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

Thank you standing by. Welcome to the Seven West Media HY '23 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. James Warburton, CEO and Managing Director. Please go ahead. [Presentation]

Good morning, everyone. Welcome to Seven West Media's First Half Results for the 2023 Financial Year. I'm James Warburton, Managing Director and Chief Executive Officer of Seven West Media. And joining me today is our Chief Financial Officer, Jeff Howard. Today, we'll take you through our results, our key priorities and then provide you with a trading update. After the presentation, we'll take questions from investors and analysts. The first half of FY '23 saw Seven West Media continue to reap the benefits of the strategy we introduced in 2019, which is to create the country's leading total television company and continue the rapid growth of our digital businesses. Seven ranked as Australia's most watched television network for the second year in a row in 2022. For the first half, we achieved a 39.3% total television revenue share, and we're tracking in line with our target for the full financial year. Since June 30, we have successfully negotiated 3 important and long-term broadcast and digital rights agreements with 3 valuable partners, the AFL, Cricket Australia and NBCUniversal. Our digital businesses, including 7plus, was a standout performer in the first half with underlying EBITDA growth of 35%, and that is excluding the Olympics. Digital represents approximately 40% of our earnings and continues to grow strongly. During the year, Seven West ventures also made a significant investment in the rapidly expanding property business, View Media Group. The financial results we announced this morning reflect the impact of the Olympics in the prior year, the inclusion of Prime's first half, an extra week and softer conditions in the advertising market. Group revenue was largely flat at $815 million, and group EBITDA was $205 million, which is broadly in line with expectations. Expenses were just up 1% to $610 million, a modest increase that was well below inflation and reflects our ongoing focus on costs and investing only where we see a return. It's important to note that this period covered 27 weeks. Operating cash flow generation was strong at $205 million, up 55% year-on-year. Underlying NPAT declined 4% to $123 million, which also reflects lower interest costs offset by the inclusion of Prime's depreciation. Reported net debt at the end of the half was $187 million. When we include a $37 million adjustment for payment timing differences, adjusted net debt was $223 million. Turning to the 3 significant long-term content deals I mentioned earlier, all of which underpin our success in the years ahead. In early September 2022, we secured the AFL media rights from 2025 to 2031, covering broadcast, and for the first time, the digital rights. AFL is Australia's #1 winter sporting code and an integral part of our overall content strategy. The comprehensive package of digital rights to the AFL for 7plus is an absolute game changer. For the first time, fans will be able to access the best AFL games and video content live and free in a way that suits them. Our AFL rights fee will increase 14% in calendar year 2025 and then 2% per annum after that. That represents a 3.6% annual increase in rights fees over the life of the new agreement compared to the final year of the existing deal. The new agreement with Cricket Australia announced in January this year covers tests and BBL broadcast rights to 2031 and again, for the first time, digital rights for 7plus, meaning 7plus now has digital rights to Australia's biggest summer and winter sports. Cricket Australia has committed to improving the BBL and is financially incentivized to do so. This is a very good deal for Seven in terms of gaining access to digital rights and improving the quality, particularly BBL. The new deal will deliver a $50 million cash saving compared to the current agreement. Our rights fee will be reduced 13% to $65 million in 2024 and will increase 2% a year thereafter. In October 2022, we announced a multiyear content agreement with NBCUniversal, one of the world's leading entertainment and media companies. The agreement provides thousands of hours of additional content to Seven Network and 7plus, creating significant new revenue opportunities. The agreement also enabled the launch of a new female SKU channel, 7Bravo on free-to-air and 7plus and have launched on January 15. Without sports streaming, 7plus has achieved the most growth in minutes of any network with a 27% increase over summer. This agreement with NBCUniversal will help underpin growth in Seven's broadcast and BVOD revenue share. As has been reported, we walked away from negotiations for new Olympics deal. In a nutshell, our digital strategy is focused on 2 key things: procuring digital content at sensible rates to drive growth in minutes and imagery and putting the tools in place to maximize its value. We are making strong progress on both fronts. The upside of the AFL, Cricket and NBCUniversal agreements in terms of increasing the audience and revenue of 7plus is significant. In 2022, 7plus had a 36% share of BVOD minutes. On a pro forma basis, we expect our BVOD minutes and our share to grow to 42% with the addition of NBCU and sports rights. This slide highlights the revenue potential in BVOD, which is important given the significant growth we expect in consumption. The CPMs we are attracting in BVOD over broadcast are material, 2x in metro markets on total people and 3x in regional. There are several factors behind this, including stronger targeting and deeper insights, both of which attract an advertising premium. 45% of our digital ad impressions sold now have a deeper data overlay, and that's why we continue to invest in 7REDiQ. One of the key factors we're targeting is that we can sell all the inventory, which allows us to drive higher revenue from our audience. The willingness of advertisers to use BVOD is greater due to lower relative cost of entry and the ease of buying. This attracts 3x the number of advertisers. Another factor attracting new advertisers is our new suite of digital products. We continue to innovate our ad products with interactive or shoppable ads that drive greater engagement and simplify the path to purchase. I'll now hand over to Jeff to take you through the first half financial results in more detail.

Thanks, James, and good morning, everyone. Total group revenue and other income of $815 million for the half was relatively flat year-on-year, 0.5%. This period includes a full half contribution from the Prime Media Group assets, but also reflects a slightly softer and tougher market comparable with the Olympics in the prior year. Operating expenses before depreciation and amortizing were $610 million. We have performed better on costs and have identified some savings, which means we'll offset some of the incremental NBCU content deal costs. Depreciation and amortization increased to $20 million in the period with 65% of the increase relating to the acquisition accounting on Prime. EBIT before significant items was down 9% to $185 million. Underlying net profit after tax before significant items was $123 million, 4% lower than the same time last year. Significant items before tax of $13 million were recorded in the period. Seven secured a 39.3% total television share in the first half '23, which is tracking in line with our target share for the '23 financial year. Total television market declined 4.5% in the period, which included Metro down 6.4%, Regional down 1.7% and BVOD up 5.4%. As previously flagged, Seven's results also include the full half contribution of Prime and an extra week's trading, offsetting the revenue and cost of the Olympics in the first half of '22. Seven's revenue was, therefore, effectively flat at $730 million, with growth in digital offsetting a small decline in broadcast and program sales. Costs are tracking in line with expectations, up 1.3%. Seven's EBITDA declined 4.6% to $196 million. 7Digital EBITDA represented 41% of EBITDA. WAN revenue was relatively flat year-on-year at $85 million, but includes $2.5 million from the extra week. An uplift in paper costs and the extra week resulted in costs 1.8% higher. Excluding the extra week, costs would have been down 1.2% year-on-year. Advertising market conditions remained mixed with retail the strong performer, while auto and real estate remained weak. Management remains focused on its strategy of holding the line on print, reducing costs and growing digital. The business continues to perform strongly from an audience perspective with multi-platform audiences up and a strong performance from thewest.com.au, up 16%. Digital subscription continues to grow with revenue up 28% in the period. Seven West Media reported a statutory profit after tax of $114.9 million and basic earnings per share of $0.074. Excluding significant items, underlying earnings per share was $0.08. Significant items of $13 million relate to the CODE 7+ project. We delivered strong cash flow generation in the period with operating cash flow before interest and tax up 55% to $204 million. This was bolstered by the timing of certain material payments that fell into the second half. We expect a working capital outflow for the full financial year. Tax paid of $82.3 million reflects PAYG payments for FY '23 year-to-date and a tax balancing payment of $61 million, which relates to the '22 financial year. The company is now making PAYG payments where cash tax should closely track P&L tax. Net finance cost declined 29% to $16 million, reflecting the reduction in net debt over the last 18 months and the lower interest costs on our debt facility. Closing net debt for the period was $186 million. However, adjusting for material payment that fell into the second half would have been $223 million at 0.7x net debt to EBITDA will remain within our target range. The on-market buyback is active in the market for up to 10% of shares on issue. To date, we have spent $7.5 million on the buyback. The Board has also determined to keep the dividend on hold given prevailing market conditions. This will be reviewed again in future reporting periods. CapEx for the full year is still expected to be approximately $40 million. And as previously flagged, we will also incur $25 million cost of investment in Project CODE 7+ in the '23 financial year. We continue to work through the onerous contracts with cash flow set to improve materially in FY '25. I'll now hand back to James to take through the rest of the presentation.

Thanks, Jeff. Turning now to our content and some of the key priorities. Seven was the #1 network across calendar 2022, winning 38 over the 52 weeks. That success was driven by a multifaceted content-led growth strategy, the revitalization of our entertainment content schedule in recent years, our market-leading sport content led by the AFL and the ongoing dominance of 7NEWS, Sunrise, Home and Away, Better Homes & Gardens and our multichannels. The latter, of course, is now even stronger with the addition of 7Bravo last month. Our success has continued since the end of the first half. In the first 5 weeks of the '23 calendar year in terms of audience shares, we've had our most competitive start to the year in total people since 2018 and our best start in 25-54s since 2019. We've grown our television audience share year-on-year, thanks to 7NEWS, Home and Away, Cricket and Australian Idol. And 7plus saw a strong 27% increase in minutes viewed across December and January without any sport content. While conditions in advertising markets have softened in recent months, the patent is not uniform. As this graph shows, 3 large categories, retail, automotive brands and insurance, grew during the 6 months to December 31. There was also very strong growth in the home and travel categories. The latter more than doubled, fueled by post COVID travel and an increase in travel companies marketing activity. Auto is also expected to recover strongly as supply dynamics improve and new launches come through. On the flip side, there were declines in ad spending by governments, restaurants, banks and communications companies. Turning now to the performance of 7Digital. This chart highlights the dramatic growth of our digital businesses. 7Digital earnings have soared from $3 million in the first half of FY '19 to $80 million in the most recent period. 7Digital growth underlying revenue 29% in the first half of FY '23. That is excluding the Olympics, with underlying EBITDA up 35%. The BVOD market grew 18% in calendar year 2022, and its ongoing growth will underpin growth across the total television market. Growth over summer and the start of '23 has been strong and includes only 2 weeks of NBCU content. We expect the growth of 7plus to continue as we add key new content in AFL, Cricket and more from NBCUniversal. The ongoing growth of 7plus and other services shows that Australia's appetite for streaming is still on the increase. It's a fundamental shift in how people consume our content, and there's a lot more growth to come. At Seven, we're driving both sides of the business. We've established an unbeatable #1 national broadcast television business, and we are supercharging our digital business for growth. This year, the full launch of VOZ audience measurement data will drive new demand for BVOD, giving our clients an improved picture of the reach of content across the total television ecosystem. Late last year, we ran Australia's first fully converged advertising campaign across Seven and 7plus with leading consumer brand, Dove. This end-to-end campaign was the first in the country to be delivered in full across linear television and digital screens at the same time, with audiences moving across the screens of Seven while the campaign was live. The result was a phenomenal 28% incremental unique reach on top of the linear viewing reach. Only 4% of the total audience was duplicated across Seven and 7plus, simply demonstrating that diversifying audiences across both linear and BVOD screens increases the available audience and reach. VOZ was used at every stage to help move the campaign across the different devices and content to reach the brand's target audience in the most effective and efficient way possible. We are seeing positive progress in our key digital priorities for FY '23. The federal government remains committed to ensuring the prominence of free services on connected television platforms with a public consultation process is currently underway. The industry group, Free TV, is taking part in the review of the anti-siphoning regime, advocating for it to be extended to the global streaming companies that operate here. We're continuing to improve the personalization of 7plus in order to increase usage and engagement, and the early results of our new dynamic user experience indicate a 15% increase in engagement. The first stage of the rollout of CODE 7+ is now live, and the second phase is expected to be completed by mid-2024. This new trading platform spans broadcast and digital and will simplify the buying process, support national and converged buying, optimize inventory and drive increased revenue. The biggest move by Seven West ventures in the half was an investment in the rapidly expanding View Media Property Group. Like all Seven West venture -- investments, it was media-led. We invested $12 million in cash and $24 million in contra to help grow the business. Led by industry veteran, Antony Catalano, and backed by ACM and Thorney Investments, View Media is a real estate digital media and agent services business. It comprises a suite of property technology platforms, which offer consumer and business solution in Australia's $300 billion real estate transaction market. There is clear opportunity for View Media to disrupt the property industry. It has a very clear strategy that includes rolling up strategic assets to build its position and setting up group businesses such as a listing portal, real estate marketing agencies and AI-driven property lead platforms and services. Seven West will be an active shareholder, driving the development of View Media Group. In early February, ANZ joined the share register, investing $50 million into the business. You've heard me talk about cost vigilance in the past, and this continues into FY '23. The only changes from 6 months ago are the inclusion of NBCUniversal costs for the second half of FY '23, offset by some savings identified to offset market conditions. Total costs for the year are now expected to be between $1.22 billion and $1.23 billion, a reduction compared to the update at last year's AGM. Turning now to the trading update. Early indications suggest the market may decline mid- to high single digits in the second half of FY '23, but we have limited visibility at this stage. Within that, the BVOD sector is expected to maintain double-digit growth. We expect to increase our share of the total television market in the current half. Our January and February revenue was weaker year-on-year in part due to one-off events, while March is tracking slightly better than the first half total television trend. Across the company, we have identified $15 million to $20 million in cost savings to offset the market conditions. That concludes the presentation. Thank you for your time, and we're happy to take your questions in just a moment. [Presentation]

[Operator Instructions] Your first question comes from Entcho Raykovski with Credit Suisse.

I've got a few questions. I might ask them one by one, if you don't mind. The first one related to your outlook commentary. And you're obviously guiding to some weaker trends into the second half versus the first half. Can you talk to perhaps what's driving that from a market perspective? I'm conscious that there's no Olympics comp, which was reasonably material in 1H '22. So are you seeing essentially a further softening in the market?

Yes, we're going to go one by one. Look, I think essentially, we've still got limited visibility. So we've got -- you've seen what we showed in terms of January, February or the commentary around that and obviously March. But the market is short. So we have limited visibility. Are we being conservative or cautious? Perhaps. But I think when you look at the range, Entcho, when you look at the numbers, I mean 5% still means the market is up 4% on 2019. And even at the highest end of guidance, the market will still be up 1% on 2019. So with all the sentiment out there and what we're seeing, I think it's obviously where we see things. Categories, we've split out for you, a much stronger retail period, a lot of government spending. We're cycling against that, plus, of course, Olympics. But we are seeing some strong category growth in things like automotive as the supply chain catches up as well. So time will tell, and we'll see where the market lands. But yes, that is obviously where we feel comfortable from a guidance point of view.

Okay. That's very useful color. And then secondly, the additional cost savings that you've identified, I appreciate there's probably a number of areas, but can you give us any more color on where they're coming from? And is there any concern that perhaps that will impact revenue in any way?

Yes. I mean I think to be very clear, they're operational savings. Prime's achieved much more than we thought it would from an operational point of view, and that's been sort of a big area, a bit of discretionary sort of spending. And the gentleman sitting to my left, I think our cost control and our rigor on costs has been extraordinary and continues to be so. So as we said many times, if it's not $1 to drive revenue and if it's not $1 to reduce debt, then $1 is not spent. I think you can see that in all the deals that we've done, particularly around sports rights, sort of economics over [ ego ], which we've said consistently. And I think very clearly, to put a fine point on it, it's not about headcount reduction. It's not about reducing content. It is absolutely about operational savings, which we're seeing across a range of areas.

Okay. Great. And final one for me. I mean obviously, you signed the new Cricket deal recently. How confident are you that it can deliver a breakeven outcome, I guess better for that matter? I'm just conscious that you're taking at the moment an onerous contract provision of, I think it's about $35 million on the existing deal, but you're getting a $10 million saving on the new deal. And whilst -- I mean it looks like a really good outcome in the context of sports rights. Is there still a concern that it might end up being a loss-making property?

I mean we wouldn't have done the deal if we hadn't done the math. So our expectation is that it's not an onerous contract. In fact, we're very confident to say that. But you've got to remember, Entcho, that we've got the digital rights. So the streaming of particularly summer sports, let alone winter sports, between the AFL and the Cricket, if you look at current run rate, it's about 3 billion minutes across the season. So if you think about that whole season running winter dominant -- winter sport dominant summer sport and you start to put it together, the Big Bash alone with the improvements that Cricket Australia made this year of the test players playing, of clearing out the white ball season at the end of the year in future contracts, more prime time games, bigger crowds, more meaningful results, we're extremely confident. And quite frankly, Cricket Australia are motivated financially to make the BBL work. So they've made some good gains from that perspective in terms of what we saw this season, and we're very confident with that deal moving forward.

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

I might just ask 3, if that's okay. First one is just I guess on capital management. You've obviously kept the dividend on pause given the kind of market that we're seeing at the moment. Maybe just interesting to see what kind of difference you would need to see to move back towards that 1 to 1.5x leverage position, noting you guys have a bit of headroom now. And then my 2 other ones, second would just be on trading commentary. Obviously, knowledge your Jan, February and March points. Just interested, is this relative to what you did in the Seven Group for the first half, so the 0.3% growth, which is kind of an underlying measure if you strip out Prime and Olympics? And then finally, just on NBCU, take the point on growing share through that added content. Interested, is it right to assume that you kind of -- you guys are making about a 2% increase from that Slide 6 chart you provide?

Okay. Thanks, Ben. So there's a few there. I think from a dividend point of view, you're right, the Board felt it prudent given prevailing market conditions to keep the dividend on hold. But obviously, we will address that and reconsider that in 6 months. I think the important point to really focus on is getting out of the onerous contracts, doing good sports deals, which include digital rights and sort of getting to a point which we've always talked about around FY '25 of making and generating significant cash. So the options remain open to us. Certainly, from a leverage point of view, if things make sense, and again, I go back to the point that we've been extremely patient, we've only done good deals. We will not do deals. Speculation always flies around Seven in terms of what we're looking at, what we're doing. And I can tell you right here and now, we are very focused on digital growth, getting out of all the onerous contracts and obviously paying down that debt. So there, the focus is for us. I'll let Jeff talk about trading commentary on NBCU.

Sure. So from a trading perspective, Ben, what we talked about was the market being down in that mid- to high single digits, Seven taking share in the second half expectation that we take share, and then we come back to a different perspective on how it's trading so far in the half. And what we've seen so far is January and February below the first half trend of that sort of minus 4.5% from a market perspective. Bear in mind that February last year, we had the Winter Olympics in Beijing. So we're comping against that. And then March is tracking relatively better compared to January and February. So slightly better than that trend from the first half. In terms of NBCU, we haven't given a share target update, a share target sort of guidance on what we've done from an NBCU content perspective. But yes, you can assume that we're looking to increase share on the back of the NBCU content that we put in place from middle of January this year.

Yes. And I mean December, January, when you look at the market, which had 2x of NBCU, we grew 27% to 347 minutes...

Is on 7plus.

On 7plus in the markets that grew at [ 18% ], and that was a huge focus of particularly the VOD category of NBCU. So you've seen the growth we've achieved in EBITDA and obviously in overall minutes without sports rights. And we were at pains to show the digital future with the content deals we've done between NBCU, Cricket and AFL, obviously.

The next question comes from Darren Leung with Macquarie.

I had 3 as well, please. Just on that market share piece and the content piece. So we can obviously see that there's aspirations for BVOD to basically get to that low 40% mark. But I wanted to confirm -- I think in the past, we had a target to get towards over 40% in total TV. Does that target still stand?

Yes, absolutely. I mean we talked about getting to 39% in FY '23, which we're on track to do, and then from '24, to get to 40% plus. I think what that chart is showing that, Darren, is actually the overall potential on today's run rate and a pro forma, it could well outperform that in terms of our expectations. And hopefully, the market can see we're conservative in terms of the deals that we do, number one; but number two, you can actually drive higher revenue shares based on the content as well. So we're already -- we don't -- we split out a total television share. We don't necessarily split it out, but we're already north of 40% in our share of the BVOD market. So I think we'll be looking pretty good in that area when you can sell it from a conversion perspective.

Understood. And then just the second one was on the cost savings. So that $15 million to $20 million identified, when we sort of compare the new cost guidance that you guys have compared to what we had at the announcement of the NBCU deal, it looks like it's only down 5% to 20%. So I'm just trying to get a feel for what the change is versus that NBCU deal.

I mean obviously, there's continuous pressure from an inflation perspective, Darren. So we're constantly looking at that. The aim is to get to the target that we've laid out in the presentation for the year and continue to keep tight control over costs going forward.

Got it. And just the final one. I'm sure you guys have seen the media speculation around M&A. So any comments you can provide there would be of interest if it's around thoughts on the balance sheet, the appropriate leverage.