RTL Group S.A. (RRTL) Earnings Call Transcript & Summary

Welcome to the analyst conference call of RTL Group regarding the presentation of the interim results 2020. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Oliver Fahlbusch, who will lead you through this conference?

Good morning, everyone, and thank you for joining this analyst call for RTL Group's results for the first half of 2020. The speakers for today's presentation are Thomas Rabe, the Group CEO; Elmar Heggen, our COO and Deputy CEO; and Björn Bauer, our CFO. The agenda on Slide 2 shows the areas our management team will cover today. And with this, I now hand over to Thomas.

Yes. Many thanks, Oliver, and good morning from me as well. Exactly 5 months ago, we published our full year results for 2019. This was just before the coronavirus hit Europe and a very challenging time began. We reacted promptly to the worldwide spread of corona by focusing on 4 areas: first, the safety of our people; secondly, the continuity of our business; thirdly, liquidity; and fourth, cost and cash flow management. It's fair to say that we did well in all 4 areas. With regards to the safety of our people, we imposed an early travel ban in March. We put in place compulsory work from home as on the 16th of March with a few exemptions. Since mid of May, we opted a prudent return to office policy. And the result is, there has been a limited number colleagues got infected. We believe no infections were caught on-premise and this is very important for broadcasting business, in particular, the broadcasting business has continued without interruptions. We witnessed an unprecedented revenue decline in the second quarter, minus 28% for the group. And our largest revenue stream TV advertising went down by approximately 40% in Q2. We succeeded in offsetting 50% of the total revenue decline in Q2. On a comparable basis, the compensation rate as recorded, was almost 60%. At the same time, we managed to generate a high cash conversion rate of 164% due to very efficient working capital management. This helped us to further reduce our debt position. And that also means that we have sufficient liquidity for recovery scenarios. We achieved all of this without cutting into the substance of our businesses or reducing investments in our streaming services. And this is reflected in gains in television advertising market shares, in outperformance of our commercial competitors and audience ratings in Germany, France and the Netherlands. And in the growth of 45% in paying subscribers for our streaming services, TV Now and Videoland, with streaming revenue up 23% in the first half of 2020. Our broadcasters and Fremantle have restarted production across all genres to offer you a fresh and exclusive content. To summarize, we demonstrated the resilience of our businesses and the strength of our management teams. And with this, I will hand over to Björn, who will take you through the details of the group's financial results.

Thank you, Thomas, and good morning, everyone. For the first half of 2020, group revenue was down by 16.4% to EUR 2.65 billion, mainly due to the declining TV advertising markets across Europe in Q2 as a result of the corona pandemic. Organically, revenue decreased by 15.4%. In the first half of the year, the group's operating cost base decreased by 9.1% year-on-year as a result of cost reductions mainly in Q2. When you look at the second quarter alone, we were able to reduce our operating cost base by 18%, proving the cost flexibility that we have in the business, while increasing ad and audience shares with our commercial competitors. The following slide provides a more detailed look at our cost management in Q2. The total cost reduction across the group amounted to EUR 234 million, representing 50% of the revenue decline in this quarter. On a comparable basis, i.e., adjusted for nonrecurring items in the first half of 2019 and higher streaming investments in the first half of 2020, the compensation rate that recorded was almost 50%. The main drivers here were program cost savings at RTL Deutschland and Groupe M6, production cost savings at Fremantle and personnel cost savings. As a result, RTL Group generated a positive adjusted EBITA of EUR 105 million in the second quarter. Looking now at the items below EBITA, down to the net profit. In March 2020, Groupe M6, sold its shareholding in iGraal to the Global Savings Group, a leading player in digital marketing and cash back. The deal took the form of a partial cash sale and a share swap. As a result, Groupe M6 has become the leading shareholder in Global Savings Group, and the transaction resulted in a capital gain of EUR 78 million. Following the decrease of the share price of Atresmedia and the decline of the Spanish TV advertising market in the first half of 2020, we have recorded a noncash impairment of EUR 60 million against our associate participation in Atresmedia. The group's tax charge came in at EUR 85 million, significantly below the first half of 2019. As a result, the group's profit for the period decreased to EUR 156 million. Looking now on the next slide, the cash flow statement. The group's EBITA to free cash flow was strong, reaching 164% in the first half of 2020. The higher cash conversion was, to a large extent, the result of working capital measures that we implemented starting in March 2020. The line acquisition/disposal of subsidiaries mainly reflects the cash received as part of the [ trial ] transaction, which I just mentioned. With no dividend payment for the fiscal year 2019, the cash generated in the first half of 2020 amounted to EUR 226 million. Despite this challenging environment, and as a result of the measures taken, we were able to reduce our net debt to EUR 181 million compared to EUR 384 million at the end of last year. As a result, our net debt position not only declined in the first quarter, but also in the second quarter, the period in which we were most heavily impacted by the pandemic. To summarize, RTL Group has an absolute low level of debt with no maturities before 2023. We have also access to significant unused and committed both from credit facilities, all covenant free, and we have sufficient liquidity for all conceivable recovery scenarios. Elmar will now start the business review with RTL Deutschland.

Thank you, Björn. In the first half of 2020, our largest unit, RTL Deutschland, continued to outperform commercial competition on advertising sales, orders ratings and streaming. The German net TV advertising market was estimated to be down between 20% and 20.5% in the first 6 months, with RTL Deutschland performing slightly better than the market. Total revenue was down 16.9% to EUR 904 million, while adjusted EBITA was EUR 174 million, representing a margin of 19%. On a comparable basis, RTL Deutschland offset 42% of its revenue decline in the first half by cost reductions. In terms of audiences, RTL Deutschland reported a combined audience share of 28% in our target group, 14 to 59. This means that our German family of channels increased [ in suite ], over its main commercial competitor, ProSieben, at that time from 3.3 to 4.0 percentage points. With this portfolio of TV channels, the streaming service TV Now and its journalistic digital platforms [ RTL DE and info.be ], RTL Deutschland reached 31 million viewers and around 7 million unique users every day in the first half of 2020. Our news channels and a popular news format all reached audience high during the corona lockdown period. For example, NTV scored its best monthly audience share ever in March. One year ago, we announced the launch of our format creation group, FC Group to develop non-scripted formats exclusively for our broadcasters and streaming services. The first format of FC Group, Like Me - I'm Famous, was commissioned by RTL Deutschland and has been available since Tuesday this week on TV Now. Moving now to Groupe M6 on the next slide. The French net TV advertising market was estimated to be down 28% compared to the first half of 2019. Total revenue of Groupe M6 was down 21.1% to EUR 557 million, mainly due to the decline in TV advertising revenue. Adjusted EBITA in the first half of 2020 decreased to EUR 85 million, representing a margin of 15%. In the first half of the year, Groupe M6 offset 59% of the decline in revenue through cost savings. And again, this was achieved without cutting into the substance of our business. The audience share of our French family of prepaid channels in the commercial target group increased to 22.5%, supported by last year's acquisition of the children's channel, Gulli. And in other countries, the main news shows on our flagship channel recorded massive audience growth in March. M6 also succeeded in launching a [ channel news ] format during the lockdown period. Tous en Cuisine scored an average volume share of 20% in the core target group. Finally, Groupe M6 continued its strategy to focus on its core businesses, generating substantial proceeds. After the sale of the football club, Girondins de Bordeaux and MonAlbumPhoto in 2018, as explained by Bjorn, the combination of iGraal with the GSG this year. The company -- they recently announced it had entered into an exclusive negotiation with Stars to sell its home shopping business. Let us now turn to RTL Nederland on Slide #13. The Dutch and TV advertising market was estimated to be down by 26.2% in the first half of 2020. RTL Nederland's revenue decreased by 11.9%, EUR 207 million, as higher streaming and platform revenue partly compensated for the strong decline in TV advertising. This resulted in a significantly lower adjusted EBITA of EUR 2 million. The combined Dutch family of channels delivered an audience share of 30.8%, up [ 0.9 points ] year-on-year. As a result, RTL Nederland increased its lead over its main commercial competitors, Talpa TV from 7.1 to 9.3 percentage points. Let's now turn to our global content business, Fremantle. Slide #14. Revenue at Fremantle was down by 14.6% to EUR 707 million, mainly due to fewer deliveries of shows and postponements of production as a result of the COVID-19 effect on numerous territories. Fremantle's adjusted EBITA decreased to EUR 23 million. Fremantle had creative successes around -- across all genres in the first half of 2020 with American Idol; America's Got Talent: The Champions; the reality-dating formats, Five Guys a Week on Channel 4; and Too Hot to Handle on Netflix, which quickly topped the Netflix's most watched channels globally. Fremantle also continued its push into drama production with launches of The New Pope on Sky Italia; Baghdad Central on Channel 4; and the UFA Fiction film, Betonrausch, on Netflix. After its launch in June 2020, The Salisbury Poisonings, the four-part drama series from BBC One, and Dancing Ledge Productions, was the BBC's highest rated drama since August 2018. Fremantle internationally sold series to AMC in the U.S. and to Movistar+ in Spain. As already mentioned, we started Fremantle production in most of the territories with significant content demand from broadcasters and streaming platforms. Of the around 200 shows in production, when lockdowns were announced in mid-March, 80% are back in production or have been in the [ EBITA fully to look ]. I will now hand you back to Thomas, who will take you through the strategy update before finishing with the outlook statement.

Yes. Many thanks, Elmar. Our industry is going through massive transformation, and we successfully transformed RTL Group's businesses. 2 factors are important: first, high reach in both linear and nonlinear, which required significant investments in content, marketing and state-of-the-art tech platforms or streaming services; and second, some better monetization of our reach throughout the targeted advertising and personalization, which requires investments in advertising, technology and data. To achieve these objectives, our strategy built upon 3 priorities. As presented in March, there's no change in our strategy. First, on core, work on strengthening our family of channels, investing in premium content, portfolio management and cost management. Second, boost the growth of our streaming services and global content businesses, Fremantle. And thirdly, fostering alliances and partnerships with European media industry. Let's take a closer look at growth. The focus here is on building national streaming champions in the European countries where we're leading television channels. These streaming services are complementary to the global services such as Netflix and Amazon Prime and Disney+. They leverage our competitive advantage and local programming. Growth in paying subscribers and streaming revenue in the first half is in line with the 'boost' plans, which we presented in March for TV Now and Videoland. Streaming revenue was up 23%. Paying subscribers were up 45% to 1.77 million and viewing time was up 36% on TV Now and 31% on Videoland. We do not plan to reduce our content investment. Streaming services, quite the contrary. We see a successful increase TV Now's originals, approximately 1 new format per week for the upcoming season in 2020, 2021, including 11 new German fiction series. Another driver for TV Now will be the streaming of exclusive matches in the Uefa Europa and Uefa Europa Conference Leagues, starting with the season 2021, 2022. Our ambitious targets for TV Now and Videoland remain unchanged. Moving on to the next Slide 18, our global content business, Fremantle. The strong drama pipeline, which includes many high-profile productions, working with world-class talent and creators. Including local dramas and dailies, Fremantle currently has 55 dramas series in production and 450 nonscripted programs in development. Some future highlights: the third season of My Brilliant Friend for HBO; a new series about the personal and political life of Benjamin Netanyahu; the UFA feature film about Siegfried & Roy; a real live drama series about U.K. Prime Minister, Boris Johnson's turbulent life during the corona crisis; and Fremantle's announcement that the Academy Award winner, Paolo Sorrentino, will write and direct The Hand of God for Netflix. Let's turn to alliances and partnerships on Slide 19. You'll remember that we made a new side at offering different forms and partnerships with European broadcasters, all of which are based on the philosophy of funding resources to establish open and mutual European platform. I can say that despite the coronavirus crisis, we made good progress over the past 9 months. Starting with the Smartclip, which is our tech platform. We're building an open ad tech platform for European broadcasters and streaming services. As part of this, we entered -- Smartclip entered into a partnership with Atresmedia, with the objective to provide the largest addressable TV product offer in Spain. Smartclip is in similar talks with many other European broadcasters. Bedrock is our open streaming platform for European broadcasters, which has entered the service, Salto, the French streaming services, which is due to launch in autumn, which will serve Videoland probably starting in 2021, which already serves the RTL services in Belgium, Hungary and Croatia. Similar to Salto, the major commercial and public radio groups in France announced recently a joint venture to develop a free digital platform with the aim to make their content available on all digital devices. And finally, Freemantle, Penguin Random House UK and BMG launched a joint podcast business as part of the Bertelsmann Content Alliance UK. The new company, Storyglass, will produce podcast projects across scripted, documentary, true crime, lifestyle and music series for all major podcast distribution platforms. I will now take you through the group's outlook statement as outlined on Slide 20. Given the current economic uncertainty, our Board of Directors decided on the second of April 2020 to withdraw the previous outlook, which we communicated on the 13th of March with the full year results for 2019 and which explicitly did not reflect the coronavirus outbreak. As stated on the second of April 2020, global economic development and prospects have significantly deteriorated since mid of March. In the second quarter of this year, RTL Group's television advertising revenue across the footprint was down by approximately 40% year-on-year. We currently expect that the decline of television advertising markets will slow down in the third quarter of 2020. Our current estimate for our TV advertising revenue in Q3 is around minus 10%, assuming a further normalization of market conditions. There is a high level of uncertainty regarding TV advertising revenue in the fourth quarter. And as a consequence, we're currently not in a position to provide a new outlook for the full year 2020, except that RTL Group's full year 2020 revenue and adjusted EBITA would be significantly below 2019 and other recent years. This brings us to the end of the presentation. Thank you for your attention, and we'll now happily respond to your questions. Thank you.

[Operator Instructions]

Perhaps while we wait, a short sorry from our side as we had a helicopter cruising over our head that caused a little bit of the sound disturbance. I hope it wasn't too bad for some seconds, I hope.

Hello, can you hear me?

Yes.

Very good. Okay. This is Adrien from Bank of America. So I've got 3 questions, please. The first one is around your commentary, Thomas, for Q3 to be down 10% on TV advertising revenues. Could you possibly break that figure down between your 3 main markets of Germany, France and Netherlands? And also if I could kindly ask you to break that figure down between July, August and September. That's the first question on the first area. The second question is, can you talk a bit about the progress that you've made with ProSieben around d-force? What's the traction of that product with advertisers and agencies? And then the third question is, I'm just curious if out of the crisis, do you expect your programming cost to be fundamentally lower because the downturn has showed you that you can show more reruns efficiently? Or do you expect it to be higher because competition keeps on rising from new entrants on the video markets?

Yes. Well, the first point is on Q3. We said minus 10% and that is across RTL's footprint. We don't break this down by territory. But I can tell you that we expect the 3 main territories to be broadly in line with the minus 10%, plus/minus a few percentage points. The problem with the breakdown and with the guidance is that if you look at Q3, September accounts for approximately 50% of advertising revenue. And to be honest, visibility, forward visibility is incredibly low. We talk, of course, to advertising agencies. We talk to advertising customers. So we do what we can in terms of market intelligence, but it probably is very, very difficult to look beyond a few weeks for the moment in terms of bookings, cancellations and the like. In July, the markets, all markets continued to decline at different rates. August was slightly, slightly, slightly better. We actually will be slightly better. We expect Germany to potentially be in positive territory to be seen. And September will probably be down in the order of minus 10% to minus 15%. But as I said, it's very, very early to tell. So if you do the math, we've got July in the books. We've got August partly in the books, and we've got a very significant September, I mean, significant for Q3. As I said, based on everything which we've seen, everything we discussed with the market and customers, we believe that a minus of around 10% is achievable if market conditions continue to normalize. And that would be a marked improvement on Q2, which was minus 40%. So I think it's a big step in the right direction. In terms of program costs, yes, it's true that we reduced our program costs in the second quarter, and you will probably continue to some extent, depending on advertising markets to reduce program costs for the rest of the year. But what we also just explained is that while reducing our program costs, we didn't want to reduce the substance of our business, defined as our market shares in terms of audience and advertising market shares. And to be honest, we're quite proud of the fact that we've managed to reduce our cost base point significantly, while increasing our market share as compared to our commercial rivals in all 3 main markets in which we operate. At the same time, significantly increase our cash conversion rate, i.e., manage our liquidity and cash position that we believe is a real achievement. We don't see program cost necessary to go up or down in the next few years. What we're going to see is that we are increasingly going to look at our program cost and budgets for linear and nonlinear office combined. And we'll see a shift from linear to nonlinear budgets, and that's exactly what we announced in March. Remember when we said that we would significantly increase by a factor of [ 4 ] our program investments in streaming services, that's exactly what we did in the first half of the year despite a corona crisis, and that helped us to increase our subscriber numbers quite significantly to 1.77 million. d-force is up and running. It's a very attractive offer for our advertising customers and agencies because it's effectively a one-stop shop for booking addressable TV both RTL and ProSie in Germany. The addressable TV market is a relatively small for all sorts of reasons, technical, regulatory and others, but we expect this market to grow significantly. And I think as we grow this market and as we grow addressable TV, we'll see positive effects on our CPMs because targeted advertising as you know commands higher prices than nontargeted advertising. So we're confident that the partnership with ProSieben started well, and we are exploring ways of expanding the partnership and advertising technology with ProSieben in the next months.

This is Christophe from Value Square. I also had 3, if I may. The first one would be [indiscernible] which was launched last week. They reported in the segment of [ Havas ] that they see a serious difficulty to sell slots that they are having for TV advertising and so on. So I wonder if you could say something about the pricing that you currently see in TV advertising. Has that totally collapsed or has that stayed at an okay level? The second one was to get my head around the Dutch business. That declined was significantly in EBITA. Is that -- if I'm thinking about it, I'm thinking that in linear TV, you have a reasonable decline in line with your other businesses. But since you had such an increase in your streaming platform that might have contributed to the costs that you had to take in that business. And could you confirm that this is indeed the increase in streaming offering in Videoland that has increased your cost and has weighed on your EBITA? And then the last one would be on BBTV and Divimove. Could you say something about these businesses in terms of profitability and business plan? How do you see this business today? How do you see them going forward? And then perhaps more specifically on BBTV, how is your relationship with BBTV? And how is that process going forward in terms of the sale or purchase of the rest of the company?

All right. Good. First on pricing. The main driver for revenue decline was not price but volume. On prices, we offered some discounts. But frankly, fairly limited at discounts, overall as a policy. On the cost base, I mean, Bjorn explained that we reduced our cost base quite significantly. And I explained that we increased our investments in streaming. So you see kind of 2, kind of opposite trends. We decreased our cost base in linear TV and Fremantle of course. And we increased our cost base, in particular, programming in nonlinear TV. Overall, there's a significant cost decrease because, otherwise, we would not have been able to offset 50% of the revenue decline, almost 60% on an adjusted basis in the second quarter. As far broadband TV and Divimove are concerned. Let me talk about broadband TV first. Broadband TV continued to grow its top line. The business is approximately breakeven on an EBITDA level, partly due to the fact that it continues to grow. As we said in the past, we're looking for solutions for this business to the minority shareholders. We decided not to exercise our option to buy the business, which I think gives you a pretty clear indication of where we're heading. So we're working with the minorities. This work or the results of the work have been delayed by the corona crisis. But frankly, we very much hope that we'll find a good solution with our minority shareholders in the next month. Divimove is very different because Divimove has a European focus. It's therefore, much more, much more aligned with our European broadcaster footprint. And Divimove is also much more diversified business. I mean clearly, a significant revenue source of Divimove is indirect revenue, it was YouTube. But we're growing our direct revenue, setting advertising directly and we're building very significantly our digital production business within Divimove, which is highly attractive. And then secondly, turning Divimove into a pretty broad-based talent agency for creators. That business is slightly negative, but consider this kind of loss to be an investment in the business. The revenue of Divimove is up. And as I said, the business is slightly negative in terms of profitability.

[Operator Instructions]

This is Adam Berlin from UBS. I had a couple of questions on Fremantle and then one on the advertising market. 2 questions on Fremantle. First is, are there constraints on physical production capacity, which could slow down the recovery? Or another I'm asking the question, by the time we get to 2021, do you think the revenues in Fremantle will be pretty much in line with what people would thought 2021 would have looked like before the crisis? And the second question on Freemantle is, is the demand coming from broadcasters and SVOD platforms for content as strong as it was historically? Have you had to cancel any of the shows in the pipeline? Or is there still strong demand from the purchases of TV shows? Those are the 2 questions on Fremantle. And then there's the question on TV advertising. Could you talk through which categories you're thinking are going to improve in Q3 versus Q2? Is it driven by some of those COVID-focused sectors like travel and leisure coming back? Or is it just other sectors just being strong? Are there any sectors you think are growing their spend in Q3?

All right. Well, first on Fremantle. I mean as we said, we're back to more than 80% of our productions, which were postponed as a result of corona, which is quite significant. And there are some constraints, of course. There are some protocols, territory by territory, which we have to respect. And some of our shows don't really work with an audience. And there are some constraints on audiences attending shows, as you know. So these are kind of some constraints related to corona. But I think much importantly and much more fundamentally, there is huge demand for content, both on scripted and nonscripted. I actually think that a number of broadcast and streaming platforms will have a gap in their program schedules in the foreseeable future quite simply because of production interruptions and postponements during corona. So the demand is there, and we're very, very confident that Fremantle will be able to serve this demand. So frankly, all depending on corona infections, protocols, restrictions and so on, which are impossible to predict. But assuming a normalization, and therefore, a gradual lifting of the restrictions, we're very confident that Fremantle will be back to pre-crisis levels pretty fast. That is our expectation. On television advertising and segments, what we're seeing in terms of sector trends is that all sectors are improving, with tourism remaining the obvious [ exception ]. We see a particular -- the particular strong growth in health and pharma, body care and retail across territories. Then we see quite significant growth and recovery in automotive in Germany, good recovery in France, a bit more weakness in other territories. But as I said, health and pharma, body care and retail, particularly strong, but frankly, all sectors are improving in the third quarter with the exception of tourism.

We have no further questions.

So we wait one some more second -- some more seconds whether there are further questions.

I think there will be delays in transmission. So we let's just wait maybe for half a minute, just in case there's a question which we've not yet heard.

This is again, Christophe from Value Square. Since I have the opportunity to ask another question, I will do so. I was just thinking about the answer you have given on the TV ad markets that you say that the pricing has been stable. I was just wondering since TV advertisement and linear TV is so much under pressure in the ad markets and digital, like Google and YouTube, and all the others are doing so strong. I was just wondering from a strategic perspective, whether we're keeping the prices steady is something that you will be able to do for the foreseeable future? Or do you believe that you will have to decrease your pricing in order to mitigate the volume loss that you are seeing towards digital channels. The second one was on Divimove [Audio Gap]

There was a question about advertising and pricing. I mean I didn't say that we didn't provide any discounts, I just said that it was not our policy to significantly increase discounts, and pricing television is a matter of demand and supply. And as you know, a supply of television reach GRPs, et cetera, is decreasing. In the last years, we've able to increase our net prices in most territories and continues to be the right policy. By the way, we believe that when markets will pick up again, television and radio advertising will be high in demand because both television and radio advertising continue to be the only ways to build reach and convey marketing messages rapidly. So we're very, very confident that we'll benefit from recovery. And then there was a second question on Divimove, but I didn't...

It was interrupted.

Yes. It was interrupted. So I apologize, but please feel free to reach out to us to follow up on Divimove, if you so wish. Any other questions?

No, unfortunately not.

Good. Then, thank you very much for joining our call on half year results 2020. Of course, as Thomas has already said, we are still available to answer any follow-up questions. Sorry again for the technical problems we had to face. Again, thank you for joining and talk to you soon. Bye-bye.

Thank you.

Thank you.

We want to thank all the participants of this conference. Goodbye.