brazil are expected to be recorded during the second part of the year. On Slide 12, we highlight the key benefits of subscription models as well as its historical organic evolution. The key benefits of this new business model are the following: more revenue visibility, we signed contracts for an average period of 3 to 4 years. Average revenue per student, higher than the average one per student of the traditional model. Higher profitability gross margin above 80%, prior to the traditional education one, average renewal rate of such systems close to 90% and a fully invested scalable platform with high growth potential. The pandemic and the closure of schools in all Latin American countries where Santillana is present, has made it extremely difficult to perform commercial work as it has been impossible to physically visit schools over the last 12 months. So March 2021 and despite the difficult environment, learning systems' students grew by 5.2%, reaching 1.8 -- 106 million students. For 2021 and based on contract designs to date, we expect strong performance of learning systems, reaching now around 2 million students versus 1.7 in 2020 representing a growth of around 15%. On Slide 13, we have further detail on the number of students by type of system on my country. Total number of students grew by 5% with strong performance of flexible systems, plus 9% and disciplinary system was 4%. Global systems decreased by 6%, mainly as a result of no performance in Brazil, where despite increasing the number of schools, where the system is adopted, there was a drop in students, especially in the first years of school enrollment. As you can see, all main countries are showing growth compared to Q1 2010, despite the very difficult economic environment previously explained, with Brazil growing by 2% and Colombia by 10%, Mexico by 4% and the rest of the countries by 6%. Santillana has guaranteed school activity in total normality to reach platforms and resources, where number of users and content have increased exponentially. COVID-19 is representing to be a fundamental change in education, accelerating the shift towards the digital of both teacher and students, creating new opportunities for growth in digital education, services and content with great potential for digital growth. Let's move to Slide 14 to explain the media evolution. Media business is the result of the future integration of the radio and news business. The new organizational structure is designed to focus efforts on accelerating the digitalization of the media platforms by enhancing the global reach of the products, leveraging on the growth potential of the brands and focusing on subscription models to capitalize on the leadership and quality of the largest products. Total revenues reached EUR 77 million compared to EUR 4.9 million in Q1 2020, and EBITDA reached negative EUR 7.5 million compared to negative EUR 5.3 million in Q1 '20. Despite the fall in revenues for the period, as a result of COVID-19 in January and February, cost control has enabled to the combined Media business to achieve a similar EBITDA than in Q1 2020, excluding severance payments. On the right-hand side, we can see PRISA Media revenue's breakdown. In the first place, we have the breakdown by business, where 51% of revenues come from radio, while the other 49% is contributed by the news business. In the breakdown of revenues by segment, as you can see, 73% comes from advertising, while 70% comes from circulation. Let's move to Slide 15 to explain Radio evolution. Radio results in Q1 have been affected by the declines of advertising market, both in Spain and LatAm during the months of January, minus 29%, and February, minus 25.5%, with March showing growth of 21.4%. Revenues in the period reached EUR 41.3 million, a fall of 12.8% in euros, 11.8% in local currency versus last year. Radio continues to advance in its strategy of creating new digital audio content, with the channel distribution and product innovation, which is having its reflection in the growth of the consumption of streaming hours and podcast downloads, reaching a monthly average of EUR 65.2 million in streaming and EUR 30.8 million podcast downloads in the period. EBITDA reached negative EUR 4.5 million versus EUR 0.7 million positive in the same period of the previous year, a fall of EUR 5.2 million, EUR 5.6 million in local currency. In the period, Spain represented 73% of total revenues. On Slide 16, we have the evolution between Spain and LaTAm Radio. In Spain, revenues dropped by 11.2% from EUR 33.4 to EUR 29.7 million. While EBITDA was reduced from EUR 2.3 million to negative EUR 0.7 million compared to the same period of 2020. As mentioned before, these impacts are explained mainly by the declines in advertising in January and February. Cost control efforts offsets revenue decline and higher redundancies compared to the previous year. Cadena SER maintains absolute leadership with a market share of 35% of Spain's generalist radio with 4,367,000 listeners, Los40 #2 position in Spain after SER and holds first place in the music radio market with an audience share of 23%. In Chile and Colombia, the group's radio maintained leadership with respective audience shares for 45% and 26%, respectively. In LatAm, leadership in Colombia and Chile is maintained with declines were larger than in Spain with revenue dropped 19% in euros or 15% in local currency from EUR 13.8 million to EUR 11.2 million. As a result of this, EBITDA was negative, both in euros or local currency, including disposals and perimeter effect, revenue reduced to 3.5% and EBITDA growth by 6.5%. Let's review news business on Slide 17. The period ended with revenues of EUR 14 million, which means a decrease of 4% compared to 2020. The revenue evolution has been affected by a decline in advertising and physical circulation, EUR 1.3 million and EUR 2.8 million, respectively. Digital subscription partially offsets the circulation declines and contributes positively to the quarter with EUR 2.2 million, which represents 7% of the total news revenues. Digital advertising continues growing its contribution compared to the same period last year, with digital advertising already representing 73% of total advertising. Despite revenue declines EBITDA in the period improved by 50%, reaching a negative EUR 3 million compared to a negative EUR 6 million in the same period last year, with a strong cost control and payable increasing its positive contribution. On Slide 18, we can see the main key highlights of the payroll model El PAÍS has reached 145,000 subscribers, out of which 101 are digital-only subscribers. Only digital subscribers have increased by 19% in the last quarter. Out of the 101 digital-only subscribers, 73% are Spanish based, while 27% are international, with annual subscriptions representing 32% of total subscriptions. Since the reading under registration initiative, the number of registered readers has experienced strong growth, reaching 3.5 million readers in March 2021, an increase of 45% compared to the same period in 2020. The evolution of the main KPIs of the subscription model have been positive, 18.5% of total page views of El PAÍS being done in an identified way to 95% more than in Q1 2020. We believe the payroll is a step forward in the new press business model of El PAÍS, which will help to consolidate and enlarge the digital business developed in the past years. The payroll is demonstrated to be a business model, which works and with strong potential for further development. I will now hand it over to Manuel to cover the closing remarks of the results presentation.

Thank you, Guillermo. As closing remarks, I would like to say the following. First, the results of the first quarter of the year comparing to a difficult start of the year, as anticipated, with the continued momentum in digital business. Second, the company is complying with the cost reduction plan of EUR 30 million in all business units. Third, there is a new organization of structure in place to accelerate the operational split between education and Media business with greater focus on the business to maximize value. And lastly, we maintain the quality outlook for the full year. Please let's move now to our Q&A.

[Operator Instructions] Your first question comes from the line of Enrique Yáguez from Bestinver Securities.

I have 3 different questions. The first 2 ones are regarding the revenue systems. In your financial statements, just said that organic revenues on a local currency basis have declined minus 16%, while the number of students has increased plus 6%. I think that you have explained that it has been due to the different revenue of the commission. I don't know if you might give us further color about this revenue recognition. On the second place, normally, at this stage of the year, you are able to provide the total number of students for the whole year. Right now, you have 1.8 million students, and you expect 2 million students at the end of the year. Could you explain the difference? And finally, regarding the advertising market evolution, I don't know if you could give us some feedback or outlook about what kind of growth do you foresee in April and May in Press and Radio.

Sure. To come back to the questions in the order, you put them. Basically, as we mentioned, regarding learning systems, there is -- this year, there's been due to COVID a different pace of revenue recognition in learning systems. The fall, as you say, is, as we mentioned, in local currency is 16%. But as I mentioned in the call, if you look at the ACV, which is the annual contracted value, which basically for South campaigns goes from Q4 the previous year to the first 3 quarters of the year. If we look at the first 2 quarters of the year versus last year, Q4 plus Q1, the drop is 66% versus the 60%. And this is something explained by, again, by difficulties in some placements of the quarters with pandemic. Here, our -- I mean, we maintain our outlook as both Manuel and I mentioned, which is to a growth in local currency in revenues for the year versus last year. So again, what we see and anticipate today is something that we reversed, and end of the year with some slightly growth in local revenues, okay? With regards to the students, well, basically, as you know, again, now what we are finalizing or how finalized is the South campaigns, we still have the campaigns to control. I mean, commercial efforts will start now in May and those campaigns, as you know, start the end of August and September. We have the positive news flow from Mexico on the vaccination campaign and have some expectations also that schools will reopen. And that's why we foresee as we provided in the outlook and are mentioned here that the number of students by the end of the year will be close to 2 million. I mean, it might be 1,950,000, but definitely, it will be close to 2 million, which is the target we have. And hence, to grow this 1.8 million that we have today to those numbers, okay? And in terms of revenues in the Media business, we saw a very strong March. Overall, for us, the quarter has been above our expectations, to be honest, because we didn't anticipate in our outlook closure of Madrid with a snowstorm for 10 days nor -- well closures across the country during -- on the first quarter so much. We already saw a strong performance. And April, what we have up-to-date is probably we will end up the month with a 65% increase versus last year. So we are still seeing momentum and a strong advertising month of April, for instance.

Yes, next question comes from the line of Fernando Cordero from Banco Santander.

The first question is regarding the, let's say, the carve-out process on the public demand activities in education in order to understand when do you expect this carve-out to be completed? And secondly, coming back to -- or as a follow-up on the discussion on the learning systems revenue this year. And according to your outlook for the full year, it seems that the average revenue per student is going to suffer in organic terms. Some dilution, a little bit lower dilution than the growth that you are expecting in number of students. I just would like to understand if this expected evolution of the number of students is having any impact from the COVID or it's just the, let's say, the structural trends that you are facing on the different learning systems markets in which you are present?

Sure. I mean, with regards to the carve-out, basically, the timing is the one we've already anticipated, which is that carve-out from public and private side of the business by Q4 this year. So we are in progress on working towards that target, okay? And with regards to your second question, I mean, basically, what we're seeing is also a shift in the different -- not a shift, but a different growth in the different systems. So we are seeing more growth in flexible systems and the security system and global systems. And also, that's what's explaining that your growth in revenues is different than the growth that we're having in number of students.

Right. Quite clearly, this effect from the different product mix in the learning systems. Do you believe that this, let's say, change in the product mix is more driven by the by the cycle? Or just, for example, in some markets where you are trying to increase penetration, is the natural aspect to increase penetration through the most flexible systems?

Well, it's a first step for schools. I mean, moving from the traditional didactic business to a learning system. It's basically, for schools it's always simpler, to start, test the system with a flexible model than integrate it in a global model, where basically all the subjects are provided by the same, let's say, provider, content provider. So it's a natural, I would say, move, to first start with a flexible system and even to start with a flexible system in some degrees of the school, not necessarily in all degrees or all the 12 years of K-12. You generally start with some of those years. And then if the school is happy. Obviously, there are upgrades to other grades. We're seeing that if we look at the growth of students that we anticipate for the year versus last year, 1/3 of an increase comes from these upgrades from schools that have tested the model and one other courses, let's say, or years to get it as well.

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