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

Seven West Media acknowledges the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. We pay our respects to elders past and present and extend that respect to all First Nations people present today.

Good morning, everyone, and welcome to the first half 2022 financial results for Seven West Media. Thank you for joining me today. I'm James Warburton, Managing Director and Chief Executive Officer of Seven West Media. Joining me is Chief Financial Officer, Jeff Howard. Jeff and I will take you through our results and the progress of our strategy as well as provide a trading update. After the presentation, we'll take questions from investors and analysts. The results announced today demonstrate the success of our strategy over the past 30 months and the healthy state of key advertising markets during the 6 months to 25 December last year. The metro ad market grew 13% in the half year with the regional ad market up 7.2% and the BVOD ad market up 58%. On a combined basis, the total television market increased by nearly 17% year-on-year. The results also reflect Seven's return to the #1 position in broadcast television and BVOD across the fiscal half and during the 2021 calendar and television survey years. Our television audience success saw Seven take the #1 position in terms of metropolitan television ad revenue with a 40.3% share, up 3.7 points on the previous corresponding period. Our share of the total television ad market was 41.4%, which includes BVOD where we secured a 43.1% share and the regional markets where we achieved a 46.3% share. Group EBITDA was up 31% to $215 million on revenue that increased 27% to $820 million. Seven's digital revenue grew a very strong 111% including a 90% increase in revenue from 7plus. Seven's Digital EBITDA jumped 144% to $76 million. Digital now represents 35% of group earnings compared with 2% 4 years ago and is on track to represent 40% of group earnings in the '22 financial year. Digital growth also underpinned a positive result in newspapers from WAN. Across the group, operating costs are tracking at the mid-range of our guidance before the inclusion of Prime. Cost growth year-on-year was driven by previously flagged investment in content and major events, both of which have helped to drive revenue growth. On 31st of December last year, we completed the acquisition of the Prime Media Group assets with leverage on a pro forma basis at 0.9x. Statutory net debt for the half was $117 million. Pro forma net debt is $295 million, which is adjusted for the Prime acquisition and cash flow timings. In late October, we announced the refinancing of our syndicated debt facility. The new facility delivers lower cost of funding, more flexible terms and maturity extended to October 2024. Finally, we can advise that during the second half, the Seven West Media Board will assess capital management options to further enhance shareholder value. The fiscal half and '21 overall brought several key achievements from our company. For the first time in 3 years, Seven was the most watched television network in the capital cities and across the regional markets with Prime and 7 Queensland. We returned to #1 in prime time in both the survey and calendar years with our highest total pay per audience and shares since 2018. Our 40.3% metropolitan revenue share in fiscal half was a higher share since the December 2016 half. 7plus was the #1 in BVOD for the second year in a row, thanks in part to the outstanding success of the Tokyo Olympics, which was the biggest broadcast and streaming event in Australian history. On a combined basis, this saw Seven deliver a 40.6% revenue share in the first half. The Prime acquisition will deliver many benefits for Seven West Media, including a strong opportunity for 7plus in regional markets. The success we saw last year led to Seven being named Australia's fastest-growing brand in the Brand Finance Australia 100 Ranking report that was released last month. This is a slide many of you are familiar with, so I won't dwell on it. As you can see, we've made excellent progress across the key elements in the 3 strategic pillars we introduced in late 2019, and we've achieved 7 of the 8 key goals we set ourselves. The one area we continue to explore is the establishment of a meaningful streaming partnership. This is not about any opportunity, rather about the right opportunity, and we continue to be patient in getting the result in a crowded market. We're closing out the final phase of our 3-year plan and have been working on the next phase of our strategy, which we'll update the market on later this half. One of our key areas of focus is capitalizing on the opportunity in total television following the Prime acquisition. I'd now like to discuss some updates across the 3 pillars of our strategy: content-led growth, transformation, and capital structure and M&A. The acquisition of the assets of Prime Media Group unlock an unrivaled total television growth opportunity for our company. The addition of Prime gives us a 41% share of the national commercial television audience, including BVOD. Our ambition is to secure an ongoing 40% share of the $3.8 billion total television market, which covers metro and regional free-to-air television and BVOD. We'll do that by leveraging Seven's data and trading platforms to maximize inventory utilization and management. This has already started. There is also a clear opportunity to drive greater premium integrated revenue at Prime working closely with our advertising partners to enhance their engagement with regional audiences. At Seven, premium revenue accounts for more than 30% of all of our broadcast revenue and creates a higher yield. The acquisition provides a significant opportunity to create a bigger presence for 7plus and 7NEWS.com.au in regional markets where they've not been promoted properly in the past. We've started new marketing on 7plus in regional areas, which is already generating new users, increasing consumption and new revenue. Prime and WAN will also work together on cross promotions and leveraging news across both businesses in WA. It's very early days, but the integration of Prime Media segment is going well. We've realized $5 million of cost synergies so far, and we expect to be at the upper end of our $5 million to $10 million cost synergy target within 12 to 18 months. The success of our content-led growth strategy was evident in our calendar year 2021 broadcast ratings performance. The revitalization of our prime time entertainment schedule is delivering results with a significant improvement in ratings across demographics, even excluding the Tokyo Olympics. With a 39.6% commercial audience share in total people, Seven Network was the clear winner. We're #1 in people 16 to 39 and under 50. Seven was the only network to increase its audience shares in total people, 25 to 54s, 16 to 39s and under 50s during the calendar year. Primary Channel 7 ended the year #1 in total people and 16 to 39s. Like the network, the main channel lifted its audience shares in total people 25 to 54s, 16 to 39s and under 50s. We had the #1 program of 2021 with the AFL Grand Final. AFL was also the #1 winter sport. 7NEWS was the #1 news program for the sixth year in a row. In its first year on Seven, The Voice became the #1 regular series of '21. Home and Away was the #1 local drama, and Sunrise was the #1 breakfast show for the 18th year in a row. The Olympic Games in Tokyo was the #1 media event of the year with 21 million Australians watching Seven's live, free and exclusive coverage across 17 days. Seven Digital had a very strong first half with EBITDA of $76 million compared with $60 million across the entire 12 months of FY '21. We're now forecasting Seven Digital will have full year earnings of more than $130 million versus our previous forecast of more than $120 million. That will represent approximately 40% of group EBITDA, a remarkable achievement in just 3 years. During the December half, 7plus reached more than 10 million registered users, up 47% year-on-year. This has now increased to more than 11 million users. Across 2021, 7plus also retained its title as the #1 commercial free-to-air BVOD service. Seven's Digital revenue jumped 111% during the half, and 75% of its sales are now enriched with data, which increases our yield. Revenue has been driven in part by the strong growth of the BVOD market, which was up 58% in the December half and up 61% across the calendar year. Advertiser adoption of BVOD is growing rapidly. PwC predicts the market will record a compound annual growth rate of 33% between 2019 and 2025, making it one of the fastest-growing sectors in the entertainment and media industry. BVOD also provides a new addressable market for us with local advertising and targeting, which we think could be material. As I mentioned earlier, there is also strong opportunities for us to increase 7plus' presence in regional markets. We have reignited the Seven West Ventures strategy, which we believe creates shareholder value by leveraging our assets. The value of the Seven West Ventures portfolio increased 56% to $87.5 million during the December half. Seven West Ventures completed 4 new investments during the period plus 2 follow-on investment rounds. The 4 new ones were Raiz Invest, Carbar, InStitchu and CarExpert. The 2 follow-on investment rounds were SocietyOne and Open. The majority of these investments were through media for equity, reflecting our strategy of investing in emerging and/or fast-growing businesses that have large growth opportunities that can be supercharged by marketing and promotion through Seven's assets. Further opportunities are well advanced as we head into calendar 2022. Slide 11 details our FY '22 cost guidance and is consistent with the format presented in August. For the full year, despite the significant lift in revenue, we expect normalized costs in Seven West Media to be in the mid-range of the guided $1.08 billion to $1.1 billion. The acquisition of Prime will see approximately $33 million added to our normalized cost base in the second half. Expected one-off costs have been reduced to $76 million from our August expectation of $94 million. Overall, when we look at Seven West Media's cost base, it's expected to be between $1.19 billion and $1.21 billion in FY '22. The refinancing of our net debt was completed in October 2021, halving debt costs, extending maturity for 3 years and improving terms. In August, a number of our investors asked us about cash flow timing differences between the years. We've included this chart as a number of timing differences have arisen between the first and second halves for FY '22. Seven West Media generated $79 million in free cash flow in the half and benefited from a $21 million tax refund. Net debt was also assisted by the accounting for Prime with $23 million of acquired cash included in our results. This and the tax refund helped absorb the repayment of a legacy contract earlier than expected and removed another hurdle, Seven West Media's transformation. We expect FY '21's tax payment to be made in the second half, which will also trigger Seven West Media recommencing installment payments after a COVID break. CapEx is also weighted to the second half in FY '22 as the relocation of the news operation from Martin Place to Eveleigh picks up pace. When we include the Prime acquisition amount, you can see the breakdown here with pro forma net debt of approximately $295 million at a comfortable leverage level of 0.9x EBITDA. Our aim is to operate within a target band of 1 to 1.5x leverage. I'd now like to hand over to Jeff to talk you through our financial results in more detail.

Thank you, James, and good morning, everyone. On Slide 14, we cover the income statement for the group. Total group revenue and other income of $820 million for the half was $175 million or 27% higher year-on-year. This impressive level of growth was underpinned by growth across all our operating markets as well as share gains. As outlined, costs remain on track to be in the mid-range of our guidance. Costs inclusive of D&A increased 25% to $616 million, reflecting some of the one-off costs incurred in the period, including the Olympics and the nonrecurrence of one-off benefits achieved in the first half of FY '21. EBIT before significant items was up 33% to $204 million. Underlying net profit after tax before significant items was $128.7 million, 47.8% higher than the same period last year. Significant items before tax of $9.6 million were recorded in the period, including the transaction costs incurred in the acquisition of the Prime business and the write-off of unamortized borrowing costs associated with the 2020 debt facility, which was refinanced during the period. Slide 15 provides an overview of the performance of the Seven segment, which includes our broadcast, digital and program sales businesses. A strong growing market and Seven's #1 position in ratings across metro and BVOD leadership has resulted in a material increase in revenue for the division. Seven Digital continues to deliver phenomenal results with revenue up 111% in the half underpinned by 90% growth in 7plus, growth in 7NEWS.com.au and the first half contribution from the digital platform's news deals. Operating costs in the period were up 29%, which, as outlined earlier, include those one-off expenses associated with the Tokyo Olympics and increased content investment as planned. The nonrepeat of temporary savings in FY '21 also contributed to the year-on-year cost increase. Net of these, Seven costs were up approximately 10% year-on-year, in line with guided cost growth. Seven EBITDA was up 34% to $205 million, comprising of $76 million digital EBITDA, up an impressive 144% as well as $18 million of earnings from program sales, which continued to deliver an annuity income stream with no incremental investment. Moving to Slide 16. WAN delivered a strong result driven by management's ongoing execution of its strategy to hold the line on print, reduce costs and turbocharge the digital and subscription side of the business. This strategy is clearly paying off with revenue growth of 6.3% to $85.8 million in the period. This was underpinned by digital offsetting the decline in print and the first half contribution of the digital platform news agreement. Advertising in retail was strong, but travel, motor and real estate remain challenging due to sector-specific issues. Paywall metro penetration is growing with early traction in retail markets. Digital circulation increased 46.5% year-on-year. On operating costs, the previous corresponding period benefited from $7.3 million lower cost due to the JobKeeper and PING grants in that period. Adjusting for these temporary savings, WAN cost initiatives delivered a 4% reduction in the period. As a result, EBITDA grew 2.1% to $19.4 million on an underlying basis. Excluding those first half '21 temporary savings, EBITDA was up 65% year-on-year. On Slide 17, we have the statutory group financial results and a reconciliation from EBIT before significant items. Seven West Media reported a statutory profit after tax of $120.5 million and basic earnings per share of $0.078. Excluding significant items, underlying earnings per share was $0.084. Slide 18 shows group cash flow for the half. Seven West Media recorded operating cash flow before interest and tax of $132 million during the period. This was achieved from $215 million EBITDA. As we've previously flagged, there were 3 sandbars in the business from a cash flow perspective, notably the Olympics and cricket rights. We called out that working capital in the period will be impacted by the $72 million in onerous provisions in the period for the Tokyo Olympics and a partial release of the cricket onerous. Working capital outflow of $82.3 million impacted operating cash conversion, which included the early retirement of a legacy financing contract. The investor slides outline the expected onerous release for the second half of the '22 financial year as well as the runoff for future years, which is predominantly cricket-related. Debt and lease payments in the period totaled $35 million, which includes the refinancing costs. The benefit from lower debt costs will flow through in the second half. CapEx was $8.2 million during the half compared to full year guidance of $40 million. This reflects a second half weighting of CapEx spend with some of this timing due to COVID-related impacts. There was also a small investment in third-party technology for the 7plus platform. The net of these cash flows was $79 million, which reconciles with the free cash flow outlined on Slide 12, then adjusting for the tax refund and the Prime cash consolidation gets you to our reported cash flow. Statutory net debt at the end of the period was $116.7 million, a decrease of $212 million in the last 12 months. As outlined earlier, on a pro forma perspective, net debt, including the Prime acquisition and certain cash flow timing adjustments, net debt would have been $295 million. I will now hand back to James to finish with a trading update.

Thanks, Jeff. Turning to the trading update on Slide 20. The strength of the television and BVOD advertising markets has continued in the second half. Our key 3 metropolitan television bookings are tracking 13% ahead of same time last year, including, of course, the Ashes Test series and the Winter Olympics. We're targeting a 2 percentage point increase in revenue share in the second half of FY '22 compared to the second half of FY '21. WAN revenue is expected to grow in the low single digits in FY '22. And as we mentioned earlier, Seven's digital EBITDA is forecast to increase to more than $130 million. Our group EBITDA target range has been increased to $315 million to $325 million, including a $10 million second half contribution from Prime. Like Seven, Prime's first half is traditionally stronger than the second half. And finally, during the second half, the Seven West Media Board will assess capital management options to further enhance shareholder value. We are now in the final phase of our 3-year strategy with significant milestones achieved, and we see significantly more potential for the business. The Prime acquisition is the first step in unlocking our unrivaled ability to target the total television market. Momentum across Seven West Media is strong, and the outlook for the markets in which we operate remains robust. We will provide our investor update later in the year on the next phase of our strategy. That concludes the presentation. Before we take questions, I'd like to show you a preview of our latest promo for The Voice. It was the #1 regular series on television last year, and it will return soon. [Presentation]

We'll now take questions from investors and analysts.

[Operator Instructions] Your first question comes from Darren Leung from Macquarie. Your next question comes from Lucy Huang from Bank of America.

I've just got a couple of questions. So firstly, in relation to the free-to-air TV ad market, just wondering if you can give us some color around the outlook coming into the fourth quarter. I understand you have a federal election. So what are your thoughts on how fourth quarter will trend? And then just with my second question, so around Seven Studios, I'm just wondering if you can give us some color around that business and maybe the revenue contribution in the first half from that. And then just thirdly with guidance, you mentioned that you're targeting 2 percentage points of revenue share increase in the second half. Just wanted to clarify whether that's -- or that's in relation to a blend of the metro free-to-air and BVOD market share that you're referring to or whether you can provide a split between free to air and BVOD.

Sure. Thanks, Lucy, for the questions. I think from a trading point of view, we've got the clear visibility into Q3, but the reality with the market is that it's exceptionally strong. So we've seen both at a state and federal level government advertising double. Retail continues to be strong. And there's still a number of categories to come back. So I think as we sort of head through a normalization period post-COVID, automotive, travel, all your destination advertising from tourism, our view is that the market will continue to be strong right the way through, certainly for the financial year, if not, the year in general from that perspective. I think your second question in relation to Seven Studios, I'll let Jeff give a little bit of flavor on in a moment. But obviously, from our perspective, it really is about Better Homes & Gardens, some of our weekend programmers, and Home and Away. And so the -- that strategy is really to produce core programming across both. And I think the last one in terms of revenue share growth, we started the calendar year '20 and '21 relatively poorly and then came back effectively with a wet sale. So if you look at 2020, I should say, we lost the first 15 weeks of survey. In 2021, we lost the first 9 weeks of survey. So we guided the market in terms of some investment in content, and you can see that starting to pay off. We've won the first week of survey. We've actually won 4 of the first 7 weeks already this year, and we look pretty good for the second week. And so a much stronger first quarter will lead to a much, much better result, certainly from a metropolitan television point of view. And again, what's dominant on the screens of television also helps drive BVOD. So we think, from that perspective, it's a blend of both and, of course, the implementation of our acquisition with Prime as well. And so the ability to sell to a $3.8 billion market, we think there's been a pretty good upside both in digital and broadcast from that perspective. Any further comment, Jeff, on Studios?

No, I think you've covered it pretty well. In the slides, we called out $18.3 million of revenue and earnings from Studios in the half. So that's in the slide deck, Lucy, so you can see it there.

Your next question comes from Ben Rada Martin from Goldman Sachs.

I just had 2 if that's okay. First one was on your FY '22 EBITDA guidance and particularly just looking at, I guess, your Prime estimate of that $10 million. I was just wondering if you could provide a bit of color on, I guess, the quantum of that it seems a little bit lower than -- from the run rate that we've seen in previous years, and your guidance for your other business implies quite a healthy growth rate. Just interested in understanding, I guess, what might be the driver of that Prime expectation. And secondly, just on Winter Olympics. Well taken that you're targeting that 2 percentage point increase in share for the half, but just wondering if you could break that up between organic growth and maybe what the Winter Olympics benefit could be, noting that 2 percentage points was the benefit for the Summer Olympics for the first half.

Sure. I mean, I think, again, with the winters, I mean, the decision to run it from effectively [ 7 30 ] and then to help launch sort of our raft of shows, which really roll out from next week, it probably all blends together a little bit between sort of the Winter Olympics and sort of -- and our core schedule. As I said before, we didn't have the best first half in either 2020 or 2021. And so we see considerable upside and hence, that -- what we've -- the color we've given in terms of those 2 share points. I'll let Jeff talk to sort of some of the timing on Prime.

Yes. So in terms of Prime, obviously, the first half is the stronger half for Prime as it is for Seven, as you can see in the first half result. And what we've done is picked up the numbers that we've inherited from Prime. We're working through all that stuff. We're working through the implementation of the synergies that we've talked about and certainly looking at all things we can do from a revenue perspective to drive that number as hard as we can. And as we get further into it -- it's been, what, 5 weeks now. As we get further into it, we'll provide updates to the market.

Your next question comes from Tom Beadle from UBS.

Great result. I guess the first one, just to follow up on a couple of the other previous questions. I just wanted to dig into the third quarter outlook in a bit more detail. I know your third quarter metro bookings are tracking about -- up about 13% at the moment. Can you just talk about where you think the market is tracking? And just how much of your growth do you think might be attributable to share gains off the back of the Winter Olympics versus just the underlying movements in the market? Just a second question on capital management, just with your EBITDA currently growing and you're targeting a leverage band above where you currently sit, how do you get from that sort of 0.9 leverage ratio today to 1 to 1.5. Like should we be thinking about one-off capital returns or a one-off dividend? Or could we expect to see you undertake some more M&A to get there? And finally, I know you're at the end of your 3-year strategy and you're going to update us with the next phase of your strategy later in the year, but just wondering if you could maybe just quickly talk to some of the types of initiatives that you might be considering.

Thanks, Tom. Look, I think from a sort of a third quarter point of view, it's probably a little bit of both. So as I said, sort of a poor start to the first half calendars in '20 and '21. Obviously, we've got the target in terms of increasing our share. So I think from that perspective, what we've got in market, the pull forward in terms of premium revenue in terms of sponsorships of sort of key programs, strength of our platforms, AFL in particular as well, I think from that perspective, it's probably, as I said, a little bit of both. I think that we will definitely take share from Ten. And I think we're probably eating into sort of a little bit of share from Nine at the same point. There's a lag effect, biased by last year's numbers until they have sort of a band of 4 or 5 weeks to look at. So you can't get a lot in this half, but obviously, you can get enough through that May and June period. I think the capital management piece is really around -- obviously, we made the comments in terms of the Board. It's great to be in a position where the Board can now look at capital management. I think what we're indicating is just the level of leverage that sort of we, as a business, feel comfortable with between that 1 and 1.5x. And I think in terms of the 3-year strategy, I've said a number of times, we're unquestionably a content company. So you can see for us, for digital earnings to be tracking now at -- well, we hope they'll get to 40% in this year, and they're only 2% 4 years ago. So what we're doing in terms of that investment in content and try and tested known quantities and pushing both a television and a digital sort of piece is crucially important. We're now up to 11.5 million verified registered users, so it's quite extraordinary. The Commonwealth Games comes in July. We're projecting, I think, to get 94 gold medals. So if you look at the winters and then the Commonwealth Games, it's going to be, we think, quite an extraordinary period to again launch our sort of back half. I don't think there's going to be a huge -- it's probably more of an evolution and probably more of sort of fine-tuning in terms of what our strategy is going forward. But I don't think there's going to be a whole -- I don't think the market should expect a wholesale change in terms of our strategy going forward.

If I could just jump on, the other thing is embedding Prime. We really want to focus on embedding Prime and really driving that opportunity as hard as we possibly can for Seven West Media.