Vantiva S.A. (TNM2.MU) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Technicolor's conference call, chaired by Richard Moat, CEO; and Laurent Carozzi, CFO. [Operator Instructions] Just to remind you, this conference is being recorded. We would like to inform you that this event is also available live on Technicolor's website with synchronized slide show. During this conference call, statements could be made that constitute forward-looking statements based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed, forecast or implied by such forward-looking statements. For a more complete list and description of such risks and uncertainties, refer to Technicolor's filings with the French Autorité des marchés financiers. I would like now to hand over to Mr. Richard Moat. Sir, please go ahead.

Thank you. Good evening, everybody, and thanks for joining our call at short notice. I am Richard Moat, I'm the new CEO of Technicolor; and I'm joined by Laurent Carozzi, our Group CFO. I'd like to take this opportunity to introduce myself and explain why I'm excited about Technicolor, outline to you the strategy that I've designed, together with the management team and the Board of Directors. I believe that with the right business focus, the right operational design and the right capital structure, Technicolor can return to delivering profitable growth, cash generation and value creation for shareholders. What I can tell you from talking to our customers, suppliers, business heads and employees is that this company plays a vital role in its various markets and provides truly differentiated products and services to its clients. As many of you know, I joined Technicolor in November 2019. Prior to this, I held a number of leadership roles in the media and communication sectors, including country CEO roles at Orange, and Deputy CEO and CFO roles at Everything Everywhere in the U.K. Most recently, I was CEO of Eir, the largest telecom operator in Ireland, where we created over $1 billion of shareholder value by designing and executing a comprehensive transformation plan. And I'm sure that the experience that I gained there is going to serve me well as CEO of Technicolor. So if we move to Slide 3, Technicolor Today. Why am I excited about Technicolor? Well, it's an iconic company, which has got a very strong legacy. It's a leader in its markets, and it's an integral player in the global media and communication ecosystems. We are present everywhere in people's lives, although you may not always realize it. We're in the credits of movies you watch, we help individuals connect to the Internet every day, and we make DVDs of all classics that you can't find online. What I can tell you from my detailed due diligence over the past 3 months and from talking to all our stakeholders is that this company is at the cutting-edge of technology and plays a vital role in its markets. To our customers, who are the most important companies in their respective sectors, people like Disney, Warner, Comcast, we are a trusted partner. They turn to us because they know we can deliver exactly what they need at the speed and scale that they require. We've got leadership positions in each of our markets, and we've got the talent and technology required to grow our market share. So looking briefly at each business in turn. First of all, Production Services is our growth engine. We're the worldwide leader in visual effects. It's an extremely fast-growing market and is driven, in large part, by the growing use of VFX in episodic and animation content commissioned by streaming companies. Gaming and advertising represent growth markets for us as well. And we're uniquely placed to capture this given our in-house expertise. Winning this year's Oscar for visual effects for 1917 is a testament to the quality of what we provide. In Connected Home, whilst this market has faced external headwinds recently, we've repositioned the business to focus on the most attractive segments. We're a global leader in broadband and Android TV, and we have a track record of launching market-leading technologies ahead of our competitors. We are a trusted partner to the leaders of the industry, such as Comcast and Charter. In DVD Services, we're, by far, the largest player worldwide, and we've got about 70% market share overall and 90% in the U.S. This is a highly cash-generative business, and it helps support growth across the group, and we see a long tail of demand in the years to come. So turning to Slide 4. Along with Laurent and the team, we performed an in-depth review of the group across all of its business lines and geographies to identify the key challenges which we face. What I found was a complex organization with meaningful scope for efficiency gains in every division. Moreover, I think that there is a significant opportunity to optimize our transversal functions and drive group synergies. Finally, Laurent and I know that the group can improve the level of transparency in our communication with financial markets. Our new strategic plan will allow us to be more efficient, better serve our clients and take advantage of market opportunities. And the key elements of it are: to focus resources on profitable growth opportunities; to take a much more disciplined approach to business selection and focus on projects which drive attractive returns; to continue to produce market-leading products and solutions; significantly streamline operations from an organizational perspective; and implement a new cost savings plan, which will improve our margins. Finally, we're going to be committed to increasing transparency by providing tangible financial targets, which Laurent is going to walk you through later in the presentation. So the strategic plan includes measures that will improve our cost structure, drive profit and cash flow, whilst enhancing our top line growth prospects. Over on 5, let me walk you through the strategic priorities that we have for each division and the initiatives that are already underway. So first of all, with respect to Production Services, we want to capture growth in episodic by working more with streaming providers. We already have minimum volume contracts in place, and there's room for us to do a lot more in this area. We've got a top-notch workforce in India, and that's currently not fully utilized, and it can help us drive profitability, especially in smaller projects. We're going to continue to invest in our people and technologies, but we're going to be disciplined around business selection. We're going to take on profitable projects that represent the best use of resources. In Connected Home, we want to focus our efforts on the growing and profitable segments of broadband and Android TV. We've already reduced our presence in the U.S. video market. Sales went from around EUR 700 million in 2017 to about EUR 100 million in 2019. So we are minimizing our exposure to what is a very challenged segment. By contrast, demand for broadband is expected to grow. We have an opportunity to streamline our research and development as well to provide our customers high-quality products in a more efficient way by utilizing a platform-based approach. And in DVD services, we want to adapt the business model and the cost structure to a declining market. We are a valued partner to our key customers, who are some of the largest players in the sector, and that is reflected in our new contracts, which give us protections in a declining volume environment. So in each of our divisions, focused business selection is going to be closely monitored to ensure that we drive profitable growth and implementation of the plan, as I said, has already started across all of the divisions. On Page 6, we think we've got a large scope for efficiency gains across all 3 business lines, which will drive the operational and financial transformation of the company. We intend to generate EUR 150 million of savings by 2022, of which EUR 100 million is going to be achieved this year. EUR 40 million of those savings are going to come from the existing plan, which started in 2017 in Connected Home; and EUR 110 million will come from the new plan, tackling key cost drivers in each of our business units: real estate rationalization, appropriate use of low-cost workforce, more active management of indirect cost spend and further simplification of our organizational structure and operations. The total cost of the plan is going to be around EUR 90 million. Then on Slide 7, in conjunction with the strategic plan, we're implementing a holistic capital structure solution to restore our strategic flexibility. Our strategic priorities are set out clearly here on the left. We want to rebuild our liquidity buffer; enhance confidence of our partners, key clients and suppliers; fund transformation projects; and capture growth opportunities in Production Services. So the capital structure strengthening initiatives include: firstly, a rights issue of approximately EUR 300 million; a 2-year extension of our revolving credit facility and Wells Fargo facility maturities from 2021 to 2023; and thirdly, a new short-term facility, providing us with additional liquidity. I strongly believe that the combination of these 3 capital structure actions will provide the company flexibility and a stable and sustainable base from which to implement all aspects of our new strategic plan, which is going to drive profitable growth. I'll hand you over now to Laurent to walk through some more of the details regarding the capital structure solution and our financial results.

Thank you, Richard, and good evening, everyone. So now flip into Page 8, I'm going to focus mainly on the -- at this stage, on the capital increase description. So the envisaged transaction is a very standard capital raise with preferential subscription rights for shareholder. So we are considering a size of around EUR 300 million, which we believe is the right amount to put the company on a sustainable and profitable path. It will rebuild the company liquidity buffer we need to actively manage to -- we need to actively manage our working-capital swings and to pursue our investments. As you recall, over 2017 and 2018, we have lost more than EUR 110 million due to key components inflation and around the same amount in payment terms reduction linked to the many credits reaching downgrades; and we also reinvested in the Connected Home transformation plan, around EUR 70 million; and finally, we repaid a EUR 90 million credit line, so obviously, depleting some of this liquidity buffer we really need to manage our working capital swings. So the additional EUR 300 million will not only rebuild this buffer, but it will also allow us to support further the growth of Production Services, as mentioned by Richard, and Connected Home. It will also help fund the cost of the new transformation plan on top of the remaining -- this is going to cost around EUR 70 million, on top of the remaining EUR 20 million of the previously engaged plan at Connected Home, for a total of EUR 90 million. What is of importance to flag is the fact that our core key shareholders, RWC and Bpi, have committed to subscribe at their pro rata stakes at the time of the launch. They are representing a combined holding of over 15%. We will be holding an AGM on March 12, 2020; and we expect to execute the rights issue in Q2, subject to, of course, market conditions. Also of importance, very strong importance, JPMorgan and Natixis, 2 key strong partners, are providing a standby equity underwriting, in relation to the full amount of the rights issue, excluding, of course, the portion RWC and Bpi have already committed to subscribe. So it basically increased the guarantee of success of this capital increase. This proposed transaction will be greatly also strengthened by the agreed extension of the maturity of our RCF and our Wells Fargo credit line that Richard described earlier. This operation is very important structural improvement of our financial -- balance sheet and our financial structure, and it will transform radically, Technicolor's financial strength as it is tackling and reinforcing our equity and our debt structure and both for the short term and the long term. This is obviously a very important and very good news for Technicolor. And we would like also to thank our banking partners, starting, of course, with JPMorgan and Natixis, but also Citi, Goldman Sachs, Morgan Stanley, Barclays and [ Med Bank ] who all are supporting us in this transformation. If we now flip to Page 9, I will give you a few words today on our 2019 results. These are preliminary results. We are planning to, next week, attend a -- we're planning next week to attend -- to organize, sorry, a full Capital Market Day and release all numbers at the same time. So these numbers that I'm going to describe to you today that you have in your deck are -- on Slide 10, apologies, are preliminary numbers that will need still to be formally approved by the Board. They are shown pre-IFRS 16 in order to help you in comparing these with your past numbers. But obviously, we have provided in the deck, a reconciliation table with the numbers post-IFRS 16. So you have both referential available. So in 2019, I'm going through rapidly, browsing rapidly through these numbers. Again, pre-IFRS 16. Consolidated sales are amounting to around circa EUR 3.8 billion, and this reflects mainly a double-digit growth in Production Services, very strong year for Production Services, and in particular, in the film division, more than offset by a strong decline in the North American video segments in Connected Home and anticipated replication volumes decline in DVD Services. The adjusted EBITDA should be around EUR 246 million. It captures, obviously, a solid improvement in Connected Home second half of the year versus the first half of the year, as anticipated, and this has been driven mainly by margin recovery. We are seeing the positive impacts from the previously announced transformation plan in Connected Home and from also our recent contract renegotiations in DVD Services. Adjusted EBITA amounts to circa EUR 36 million. As I have highlighted before, we believe that EBITA is a closer proxy to cash for Technicolor and the right metrics to use when analyzing the group. Our EBITA last year was impacted by a large increase in rendering cost consumed in Production Services, Film and Episodic Visual Effects as a result of a very, very intense period of deliveries as well as higher D&A linked to the investment in this very -- Film and Episodic division. The free cash flow has landed at around a negative EUR 161 million. As expected and communicated in the 2019 third quarter press release, the working capital of Technicolor at the very end of the year was negatively affected by downgrades by the rating agencies throughout 2019, and in particular, towards the end of the year. The impact is estimated to be, overall, in the region, short of EUR 100 million, mainly explained by one-off reductions in payment terms. However, and it is very important to notice, we are recouping, and we have obviously recouped a lot of that already at the very start of 2020. Most of these payments were really cut off and early payments made by the company. So the numbers I'm commenting now are preliminary, again, nonaudited figures. We will be closing our full year 2019 numbers over the coming days. And next week, we plan to be publishing the final full year 2019 numbers with all the details you are accustomed to. So we recommend you to reserve your questions for next meeting on this topic, and this meeting will be very, very quickly next week. Moving on to the next slide. You will discover here that we are now planning to, again, go back to this habit of providing guidance to the market. And as part of the new management's willingness to improve the transparency, we are now also providing, not only short-term, but also medium-term guidances to the market. On Page 11 of your deck, we present the guidance post-IFRS 16. But we have included in your deck in the appendix, the reconciliation table of the guidance pre- and post-IFRS 16. So you have both references. In 2020 and post-IFRS 16, we expect to generate an EBITDA in line with 2019 level, but a meaningfully improved EBITA, around EUR 70 million versus circa EUR 40 million in 2019, again, post-IFRS 16. By 2022, and here, we are providing you a 3-year cumulative guidance, we expect to generate the cumulative EBITDA of around EUR 1 billion and the cumulative EBITA of around EUR 340 million, reflecting the benefits of the strategic plan and the cost initiatives that Richard has just walked you through. We have, of course, built up this guidance with caution. By 2022, finally, we expect that the net leverage of the company will be reduced below a ratio of 2.75. So a very significant drop from today's level. Moving on to the next slide. You will discover here the key next steps and an agenda for the coming week. We will be releasing our full year -- we would be releasing our full year 2019 financial results on February 18 evening, and holding a Capital Markets Day in London the following morning, where we will go into a lot more details on each of our businesses and our strategy, and you will have the opportunity to enter also in a dialogue with our top managers. We -- you will be also holding an EGM, obviously, on the 23rd of March 2020 to address the resolutions that are required for the envisaged transaction. This finishes my quick and brief presentation. What I suggest is that we are now handing over to Q&A if you have any. So operator, please, you have the floor now.

[Operator Instructions] We currently have no questions over the phone.

Okay. Well, thank you very much for listening and...

What I suggest, in any case is, as you know, we will be all available tomorrow and in the following days if you have questions. So if -- we will be also available for meetings and calls. So obviously, we'll be contacting you. Do not hesitate to reach out to, in particular, Christophe le Mignan, the Investor Relations of Technicolor, if you want to have some follow-up questions.

We look forward to talking to you tomorrow or seeing you at Capital Markets Day next week. Thank you very much.

Thank you very much.

Thank you very much. Ladies and gentlemen, this concludes this conference call. Thank you all for your participation. You may now disconnect.