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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the RTL Group Analyst Call. [Operator Instructions] It is my pleasure, and I would now like to turn the conference over to Oliver Fahlbusch. Please go ahead, sir.

Yes. Good morning, everyone. Thank you for joining this analyst call for RTL Group's results for the first half of 2022. The speaker for today's presentation are Thomas Rabe, RTL Group's CEO; Elmar Heggen, our COO and Deputy CEO; and Björn Bauer, our CFO. The presentation for this call is available on our corporate website, company.rtl.com, following the link included in our press release under downloads. The agenda on Slide 2 shows the areas our management team will cover today. After the presentation, Thomas and Björn are available to answer your questions. And with this, I now hand over to Thomas.

Yes. Many thanks, Oliver, and good morning from me as well. RTL Group had a solid first half of 2022 in terms of operating and financial performance, reporting record first half revenue of EUR 3.3 billion. Despite higher streaming startup losses, RTL Group generated a high adjusted EBITA compared with the first half of 2021, demonstrating once again our ability to generate strong financial results in challenging macroeconomic conditions. Our families of channels in Germany and the Netherlands achieved higher audience shares in the main commercial target groups and thus increase their leads over the main commercial competitors. And [ Season ] France scored its best prime time audience share in the commercial target group in 10 years. We've also made significant progress in executing our strategy. We continue to actively manage our portfolio and completed the sale of RTL Belgium, RTL Croatia and VideoAmp with significant capital gains. Our streaming services, RTL+ and Videoland continued to grow dynamically with more than 4.5 million paying subscribers at the end of June. One year ago, we announced that we will accelerate the expansion of Fremantle, targeting full year revenue of EUR 3 billion by 2025. Fremantle is making very good progress to deliver on this target, with 5 acquisitions and step-ups closed in the first 6 months of the year. On the proposed combinations of Groupe TF1 and [indiscernible] in France and Talpa Network and RTL in the Nederland, we expect the competition authorities in both countries to decide that in autumn. We remain convinced that market consolidation is necessary to compete with the global platforms. I'll now hand over to Björn, who will take you through the group's financial results in more detail.

Thank you, Thomas, and good morning, everyone. In my presentation on the financial results, I will focus on 2 points. First, our solid financial results despite softer TV advertising market since March; and second, our active portfolio management and its impact on the income and cash flow statements for the first half of 2022. Let's start with a closer look at our key financials on Slide 6. Thanks to our investment into streaming and content and the strong performance at RTL Nederland, our first half revenue reached a new record level of EUR 3.3 billion. Positive foreign exchange rate effects amounting to EUR 41 million also contributed to our revenue growth in the first half. On an organic basis, i.e., before scope and FX effects, group revenue was stable as organic revenue growth at RTL Nederland and Groupe M6 was offset by negative effects from the timing of production deliveries at Fremantle. Despite higher streaming startup losses and more challenging macroeconomic conditions, adjusted EBITA was up 3.7% to EUR 501 million, mainly thanks to significantly higher profit contributions from RTL Nederland. Group profit was EUR 304 million after reaching the extraordinary record level of EUR 929 million for the first 6 months of 2021, which was positively impacted by the capital gain from the sale of SpotX. Moving on to Slide #7. Here, you see the development of RTL Group's total and TV advertising revenue on a quarterly basis. RTL Group started dynamically into 2022 with group revenue and TV advertising revenue, both up by 11% compared to the first quarter of 2021. Since March, the European TV advertising markets have softened, resulting in a 3% decrease of RTL Group's TV advertising revenue in the second quarter. This decrease was more than offset by scope effects at the level of RTL Deutschland and Fremantle as well as positive FX effects. As a result, RTA Group's total revenue was up 6% in the second quarter of the year. Looking now at our underlying profitability in the first half with higher streaming start-up losses totaling EUR 74 million, our adjusted EBITA before streaming start-up losses was up 7.1% to EUR 575 million, also exceeding the pre-COVID levels of the first half of 2019. Moving on to Slide 8 and the items below EBITA down to group profit. As you know, in April 2021, RTL Group sold its interest in SpotX to the U.S. tech ad company, Magnite. In the first half of last year, the capital gain from the disposal of SpotX alone amounted to EUR 745 million. As already mentioned, this was the key driver for last year's record group profit. With Magnite share price decreasing in the first half of 2022, the effect from the remeasurement of the 12.37 million Magnite shares held to RTL Group was minus EUR 85 million in our accounts for the first half of 2022. This effect was reflected in the lion's share value measurement of investments. In total, RTL Group recorded capital gains of EUR 111 million in the first half of 2022 relating to the disposal of RTL Belgium and RTL Croatia. The Group's tax charge came in at EUR 134 million. The significantly higher tax charge in the first half of last year was due to the capital gain from the disposal of SpotX, which was taxed at rates below our normalized tax rate. Accordingly, the reported tax rate in the first half of 2022 was 31% compared to 23% for the first half of 2021. Looking now at the next slide, the cash flow statement. Our operating free cash flow was EUR 166 million, while the operating cash conversion rate was 35% in the first half of 2022. The lower operating cash conversion rate was due to unfavorable changes in net working capital, mainly at RTL Deutschland and Fremantle. Thomas already said, we continue to actively manage our portfolio, and this is reflected in various lines of the cash flow statement. The line acquisition disposal of subsidiaries mainly reflects the cash received as part of the disposal of RTL Belgium and RTL Croatia and the cash paid out for the Fremantle acquisitions Lux Vide and Element Pictures. The cash received from the sale of VideoAmp is reflected in the line acquisition disposal of other investments, financial assets. And the cash effect from the acquisition of Gruner + Jahr net of cash acquired, is shown in the line acquisitions of companies under common control. Please keep in mind that EUR 210 million for the acquisition of Gruner + Jahr assets were already prepaid at the end of 2021. Cash outflow for the step up to 100% in Eureka is reflected in the line transactions with noncontrolling interests. With the dividend payment for the financial year 2021 amounting to EUR 774 million, we reduced our current deposits with Bertelsmann by EUR 568 million in the reporting period. This effect is shown in the line transaction with shareholders and its subsidiaries. To summarize, with the lower operating free cash flow and most importantly, the dividend payment, the cash used in the first half of 2022 was EUR 67 million. At the end of June, RTL Group was still in a net cash position of EUR 35 million, and that is despite the dividend payment. For the business review, I will now hand over to Elmar.

Thank you, Björn, and good morning from my side as well. In the first half of 2022, our largest unit, RTL Deutschland, continued the dynamic growth of its streaming service RTL+. The number of paying subscribers was up 69% year-on-year to more than 3.4 million at the end of June. The strategic partnership with Deutsche Telekom [ Mediengruppe ] and the diverse range of programming on RTL+ contributed significantly to the growth. In terms of content, after last year's deal was constant in film, RTL Deutschland signed agreements with Warner Bros. Entertainment and Paramount to acquire attractive program packages for both RTL+ and our linear free TV channels. In May, RTL Deutschland announced an extensive partnership with UEFA to broadcast half of all football matches of the German national team in the UEFA Nations League until 2028. And the European qualifiers for both the FIFA World Cup 2026 and UEFA Europe in 2028. The first half of the year also saw the launch of various extension of publishing brands, such as Stern, Gala and GEOlino to the TV screen. Good examples for the ongoing integration of Gruner + Jahr into RTL Deutschland. Our strategy has always been clear. Investments in local exclusive content, including the rights for live sports events, to strengthen both our linear TV channels and our streaming services. And this strategy pays off, as demonstrated by the success with a live broadcast of the UEFA Euro League matches in 2022. Looking now at the financials of RTL Deutschland in the first half of 2022. Total revenue was up 21.5% to EUR 1.240 billion, driven by the acquisition of Gruner + Jahr and Lagardère. Adjusted EBITA was down 5% to EUR 191 million, mainly due to higher program costs for the linear TV channels as well as higher streaming startup losses. This was partly offset by the reversal of provisions of EUR 35 million relating to the legal proceedings with RTL DE. In terms of audiences, RTL Deutschland reported a combined audience share of 27.3% in the main -- in the target group of [ Euro's ], Page 14 to 59, which was up 0.8% -- 0.8 points. Our German family of channels increased its lead over its main commercial competitor [indiscernible] from 4 to 4.9 percentage points. The main channel, RTL Television remains the market leader in the target group, 14 to 59, while VOX overtook [indiscernible] in the first 6 months in the 14 to 49 age group. Moving now to M6 on the next slide. Total revenue of Groupe M6 was up 2.9% to EUR 664 million, mainly driven by non-advertising revenue which benefited from the recovery of the film business and scope effects coming from the acquisition of Stéphane Plaza Immobilier. Adjusted EBITA was almost stable at EUR 149 million resulting in a profit margin of 22%. The audience share of our French family of free-to-air channels in the commercial target group was 22.4%, down 0.7 points. While the all-day audience share of the main channel M6 down in the commercial target group, the channel scored its best orders performance in the past 10 years in the crucial prime time slot. M6 acquired the rights to become the official free TV broadcaster for the finals of the UEFA Champions League in the years 2025 to 2027, another example of our strategy to invest in premium content. Let's now turn to Page 13, RTL Nederland. The Dutch net TV advertising market was estimated to be up 17% in the first 6 months of 2022 with RTL Nederland continuing to outperform the market. RTL Nederland total revenue increased by 19.8% to EUR 303 million. This resulted in a record first half adjusted EBITA of EUR 86 million, up 59.3% from the first half of 2021. The profit margin was 28% in outstanding performance. The combined Dutch family of channels delivered an audience share of 34.5%, up 1.4 percentage points year-on-year. The strong orders growth was again driven by the main channel RTL 4, which scored higher ratings with shows such as De Verraders, Make Up Your Mind and the new format, Lago di Beau. RTL Nederland streaming service Videoland recorded paid subscriber growth of 6.2% compared to the end of June last year. Nederland's growth was largely driven by the 4 seasons of the original series of Mocro Maffia and the reality format, Temptation Island, both of which are exclusively available on Nederland in the Netherlands. Turning now to our global content business on Slide 14, Fremantle. Revenue at Fremantle was up 8.1% to EUR 983 million, thanks to scope effects from the acquisitions of This is Nice Group, Lux Vide and the Element Pictures plus positive foreign exchange rate effects. The unit revenue [indiscernible] organically, mainly due to timing effects as Fremantle's revenue in the first half of 2021 was boosted by the deliveries of Season 1 of The Mosquito Coast and Season 3 of American Gods. This will normalize over the full year and we still expect Fremantle to report significant organic revenue growth for the year 2022. In March, Fremantle's CEO, Jennifer Mullin, presented you the boost plan for Fremantle to become a EUR 3 billion company by 2025. In the first 6 months, Fremantle completed 5 acquisitions and step-ups. All transactions demonstrate Fremantle's strategic plan to invest and to grow premium production companies and creative talent around the world. I will now hand you back to Thomas, who will take you through the strategy update before presenting [indiscernible] .

Yes, many thanks, Elmar. Let's turn to Slide 16, which is our strategy framework, which is unchanged based on 3 priorities, which are Core, Growth and Alliances & Partnerships. Core means investing in Fremantle content, strengthening our families of channels, cost and portfolio management, including larger consolidation moves. Growth continues to focus on streaming services, advertising technology and addressable TV as well as content production with Fremantle. The Alliances & Partnerships span from advertising sales and content production to technology and data. Moving on to Slide 17 with some more color on streaming, which clearly remains growth business for us and for which we have clearly defined ambitious targets. With more than 4.5 million paying subscribers at the end of June, our subscriber base grew by 48% year-on-year, mainly driven by RTL+ in Germany. Streaming revenue grew by 21% to EUR 130 million. As you can see on the slide, we increased our content spend by 46% to EUR 124 million in the past 6 months. This translates into streaming startup losses of EUR 74 million in the first half of the year. On the basis of strong growth in paying subscribers and as a consequence of these higher investments, last year, RTL Group significantly raised its midterm targets for RTL+ and Videoland by 2026 as follows: To grow the total number of paying subscribers to 10 million; to grow streaming revenue to EUR 1 billion and to reach profitability. To reach these goals, we will increase the annual content spend to around EUR 600 million. This means that we will triple the annual content spend compared to 2021. The peak of the streaming startup losses expected this year was around EUR 250 million. In summary, we are well on track to reach these targets. In the second half of the year, we expect RTL become a cross-media entertainment service, comprising video, audio and text. The new RTL+ will offer audiences, the most diverse range of high-quality entertainment and independent information, all in an easy-to-use and personalized manner with an attractive price for the consumer. Our German management team will soon present more details on the cross-media proposition of RTL Plus. Moving on to the next Slide 18. We have a clear target structure for RTL Group's portfolio with National Media champions in Germany, France, the Netherlands and Hungary and cross-border cooperation in the areas of advertising sales, advertising technology, streaming technology and content development. And finally, Fremantle has ambitious growth plans. We've communicated clear targets for all of our growth businesses, which are as follows: Fremantle, EUR 3 billion revenue by 2025; streaming EUR 1 billion revenue by 2026; and addressable TV advertising, EUR 200 million revenue in Germany alone by 2025, which means in total, EUR 2 billion revenue compared to 2021 coming from these 3 growth businesses. I'll now take you through the group's outlook statement for 2022. Due to softer-than-expected advertising market, the effect of the FIFA World Cup in November and December and numerous external factors, in particular, the war in Ukraine, inflation, energy supply and supply chain issues, RTL Group revised its outlook for 2022. We now expect stable to negative TV advertising markets in the second half of 2022 across our portfolio and continued growth of streaming and content markets. Visibility for the TV advertising markets remains low. Our revised adjusted EBITA guidance reflects a range of 0 to minus 8% for our TV advertising revenue in the second half of the year, and a cost compensation rate of approximately 1/3. This wider range for our TV advertising revenue is explained by the numerous external factors and the unprecedented level of uncertainty, I just mentioned. As the major consolidation moves in France and in the Netherlands [indiscernible] are still subject to regulatory review, our outlook assumes the full consolidation of Groupe M6 and RTL Nederland in the current scope for the full year 2022. So on Slide (sic)[ 20 ], based on these assumptions, we now expect our full year revenue to be between EUR 7.3 billion and EUR 7.5 billion in 2022. The revenue increase is explained by positive scope and foreign exchange effects of approximately EUR 0.5 billion. and organic revenue growth of EUR 0.2 billion to EUR 0.4 billion, depending on the performance of the TV advertising markets in the second half of the year. We also expect our adjusted EBITA for 2022 to be between EUR 1.05 billion and EUR 1.15 billion, including streaming start-up losses of approximately EUR 250 million. This means that we expect our adjusted EBITA before streaming startup losses to be between EUR 1.3 billion and EUR 1.4 billion in 2022. Our dividend policy remains unchanged. you know, RTL Group plans to pay out at least 80% of the adjusted full year net result, including cash capital gains. Thus, this brings us to the end of the presentation. Thank you for your attention, and we are now available for your questions.

[Operator Instructions] The first question is from Nizla Naizer from Deutsche Bank.

I have a couple of questions. The first is on the advertising outlook for the second half of the year. Could you maybe give us some color as to which sectors are you seeing specific weakness in? And what has sort of surprised you based on the outlook? And secondly, could you also give us some color by market, what sort of advertising outlook you expect for the second half? Some color there would be great. My second question is on RTL+. Any color that you can give us as to when you do plan to launch and whether the current outlook for advertising might change your mind based on whether you think this is the right time or not to go with the integrated offering? Some color on your thinking there would be great. Yes, that's it for me for now.

Great. I mean on the advertising outlook, I have to tell you, at this point, nobody knows how the advertising markets are going to perform in the second half of the year. There's a complete lack of visibility, I'd even say, predictability. It's quite unprecedented. I've been around for 22 years. I've never seen anything like this because, frankly, our customers don't know. The agencies don't know and their customers don't know because they don't know how their businesses are doing and how they have to potentially cut their costs, including advertising spend. And that's why we said that our outlook on the revenue and also on the EBITA side is based on 0, i.e., stable advertising markets, which I think is quite optimistic to up to minus 8%. If I would have to make a guess today, I'd probably -- I'd say to probably come out at the midpoint of minus 4%. But as I said, there's very, very little data to support this. In terms of markets, again, we don't differentiate. But I would say that RTL in Netherlands is likely to be stronger than RTL in France, the M6 is likely to be stronger than RTL in Germany. So Germany currently looks to be the weakest market. And the Netherlands strongest market, but that is just kind of a snapshot today. Things could change significantly over summer. In terms of sectors, Björn, anything you'd like to add specific strengths or weaknesses we're seeing?

I mean, last year, we saw a broad recovery of all our sectors with, I would say, two exceptions. One was auto, the other one, travel. In 2022, we did see a stronger performance of travel, but otherwise, I would say, no particular sectors to highlight. I think the other point to mention is that the two summer months of July and August are among the two smallest months. So the swings that we are currently seeing are not as meaningful for the rest of the year in the 4 months September to December are the biggest 4 months of the year, so they will ultimately drive our performance.

And as I said before, I mean not only do we have a series of external factors, which drive uncertainty. In addition to that, we have a major sports event, [ FIFA ] World Cup in the middle of the peak advertising season, which is November, December. And there's just no data, frankly, no precedent on property to properly assess the potential effects. And that's, as I said, why we opted for a pretty broad range of stable to minus 8% advertising markets without being specific on individual markets or sectors. As far as RTL+ is concerned, first of all, I mean, as we presented the video product has significant traction, with significant growth in our subscriber base and revenue. So that's good. We're going to extend the offers we announced last year in steps. The management of RTL Deutschland will make announcements in the course of August. So pretty soon. And you will then get a better understanding what the exact rollout plan is. So how we're going to move from video only to video, audio and text. And you will also get a full visibility on the pricing of the offering. And I'm sure that when you see the pricing, you will conclude, that it's highly attractive for consumers. So the bundle obviously needs to discount compared to individual subscriptions. And we believe that is particularly attractive in inflationary environment in which we operate. So we think the timing could not be better.

The next question is from Julien Roch from Barclays.

Yes, First question, coming back on, I suppose, the question that was just asked before. I understand that July and August are very small months. And I understand that it's quite hard to forecast what's going to happen for the rest of the year because we never had the World Cup in November, December, hopefully, last time ever. But if you could still give us some indication of the trends in July and August, and your 3 main markets, that would be great. The second one is -- initially, I believe you were saying you were expecting an outcome on Talpa RTL in kind of June, July. It's now been pushed back to the autumn and the European Commission approve the merger for everything but the core business, which is a bit bizarre. So if you can give us some update on the Netherlands, what the regulators have said, why is it taking longer than expected? That's my second question. And then the last question is, in the past, you gave us total viewing in Germany with the split between linear and on-demand, if we could get that for the first half, that would be great.

Excellent. Let's start with July, August, Björn?

As I said before, two small months, so the [ swings ] are not as meaningful. But in July, I'd say the weak environment continued and we are down in July. August, at this point, we don't have full visibility, but August looks better, and we have no real visibility on September and beyond.

Elmar, on the Netherlands?