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

Ladies and gentlemen, welcome to Technicolor's conference call chaired by Richard Moat, CEO; and Laurent Carozzi, CFO. [Operator Instructions] Just to remind you all, this conference is being recorded. We would like to inform you that this event is also available live on Technicolor's website with synchronized slide show. During this conference call, statements could be made that constitute forward-looking statements based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed, 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, ladies and gentlemen. Technical's first quarter 2021 results are an encouraging signal that our turnaround strategy is going well, and each division continues to redefine content experiences through innovation and improve its performance. However, the unpredictable headwinds and challenges caused by COVID aren't over yet, and I hope you and your families are keeping safe and secure. Thanks to the significant worldwide vaccination campaign, we're starting to see signs of improvement, nevertheless, for example, the recent announcement in the U.S. and France of upcoming reopening of cinemas. So if we move to Slide 4, Key Figures From Continuing Operations. In the first quarter, all of our activities benefited from a strong and growing demand, driven by the Connected Home with strong Broadband access, the need for original content from studios and streamers and appetite for catalog DVDs. And in this context, our unrivaled talent pool across 25 countries has proven very nimble and innovative in delivering high value-added services to our clients. So our revenues of EUR 711 million were up 4% at constant rate, demonstrating a very positive first quarter 2021, primarily driven by lower revenue in Film & Episodic Visual Effects and DVD Services, but a strong performance in Connected Home, particularly in North America and Eurasia. Adjusted EBITDA was up 72% at constant rate to EUR 43 million, reflecting operational and financial improvements across all activities, in particular, in Connected Home. The ongoing implementation of our cost transformation program delivered EUR 20 million of cost savings in the quarter. Adjusted EBITA was almost breakeven, a EUR 33 million improvement as a result of the EBITDA increase and lower D&A related to efficiency measures. Our free cash flow before financial results and tax was still negative, but it was higher by EUR 118 million at current rate compared to the first quarter of 2020, driven by that good performance in Connected Home, working capital improvement and the ongoing implementation of our cost transformation program. Based on the profitability improvement in this first quarter, despite some challenges related to our capacity to deliver relating to key components and recruitment constraints, we're confident of achieving the outlook presented in our full year press release, which we issued at the beginning of March. Turning to Slide 5. Production Services revenues amounted to EUR 140 million, which was down 16.6% at constant rate due to slower-than-anticipated ramp-up of projects following the pandemic-related impact on production around the world. But this was partially mitigated by significant revenue growth for MPC Episodic, where sales have more than doubled in absolute value. Adjusted EBITDA amounted to EUR 14 million, which is up EUR 3 million year-on-year at constant rate. So just to give you a few highlights, in Film & Episodic Visual Effects, teams worked on over 12 theatrical films from the major studios, including Cruella and The Lion King prequel for Disney, Mortal Kombat for Warner Brothers, and Nightmare Alley for Searchlight pictures. Our team has also worked on over 25 episodic and streaming projects, including Chip ‘n Dale: Rescue Rangers for Disney, The Nevers for HBO and The Wheel of Time for Amazon. Revenues were significantly down due to the continued impact of the pandemic on live-action film shoots. Our advertising businesses delivered over 1,000 commercials, including 20 out of 42 Super Bowl spots this year, whilst winning 3 Visual Effects Society awards and 6 British Arrows. Notable projects included Audi's Futures Is an Attitude and Samsung's Awesome Is for Everyone 2. Revenues were lower compared to last year, but operating performance increased, showing the positive impact of the transformation program on margins. In Animation & Games, revenues were stable compared to the prior year. Mikros Animation was in production on multiple films including Spin Master's PAW Patrol: The Movie and Paramount's The Tiger's Apprentice. It has also secured 2 additional projects in the recent past. On the episodic side, our teams continue to work on several series, including Chicken Squad and Mira, Royal Detective for Wild Canary and Disney; Fast & Furious: Spy Racers for DreamWorks; and Kamp Koral: SpongeBob's Under Years for Nickelodeon Paramount+. During the quarter, we continued the harmonization of technology infrastructure to eliminate inefficiencies from what were previously siloed operations. We also further reinforced our top management. Josh Mandel was appointed CEO of The Mill, Andrea Miloro was hired from Blue Sky as President of Micros Animation to expand our global feature and episodic animation services. Looking ahead, following the disposal of Post Production, we have renamed Production Services as Technicolor Creative Studios to showcase our global family of leading VFX and animation studios servicing the theatrical, episodic, streaming, games, advertising and experiential marketing industries. We've been awarded numerous new projects, securing approximately 90% of the expected 2021 sales pipeline for Film & Episodic Visual Effects and Animation & Games. Recent surges of the pandemic in India, Toronto and Montreal required a shift back to work from home for almost all staff during the second quarter in order that we maintain full operating capacity. Nevertheless, as vaccinations continue to roll out globally, the industry is optimistic about the steady return to normalcy during the back half of 2021. Turning now to Slide 6. Connected Home revenues totaled EUR 428 million, which was up 18.3% at constant rate, driven by strong demand in North America and Eurasia to supply higher-power Broadband in support of pandemic-related remote work and education activities. Demand was, however, down in Latin America due to the difficult macroeconomic situation in the region. Adjusted EBITDA amounted to EUR 28 million, up EUR 14 million at constant rate driven by the increased demand for the North American cable division and OpEx improvement initiatives implemented in 2020. The division maintained its market leadership in the Broadband segment and in the Android-based video segment, where we achieved the deployment of over 10 million set-top boxes since the beginning of 2016. Adoption of DOCSIS 3.1 and Fiber gateways is expected to continue through 2021, and we're already working with multiple tier-1 operators in North America, Europe and Latin America to meet current deployment demands. The next wave of the expansion will be driven by the next-generation WiFi technologies and higher speeds, like 10 gig. Looking ahead, demand is going to remain strong throughout 2021, and we're going to continue to focus on selective investments in key customers, platform-based products and partnerships to improve margins over the year. The COVID pandemic has, however, created distortions in the industry, in particular, global logistics disruptions in semiconductors. We're continuing to work with our partners to minimize supply disruptions, and we're engaged in commercial discussions in order to pass surcharges through to customers wherever possible. Now on to Slide 7. DVD Services revenues totaled EUR 139 million, down 7.7% at constant rate, which I think is a very good performance when you consider that Q1 2020 was a quarter which was largely unaffected by COVID and when cinemas were open and new releases were taking place. Total replicated disc activity was down 11%. However, standard definition DVDs were up 1% year-on-year, driven by the ongoing push of back catalog products. However, Blu-ray was down 31% due to the lack of new release content, and CD volumes were down 34% as a result of structural decline and the COVID-related impacts. The decrease in volume, however, was partially mitigated by pricing improvements following the studio contract renegotiations that we did and by growth in non-disc-related supply chain activity. Adjusted EBITDA amounted to EUR 4 million at current rate, which was much better than expectations. The division continues to adapt operations and related customer contracts in response to continued volume reductions. And 2 significant North American facility closures were affected in the first quarter of 2021 as part of the ongoing transformation plan. Going forward, theatrical new releases showed an increasing trend over the course of Q1 2021 as theaters began to reopen and major new titles like Godzilla vs. Kong were well received by audiences. Studios continue to have DVD releases alongside their various experiments in video-on-demand strategies, and most major retailers continue to remain open and to allocate shelf space to catalog and library content promotions. With David Holliday, the new President of DVD Services, the division has already accelerated its restructuring plans to continue to adapt to the evolving situation. Over on Slide 8. To conclude, we will continue to improve efficiency and productivity throughout 2021 and 2022. Thanks to the ongoing transformation initiatives, which we began over a year ago, we've been able to invest more in hiring and unleashing top talent whilst consolidating, sharing and harmonizing best practices. These efforts and investments are fueling our vision for transforming the future of film, episodic, gaming, integrated marketing and advertising campaigns, and give us the confidence that we will continue to deliver improved operational and financial performance. With already EUR 20 million of cost savings realized in the first quarter, we're well on track to achieve more than EUR 115 million in the year 2021 as planned and to deliver cumulative EUR 325 million by the end of 2022. So looking at our guidance. For 2021, we confirm revenues from continuing operations will be broadly stable versus 2020. Adjusted EBITDA will be around EUR 270 million. Adjusted EBITA will be around EUR 60 million. Continuing free cash flow before financial results and tax will be around breakeven. And net debt-to-EBITDA covenant ratio will be below 4x at year-end. And we're also maintaining our previously issued 2022 guidance. So with that, I'll hand over to Laurent, who will go into our Q1 2021 performance in some more detail.

Thank you, Richard, and good evening all. So I will now provide you with further details regarding our Q1 results. So overall, as mentioned by Richard already, they show a significant improvement versus last year, driven by sales growth despite the supply constraints and quite significantly by improved margins. It should be noted, before we go into the details, that Post Production has remained consolidated during this quarter. Its sales were down quarter-on-quarter 24% at around EUR 20 million, and its EBITDA remained flat at around breakeven. So if we move on now to the Slide 10. I'm going to present to you our consolidated profit and loss. So our revenues of EUR 711 million increased by EUR 26 million at constant rate representing an increase of plus 3.6%. In Production Services, Production Services revenues amounted to EUR 140 million in the first quarter of 2021, down 16.6% at constant rate and 20.8% at current rate year-on-year. More specifically, Film & Episodic Visual Effects revenues were significantly lower year-on-year, mainly due to slower ramp-up of projects following the continued impact of the pandemic on live-action film shoots. Q1 2020 was still an active quarter for Film & Episodic. Advertising revenues were also lower due to the impact of COVID-19 on client spend and live-action production shoots. Animation & Games revenues were stable versus prior year. And Post Production accounted for lower revenues compared to the prior year, driven primarily by the pandemic's impact on production. In Connected Home, revenues totaled EUR 428 million in the first quarter, up 18.3% year-on-year at constant rate, and plus 8.7% at current rates. This has been achieved despite the start of the negative impact on sales or supply shortages. So if you want to be more specific in Americas, in North America, the revenues remained strong, driven by increased demand from cable customers for upgrades to high-power Broadband to support remote work and educational activities. Latin America encountered difficult macroeconomic environment, and this has continued to drive the demand down, particularly in Mexico and Argentina. In Eurasia, Europe, Middle East and Africa enjoyed significant increase of revenues due to strong demand in Europe, both for Broadband and video products, and expansion of new GWs and STB technologies to a larger customer base. Asia Pacific exceeded prior year revenues driven by demand in India and in the Australian and Korean markets. If we now turn to DVD Services, the revenues totaled EUR 139 million in the first quarter, so down 7.7% at constant rate and 20.4% at current rate compared to 2020. Our adjusted EBITDA at EUR 43 million is up 72% at constant rate. This reflects operational and financial improvements across all activities and particularly in Connected Home despite lower business volumes in Film & Episodic Visual Effects compared to first quarter 2020. I remind you that the quarter at the time wasn't yet affected by COVID 19. Production Services adjusted EBITDA amounted to EUR 14 million or 9.7% of revenues, up EUR 3 million year-on-year at constant rate despite the lower sales. Connected Home adjusted EBITDA amounted to EUR 28 million in the first quarter or 6.4% of revenues, up EUR 14 million at constant rates, driven by the increased demand from the North American cable divisions and OpEx improvement initiatives implemented in 2020. Clearly, Connected Home enjoyed a very strong quarter. DVD Services adjusted EBITDA amounted to EUR 4 million, plus EUR 3 million versus last year despite lower volumes of sales. So the margins benefited from better replication pricing, better consumer mix and cost-saving actions, particularly -- and partially offset by labor cost pressures and various impacts from severe weather events experienced in the U.S. in the first quarter. If we move on to the adjusted EBITDA, it is at breakeven and represents a EUR 33 million year-on-year improvement at current rates as a result of, on one hand, the positive increase of EBITDA, but also on the positive impact of efficiency measures, in particular lower rendering spend for Production Services and a positive impact of client contracts renegotiations for DVD Services. The P&L nonrecurring items at a charge of EUR 15 million are mainly related to the restructuring costs and accounted for EUR 14 million at current rate. They include EUR 11 million coming from the DVD Services cost of footprint optimization. The change in working cap of negative EUR 192 million reflects the end, and that's very important, of the payment terms normalization at Connected Home. It is an EUR 82 million improvement versus last year. And if we focus on Connected Home, it has to absorb EUR 120 million impact of cash-outs to finish its cycle of payment terms reductions. It will start in the second quarter 2021 to benefit from a normalized and derisked working cap contribution. It should also be noted that Production Services has started to benefit again from down payments, the mark of the return of studios to large orders. Free cash flow before financial results and tax from continuing operations amounts to a loss of EUR 196 million, and it represents still EUR 118 million year-on-year improvement at current rate, and that's driven by significant improvements in Connected Home operational performance, working capital improvements in Production Services and DVD Services, and the ongoing implementation of our cost transformation program. So clearly, a sign of the turnaround is underway. The net debt at nominal value amounts to EUR 1.1 billion and IFRS net debt amounts to EUR 1.074 million. The difference mainly relates to the mark-to-market debt valuation on issuance and will be reversed through noncash interest charges over the life of the debt. If we move now down to the Slide 11, I'll be now much more quicker on all the remaining slides. So on this slide, the EUR 19 million increase in adjusted EBITDA at constant rate is due, as we can tell, mainly from the EUR 14 million increase in Connected Home, followed by a EUR 3 million increase in Production Services and the same amount at DVD Services. Corporate and other decreased its contribution by EUR 2 million and was driven mainly by lower revenues and trademark versus last quarter. The ForEx impact was a negative EUR 3 million on EBITDA. Slide 12 provides you a bit more details on Production Services. So revenues amounted to EUR 140 million in the first quarter, down 16.6% at constant rates. This reduction is due to a slow ramp-up of projects following pandemic-related impacts on productions around the world. The revenue decline was partially mitigated by significant revenue growth at MPC Episodic, where sales more than doubled in absolute value. MPC Episodic, to make it clear, service mainly what we call the streamers, so the Netflix and Amazon of this world. Advertising revenues were also up. Adjusted EBITDA amounted to EUR 14 million, up EUR 3 million year-on-year at constant rate, and adjusted EBITA was a negative EUR 2 million, up still EUR 13 million year-on-year as a result of cost optimization, primarily in advertising and lower cloud run rate cost. Advertising EBITDA and EBITA, despite a sharp drop in its revenues linked to the pandemic, increased in absolute terms compared to 2020, showing the positive impact of the transformation activities on its margin. Moving down to the Slide 13. Let's have a look at Connected Home. Revenues totaled EUR 428 million, up 18.3% year-on-year at constant rate. The division continued to experience supply challenges due to COVID. Demand is strong, very strong in North America and in Eurasia. But Latin America is continuing to prove difficult because of currency weakness and supply constraints. The division is maintaining its market leadership in the Broadband segment and in the Android-based video segment. Although demand will remain strong throughout 2021, I'm talking about final demand, customer demand, the COVID pandemic has created a distortion in the industry with disrupted global logistics. Shortages in semiconductors, and Richard has touched upon this, which started in the second half of 2020, affecting many industries and will continue to impact the remainder of 2021. And particularly, difficulties with component supply due to high overall demand is increasing the price of some component costs. And component shortages, second effect, could delay sales during the coming months. In consequence, Connection Home will continue to work with its partners and customers to minimize supply disruptions. Technicolor has engaged in commercial discussions in order to pass surcharges through to customers. The situation is currently in line with expectations used to set the 2021 guidance, but they are not improving. Adjusted EBITDA amounted to EUR 28 million in the first quarter 2021 or 6.4% of revenues, up EUR 14 million at constant rate driven by the increased demand from the North American cable division and OpEx improvement initiatives implemented in 2020. Adjusted EBITA, EUR 10 million, increased by EUR 12 million at constant rate compared to the prior year. This positive evolution in profitability is the result of the significant transformation plan launch 3 years ago. Moving to Slide 14. DVD revenues, they totaled EUR 139 million in the first quarter. They're down 7.7% at constant rate. This reduction is mainly driven by a 10.7% reduction in total replicated disc activity. This negative trend was partially mitigated by pricing improvements following the studio contracts renegotiations and by growth in non-lease related supply chain activity. COVID-19 continued to have a negative impact in the first quarter, predominantly related to a significant reduced level of new release activity as compared to the first quarter of 2020, which was largely unimpacted by COVID-19. The adjusted EBITDA amounted to EUR 4 million or 3.1% of revenues. The EUR 3 million improvement year-on-year is explained by better replication pricing, cost-saving actions, partially offset by labor cost pressure and various impacts from severe weather events impacting the U.S. in the first quarter. These overall positive actions more than offset the negative impact of lower volume sales. So clear improvement here of profitability, thanks to the hard work being implemented by the new team -- new management team. Lower depreciation and amortization and positive impact of past contracts renewal helped to deliver an adjusted EBITA of negative EUR 6 million to be compared to a negative EUR 16 million in the first quarter 2020. So a plus EUR 10 million improvement in a tough year -- in a tough quarter. Nonrecurring items at minus EUR 12 million have remained high as the transformation plan is being currently further implemented. Slide 15. This slide takes us from EBITDA to EBIT, nothing major to note here. So between adjusted EBITA of negative EUR 1 million and continuing EBIT of negative EUR 26 million, we have mainly 2 items, EUR 9 million of PPA amortization, noncash, as you know; and restructuring costs amounting for EUR 14 million at current rate and mainly coming from EUR 11 million of cost optimization at DVD. Slide 16. We're moving from EBIT down to the net group results. So the EBIT amounted for a loss of EUR 26 million in the first quarter of 2021. Financial results totaled a negative EUR 32 million in the first quarter, again, compared to EUR 25 million in the first quarter of last year. The change reflects net interest costs of EUR 31 million. They are up from last year by EUR 70 million, primarily due to the higher interest rate on the new debt structure. And we have other financial income, they improved by -- to negative EUR 1 million in the first quarter of 2021 compared to a negative EUR 9 million in prior year. And that's mainly due to financial fees on the bridge loan put in place in March 2020. Income tax amounted to a negative EUR 1 million compared to breakeven last year. Group net income, therefore, amounted to a loss of EUR 61 million in the first quarter 2021 to be compared to a negative EUR 87 million loss in the first quarter 2020. Slide 17. As shown previously, the free cash flow, after financial results and tax from continuing operations, amounted at EUR 227 million negative, and they represent EUR 111 million year-on-year improvement at current rates. They are driven by a significant improvement in Connected Home operational performance, working cap improvement in Production Services and DVD Services, and by the ongoing implementation of our cost transformation plan. In particular, it should be noted that the working cap variation has absorbed EUR 120 million negative charge of payment term reduction in Q1 2021. And this same movement was only EUR 40 million in Q1 2020, so it absorbed a negative EUR 80 million through this quarter and despite that, we managed to improve. As mentioned previously, the group has now reduced its payment terms to a competitive level. And the working cap, starting in H2 2021, will no longer reflect the negative adjustments recorded in the past few years. Slide 18 provides you with the debt structure. So we have EUR 102 million of cash and cash equivalents, and our net debt amounted to EUR 1.074 million under IFRS 16. Liquidity. So in Slide 19, our total liquidity amounted at the end of the quarter to EUR 175 million, with EUR 102 million of cash on hand and EUR 73 million of undrawn Wells Fargo credit line facility. This concludes my presentation. And with this, Richard, I hand over to you to wrap up. Thank you.

Yes. Thanks very much, Laurent. So let's go for your questions.

[Operator Instructions] We already have some questions. The first one comes from Thomas Coudry from Bryan Garnier.

I have a few. First of all, you mentioned some challenges in the recruitment. I would assume that you referred to Production Services here. Can you give us some more color on the potential issue here? And in particular, what is the situation in [indiscernible] we know that you intend to use Indian people a lot in your Production Services, the COVID-19 situation is pretty bad there, so it would be nice if you could give us some information and update on the situation here and the group recruitment challenges as a whole. That was my first question. Second question on Production Services. So your margin has -- EBITDA margin has increased year-on-year. Still it's rather low as compared to Q4 last year. Can you give us some more color on whether we're talking about specific seasonality impact here as far as Q1 is concerned? Or if there is a specific, let's say, impact on margin from the higher episodic contribution this quarter? And how we should look at this EBITDA margin in Production Services going forward in the year? And last question, please. Just on the component issue. I would just like to understand, indeed you're sticking to your guidance, but it seems that you're giving a little bit more color on what you're expecting, the impact to worsen in the year until Q4. Before you were mentioning that you might have some -- let's say, some sales going maybe from H1 to H2. Has your confidence in your guidance deteriorated since you first announced it with the full year results because of this component issue lasting maybe longer than what you thought initially? That was my last question.

Okay. Well, I'll take questions 1 and 3, and then I'll pass back to Laurent in terms of the Production Services margin question. So with respect to recruitment, yes, you're right. The reference to recruitment refers to Production Services. During the period of the pandemic, particularly during the early part of 2020, we significantly reduced our headcount, especially amongst contract staff because the amount of work that fell off a cliff when live-action shooting stopped at the end of March 2020, and we needed to trim our cost base because obviously, we needed to protect our cash flow. But as was stated in the presentation there, the pipeline which we're establishing across the entire division is very robust. So we've now got more than 90% of our 2021 pipeline secured across File & Episodic and Animation & Games. We can't see so far forward in advertising, which is always the case, but we can see that the second quarter is going to be very good. And it seems that advertising activity is rebounding as lockdown restrictions relax. So there is a significant demand for incremental work coming now in Production Services, and we need to ramp up our recruitment in order to keep pace with it. I guess the real -- it increases gradually over the course of the year, over the quarters. And then 2022 is looking as though it's going to be a real blowout year for the industry as a whole and for us in particular. So we need to ensure that we've got the right number of staff on board. And we're recruiting them across the world. And as you say, India is an increasing feature of our activities in this context because we referred, again, in the presentation to previously siloed operations. And one of the major strategic drivers which we have is to get as much work back to India as possible and to have one delivery pipeline behind the sales forces, which operate for the individual brands and individual business units, so that we can drive the highest possible margins. Obviously, because of that, at the moment in India, the lockdown situation and the progress of the pandemic is very severe. And that sort of slows down recruitment activities somewhat. However, they are nevertheless proceeding at pace, and we're confident of having the staff on hand that we will need when the time comes to fulfill all the projects which we have on the blocks. But it was simply a reference to the fact that, that is one of the key initiatives which we have facing the business right now. But the number of people that we have on hand is building up week-on-week, and so that is progressing in accordance with plans. Now in respect to your third question, on the question of components and the guidance which we're giving today. Well, obviously, we're reconfirming our guidance for the group for 2021 and 2022, which obviously means that we're confirming the guidance for Connected Home because that's a significant proportion of group results. We -- our confidence has not deteriorated. I think obviously, the situation has evolved. And we've got more data now in terms of what impact that we think we will experience from the lack of availability and increase in prices in semiconductors and memories and other key components. And basically, I think you could say that the assumptions which we built into our original business plan and the guidance which was built from it remained pretty robust, and we track them carefully. And I think we're moving very close to the projections which we originally made. There are some elements which are more difficult to predict, because the situation is evolving and more and more different types of components are becoming under stress. But nevertheless, subject to that, from what we can see today, we have enough information and enough data to be able to reinforce the guidance, which we previously made. Laurent, would you like to handle the second question on Production Services margins?

Yes. So you're correct, there is a variation in terms of the margin from quarter-to-quarter at Production Services. But I would say, in a nutshell, nothing to worry about. This is logic and linked to the cycle of the activity. In Q1 2021, as mentioned, we have -- the teams have built up a very, very strong pipeline. I think it's probably the strongest I've seen in the 2.5, 3 years I've been in the company. And we are recruiting. We are recruiting, therefore, we are piling in cost at the moment. We're bringing in people in India, in Canada, also in London. But we are not yet getting the revenues. So the team starts to work. And you know we are being paid on milestones, so whenever we deliver. And before that, we cannot recognize the revenue. So it's logic to have a low quarter in Q1 if you look at Production Services, and that's mainly, of course, devoting around FEV, so Film & Episodic, we were expecting and we expect and then we continue to expect a big improvement in absolute terms and in margins from one quarter to the other, and from one half to the other. So the peak of the activity for Production Services will be in the second half of the year, once the team are fully on board and deliver. So we expect very significant Q3 and Q4 contribution and the ramp-up from Q1 to Q2. So yes, and you will see fluctuation on margins. So obviously, you will see improved margins coming from a quarter-over-quarter basis. Q4 last year, we benefited -- we had still a bit of work coming through and we benefited from that. So that explains the difference in terms of margin. Maybe to just add one comment on what Richard has mentioned as far as the components are concerned. We know that we don't know. So we know that this is a sector that is quite complex roughly, in particular in the context of components going up. So we built up a lot of stress case and we're trying to make sure that we have enough reserve and prudent forecast, so we can weather more than one hit. So that's what gives us so -- at the moment, sort of confidence that we should be able to get through and deliver 2021 guidance.

We have another question from Fiona Orford-Williams from Edison.

Thomas took my component question and my India questions, so we'll go with others. First of all, on Production Services, you mentioned in the statement that the MPC Episodic had doubled. Is that a significant number and that it ought to be accounting for separately? And also on Production Services, you've talked about the ambition to expand the Mikros -- the animation activity. Is that through gaining market share? Or is it moving further up the supply chain? Could you just give us some color around that would be helpful. And also, if labor recruitment is difficult, is there are signs of wage inflation already coming through? And on DVD Services, just a quick one. You talk about the non-disc distribution, is that also now becoming a significant element of the equation?

Laurent, would you like to kick off with the MPC Episodic question?

Yes. I mean the MPC Episodic has indeed had a strong quarter and is planned and programmed to have a strong year. As you know, MPC Episodic is -- that's basically the -- I think you're referring here to more to the episodic side of FEV, that's my understanding of your question. And so this is a division that's servicing Netflix and Amazon. And indeed, as Richard has indicated in the past, that it was one of the axis of growth for the division. It is. Clearly, there are a lot of contacts being made currently. We can't disclose to you. And we have no plan in the short term to disclose its sales separately, but from 25% a year or so ago, it's going to grow up quite significantly this year. Maybe Richard will give you more color on that, but there are various conversations held with a lot of people in this field. They are all looking for content, and we are obviously one of the main provider here. So I can't give you a specific number in terms of each share targeted at the end of the year, but it's going to be significantly above 25% where it was before. That's for sure.

I'll pick up the question on animation. So we -- animation has been running at pretty much the same sort of scale for quite some time. And our ambition is to grow its scale substantially and in so doing to acquire market share. And at the moment, we're currently working on 4 titles consecutively, which I think is historically probably the largest volume of work that we've done at one time. And we've just been awarded a fifth. And the recruitment of Andrea Miloro from Blue Sky, who's a real big hitter in the animation space, I think shows the commitment which we have to expanding that division. And she in turn has been bringing in a number of people that she worked with previously to strengthen our management team and our approach to animation and to provide confidence to the big animation studios that we're serious about this play. So I think in 2021, you're going to see a significant improvement in revenues from animation compared to 2020. And it's also our ambition to continue to improve the margins in that business also. Now the third question you asked was about wage inflation relating to recruitment. I think that's a very good question. I think that inevitably with the amount of work which is out there across the industry as a whole, particularly the amount of work which we've gained because I think we're getting work at the expense of some of our major competitors. And the scale of recruitment which we are undergoing, and indeed all of our competitors are simultaneously, there's bound to be upward pressure on wages. I don't think we've seen that come through yet. But I think that -- but it is inevitable that it will arise over the next 18 months. Laurent, would you like to take the one about non-risk activities in AGS?

Yes. I think you're referring probably to the distribution part of the business, and in particular the non-DVD distribution. So as you recall, it was like a year or so ago, it was in the region of delivering -- it was north of EUR 100 million, EUR 120 million of sales. Clearly, it's growing nicely at the moment. I think your question is a tricky one because I think it's a nice add-on business in the sense that we have -- the bulk of our distribution activity is dedicated to delivery of the DVDs, right? Because we have capacity, we have a network, we are logistic and we have a knowledge of how to do that. And it's a complex -- these are complex operations because you're talking about delivering millions of DVDs in small packages, different components to 5,000 Walmarts in the space of a week or 2 weeks. So you don't have so many people that are good to do that. So therefore, this has driven us to open up this, as I said, sort of non-DVD activity here. And with COVID-19 and with the surge in mail order, we have more and more clients that are coming to us. And indeed, even some of the very large operators, the Amazon or whatever, when they are short in terms of capacity or whatever, they use us. I think today, the way the team looks at it is it's a nice to have. We're happy to have it. We have this capacity. We are going to benefit, probably a bit more than what we're expecting in the past. Is this going to be an independent, full-scale autonomous division? I think it's probably a little bit early to say that. It's a little bit premature. So I think it's going to be a nice add-on. But again, COVID has made clear that there is value in there. And the team is doing everything they can to basically service new clients that are coming along. But I don't think it's going to be as significant -- I doubt that it's going to be a EUR 300 million to EUR 400 million business in a few years. But it's going to continue to grow probably in '21, maybe '22.

Yes. So it basically means that we shouldn't get too obsessed by just looking at the declines in volumes of the traditional distribution?

Yes, because you have -- well, the question around DVD is the following. You have, indeed, volume decline, yes, mainly in relation to what -- I mean, 2 or 3 things are moving the needle here. One, as Richard has mentioned, we have renegotiated contracts, all the contracts. So basically, that has led to price increases. So this is compensating. Sometimes we have very significantly loss-making activities, now we've brought them back at breakeven point. So that's point number one. And there will be new contractor negotiations in -- starting in 2 to 3 years. Point #2 is distribution. Distribution is -- you have the edge factor coming from these non-disc growth that is this coming year. And I think the third point, not to be disregarded, it's the fact that David Holliday, the new CEO has, let's say, fast -- or accelerated the recruitment of the activities mainly in North America and in Mexico, in what, so in low-cost countries. And he's starting also transformation work. So that basically means to deliver the same services at lower cost. So nobody is going to deny the fact that this is a declining activity, but it is very, very obvious that there is a long, long tail here.

[Operator Instructions] We have another question from David Cerdan, Kepler Cheuvreux.

I have a few questions for you. The first one is regarding Connected Home. So how do you explain this strong demand in the U.S.? And how long is it sustainable to be so much up in this region? The second is related to your competitive environment. Have you any indication to give us regarding your capacity to better negotiate than your competitors with your -- the clients in this industry? And my last question is regarding Production Services. Do you think that there is a potential for you to start a consolidation in this sector? Is it something that could happen in 2021 and 2022?

So can I just clarify that second question, when you said are we in a better position to better negotiate with clients, is -- that's a Connected Home related question, yes?

Well, yes, it's Connected Home first. And secondly, are you in a better positive position to negotiate first with the clients? But If you make a comparison with the rest of your competitors, is it the same situation for them? In other words...

Okay. Okay. So Connected Home, the strong demand in the U.S. comes from the fact that people were locked down, obviously, in large numbers. They needed to work from home. They were at home with their families using multiple devices over extended periods for the first time. And so therefore, people want to upgrade their Broadband and WiFi experience, and they're trading up to the sort of high-end products, which we supply to our cable and telco customers. So we saw a very strong demand across North America throughout 2020 with Comcast, one of our largest customers, having several consecutive quarters of extremely strong demand, record demand. And that, according to results they published recently, has continued through into 2021. So clearly, this wave of upgrade, this desire to improve WiFi and Broadband experience has not yet been extinguished. And certainly, if you look at the lead times which we have for orders, which has necessarily become very elongated because our major suppliers have forced us to provide lead times and forecasts for products going out much further than we ever have previously, so 50 weeks. In many cases, we can see through into the second quarter of 2022 in terms of demand. And so therefore, demand is very robust. In the U.S. in particular. And so certainly, through until the middle of next year, we see no change in these kind of trends, which obviously is very positive. And I think it's one thing to note that when they make these types of component-related crises previously, they've sometimes been at times when demand has not been as predictable or as robust. So now at least, I think we can say that the top line is there, the actual timing of delivery may be uncertain because of some of these factors, which we've been discussing, but it remains robust for the foreseeable future. Now in terms of the competitive environment, can we negotiate better with clients, I think that when we put together our assumptions concerning what impact the semiconductor and memory issues we're going to have on our business, we made the assumption that we were going to be able to pass through a certain proportion of the costs to our clients. And we are achieving the level of pass-through that we predicted, which is why, as I said earlier, we feel that the projections, the assumptions we made, which we've built into our business plan and into our guidance remain robust. And I don't think that necessary -- well, we're obviously one of the largest players in the market. In fact, probably the largest now outside of China. And that gives us some clout with our major suppliers. And therefore, we can, to some extent, try to make sure that we get our fair allocation or more than our fair allocation of these components that we need in order that we can maintain manufacture and supply to our major customers. So I think that puts us in a good comparative situation compared with our competitors. And with respect to clients, I think that probably everybody has been experiencing this. But with uncertainty arising about the resiliency of supply, clients obviously don't like paying higher prices. But ultimately, I think they recognize that with this demand remaining so robust, they have to have the product. Otherwise, they're going to be disappointing customers. And therefore, ultimately, they're prepared to pay in order to guarantee that they achieve it. And certainly, again, the fact that we're one of the biggest players in the market and a player that's provided reliable supply over a number of years, gives our customers good confidence that we will continue to do so this time around as well. And your third question about potential to stop consolidation. Well, I mean, obviously, we're the market leader in terms of visual effects for the film industry and our position with episodic and streaming is growing. We've got the largest brands with respect to advertising visual effects in the world, The Mill and MPC Advertising. So we're in a strong position. And I guess we have to be realistic, however. We went through -- we restructured our balance sheet last year. We got new money into the business. We have been working hard on making sure that we improve our working capital, that we maintain very robust cash flow. And that we transform the business and improve margins in every single area of our activities. That's been a major area of focus. We have no plans at the moment to look at consolidation opportunities. But obviously, we will see how things evolve.

We have no more questions. [Operator Instructions] Well, it seems that we have no further questions.

Okay. Well, with no further questions, thank you very much for your time this evening, and we will look forward to continuing to improve our performance in the coming quarters and to maintain the guidance which we've set tonight. Thank you very much.