Seven West Media Limited (WANHY) Earnings Call Transcript & Summary

Good morning, and welcome to the full year financial results for Seven West Media for 2020 from our studios in Media City at Eveleigh. I'm James Warburton, Managing Director and CEO of Seven West Media. Joining me today is Jeff Howard, our Chief Financial Officer, who joined us 6 months ago and has already made a huge contribution to the business. This morning, Jeff and I will take you through our progress on the transformation of the company and our results for the 12-month period ending 27th of June 2020. For those joining us via video, this presentation covers a summary of the key points included in the ASX-lodged results presentation. After the presentation, we'll take questions from investors and analysts. Let's get started. On Slide 2 is our disclaimer. Moving to Slide 4. It's been 12 months since I came back to Seven West and laid out our new strategy to transform the company. At that time, the company had been impacted by challenging market conditions. It was a traditional business run the old way and it faced significant headwinds. While our content spine remained solid, we were losing our ratings dominance due to a stale and stagnant prime time entertainment offering that was failing. We put the Seven Studio strategy of creating our own shows and IP ahead of our audience ambitions. We shut our doors to the external production community, and we were introverted in our search for new and fresh ideas. As a result, we weren't embracing some of the best ideas the market had to offer through tried and tested international formats and content creators. Our BVOD proposition, 7plus, was a distant #2 in the market, and it wasn't integrated into the business. Instead, it was run separately to our programming department. We had several contracts, including sport content rights, which were reflective of a very different market. They were uneconomic and a significant drag on cash flow. Not only that, but our costs were growing, driven by excessive complexity, layers of middle management and investment in the wrong areas. Lastly, the company's debt burden was at a level that absolutely prevented the group's potential to pursue new growth initiatives, explore M&A and provide the flexibility to navigate significantly challenging ad market conditions. Today, we have a different story. We're 12 months into a 3-year transformation of the company. We have a plan and we're executing it. Real structural change is underway at The West. Generational change across regional and community mastheads is in motion with a digital-first editorial focus. The 7-day newsroom innovation across The West Australian and The Sunday Times is industry-leading. 10 months ago, I said turning Seven's fortunes around would not happen overnight. It takes time. First, you must commission programs, make your choices and then you have to produce them. But those seeds have been sown. They're starting to bear fruit. And we're positioned to improve our performance in a bid to win the content battle. Unfortunately, COVID delayed 2.5 tentpoles. The Olympics were delayed and the AFL and Home and Away went on hold for 8 weeks. Yet despite all this, the strength of our daily content spine means we're less than 1 share point behind for the survey year-to-date. Costs have been a major focus over the last 12 months across the group. They've been accelerated by the extreme conditions that COVID has triggered. We've reset the company's cost base, simplified the structure. We're addressing processes, headcount and uneconomic contracts. And we're not finished. Our debt burden is material. And it's amplified by those onerous contracts. But we've actioned a strategy to divest assets to work down debt. At the same time, we've engaged our lenders and amended our debt facilities to ensure we have the liquidity and flexibility to implement our transformation plans. We're positioning the company for the future and to capitalize strongly on the market recovery. However, this is not the definition of success. Our view is that the market needs to and will consolidate. But our focus is transforming our company to ensure we can capitalize on this. On Slide 5 is an overview of Seven West's performance in FY '20. It's certainly been a turbulent year so far in 2020. And like many companies, we face material challenges from COVID. We've been proactive in accelerating the pace of change in our business to adapt to these operating conditions. During the 2020 financial year, the local advertising market endured the largest declines on record. SMI reports the total advertising market declined by 15% in FY '20 and by over 40% in Q4. The metropolitan free-to-air market experienced similar declines with market revenue down 14% for the financial year and a decline of 34% in the fourth quarter. Pleasingly, the BVOD market continued to grow strongly throughout this period with market revenue growth of over 30% during the financial year and growth of 15% in the fourth quarter. Against the backdrop of this challenging ad market, group revenue from continuing operations declined 14% to $1.2 billion for FY '20. During the fourth quarter of the financial year, group revenue declined by 33%. Temporary and permanent cost-saving initiatives led to a reduction in costs from continuing operations of 7% to $1.1 billion for FY '20. Net cost savings in the financial year were weighted to the second half with $92 million saving in the period, more than offsetting the $16 million increase in the first half. Savings were not enough to offset the decline in revenue. And as a result, EBIT from continuing operations before significant items declined 54% to $99 million. Net debt has been reduced to $398 million. And we have reported $352 million of significant items before tax. On to Slide 7. Our strategy is three-pronged, focused on content-led growth, transformation, capital structure and M&A. And I'm pleased to say, over the last 12 months, we've achieved several major milestones implementing this strategy as we accelerated the turnaround, including $170 million of gross cost savings actioned across the group, excluding divestments, savings accelerated, not initiated by COVID. As a result, we have ended FY '20 with the lowest television cost base since 2007 and the lowest headcount since 2003, reflecting a 20% reduction on FY '19. We secured $150 million in proceeds from asset sales despite the uncertain economic environment. Completion of the Pacific Magazines sale was both a timely exit and a great outcome for Seven West. In June, we renegotiated the AFL broadcasting rights, rebasing it lower and locking in a saving of $87 million over the existing contract to 2022. We also extended this marquee contract through to 2024, ensuring Australia's dominant sport remained on Seven. Our new tentpoles have started to roll out. Big Brother and Farmer Wants a Wife have performed strongly. And Plate of Origin and SAS Australia will each complement our dominant content spine. Our public affairs programs, 7NEWS, Sunrise and The Morning Show, all continue to maintain their #1 position in their categories. During times of global uncertainty, the value of premium and free news services has been unquestionable with our news audience growing 11%. And it's the same for Home and Away, Better Homes & Gardens and The Chase, which all win their respective categories. 7plus has sustained growth at an exceptional rate and is now the leading commercial BVOD service, dominating the category for a fourth consecutive month. Each of these achievements represents a milestone on the way towards turning Seven West Media around. And I believe our momentum is growing. For those following with the slide deck, I'm moving to Slide 8. There is a great deal more work underway to position Seven West Media as a media business for the future. Ongoing initiatives include: commissioning of 4 new tentpole programs to be launched in 2021; enhancing our data proposition and establishing key strategic partnerships; targeting further cost savings in FY '21 with an additional $30 million to $50 million gross cost-out; WAN is undertaking an extensive transformation by their management team following the conclusion of Greg Hywood's review; and we have a number of live sale processes underway, including the TXA transmission facilities, Seven Studios and Seven West Ventures. Proceeds will be used to reduce debt. Moving to Slide 9. In October last year, when presenting our 2020 Upfronts, I outlined the content-led growth strategy and how this would be executed through our tentpole programming. The aim of this strategy was and is to deliver an improved network performance specifically in the critical 7:30 p.m. time slot and with a richer demographic profile. However, it was always going to take time for this strategy to come to the fore, given existing programming lineup that was locked in and the 6-month development lead time for new commissions. The strategy launched in earnest on June 8 with Big Brother and delivered significantly improved ratings across the network. Our target audience growth in younger demographics was achieved. Farmer Wants a Wife was the second tentpole to premier from our refreshed content strategy. And it delivered the biggest launch of a regular series for the network since 2018. And it was the #1 program nationally. We view this as 2 from 2 bricks in the wall. Our daily content spine is consistently strong, and we maintain long-term dominance in our public affairs programming with 7NEWS, Sunrise and The Morning Show winning their time slots every day. Home and Away, Better Homes & Gardens and The Chase remain the leading programs in their respective categories. The return of the AFL after an uncertain season start has been a ratings triumph, growing 17% in the metropolitan market year-on-year. This unbeatable combination has allowed us to achieve our absolute focus. And we've won 10 of the last 11 weeks, delivering year-on-year share growth for people of 25 to 54. The strategy has come to life. We will continue to drive this performance with concentrated production investment in the Sunday to Tuesday 7:30 p.m. prime time slot, which is complemented in the back half of the week by the AFL. Slide 10 highlights the importance of content, not just across broadcast, but also on our BVOD platform, 7plus. 7plus has dominated every month since April, delivering a 46% average monthly share since then. And we've seen 103% growth in consumption. This has been partly driven by Big Brother throughout June and July, which delivered our highest launch ever on 7plus. The breadth and depth of our content has seen 7plus grow faster than any competitor BVOD service, doubling the platform's minute consumption growth in June year-on-year and growing at double the rate of the market growth. Importantly, consumption on 7plus is tracking at roughly 50-50 between broadcast shows and library content, meaning we are not reliant on a single franchise to deliver audiences for our advertising partners. Slide 11 demonstrates our content strategy in action with the launch of Big Brother. We saw massive growth in target demographics with 25-54 up 67% and 16-39 up 88% year-on-year in the time slot. It was the #1 show on broadcast and BVOD. And it highlighted the value of content that deepens the engagement with our audience. Time shift and streaming means it's available 24 hours a day. On live broadcast, we had an average of 1.15 million. And it also averaged close to 200,000 streams per episode. Big Brother delivered over 100 million social engagements and a massive number of live votes [ for the program ]. When we get it right in our entertainment slot, this is what we can deliver. When we have a competitive start to the week, we can win the week. These results provide a clear pathway back to leadership, underpinned by our long-standing strength in news, current affairs and sport. I'll now pass to Jeff to talk about our progress on transformation.

Thank you, James, and good morning all. On Slide 12, we outline our progress on the cost transformation. In FY '20, we delivered $170 million of gross cost-out across the business. This includes $135 million within the TV business and $33 million from the publishing business, including $12 million of cost savings in Pacific implemented prior to the sale. While implemented, the majority of these savings will be realized during FY '21. These are permanent initiatives and include the annualized savings from the renegotiated AFL deal. We have undertaken an extensive review of all our sports rights and continue to negotiate with various parties. It's worth noting these cost reduction outcomes are before normal cost inflation in the business, which typically runs at 1% to 2% per year. A further $51 million of temporary saving initiatives reduced the impact of COVID. These included temporary salary reductions, JobKeeper, spectrum holidays and production deferrals. These temporary savings are largely one-off in nature and therefore will return in FY '21. We've outlined FY '20 operating expenses in the chart on the right, including a reconciliation to a normalized cost base, excluding the temporary savings and divested businesses in the period. On Slide 13, we cover our third pillar, capital structure and M&A. As James outlined, the significant impact of COVID on content and cash flow has been substantial. However, the completed asset sales underpinned liquidity for the foreseeable recovery scenarios. The cost-out program goes a long way to delivering sustainable cash-generating business post recovery. As announced on 30 July, we amended our debt facilities to ensure liquidity through the transformation of the business. A $450 million maturity has been deferred until July 2022. New covenants are in place to December 2021, monitoring liquidity and EBITDA. Leverage and interest cover covenants will be reinstated from December 2021. Our cost of funding will increase to a 4.5% margin over BBSY. We are absolutely focused on deleveraging to position the business for optionality. We are targeting material asset sales over the next 12 to 18 months to offset FY '21 working capital and Olympic outflows and drive net debt reduction. Slide 15 shows the P&L for the full year ending 27 June 2020 on a continuing basis. We have provided a reconciliation, including discontinued operations, in the appendix. As James noted previously, the worst advertising market on record materially impacted revenue and results for the year. Total group revenue and other income of $1.2 billion was 14% lower year-on-year. Cost-out initiatives delivered a reduction in operating costs, which decreased by 7% to $1.1 billion. The reduction in operating costs was not sufficient to offset the reduction in revenue, leading to a decline in EBIT before significant items of 54% to $99 million. Overall, net profit after tax before significant items was $41 million, 66% lower than the same period last year. Significant items of $352 million before tax include impairments and the provisioning for onerous contracts. Including significant items, Seven West Media delivered a loss after tax of $200 million. During the period, the group adopted the lease accounting standard on a fully retrospective basis. As a result, the prior period has been restated. We have provided a reconciliation in the appendix. Slide 16 provides an overview of FY '20 performance for the Seven segment, which includes our broadcast, Digital and Studios businesses. Seven revenue decreased by 15% to $1 billion, largely driven by the 14% decline in the metro free-to-air advertising market. During FY '20, Seven delivered revenue share of 37%, a decline compared to the prior period, impacted by limited sport and an underperforming entertainment lineup in early 2020. We are confident our new entertainment schedule will materially improve prime time audiences and demographic mix, presenting an opportunity to capturing greater revenue share in FY '21. We've already started to see an improvement on this front. During a period of significant disruption in content production, Seven Studios delivered flat year-on-year distribution and third-party production income. Our Digital revenue grew 40% during the period in a market up 30% with EBIT of $26 million, representing 92% growth compared to the prior period. The BVOD market continues to grow rapidly. During the fourth quarter, when the broader ad market declined 40%, BVOD delivered growth of 15%. We are confident this momentum will continue. 7plus delivered 32% revenue share in FY '20 compared to 37% audience share. This highlights the upside by improving our power ratio, particularly given the dominance of 7plus since April, where average monthly audience share has been 46%. 7NEWS.com.au has delivered outstanding outcomes since launching in March last year. Within a year of launch, 7NEWS.com.au reached the #2 most viewed commercial news site in Australia. Digital and broadcast are now one and the same at Seven. And Digital is a rapidly growing part of our business, which will drive meaningful earnings in the future. Next, we turn to The West and other businesses on Slide 17.

Our publishing business is transforming as it continues to face challenging conditions. Advertising revenue for WAN declined just under 10% year-on-year, which includes the benefit from the consolidation of the Community News Group. Circulation revenue in the business declined 7% during the period. In June last year, thewest.com.au launched digital subscriptions. As well as providing new revenue streams, digital subscriptions give us valuable audience data and insights, which we can use to further monetize our leading local journalism. This paywall has rolled out to regional mastheads in February with promising early adoption. The print edition has undergone a renewal under new editorial leadership, resulting in stable readership year-on-year, outperforming the industry average, which saw meaningful declines. The West transformation program has resulted in gross cost-out of $21 million in FY '20. Additional cost-out is being targeted in the business for FY '21. During the period, the group's property assets in Perth were sold for $75 million with an ongoing lease expense of roughly $4 million per year going forward.

On Slide 18, we have the statutory group financial results and a reconciliation from EBIT before significant items. Seven West Media reported a statutory after-tax loss of $162 million and basic earnings per share loss of $0.106, including discontinued operations. Excluding significant items and on a continuing operations basis, profit after tax was $40.8 million and earnings per share was $0.027. The Board has determined that it is again prudent to retain the suspension of the dividend to focus on paying down debt, increase balance sheet strength and flexibility. Slide 19 shows group cash flow for the year and our net debt position. Seven West Media recorded operating cash flow of $85 million for the financial year. Working capital outflow of $27 million and redundancy and employee payments of $26 million negatively impacted operating cash conversion. CapEx was $19 million during the period. During the period, we deferred nonessential CapEx, focusing on revenue-generating CapEx. For FY '21, we expect CapEx to be slightly higher than FY '20. Net debt at the end of the period was $398 million, down 29% compared to the end of FY '19. Net debt at the end of July was $481 million with the increase attributable to working capital outflows. We expect FY '21 to include working capital outflows associated with onerous provisions, redundancies and Olympic payments. A cancellation of the Olympics would see the group refund $50 million in prepaid rights fees. The chart on the right-hand side shows how the onerous provision will unwind through the cash flow. The increase in onerous provisions at year-end predominantly relates to cricket, which we've reassessed, given current market conditions. The key outflows in FY '22 relate to the Olympics. I will now hand it back to James to finish with a trading update.

Thanks, Jeff. On Slide 21 is our trading update. Advertising market conditions remain volatile and unpredictable in Q1 of FY '21, although the rate of decline has slowed since the fourth quarter of FY '20. Given the uncertainty in the advertising market, we're unable to provide guidance on FY '21 revenue. However, July as a trend was significantly improved on the June quarter, with the market down 16%. While the market remains very short, forward bookings for August to October give us some confidence that this will continue to improve. We secured a 39% share in July, which is an excellent start to FY '21. Looking forward, I'm excited about our new entertainment lineup, providing the opportunity to capture stronger audience and revenue share. As you can see, there's a lot underway at Seven West Media with the team dedicated to transforming this business to a sustainable media business for the future. I'd like to thank the entire team for their efforts this year. We're navigating some of these interim challenges through COVID, but we will emerge stronger. As you know, small changes could have big effects on our profitability. An extra 1% of market growth is an incremental $8 million to EBIT while a 1 share point improvement in market share is a $21 million benefit to our bottom line. We have significant operating leverage in TV. Our lower fixed cost base will provide greater upside on market recovery and drive significant value for our shareholders. That concludes the presentation. Thank you for your time, and we're happy to take your questions in just a moment.

[indiscernible] seeing in August and whether you're -- how is revenue -- sorry, the ad market growth tracking in August and whether you're starting to see any impact from the Melbourne lockdown? And if companies are spending, maybe if you can give some color as to which segments are starting to return to TV. And then just second one in terms of the newspapers division, so just wondering, given that the review has just been completed, whether you can share with us some color into some of the conclusions being drawn out of the review and maybe what are some of the recommendations in terms of how they're going to restructure the newspaper division. And then just thirdly, in terms of the asset sales, so with Seven Studios, I think ITV was previously interested. I'm just wondering if they're still interested in this asset. And if you do get rid of Studios and Ventures, do you think this is sufficient to lower gearing over time?

No problem. That's quite a few questions in one. But look, I'll take them one-by-one. I think from an overall revenue point of view and what we saw in July is that the market is improving. And we're at that minus 16% and we can see rolling forward in the next quarter. Obviously, it's very short and volatile, very difficult to guide on revenue at the moment. But we see that the market has improved. And I think as the -- when you look at the stage 4 lockdown in Melbourne, clients were more adept and probably less of a shock obviously in terms of planning through to the end of the year. And so we think the market is set to improve and probably to improve quite quickly. But again, a lot depends on sort of border reopenings. And I think that's sort of the key area that we need to look at going forward. I think your second around the newspaper group and WAN is that obviously we've got a great CEO in WA in Maryna Fewster and Editor-in-Chief, Anthony DeCeglie. And they're going through a plan of transformation. You saw in the results, they took about $21 million worth of cost over the last financial year. And now that we've had an entire review done by Greg, the focus is on digital transformation and turbocharging digital results, I should say, and holding the line on print where it's cash flow positive. And so it's too early to get into that review that was recently completed, other than to say we're working through it. And I think the last point around asset sales is the 3 processes that we've called out will be determined this year, one way or the other. And we think it's material across those 3 assets to deleverage the company and obviously pay down debt.

Your next question comes from the line of Eric Choi.

Well done, James and Jeff, on the transformation and de-gearing so far. I might follow Lucy's lead on the number of questions. Number one, can you just tell us if there's been any update to the mark-to-market digital ventures valuation of $100 million that you had in the first half result? And maybe can you remind us what the earnings profile of the TXA assets are? And then secondly, can I just confirm exactly what the net debt-to-EBITDA was at FY '20 for the purposes of your covenants? I know you need to strip out AASB 16 at the very least, just unsure if there's any other adjustments we need to make. And then just lastly for Jeff, could you just quantify the FY '21 working capital and redundancy outflows for us?

Yes, no problem. I'll hand two, three and four to Jeff. And I think on question one, that was essentially the book value of Ventures that we, in the last results presentation, sort of put forward. And obviously, we're going through a process that Grant Samuel are helping us run. And we're probably -- obviously, we're looking to maximize the price on the Seven West Ventures. And Jeff, I'll hand the rest to you.

Yes. Eric, earnings profile on TXA, so we haven't put that out there. It's obviously subject to the sale process. So there's information out in the market under NDA for people that have signed up to that. So we won't talk to that one on the call. But needless to say, TXA is a fantastic asset that we're quite excited about the process of running on that one. Our net debt-to-EBITDA at the end of FY '20 was about 3.5x on the covenant-tested basis, so based on the facilities that we had at that time. Obviously, they've been amended since then. And then the last question was around working cap outflows. I mean the key drivers of working cap outflows in FY '21 will be linked to things like redundancy payments and the unwinding of the onerous provisions, which we provided detail on in the presentation. But also just where we end up from an earnings perspective and the timing of the earnings depending -- will drive receivables, payables, all that sort of stuff as we head into the end of the fiscal year next June.

We have your next question from the line of Brian Han.

James, how important is the Home and Away franchise to the Studios business? And that importance, is that an advantage or a hindrance to your efforts to sell to business?

Well, the Studios business itself is -- we've built a lot of core franchises, I mean, Home and Away, Better Homes & Gardens and Border Security, in particular, Plate of Origin and My Kitchen Rules in the past. So it's a very important program for Seven. And when you look at the life of series deals that, that franchise has, that's a core part of the valuation moving forward. So certainly, Australia's biggest drama production, full stop, #1 drama in the country is something of significant value within the Studios business.

While we're on the Studios, can you tell me what the studio's EBIT was in F '20? You used to provide that figure.

Yes. I'll get that one. So we've stopped reporting Studios, again given we're running a process on Studios. So -- and we're thinking about Studios differently going forward. But Studios' EBIT was a bit lower than it was last year. So that's probably as much as we're prepared to say on the Studios at this point.

Okay. If I could just follow up, gentlemen, it looks like Seven sort of is reducing its dependence on in-house production to fix your prime time and filling it with perhaps more and more reality shows. I'm just wondering, how does the economics change if a prime time schedule changes from mainly scripted shows to one that is full of reality TV shows?

Well, I think the largest sort of [ variable ] on all of that is what it does to ratings and what it drives from that perspective. So you saw what a share point was worth. And certainly, our share was back year-on-year. And so it comes predominantly to what you're delivering from an audience point of view. And so reality versus drama versus other sort of genres, it's actually about picking the right content that can drive advertising outcomes. And more importantly, it's not just about linear television. It's actually about growing meaningful digital earnings as well, which you're seeing with BVOD and particularly in that under 40 audience. The industry has built a BVOD -- $200 million BVOD industry effectively in 2 years. And then clearly, there's a $1.5 billion sort of AVOD market, if you like, which is dominated by Facebook and YouTube. And so huge growth opportunities for us to unlock as we move into VOZ, which is due in the market in December 2 of this year.

We have our next question on the line from the line of Entcho Raykovski.