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

Ladies and gentlemen, welcome to Technicolor conference call shared by Richard Moat, CEO; and Laurent Carozzi, CFO. [Operator Instructions] Just to remind you all, this conference is being recorded. We would like to inform you that this event is also available live on Technicolor website with synchronized slide show. During this conference call, statements could be made that constitute the 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 the call to Richard Moat. Sir, please go ahead.

Thank you very much, and good evening, ladies and gentlemen. It's a great pleasure to speak to you as we are announcing our year-end 2020 results. 2020 was obviously a very significant year for Technicolor as it was for many businesses. We've been dealing with the impacts of the COVID-19 pandemic, which obviously is being gradually brought under control across the world, even though its impact is still going to be felt for some time to come. And on the other hand, we've restructured our balance sheet during the year and reengineered our operations. We've also restructured our global footprint, implementing changes across all of our divisions. But above all, I think the key message is that we have exceeded our guidance for 2020. Connected Home beat the targets originally set for it before the crisis began. But Production Services and DVD Services were hit by the halting of activity in the film industry and the associated cinema closures. So if we turn over to Slide 4, 2020 at glance. 2020 was, as I've said, above all, a year where Technicolor has reengineered its operations. We strengthened our balance sheet through a successful financial restructuring and we significantly improved our operations, our profitability and our cash generation, ultimately creating value for all of our stakeholders. The management team has been renewed. And their incentives have been realigned to value -- to create value for the company in the short and in the medium term. We gained momentum towards becoming a more innovative, faster to market and artistically cutting-edge company. And in the process, we achieved permanent cost savings of around EUR 170 million. Despite the pandemic, as I've said, we exceeded our 2020 guidance on all metrics. EBITDA, EBITA and free cash flow. We are looking forward to the future with confidence and we're going to continue to execute our transformation program to deliver improved operational and financial performance. Turning to Slide 5. Our 2020 results are a significant achievement in the context of the successive waves of COVID-19. Our revenue of EUR 3 billion demonstrates, however, the resiliency of the group's activities in the face of the pandemic. Production Services had better-than-expected levels of activity in advertising, which helped mitigate the slower-than-anticipated return to activity in live-action shooting. The Connected Home performance was driven by strong consumer demand for better broadband and WiFi, particularly in North America. DVD Services registered continued strong back-catalog demand, which partly offset the lack of new film releases. Our adjusted EBITDA reached EUR 167 million, including a second half where we saw more than doubling compared to the first half. Our adjusted EBITDA was negative EUR 56 million as a result of the lower EBITDA, mitigated by lower depreciation and amortization and reserves. Our continuing free cash flow was negative at EUR 124 million, but that was within the range to which we guided and represented a positive inflow of EUR 118 million in the second half of the year. Moving on to Slide 6. Production Services revenue amounted to EUR 513 million in 2020, down 41.4% at constant rate and 42.5% at current rate year-on-year driven mainly by the pandemic-related impacts on production in Hollywood and around the world. But the revenue decline was partially mitigated by double-digit revenue growth at Mikros Animation,and the launch of MPC episodic early in 2020. We continue to lead the market in film and episodic visual effects. The team's worked on around 25 theatrical film projects for the major studios and over 40 episodic and nontheatrical projects. MPC film won the Oscar and BAFTA Awards for visual effects for the film 1917. In advertising, we continue to receive numerous industry accolades, and MPC won Visual Effects Company of the Year at the Ad Age Creativity Awards 2020. And at this year's Super Bowl, The Mill and MPC Advertising worked on over 20 top commercials. Animation delivered approximately 3,100 minutes for TV and film on works such as The SpongeBob Movie, while games completed its work on several AAA titles such as FIFA 21 and Assassin's Creed Valhalla. Christian Roberton was recently appointed President of the Production Services division to focus on technology, quality and creativity, combined with cost efficiency. Christian immediately implemented management changes and Josh Mandel has become CEO of The Mill and Andrea Miloro has recently joined us to lead the Mikros Animation brand. We also announced, on January 14, that Streamland Media had agreed to purchase our post-production business for EUR 30 million. This activity was no longer aligned with our strategic repositioning on value-added VFX services. And closing of that deal is expected during the first half of 2021. Moving now to Slide 7. Connected Home delivered a strong year, exceeding the original targets which was set before the pandemic was known about and maintaining its market leadership in the Broadband segment and in the video Android TV based segment. Increased demand from cable customers in North America drove revenues, but we were hit by a slowdown and supply constraints in Eurasia. Latin America was negatively impacted by the difficult macroeconomic situation in the region as well as buying power impacts resulting from currency devaluation, which stems from the drop in oil prices. The division successfully completed the bulk of the transformation plan, which was launched back in 2018. Selective investments in key customers and a platform-based products approach, combined with strategic partnerships with key suppliers, have generated a significant increase in productivity. Adjusted EBITDA, as a result, grew 46.7% at constant rate, and the EBITDA margin expanded from 4% to 6.2%, highlighting the positive impact of the cost restructuring measures. 2020 EBITDA of EUR 41 million was almost twice 2019 EBITDA of EUR 23 million. Over on Slide 8, DVD Services performed well in a difficult environment. This was achieved despite a decrease in revenue of 19% at constant rate. DVD Services volume was down 22.9% year-on-year, but that was lower than anticipated in the rebudget. Lower replication and packaging disc volumes across all formats and lower distribution activity as a result of the negative impact of COVID-19 on new film releases were mitigated by a buoyant demand for back catalog. Adjusted EBITDA amounted to EUR 54 million at current rate, better than original expectations given the acceleration of cost-saving actions and the positive impact from contracts renegotiated in 2019 and in 2020. 2020 EBITDA reached breakeven compared to a loss of EUR 6 million in 2019, illustrating the positive impact of successful contract renewals and aggressive transformation actions. David Holliday, the newly appointed President of the division has been tasked with further in-depth transformation of the business, streamlining internal processes and centralizing cost management whilst accelerating revenue and profitability from non-disk activities. So on Slide 9, our short- and medium-term outlook. We intend to continue to improve efficiency and productivity throughout 2020 and 2021, and we're now targeting a total of EUR 325 million in run rate cost savings by 2022, an increase of EUR 25 million compared to our previous announcement. Despite persistent uncertainty relating to the pandemic, we're looking to the future with real confidence. And we will continue to deliver improved operational and financial performance. In 2021, we are targeting an adjusted EBITDA of around EUR 270 million. Adjusted EBITDA of around EUR 60 million and continuing free cash flow before financial results and tax at around breakeven. The net debt-to-EBITDA covenant ratio should reduce to below 4x at 2021 year-end. In terms of 2022, we're confirming our guidance, which has been updated given the sale of post-production and the change in ForEx assumptions. We're targeting an adjusted EBITDA of EUR 385 million, adjusted EBITA of EUR 180 million and continuing free cash flow before financial results and tax at around EUR 230 million. In an increasingly digital world, where the customer experience is at the heart of the promise of brands and studios, Technicolor has a key role to play by bringing its creative technology to provide content experience through a powerful combination of storytelling and innovation. So let's review in detail the tremendous assets, which we've got across our 3 businesses. We turn to Slide 11. Production Services is the worldwide leader in the creation of extraordinary entertainment experiences. In our 3 areas of expertise, we share the same key opportunities. Big customers who have been trusting us for many years, strong expertise at the cutting-edge of technology and top brands among some of the most trusted brands in the industry. Our customers include Disney, Universal, Netflix and Apple TV in film and episodic, Ubisoft and DreamWorks in animation and games through to Google, Amazon, and Adam & Eve in advertising. Our experience is based on industry-leading talent, cutting-edge software and creative execution. We have the top brands of the Moving Picture Company, MPC; Mr. X, Mikros and, of course, Technicolor. On Slide 12, as I said, Christian Roberton, the new President of Production Services has got a clear strategic plan for the period 2021 through to 2023. First, we're going to structure for more efficiency through unified production services platform sharing strategy. Then we intend to accelerate organic growth through streamlined processes and modernized tools and systems. And finally, we want to scale from strength into new services. There continue to be production stoppages and delays as the latest wave of the pandemic temporarily restrict production capacity or limit international travel for talent and crew. Nevertheless, as vaccinations continue to roll out globally, the industry is optimistic about a steady return to normality during the back half of 2021. By 2022, we expect unprecedented demand from clients for new content as their COVID-impacted inventory is finally released over the period 2021 to 2022. Over on Slide 13. Production Services has been awarded several new major projects, already securing more than 75% of its expected 2021 sales pipeline, fulfillment, episodic visual effects and animation and games. We are leading the convergence of gaming technology and digital production services. It is driving the future of content production through a transformation from traditional linear workflows to interactive ones that allow for a frictionless, collaborative process at considerably less cost and time. We are developing services to high-end local content production in film and episodic. We're expanding direct to brands, relationships in advertising, and in animation and games, we're going to expand towards more scalable services. Finally, behind the technology, talent is key in these activities, and we're working hard to recruit and to retain it. On Slide 14. In 2020, Connected Home was the global leader with 16% worldwide market share, 24% in the Americas and 10% in Eurasia. We are #1 in value for broadband modems and gateways with industry-recognized leadership in wireless and broadband technologies for cable and telecom operators. And we are #2 in value for digital set-top boxes with leading positions in the cable and satellite segments. On Slide 15, our vision has charted our road map for the coming years. Traditional video is continuing to be on the decline despite a transitional rebound, which is expected in 2021, while multi-gig broadband access markets and streaming Android TV are on the rise with solid growth. In 2021, the market will continue to be driven by the expansion of fiber and the adoption of WiFi 6 technologies. However, the supply chain for electronic equipment is going to be stretched by excess demand for electronic devices, which has arisen during the pandemic. In 2022 and 2023, these trends will continue, together with 5G deployment and the early introduction of next-generation DOCSIS. Then turning to the next slide, we look at DVD Services. DVD Services is maximizing the long tail with 3 key levers for future growth and margin improvement. And these are customer relationships. We're going to further implement activities based on volumetric pricing mechanisms, a multi studio consolidation is offering an opportunity to deepen our relationship, while volume mix will shift further to higher-value format. Secondly, on cost optimization, continued decrease of OpEx at a faster pace than volume decline, together with strict CapEx management is going to drive us towards this target. And thirdly, we're going to diversify into freight management and distribution together with examining further the emerging opportunity in production of precision lab-on-chip devices for high-growth diagnostic and life science applications. So DVD Services intends to mitigate its volume decline to underpin sustainable future profitability. With that, I'll hand over to Laurent, who is going to detail our new financial structure and run through in more detail our full year financial performance. Laurent?

Thank you, Richard. Good evening, ladies and gentlemen. So if you don't mind, turning to Slide 18, it presents you the key figures of the group. So I'm going to take you through the details of our 2020 full year results. So the current slide, details of consolidated P&L, and I will spend some time on this to provide you with the overall picture in one go. So I will be quicker with the following that I've gathered in the comment on these slides all the moving parts concerning all our divisions. So first of all, ForEx impacts, you have the impact on your slide. It's negative 2.4% at revenue level, but it was almost meaningless at the profit level. So now all the numbers I will be commenting will be at constant rate. So overall, 2020, as Richard has mentioned, it's been a quite very difficult year. So our revenues of EUR 3 billion decreased by EUR 700 million at constant rate, representing 18.5% in percentage terms. So let's look at the trends per division. So Connected Home. Within Connected Home, North America, revenue remained strong, quite surprisingly, with a growth of 15%, plus 7% versus last year rate, representing an amount of EUR 114 million of extra sales, driven by increased demand from cable customers for upgrades to higher power broadband. So obviously, this is related to the increase of remote work and education activities performed from home. So if you move to Latin America, recorded -- Latin America recorded lower revenues, so a negative 24.3% versus last year, in total, a decrease of EUR 100 million. A difficult macroeconomic situation in the region continued to drive our clients' demand down, and particularly in Brazil, as currency devaluations drove higher the box acquisition prices. They are all denominated in dollar, as you know. For Asia Pacific, sales were highly impacted as well. So 30.5% down representing a decrease of EUR 115 million versus 2019. It was impacted by lockdowns in the main countries served, with slow recovery, mainly in India and Australia, combined with semiconductor supply constraints towards the end of the year. For EMEA, the sales were down 24% versus 2019 and representing a decrease of EUR 117 million. And they were mainly -- mostly explained by lower demand and COVID-19 supply issue. One should say, as an overall comment, that the final demand for customers has remained very high, and when service like in North America, the results were very good. But in some other part of the world, like LatAm or Eurasia, one of the main problem was access to homes or profitability of these [indiscernible] are boxes for our home clients. This has been refraining our capacity to sell further. If we look now at the adjusted EBITDA. So you can see that on the slide, it's -- it amounts to EUR 167 million. And it decreased by EUR 149 million. And that is quite an achievement. Thanks to the rapid adjustment of our production capacities to lower activities volumes. And that combined with the Panorama plan implementations. I remind you that we've lost EUR 700 million of sales. Panorama, as a reminder, targets our cost and transformation plan. It targets mainly fixed cost and also efficiency gains. Within that, Production Services adjusted EBITDA amounted to EUR 18 million. It was down EUR 144 million year-on-year, driven mainly by pandemic-related impacts on production in Hollywood and around the world. The costs were aggressively reduced to offset the EUR 370 million at concentrate revenue decline in a high-margin segment. So this has been our most affected division in 2020. We believe 2021 and 2022 will be marked by a gradual return to past levels. Connected Home adjusted EBITDA amounted to EUR 110 million in 2020 or 6.2% of revenues. It was up EUR 37 million in absolute terms, and that was primarily linked to the cost reduction, the Panorama plan initiatives implemented in 2020. And that is, again, quite an achievement in such a difficult year. For the DVD Services, the adjusted EBITDA amounted to EUR 54 million, 7.6% of revenue, better than expectations, given stronger-than-anticipated catalog sales and the acceleration of cost saving actions. The margin also includes the benefit of the positive impact from contract renegotiated in 2019 and 2020. Our group adjusted EBITDA, a loss of EUR 56 million was lower by EUR 96 million versus last year, as a result of the EBITDA decrease, mitigated by lower depreciation and amortization and reserves. In particular, for those who were present at previous conferences, significantly lower rendering costs were at play here. If you look at the nonrecurring item, you will discover a big number, a negative EUR 168 million, but it includes 2 different things. An impairment charge of EUR 66 million related to the DVD Services, and due to revised COVID-related assumptions, and we incurred this one in June 2020. So it's no novelty to you here. The second large item, the restructuring costs, and they accounted for EUR 100 million at current rates, including EUR 33 million in DVD Services, mainly resulting from optimization of distribution sites, EUR 27 million in Production Services, cost streamlining actions, mainly efficiency measures; and EUR 31 million in Connected Home pursuant to the 3-year transformation plan. Finally, we had EUR 9 million at corporate level. Overall, this EUR 100 million is a P&L charge, out of which EUR 46 million of this will be cashed out -- has been, sorry, cashed out in 2020. The bulk -- the remaining part of it will be paid in 2021. Free cash flow before financial results and tax from continuing operations amounted to a negative EUR 124 million, and it was lower by EUR 116 million versus last year, despite significant improvements in Connected Home operational performance and the ongoing implementation of our cost transformation program. It is important to note that this year, the group reduced in a very significant proportion its payment terms, paying down close to EUR 19 million in agreement with its main suppliers, of course, in 2020. We will, in 2021, further reduce these payment terms and with a cash outflow plan of around EUR 120 million. This concerted plan, and the notion here is very important, concerted plan with some of our key suppliers will lead us to sit in a very competitive levels in terms of payment terms with our suppliers. Also, it should be noted that at year-end 2020, a lot of payments were made earlier than last year, compensated by a good management and therefore, lower expense of inventories. So these operations, the one I mentioned for 2020 and the remaining that will take place in early 2021 are contributing to normalized Technicolor working cap movements. It was planned as such in the financial restructuring plan, and the implementation is today fully, if not better, than in line with our expectations. Finally, the net debt at nominal value amounts to EUR 897 million. And if you look at the IFRS net debt, it amounts to EUR 812 million. I will refer you to documents we've posted at the end of the restructuring process, where we make a very clear difference between our nominal debt and our IFRS debt, and we have provided you there our full schedule of the debt and interest repayment from 2020 up to 2024. So with that, we'll move to the next slide, Slide 19. And now -- from now, I will be very brief with each comment on the slide. So this slide provides you with a graphic breakdown, obviously, of the EBITDA contribution. So in total, we had EUR 149 million decrease in group EBITDA at constant rate. And as you can see, it is mainly due to the EUR 144 million decrease in Production Services. Connected Home improved its contribution by EUR 37 million, while DVD Services had a negative impact due to lower application volume. Corporate and other decreased its contribution by EUR 16 million, driven by lower patent licensing retained contracts that we benefited from in 2019. If we move to Slide 20. You have here a snapshot of Production Services. I've commented already the main numbers. So as a summary, Production Services revenues amounted to EUR 513 million in 2020. So they were down 41% at constant rate or they've lost EUR 370 million sales. So quite a big amount here. So it's driven obviously by the previously anticipated pre-COVID-19 delays in awards coming from 1 and several key clients in the first half, but mostly by the subsequent pandemic-related impacts on production around the world in H2. It actually even started in Q2. [indiscernible] was a subsegment, obviously the most affected within the Technicolor environment. Facing that, very aggressive cost-cutting measures were implemented and efficiency improvements was successfully achieved, and they helped to compensate for the massive loss of sales. So as a result, the adjusted EBITDA amounted to EUR 18 million only, if one can say, so down EUR 144 million year-on-year at constant rate. And this negative evolution was further mitigated by lower vendor cost and adjusted EBITDA was, as a consequence, down by EUR 107 million at constant rate. If we move to Slide 21, slide dedicated to Connected Home, so the division generated correct revenue performance in a declining market and an excellent full year profitability. COVID had limited impact in 2020 overall, and the crisis made clear that broadband gateway boxes are clearly high in demand. Revenues totaled EUR 1.7 billion in 2020, down only 7.6% at constant rate with a limited 3.3% decline in the second half. Adjusted EBITDA amounted to EUR 110 million in 2020 and representing a 46.7% growth at constant rate. The adjusted EBITA of EUR 41 million almost doubled compared to prior year current rates. This very positive evolution in profitability is the result of the transformation plan launched 2 years ago and intensified further to last year. Strategic choice is to focus on gateway broadband access and to transform operations have proven so far successful in the COVID-19 era improving drastically productivity. Moving on to Slide 22. DVD Services revenue totaled EUR 700 million in 2020, down 18.6% at constant rate. And that represents a loss of EUR 164 million of sales, that was due mainly predominantly to lower volumes across all formats as a result of reduced numbers of new movies they released in DVD formats. The adjusted EBITDA amounted to EUR 54 million in 2020, down only EUR 26 million at constant rate. Lower D&A and the renewal contracts helped to deliver an adjusted EBITDA at breakeven, the EUR 6 million improvement versus last year. So it's quite an achievement. The Slide 23 will take us from the adjusted EBITDA to the EBIT. So in summary, what you have is, we've -- and we've already commented that an EBITA of EUR 56 million, a negative at EUR 56 million and the continuing EBIT of a negative EUR 264 million. So you had 3 items mainly in between these 2 ratios. The first 1 is a EUR 40 million PPA amortization. You know what it is and it's noncash. Second, a EUR 75 million impairment charge and write-off. It's mainly related incentives around DVD Services with a EUR 66 million impairment charge that we booked in June. Again, this is a noncash element. And then EUR 100 million of restructuring costs. This EUR 100 million breaks down into EUR 27 million at the level of Production Services, mainly streamlining action cost, EUR 33 million at the level of DVD Services. And here, the action is more around optimization of the distribution site. EUR 31 million in Connected Home to finish -- continue the 3-year transformation plan. Only half, as I've mentioned earlier, of this amount is cashed out in 2020. The rest will impact 2021. If we move to the Slide 24, we are now going to continue to move from EBIT down to the net group results. So the net group results overall is a loss of EUR 207 million. It's going to be compared to a negative EUR 264 million of continuing EBIT. The difference is explained by a slight increase in net interest expenses and some tax charges. And this is more than fully offset by a positive, but mainly noncash the EUR 155 million post of other financials. And this big positive amount is mainly related to our financial restructuring, and it's the mark-to-market accounting posting. So here, I don't think you should take this as an operational indicator at all. It's just an -- not just, but this is an accounting noncash impact of our restructuring activity. If we move to the Slide 25, I thought it would be useful for you to have a view on the bridge between last year free cash flow and this year. So as shown previously, our free cash flow has declined by EUR 93 million to a negative EUR 191 million at constant rate. So there is EUR 149 million reduction in EBITDA that's explained that. I'm moving from left to right on the chart. We will discuss this. Then you can see that we've spent less in terms of CapEx. Some of that was expected. You remember that we explained to you that some of the contract payments we are making to some studios in the DVD Services will disappear this year, and it has been the case. Also, we've been investing less. We have -- the 2020 was marking the end of the CapEx investments in Australia and India and in Montreal for production services. The rest reflects basically a reduction in our spend in a very difficult year. We had a little bit more restructuring costs, but the bulk of the Panorama plan will come next year. Overall, our World Cup was still negative and a bit lower than last year at EUR 35 million, but I've already mentioned that this year, we swallowed worsening basically with -- of payment terms of EUR 93 million. We also reduced, and we paid early to a huge amount of client versus last year. So we've started a very drastic and rationalized approach to bringing down this company with a normalized working cap. This will be achieved probably already at the end of the first semester of this year. Rendering, we spend less EUR 24 million financials as well. So that leaves you and gives you the full bridge to the EUR 191 million negative that we had at the end of the year. Slide 26 gives you a snapshot of debts. So following our financial restructuring, we have reduced our total gross debt in nominal terms to EUR 1.2 billion. And we had EUR 330 million of cash and cash equivalents available at year-end. And the $125 million Wells Fargo facility was undrawn. Flipping rapidly to the Slide 27, you already know this classical slide showing the detail of debt at the end of the year 2020. As a point of interest, the capital lease debt reduced from EUR 272 million in 2019 to EUR 164 million in 2020. You can see that at the middle of your side, middle bottom side of your slide. And that decrease, that significant decrease illustrates the big effort we achieved in real estate rationalization and also the EUR 50 million reduction in relation to the post-production disposal, and that comes on top of the EUR 30 million of cash. Slide 28 gives you a brief snapshot of our EUR 330 million cash on hand we had and the undrawn Wells Fargo facility. So that should give you an overall view on our situation at the year-end. And with this, I conclude my presentation, and I now hand over to Richard for the conclusion. Richard, over to you.

Thanks very much, Laurent. So during 2020, there were significant structural changes implemented across all divisions within Technicolor, and that was combined with further investment to improve our efficiency. In particular, Production Services strengthens its capacity to serve its clients through state-of-the-art technologies and artistic expertise. Despite persistent uncertainty relating to the pandemic, we are looking forward to the future with confidence, and we're going to continue to execute our transformation program to deliver improved operational and financial performance. 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, a renewed management team, and our teams are dedicated to achieving success across each of our business units, where we play a vital role in providing truly differentiated products and services to our clients. We're issuing guidance towards strong figures for 2021 and maintaining our previously issued 2022 guidance. I'm completely convinced that Technicolor can return to delivering profitable growth, cash generation and value creation for shareholders. So thank you very much for your attention. And now with Laurent, we're ready to take your questions.

[Operator Instructions] We have our first question from Alex Duval.

Alex Duval from Goldman Sachs. I've got 2, 3 quick questions. Firstly, you mentioned gaming and special effects there. Obviously, it's $150 billion market, and it's probably the fastest-growing entertainment market globally. So I wondered if you could give a bit more color on how that fits into your strategy and the extent to which Technicolor can benefit from gaming, video games in coming years? Second of all, you talked about semi tightness. Obviously, we recall that in recent years, that has had an impact as a swing factor, both positive and negative on margins at Technicolor. So I wondered if you could give us a bit of help on understanding your thought process trying to think about the extent to which that's factored in to the guidance and whether you've kind of factored in a certain margin impact for that? And then I've got a quick follow-up afterwards.

I'm sorry, I didn't quite hear the second question. What was the subject of that second point?

Well, I guess, for broadband or set-top box, obviously, semis are extremely tight across many different end markets. So just curious to what degree do you think that's sort of factored in? And any quantification you can give in terms of how that's factored into your guidance?

Okay. Semiconductors, okay. Right. Okay. So I think I can take both of those. So gaming special effects, as you say, is a massive market, $150 billion. That makes it about, I think, 3x bigger than the tentpole market for films in Hollywood. Now obviously, a lot of that is made from actual game sales, where the players who are creating the original content are sort of passing that through to customers. So in terms of where we play in visual effects, the market opportunity would be substantially less than that. But nevertheless, we only play in this sphere at a relatively low level. And it's our -- and basically just doing work for hire. And it's our ambition to move up the value chain and to play a lot more effectively in that space. And in that context, I think that the convergence, which is taking place between the types of tools, the sort of real-time tools, which are used in the gaming sector and are becoming increasingly used in the other sectors such as visual effects and advertising, where you're moving to being able to do editing of content kind of on the spot rather than taking it away after the filming has been done and then doing it in a remote location at another time. I think that the all of that, the expertise which we have across our 3 divisions is going to play into being able to make more out of gaming. I don't want to go too deeply into at the moment because I think that would be commercially confidential. But definitely, we've got the ambition to scale up our presence in gaming substantially. And then with respect to the crisis, which has been building in the worldwide semiconductor market, which I'm sure all of you have been reading about, it's been affecting many different industry sectors, perhaps one of the most high-profile of them has been the automotive sector. I mean, we have been impacted by this. We have -- we've been talking to our major vendors about the availability of semiconductors and the impact -- the knock-on impact on pricing that shortages are going to have and we've assessed what we think the impact is going to be in 2021 and 2022, and we have looked at to what extent we can pass through costs to customers, and to what extent we cannot do that because it would impair our market positioning. And we have incorporated into our guidance for 2021 and 2022 what we think the impact of that will be. So our guidance incorporates the impact of that crisis, and we've made the best estimates we can of what effect it will have on us.

That's much appreciated. And just a very quick follow-up. Looks like the broadband side of things, gateways will have benefited from this work-from-home trend, and obviously, people being at home due to lockdowns. How do you think about the sustainability as we sort of hopefully gradually see a reopening again in various economies? To what degree is that a headwind because people have set up that equipment or to what degree do you see sustainability there? Just love to understand the thought process.

Well, our major semiconductor supplier moved to a requirement for us to supply forward-looking forecasts of up to 50 weeks quite recently from 36 weeks. And whilst on 1 hand, you could say that's a negative development because, obviously, we have to force our clients to think quite a long way ahead in terms of their requirements. At the same time, it gives us an excellent forward view of what probably the next 15 months is going to hold. And so I can say with confidence that the type of demand, which we saw in 2020, particularly in North America, is going to continue in 2021. And I don't think that the resolution of the COVID crisis or the relaxation of restrictions is going to have any significant impact on that because I think that large numbers of people have worked out that they just have to have a better broadband and WiFi experience at home. And that is driving -- continuing very high sales amongst our major cable and telco customers. And we were selected by Comcast for the latest generation XB8 box. And so we know -- they've already placed a significant order with us for 2021. And so we've got excellent forward visibility, and I'm convinced that the demand is going to remain strong.

We have another question from [indiscernible]

I have one and a follow-up. First one, please, is on Production Services. We have seen major studios such as Warner, in particular, saying that they would now release their production at the same time on their platforms and on theaters. Do you think this is a real trend that we might see in the future in that industry? And if it should remain like this, what impact do you think it could have on theatrical releases and on your business of Production Services as well as DVD? So that's my first question. I would like to have your point of view on this evolution of the industry. My second question is more a follow-up on the semiconductor question. First of all, on the pricing impact. I understood that you had made some renegotiations with your customer to be able to pass-through, I would say, in a smoother way, the increase in your -- of pricing in your supply. I understand from your answer that it might not be the case. So can you please clarify how much you are able to do -- contextually speaking or from a market standpoint, how much you are able to pass-through the either rises of prices of your components into the customer pricing? And the other aspect was about -- on volume. Also, do you think that the shortage of semiconductors might impact the volumes? And did you have -- did you overstock, I would say, by the end of last year with possibly a negative impact on your working capital in order to prevent from possible shortages in the coming months?

So starting with the question of whether the major studios will move to releasing their product directly to streaming rather than going through theaters. I think that the move which we saw Warner make which was obviously to try to drive up subscriptions on HBO Max is not going to be replicated by the other studios. I think that they were taking a big bet there in terms of the number of incremental customers, which they were likely to get on their streaming platform and whether they could actually develop a strong enough pipeline of continuing content to keep those customers in the long term after the film releases had been made. And it remains to be seen whether that was a sensible financial bet or not. I mean, under normal circumstances, the studios are going to make a lot more money from pushing the product out into cinemas than they are through going exclusively to streaming platform. So that was an interesting move, but I don't see that as being a fundamental shift in the industry paradigm. I think when restrictions are released, that people are going to want to be entertained, they want to going to get out of their homes. They're not going to want to sit watching Netflix with a tray of food on their lap for any longer. And we're going to see a rebound in the theater market. So that's our firm belief, and we think that will drive our top line in both Production Services and in DVD Services, where we're obviously hopeful that new release revenues is going to recover in the second half of 2021. Looking at the semiconductor question you raised and the pricing impact and whether it could be passed through, I wouldn't want to be too specific about that because I think, obviously, it's commercially confidential, but we would want to pass-through the majority of any price impact to our customers. Now the extent to which we can do that obviously varies because as you rightly say, there could be contractual restraints on doing that or there could be practical constraints in the fact that some customers have got ready alternative supply from another player, some customers don't. And there are some who are in a gray area or in between. We have to make an assessment of what our competitive position is with each customer and then seek to pass-through the maximum amount that we can. And all I can say at the moment is that the process is going relatively well, but it is still work in progress. And then in terms of did we stock up on semiconductors at the end of last year, the answer is no. But we have -- we have known about this crisis right from the start from well before it was publicized in the press, and we've been negotiating with our major semiconductor suppliers to make sure that we get the maximum amount of supply at the best possible price. We're one of the largest players in terms of the purchase of the types of semiconductors that we're talking about. And we've managed to do relatively good deals with our major suppliers to ensure that we don't pay too much extra, and that above all, we maintain the pipeline of supply. And I'm pretty confident that we can do that throughout 2021.

We have a third question from Fiona Orford-Williams.

I'm not going to do by semiconductor question because I think we've covered that now. Can we talk, please, in terms of Connected Home about Latin America? There have been -- these issues have been the case now for some time, and it doesn't look like there's going to be any easing on currency and the economy. So what can you do to make sure that you're in a good position? And secondly, I'd like to ask about the profile of cash out for the year between the first half and the second half. You've got the normalization of the working capital you're talking about in the first half, would we then expect an outflow in the second half? Could you just give me some idea of the price, that would be helpful?

Sure. Well, I'll take the first one and then pass the second one over to Laurent. I mean, that first one is a really tough question. Obviously, the Latin American economies have been very badly hit by the COVID crisis, perhaps worse than the sort of more developed economies. Obviously, they're oil dependent. And so the collapse in the oil prices led to a collapse in their currencies fairly early on in the COVID crisis. And as a result of the fact that our products are dollar-denominated, obviously, that was a disincentive to spending at the previous levels. So we've seen, as Laurent described in his presentation there, quite a significant reduction in demand from Latin America. And to see that change, we're obviously going to be reliant on quite a swing back as the COVID crisis starts to reduce in terms of its impact on those societies and economies and hopefully, an improvement in the relative exchange rate. But obviously, none of that can be guaranteed. So we just have to see how things progress. The good news is that demand in North America, as I described in the earlier answer, still remains extremely strong. So we just got to hope that Latin America will recover at some point in the future. Laurent, would you like to handle the cash question?

Yes. Look, the year is going to be another of this year or 2 halves basically, where the first half, you will be free cash negative before going back to and pumping in positive cash. Now one, this is the natural trend of the company because of HES -- so the DVD, sorry, past cycle and also of Connected Home. This year, it will be amplified by 2 things: one, Production Services, as you know, they have already 75% of their overall portfolio and a higher percentage in film episodic already booked. This is going to start. We're recruiting now. So the teams are doing now, so we're spending a bit of money now. And the work will start gradually through Q2, Q3, Q4. So you will have the cash flow generation of Production Services that is expected to be very significant, obviously, this year, in a recovery year, is coming through gradually. So point one. Point two, you have -- as I've mentioned earlier, we are normalizing our working capital. And this is completely aligned with what we had discussed with all lenders and shareholders back then at the time of the financial restructuring. And what happened is we -- in a concerted fashion with our main -- obviously, mainly connected home suppliers, we've agreed upon reducing our payment terms to quite aggressive levels. So we will be well below 80 days on average and around 70 days. It's a very, very, very competitive level. That will mean that in H1 and literally, as we speak, we are paying out EUR 120 million of early payments in order to put that. So this is -- and this is going on at the moment. This is completely aligned with our cash projections what we had planned. Our overall cash position and free cash position is probably a bit better than what we're expecting. But still, we will have to swallow that in H1 versus H2. So deep in H1 before going back to normal levels to basically sort of breakeven points in -- at the end of the year, which basically means quite a significant amount of free cash flow expected for H2.

[Operator Instructions] We have a question from David Cerdan.

This is David Cerdan from Kepler Cheuvreux. First of all, I have a question regarding the future of Production Services. So you have been able to adjust down your workforce, but do you think that you will be able to get or to deliver the recovery. I expect the recovery in Production Services to be very strong because of the demand. So do you think that you will be able to deliver? This is my first question. And regarding the long term, how do you see the future for this division in regard to the strong -- the decision of the company's platform to significantly increase the content in the future? So are you very confident in delivering the future for Production Services?

Yes. So we did reduce the workforce in Production Services quite substantially during the early stages of the pandemic because it was necessary to do so to address the significant reduction in revenue, which we're experiencing in production services and our overall group cash position. But a lot of the people who left were on contract rather than permanent employees. And the Production Services film visual effects business is like any other sort of client services business. You've got some people who are vital to the future of the business, you have the relationships with the Hollywood studios and the major streaming players, you can win business. You've got people who are extremely creative. You have to be part of the teams, which are employed on these major film or episodic projects, and you've got people who are extremely skilled in various areas such as coloring, lighting. These people, you have to retain at all costs. And those people, we did retain. We lost virtually no major talent during the pandemic. And in fact, we recruited a lot of key staff from other players who are in difficulties. Now having said that, obviously, in terms of the forward pipeline of activity, which we have acquired, which is significant, which is very positive. As I said in my section, we've got more than 75% of production services revenues secured for 2021 across visual effects and animation. And if you look at visual effects alone, it's close to 100, then clearly, we need to scale back up again. But we've demonstrated in the past that we can scale the business up and down. We've got the Technicolor Academy, which can train hundreds of people very rapidly. And we are confident that we are going to have the manpower necessary to deliver the pipeline, which we've acquired. In fact, we've still got our teams out there, trying to win more business so that we can exceed the original 100% size of the pipeline, because we have the capability to do that. So I'm confident that we will, as you say, deliver the recovery. But obviously, it's a very important point that you raise. And in terms of the future of the division, I think that -- there is going to be a continuing burgeoning demand for original content across the 3 divisions, which we're retaining, obviously, we're selling post production. So across visual effects in the film and episodic industry with episodic growing very strongly, and I think in 2020, potentially actually exceeding the level of spend on theatrical film. Also, however, in advertising, where we're the #1 supplier of visual effects to the advertising industry worldwide through MVC Advertising and The Mill, and through our animation and games division, where we're currently working on 3 projects simultaneously, which is a level of activity that I'm not sure we ever had before and when we're actually winning more titles as we speak. So 2021, I think that there's obviously some level of uncertainty, which still remains about the speed of recovery. It's going to be a gradual process throughout the rest of the year, I don't think there's going to be some sudden change in trajectory. And during that time, there may well be pieces of work, the start of which is delayed from its originally scheduled date. But nevertheless, a lot of the work which we have been winning has been computer graphics heavy, such as, for example, the Lion King prequel from Disney, and that work can start straight away and has started indeed. And so we've got money coming in already and good confidence that this thing will continue to improve. I think 2022 is going to be a real blowout year, and judging by what we can see from our forward pipeline and everything that we hear about the development of the industry. We're obviously a big player. We've got 20% market share. You have to use us, if you want to get this level of content delivered. So that is a real benefit. And a lot of the content, which we're getting is very high quality, a number of Disney titles, the type of stuff that the best talent wants to work on. So that attracts them to us, and it becomes a virtuous circle. So as far as I can see out to '22 and beyond, I see strong development of Production Services. And as I said in one of the slides in my section of the presentation, in the short term, we want to make ourselves more agile and efficient. We want to achieve synergies across our various brands for the first time; create, for example, 1 single delivery pipeline, which goes back to India, the One India Project, as we call it; create 1 technology stack across all of our individual business units, whereas previously they had individual stacks. We want to carry all of that out, make ourselves as efficient as possible and then look at ways in which we can scale both organically and inorganically. So I feel very positive about the future of this division and look forward to driving the delivery of it.

[Operator Instructions] So we don't have any questions.

Okay. Well, thank you very much, everybody, for listening. I hope that was helpful. And as I say, I think that was a good set of results against the background of the COVID crisis and the financial restructuring of the group. And as I've said before, we're looking forward to real confidence in the future. Thank you very much for your time.

Thank you.

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