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 reminding you that 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. I'm very pleased to be with you today to run through Technicolor's third quarter and 9-month results, which are robust and in line with expectations. Since the beginning of the year, we've been experiencing a steady improvement in our businesses, and we're benefiting from improved profitability as a result of our disciplined operational focus. Today, we continue to be impacted by supply constraints, but we're working our way through these aided by our agile and responsive staff. Managed by strong new leadership, our teams are fully engaged in delivering the cutting-edge technologies and high value-added services expected by our clients. So if we start on Slide 4. Looking at the key figures for the group. At the end of September 2021, Technicolor was experiencing strong and growing demand across all activities. Technicolor Creative Studios has been awarded numerous new projects with approximately 75% of its expected 2022 sales for Film & Episodic Visual Effects and Animation & Games committed. Connected Home has seen continued significant demand in North America and in Eurasia, and there has been robust catalog demand and continued growth in nondisc-related supply chain activity in DVD Services. However, supply constraints have been affecting both Connected Home and, to a lesser extent, Technicolor Creative Studios. For the first 9 months of the year, Technicolor reported total revenue of EUR 2.05 billion down 4.4% at constant exchange rates, impacted by key component shortages, which prevented the business from fully servicing its growing demand. Adjusted EBITDA of EUR 176 million was up 71.3% at constant rate, and this reflects operational and financial improvements mainly in Technicolor Creative Studios. Adjusted EBITDA improved by a robust EUR 111 million year-on-year to reach EUR 46 million. Free cash flow before financial results and tax from continuing operations was still negative at minus EUR 206 million, but this represented a EUR 72 million year-on-year improvement at current exchange rates. Free cash flow in the third quarter alone was positive EUR 3 million, representing a EUR 38 million improvement compared to third quarter 2020's free cash flow of negative $35 million. Based on business activity for the first 9 months and the continued successful optimization of our businesses, we are confirming our outlook for 2021 and 2022. Turning to Slide 5. Technicolor Creative Studios is benefiting from a surge in demand for original content in the Film & Episodic Visual Effects and Animation & Games service lines, combined with an outstanding performance from the Advertising service line. Revenues amounted to EUR 157 million in the third quarter of 2021 up 38% at constant rate and 41% at current rate quarter-on-quarter. Adjusted EBITDA amounted to EUR 33 million, which represents a EUR 35 million improvement compared to last year's negative Q3 EBITDA. Adjusted EBITDA was EUR 16 million, up EUR 40 million quarter-on-quarter as a result of margin improvement in combination with aggressive permanent cost reduction measures. Revenues for Film & Episodic Visual Effects more than doubled year-on-year in Q3 as the business continued to recover from pandemic-related impacts. The FX teams worked on over 20 theatrical films, including the Lion King prequel for Disney, Resident Evil: Welcome to Raccoon City for Constantin Film/Sony and Sonic the Hedgehog 2 for Paramount. We also worked on over 35 episodic and streaming projects, including Chip 'n' Dale: Rescue Rangers for Disney+, Vikings: Valhalla for MGM/Netflix and The Wheel of Time for Amazon/Sony. In September, MPC and Mikros announced an alliance of their episodic and film divisions. Mikros, a French company with over 35 years in the VFX industry, has been a Technicolor brand since 2015. The combined studios will operate under the MPC episodic brand and will continue to service the French entertainment industry. After the end of the quarter, MPC Film received an HPA award nomination for outstanding visual effects theatrical feature for its work on Legendary's Godzilla Vs. Kong. Advertising recorded double-digit growth as momentum continued to build, particularly with repeat direct-to-brand business with major advertisers. During the third quarter, Technicolor's Advertising business has delivered approximately 660 commercials while winning several prestigious industry awards. Notable projects delivered in the quarter include Lego's latest global Rebuild the World campaign by MPC; Nike's latest Play New campaign featuring Megan The Stallion from The Mill; and Pentakill: Lost Chapter: An Interactive Album Experience, which was a metaverse concert for Riot Games from The Mill. Technicolor Creative Studios announced in September the launch of a global network of creative hubs, hosting The Mill and MPC brands in co-located studios, beginning in London and New York City. In conjunction with this announcement, TCS have appointed Josh Mandel and Mark Benson, CEOs of The Mill and MPC, respectively, to co-lead the Advertising offering globally. Animation & Games recorded significant double-digit growth year-on-year. Mikros is in production on Paramount's The Tiger's Apprentice and GCI Film's Ozi, while beginning to ramp up production on 4 additional feature films. During the quarter, Mikros completed work in episodic on Disney Junior's brand-new Halloween special, Mickey's Tale of Two Witches and continues to work on multiple episodic series. In October, Technicolor announced the appointment of Jeaneane Falkler as the President of Technicolor Games, a newly created position to lead growth in the game sector. Abiding by evolving local and national government regulations, and in consultation with local business leadership, TCS continues to adjust capacity limits, on-premise protocols, and remote work policies and support on a local basis to ensure the safety of our talent, clients and others. The pandemic continues to affect both immigration and travel, negatively impacting the industry's ability to attract talent to locations where the demand for talent exceeds local supply. Furthermore, immigration policy changes in Canada and in the U.K. and Europe as a result of Brexit are also having an adverse impact on the acquisition of talent. To support its strong pipeline, TCS continues to invest in its academies across multiple locations to generate new talent into the business. Now on Slide 6. Connected Home revenues totaled EUR 330 million in the third quarter down 34% at constant rate quarter-on-quarter. However, the worldwide semiconductor key component crisis, combined with supply chain dislocation and cost increases has further deteriorated during the third quarter, creating renewed challenges for the business. The division has intensified its collaboration with clients and suppliers to maximize deliveries and to mitigate potential profitability and working capital impact. Adjusted EBITDA amounted to EUR 17 million in the third quarter, down EUR 16 million at constant rate due to the sales shortfall and higher component prices, particularly -- sorry, partially offset by reductions in operating expenditure. The division continues to be at the front end of innovation. New wins and product launches are offering better user experience, including WiFi 6, Android TV, Google Assistant, Dolby Vision and Dolby Atmos sound experience. Looking at business highlights by region. In North America, revenues were down due to supply constraints and transportation delays despite continued increased demand from cable operators. The division aims to continues to secure new wins and grow share in Tier 2 and Tier 3 customer groups in both Broadband and Android TV. In Latin America, demand is up across the region due to key wins in WiFi 6 on both DOCSIS and Fiber, but revenues were down in the third quarter once again due to global supply constraints. In Eurasia, DOCSIS and Fiber demand and supply remains strong, while sales of legacy technologies like DSL reduced sequentially. Video demand remained stable, but highly constrained by integrated circuit component supply. DOCSIS 3.1 revenues continued growing strongly in the region. In Asia Pacific, demand remains strong for Broadband and Video, although once again, highly constrained by specific key components. Going forwards, the division will continue to focus on selective investments in key customers, platform-based products and partnerships, optimizing fixed costs that will lead to improve margins over the year. Now on Slide 7. DVD Services revenues totaled EUR 198 million in the third quarter up 4% at constant rate. Total replicated disc activity was down 7% in the third quarter with standard definition DVD down 11% and nevertheless, up 1% year-to-date with the continued aggressive marketing of back catalog product by the major studios. Blu-ray was up 8%, driven by the recovery in major studio new releases, whereas CD volumes were down 10% due to a combination of expected structural declines and COVID-related impacts. DVD Services continue to implement structural division-wide initiatives to adapt distribution and manufacturing operations and related customer contract agreements in response to continued volume reductions. Adjusted EBITDA amounted to EUR 29 million at current rate in the third quarter, slightly better than expectations given stronger-than-anticipated disc volumes, the acceleration of cost-saving actions and higher activity in freight and logistics. Adjusted EBITDA amounted to EUR 18 million, a EUR 3 million improvement. Going forward, Theatrical new release is showing an accelerating trend with significant box office results from recent major releases. DVD/BD release remains the normal windowing sequence to studios, even with the experiment with various premium video-on-demand and day-and-date strategies. Retailers are expected to reallocate shelf space in favor of higher-priced new release product. Some production facilities continue to experience temporary staffing shortages, but the overall impact of operations remains limited. The ongoing COVID-19 impacts remain uncertain, but DVD Services has accelerated its future restructuring plans in an effort to adapt. So over on Slide 8. To conclude, all Technicolor activities are benefiting from strong and growing demand, driven by the urge to equip homes with high-quality broadband access, the need for original content from studios and streamers and significant appetite for catalog DVDs. Thanks to the ongoing transformation initiatives begun almost 2 years ago, we've been able to invest more in hiring and unleashing top talent while consolidating, sharing and harmonizing best practices. With already EUR 75 million cost savings realized in the first 9 months, we're well on track to achieve around EUR 115 million by the end of 2021 as planned and to deliver a cumulative EUR 325 million by the end of 2022. This improved efficiency, together with our responsive organization, will help us to mitigate the supply constraints and component price increases that we're facing. Our vision for transforming the future of film, episodic, gaming, integrated marketing and advertising campaigns give us the confidence that we will continue to deliver improved operational and financial performance. So for 2021, we confirm revenues through continuing operations broadly stable versus 2020; adjusted EBITDA of around EUR 270 million; adjusted EBITA of around EUR 60 million; continuing free cash flow before financial results and tax at around breakeven; the net debt-to-EBITDA covenant ratio below 4x at year-end, and we're maintaining our previously issued 2022 guidance. Now I will hand over to Laurent, who will go into our Q3 and end of September year-to-date performance in more detail.

Thank you, Richard, and good evening all. So I will now provide you with further details regarding our Q3 2021 results. So overall, as mentioned by Richard already, but it's good been repeating it. So Technicolor delivered a positive third quarter 2021 and a significant improvement in profitability despite renewed supply constraint challenges affecting both connected home and Technicolor Creative Studios. Over the summer, supply constraint reached another level, forcing us to accelerate and intensify discussions with clients to mitigate the potential negative impact. So far, we have managed successfully, as demonstrated by our results. And we keep monitoring, of course, the situation very carefully over this fourth quarter. So now let's go on to Slide 10. This slide, as usual, presents you with our consolidated P&L. I will give you a bit more color per division and spend a bit more time on this one, and then we'll go faster with the following one, as usual. So our revenues year-to-date, as mentioned by Richard, has amounts to EUR 2.05 billion, decreased by EUR 99 million at constant rate, representing a decrease of 4.4% at constant rate. So if we look at Technicolor Creative Studios, TCS revenues amounted to EUR 452 million end of September 2021, and it's year-to-date accumulated, up close to 18% at constant rate and [ 16% ] at current rate year-on-year. This is a strong performance for the division versus prior year and driven mainly by the demand for VFX technology, and Richard insisted on that earlier, and also a continued strong performance in advertising and animation & game. If you go a bit more in detail, FEV is at EUR 50 million, 5-0, MPC Film paying EUR 31 million contributor and MPC Film is where we have our -- maintain -- movie activities. MPC TV is up by EUR 20 million; and Mr. X, EUR 1 million. Advertising, is EUR 31 million, and it's being driven mainly, and that's been quite constant through the year by the MPC Advertising, 1 or 2 studio activity of EUR 25 million, while The Mill was performing a little bit less to a token of EUR 7 million. A&G, it was up EUR 20 million, which, in particular, work for hire up EUR 11 million. If we look at now at Connected Home, Connected Home revenues totaled EUR 1.1 billion. End of September, it's down 13% at constant rate and, of course, mainly due to supply constraints and transportation delays. At the same time, there has been very strong worldwide market demand for product that, unfortunately, we cannot yet provide for. And we have a huge backlog at the end of this year that might or might not translate into 2022. The majority of customers is now committing on volumes until the end of 2022 and is winning on the pass-through contracts to secure component supply. This situation is expected to continue well into 2022. So compared to last year, year-to-date, the division sales are down EUR 173 million as, again, we meet all client needs. More specifically, Americas is down close to EUR 140 million, mainly explained by North America, down EUR 90 million; and Eurasia is down EUR 35 million driven mainly by APAC, EUR 20 million; and EMEA, EUR 15 million. DVD Services revenue totaled EUR 481 million end of September, broadly stable versus last year at constant rate. The continued higher-than-expected back catalog sales has contributed slightly positively, combined with the good performance of non-lease distribution and raw material inflation pass-through. It's important to notice that we're managing in this division to pass through some of the inflated costs we are experiencing. It has helped to compensate for weak distribution activity. Our overall adjusted EBITDA amounts to EUR 176 million, up EUR 71.3 million at constant rate. That accounts to an increase in absolute terms of EUR 75 million year-on-year. This reflects the operational improvements, particularly in Creative Studios and DVD Services. So TCS, Creative Studios, the adjusted EBITDA amounts to EUR 74 million, 16% of the revenue in terms of margin, and it's up EUR 75 million year-on-year at constant rate. It's driven by the impact of higher revenues versus last year, we commented on that and of course, the continuation of the efficiency improvement plan led by the new management. Connected Home, its adjusted EBITDA amounted to EUR 73 million, a 6.7% of revenue, down EUR 9 million at constant rate, mainly due to lower sales impacted by component shortages. DVD Services EBITDA amounted to EUR 39 million at current rates, up EUR 12 million versus last year. Profitability improvement has benefited from the acceleration of cost-saving actions and higher activity also in freight and logistics despite continued labor and material cost pressure that have affected the company through the year so far. Adjusted EBITA of EUR 46 million represents EUR 111 million year-on-year improvement at constant rate. This result, of course, from the EBITDA increase versus the positive impact of efficiency measures, in particular, low depreciation and amortization following lower equipment spend for Technicolor Creative Studios and lower depreciation for DVD Services going along with the reduction of footprint. Restructuring costs amounted to a negative EUR 31 million at current rate. So it's including EUR 15 million year-to-date of DVD Services. This is driven mainly by the important efforts in footprint rationalization. The change in working cap is negative EUR 240 million. It reflects mainly Connected Home payment terms normalization that occurred in H1 2021. For your details, the work up of Connected Home through the summer in Q3 was neutral, almost 0. So Connected Home and group working cap have normalized in Q3 as planned. There is only one caveat. The key component shortage has, however, created a risk of unfinished goods inventories build up, but the group is addressing this through active cooperation with its clients and suppliers, and we believe we should be able to fix this issue in Q4. Free cash flow before financial results and tax from continuing operations is negative EUR 206 million, represents EUR 72 million year-on-year improvement at current rate, driven by the profitability improvement at TCS and the ongoing implementation of our cost transformation program. The free cash flow in the third quarter alone is amounting to a positive EUR 3 million. It's more, but it's good to mention that for once this is happening, representing a EUR 38 million improvement compared to the third quarter of 2020. The net debt, to finish off, at nominal value amounts to EUR 1.258 billion, and the IFRS net debt amounts to EUR 1.183 billion. The difference mainly, as you know, relates to the mark-to-market debt valuation and will be reversed through noncash interest charges over the last of the debt. So with that, finishing on this very slide, we're now going to go faster. So moving on to the Slide 11. So you see -- you can see here the walk from 2021 of the EBITDA. EUR 75 million increase in adjusted EBITDA at constant rate is mainly, as you can see, by EUR 75 million increase in TCS and a EUR 12 million increase in DVD Services. Connected Home decreased slightly -- was flat and decreased slightly by EUR 9 million. Corporate and other decreased its contribution by EUR 2 million. If you do remember, we had a positive contribution last year, retained patent revenues, that figure is no longer here, and we compensate for some of the [indiscernible]. ForEx impact was a negative EUR 5 million on EBITDA, so not a huge number. Moving on to Slide 12. Technicolor Creative Studios, revenues amounted to EUR 157 million in the third quarter. So I'll be commenting in these slides mainly in the third quarter. In the third quarter of 2021, up 38% at constant rate. The division is benefiting from the surge in demand for original content in a few many pieces of the VFX and the Animation & Games service lines. That's combined with an outstanding performance from the Advertising service line. If you want more specifics on film & episodic, revenue in the third quarter more than doubled year-on-year as the business continued to recover from pandemic-related impacts. Advertising increased from a double-digit growth as momentum continues to build, particularly with repeat direct-to-brand business with major advertisers, one of the new strategic initiatives we undertook 2 years ago. Animation & Games, significant double-digit growth year-on-year driven by strong volume across all business units. The adjusted EBITDA amounts to EUR 33 million. It's up EUR 35 million quarter-on-quarter at constant rate and the adjusted EBITDA, EUR 16 million is up EUR 40 million year-on-year as a result of, of course, higher-margin volume growth in conjunction with permanent efficiency measures being implemented. Moving now on to Slide 13, so Connected Home, third quarter. So the revenues totaled EUR 330 million. They're down 34% quarter-on-quarter at constant rate. Growth in demand this year in North America and Eurasia was 20% in line with other consumer electronics industry. Growth in demand, so the market demand is up, but the capacity to deliver the entirety of the extra demand is not available, mission components to make it simple, and that leads to important sales delay. To really be more specific per region. North America, the revenue were down due to the supply constraints and the transportation delays despite continued increased demand from cable operator in that arm. The demand is up actually in Q3, was a bit soft in the first half and it will be coming back up in Q3, in particular because of the key wins in WiFi 6 and in Fiber. Unfortunately, the revenue went down because we struggled still to deliver all these demand from our clients. In Eurasia, EMEA, DOCSIS and Fiber demand and supply remained strong, 15% and 40% -- respectively, while sales of legacy technologies like DSL reduced sequentially. Video demand remained stable while highly constrained by IC component supply. The DOCSIS 3.1 revenues continued growing strongly in the region. And among new project launch, there was a WiFi 6 DOCSIS product with Vodafone. Asia Pacific, the demand remains strong as well but still constrained by operating results and IT delivery. So during the summer 2021, It's important to notice that the worldwide semiconductor's key component price is combined with supply chain, this location has further deteriorated, creating renewed challenges for the Connected Home business. So we have continued difficulties in obtaining components that delays the production to find customers. We have challenges in logistics, and overall, we are facing cost increases through multiple categories of components and logistics. But we are addressing these issues and the division has immediately intensified and started immediately in the -- over the summer in August its collaboration with clients and suppliers to maximize the delivery and mitigate the potential profitability and working cap impact. So this is showing, as you can see, positive results as we speak. The effort still needs to be sustained as the crisis doesn't show any signs yet of tempering, and we're going well into Q4 with the same intention of still delivering our numbers. Adjusted EBITDA amounted to EUR 70 million in the third quarter of 2021 or 5.1% of revenue down EUR 16 million at constant rate. That's again due to the same reason. This says software and higher component prices. It's been though offset by reduction in OpEx and, in particular, very significant efficiency improvements. If we move to Slide 14, we're going to tackle the DVD Services. The revenue totaled EUR 198 million. In the third quarter, it's up 4% at constant rate. The revenue growth was driven by an increase in higher priced Blu-ray volume. It's a signal of the fact that the new releases are coming back in play now and ongoing growth also in nondisc related supply chain activities or distribution if you want, that have on this product and the positive impact of pass-through of raw material costs. The impact of COVID-19 on these volumes is somewhat in the third quarter with an increased level of new release activity which helped drive the higher mix of Blu-ray volume, as I've mentioned already. In detail, you have the SD volumes, standard definition volumes have declined by 11% in the third quarter, but overall, they are up 1%, as Richard mentioned earlier. Blu-ray volumes were up 8%. It's still a sign that you now have the new releases. This should continue into Q4 and into 2022. CD volumes were down 10% year-on-year. It's an expected decline level. Adjusted EBITDA amounted to EUR 29 million at current rate, 15% of revenue, slightly better than our expectations given stronger-than-anticipated disc volumes but also by the acceleration of the cost saving actions and the [indiscernible] and higher activity in freight and logistic. Of course, this upside was partially offset by continued labor and material cost pressure as well as the reduced mix. We expect this continue to deliver and material cost pressure to continue. But on one hand, we manage -- and the management has achieved pass-through to customers for part of it. And then we have accelerated also all the restructuring and the footprint rationalization. So that's happening here, and you will see that we also are benefiting from very significantly lower depreciation and amortization as we are reducing our throughput. So if we move now to the Slide 15. It is a slide that takes us from EBITDA to EBIT. We don't have a lot of things to mention here. We have an adjusted EBITDA of EUR 46 million, continuing EBIT of EUR 7 million. In between EUR 28 million of PPA amortization, no change. I mean it's the same mechanical type of amortization you see quarter-on-quarter. The restructuring cost, they accounted for EUR 31 million, EUR 15 million are in DVD. That is per the intensity of the action within this division. And that's mainly focused around footprint rationalization. And we have also a noncurrent that is positive, you might wonder why. It's really a noncash item. It's linked to a positive ForEx impact in relation to the shutdown, the close down of one of our Singaporean entity. So no meaningful economic impact here. Moving down to Slide 16. So EBIT from continuing operations amounted to a profit of EUR 7 million. In the first 9 months, it was last year a negative EUR 212 million. And there was -- it's basically mainly due to better operational performance. But also do remember that in 2020, we had a DVD services impairment and higher restructuring accruals overall. So it's a signal that we're starting to emerge from the restructuring period. The financial results totaled EUR 94 million, negative EUR 94 million. Year-to-date, we had [ EUR 104 million ] for last year, positive. But careful, we need to look at the details. So net interest cost was EUR 93 million, negative up from last year by EUR 39 million is primarily due to the fact that we're paying higher interest on new debt. The other financial income are lower at EUR 1 million. But again, last year, we had a positive -- a big positive contribution of EUR 159 million in relation to noncash gain on the equity and debt initial valuation, so not a meaningful number last year, noncash as well, but it was in our accounts. And therefore, it compares in our favor this year. Well, in contracts, the amount for EUR 19 million. It's a bit more than EUR 5 million we paid last year. You might wonder why but it is a sign that the activity is picking up, the EUR 14 million comes mainly from Canada, where we have a lot of VFX activity, and we do pay taxes in Canada. So it's a signal that clearly the activity is picking up here. The group net income therefore, amounts to a loss of EUR 106 million. It was EUR 121 million last year, but let's say it was benefiting from a big positive element. If we move to Slide 17. You have here the work of the free cash flow so -- from continuing operations. So last year, we were at negative EUR 335 million. You can see that we've improved this by EUR 57 million year-on-year. Of course, you have the EBITDA contribution of EUR 75 million. We spent a bit less CapEx, EUR 16 million, this year than last year, slightly better, I would say, pension and other ForEx impact, nothing really meaningful. We have higher restructuring cash-out, EUR 24 million. Do remember, I told you last year that we had a big P&L restructuring charge last year when we booked huge amounts of restructuring and half of that was cashed out in 2020. And I told you at the time that the other half will be cashed out this year. This is what's happening. And finally, we have a EUR 14 million deterioration of work cap consumption. Maybe what you have in this number, it's a big mix, but you have the normalization of the payment terms that occurred in H1 2021. I remember that we paid revenue -- paid more than EUR 120 million impairment of rationalization then, and we have sold that. And the only slightly negative thing we have is slightly more higher inventories uncovered by EPS at the end of September and that we're working on reversing into Q4. Slide 18, you'll find presented the debt structure. As you can see, it's written small -- written more towards the bottom that we have EUR 49 million of cash and cash equivalents, and our nominal debt, of course, still amounts to EUR 1.2 billion more or less. In Slide 19, our total liquidity, as you can see, amounts to EUR 120 million with EUR 49 million in cash and EUR 71 million of Wells Fargo credit line. We drew, as you can tell from these numbers, EUR 37 million on the Wells Fargo line [indiscernible]. And with this, this ends my presentation, we can...

Thank you very much. So we look forward to your questions.

[Operator Instructions] And we have our first question from Emmanuel Matot from ODDO.

I have 4 questions. First, in TCS, does that make sense to believe in a scenario that sales in 2022 could go back to the level prepandemic despite difficulties to recruit talents? Second, how long do you think the situation will last regarding shortage of components and challenges with logistics for Connected Home, what your suppliers are currently telling you? Third, in DVD Services, can you remind me what is a nondisc supply chain activities, its size in terms of sales and if its growth prospect can compensate the structural decline of DVD volumes in the future? And my last question, are you looking to refinance your debt in the next 12 months? Do you think this is possible as you are still considering to reach our 2022 road map?

Okay. Well, thanks very much for those questions. If I take the first one, which was, do we think that TCS can reach its pre-pandemic levels of activity or exceed its prepandemic levels of activity in 2022 despite the difficulties in recruitment of talent. I think that we certainly hope that, that can be the case. We expect that the 2019 levels will be exceeded in 2022. I guess that's inherent in the continuation of the guidance, which I said we were making for 2022. Certainly, the recruitment of sufficient talent, I think, is an industry-wide problem because there is so much demand coming from both the Hollywood studios and the episodic and streaming players. And it is very difficult to recruit talent to keep pace with the enormous amount of demand which we are experiencing. But despite that, we are making significant inroads into the problem. We're running multiple academies to train new staff in very large numbers, bringing new people into the industry. And so we anticipate that we will be able to keep pace with that demand. And I think, as I said earlier in my section of the address, we have 75% of our pipeline committed for 2022. So we're pretty confident about the level of demand throughout next year. In terms of the shortage of components, you said how long would that last and what are we hearing from our suppliers. I think that everything that we see and hear suggests that the key component crisis and indeed, the supply chain dislocation crisis, which is associated will continue throughout 2022 and into 2023. How long it will last beyond that, I think, is anybody's guess. But the level of problems which we are seeing at the moment, I don't think it's going to dissipate within a 12-month period. Now having said that, I think that in this fourth quarter, we are starting to see some stabilization of the process, certainly during the third quarter as I and Laurent said, the sort of level of problems which we're experiencing and a number of issues coming up with severe. But in the fourth quarter, I think we've seen some stabilization. We're expecting a slightly better revenue outcome than we thought a few weeks ago because component supply is improving slightly. Nevertheless, as we go into 2022, I think what we're hearing from our major suppliers is that they like visibility on their own component supply, which, therefore, feeds into inability on their part to give us complete surety with respect to our component supply. And therefore, there is going to be uncertainty, which as I say, I believe will last through 2022. Nevertheless, I think that there will be an improvement in '22 compared with '21. DVD nondisc supply chain activity, would you like to take that one, Laurent?

Yes. So first of all, what are we talking about? So we have overall distribution activities. As you know, we are distributing all discs. So that basically means that we have a business, whereby we are storing new warehouses. Discs, we are picking them and packaging them. And then we are sending them to clients, clients in the Walmart or in the world -- the [indiscernible]. So we have a network. We don't own trucks but we have logistic capacity and knowledge to do that. A few years ago, a nondisc, so that's your question, Emmanuel, business was started. And so that's really the same thing, but it basically targets non disc. So you have a variety of things that clients like one-off, and why not. And we are basically performing for them logistic issues. So we are helping them to go from their warehouse to their clients, and we do that. We have -- within that also, we benefit from some beneficial tariffs. Some of that will be managed in the future. We're replacing that. We have strong demand for activity coming through. And therefore, it's a business that is in the making. And I think in the early day, they have put it as one of his major focus. Going forward. So at the end of September, the sales were EUR 122 million in total for distribution. We have EUR 90 million more in discs and the rest was performing nondisc. We expect this EUR 120 million to go to be north of EUR 150 million at the end of this year, with in particular, the nondisc activity, probably not doubling but getting close to 35% increase. There's strong demand for this activity. It's understandable in period of lockdown, obviously, and an increased amount of delivery -- home delivery and all these elements. So this is where we are. So I hope these answer your questions. And that's -- but I think going forward, maybe they will or [indiscernible] will express itself, and this is one of the growth focus for the focus for this -- for the coming years. The last question about refinancing the debt. Well, we need to be a bit clear about how we deal with this question. So it's public information that we averaged EUR 425 million of what we call the new money back in 2020, and it has in noncore on that end in July 2022, noncore means that we can't do much with it, and we are entitled with the payment of interest. After we can, of course, start to repay. It's an expensive debt. It's 12%. So I would say it's completely not -- you wouldn't be surprising that we start to think about how we are going to tackle this going forward. So to your question, it's a way to say, yes, of course, we'll be looking into ways, and we always are looking at ways of how we can refinance our debt. There's no urgency at all because we have a long call in July, but these are certainly things we need to start working soon on. But I hope it answers even modestly your question.

So we have another question from Thomas Coudry of Bryan Garnier.

I have 3. The first 2 on your 2021 guidance and how you plan to achieve this. On the EBITDA first, reaching your full year guidance means that you must have a significant acceleration in the Q4 EBITDA versus what you did in Q3 and Q2 as well. So can you guide us through where you expect the improvement to come from? Does it -- should we expect it to come from Creative Studios? I would expect so. And if so, are you staffed, I would say, to deliver the expectation of the order book in Q4? The second question is how to reach the free cash flow guidance over the year. Obviously, your free cash flow has improved again, as you mentioned, Laurent, in Q3. But again, to reach your full year guidance, you need -- it's a very positive cash generation over Q4, a little as you did last year. How can you be confident in delivering this type of performance given the, let's say, the interrogation of threats that you have on the working capital required on the Connected Home business? You gave part of the answers, I guess, Laurent, but I would be interested in knowing more how you deal with this issue. And my last question is actually about -- again about production and Creative Studios. Do you see already significant inflation on production cost? And given that you're a leader, and there is a very strong demand on this market, how do you feel your ability to pass this inflation through to your customer is? Do you have the pricing power to have the studios pay for this inflation? Should it become significant? That was my last question.

Okay. So there are 3 questions but made of probably 10 different sub questions. So I'll try to answer your Q4 questions first. So yes, first of all, as you mentioned, Q4 is always a strong quarter for Technicolor. There's nothing new here, mainly, but not only to the cycle of the DVD and Connected Home, and this year with a strong recovery in TCS, as you mentioned. So to -- in terms of contribution taking these one after the other. Connected Home, we -- as I've mentioned, we have a very, very strong demand for our product. The level, I said to you, I mean, this number shouldn't be taken as an indication that this will happen next year, but we have a backup of above EUR 400 million of sales, which basically means that if we upsize, we won't be able to deliver because we don't have enough product for the rest for this Q4 quarter. And if you do your math and you consider that we are going to go to stable, you'll see that we'll be almost getting close to EUR 0.5 billion of sales in Q4. How do we know we can do that? Because simply, we have the orders, we have the deals. And for the big chunk -- big chunk of these boxes, we already have manufactured them. So we know that we have it. So what could go wrong in here will be mainly logistic issues, but logistic issue, what does it mean? My boxes are on the board, and I can't lend them in Los Angeles, for instance. And that's -- if that happened, that will be my last week of December, and this last week is not a big contributor in sales or in EBITDA. So on that front, at the moment, we feel that, here, we have -- it's close enough to us, if you want, for us to properly assess what we can deliver and what we cannot. Could we have a very nasty surprise. Don't think so. It would mean a further decommissioning from a Texas Instrument type of suppliers, which honestly doesn't seem to be the case. We have constant conversation with them. So we don't think so. HCS -- sorry, DVD should continue. Their demand from back catalog continues. As you can see, if you read the median price, you see that the number of new release is increasing. And that's good for us because of the Blu-ray. And we even had a little bit of stack of UHD, the higher-margin businesses coming. They have approved so far and prudent. But so far for the Black Friday looks okay. So here, we think that should be good. We think that, finally, TCS should have a strong quarter. So 2 things here. In any way, we were expecting a strong quarter for TCS because of this big ramp-up demand in movies. So we will be delivering a strong quarter and almost -- we're not giving too many elements, but we had a region of EUR 400 million in year-to-date. So we won't hit EUR 200 million. We'll be short of that. We will be somewhere in between EUR 150 million and EUR 200 million. So that's going to be significant. Now to your -- one of your many questions, we would hope to do more. We would have hoped to do more because what we have is that in terms of demand, it's even higher than that. But as mentioned, with the recruitment that we're doing. And we know we can deliver the numbers because we have the people on board. So we know we can deliver that number unless clients delay. But at the moment, we don't see that. We should have been delivering more. So it's a strong quarter. You're right. It indicates the fact that the industry goes up. Should have been higher if we had been able to recruit for that. The recruitment is at full swing at the moment -- full speed at the moment, but we do what we can. And hopefully, we're going to catch up in 2022, but that's that. So -- and in part of Connected Home, we'll probably do better even than what we are planning because of all the actions we were doing. Free cash flow -- sorry, yes, free cash flow, first of all, in Q4 is always strong because that's the quarter where we have been delivering and we are cashing in tons so there is no difference here. If we look before the work up, we have an OCF that is going to be very significant in positive terms. That's for sure and maybe because the 3 divisions are the peak of their delivery here, so no change. And in terms of workup, as mentioned, one, usually, this is a quarter where we have a very positive workup because we see when we're cashing in. I've mentioned that we -- if I can go a bit in detailing in the last smaller crisis, but in last issues we've been facing. If you have key component issues, it basically means that whenever you buy components for -- to build up a box, you have components and you have components that you're missing. And therefore, you are -- gradually you are at risk to build up inventories of key components that, at some point, you will have to pay for. And all the discussions and the talk to the clients are about -- and the supplier is about to tell them, look, "don't carry on your inventories." So there is a need to be to find a way to help us fund that, and this is happening. So this is -- these are the conversations we -- that the management is having now. We know we have -- it's going through the population of client and suppliers do understand where we are. It's not specific to Technicolor. It's not even specific to our sector. It's specific to all industries in relation to key components. So we know that we should be able, again, this year to deliver a positive workup. That's how you bridge B2B -- below a good and strong OCF, the free cash flow needs. What is -- what are our risks here? Honestly, I think, of course, called TCS and the DVD, very limited. For Connected Home, this is where you have the big numbers going at play. We have been working on that since August. There is a super specific plan. It is reviewed every week by Richard and myself. We look at the numbers. We see the progress. So at the moment, we feel that we have a strong grip on that. It's not easy. It's always complicated, but we have strong hope that we don't get there.

And then if I could take the third question, you were talking about the ability to potentially pass increases in production costs in Technicolor Creative Studios through to the customer and whether we were seeing an increase in production costs. I think that, broadly speaking, we have not been seeing a major increase in costs yet. However, there is obviously upward pressure on salaries because demand is exceeding supply. The recruitment market amongst artists is very hot. And so there is definitely upward pressure on salaries across the board, across the world, and every company is going to be experiencing this. I don't think it's led to a major increase in our OpEx as yet. But certainly, we could be seeing that impact into 2022. So we're doing various things to protect ourselves against the impact of that, many of which I've mentioned before, but they're now in full swing. So there's the One India program, where we are creating a single pipeline going back to India, which means that we use the individual brands, Mr. X, MPC Film, et cetera, to sell to the client, but then there is a single delivery pipeline behind that, which takes the work back to India as far as is possible because we can get greater margins through doing the work in India. And in India, we are using multi-disciplined staff who can work across several different operations and across multiple brands in order to make our operation there as efficient as possible. I think in addition to that, we're using better staff utilization across the board through new software tools. And we're also standardizing our approach to technology and using the same tools across multiple brands, which is something which we haven't done before to date. In addition to that, for example, we are, as I think I mentioned, bringing together our advertising studios, The Mill and MPC Advertising together under kind of 1 company, 2-brand approach and co-locating those advertising -- 2 advertising units in all of the major operating locations, London, New York, Chicago, LA, et cetera. So there's a whole raft of efficiency-related measures, which we're taking to reduce our OpEx, improve our efficiency at the same time that we anticipate seeing this potential growth in OpEx in the future. So one, hopefully, is going to compensate for the other. Now in terms of the ability to pass through those costs to the customer, I think that, certainly, where we're being approached about pieces of work, which would take us beyond the kind of budgeted total pipeline level, which we have for '21 and '22, we have to think very carefully about whether we want to take on incremental work because we need to be able to do it on time, on budget and very high quality. And -- but if we do, then certainly, we are going to be charging higher prices for that against the background that I've just been describing. With respect to the existing pieces of work where we've already entered into contracts at specific prices, then I think that, at the moment, raising those prices is going to be problematic. But obviously, we'll see how this situation unfolds as we go into 2022.

[Operator Instructions] And we have our next question from Fiona Orford-Williams from Edison.

Just following on from that last question. Given this is an industry issue in terms of capacity, are you -- are we seeing now some projects actually pushed out and delayed because there isn't the industry's capacity to do it? And just going back on the Connected Home. There's a phrase that you used in the statements that I'm not really sure I understood what it means. When you're talking about investments in key customers, platform-based products and partnerships, can you just elucidate that for me? And then there's 2 straightforward questions for Laurent. One is on the restructuring costs, we've got 31 for the first 9 months. What are we looking at for the year? And also, please, could I have some help on the full year tax charge.

There are definitely projects which are being delayed because of lack of capacity. I mean there are projects which are being shopped around the entire industry where certain players can't cope with the amount of work which they have. And the studios are offering them to alternative players to see whether they want to take them on or not. And I mean it depends on -- specifically on which piece of work we're talking about. Some pieces of work we take on because we may be closer to those studios, and we want to help them out. Other pieces of work, we reject because we don't have the relationships and it would be too difficult in terms of our overall pipeline to take them on, or they're not being offered at the right sort of price going back to the previous question. So definitely, some projects in the industry are being delayed. But I think the really big ones are still on track. In terms of Connected Home, the question you asked about key customers and a platform-based approach, I think this is something which we've been following for the last 2 years, which is that we want to concentrate on the customers who buy the largest number of products from us and with whom we get the best margins because basically volume in this industry translates through into improved margins. And so therefore, we've sort of been decommitting from much smaller customers, focusing on Tier 1 customers, who can bring us those volumes and putting all of our sales efforts behind a very specific targeted list of customers, both across the Americas and Eurasia right across the world, in fact. And in terms of the platform-based approach, the idea there is that up until a couple of years ago, we were adopting a 2 bespoke approach to the development of products. We were developing too many products with too many variants. And the more products you develop, the more expensive it becomes because of research and development. And therefore, in order to keep the price of products down and margins up, we have been focusing on so-called platform-based products, which means ones which don't require extensive bespoking and ones which can be sold ideally to a variety of clients rather than one single client. So it's that kind of homogenous approach to the products which we've been seeking, and that's what lies behind that statement.

I'm sorry -- no I was just saying that it's just a reiteration of what we had before, but it slightly works in that case.

Yes. Okay. So taxes for the fourth quarter, if you look at where we stand in -- at the end of September. So we are short of EUR 20 million. So I think reasonably speaking, we will be paying mainly taxes. It will be mainly in Canada, I guess, and we don't have any tax credit. So I think you're adding between EUR 5 million and EUR 7 million, you shouldn't be too far out the market also on your assumption on business to do in Canada. And for restructuring, we probably will do a bit more because we've accelerated that. We've done a little bit more. So I would say it's not an exact number. We're finishing some of the plans, but let's take something in between EUR 10 million and EUR 15 million for Q4, and we should be more or less in the ballpark.

And will that program then be finished particularly on the DVD -- Or is there more to overspill into '22?

We have some planed for '22. But that's really significantly lower than as we mentioned to you in the past, I mean, if I look at what we were planning, I mean we are -- yes, I don't know if we, at the moment, it would be EUR 20 million or more, I mean, that will be -- it looks like it's been a maximum. Now again, I'd be very prudent because we are constantly looking at improving efficiencies. So this is the brand as it is today and I think prevents us to try to capture more and better efficiencies everywhere. Remember, we have new management in 3 divisions, and they are driving very hard on the efficiencies in terms of causes. Of course, you have the benefit in your EBITA, EBITDA and your cash flow. But at the moment, the plan is to, let's say, to have it really small compared to where we have this year.

So next question is from David Cerdan from Kepler Cheuvreux.

David Cerdan, Kepler. A few questions for you. First is related to your key issue in TCS. So does it -- wouldn't -- sorry, would it be?

Would you speak up a bit, David, because we're struggling to hear you.

Okay. I repeat. So in TCS, my question is, first, how many employees do you have pre-COVID and now in terms of staff? And the second question is related to this program of scarcity. Do you think that it could make sense to make some bolt-on acquisitions in this business line to get some stuff? And I have another question regarding the adverse environment. How do you compare with your competitors for Connected Home and TCS?

Sorry, could you ask that third question again? I didn't understand it.

The last question was related to how do you compare with competitors for Connected Home so the program of shortage of components, et cetera? And for TCS, it is related to the shortage of talent, the difficulties to recruit?

Okay. So maybe if I address the last question first, in terms of how our competitors are faring against the background of the key component crisis and the supply chain dislocation issues, I think everybody is affected in exactly the same way. Obviously, there's a lot of talk in the industry and so we learn what is happening with respect to our competitors. And I think they're suffering the same impacts and taking many of the same initiatives that we are to protect themselves against it. You no doubt saw that CommScope published their results today and their revenues were down, I think, something like 28% year-on-year, and they were in negative territory in terms of EBITDA. So obviously, they're finding it tough also. With respect to Technicolor Creative Studios, we know that everybody is having exactly the same problem in terms of recruitment, in terms of finding the adequate numbers of staff to fulfill the very significant demand, which is coming from the Hollywood studios and from the streaming and episodic players. And this is clear from the fact that some very important cycles are being shopped around the industry, trying to find a home for them. They were awarded previously to some of our competitors, and now, the studios are looking for somebody else to take on the work instead. And these are not isolated incidents. So clearly, there are problems amongst many of our competitors. And I don't think anybody is immune from this. It's an industry-wide problem.

Acquisitions for TCS? Any potential acquisition for TCS?

We have no plans to make any acquisition in the TCS space. I mean, obviously, if an opportunity came up in the future, then if it was the right fit, then we'd certainly look at it. But we don't have any ambitions in that respect at the moment. Our ambition in the shorter term is to continue to transform the business to make it as efficient as possible and to drive up the margins in each of the individual business units and across the division as a whole.

I think maybe for your first question, we will be providing you with the exact numbers because we were close to 8,000 staff at the end of 2020. And we -- exactly how many we staff is like -- I know we were putting on average in a region of the 907, 900 per week at the moment. So maybe we are closer to 9,000, but I'd rather have we'll bring you the exact number so you can have it. And do remember that half of this staff is in India. So -- but we would go back to you with the exact numbers. I don't have them with me.

In fact, I can tell you -- I'm sorry, I was just pulling up the exact number. So we have just over 10,000 towards at the end of September.

So it means that we have 2,300 hires so far this year, and that's continuing into Q4. So...

And in some industries, companies create some schools to -- in order to increase the volume of skilled students. Do you think that it could make sense for Technicolor to invest a few million euro in the creation of some schools?

Well, we run our own academies, as we call them, on a regular basis. And I think they take about 12 or 16 weeks. And we've finished one recently, which was to recruit a 1,000 people, and we're doing another one immediately thereafter, which was unplanned, but we're going to do it between now and early 2020 to recruit a further 1,000 people. So we already have those kind of initiatives. We've had them for several years, but we're accelerating them now to get new people into the industry. New people straight out of university in large numbers to help to fuel the pipeline of work.

So we have no further questions. [Operator Instructions] So it seems that we have no further questions, gentlemen.

Well, thank you very much for joining the call this evening, and we look forward to speaking to you in February when we'll be publishing our full year 2021 results. Thank you very much indeed.

Thank you.

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