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

Good morning. I'm Kerry Stokes, Chairman of Seven West Media. Welcome to this Annual General Meeting of the company. In light of social distancing requirements, the Australian and New South Wales governments currently have in place temporary changes in legislation. Allowing the convening of online, the Board has decided in the interest of health and safety of shareholders and staff to hold this year's meeting virtually. There is a quorum present, and I'm pleased to declare the meeting open. First, let me introduce the members of the Board: Colette Garnsey; Ryan Stokes; James Warburton, our Managing Director, James Warden. Attending us remotely are John Alexander, Teresa Dyson, David Evans, Michael Malone and Michael Ziegelaar. Also joining us is Jeff Howard, our Chief Financial Officer; and Warren Coatsworth, our Company Secretary. Representatives from our auditors are also present at today's meeting. If as a holder of ordinary shares or a proxy or authorized representative, you'd like to ask any questions, I'll take questions during the course of the meeting which relate to the resolution being put. Questions relating to general business will be taken at the end of the meeting. Shareholders and proxy holders are able to participate in this year's AGM by using the Lumi AGM platform by referring to the information we have sent in a Notice of Meeting. The company has received a number of questions in advance of the meeting, which we'll address in relation to the relevant items during the meeting. [Operator Instructions] If you're asking a question about 1 of the 5 items of business in today's meeting, please include the number of the item at the start of your question. You can submit your questions from the start of the meeting. I won't address them until the relevant time in the meeting. Some questions might be amalgamated if we receive multiple questions of the same topic or resolution. The meeting marks the end of what has been the most tumultuous year in the history of Seven West Media, the rest of the media sector and the global economy, as the COVID-19 pandemic impacted on all of us. At the start of the 2020 financial year, the Board appointed a new Managing Director, Chief Executive Officer, James Warburton, to make the necessary changes to regain the group's winning position with improved financial, operation and programming strategies. James and his team put in place a range of building blocks to regain our leadership position and to build on the success of AFL, news and current affairs, programs in our TV business, while cutting our costs, selling noncore assets and lowering our debt level. These initiatives being put in place were then hit early in 2020 by the bushfires, followed that by the onset of the COVID-19 crisis, which has dented consumer confidence and business activity, with media bearing the brunt of lower advertising expenditure as a result. The restructuring initiative continued through those events, with millions more viewers turning to Sunrise, our news bulletin, special programs, newspapers and digital platforms to keep abreast of developments. It's a tribute to our staff that we'll continue to be the preferred source of trusted information, and I thank them all for their hard work and dedication during what's been a very difficult time in our history. The unprecedented set of difficult economic conditions following to pandemic brought more urgency to our plans to reinvigorate the group, and we had to make some very difficult decisions to shore up our business to withstand the economic shocks. This work continues with the divestment of noncore assets and a sharper focus on our cost structure, a refreshed programming schedule and content across all of our platforms. Sadly, cost cutting has resulted in the departure of many valued staff who have made significant contributions to the group over many years. They have our greatest respect, and we wish them well in the future. As part of our work to position with Seven West Media for the future, we've been working with the rest of the industry and the federal government to get our fair share of advertising dollars, hundreds of millions of which continue to be siphoned off by foreign digital players. These foreign-owned platforms pay little tax in Australia and operate on an entirely different playing field without being constrained by the myriad requirements placed on local media players. We welcome the very effective work being performed by the Australian Competition and Consumer Commission in bringing these platforms to account for the damage they are causing to jobs, the integrity of news gathering and the established law-abiding businesses in Australia. We urge political parties from all sides to implement changes in legislation recommended by the ACCC. Our management team are preparing a very exciting program schedule for 2021, have successfully renegotiated our rights contract with the AFL and horse racing and other sports and programming contracts identified for new arrangements. We believe these measures and others being put in place will put Seven in a long-term winning position, and we're best placed to be the first and strongest to recover from the current difficulties. On behalf of the Board, I thank you, our shareholders, and our staff to the ongoing support of Seven as we continue to navigate our way through the very choppy waters of the -- in the economy. I'd now like to welcome James Warburton to speak to you. James?

Thank you, Chairman. Good morning, and thank you for joining us. 2020 has been a year like no other, but I think it will be the pivotal point in the turnaround of our company. We've accelerated the transformation of Seven West Media through the COVID-19 pandemic and clearly positioned the business for future success. 15 months ago, we were in a tough spot. Our prime time television schedule was tired, stagnant and stale. Revenue in our core offerings was in decline. Cost reductions weren't keeping pace with revenue, and we were stuck with uneconomic sporting contracts. Seven's BVOD offering was a distant #2, and WAN's digital offering was in the early stages of rollout. We were also hampered by significant debt levels. In August 2019, we embarked on a strategy to address all of these issues. The strategy had 3 pillars: content-led growth, transformation and addressing our capital structure and exploring M&A. In FY '20, we simplified the management structure of Seven West Media and appointed a new executive team. We also made other transformative changes. We departed from our internal production strategy for key tentpole shows and launched a completely refreshed prime time lineup, which we believe clearly positions us to win. We implemented $170 million of annualized gross cost-saving initiatives, including the renegotiation and the extension of the AFL contract. We have prioritized our digital strategy and reinvigorated our 7plus BVOD platform, securing the #1 position in about 12 months and turbocharged WAN's digital subscription push. And we secured proceeds of $150 million from the sale of assets to reduce debt. At our Upfront in October 2019, we outlined a refreshed and revitalized prime time content strategy. We were confident we'll return Seven to leadership in key advertising demographics and help strengthen our already dominant content spine. The reality of 2020 has turned out to be completely different. We thought our new tentpole programming strategy would take 6 months to come to fruition, but that's not what happened. We had to delay filming of Home and Away. We weren't expecting to lose the AFL for 8 weeks, and we weren't expecting an olympiad without the Olympics and Paralympics. We weren't expecting that we'd be forced to delay Holey Moley for 6 months, or that we would lose Australia's Got Talent entirely. And in fact, it should be on air right now. COVID didn't single us out, but it certainly affected us significantly more than it did our competitors. However, our content-led growth strategy of outsourcing known and tried international formats kicked off in June this year, and things started to change quickly. We moved from almost 5 share points down in the first half to more than 2 points up in the second half, which is a remarkable turnaround in the television business. The resurgence was led by our refreshed and rebooted Big Brother, coupled with the return of the AFL. Big Brother was a runaway success, and we followed it up with a new version of Farmer Wants a Wife and now SAS Australia, which launches the #1 entertainment show in October. It's been too long since Seven launched back-to-back hits, let alone 3 key new tentpole shows. The AFL, which we extended our agreement with until 2025, was up in audience by a massive 15% in the capital cities this season and has clearly cemented its position as Australia's #1 winter sport. Sunrise has not been beaten this year and dominates breakfast TV. Between 5 and 7 p.m. Monday to Friday across the entire survey year, we have won every single day, thanks to the strength of The Chase and 7NEWS. Our ongoing process with Cricket Australia is much talked about. To be 100% clear, we love the cricket, and we have a huge amount of respect for the athletes. Ultimately, we pay for the media rights to deliver quality content and strong audience numbers. We paid for and expect a first-class product, and we will hold Cricket Australia accountable to provide it, even if it means at times we're outspoken. It isn't just the Seven Network where we are focused on content-led growth. Generational change is also underway at WAN with a digital-first editorial focus. Our focus is to position The West and its broader portfolio to hold the line on print, while we turbocharge it for content-led digital growth. So that's content. The second strategic pillar focuses on the transformation of Seven West Media, and we have made significant progress in that area. In FY '20, we delivered $170 million in permanent gross cost reduction initiatives across the business, with the majority of these savings to be realized in the 2021 financial year. Temporary saving initiatives of $51 million were actioned in March, which helped limit the impact of COVID-19 on the business. The combined outcome of these savings has been transformational, resetting the business cost base, simplifying its structure, optimizing processes, reducing head count and addressing uneconomic contracts. We have started the transformation, but we are not finished. We're targeting $30 million to $50 million in further cost-out initiatives in FY '21, which will be incremental to the savings actioned in FY '20. We have also made significant headway on our third pillar, capital structure and M&A. The total proceeds from asset sales in FY '20 were $150 million, including the sale of Pacific Magazines. We have active sales processes underway with the proceeds to be used to work down debt. We're at an advanced stage with those asset sales, and we'll update the market in coming months. During the 2020 financial year, we reduced net debt to $398 million compared to $564 million at the end of FY '19. In July, we amended and extended our debt facilities to ensure liquidity through the transformation. New covenants are now in place to December '21, monitoring liquidity and EBITDA. Leverage and interest cover -- covenants will be reinstated from December '21. We are all absolutely focused on deleveraging to position the business for optionality, and we'll continue to address our capital structure to deliver this flexibility. Turning to the results for FY '20. There is no question that COVID-19 resulted in a very challenging year for advertising markets. The metropolitan free-to-air ad market declined 14% for the financial year, including a decline of 34% in the fourth quarter. The newspaper ad market was also challenged with revenue down 30% in the fourth quarter. Overall, our group revenue was down 14% in the year, including a 33% decrease in Q4. Against this backdrop, Seven West Media's FY '20 EBIT from continuing operations before significant items declined 54% to $99 million. We reported $352 million of significant items before tax largely related to impairments and the provision for onerous contracts. Accounting for these items, Seven West Media delivered a loss after tax of $200 million. The impact of COVID-19 has been substantial. However, the cost-out program goes a long way to delivering a sustainable cash-generating business as market conditions improve. Further, the already completed asset sales underpin liquidity for the recovery. Following the cost-out initiatives implemented in the 2020 financial year, we expect FY '21 operating costs, excluding depreciation and amortization, to be within analyst consensus range of between $1.03 billion and $1.05 billion. We are working hard to drive significant change in the core business and improve profitability despite market and economic headwinds. The changes we have implemented so far position the business strongly to capitalize on market recovery, but there is still much to be done. M&A remains very much on our radar, but our initial priority is strengthening the balance sheet so that we can participate in future market consolidation and resume dividend payments to our shareholders. Despite everything that happened this year, we still reach and engage with 17.5 million people a month. Despite a soft start to the 2020 ratings year, we are only 0.5 point behind our nearest television competitor in prime time. We lead the year in BVOD. So think about what happens next year when we get back just the missing content of 2020, then add in the new, add 5,250 hours of the newest and freshest family content in the country, and you can see how this schedule on Seven and 7plus will be the most disruptive schedule ever delivered. In the past 6 months, we've clearly demonstrated that when we can deliver engaged audiences, particularly after 7:30 p.m., advertising market share will follow. I'd like to thank you, our shareholders and all our staff for your support in these most challenging times. We truly appreciate it, and we'll continue to work tirelessly to strengthen the business and grow its value for all our stakeholders. I'd now like to show you a short reel that underlines why we're excited about Seven and the year ahead. [Presentation]

You can see why we're excited about our future. Finally, today, a trading update for the business. As I outlined earlier, since August 2019, we're focused on content, delivering what we can for 2020 despite the impact of COVID and putting a strong schedule in place for 2021. We are confident that the slate we outlined at our Upfront and showed you today will ensure Seven is absolutely competitive in '21 and beyond. Competitive content drives revenue. So far in FY '21, we've seen strong revenue share performance when we've delivered engaging content. The holes in our schedule are fixed for 2021. When content works, share follows with each share point worth $22 million per year. The market has improved since the August results but remain short and volatile. The metropolitan free-to-air market was down 5% year-on-year for the period from July to October. Over the same period, the BVOD market continues to grow strongly, up approximately 35%, with 7plus capturing share and growing over 60% in that period. Forward bookings suggest Seven's advertising revenue for the first half could be down approximately 5%. Pleasingly, cost savings year-to-date, excluding JobKeeper, have more than offset this revenue decline. WAN has also had a positive start to FY '21. Excluding JobKeeper benefits, year-to-date cost savings have offset most of the revenue plan, which has been driven by continued weakness in travel against a stronger retail backdrop. Relentless focus on cash flow has reduced net debt to approximately $425 million at the end of October with $750 million in drawn facilities and $325 million of cash. Seven West Media is not in a position to guide on FY '21 earnings due to market uncertainty. Thank you. And back to you, Chairman.

Thank you, James. We'll now attend to the business of today's meeting. The notice convening the meeting has been in your hands for some time. I'll take the notice as read, unless there is an objection. Again, holders of ordinary shares or a proxy or authorized representative of ordinary shareholders may ask questions using the Lumi AGM platform. And I'll take questions which relate to the resolution being put. Any questions relating to general business will be taken at the end of the meeting. If we experience significant delays today and reserve questions submitted by shareholders through the virtual meeting platform, we'll endeavor to come back to those questions during the time set aside for general questions. Voting today will be conducted via a poll on all items of business. In order to provide you with enough time to vote, polling on the resolutions is now open. The voting icon is now visible on the Lumi AGM platform. Selecting this icon will bring up a list of items and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote will automatically be recorded. You do, however, have the ability to change your vote until the time I declare the voting closed at the end of the meeting. The results of the voting will be concluded once the voting is closed and will be released to the ASX later today. So please look out for the ASX release to see the results. Before each resolution is put to the meeting, we will display on the screen the counter proxies as directed on the proxy form. As you will see from the screen displays, a significant number of shareholders vote by proxy. As Chairman, I propose to cast all available undirected proxies in favor of each resolution. The first item of business is to lay before the meeting the financial statements and report of directors and auditors for the year ended 27th of June 2020. There is no requirement for formal resolution on this item, so the item is excluded from the proxy form and will not be voted upon. Before I take questions on this resolution, let me make 2 general comments about the company's financial position and dividends. When James was appointed Managing Director and Chief Executive Officer in August last year, he put a plan in place to transform Seven West Media. We recognized at the time that we'd need to improve our content to attract audiences and secure revenue and transform the business and reduce our debt. Summer bushfires and then the onset of COVID led us to accelerate our activity. Since then, we've completely changed our content lineup, significantly reduced costs across the company to improve profitability and cash generation and sold a number of noncore assets to underpin certainty of liquidity during the COVID crisis and reduce net debt. We continue to explore all options to continue this net debt reduction, including further asset sales to give Seven West Media greater balance sheet flexibility. With this plan in place and the actions taken, the Board and I are very confident about the future of Seven West Media under James' leadership. We also received a number of questions from shareholders prior to today's meeting about the company's dividends. As your Chairman, I'm conscious they've been on hold for some time. Let me assure shareholders that we're aligned about the reinstatement of dividends. Once we've sustainably restored Seven West's balance sheet, the strength, then the Board and I will discuss the company's capital management strategy, including reintroduction of the dividend. I now welcome further discussion or questions on the annual accounts for the year under review. Have there been any questions submitted on the annual accounts for the year under review?

Not at this stage, Mr. Chairman.

Thank you. The next 3 items of business relate to the reelection of directors. No nominations were received from other persons. Item 2 relates to shareholder consideration of my reelection to the Board. Normally, our Audit and Risk Committee Chair, Teresa Dyson, would take carriage of this item. However, Teresa is attending this meeting remotely and unable to be present in the room. I'll now hand over to Ryan Stokes, who is with us today.

The first director candidate offering himself for reelection is Mr. Kerry Stokes, who is retiring and, being eligible, offers himself for reelection. Mr. Stokes has served and have been involved for investing in and managing diverse businesses for more than 4 decades and has broad business interests and investments in a range of major business sectors in Australia and overseas. Mr. Stokes brings invaluable leadership insights and attributes to the Board, particularly having a regard to his business success and his detailed understanding of your company's operations. Have there been any questions submitted for this matter?

There has been one question. Is the Chairman planning to serve a full 3-year term as Chairman? And what does he think about the idea of transitioning to an independent Chairman, given that independent shareholders own a majority of the shares on issue? If not, can we appoint a clearly independent Deputy Chair or Lead Independent Director?

Happy to address. The position is Independent Non-executive Chair. I think the -- in relation to the Chair of Seven West, there's been, as mentioned, invaluable experience and contribution from Mr. Stokes. As far as intentions, I think it's best addressed to him in general business. Any other questions?

No, Chair.

Okay. The proxies lodged for the resolution appear on the screen. Thank you. As the Chairman has directed, a poll will be taken on this resolution at the end of the meeting. Chairman, if you may care to manage the remaining items of the business. Back to you.

Thank you, Ryan. I'll just answer a couple of those issues and those questions raised. Obviously, my tenure as Chairman is something that will need to be reviewed during the course of my current tenure. And as a matter of being in discussion with the Board about, I expect that we will elect a Deputy Independent Chairman from the existing directors on our Board. And we'd look to having the next Chairman would be one who was selected by the directors at the relevant time. Second director offering herself for reelection is Teresa Dyson, who is retiring and, being eligible, offers herself for reelection. Teresa is an experienced company director with a broad range of experience across public and private sectors. She brings skills and experience in financial, regulatory, legal matters as well as governance and risk management to the Board. Teresa's special responsibilities include a chairmanship of the Audit and Risk Committee. Have there been any questions submitted on this matter?

Chairman, there is one question on the matter. Could Ms. Dyson advise shareholders of how she will make time to attend to all her Seven West Media duties given her considerable workload, the issues Seven West Media is confronting and the implications and effect of COVID?

I don't know if we can organize that. Can we?

I think we can. Teresa joined us by phone. So Teresa maybe would be able to answer that, Chairman.

Thanks, Chairman. I'm happy to answer that question. Is that audio coming through clearly enough?

Yes.

Great. Thanks. Thanks for the question. I've certainly been privileged to be a Non-executive Director of Seven West Media and Chair of the Audit Risk Committee now for about 3 years. I do have a range of other commitments, but they all have different sort of time limitations. And I'm very mindful of actively managing my portfolio of non-executive directorships to ensure that I have the time, energy and capacity that's required for all of those roles and particularly for the Seven West Media role. And I think I've been able to do that over the last 3 years. And I certainly plan to contribute -- to be contributing that time and energy to the Seven West Media Board and the roles that I play there going forward.

Thank you. I'd like to add to that, that Teresa has been available at short notice for the many meetings we've conducted during the emergencies created by the COVID crisis. And we've found her counsel and her contribution to be extremely valuable.

There's a further question, Chairman, on this resolution. Can Ms. Dyson please explain her full history with the Stokes family?

Sure. I'll leave it to her. But for us, there is no history. I first met Teresa when she joined the Board of Seven West. I'll let her answer.

Thanks, Chairman. That's right. Before I commenced discussions in relation to joining the Board of Seven West Media, I hadn't met many members of the Stokes family.

Proxies lodged for this resolution appear on the screen. Thank you. A poll will be taken on this resolution at the end of the meeting. Third director candidate offering himself for reelection is Michael Ziegelaar, who is retiring and, being eligible, offers himself for reelection. Michael is a highly credentialed corporate lawyer with a deep legal and commercial experience gained through advising many of Australia's largest corporate transactions. He contributes broad skills in law, mergers, acquisition, fundraising, governance, finance and business development to the Board. He is a member of the Audit and Risk Committee. Have there been any questions submitted on him?

Chairman, there are 2 questions on this resolution. The first one is could Mr. Ziegelaar identify the time requirements of his main role as a partner in a law practice and advise shareholders how he ensures that he makes time to tend to Seven West Media requirements? And the second question is similar to the previous resolution. Can the candidate please explain his full history with the Stokes family?

Thank you, Chairman, and thank you for that question. Can you all hear me clearly?

Yes, Michael.

Thank you. Thank you. In relation to question one, I have no other board roles, and I've been able to devote the time and attention necessary to my Seven West Board and audit commitments. I've attended all Board meetings, audit committee meetings and been available for all Seven West Media matters as required. My job as a lawyer has not prevented or hindered that in any way. In relation to the second question, I'd like to raise that I did not know the Stokes family prior to my appointment to this role. Thank you, Chairman.

Thank you, Michael. I'd just speak to the fact that once again, Michael has been available at all times during any periods that we've required it and has made a very strong and committed contribution to our considerations. Proxies lodged for this resolution appear on screen. Thank you. As directed, a poll will be taken on this resolution at the end of the meeting. The next item of business, item 5, is to adopt the remuneration report for the company for the financial year ended 27th of June 2020. In year '20, the Board and management actively responded to the financial challenges created by COVID-19 pandemic, which adversely affected the company's advertising revenue. During the final quarter of year '20, fixed remuneration for all key management personnel and non-executive directors was reduced by 20% and 50%, respectively. Fixed remuneration was restated to contracted levels effective 1st of July. No performance-based remuneration rewards under Seven's short-term incentive plan were made in the year '20. The company's underlying earnings before tax interest result fell below the 90% range of budget. Accordingly, the STI gateway did not open. Therefore, despite significant transformation progress achieved to date, no STI awards were made in the '20 performance year. 2018 LTI granted reached the end of its 3-year performance period on the 30th of June 2020. 100% of the award was tested against relative shareholder return, which did not meet the performance hurdle and, therefore, will not vest. All performance rights lapsed. In the year ahead, we continue to review the company's remuneration framework to ensure it remains appropriate. We welcome discussions on the question of the remuneration report under review. Have there been any questions submitted on this item?

Yes. Chairman, there have been some questions on this topic. I'll try to paraphrase a couple of questions that are similar. One is they're about the STI and LTI structure, the generosity of that structure and the weighting of the STI and overall remuneration. And a specific question, could the company discuss its views on moving to a higher weighting on LTI compared to STI going forward?

So I didn't quite hear that.

So the question is about the STI and LTI structure, the generosity of the STI and LTI, and also about, can we discuss our views on moving to a higher weighting on LTI compared to STI going forward?

On the high weigh...

Higher weighting of LTI versus STI.

Well, as I've just mentioned, the STI wasn't applied for the last several years now because the performance hasn't been met. So in regard to the LTI going forward, we hope that it is met. And if it is generous in LTI, that's appropriate to -- actually for our shareholders, I think, to reward on performance. And from our point of view, the long-term incentive is the half of that will be in shares in the company. So there's a very strong incentive for performance and for shareholder value.

No further questions on this item, Chairman.

Proxies for this resolution, item 5, appear on the screen. I've been asked to advise that the vote on this resolution is advisory only and does not bind the directors of the company. Directors of the company and its other key management personnel or their respective closely related parties cannot vote in relation to this item, except as a proxy in limited circumstances. Thank you. I direct that a poll will be taken on this resolution at the end of the meeting. The next item of business is item 6. It relates to the grant of performance rights to Managing Director, CEO under the Seven West Media long-term incentive plan. Shareholders are being asked to approve the cancellation of the 2020 LTI grant, which is proposed to be replaced with an annual grants commencing 2021 LTI grant. This means that none of the LTI grant for 2020 will remain on foot, and Mr. Warburton will forfeit his LTI for the year '20 performance year. The decision to cancel the LTI '20 LTI grant and commence annual rights reflect the company's decision to focus on the growth of Seven West Media and value to shareholders, which the Board considers provides better alignment with the company's strategy and financial circumstances during this critical turnaround phase for the company. The change also reflects the Board's determination that the Communication Service Index is no longer an appropriate peer group, given that it comprises ASX 200 media and entertainment industry group and telecommunication services companies operating under different market conditions. The performance period for Mr. Warburton's performance rights under the year '21 LTI grant, to be voted on today, is 3 years commencing 1st of July 2020 and ending on the 30th of June 2023. Any shares allocated on vesting will be subject to an additional 12 months holding lock. Full details in Mr. Warburton's 2021 LTI grant are described in detail in your Notice of Meeting. Under ASX Listing Rules, shareholder approval is required in order for a director to be issued new securities under an employee incentive scheme. It is currently intended that shares will be acquired on market to satisfy the rights that vest. And therefore, member approval is not required under ASX Listing Rules. However, approval is being sought for the year '21 LTI grant to Mr. Warburton to provide flexibility for the company to satisfy rights under the LTI plan with new shares, if required. Have there been any questions in relation to smarter?

No, Chairman, not this time.

Proxies lodged for this resolution appear on screen. Thank you. I have directed a poll will be taken on this resolution at the end of the meeting. Before we come to the end of the meeting, are there any further questions?

There are quite a few general questions, Chairman, so we'll try to work through these logically and together, if we can. First question is, what are we doing to restore shareholder value given the reduction in share price over the last few years?

It's something we're all very keen to achieve, and I think what we're doing about it is working as hard as we can to actually restructure the company to compete in a new environment. And I think we are being reasonably successful with that. I'm very encouraged by what Mr. Warburton and the team have achieved. I'm encouraged by the executives who have made very hard decisions during the course of this year with cost cutting to get the company back into a position where we have a sound foundation going forward, upon which we can build profits for the future. And building profits in the future is the key to our share price and a future key to dividends.