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

Thank you for standing by, and welcome to the Seven West Media First Half FY '24 Results. [Operator Instructions] I would now like to hand the conference over to Mr. James Warburton, Chief Executive Officer. Please go ahead. [Presentation]

Good morning, everyone, and welcome to Seven West Media's results for the first half of the 2024 financial year. I'm James Warburton, Managing Director and Chief Executive Officer of Seven West Media, and joining me is our Chief Financial Officer and incoming MD and CEO, Jeff Howard. As you know, we are transitioning the leadership of Seven West Media on or before June 30 this year. 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. Our aim is to be Australia's most connected news, sport and entertainment brand. We will do that by delivering on our 4 key objectives, which we have detailed in previous presentations. The first half of FY '24 saw the continued disciplined execution of our strategy, with growth in audience and revenue share, tight management of costs, and continued investment for the future. Our total television audience increased during the half as our content strategy delivered in terms of increased audiences. This audience growth underpinned revenue share growth in the first half, ensuring Seven outperformed in a challenged market. We delivered a total television revenue share of 41% in the half, which represented an increase of 1.7 share points and made Seven #1 in terms of revenue share. The total television advertising market declined 9.1% in the period, with Q2 softer than expected and impacting results in the first half. Costs were in line with expectations, with FY '24 cost investments weighted to the first half to help improve our audience and revenue share. We are implementing a two-year $60 million cost-out program in response to the market weakness. As a result, FY '24 cost growth will be held at 1% to 2%. We've demonstrated consistently this cost-out program may be resized as we respond to further challenges in the market outlook. During the half, we refinanced our group debt facility for 4 years. Net debt as of 31st December was $257 million and broadly in line with debt at June 30. Leverage of 1.3x reflects the ARN media investment of $67 million and lower earnings and is within our target range of 1 to 1.5x. On the industry front, we've seen positive progress in the key regulatory areas of the prominence of free TV services on connected television sets and the anti-siphoning regime and in audience measurement with the launch of VOZ. Our investment in ARN Media, which was announced in November last year, aligns with our strategic pillar of partnering for growth with existing and long-standing commercial partners. I'll now hand over to Jeff to take you through the financial results in more detail.

Thank you, James, and good morning, everyone. Total group revenue and other income of $775 million was down 5% against the first half '23 result. Revenue for the year was impacted by softer market conditions, one-off events, as well as the prior year including an additional week. While total TV share was up 1.7 share points, equivalent to $26 million, market decline of 9.1% had a $50 million underlying impact in the half. WAN had a very good first half with revenue growth of 3.6% year-on-year. Operating expenses before depreciation and amortization were $651 million. Costs were in line with expectations, up 7% compared to the same time last year. This was driven by the Q2 content investment we flagged last August and inflationary pressures which for the half were slightly higher than our longer-term trend. As a result, EBITDA before significant items was down 40% to $124 million. Depreciation and amortization decreased to $18 million for the year. The reduction mainly relates to Prime intangibles now largely amortized. Significant item expense before tax of $8 million was recorded in the period. Underlying net profit after tax excluding significant items was $63 million, 49% lower than the same time last year. As mentioned, the total TV market declined 9.1% in the period. The metro market declined 13%, regional was down 5.5%, while BVOD was up 12.5%. The market softened post our November AGM; the impact was approximately $10 million up to the end of December. This market decline is inconsistent with an improved audience outcome, with Seven delivering actual audience growth and not just share across broadcast and BVOD during the period in 4 of 7 months so far in FY '24 and against 5 of our tent poles plus cricket over the last 12 months. Pleasingly, we have seen audiences growing across linear and 7plus for the half year, including a 2.2% increase in linear audiences and 36% minutes growth from younger demos on 7plus. Having set ourselves a target of greater than 40% share, Seven outperformed during the half with a total TV revenue share of 41%. Share growth was achieved across each month of the half year. As we head into Q3, traditionally our toughest quarter and the smallest revenue quarter by market size, we remain confident in further revenue share growth with Australian Idol leading our 2024 content lineup and audiences up mid-single digits year-on-year. Seven's costs in the first half tracked in line with expectations and were reflective of the content investment into the second quarter and slightly higher than normal inflation. We have implemented the cost-out initiatives, and as a result the second half will see a 4% reduction year-on-year, pulling back FY '24 year-on-year cost growth to between 1% and 2%. Over in The West, management remains focused on its strategy of holding the line on print, reducing costs and turbocharging WAN's digital opportunity. From a digital perspective, growth in audiences and the launch of new digital products saw a unique monthly audience of 4.4 million, up 18.5% in the past year. Advertising market conditions remain mixed, with strength in retail trade and the travel sector while motoring and government spend have seen weakness. The West revenue was up 4% in the first half on a reported basis despite the extra trading week in the corresponding half last year. The West has been capitalizing on commercial print opportunities due to the closure of competitor printing facilities, which are driving revenue and cost growth at a positive margin. Seven West Media reported a statutory profit after tax of $54 million and basic earnings per share of $0.035. Excluding significant items, earnings per share was $0.041. Significant items pretax of $8 million related to Project Phoenix, fair value losses recognized on the ARN investment, redundancy and restructure costs. These have been partially offset by a gain recognized on a change in expected term on one of the group's property leases. The ARN investment is strategically important to the group, with the fair value loss noted above reflecting changes in share price both at and since acquisition as required under the accounting standards. In line with the revised presentation at June 2023, we have presented a cash flow table for the first half to highlight the recurring, temporary and capital items impacting cash flow in the half. Working capital represents normal movements in typical items such as accounts receivable and payable, program work in progress, deferred income. It also includes approximately $7 million of noncash ventures contract utilized during the year. We have split the net tax refund in the half of $11 million into two components: the first half FY '24 related payments of $17 million and a refund of $24 million received on the lodgment of the FY '23 tax return. 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 $69 million in the first half. Temporary and capital items include onerous contract payments. We are now in the last year of the old cricket deal, with the onerous provision having a $38 million impact for FY '24. This should reduce to approximately $2 million per annum after FY '24. Project Phoenix is nearing completion and will be launched during calendar '24, with forecast costs of $20 million expected for financial '24. We spent $7 million on the share buyback program and in refinancing the group's debt facilities in the half. We finished the year with net debt of $257 million, an increase of $8 million from June '23, and leverage of 1.3x. Excluding the impact of the ARN investment, reported leverage would have been 1x. Maintaining sensible leverage remains a key focus. 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 '24 cost guidance in line with the revised cost guidance announced at the FY '23 AGM of $1.23 billion to $1.24 billion, representing a year-on-year cost growth of 1% to 2%. To provide additional detail, we have split the full year costs in the chart into first half and second half components. This demonstrates the expected cost decline in the second half compared to the previous 2 years as well as to show the weighting of the cost investment into the first half. At the AGM in November, we announced a cost-out program of $60 million, with $25 million to benefit FY '24. These benefits are included in the second half forecasts. We will revisit this program if the advertising market remains weak across the remainder of '24. We will act decisively to respond to any further challenges that arise. Excluding the impact of the World Cup, SWM's two-year cost growth is expected to be approximately 1.5% per annum based on the midpoint of the revised FY '24 forecast. I'll now hand back to James to take you through the next part of the presentation.

Thanks, Jeff. After nearly 5 years leading Seven West Media, I'm proud to say that the business is set up for the future, a future that sees the total television industry set to regain revenue share from other mediums and Seven's share within that. Our ambition has been to build Australia's leading media business. That ambition remains our absolute focus and is underpinned by a number of key activities. Our focus on the regulatory framework for free-to-air television, that is, prominence and anti-siphoning, will strengthen the television industry and Seven's position. Solid progress is being made, and I commend the industry for working together in this very important area. At the same time, VOZ will change the power and currency of total television. Capturing real-time national reach and frequency data across broadcast and all streaming is allowing advertisers to target audiences and maximize ROI. This will drive money back into total television and into Seven. Premium video content is growing audiences, and that will underpin total television's share of the ad market and Seven's total television revenue share within that. Our major sport rights are locked in through to 2031, and the AFL and cricket world digital rights from FY '25 will be a BVOD audience and revenue game changer. Our deals are good deals, not ones that deliver a sugar hit for a couple of weeks and require a huge amount of effort for no financial reward. We do not have onerous contracts going forward. We're investing in the 7plus platform and the new Phoenix trading platform to deliver the best user experience and enable Seven to lead converged audience trading in the market. Our cost discipline will deliver operating leverage, and as we did in the latter part of 2023, we will act decisively to reduce costs in the event of a protracted soft market. We have previously discussed our expectation that the fragmented traditional media market will consolidate into a smaller number of scale players. That consolidation is now underway, and we've taken a position in ARN media. Combined, these activities are targeting outcomes that will benefit Seven now and into the future. Primarily, as the economy improves and VOZ becomes currency, we remain confident that the television market will stabilize and recover, and Seven's market share puts us in a strong position to capture a much greater upside than the last downturn recovery cycle. These actions and benefits then provide the platform to create options for future growth. The monthly reports under the VOZ audience measurement system are now live and continue to show the ever-increasing reach of the free-to-air segment. Across linear and BVOD, total television reached 23.8 million people in January 2024. That's an increase of 4.2% compared to the year prior, while Seven grew its reach by 2.9% to 17.1 million people. Together with our increased reach, the VOZ system also shows an increase in average audiences during January, with Seven's audience growth of 10.1% outpacing the free-to-air market of 3.9%. No matter what the naysayers claim, VOZ is clearly demonstrating that free-to-air viewing is growing, driven by the 2 biggest networks, and people are spending longer watching our content across multiple screens. This will drive advertising dollars back to TV. We're also turning our mind to the commercialization of the use of our content in the production of generative AI. We're exploring avenues through direct engagement with the digital platforms while also considering regulatory options, including seeking copyright reform or a solution under competition law. Many of you would have seen and heard us talk about this slide over the past 12 months. It shows how the total television advertising market has moved each calendar year since 1993 as far back as we have calendar year data. The data shows that, fairly consistently, the total television market recovers strongly after periods of downturn. We expect that a similar recovery will occur post the current rates tightening cycle and are ensuring Seven is well-positioned to benefit when it does. Our content strategy is clearly driving audience growth in both terms of linear television and BVOD. This growth is driving revenue share gains for Seven, especially as the market recovers. Including January, we have delivered audience growth in 4 of 7 months of FY '24. SAS Australia, Farmer Wants a Wife, Dancing With The Stars and MKR all grew their audiences year-on-year, and while relatively early in its season, I'm pleased to now add Australian Idol to the list of tentpoles that have grown audience year-on-year. The AFL Grand Final saw a remarkable 22% increase in its television audience. Across the summer months, we saw audience growth for both Test Cricket and BBL. Our cricket is extremely well positioned, with digital rights for 7plus starting later this year and 2 massive summers coming: Australia versus India tests in '24/'25 and the Ashes in '25/'26. What we've clearly seen with 7plus is that live streaming is delivering new audiences and those new audiences can be monetized. We've seen that with major events, such as the AFL Grand Final, the Test Cricket Championship and, of course, the FIFA Women's World Cup. The FIFA Women's World Cup delivered extraordinary numbers on 7plus, with the Matildas semifinal against England becoming the most streamed event ever in Australia. At the same time, our tentpole programs such as The Voice, MKR and others delivered a strong 36% increase in live minutes watched on 7plus year-on-year. News is a critically important part of our content on both linear and 7plus, and we're seeing good growth in viewing of our news and digital platforms. As mentioned before, the AFL and cricket digital rights will start kicking in towards the end of this calendar year. Together, they will generate more than 4 billion minutes of content a year on 7plus. We expect them to lift 7plus' share of BVOD viewing to more than 45%, positioning Seven for significant revenue upside in a growing premium digital video market. Our Phoenix converged advertising platform is on track to launch in calendar year 2024, and it will drive further growth. Phoenix is the future of effective total television audience trading, driven by market-leading technology with partners including Salesforce, Landmark and Databricks AI. Phoenix will give our clients the ability to buy seamlessly and on a converged basis nationally across metro, regional and BVOD. For us, it will drive dynamic revenue yield optimization and improve our inventory utilization. It also further proves the effectiveness of total television advertising and gives us better access to SMEs and other new revenue markets. I'll hand back to Jeff to provide the trading update.

From a trading perspective as we head into 2024, pleasingly, after the Q3 FY '23 market declined by 11% and against the 9% decline in the first half of '24, we are starting to see this moderate in Q3. After a solid first half up 12.5%, we expect the BVOD market will grow at double digits into the second half and beyond. At this stage, Q4 is too early to call. However, we are expecting further moderation in decline compared to Q3 '24. We expect Seven will grow share in the second half. We are maintaining our forecast share at greater than 40% for the full year. From a cost perspective, the full $25 million of FY '24 benefits have been secured. As a result, second half costs will be circa 4% or $20 million to $25 million lower than the second half '23, and full year cost growth is expected to be held at 1% to 2%. And to repeat it again, what we noted earlier, while we are delighted with the audience and share outcomes being delivered, we will act decisively to further reduce costs in the event of a protracted soft market. That concludes the presentation. Thank you for your time, and we are happy to take your questions. Before we do that, though, a quick thank you to James on behalf of all my colleagues at Seven West Media, and I'm sure on behalf of many on the call today. Seven West Media is a fundamentally better business today than it was in August 2019 when James returned to lead the business. We are optimistic about SWM's future and wish you all the best as you embark on your next adventure. Thank you. [Presentation]

[Operator Instructions] Your first question comes from Entcho Raykovski from A&P.

James, if I can just echo those comments, best of luck for whatever you're up to next. With that, into my question, I'm just interested if you can give us the sense of what BVOD growth you did for the first half relative to that market growth of 12.5%. And where is BVOD share now when you take that into account? And what can you achieve post the AFL/cricket digital rights once they kick in in September? And sorry, just to -- I'll try and wrap it all into one -- and how does the Olympics on Nine potentially affect the BVOD share in '25? Obviously, that will be a property which will attract a lot of interest. So how do you, I guess, offset that and the attraction which it will have?

Thanks, Entcho. There's a little bit of an anomaly around sort of an extra week. But when you look at the like-for-like numbers, the BVOD market grew 12.5% and Seven grew 16% from a BVOD perspective. We grew our minutes by 36%, and we're performing extremely strongly on VOD. I think when you look at the numbers, and we have put these out at a couple of conferences we spoke at, but we're expecting, on today's numbers, about 4 billion minutes and sort of that 4 to 5 share points. And so if you actually think about our 41% share, which is the leading share position in the market, we're winning metro share, we're winning regional share quite convincingly. And BVOD share is the share that sort of where we're a very clear #2, and we believe that our BVOD strength, with 52 weeks of those minutes coming, will sort of take us to potentially sort of the leading position. And obviously, the Olympics is a one-off. No doubt, the streaming numbers will be huge. But as we said in our presentation, we're not after sugar hits and massive loss makers. We're after profitable rights and rights that drive 52 weeks of the year. So I think that's a very important part of our strategy.

Your next question comes from Lucy Huang from UBS.

Likewise, all the best, James, for your next adventure. My question is also on BVOD, just a more high-level question. I think we're starting to see platforms, like Netflix for example, talking about focusing more aggressively on their version of the ad tier moving forward. Just wondering if you can provide some thoughts over the medium term, how do you think this could all play out? And what could this mean for BVOD, if it's more competition that you're expecting in the market?