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

Ladies and gentlemen, welcome to the Technicolor's conference call chaired by Richard Moat, CEO; and Laurent Carozzi, CFO. [Operator Instructions] Just to remind you all, this conference is being recorded. I 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, forecasted 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 now like to hand over the call to Richard Moat. Sir, please go ahead.

Good evening, everybody. Laurent and I are very pleased to be able to run you through Technicolor's third quarter and 9-month year-to-date results. I hope you and your families are safe and secure. The COVID-19 pandemic is obviously far from over. And in recent weeks, we've seen an increase in infection rates and hospitalizations across many European countries where restrictions have obviously been stepped up. But hopefully, the situation is different from the one that we experienced in March to May. And our organization, I believe, is far better adaptive now to work in an environment with constraints related to COVID-19. So if we could start on Slide 4, the key highlights, during the quarter, despite year-on-year reductions in sales and earnings, the Technicolor group has continued to demonstrate its resilience in facing the COVID-19 crisis. Advertising experienced better-than-expected quarterly results. DVD Services saw strong back catalog demand and Connected Home benefited from people's desire for enhanced broadband and WiFi services during the lockdowns. These were offset by the negative impact of the halt in live action shooting on our film and episodic visual effects and post-production activities and the lack of new film releases on DVD Services. Although Technicolor suffered in terms of sales during this difficult period, the group's transformation plan has significantly improved underlying profitability and year-on-year cash flow generation. Following completion of our financial restructuring, technical now has the appropriate financial structure and is going to benefit from sufficient funding for the foreseeable future to accomplish its transformation and its expansion projects. We're continuing the drive to reduce our costs and become a leaner and more agile company. The group is now targeting a total of EUR 325 million in run rate cost savings by 2022, which is an increase of EUR 25 million compared to our previous announcements. At the end of September 2020, the group had already realized EUR 109 million of those cost savings, and as previously stated, we anticipate achieving more than EUR 160 million savings during 2020 as a whole. Technicolor's ongoing cultural transformation, which is aimed at relentlessly focusing on improving operations, profitability and cash generation, continued in the last quarter with appointments of Christian Roberton as President of Production Services and David Holiday as President of DVD Services. Christian joined MPC back in 2003 where he started as a VFX production manager, and in 5 years, he became Managing Director of Film. He's been a member of the Technicolor Executive Committee since 2019. David was appointed in May 2020, and he brings a wealth of leadership experience to DVD Services, having spent nearly 40 years overseas working in the Middle East, Europe, Asia, Southeast Asia, Africa and South America. Our teams are dedicated to achieving success across each of our business units, and we're confident of achieving our 2020 and 2022 outlook and delivering profitable growth, cash generation and value creation to our shareholders. If we move to Slide 5, looking at our Q3 and 9-month figures, consolidated revenues for the group at a constant rate were down around 16% in the third quarter and down 9 months -- over the 9 months, down 18% to EUR 2.23 billion, but the impact of COVID-19 on Production Services and DVD services was partially compensated by an outperformance in Broadband, particularly in North America where we achieved 41% growth in Q3 quarter-on-quarter. Our adjusted EBITDA of EUR 53 million in Q3 and EUR 106 million over the 9 months reflected operational improvements across all of our activities, particularly in Connected Home but lower business volumes in Film & Episodic Visual Effects and in DVD Services. Our adjusted EBITDA reflects the EBITDA evolution and was impacted by lower [ depreciation ] and amortization and reserves. Our free cash flow grew strongly in Q3, leading to a $76 million improvement at current rate compared to last year, improving to a loss of negative EUR 335 million. Turning to Slide 6. In Production Services, Q3 revenues were down 52% at constant rate driven by the previously anticipated pre-COVID-19 delays in awards coming through from 1 key client but mostly by the subsequent pandemic-related impacts on production around the world. Adjusted EBITDA amounted to negative EUR 2 million in the third quarter, down EUR 50 million year-on-year at constant rate, with most of the reduction coming from Film & Episodic Visual Effects. As I already mentioned, the Advertising service line continued to implement cost reductions to improve profitability and reached a 12% EBITDA margin in the third quarter. As I previously mentioned, we've also announced the appointment of Christian Roberton as President of the Production Services business division. He successfully built up organically one of the largest and most effective visual effects agencies in the world with 20% market share. The division has won multiple accolades over the years, including several Oscars, and it's grown sales from about EUR 50 million to around EUR 900 million in 2019. His focus on technology and creativity, combined with cost efficiency, rigorous management and client focus, is going to fuel our drive to consolidate Production Services' leadership position in the future. This announcement is also a part of Technicolor's ongoing cultural transformation. Let me highlight some of the key achievements in this division. VFX teams worked on 7 theatrical films from the major studios, including projects like Cruella for Disney and Top Gun: Maverick for Paramount and also on over 20 episodic and streaming projects, including Jupiter's Legacy for Netflix, Raised by Wolves for HBO Max and the Wheel of Time for Amazon. Our Advertising business continued to receive numerous industry accolades, including MPC's Nikola Stefanovic within Best Colourist for his work on the 90th anniversary campaign for Durex' Step Forward at the Golden Lion Advertising Awards in Shanghai. In Animation, Mikros Animation was in production on 3 features and many episodic pieces of work, while Technicolor Games completed its work on EA Sports UFC 4. In post production, Technicolor worked on 65 theatrical projects and more than 115 TV or over-the-top series or mini series. It also won 2 Emmy Awards for outstanding sound mixing and sound editing, both for its work on HBO's Watchmen. Overall, during third quarter, film and episodic productions began to restart, initially in the Asia Pacific region and some European territories, followed by Canadian and limited U.S. productions during the latter half of the quarter. The major U.S. studios also reached an agreement in late September with all of the key Hollywood unions, and the industry expects production activity to accelerate as a result. A number of countries like Canada, France and the U.K. have launched or will launch production insurance indemnity schemes that will provide pandemic-related coverage, which is also anticipated to stimulate production activity for producers who cannot afford to self-insure, such as the major U.S. studios. Overall, Production Services is observing an increasing level of bidding activity for projects, particularly for streaming and over-the-top distribution. Moving on to Slide 7. In DVD Services, revenues in Q3 were down 22.7% at constant rate, with replication volumes being down by a similar level. Activity was strongly impacted by the limited amount of new releases due to COVID-19, while back-catalog volume showed good resilience. Adjusted EBITDA amounted to EUR 27 million at current rate in Q3, which was better than our expectations given stronger-than-anticipated disc volumes and acceleration of several cost savings actions. The margin also reflects the positive impact from contracts which we renegotiated in 2019 and early 2020. David Holliday, the newly appointed President of DVD Business Services has been tasked with the in-depth transformation of the business. And in a short period of time he's been with us, he's already achieved the acceleration of site closures, review of internal processes and cost management and a very disciplined approach to contract negotiations. Following protracted negotiations, the Paramount replication/manufacturing contract will expire in mid-2021 and will not be renewed, but the associated distribution contract remains with Technicolor. The impact of this will be mitigated by accelerated actions of DVD Services in respect to its business transformation plans. Looking forward, theatrical new release activity continues to remain very limited, with many key title release dates getting pushed out into 2021. Most major retailers have either remained open or have reopened, but the level of sales activity is still below normal. The impact throughout 2020 and beyond will be dependent on the extent and duration of ongoing restrictions. The specific timing and extent of the reopening of movie theaters is obviously going to impact the level of new disc release activity. DVD Services has accelerated aspects of its future restructuring plans in an effort to adapt to these impacts. On Slide 8, Connected Home revenues were up 10.6% in Q3 at constant rate. Revenues remained strong in North America driven by increased demand from cable customers for upgrades to higher-power broadband and better WiFi performance. Adjusted EBITDA improved dramatically to EUR 31 million in the third quarter, which represented 6.3% of revenue. You'll recall that EBITDA margin back in 2019 was only 3.5%. And the division managed to be very close to its original 2020 budget targets, which were set prior to the arrival of the COVID crisis. It's the result of the transformation plan, which the division launched 2 years ago, which focused on gateway broadband and Android TV and drastically improving productivity to increase the division's performance. It validates the solidity and future of the Connected Home business model with continued focus on selective investments in key customers and specific parts of the portfolio that are going to lead to improved margins. In the current COVID-19 context, Connected Home is fully operational due to the early adoption of a remote working model that successfully moved half of all the employees off-site to ensure key engineering facilities remained safe and open. The COVID impact is now limited in Asian-based manufacturing and supply chain, but it's still impacting capacity in Latin America through manufacturing and back-end operations. Over on Slide 9. We continued our strong focus on the delivery of our previously announced cost savings through our Panorama cost saving plans. And as I mentioned in my introduction, we're well on track to achieve total savings in this year of -- in excess of EUR 160 million. This has driven a year-on-year improvement in cash flow despite the significant fall in the top line. Through our Panorama 3 initiative, we're now targeting EUR 325 million of savings through the end of 2022, including a EUR 50 million reduction in our transfers function costs. We're confident of achieving the outlook presented in our press release, which we issued on July 30 this year, including the EBITDA 2020 target of EUR 169 million and EBITDA 2022 target of EUR 425 million. In addition, continuing free cash flow before financial results and tax in the range of negative EUR 115 million to negative EUR 150 million in 2020 but improving to a positive EUR 259 million in 2022. I'll now hand it over to Laurent, who will go through our new financial structure and our Q3 and 9-months' financial performance.

Thank you, Richard. If we now move down to the Slide 11, we are going to briefly review our successful completion of the financial restructuring. I'll be very brief, as for most of you, you know already this slide. So on the Slide 11, from left to right, we are depicting the key items of the balance sheet restructuring. All value on this slide are nominal value. So if you remember, we benefited from a new cash injection of net EUR 480 million under debt format with a maturity set at June 2024 to fund the company's operational needs and repay the $110 million bridge loan that we set up in March 2020, and we repaid that by July 31. So that's the first part. The second part is, as you remember, a debt-to-equity swap of the value of EUR 616 million on the entire term loan and RCF on a pari passu basis. It was performed through 2 different capital increase of the same size, EUR 330 million. One, a [ requirement ] of the GPS and the other one, fully reserved term loan and RCF creditors. As a result, an amount of EUR 572 million has been reinstated, and you can see that's on the right-hand side of the slide. And it's been extending its maturity and runs now until December 2024 with a bullet repayment. We'll come back to these elements later. We also were benefiting from loan by Allianz -- sorry, by Wells Fargo, amounting to $125 million. This has been prolonged and extended with the maturity extended to December 2023. Finally, in this very summarized approach to what we've been completed through the summer in Q3, and as you know, we've closed the -- following the closure of the SFA procedure, which was also the Chapter 15 procedure at the end of the summer, and that has marked the final step of Technicolor's proceeding in the U.S. If we move now down to the following slide, Slide 12. This one is a little bit more technical. And I think and hope we'll provide you with a clear view on the debt that is now outstanding and a debt you should take into account in your model. It will help you to forecast our cash interest payments or peak interest payments and the P&L accounting. It's a very important also side because it will help you to better understand our financial statements and find in our financial statements the amount of debt that you should be considering. Indeed, IFRS standards that we're applying require to recognize the new money, the reinstated debt and the equity issued at fair value and not at nominal value as it has been presented to you in the previous slide. So you won't find the previous slide number in our balance sheet statement. So it's important for you to figure out what's happening here. The difference in value obviously, between the nominal value that you had presented to you previously, the real value, I would say, and the IFRS accounting will be reversed over time by correction of the interest accounted for the preparation of the consolidated financial statements under IFRS. So to make it even clearer, if you look at our balance sheet at September and as published in your press release, you will find EUR 937 million of debt. But in reality, we have to repay in 2020 for more than EUR 1.2 billion of debt. Balance of that is the notion of fair value applied to the accounted that we have to have on our balance sheet. So then the same type of differences do apply to the equity changes. The cash, of course, in the balance sheet and in the cash flow statement won't be affected, of course, by those IFRS effects, which are purely technical and noncash. So really, the point of concern is really the way you will be looking at the debt in your -- in our balance sheet as published. So going a bit more in the details, the new money is valued at a mark-to-market of EUR 478 million. The difference between the cash received, and we received EUR 420 million, a bit less, EUR 416 million because of dollar fluctuations, and the fair value, so the EUR 478 million, is booked in financial charge. Reinstated debt, so EUR 572 million, as shown in the previous slide, is accounted for, again at fair value, at EUR 466 million in our statements. Of course, none of these are posting balance. So to restore the balance, we have to record in the P&L the positive result of EUR 164 million. As a result, our new shareholders' equity amounts to EUR 300 million and has been improved by EUR 646 million. Here, of course, really simplify the overall operations and accounting that are taking place. So for those who are interested in having the details, basically, we have posted on our website a dedicated deck that is going to take you step-by-step through the -- all the accounting of the operation and will explain to you not only the principles but also the details of the debt and the equity changes. So you will have that available to you on the website. And for those who need more explanation, we'll be, of course, available to give you more details. To be even more pragmatic, on the very slide you have in front of you, we have detailed in nominal terms, i.e., the real value, of our debt. And you can see it on the top right-hand corner, it's EUR 1.26 billion that we will have to pay in 2024. You will find also below the amount of cash interest. So in the little spreadsheet you have below, the amount of cash interest we will have to pay year after year and also the P&L charge, and it's called IFRS in the slide and adding up to EUR 484 million. So if I take you from left to right, per year, so 2021, '22, you will have the amount of cash interest we'll be paying totaling EUR 198 million. You will have the amount of PIK interest that are going to add up, so EUR 296 million. PIK interest, why? Because part of our debt is bearing interest, are being paid cash, left column. And some PIK, so at the end of the period, that's EUR 196 million. And above in the chart, you see it in the gray color, we will have EUR 196 million to pay back as well in 2024. The current IFRS adjustment helps basically accounting to match with the imbalances we have on our balance sheet. And the total IFRS column gives you the amount that we will be reporting year after year on our P&L. So with these elements, you have -- we've done for you, basically, the work of figuring out what is it that you need to plot in your model for the service of this debt and the difference between what will be really cash to be paid and what will not be. Well, with this -- and again, we will be available for more questions. Last word on the total shareholders' equity. At September end, it amounts now to 300 -- around EUR 300 million. It has been improved by EUR 646 million coming from the capital increase. Let's move now down one slide -- 2 slides, sorry, to Slide 14. So let's move now to the results year-to-date. So on this slide, you will find our consolidated P&L. I will not comment in detail all figures, but we'll give you some key highlights. So again, here, I'm commenting year-to-date September numbers for the first 9 months. So our revenues for the first 9 months of the year decreased by EUR 529 million, but our adjusted EBITDA decreased by only EUR 97 million, thanks to the decrease in variable costs, of course, but also to the continued effort that we realized on fixed-cost adjustments and that Richard touched upon earlier. Our adjusted EBITDA decreased by only EUR 63 million, mitigated by lower depreciation and amortization and lower reserves. Our net results improved by EUR 20 million to a negative EUR 120 million, and our free cash flow was higher by EUR 76 million versus last year. And I should say it's quite an achievement in a COVID year. Of course, it remains negative at EUR 335 million. Note that ForEx had a very minimal impact through this period. If we move now down one slide to the Slide 15, here, you recognize a very traditional EBITDA bridge. So we have a negative variance to explain EUR 95 million, and it's driven mainly by sales decrease impact on Production Services, mainly around lower volumes coming from our Film & Episodic division and from HES where we had lower volumes linked to a lot less new releases than in a normal year. It's been mitigated by Connected Home, higher EBITDA as a result of gross margin improvements and cost-saving plans more than offsetting lower revenues. Corporate and other reports a lower EBITDA as last year -- it's important to notice that, last year benefited from higher retained patent licensing contracts. We will have some of these benefits, I think, as we mentioned to you, but probably later on this year in Q4. So let's now move on to the following slide that are detailing the results per division, so we move to the Slide 16. Now just one point here. We -- as we have already commented all the half year results at our previous call, we are going to focus here really on the third quarter results. So during that quarter, Production Services revenue amounted to EUR 111 million, down 50 -- let's say, close to 52% at constant rate and driven by the previously anticipated pre-COVID-19 delays in awards coming from one of our key clients, but also now by the impact of the second pandemic related impacts, what we have on live action shootings around the world. The adjusted EBITDA amounted to -- was close to breakeven, small loss of EUR 2 million in the third quarter, down EUR 50 million year-on-year at constant rate. The adjusted EBITDA reduction is mainly due, as you would expect, to Film & Episodic Visual Effects. This negative evolution has impacted adjusted EBITA as well compared to the prior year, but a little bit less as we have basically had to support a lot less rendering cost this quarter. As already mentioned and it was not notifying, the Advertising service line has continued to implement cost actions, very stringent cost actions and therefore, has managed to improve its profitability in this very complicated context. If we look at the following slide, Slide 17, we can see that DVD Services revenues here have totaled EUR 193 million in the third quarter, and they are down 23% at constant rate versus last quarter -- or same quarter in 2019. Lower volumes across all formats as a result of the negative impact of COVID-19 and the absence of new releases have, let's say, exacerbated the structural trend of decline. Catalog sales, nevertheless, have shown a great deal of resilience, mitigating the impact -- the negative impact of lack of new releases, and that's been one of the good surprise of the past 2 quarters. So total combined replication volumes were down 23% year-on-year. The adjusted EBITDA amounted to EUR 27 million, as you can see on the slide, down only EUR 3 million. EBITDA margin improved strongly to 14% of revenue versus 12% in 2019. And this was better than expected given stronger-than-anticipated catalog disc volumes, given also to the acceleration of certain element of cost savings actions and the positive impact, of course, of the contract renegotiation that we went through in '19 and at the start of 2020. The lower depreciation and renewal contracts also helped payments, also helped to deliver an adjusted EBITA of EUR 15 million that is, surprisingly, EUR 4 million better than last year. So again, quite an achievement and a demonstration not only on the resilience but also the successful transformation plan. So the DVD business model transformation is really underway and started to produce results despite a very tough COVID environment. Moving down one slide to Slide 18, we are going to now discuss Connected Home. The division has demonstrated very strong revenue performance and an excellent year-to-date profitability, and it's on track to meet its original 2020 targets set before the COVID crisis, which is quite remarkable. Revenues totaled EUR 488 million in the third quarter, and they are up close to 11% quarter-on-quarter at constant rates. It's been driven mainly by strong increase of demand from the North American cable division, offset to degree by a lower demand coming from our Eurasian activities. These activities have been hampered by COVID restriction limiting sometimes access to the home. So despite the fact that the final demand is very strong, sometimes our clients couldn't access home so therefore, leading to a lower demand than expected. But all in all, a very strong performance sales wise. Adjusted EBITDA has amounted to EUR 31 million in the third quarter, 6% of revenue and versus a breakeven point last year. So a strong, in absolute terms, improvement year-on-year of the contribution of Connected Home. Adjusted EBITA is up at EUR 15 million, an increase by EUR 15 million compared to prior year at current rates. So this positive evolution in profitability is the -- simply the result of the transformation plan launched some time ago. And the strategic choice is to refocus on gateway broadband access and to transform operations that are proven so far successful in the COVID-19 era, improving drastically productivity and therefore, profitability. Let's move on now to the Slide 19. So we have covered the third quarter of our divisions. Let's go back now to the rest -- the remaining of the -- our P&L, detailing what happened between adjusted EBITDA and EBIT. And here, I'll be back to commenting year-to-date numbers. I believe it makes more sense for some of these items. So between adjusted EBITDA and continuing EBIT of minus EUR 212 million, we have mainly 3 items. We have the PPA amortization, as you know, quasi mechanical noncash calculation, EUR 31 million. We have a EUR 71 million impairment charge that we took in relation to the DVD Services. We've revised down the assumptions in light of the COVID impact. And finally, we have EUR 51 million of restructuring costs, out of which we have EUR 24 million for Production Services, EUR 17 million for DVD Services and the rest for Connected Home. They are mainly linked to a combination of our transformation plan and also our mitigation actions for targeting the COVID negative impact. Let's move on to Slide 20, so the following one, going down further into our P&L. So we can see here, so we are going to detail in between all the lines between EBIT and net result group share. So net result continuing, it's negative EUR 121 million. It's an improvement and an increase of EUR 29 million versus last year. How does that happen? The EBIT has decreased by EUR 138 million, but this has been mitigated by other financial expenses of EUR 167 million. Remember, part of that number, that could be -- that could seem a little bit surprising, is explained by the noncash results linked -- of EUR 164 million linked to the balance sheet restructuring I described to you before. That's the balancing post that we need in order to make the balance between nominal and fair value notion on the balance sheet. So it's EUR 164 million. It's noncash. I don't think you should consider it as anything but a balancing post to our accounts. Of course, checking that aside, we have higher net interest expense of EUR 5 million that are mainly linked to the bridge loan spend we -- interest we had to bear, and it's offset by a lower tax of EUR 4 million. So not a huge amount here. We have a net result discontinued of negative EUR 10 million. As you know, this is mainly cost in relation to higher legal settlements we had, in particular one in Germany around the CRT litigation. Without further ado, moving on to the following slide, the Slide 21. You have -- you are here at September end again, and you have a traditional bridge of free cash flow. So you can see that it has improved in absolute terms by EUR 74 million from negative EUR 411 million a year ago to EUR 335 million at the end of September. Why is it better? Well, we have a negative EBITDA, but better -- an improvement in CapEx, better by EUR 43 million, was mostly due to lower capacity expansion and also contract payments in both Production Services and HES and also lower Connected Home R&D capitalization and overall straight control over CapEx. One of the big elements that explain this positive variation is in relation to our working cap that has improved by EUR 112 million. And why? That's mainly because of a better management -- inventory management. Do remember that last year, at the start of the year of '19, we had to suffer an excess of inventories buildup that we had to pay for. And since then, we've implemented at the time a very strict control of inventories and it has bear fruits. And as you can see now, we have no longer to suffer this, and that produces a positive impact on a year-on-year basis. Finally, you can see that we have a higher restructuring cash out to the token of EUR 14 million, and they are mainly around -- due to the Panorama plan and around HES and Production Services. Moving on to the following slide, Slide 22. Here, a brief snapshot on our liquidity. So at the end of September, the cash on hand was in the region of EUR 241 million. And we have the line of Wells Fargo undrawn. I should comment that this situation has continued up until now. So that's a reflection even on where we stand today. Finally, my last slide is Slide 23. Here, I won't, of course, detail all these lines, but you have laid out in front of you the new deck and the new deck structure. You do have, at the bottom of the spreadsheet, the IFRS 16 related debt. And so I think with that plus with the spreadsheets we provided you with at the start of the presentation, you should be able to properly model our debt and our cash interest payment. And of course, we remain at your disposal for further questions. And please do check if you want to have more details, the deck we're putting on the website that is further -- providing you with further details on this debt restructuring. Well, with this, I hand over to -- the call to Richard for the conclusion.

Thanks very much, Laurent. So to conclude, in the third quarter, Technicolor demonstrated its resilience in facing the COVID-19 crisis. We've now got a stronger balance sheet, and that's going to provide a platform for the creation of a sustainable future. We're entering a new era in our history, and we're continuing the drive to become a leaner and more agile company. We've got the right business focus, and our teams are dedicated to achieving success across each of our business units where we play vital roles in providing differentiated products and services to our clients. I'm convinced that Technicolor can return to delivering profitable growth, cash generation and value creation for our shareholders. So thanks very much for your attention. And now Laurent and I are ready to take your questions.

[Operator Instructions] The first one comes from Anastasia Chironova from Alcentra.

I have a couple actually. Firstly, I wanted to see if you could give us some guidance on Q4. You obviously reiterated the guidance you've given earlier for the full year, but I was wondering if you could give some detail by division.

Look, we -- I don't think we are going to provide you with specific guidance for Q4 as the quarter is really -- we aren't really on board of it. But maybe to give you some hint and some flavor of how it looks like. So you can see that at the end of September, we are quite reasonably doing well in terms of performance. And we are, obviously, maintaining our guidance at the end of the year. So that does imply, if you do the math, a small or sort of a slower or lower performance in Q4. Now at the moment, we should say the way we're looking at Q4, we are very prudent. We remain in the COVID environment. Yes, we are ahead. Yes, we have, versus our own expectations, Connected Home performing better, Advertising performing better, the DVD division performing better. But we have tried to maintain a reasonable amount of prudence in Q4. To get us to this market, basically, what we believe is that probably, we factor in -- but again, we have no sign of that, but some prudence around potential supply constraints as far as Connected Home is concerned. Again, no sign of that today that one has to be prudent. It has basically some [indiscernible] of some cases might have been affected a little bit by the new sort of lockdowns we can see here and there and the impact of COVID. So we have here a little bit of a prudence, and we think we should be prudent, especially in parts of what could happen in Europe. Again, our Lat Am, Latin American clients in -- for Connected Home are suffering from high dollar. You're buying more boxes in dollars, but they're selling them in local currencies. So it's been tough for them. So we think that, that might continue. Of course, we continue to improve our cost structure, but we are a little bit more prudent there in Q4. What is the part of prudence, what is the part of reality? I can't tell you. We'll see where we land. As far as HES -- DVD, sorry, is concerned, again, in Q4, we believe that we're prudent because we think that we won't have a lot of new DVD releases. Obviously, the series of lockdowns and the lift on the live action shooting remains very, very heavy there. So we don't think we're going to be having a lot of that. And we are always being prudent because we think we might have a site closure that could come in and basically affect ourselves. The team has been extremely successful in avoiding that and managing that, but you never know. So that's something also we are taking into consideration. And as far as Production Services is concerned, we believe that we're more or less in line with what we were thinking. So slow pickup -- very slow pickup in terms of tentpole movies and episodic. And we are quite prudent as far as Advertising is concerned in Q4. We were prudent in Q3, we were prudent in Q2, we're proving so far. But we think we -- Advertising is very linked to GDP growth, as you know, and we believe we should be prudent. So that's a little bit what is behind the construction of Q4. That will take us to achieving our guidance at the end of the year. But again, as I think Richard has mentioned, we have some prudence embedded in -- ahead of us, and we are quite confident in achieving this guidance.

Perfect. And maybe just thinking beyond this year, specifically for Production Services, if we continue to have the delays in live shooting and smaller scale projects, how comfortable do you feel about your kind of more medium-term targets for '21 and '22?

Well, as we indicated in the presentation, there has been a pickup of activity in Production Services, particularly in Film & Episodic in this third quarter. There's been a lot of -- a lot more conversations with the big Hollywood studios about pieces of work, verbal commitments, firm commitments in certain cases. Some of that work is computer graphics heavy, which means that it can start in the short term without the need for live-action shooting. We've got a very good forward pipeline. We're looking at something just over 50% of revenues, which we're budgeting, being committed by the studios at this stage with another tranche on top of that, which we're highly confident of achieving. It's probably a little less in percentage terms than we've seen in some previous years, but I guess that's natural given the nature of where we stand with respect to the COVID crisis. So recovery is starting to happen slowly. As I indicated in my presentation, we're working -- have been working on a number of film and episodic projects in the third quarter, both in FEV and in post production with some distance away from returning to any form of normality in terms of the levels of activity, which we saw in 2019, but nevertheless, there has been a pickup, and that gives us confidence that we'll be able to achieve our targets for '21 and beyond.

Our next question comes from David Cerdan, Kepler Cheuvreux.

David Cerdan, Kepler Cheuvreux. I have a few questions for you, if I may. First one is just to come back on Production Services. How -- I would like to know what is your performance in Q3 compared with the rest of the industry. Do you see some bankruptcy within the industry and notably for the smaller players? So first question on Production Services. For DVD, the contract with Paramount for the manufacturing is not -- will be over. But can you explain who will be the new supplier of Paramount? Or is there any other reason why they have stopped this contract? And for connecting all my question is related to the gain of market share. Your performance is great in Q3. Is it just because of you or because of the market?

Okay. So the -- it was announced yesterday -- in terms of the competitive environment that Production Services is in, it was announced yesterday that there had been an amalgamation between Framestore and Method. And so that's a couple of our relatively large competitors getting together under the umbrella of an investment by Crestview and RS Capital. And so I guess, that's going to be one less competitor that we have to deal with in the future. I think both of those companies were needing a significant cash injection in order to keep going because everybody in the industry has obviously been hit by the collapse in revenues from the making of theatrical tentpole movies. Double negative, another one of our competitors, probably the largest amongst our competitors, has also engaged in a debt raising exercise, which they pulled recently. So I mean I don't have detailed intelligence, but I would say that everybody is suffering, and I personally am very pleased that we have accomplished our financial restructuring relatively early in this crisis. And I think that puts us in a strong position to take advantage of the recovery as it happens. In terms of the question you asked about DVD, the new supplier is Sonopress, which is a subsidiary of the Bertelsmann Group. And so it was simply a question of the cost. We were getting down to levels where we didn't think that it was going to be possible to make an adequate return on the contract and therefore, it went to the other supplier. We do, however, retain the distribution contract, which is associated with the distribution contract that we have with Universal. And then the question about Connected Home, the excellent performance, is that down to us or the market? I think it's kind of a combination of both. I think the -- there's been very strong demand, particularly in North America. You can see that, that is up substantially quarter-on-quarter. And that's been for -- I mean people are locked down, working from home, large numbers of the family using different devices simultaneously. There's the desire to get the best possible broadbrand and WiFi performance, and we have some of the most high-performance products in the market, such as the XB6 and XB7 boxes, which is sold by the major cable operators in the U.S. and they have WiFi 6, excellent in building WiFi propagation capabilities and download speeds of up to 1.3 gigabits per second. So we've seen sort of record quarters, the best for 12 years from players like Comcast, who are our largest customer in both Q1 and Q2, and we've been riding that wave. So I think that the market has been helping, but we've definitely been seeing the benefits of the cost-saving program, which has been underway for 2 years now in Connected Home and continues as part of our ongoing Panorama programs. So a combination of those 2 factors.

I have a question, if it's possible, on the restructuring. What could be the amount of restructuring for this year?

Look, this is typically not a number that we can give you. So let me see if I can give you a hint. I think we have -- you should think of basically -- the number you have at the end of September, you have it more or less on a quarter-per-quarter basis. So I think you should more or less consider that we have -- we're going to have a quasi same amount in Q4, the one you have per quarter. I think that's probably the best way for me to help you in there. The effort is continuous. So it's not reducing over the period.

[Operator Instructions] Next question comes from Russel Higgins from Barings.

Good set of numbers, positive to see. Just 2 questions for me. One, on the Production Services side, you've noted that recovery is happening. How -- could you kind of benchmark that against your expectations? I'm conscious the autumn/winter filming is an important one. And then when you start looking at the 2021 contracts, are you starting to see pricing pressure to the market as a result of the weakness in peers? Is it getting -- I think you mentioned increased activity in bidding. Is that putting pressure on pricing? And how are the Disneys of the world kind of reacting to this? Clearly, a core -- there are a number of core partners, which are under a lot of financial pressure, and it can't be comfortable for them, right?

Yes. If I -- so first of all, in terms of the Production Services recovery, you'll recall that when we issued our guidance in the middle of the year, we actually were talking about an upside case as well as our core case. And the core assumption was that live-action shooting would have restarted in Hollywood by the 1st of October. Now clearly, the level of activity, which we see at the moment, doesn't meet that expectation. It's starting to recover, but it's nowhere near the levels which we saw before the COVID crisis started. So in terms of our expectations, I think that we are pleased to see the increase in activity, which is occurring in Q3 and accelerating into Q4, but we're still cautious about when you could say there would be a return to, let's say, normality. And it's certainly going to take some period during the first part of 2021 to achieve that. In terms of pricing pressure, we haven't actually seen too much of that in the theatrical tentpole movie market. And the prices which we're getting for the contracts, which are under discussion and which have been awarded, are pretty much the same as the prices which we've seen in previous years. I think there might be some downward pressure in the episodic and streaming market. But certainly, in the large film market, we haven't seen a significant change in prices. And the Disney question, I wonder if you could repeat that. I wasn't quite sure what you were asking from us.

I guess it's more just how are the big studios reacting to core. You've mentioned yourself -- I mean it's good that balance sheet has now been fixed. But clearly, a couple of competitors as well in the space, which are struggling through this. Are they -- how are they reacting to that? Is that a fair question to ask?

Go ahead, Laurent.

Yes. I think to try to have a crack at your question that is quite complicated. I think when we discussed this matter with Christian, he's basically -- the studios are very much concerned about basically [ not killing ] 2 or 3 years in a row. So when Technicolor works, today or in end of '20 or in '21, we're working for movies that should be released in 2022. So it's a long preparation, a long work. Now it seems that the studios are very preoccupied by the fact that they absolutely need fresh products, not for 2021 per se, because here, you have basically all the product that hasn't been shown, for instance, in theaters or whatever that is available from 2021. But the roster, if they don't do anything in 2022, would be empty. And as you know, it's no secret to say that some of the studios, the likes of Disney, but they're not the only one, they have theme parks, they have a lot of merchandising attached to these things, and they need to keep the pipeline. So the sort of a soundbite we're getting from the conversation with the studios is that they are -- as Richard was mentioning earlier, the guys are quite actively greenlighting and are filling the needs of studios to get started in terms of production. Now in the mix, will that mean that they will be more inclined to do more CG movies, computer-generated movies so -- than a movie that's filled with actors, yes, probably. That's probably what we can see today. So I don't know if I'm answering properly your question, but this is really the agitation we can see, we can witness at the moment is linked to the fact that if this is not starting now, 2022 will be empty. And that's probably the reason why we have some -- a lot of green awards -- greenlights and awards coming our way, I guess, our competitors as well, that the market is looking up.

That's helpful. And just final question for me. It's good to see the continued strength in Connected Home. So you -- is this kind of wave of broadband activity, is that coming to an end? Have you got any visibility on that over the next 6- to 12-month period? Or should we -- when should we expect this strength to kind of subside?

Well, I think that, I mean, certainly, we can see out through the first half of 2021. And we think that, overall, the same trends are going to continue. It's going to be strong demand in the U.S. offset by problems in Latin America because of the collapse of the currencies there and our pricing of our product in dollars. But hopefully, we will see a recovery in Eurasia because there's been some territories, like Japan and Australia, where we've seen the lockdowns having a significant impact on demand, and we hope that, that will reverse. But overall, I think that in the first half of 2021, we do expect these trends to continue. And that may well be so for the year as a whole, but we've got better visibility over the first half.

We have another question from Vihren Jordanov from Cairn Capital.

I guess maybe a follow-up to one of the previous questions. Is there any way you could maybe give us a sense, if not quantify, how much additional demand you've had over the last 2, 3 quarters in the Connected Home division from this kind of growth in the Broadband segment and people kind of upgrading or connecting to new providers or stronger networks and all that stuff that you've seen in the U.S.? Is that possible at all?

Sorry, we're trying to find a way to answer your question without disclosing information we cannot disclose. So if you -- I think we are very sharp in conflicting trends when you look at the trend. So North America, obviously, has been going up very, very strongly. Let me give you some color around that. The increase has been, let's say, without disclosing you to specific numbers, but a little bit short of an additional EUR 150 million versus last year. So it's quite significant. What's behind that? Mainly, a lot of activities we have with the North American cable operators. We're servicing a lot of these through the likes of the Comcast, the syndication in Charter. And that's been driven by, as you know, there was the XB6 and then the XB7 boxes. [ The 3.1 boxes ] were introduced sequentially in the market. The pickup was strong. And we had a leader slowdown at the start of the year because we had some pinch in terms of delivery constraints in Q1. But very quickly, we saw the demand coming in massively there and continuing. Now someone asked us the question about Q4 earlier. At the moment, obviously, we are ahead of our own expectations. So is it because sales have been put in from, let's say, Q4, Q1 into Q3, Q2? Or do we believe that this trend will continue? That's -- it's a little complicated to say. As Richard has mentioned to you, at the moment, the tone coming from there is that there is demand -- final demand and willingness from the cable guys to deliver. So that seems to continue. So that gives you an idea of the magnitude. Now conversely, in what we call [indiscernible] so in the rest of the world, this year versus last year, we delivered less in terms of sales. But here, the trends are very different. I think if you look at Europe, first of all, you should remember that we were still doing quite a bit of video still in Europe. And we've -- either because the generation of the boxes were finished or we had -- because simply, our clients were less asking. We saw a softness in video. We were expecting some of that, so we have it. That's fine. We also -- in India, for instance, we're a very strong provider to the likes of Tata Sky. Very, very strong big orders last year. And obviously, we -- the equipment has finished. So here, it's a little bit more video story versus a broadband story where broadband demand remains strong. In Latin America -- again, the question is the final demand is here, so people are keen to upgrade their boxes, in particular, in gateway broadband access. The trick is to either -- might be able to track down to the home. And when you have lockdowns, sometimes it's complicated, you can't do that or -- and you have some more direct clients. Direct clients would be the, I don't know, the [ Claro ] of this world or the telco of this world. They have had some problem because their margins are very massively pinched because of the dollar surge. So they tend to slow down a little bit the demand. I'm not completely convinced I'm answering properly your question, but I would say, you have an order of magnitude in the U.S. and at the moment, this seems to be continuing. For the rest of the world, it's been off, but we believe in 2020, mainly because it's more COVID-related annoyances that are here, the underlying demand seems to be continuing. So we see we'll be living on -- basically following up on the -- from one lockdown to another. And if lockdown restrictions are released, then probably that we have the market. So that's where we are at the moment.

It was the last question. We have no further questions.

Okay. Well, should we wait 10, 20 seconds maybe to see if -- in any case, we are at your disposal to answer follow-ups. If you want, we'll be happy to -- we won't go on the physical road show in the coming weeks, obviously. But our team is available to take calls from you guys. And basically, we'll -- again, for any accounting questions, do not hesitate to go back to our website and have a look at what we've displayed here. It could be -- I'm not sure it's going to be fascinating reading, but it's going to be important really to understand our statements. With that, I think we are going to finish the call. So operator, thank you very much, and hopefully, we'll all see you soon or talk to you soon over the coming days.

Yes. Thank you very much, everybody.

Thank you.

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