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

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

Good morning, everyone. Welcome to the Seven West Media results for the 2023 financial year. I'm James Warburton, Managing Director and CEO at 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. Seven West Media is Australia's most connected news, sport and entertainment brand. It's the undisputed leader in the national total television market, reaching 91% of the Australian population every month across all of our assets. In FY '23, the group generated revenue of just under $1.5 billion and EBITDA of $280 million. Seven's unparalleled and unmatched national reach underpinned our revenue share in FY '23. We achieved our total television revenue share target of more than 39% in the first half and fourth quarter of the financial year. This was a very pleasing result against FY '22, which included 2 Olympic Games. Excluding the games, we achieved underlying share growth in every quarter of FY '23 with full year growth of 1.2 share points. This share growth was achieved against a cost base that we managed in line with the outlook we provided at this time last year. We drove temporary and permanent savings to offset the first half year of NBCUniversal and other unexpected costs and held year-on-year cost growth at less than 1%. These outcomes were achieved in a soft total television market that declined 7.9%. Our expanded content deal with NBCUniversal is driving digital audience growth and is on track to deliver 2 billion minutes of content a year. Next year, we had the biggest winter and summer sports, the AFL and Cricket to 7plus, which will be an absolute game changer. It's the first time in history that these sports will be available to be streamed for free. This will have a huge impact on the growth of 7plus. Underlying EBITDA from our digital businesses increased 17% in FY '23, excluding the Olympic and Commonwealth Games. Digital now accounts for 49% of underlying group earnings, up from just 2% 5 years ago. And given this growth, we continue to invest in driving digital leadership. This slide outlines our key financial results for FY '23. We see this as a solid performance in a pretty challenging environment. Revenue declined 3% to approximately $1.5 billion. As mentioned, the total television advertising market declined 7.9% during the year. Operating costs were well managed within the context of our continued investment in programming and the ongoing inflationary pressures across our business. Excluding depreciation and amortization, our costs increased by 0.9% over the year prior to $1.2 billion, which was in line with our most recent guidance and reflected the benefit of temporary cost savings. EBITDA declined 18% to $280 million, and underlying net profit was $146 million. Net cash flow before temporary and capital items was $155 million. Net debt of $249 million was down slightly from $256 million in the prior period with prudent leverage of 0.9x maintained. I'll now hand over to Jeff to take you through the full year financial results in more detail.

Thank you, James, and good morning, everyone. Total group revenue and other income of $1.5 billion was down 3% against FY '22 results. Revenue for the year was impacted by softer market conditions and some tougher market comparables. Excluding major events, Commonwealth Games and the Olympics, the group grew underlying market share during FY '23 to partially offset these market conditions. Operating expenses before depreciation and amortization were $1.2 billion. Costs were up less than 1% year-on-year, with tight cost control and temporary cost savings identified to offset the incremental NBCUniversal content deal costs. Overall, costs were in line with expectations, reflecting SWM's operating leverage, EBITDA before significant items was down 18% to $280 million. Depreciation and amortization increased to $42 million for the year. This increase primarily relates to the amortization of the acquired prime assets, including the amortizing intangibles. Significant item expense after tax of $1 million was recorded in the period. Underlying net profit after tax, excluding significant items, was $146 million, 27% lower than the same time last year. As has already been mentioned, the total television market declined 7.9% in the period. The metro market declined 10.6%, regional was down 4%, and BVOD was up 6.1%. While the first half of FY '23 saw a decline of 4.5%, the total television market softened in the second half as consumers started to feel the pain of increasing interest rates. Against some tough comps, the total television market declined nearly 12% in the second half. Pleasingly, the BVOD market maintained its positive momentum. Having set ourselves an ambitious target to retain in FY '22, 2 Olympics 39% full year total television share, Seven outperformed in both the first half and the fourth quarter. While we finished the year with a 38.5% total television share, pleasingly, we achieved some underlying growth in every quarter of FY '23. Ex Olympics and Commonwealth Games, underlying share growth year-on-year would have been approximately 1.2 share points. We remain absolutely focused on continuing to improve our offering at the beginning of the calendar year, the smallest quarter by market size. The flag this time last year, Seven's results now include the full year contribution of Prime and an extra weeks trading. These offset the revenue and cost of the 2 Olympics in 2022. Seven's revenue decline, therefore, effectively reflects the net market decline and share gain experienced in FY '23. From a category perspective, we experienced weakness in food, retail and government, while travel, auto and insurance all grew year-on-year. Digital revenue and EBITDA were broadly flat on the prior year on a reported basis. Underlying digital EBITDA, excluding the impact of the Commonwealth Games and Olympics, saw a growth of 17% during the year. However in the West, management remains focused on its strategy of holding the loan on print, reducing costs and turbocharging the digital opportunity. From a digital perspective, growth in audiences to record levels and new products saw digital subscriber revenue up 17% year-on-year. WAN revenue was up slightly in FY '23 driven by the 53rd trading week. Adjusting for this week would result in a relatively flat year-on-year outcome. Advertising market conditions remain mixed with retail the strong performer, while auto and real estate remained weak. The key drivers of WAN's cost growth included paper costs are up almost 100% year-on-year, driven by supply issues, energy and shipping costs. Pleasingly, these are starting to reduce. The extra week also added to the FY '23 cost base. Seven West Media reported a statutory after-tax profit of $146 million and basic earnings per share of $0.094. Excluding significant items, underlying earnings per share was $0.094. Significant items, pretax of $7 million related to the CODE 7's project being partially offset by gains recognized on our ventures portfolio and property sales. We have changed the way we present the cash flow table in FY '23 to highlight the recurring, temporary and capital items impacting cash flow in the year. Working capital now represents normal movements in typical items such as accounts receivable, payable, program work in progress deferred income, et cetera. It also includes approximately $5 million of noncash ventures contract utilized during the year. We have split total tax payments in the year of $86 million into 2 components: the FY '23 related payments of $27 million and the previously flagged balancing payment for FY '22. We should now be in the normal cycle of tax payments. The balance of the recurring cash flows included net finance costs, CapEx and lease payments. After these outflows, Seven generated cash before temporary and capital items of $155 million in FY '23, 19% lower than FY '22 in line with the market-led EBITDA decline. Temporary and capital items include onerous contract payments. We're now in the last year of the Cricket deal, so onerous should reduce to approximately $2 million per annum after FY '24. We also have roughly a year of Project CODE 7+ implementation cost to go with a similar number expected for FY '24. And we spent $15 million on the buyback in FY '23. The program has been extended into FY '24. We finished the year with net debt of $249 million, a decrease of $7 million from FY '22 and leverage of 0.9x, maintaining sensible leverage remains a key focus. As we look forward to FY '24, we expect CapEx to be broadly in line with FY '23. The move from Martin Place to Eveleigh is now complete, meaning for the first time in 40 years, everyone in Sydney is under one roof. We will be looking to finalize the exit from Martin Place, either by sublease or exit as soon as possible. We have determined to keep the dividend on hold given prevailing market conditions. This will be reviewed again in future reporting periods. Costs continue to be a focus for the group with FY '23 cost ending within guidance provided at $1.208 billion. As we look to FY '24, the second half of the full year NBCU costs will be largely offset by comp games and extra week costs incurred in FY '23. Other FY '24 cost increases are expected to be driven by incremental content hours and digital capability investment with underlying inflation expected to be around 2%. These investments are focused on improving the user and client experience across our product range. FY '24 cost base will also include the cost for the current broadcast of the FIFA Women's World Cup. Excluding the impact of the World Cup, Seven West Media's 2 years cost growth is expected to be approximately 2.6% per annum based on the midpoint of the FY '24 forecast. I'll now hand back to James to take through the rest of the presentation.

Thanks, Jeff. As mentioned said before, Seven is the undisputed national total television leader. Our broadcast network was #1 in reach for FY '23. Regional Australia represents 36% of the national population and Seven is the dominant force of regionally by a country mile. Our 7+ platform now has 13.5 million verified users, more than 10 million were active during FY '23 and nearly 6 million were active during the fourth quarter before the Women's World Cup had even begun. No one can match our audience reach of 91% across television and premium long-form digital video and all of our other assets. Every month, our television and digital business alone reached 17.5 million Australians. With the launch of the VOZ audience measurement data this year, we now have singles of truth about the all-screen reach of consumption of our content. VOZ is also a game changer in terms of monetizing our audiences. It captures viewing that is currently not being monetized and it reduces friction and complexity for advertisers by providing all the viewing data nationally and across all platforms. A clear and strong focus on national total television means we are competing in a larger market. That market consists of the 3.6 billion metro subscription and regional television ad market, the BVOD ad market, which now stands at $460 million a year and is expected to grow to $1 billion over the next 3 to 5 years and the similarly fast-growing $2.5 billion AVOD market. Underpinning all of this is Seven's audience reach and the fact that we deliver more mass cultural experiences than anyone else, thanks to our leading content. 7NEWS and Sunrise have dominated their time slots for years. Our entertainment content lineup is strong, as demonstrated by the success this year of Farmer Wants A Wife, Dancing with the Stars, Home and Away and The Voice just to name a few. And our sport is the most watched in Australia, including the AFL, Cricket, supercars, horse racing and of course, the incredible success that is the FIFA Women's World Cup. Next year, we'll add AFL and Cricket digital rights to 7+. For the first time, Australians will be able to access online the best games and video content, live and free in a way that suits them. Content and audiences are at the center of everything we do. The decline of television audiences ironically gets a lot of column inches in newspapers, and it seems to be a favorite conference topic. To be fair, for years as an industry, we haven't done ourselves any favors by focusing attention on the smallest possible audience number, linear broadcast only. In our view, the constant talk about advertisers moving away from television is overdone. VOZ is and will continue to be a game changer for the industry monetization. We're at the beginning of this exciting opportunities to sell the total television story powered by VOZ. At Seven, we are underpinning the rich data from VOZ with our first and second-party data sets and we are now introducing new tools to enable us to further enhance commercial outcomes: Audience acquisition, activation, engagement, retention and monetization. We still have a way to go with some of the tools. CODE 7+ remains an essential part of the mix, but others like AI-driven personalization and other investments in the platform experience are already making a significant contribution. From an acquisition perspective, television audiences are consuming more minutes of long-form content than ever before, with minutes increasing by just under 100 billion in 10 years. People are watching more premium long-form video content than ever. Broadcasters have now become much better at audience activation and are taking the lion's share of these minutes. In FY '23, free-to-air platforms accounted for more than 70% of total long-form video minutes consumed on free-to-air and paid SVOD streaming platforms combined. Excluding the Olympics, this has grown 5% year-on-year. Engaged audiences are more likely to be retained on platform. Those engaged audiences need to be measured effectively. This chart shows the potential of effective measurement. One episode of Farmer Wants A Wife reached 2.2 million people overnight. After 7 days, that reach had grown 12%. But over the series, audience reach was a staggering 4x higher than a single episode at nearly 9 million people, and that was up 20% compared to the 2022 series. Audiences clearly remain engaged with total television. And those engaged audiences can now be monetized. We've only just started telling this story to our advertisers, selling on a converged basis with our rich attached data optimizes commercial outcomes for both clients and Seven. We can capture a greater share of market, increased audience reach and lower cost per reach points. Our aim is to be Australia's most connected news, sport and entertainment brand, and we will do that by delivering on 4 key objectives: The first is to accelerate our digital future. That involves building Australia's most loved and watched streaming service with 7+ to drive maximum audience, revenue and profitability. The second objective is to enhance and elevate our brand. In a highly crowded and competitive market, we need to ensure that the Seven content and brand remains relevant, compelling and different. The third objective is to optimize the business. We will double down on our focus to lead the market in audience and revenue shares. We will work on our core assets harder, save sensibly to invest wisely and drive an efficient business in order to be more effective. We have a strong track record of managing costs, and this will continue as will our focus on maintaining a healthy balance sheet. Importantly, all our major sports deals are done through until 2031. The fourth and final objective is to partner for growth, and we will look for new initiatives that drive revenue. A great example of this is the One Platform initiative with NBCU, where we contribute to global partnerships that enables us to generate revenue from clients worldwide. The foundations of our strategy are in place. We have a strong engaging content schedule and the digital rights to the AFL and the cricket are a massive present under the Christmas tree. The VOZ audience measurement system is clearly showing the power of total television and its effectiveness for clients. Our ongoing investment in 7+ is driving increased user engagement and our new trading platform, CODE 7+, will improve our ability to increase our share of the $6.5 billion video advertising market. Turning now to the trading update. Our FY '24 content schedule is optimized to maximize our total television audience share and to drive our revenue share target. We're targeting a 40% total television revenue share in FY '24. Recurring costs are up as we invest in content and digital, well less than inflation over the last 2 years, and we continue to look for ways to drive efficiency into the business. We expect the total television market to stabilize during the first half of FY '24 as the market cycles against easier comps for the second quarter. Early trading indicates Seven's underlying revenue is tracking to FY '23 market trend in July and August. And currently, we're pacing slightly ahead of last year in September. That concludes the presentation. Before we take questions, here's a sneak peek of SAS Australia that airs later this year.

[Operator Instructions] The first question comes from Eric Choi from Barrenjoey.

I just had 2. First one, maybe for Jeff. I just wanted to confirm some of the TV PCP comps, at least based on what I can see from the SMI data, which I've realized doesn't capture BVOD. But it looks like you guys are guiding to a flatter second quarter versus I reckon that minus 7% in the PCP. And then when you run into the third and fourth quarters, I reckon that PCP comps turn into sort of minus 13% and minus 14%, which to suggest growth should be better. But yes, if you could confirm those comps? Then the second question, just for James. So actually, I really appreciate all the slides that you've put in on BVOD and aggregating the TV, you don't think it's well understood. And it looks like the data is definitely there. But just chatting to the industry, I think the view is there still is an integrated solution where agencies and advertisers can buy all that, I guess, aggregated audience together and I guess some of the agencies are saying the first network to crack this will be the biggest beneficiary. So just your thoughts on how you're going to monetize that in terms of presenting an integrated buying solution.

Eric, I'll take the first one. Thanks for the questions. So just in terms of where market was in FY '23. So Q1 was minus 5%. We had the Olympics comps in that quarter. So we think the market was sort of -- probably flattish when you take the Olympics out. We started to see the market soften late October into November. And so the market in Q2 is minus 4%, and that was clean, as I say, like-for-like comps. So first half was minus 4.5%. From Q3, Q4, we started to see that market really soften. So Q3 was minus 10.5%. Q4 was minus nearly 13%. So the second half was minus 12% roughly and for the full year minus 7.9%. We called out in the trading update that we're seeing July and August tracking back towards that sort of FY '23 trend of sort of minus 8%, when we strip out the comp games, it was in that sort of first quarter for us last year. And what we're seeing from a September bookings perspective, so what we've actually got in the book today, that we're tracking up slightly in September. And we're doing that -- we're calling that with some pretty solid bookings into the month already. Too early to call October. But certainly, we'd expect that once we get to those easier comps, then we shouldn't be having the sort of minus 10%s, 12%s that we've been seeing certainly in calendar '23 continue into '24. James?

Thanks, Jeff. Thanks, Eric. The only thing other thing probably worth sort of noting is that Seven is gaining shares. So we've started FY '24 on a really positive note. You've seen our ambition, we've talked openly about sort of getting -- putting a floor in front of the share. And I've said for a little while now that it's a 2-player market. We're seeing some of the worst shares, we've seen on record for the third player, and that is actually looking in FY '24 going sub 20 into the teens as well. So I think that sort of plays into the strength of Seven in our programming schedule and digital growth. I think, Eric, the key thing around VOZ is it is going to be the industry standard. And so there's a lot of work behind the scenes in terms of gold certification, all the different systems and post-analysis systems that media buyers use. This will become the currency in the first quarter of next year. And so there's a lot of work to get there. People don't really like change. I mean, it reminds me of when we move from diaries to people meters some time ago. So as this becomes the currency, we start to look for the rich numbers. And that VOZ data at 3 p.m. or it's now slightly earlier at sort of 2:00 p.m. is absolutely hidden from industry view. And we're really pushing at an OzTAM board level for that to become the standard and for that to be pushed out to the industry much earlier, hopefully, by about 11:00 a.m. That's a work in progress. But come next year, we've talked about VOZ for a long time, but it will become currency and it will have a huge effect on showing the true effectiveness of all the screens on free-to-air television.

The next question comes from Entcho Raykovski from E&P.

I also had a question around just the near-term trajectory and your comment around September tracking up year-on-year. But I'm just interested specifically for September, the fact it's up. Is there any comps impact which is driving that? Or do you think it's just market improvement? And I just -- I have a couple of follow-ups. Do you want me to ask them now or leave to later.

No, no. Go ahead. Go ahead, yes.

Go now? Okay. So the second one is on BVOD market growth. it's obviously slowed down significantly in FY '23. And I'm just interested in what you put this down to, whether it's the market, any sort of worries that it's sort of stopping the penetration? And also it seems to have slowed down from your prior guidance for BVOD to maintain double-digit growth in the second half of '23. So I don't know whether maybe May and June were particularly weak. If you can comment on that would be helpful. And my final question is, this has got a bit of publicity, but how do you assess the risk that gambling advertising restrictions we imposed and what can you do to mitigate?

Thanks. I'll take the second turn and I'll let Jeff circle back into the September trading. I think essentially, I mean, the BVOD market growth was 6%, that comped against 46% growth the year prior, which, of course, had the Olympics in it, which had a dramatic effect. So I think when you look at the relativities and look at the CAGR across sort of 4 or 5 years, you're seeing quite a significant level of growth. Similarly for Seven, we had those 2 big -- or as Olympics and Commonwealth Games really, those 2 big sort of drivers. I mean, to put it in perspective, the Matildas through the games that we've had so far is, I think, last Saturday was something like 100 million minutes. So it's quite a lot of inventory from that perspective. So we're not really worried about the growth in BVOD. And as in my earlier comments around VOZ is the true reach of what we're achieving is something that's really important. I think with gambling, it's important to note that was a parliamentary committee that put a form of recommendations to the government. Free-to-air television is already highly regulated. As an example, we can't put ads in live sport prior to 8:30 p.m. as it sits at the moment. But yet there's a lot of signage, ground signage from stadiums and things like that, that drive frequency. So it's got to be a solution across the board from everyone, from the broadcasters online, outdoor and the codes themselves. So we think we play an important part in that, and we're obviously working with the government to do our part. And again, we'll see where that regulation goes in the future. And I think there's a lot of work to go -- work to do on that yet so far. And there'll be more work to do on that. And as I said, it needs to be across the industry. It can't just be on free-to-air television. And on September, yes.

Entcho, your first question. Thanks for that. Just to talk to what James sort of mentioned before, we are seeing -- we think we're seeing share growth into the quarter. So that's helping us as opposed to it's not just market, we think. From a comps perspective, there was nothing really in September last year. There's not in September this year. So it's a relatively normal month for us. AFL finals, obviously are in both years. There's no World Cup impact in September. It's all done by December. So it's a pretty clean month comparing year-on-year.

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

I've just got three if that's all right. Maybe just the first one on the cost base. You've outlined that you'll continue to look for ways to I guess, drive efficiency into the business. Is that reflected at all in the FY '24 cost guidance? Or I guess, would you guys need to see a bit of a deterioration in your ad market outlook to potentially look at those levers more closely? And then the second one, just on the July and August trading, maybe just clarifying your underlying commentary. Just considering this doesn't include any of the benefits you guys might see from the Women's World Cup as a one-off event? And then finally, just on the West, maybe Jeff, just on your comments that the management team is focused on growing digital and holding the line on print. I guess, is your expectation for FY '24 or may the ad market potentially make that a little bit difficult into next year?

Thanks, Ben. I mean, I think again, with the cost base, we've been pretty specific in terms of the 2% inflation, the additional hours. We've tended to run out of content towards the back end of the year and really not, I suppose, post-acute with the bigger revenue month of October, November, in particular. And so we are very comfortable and on a bit of a role, to be honest with sort of our ratings at the moment in our share growth, and we think we can continue that from that perspective. Obviously, we're also banking and we showed at the Macquarie Conference, how the market after a downturn always rebounds. So we obviously will continue to look at levers as we did this year should the market deteriorate. I think the important thing with the Women's World Top -- Women's World Cup is that you got to remember, the audience has been absolutely unbelievable, and we've loved telling the narrative of this wonderful team and go the materials tonight and hopefully all the way on Sunday, but there's no ads in the telecast. So all this notion around -- sorry, no ads during play, during extra time, during penalty shootout. So it's quite limited in terms of its commercial [indiscernible]. What I do like about what we've done as a team is there's probably been $0.5 billion spent on soccer rights. And we picked the eyes out of this by seeing how incredible the materials were at Tokyo, and we thought as a home World Cup, how amazing this story would be, and it's exceeded all of our water streams, but it drives our schedule and drives our dominance moving forward across our higher schedule. I'll let Jeff talk about the West.

Yes, the West. So not really expecting any sort of material change in trend in the West. Driving that digital revenue forward has been an absolute focus, and that continues to go pretty well in terms of digital advertising revenue, also subscriptions, the products that we're putting out to attract audiences to our products, we continue to roll new products out. And they're offsetting some of the challenges that we see around the print advertising categories. So we're not expecting any material change in that. In terms of -- there's an allocation of Google and Facebook into the West, again, not expecting that to change. So there should be relatively what we would be normally expecting for the West in '24.

The next question comes from Lucy Huang from UBS.

I just have three as well. Just firstly, if I can clarify on the BVOD point too. Just wondering whether you can give us some color as to first quarter where we -- whether we've started to see growth returning back into BVOD markets, noting that second half, we were comping a pretty high comp? And then my second question is just on the target for 40% revenue share in FY '24. Where are you expecting most of the share gains to come from? Is this metro or regional or BVOD market? So maybe if you can give us some color as to which types of format do you think would do pretty well this to drive you up to that 40% revenue share?

Do you want to lead with BVOD?