T4F Entretenimento S.A. (SHOW3) Earnings Call Transcript & Summary

Good morning. I'm here with Andre, our Chief Financial and Investor Relations Officer. We'd like to thank everyone for attending our results webcast for the 2020 fiscal year. No company could talk about 2020 without mentioning the impacts of the new coronavirus pandemic. Unfortunately, we were particularly affected given that the first and main measure adopted by the authorities to mitigate the impact of the pandemic was social distance, which hits the core of our business, and therefore, by decree, we have been unable to promote our events since March last year. After this tragic year, which brought many uncertainties, I will briefly review the recent events that brought us here and the various initiatives that we have implemented to mitigate the effects of the pandemic in our business. In the sequence, Andre will better illustrate the scenario by showing our operating and financial results. After 2017 and 2018, 2 years of positive results in which we delivered many events, from 2019 onwards, we faced several challenges that made us rethink our strategy. The low flow of international artists to South America in 2019, the effect of hyperinflation in Argentina, the recent political and economic instability and the foreign exchange rate devaluation strongly impacted our industry and showed us the need for change. During 2019, we started a turnaround process that started with the design of a new strategic plan. The 2020 year began with good prospects, and we started to put into practice the actions of our new strategic planning, reviewing the business model in the sectors we operate, opening new growth avenues in markets adjacent to our core business in addition to add new products and skills through inorganic growth initiatives. At the end of this journey, we aim for a company with a more diversified product portfolio with more recurring results and a predominantly flexible cost structure. Likewise, after a frustrating 2019, a greater traction of the economic reform agenda was projected in the second year of government, indicating a growth of the Brazilian GDP of around 2.3%. Such expectations reinforced our constructive vision regarding the resumption of the company's growth. However, the spread of the new coronavirus around the world has virtually changed such expectations. The first cases in Latin America were recorded in February 2020. And since then, society has had the need to adapt to a new model of life. Since March, among other social distancing actions, quarantine was decreed in the cities where we operate, and we were legally prevented from operating. Consequently, we saw the GDP close to the year with a retraction of 4.1% in Brazil, 5.8% in Chile and 9.9% in Argentina. In our industry, we had even more severe impacts being without a doubt one of the most affected by the pandemic. Given this scenario, we moved quickly and took difficult decisions, which would later prove to be correct given the seriousness and extent of the pandemic. In order to reduce expenses and preserve our cash, we reduced our workforce in Brazil by 45% in the first quarter of 2020 in addition to adhering to government measures that allowed to suspend or reduce the workload of another 17%. Additionally, we revisited all contracts with the suppliers, renegotiating amounts and scopes, suspending or canceling services as well as reviewing payment terms. In parallel, we adopted home office for the remaining workforce, preserving the health of our team who remain focused on pivoting the company according to our strategic plan, while we do not operate so that we can get out of this pandemic even stronger. The result of these efforts was reflected in the 58% decrease in the SG&A when comparing the fourth quarters of 2019 and 2020. At the same time, we observed a change in society behavior, which accelerated the conception of digital products and services and with that, new forms of entertainment also emerged. Right at the beginning of the quarantine, there was a perfusion of artists' lives that in Argentina became a monetized business. However, in Brazil, there was no adherence to the costly model and the live events remained free. Consequently, during this period, our revenues were limited to these lives in Argentina; the rent of UnimedHall for third-party events; the promotion of 2 stages of Stock Car before divesting our participation in Vicar, promoter of the category; and the sale of tickets to cultural events through the newly acquired INTI. Both the sale of Vicar and the purchase of INTI are aligned with the strategic planning mentioned above. In addition to strengthening our cash, the sale of Stock Car allowed us to focus on business lines of business more adherent to our core business. The purchase of INTI, in turn, allowed us to own the code of our ticketing system, in addition to expanding our presence in this segment, representing the first step in the process of creating and developing our own technology platform. At the same time, we reviewed our whole portfolio of assets, eliminating those that presented the results below our expectations. In this context, we have discontinued the operation of our venues in Belo Horizonte and Rio de Janeiro, making our structure much leaner and flexible. I would like to make it clear that we will not stop acting those markets. We will continue to promote the best content in the best geographies without limiting ourselves to our own venues. Finally, we promoted the reprofiling of our debentures at the end of last year, extending the profile of our indebtedness. We are convinced we have taken the necessary measures and are now cropping the rewards of those initiatives. Despite we did not operate for more than 9 months in 2020, our gross cash balance decreased by only BRL 7.7 million and the cash balance net of financial debt by BRL 7.6 million, both in relation to the end of 2019, all this with a much lower level of expenses and a longer debt. Now Andre will present our operating and financial results for the period.

Thank you very much, Fernando, and everybody, for participating in our results call. In the fourth quarter, the easing of the pandemic allowed the city of São Paulo to move towards the green phase of its recovery plan, which would allow us to return operating with reduced capacity among other restrictions. Given the uncertainties regarding the continuity at this stage, margins compressed by such restrictions and the possibility of these events becoming the focus of spreading the disease at a time still critical of the pandemic, we decided not to promote our content during this period. Thus, as shown on Slide 5, we ended 2020 with only 11 shows held in the first quarter before the determination of restrictions to contain the effects of the pandemic. For those shows, we sold 37,000 tickets. The revenue of BRL 1.7 million in box office, food and beverage and venues operations in the fourth quarter of 2020 was basically composed by the sales of tickets for live events in Argentina, which contributed BRL 700,000 and tickets for third-party events in the culture sector through INTI with approximately BRL 800,000 in addition to revenues from renting UnimedHall for closed events. Additionally, the live events in Argentina also generated sponsorship revenue in the amount of BRL 400,000. We closed the year with BRL 40 million in net revenue against BRL 394 million in 2019. This 90% reduction is a direct result of the impossibility to operate for more than 9 months due to the restrictions imposed to tackle the pandemic. The drop was accentuated mainly by the non-promotion of outdoor events. They are our largest revenue generators and usually occur from March on, where we would hold Lollapalooza Brazil. Moving on to Slide 6, we can see the impact of not operating on gross profit. Despite the 87% reduction in costs in the fourth quarter of 2020 compared to the same period in 2019, the fixed costs, mainly related to the maintenance of our venues, led us to a negative gross profit of BRL 5.8 million. Looking at the full year figure, we see the same pattern, ending with negative gross profit of BRL 15.1 million. On the other hand, as exposed by Fernando, we can now observe the result of our efforts to contain expenses and maintain the company's financial health. On the right side of the slide, there is the evolution of the SG&A, which showed a steady decline over the 2020 year since the first quarter when we took the first initiatives to reduce expenses. As a result, we had a 32% reduction when comparing 2020 with 2019. And in addition, 58% on a quarterly basis, comparing the fourth quarter of the 2 years. We reinforced our commitment on controlling expenses through efficiency gains by improving internal process, capturing synergies with the company's new business and constantly evaluating supplier contracts. In other operating income and expenses, we accounted in the fourth quarter provisions for impairment in the total amount of BRL 23.3 million, of which BRL 17.3 million came from Metropolitan and BRL 6 million from the operations of Argentina and Chile. Both have no effect on the company's cash. Additionally, we have written off deferred income taxes in the amount of BRL 13.8 million. On Slide 7, we give more details about these events. The provision at Metropolitan is due to the smaller cash flow projected for this company after we gave back the venue in Rio de Janeiro. Metropolitan will continue to operate shows in Rio de Janeiro, both indoor and outdoor, but now in a nonproprietary venues. As previously mentioned by Fernando, Argentina GDP fell by 9.9% in 2020 and Chile by 5.8%. With this, the lower expectation of population purchasing power in these geographies led to a revision of our projections, resulting in impairment provision. Given the impacts of the pandemic on our operation, we have proactively adopted a conservative policy not registering deferred assets related to the expectation of income tax recovery in 2020. Additionally, we did a write-off in deferred income tax stock in the amount of BRL 13.8 million, concerning the portion of the income tax nonrecoverable over a 10-year horizon time frame. We emphasize that these values do not expire and have no cash effect. Our estimate is that they will be fully used in 13 years. To better illustrate these impacts on the results, we pass to Slide 8, where we present all nonrecurring events that we exclude from our P&L for purpose of adjusted EBITDA and net income. In addition to the impairment and deferred income tax previously explained, in the fourth Q '20, we had the effect of BRL 700,000 from contingencies totaling BRL 7 million in the year as well as BRL 1.6 million referring to the write-off of assets from Belo Horizonte and Rio de Janeiro venues. We also excluded from the results the gain of BRL 15.3 million related to the gain of capital on the sale of the Stock Cars promoter. As a consequence, Slide 9 shows EBITDA for the period, which closed at a negative BRL 35.9 million in the fourth quarter of 2020 against a positive BRL 7 million in the same period last year. In the fiscal year of 2020, our EBITDA was negative BRL 62.1 million compared to the negative BRL 22 million registered in the prior year. Upon the adjustments presented on the previous slide, the adjusted EBITDA for the fourth quarter of 2020 was BRL 10.3 million and the full year BRL 45.5 million, both negative compared to BRL 2.6 million positive and BRL 5.9 million negative in the same periods of the previous year. On the next slide, we can see that the net financial result for the fourth quarter of 2020 show an improvement of BRL 3.7 million versus the same period of the previous year. The full year figure, the improvement was BRL 22.8 million coming from BRL 38 million to BRL 15.2 million, both negative. Such variation is explained by the reduction in the Brazilian basic interest rate that index our debentures and by depreciation of the cash balance in dollars and Chilean pesos. With that, we view on Slide 11 that we finished the fourth quarter with a net loss of BRL 56.7 million versus BRL 6 million in the fourth quarter of 2019. The adjusted net loss for the same period was BRL 17.2 million and BRL 7.8 million, respectively. We ended the year with a net loss of BRL 109.4 million and BRL 79 million in the adjusted view against BRL 71.8 million and BRL 26.2 million in 2019, respectively. The next 2 slides clearly show the results of our measures that we're taking in order to preserve our cash position. On the left side of Slide 12, we see the free cash flow in the fourth quarter of 2020 improved by BRL 16.5 million compared to the same quarter of 2019 due to the following effects. In the operating cash flow, even without operating during the period, consumption was only BRL 1.3 million higher than the previous year, due to the restructuring executed in the company and the renegotiation with suppliers. In investments, we received another installment related to the sale of our stake in Vicar. Besides that, we reduced CapEx volume by 35%. The 50% improvement in the cash flow of financial activities is due to the lower interest rate in the period as well as the reduction in the amounts paid for the rent of our venues accounted as leasing liabilities. Finally, the foreign exchange variation on offshore cash and investments generated a positive impact of BRL 3.8 million. While in 2019, this result was negative by BRL 4.8 million. On the right side of the slide, we see the annual results, where the main variation is in the operating cash flow. Unable to operate for more than 9 months, we consumed BRL 30.1 million against the generation of BRL 24.1 million in 2019. This result was offset by the other lines where we observed on a larger scale, the same effect exposing the quarterly valuation previously explained. The combined effect of those vectors was a negative variation of only BRL 7.7 million in the most challenging year in Time For Fun history. As a result of this cash flow, we show on Slide 13 the evolution of the company's net cash. It is worth noting the increase of BRL 3.8 million in net cash. This was a direct result of our efforts to controlling expenses and decrease of the lease liability by BRL 11.4 million, driven by the renegotiation of the leasing contracts during 2020 as due to the discontinuity of the operations of our venues in Belo Horizonte and Rio de Janeiro, which led the company to have a lighter and more flexible cost structure. Said it, I give the floor back to Fernando. Thank you very much for your attention.

Thank you for the explanations, Andre. We now move on to Slide 14, where we will comment on the events subsequent to the year 2020. With the worst scenario of the pandemic in Brazil, we recently announced the cancellation of 2 shows by Taylor Swift in São Paulo. The singer decided to cancel the shows she would do in Brazil as well as those that would take place in the Northern Hemisphere. On March 17, the Law 14,046 was reprinted. It establishes the no mandatory return of postponed or canceled concert tickets, which must be converted into credits for use in future events promoted by the company. With this reprint, the deadlines were postponed, covering events postponed or canceled until the end of December 2021 and establishing the deadline for the use of credits until the end of December 2022. Finally, after more than 22 years of operation, we decided to terminate the lease for our venue in São Paulo, the UnimedHall. In recent years, the pressure on the results generated by the devaluation of Brazilian currency, successive rent adjustments and more recently, the restriction generated by the pandemic made us take this decision. To conclude our presentation, I would like to move to the last slide, where we talk a little bit more about the prospects for the future. Our pipeline is constantly being revised due to restrictions caused by the pandemic. We are working to reconstitute it, and we see a strong supply of artists, especially for 2022, where we see twice as many artists on tour with capacity for outdoor shows when compared to previous years. On top of that, observing the experience of countries where vaccination is more advanced, such as Israel, United Kingdom and United States, give us good prospects for resumption of live events as soon as the population is immunized. Bear in mind that we also have a pent-up demand for live content, which should be captured as soon as there is security to promote such events. We hope that 2022 will be a great year for entertainment industry. We continue our strategic planning, seeking to explore new lines of business and increase our presence in orders that we already operate, such as festivals and family events in place of assets with high fixed costs, such as concert halls. In this way, we will make the company increasingly lighter and the customer experience more digital as well as the company itself. Our focus is on the constant evolution of the portfolio, aiming to always have the best contents. Thank you all for your attention and wish everybody a good day. The Investor Relations team is available to answer any question.