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 that 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 of 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.

Thank you. Good evening, ladies and gentlemen. It's a great pleasure to speak to you today as we announced our strong year-end 2021 results as well as some very promising developments for our company. 2021 was a significant year. We delivered excellent financial and operational results and continued executing on our successful transformation program. As with many industries, we were challenged by a very volatile environment, but thanks to our challenged employees, led by an experienced leadership team, we managed to achieve our targeted goals. So today, we've built a very strong foundation, and we've reached a turning point in the history of our group. We've got the right momentum, and we've got a unique opportunity to refocus our operations and address the future in a different and a more sustainable way. I'll come back to that in more detail in a moment. Let's turn to Slide 4 to look at the key highlights and announcements, which we're making today. So in 2021, we delivered a strong business performance across all divisions, and we've achieved our guidance despite, as I said, having to navigate a very challenging environment. We've created 3 profitable businesses, which are global leaders in their respective markets. 2022 looks good and that enables us to confirm our guidance for next year. Besides the excellent results today, we're also announcing a key strategic move, which is aimed at accelerating value creation. We intend to list Technicolor Creative Studios to enable its further growth and development in line with the significant industry demand. We intend to spin-off and list TCS with a distribution in kind of 65% of the shares of TCS to Technicolor shareholders. Through this process, we intend to enable Technicolor to evolve into 2 industry-leading independent listed companies, each with the ability to pursue its own strategic agenda and achieve market valuations consistent with their fundamentals, thus unlocking value for all stakeholders. In addition, we intend to further deleverage so that both companies can have more active development profiles through refinancing of the entire existing debt structure. We plan to issue EUR 300 million of mandatory convertible notes who conversion into Technicolor shares will be effective upon the execution of the spin-off. Angelo Gordon, Bpifrance and other selected shareholders have committed to subscribe to the full amount of the mandatory convertible. We're starting an exciting journey, and we are ready to take a further step to align strategy, value creation and financial objectives for all of our stakeholders. In addition, we also announced today the sale of our Trademark Licensing operations as we received a binding offer of EUR 100 million in cash. This is a great opportunity to further simplify our group structure through the sale of this non-core asset, and we expect the transaction to be closed during the first half of 2022. So turning now to Slide 5. Going back to our 2021 results. For the full year 2021, Technicolor met all its guidance. We had adjusted EBITDA reaching EUR 268 million at actual rate, EUR 272 million at constant exchange rate, driven by strong demand despite the volatile environment. This represents a 9.3% margin, which is up 379 basis points at constant exchange rate. Adjusted EBITDA of EUR 95 million was a EUR 155 million improvement compared to last year's results. And continuing free cash flow before interest and taxes was close to breakeven, which represented a EUR 119 million improvement year-on-year, reflecting strong operational progress and cash control. Our net debt-to-EBITDA ratio reduced to below the 4x level, as expected, reaching 3.87x at constant exchange rate. Finally, we delivered EUR 116 million of cost savings in 2021, following the EUR 171 million achieved in 2020. So that's cumulative EUR 287 million, and we're well on track to achieve our EUR 325 million goal by the end of 2022. Overall, our strong financial improvement in 2021 are a result of our transformation program, which has involved significant cost savings and operating efficiencies across all of our businesses. Turning now to Slide 6. On our 2022 guidance. While we still continue to face an uncertain and volatile environment, we've got solid foundations for growth, and we expect to continue delivering improved operational and financial performance throughout the year. So for the full year 2022, we are targeting growth in revenues from continuing operations. Adjusted EBITDA of EUR 375 million, adjusted EBITA of EUR 175 million and very positive free cash flow of EUR 230 million. And please note that these numbers have been adjusted in line with recent accounting and scope changes and those adjustments are fully detailed in our press release. So let's get into more details on these 3 businesses. Turn over to Slide 8. Let's look at Technicolor Creative Studios. In 2021, the TCS business had another successful year. Cementing it's position as the independent global leader in tech-enabled content creation with an award-winning portfolio. Some key highlights of the year include MPC teams working on more than 30 theatrical and 60 streaming and episodic projects, which were awarded with the Academy Awards and BAFTA nominations as well as the Visual Effects Society Award. The Mill teams contributed to over 3,000 projects, which also led to several key industry awards. Mikros Animation was in production in over 5 features and 17 episodic series or TV specials, which include major franchises for Disney, Nickelodeon and Paramount. The Technicolor Games elaborated on major games IP such as FIFA 22 and NBA 2K 22. Turning to Slide 9. Part of TCS' success came from the positive effect of its reorganization. Following the sale of Post Production in April of 2021, we renamed the former production services as Technicolor Creative Studios, highlighting its premium positioning. Christian Roberton is its President and he's reorganized its activity into 4 focused businesses led by highly qualified managers. Through this reorganization, Technicolor Creative Studios is benefiting from a more centralized network with consolidated teams and a series of single site with multi-brand campuses. It allows us to eliminate inefficiencies and to take a further step towards a more integrated organization. These initiatives, along with high demand from our customers have translated into strong and improved financial results for the TCS business. As you can see on Slide 10, in 2021, revenues amounted to EUR 629 million, which was up 37% at constant rate year-over-year if you exclude the Post Production business. This improvement, notably in the second half, resulting in a surge in demand for original content of all the business lines compared with last year, in which we suffered from pandemic-related impacts on production from Hollywood and around the world. At MPC, revenues grew significantly driven by the continued ramp-up in production of major theatrical projects as well as increasing contributions from all the major streaming platforms. At The Mill, advertising revenues grew across all markets year-over-year, driven by a faster recovery in advertising spend than we anticipated. At both Mikros Animation and Technicolor Games revenues grew significantly, driven by higher volumes across all segments. The shortage of talent, which impacted the entire industry was partially mitigated by significant retention and hiring action plans implemented during the year and more intensively in the fourth quarter. At the end of '21, TCS staff reached approximately 10,560, which was up 2,860 or 37% compared to the end of 2020. So adjusted EBITDA amounted to EUR 113 million, that was up EUR 94 million year-on-year at constant rate, and adjusted EBITDA was EUR 41 million, up EUR 119 million year-over-year at constant rate. On top of the revenue increase, there was a significant margin improvement from the positive impact of the transformation programs in conjunction with permanent cost reduction measures. As for 2022, we expect the demand for Technicolor Creative Studios' breadth of services to continue to grow significantly. The division has been awarded multiple new projects for film and episodic VFX and animation, resulting in approximately 2/3 of the 2022 pipeline being committed already, which is unprecedented at this stage of the year. And we will continue to invest significantly in artist recruitment, retainment and training. Now turn to Slide 11. This covers our Connected Home segment. Overall, the division made important strides in maintaining its leadership position in the key market segments, thanks to strong activity from broadband operators, particularly in North America. That's reflected in the broadband share of revenue, which was 64% in 2021 compared to 61% in 2020. We also struck new deals with major operators in EMEA and the Americas. In addition, the division continued to be at the front end of innovation with new wins with key partners and successful product launches. Importantly, our work and our sustainability has been recognized by EcoVadis, the world's largest and most trusted provider of business sustainability ratings. The company's sustainability performance was deemed advanced in all 4 categories assessed environment, labor and human rights, ethics and sustainable procurement for its structured and proactive sustainability approach, engagement and tangible actions. On Slide 12, in 2021, the division showed dexterity in navigating the supply chain constraints and the semiconductor crisis. Nevertheless, we were limited in our ability to fully satisfy the very strong demand we are getting from our customers. In fact, the underlying demand for 2021 was higher than our actual sales in 2020. To address this, since the summer of 2021, the division has intensified its collaboration with clients and customers to maximize deliveries and to mitigate potential profitability and working capital impacts, and it started to pay off, particularly in the fourth quarter. As a result, Connected Home revenues totaled EUR 1.544 billion in the full year 2021, which was down 10% at constant exchange rates compared with 2020. However, EBITDA was flat at constant exchange rate, reaching EUR 103 million, and the margin was up by 0.7 percentage points to 6.7%, reflecting cost-cutting and operational efficiency measures. For 2022, we expect global demand for Connected Home broadband equipment to remain strong despite continued component shortage and pricing challenges. Nonetheless, efficiency measures, progressive improvements in delivery and constant discussions with our suppliers and customers should continue to help offset these headwinds. On Slide 13, looking at DVD Services. DVD Services experienced a year of commercial success and operational efficiencies, we implemented structural division-wide initiatives to adapt to the continuous volume reduction of discs. That said, in 2021, volumes were only down 2.7% year-on-year compared to the previous pandemic annual decline of around 11%. This was in part due to the marketing efforts of back catalog products by the major studios who are starting to focus on theatrical new releases given the recent improvement in box office attendance. In addition, we've had some success in the development of new businesses as we continue to focus on diversifying our growth strategy with non-disc operations. Under David Holliday's leadership, DVD Services has evolved into a specialist manufacturing and supply chain services division, repositioning the disc activity into a profitable volume-based business. Diversification is now accelerated through manufacturing services, including vinyl and biodevices and supply chain and fulfillment services and solutions. We already managed, for example, 50,000 consolidated shipments per day for some of the most prominent names in media and consumer services. On Slide 14, DVD Services financial results were revenues totaling EUR 701 million in 2021, which was remarkably up 1.6% at constant exchange rate. The first time we've seen that in many years. Despite slightly lower disc volumes year-over-year, we saw increased revenues from non-disc operations, mainly in the U.S. Adjusted EBITDA amounted to EUR 67 million or 9.5% of revenues compared with 7.5% in 2021, up EUR 15 million at constant exchange rate. Margin improvement mainly resulted from a significant year-over-year footprint optimization and cost savings. We finalized the closure of 4 facilities while continuing to develop our Memphis hub. Margin improvement could have been even greater, but we had to deal with higher labor costs in North America and higher raw materials costs. For 2022, our improving format mix, along with continuing cost efficiencies is expected to mitigate the anticipated modest disc volume decline. In addition, we will pursue further expansion of non-disc businesses, which are expected to provide a positive contribution to the division's revenues and margins in '22 and significant growth for the following years. I'll now turn it over to Laurent, so he can go into more detail on our performance.

Thank you, Richard, and good evening, everyone. So I'll now provide you with further details regarding our full year 2021 performance. So again, at constant ForEx rate and accounting principle, we have significantly outperformed the expected guidance. Overall, as mentioned by Richard already, Technicolor delivered a strong 2021 year and significant improvement in profitability despite renewed supply constraint challenges affecting both Connected Home and Technicolor Creative Studios. Over the summer, we accelerated action plans to mitigate the potential negative impact on our inventories. The achievement of the full year 2021 guidance demonstrates that we have managed these successfully and once again demonstrated the capacity of this company to brilliantly sell through difficulties and manage complexities. So the Slide 16 presents the consolidated figures for the year. As already commented, the results, as Richard has already commented, the results by division. I will only provide you with a consolidated review of our financial performance. Details by division are also available in appendix in this presentation. On a consolidated basis, our revenues year-to-date of EUR 2.9 billion reduced by EUR 50 million at constant rate, representing a decrease of 1.7%. TCS recorded a strong growth, plus EUR 162 million at constant rate, while Connected Home was impacted by industry-wide key component shortages and supply chain dislocation, which prevented the business from meeting strong customer demand in full and therefore, posted EUR 177 million sales shortfall. It should be said that the backlog for this division was in the region of EUR 500 million. So as you can see, there's a lot of sales that could have been fulfilled if any, we could have had the supply the key components. Our adjusted EBITDA of EUR 268 million was up EUR 109 million at constant rate or 67%. This reflects operational improvements, notably at TCS of EUR 90 million, along with cost savings and operational efficiencies. The adjusted EBITA of EUR 95 million represents EUR 155 million year-on-year improvement at constant rate. This resulted from the EBITDA increase and the positive impact of efficiency measures, in particular, lower D&A following lower equipment spend for Technicolor Creative Studios and lower depreciation for DVD Services along with the reduction of footprint. The restructuring cost amounted to a negative EUR 37 million at current rate, including EUR 17 million year-to-date in DVD Services, driven by mainly footprint rationalization. The change in working cap is negative EUR 81 million has improved compared with 2020, where it was at negative EUR 103 million. It's deriving mainly from higher client down payments and favorable payable transaction variations at Technicolor Creative Studios resulting from higher activity in 2021. The key component shortage at Connected Home created an increase of unfinished goods inventory at Connected Home and also case inventories, notably in the third quarter, which was offset by active cooperation with its clients and suppliers, including new factoring mitigating lower -- factors lowering the suppliers payment terms in 2021 to return to normalized level. Free cash flow before financial results and tax from continuing operations was already -- was almost at breakeven at a negative EUR 2 million. This represents an improvement of EUR 119 million year-on-year at current rate, driven mainly by the profitability improvement in TCS and the ongoing implementation of our cost transformation program. The free cash flow after interest and taxes amounted to a negative EUR 82 million, still EUR 100 million improvement compared to last year. The net debt at nominal value amounts to EUR 1.1 billion and IFRS net debt amounts to EUR 1.039 million. The difference mainly relates to the mark-to-market devaluation and will be reversed, as you know, through noncash interest charges over the life of the debt. Year-on-year, the change in net debt as the IFRS free cash flow is at breakeven, mainly results from the impact of interest and PIK charges and of leases payments. Let's now move to Slide 17 with a focus on revenue. So I'll go faster. The year-on-year 1.7% revenue decline at constant exchange rates led us to a EUR 2.9 billion of revenues. The EUR 162 million revenue improvement at TCS, driven by the strong market recovery was offset by EUR 177 million lower revenues at Connected Home due to the supply and component constraints. TCS revenues were EUR 629 million, increased by EUR 162 million at constant exchange rate and at constant perimeter, so i.e., excluding the sale of Post Production that we did that we performed last year. TCS revenues now represent 20%, 22% of the consolidated revenues, and they should be compared -- and that should be compared to the 17% mark they had in 2020. This increase was mainly driven by MPC and The Mill. You go into more details, film and episodic recorded a revenue of EUR 103 million, mainly with a strong performance from MPC Film, but also with a very good performance of MPC episodic and Mr. X, as you know, more [indiscernible] clients. Advertising, up EUR 35 million is backup is basically by the very, very strong year of NPC advertising doing a tremendous year in 2021. [ ANG ] delivered plus EUR 24 million and being mainly driven, as Richard has mentioned, by the fact that for once this year, the company has been working on 3 movies versus one in the past and is clearly stepping up in its capacity to deal with a larger and larger amount of accounts. The DVD Services increased slightly by EUR 12 million at constant exchange rates to reach EUR 700 million. It's a good performance, mainly achieved, thanks to growth in new distribution and freight businesses in the U.S. Connected Home share in consolidated revenue decreased from 59% to 53%. And Connected Home amounted to EUR 1.5 billion, and declined as we've already mentioned that to -- by EUR 177 million at constant exchange rates as they were impacted by industry-wide key component shortages. One word on Corporate and Other, which includes Trademark Licensing, no change here, revenues remained stable at EUR 23 million. Also note that revenues were negatively impacted by EUR 47 million of change in scope due to the sale of Post Production in April 2021 and a negative ForEx impact of minus EUR 59 million. Excluding those impacts, consolidated revenues would have been almost flat at EUR 3 billion. Let's move now to the Slide 18 and comment rapidly EBITDA performance. As shown in this slide, EBITDA improved significantly by EUR 109 million, 67% to hit EUR 268 million. This growth was driven on top of the strong recovery at TCS by operational efficiencies and cost savings for all of our divisions as illustrated by the EBITDA margin improvement. I will not comment on each business performance, as Richard did earlier. So let's move on to Slide 19. Adjusted EBITDA also reflects to improvement in efficiencies and cost savings as it increased by EUR 155 million at constant exchange rate to a positive EUR 95 million to be compared to a negative EUR 59 million last year. Operational efficiencies are also reflected in lower G&A following lower equipment spend for TCS and lower depreciation for DVD Services along going along with the reduction in footprint, of course. Otherwise, nothing major to note here between adjusted EBITDA of EUR 95 million and continuing EBIT of EUR 30 million, we have mainly 2 items. EUR 38 million negative of PPA amortization and EUR 37 million of restructuring costs at current rate, including EUR 17 million year-to-date in DVD. These were driven, of course, mainly by the footprint rationalization. And this has to be noted that this amount is very significantly reduced from the negative EUR 100 million of last year. Finally, EBIT from continuing operations amounted to a profit of EUR 30 million compared to a loss of EUR 167 million in 2020 due to better operational performances, while also 2020 was impacted by DVD Services impairment and higher restructuring accruals. On Slide 20, -- we are looking now at -- mainly at the financial results, we totaled a negative EUR 126 million in 2021 to be compared to a positive EUR 77 million in 2020. This positive number was -- this number is reflecting 2 things: one, an increase in interest expense, EUR 48 million due to the higher interest rates we are paying on our new debt structure. And conversely, in 2020, we've posted a positive EUR 158 million of noncash gains on the equity and debt initial valuations following the financial restructuring, as you know, our balance sheet. The income tax amounted to EUR 24 million to be compared to EUR 5 million in 2020, mainly due to higher results at TCS. And these taxes are mainly located in Canada and in the U.K. Group net income, therefore, amounted to a loss of EUR 140 million in 2021 compared to be compared to the negative EUR 211 million loss in 2020. Slide 21. As shown previously, 2021 free cash flow after tax and interest from continuing operations amounts to EUR 82 million negative represents EUR 104 million year-on-year improvement. It's driven by the EBITDA improvement, EUR 109 million, lower CapEx, EUR 6 million, better pension and other and ForEx impacts, and this is mitigated by higher restructuring cash out of EUR 24 million. A more favorable change in working capital with an improvement of EUR 16 million year-on-year at constant exchange rate already commented earlier. Slide 22. You see here our net debt at nominal value, it amounts to EUR 1.1 billion and IFRS net debt amounts to EUR 1.39. On the liquidity at the year-end amounted to EUR 296 million, and we had an undrawn Wells Fargo facility of EUR 97 million. Richard, this marks to the end of my -- the start of my presentation. Now, I'll let you present the major strategic steps we intend to pursue.

Thanks a lot, Laurent. So I'll run through our announced spin-off and refinancing and highlight what we see as the future of these 2 independent companies. So on Slide 24, as we mentioned earlier, following a comprehensive review of strategic options, our Board of Directors has unanimously approved the partial spinoff of the Technicolor Creative Studios segment. Through this transaction, we're going to be creating 2 independent market leaders in their respective sectors. Technicolor Creative Studios, the leader in visual effects. And on the other hand, Technicolor SA, Technicolor Ex-TCS as it's known, composed of the Connected Home and DVD Services businesses whilst retaining upside in that division is upside exposure to Technicolor Creative Studios. TCS will be listed on Euronext Paris Stock Exchange with headquarters in Paris, and Christian Robinson, the current President, will be appointed Chief Executive Officer. TCS will have its own Board of Directors and a management team, independent from Technicolor Ex-TCS. Technicolor Ex-TCS will also remain listed on the Euronext Paris Stock Exchange with headquarters in Paris as is the case today. Post spinoff, Luis Martinez Amago, the current Head of Connected Home will be appointed Chief Executive Officer. As we move forward with the process, we plan on publicly sharing additional details on both companies, and we will organize 2 Capital Markets Days, one for each company at the end of May or in early June. With this announcement, we're also planning to refinance the group's existing debt in order to equip the 2 future companies with a more agile balance sheet fully adapted to their individual strategies, which will enable both companies to accelerate growth. So turning to Slide 25. I'll highlight the rationale for this operation, which aims first and foremost, at creating value. Above all, we consider this is the right time to make this move. Thanks to the exceptional effort, which we've made over the last 2 years, we've turned our 3 businesses into 3 profitable leaders, and we think now is the time to offer them the opportunity to accelerate. Both entities will have an efficient capital structure, which can be tailored to their strategy and will enable them to pursue their own agendas. TCS will become a unique pure-play story in a growing market, and Technicolor Ex-TCS will have the opportunity to reduce its debt and reimburse existing lenders. Both entities will have a more focused strategy with our own agenda. In a nutshell, this operation aims at maximizing value to all Technicolor stakeholders, employees, customers, suppliers, lenders and shareholders. I'll leave the floor now to Laurent to present you the contemplated refinancing process.

Thank you, Richard. And now we're turning to Slide 28. So overall, this envisaged refinancing package, along with the spin-off is a unique opportunity to -- and improved conditions, of course, the existing expensive debt reduce concurrently the cost of debt and create optionality to refinance the balance sheet of both entities. So the first part of this refinancing is the intention to issue a EUR 300 million mandatory convertible notes to be converted into Technicolor shares at the discretion of the issuers or the inception of the spin-off prior to the distribution. Importantly, this monetary convertible note is fully subscribed by existing shareholders, i.e. Angelo Gordon, BPI and a set of selected shareholders. The issuance of the monetary convert is subject to a 2/3 majority approval at an extraordinary general meeting of shareholders, which is expected to take place early Q2 and in any case, no later than May 25, 2022. We have included a summary of the key terms of this MCN -- of these notes in the appendix sections presenting conversion price, coupon, maturity details, and we'll be happy to go back to this through Q&A. Concurrent with this package, we will also negotiate a new debt structure consistent with the proposed spinoff, allowing us to create optionality to refinance the balance sheet of both entities. So if we turn now to Slide 27, we are going to review the transaction time line. So the issuance of the monetary convertible note is subject to the approval, as mentioned, of Technicolor's shareholders at an upcoming EGM, held no later than end of May of 2022. In addition, the spin-off is also subject to the approval of shareholders at the next EGM to take place at the end of June. And this next EGM will probably be -- will be held at the same time that we'll be holding our AGM or more classic AGM. Following shareholders' approval, we expect to complete the refinancing beginning of Q3 2022 and the spin-off by end of Q3 2022, which is also subject to customary closing conditions, consultations and regulatory approvals. Once the spin-off transaction is completed, both TCS and Technicolor Ex-TCS will be listed separately. Before leaving the floor to Richard, who will present you to you the key assets and the strategy of TCS and Technicolor Ex-TCS, I would like to take this opportunity also to again thank our shareholders for their constant support, our lenders and of course, our advisers, Rothschild, d’Angelin, Goldman Sachs, Morgan Stanley, Bredin Prat and Kirkland, who have been of tremendous help through this sequence. Richard, over to you.

So let's go to Slide 28. Following the completion of the transaction, both TCS and Technicolor Ex-TCS will be 2 independent companies, leaders in their markets with stronger foundations for accelerated growth. Overall, the 2 companies have got distinct characteristics in terms of growth and management performance and independently, they will have the ability to pursue their own strategic paths, consistent with their underlying business dynamics and financial fundamentals. So on Slide 30, starting with Technicolor Creative Studios. As I said before, TCS is the undisputed publicly listed global leader in VFX, it will offer an attractive pure-play equity story in a market experiencing exponential growth driven by an increasing demand for content. TCS is the world's largest and most creative visual arts company, uniquely positioned for the metaverse through its 4 business lines. It benefits from long-standing and deep relationships with all major players in Hollywood and with the streaming platforms. So its points of excellence, MPC, fulfillment episodic visual effects, offering the highest quality artistry and cutting-edge technology with strong barriers to entry. The Mill for advertising, providing creative execution and immersive experiences for 360-degree digital campaigns. Mikros Animation offering high-quality and end-to-end CGI for TV and streaming platforms and Technicolor Games, developing art and animation for the gaming industry. TCS is uniquely positioned to capitalize on future visual content opportunities, such as in streaming and in the metaverse. Slide 31 presents more details on TCS's 4 business lines, demonstrating the competitive advantage it enjoys along with its long-standing customer relationships. On Slide 32, as an independent company with direct access to capital markets, TCS will be able to accelerate the execution of its strategic agenda and growth trajectory. TCS' ambition is to develop a collaborative global structure to drive innovation and creativity across its studios in order to capitalize on future and scalable markets. The key strategic priority will be to capitalize on the wave of booming demand for content, while also continuing margin improvement through a more efficient organization. TCS's ambition is to scale the business and to expand into experiential marketing and gaming. On Slide 33, the future TCS being an independent company will enjoy many advantages. -- content creation capabilities, putting it in a unique position in future growth environments, cutting edge technology expertise, deep relationships with key customers, including major theatrical and streaming players, a new integrated and efficient organization led by a best-in-class management team, a unique talent pool supported by its leading academy and a significant runway for EBITDA expansion and strong cash flow generation. In short, TCS with its unique worldwide leadership has strong fundamentals for long-term growth and provides an upside opportunity for all the Technicolor's stakeholders. Turning to Slide 35. Now let's look at Technicolor Ex-TCS. Technicolor Ex-TCS will maintain market leadership status in Connected Home and DVD Services. The company is expected to have a stronger balance sheet following the [ counterplace ] to refinancing and this will equip both Connected Home and DVD Services with additional room to expand to reinforce their status as global leaders. Looking at Connected Home, it's #1 in broadband serving 60% of the top 10 suppliers and #1 in Android TV with a 45% market share. It serves 50% of the top 10 video suppliers, and it has a 14% market share in home gateways. Connected Home is a leader with a comprehensive product offering and a focus on the growing segments of broadband and Android TV. It's got a best-in-class supply chain and innovative products and solutions, a promising diversification strategy in Internet of Things solutions. The business undertook a major transformation plan over the past 3 years and it's now on a growth trajectory. Looking at DVD Services, it's #1 worldwide in all disc formats with 65% market share, and it sold 800 million discs in 2021 and achieved 55,000 shipments per day. The division has reinvented itself. It's now leveraging its leadership experience to provide end-to-end solutions to all major studios, it's strategically allocated to provide clients with highly flexible, scalable solutions. It's developing new profitable and high-growth adjacent businesses. It's entering the specialist manufacturing in the areas of vinyl and microfluidics and it's offering high-value added supply chain services. Furthermore, Technicolor Ex-TCS's stake in TCS will provide additional financial flexibility to invest in the future of its businesses. Turning to Slide 36. Technicolor Ex-TCS' value proposition can be summarized in these 5 key points. It's a company which is composed of 2 market leaders offering highly differentiated capabilities. It's a highly strategic partner to its customers creating strong stickiness. It's got a great opportunity to expand the total addressable market in highly attractive adjacent markets. It will have a stronger balance sheet with greater liquidity, significantly derisking its financial profile and supporting strategic priorities and growth. And it's got an experienced management team in both divisions, which has driven transformation and proved its ability to react fast and to adapt efficiently in facing headwinds such as supply shortages. It will now pursue the repositioning of the group and work to create value. So we're now at the end of our presentation, I'm not going to comment on the last 6 slides, they're there for your review. They present in greater detail the work which has been accomplished by Luis Martinez Amago and David Holliday, who I believe are great assets to those divisions. I invite you to give them a closer look. So thank you very much for your attention. And now with Laurent, we're available to take your questions.

[Operator Instructions] The first one comes from Emmanuel Matot from ODDO BHF.

Hope you can hear me well.

Yes, we hear you well.

I have several questions, please. First, what about inflation in TCS. Do you have to increase significantly wages? And do you have a strong pricing power to compensate any negative impact? Have you seen a deterioration of your employee rotation last year. Second, in your forward-looking assumptions for 2023, you have an EBITDA increase, but a decrease of free cash flow. How do you explain that? Third question, how do you plan to split the EUR 1.3 billion of gross debt between TCS and the next Technicolor Ex-TCS? And last question, if I may. Why EUR 300 million mandatory convertible notes and not a capital increase?

Okay. Well, I'll start with a response to the first question concerning inflation. There is definitely a war for talent in the global market for artists working on visual effects, which is impacting every business which operates in the sector. As I said during the presentation, we have grown our headcount significantly by 37% during the year from 7,700 to 10,560, and we will continue to expand it to keep pace with the enormous demand for content, which we're seeing. As I said, we've got 2/3 of our pipeline for 2022 secured, which is unprecedented at this stage of the year. So we're going to need more people to fulfill that. But nevertheless, there is the strong competition for the talent, and that has led to an increase in the rate of attrition, particularly in markets such as Canada. In Canada, there's been -- continuing problems with COVID because of Visa-related issues and also in India, where we have a very heavy presence. But nevertheless, we are coping with these factors, and we're going to be running larger numbers of Technicolor academies, which we put thousands of people through each year in order that we can cope with the rate of attrition and continue to grow the very -- the number of very high caliber artists, which we have in the business. Now nevertheless, clearly, as a result of the increase in demand for high-quality content and the demand for artists across the globe, there is going to be upward pressure on wages. But Laurent and I have built into the projections for TCS -- provisions for this in the projections which we're making for future years. I don't know if you'd like to add anything to that, Laurent?

Yes. Yes, it's absolutely correct. Emmanuel. And also do remember that we're working on contracts with the studios and reselling the VFX [ shots ]. And we have -- basically, the way we're pricing these things is we have a standard cost approach to that. And we -- for the coming -- for the coming movies and the coming projects we're working upon. Of course, when we build up of standard costing, on top of which we're adding our margin, we're capturing the inflation. So the model of TCS is actually that you have a pass-through of the inflation in the -- for the upcoming contracts because they are based on the new costs. Where you have a risk, to your point, is when inflation starts kicks in on existing contracts and that you have already negotiated the price and this is where the point of Richard is made that we have been prudent in terms of assuming the margins we could extract on this contract. I might take your second question around [ guidance ]. With a few important elements, and I'm glad you asked this question. First of all, what you have, if you read the press release, and I know you didn't have much time to read it, but we're not providing guidances. We are cleansing data that we shared with the people supporting the monetary convertible notes. We will be we will be providing guidance on TCS and on Technicolor Ex-TCS at the Capital Market Day that will be held in May. So you shouldn't consider these numbers as basically for the guidance. There were numbers that we put together before Christmas and we used in order to base our analysis of the capital requirements and whatnot. Having said that and to answer your question more in detail. If you read the footprint, you will see that when we look at what we call RemainCo and SpinCo, which is Technicolor Ex-TCS and TCS. In this model, we have basically assumed a few things. One, that we will have dis-synergy cost and it's mentioned in your press release that it can go up to EUR 40 million, split amongst the two, first point. And the second point is you will have fees to be paid also in relation and cost in relation to this transaction. And you have the detail in your press release. Now in 2022, you will have some of these costs kicking in, but not the entirety of these. And they will be really fully affecting 2023. So this is really the reason why you have basically a variation in this element. The -- what you should note is that the free cash flow of these divisions will continue to improve in 2023. And basically, the only reason why you have a variance is the fact that they will have to support some, let's say, nonoperational costs in the process. About the debt split. So the capital structure of both entities have not been decided yet. Having said that, having said that, the aim is to make sure that Technicolor Ex-TCS is put in the market as a much, much better financial position, i.e., the aim, we see if we are successful with the aim is to deliver a company fully financially de-leverage after, of course, the disposal of TCS shares. You notice that they will keep 35% of TCS. And with the proceeds of the sale, the plan is to fully de-leverage this Technicolor Ex-TCS company. The remaining part of the debt being supported by TCS. So that's how we will monitor. But we will give you precisely the capital structure again at the time of the Capital Market Day. In the meantime, we'll be proceeding to order refinancing, and we will basically further adjust our view on TCS shares disposal. But finally, you asked why is it that we went for this monetary convertible note of EUR 300 million and not for more traditional capital increase. I'll give you 2 reasons for that. One is to perform a capital increase, you need to have basically banks supporting you, and you will have to allow for discounts. And the discount will be quite significant, 20%, 30%, you are in the market. So you know what I'm discussing here. And to be honest with you, we didn't have a lot of support on these parts on this approach. The second element is I think the mechanism we've put in place, whereby we have this mandatory convertible note, and that's very important what I'm saying here, fully [ backstopped ] today, allowing us to go in that market with a perspective of very significantly deleveraging the 2 entities and therefore, significantly improving the ratings in the perspective of the spin-off is to be fully executed and it's in our hands. The spinoff will happen via our distribution of shares has to be decided by the CEO and the Board of the company. We are not dependent on market conditions. And on a day like today, I think you can appreciate the fact that not being market dependent has a value. So irrespective of market conditions, we can proceed to the spin-off, and we can proceed with this operation. Sorry, Emmanuel, I've been a bit longer. I hope I've answered your question.

Yes, that's very clear. My I add one question. It's regarding the decline at Technicolor Ex-TCS from above EUR 160 million in 2022 to above EUR 150 million in 2023. Maybe you can comment a little bit on that. And if I'm right, you are talking also about assumptions for 2024, but I can't find any figures on the press release. Maybe they are...

I'll take the first question. The -- the underlying demand, which we had in our Connected Home division was way in excess of the sales, which we achieved in 2020. So we never had all of the semiconductors, in particular, the chips, but also many other key components, which we couldn't get supply of and we could have increased our sales substantially. But unfortunately, those -- that restriction in terms of key components continued throughout the year. In fact, it got worse in the middle of the year. And as a result of that, our sales were restricted. So it wasn't just the demand was the problem, it was getting the supply in order that we could fulfill that demand. So that demand is still there, and we believe that we're going to see growth in 2022. The semiconductor crisis and the dislocation in worldwide supply chains is going to continue through '22, but we hope to see some kind of alleviation in the scale of the problem during the year. And then the improvement as we go into 2023 as more manufacturing chip capability comes on stream. So I think that the decline in revenue should be seen against that background. It really has no bearing on the future potential of the Technicolor Ex-TCS division, which I think has got great growth prospects in the future once we get through the impact of the twin crisis.

And Emmanuel, if you don't mind, could you repeat your other question, please?

Yes. If I'm right, you are talking about figures or so, assumptions for 2024. But I can't find any one in the press...

No, again, yes. Again, Emmanuel, we -- you can't find them because we didn't provide that. We gave you just a qualitative information on 2024. Again, and this is very important. These numbers are not basically official guidance. They are numbers we've used, prudent numbers we've used in our assessment with the banks of what is required for this company. And this is in no way should be considered as a guidance. We will come to you to the market with proper guidance in May. And again, above and beyond what I've also mentioned to you, beyond the cost intrinsic to this transaction, the dis-synergy costs, there is also -- and we will give you more clarity on that at a certain level of investment that is also part of these numbers, and you don't really see the benefit of it because it will show up in 2024. So we will prepare a fully comprehensive set of guidance that you will receive, but that will be for May.

We have another question from David Cerdan, Kepler Cheuvreux.

Yes. A lot of my questions have been already answered. I have just a few questions regarding first TCS. So the profitability is around 6.5% at the EBIT level. Is it the norm inside the sector? And how do you expect TCS to significantly improve its margins from 2022?

Right. So I mean, for us to tell you if this is comparable in the sector, it's difficult because we are the only one listed company. So what we know is that the -- so to answer more specifically your question, TCS is made up of our 4 divisions. So you have FEV, so the Film and Episodic, Advertising, Animation and then we have Games. If you take Film and Episodic, we believe that we have quite good margins in this sector because of our size, because of our [ use of India ] that is quite systematic and also because -- although these margins were, as you know, quite diluted -- the streamers in business. It happened that the business we're doing now with the streamers because of the growing ambition of the projects, these margins are going up now. So we have a favorable mix now happening with the growth of the streamers within this division. So here, we think we are pretty good. Probably we don't know. Again, we can't tell you. I don't know what the [indiscernible] margins are or the other ones, but we believe we are not too bad -- too badly to polling position there. As far as advertising is concerned, basically, you know because we've been very public with that, we're coming from very, very, very low territories 2 years ago. A lot of work has been achieved -- has been done. We reached -- we've managed to push up the margins in between 15% to 20%, and we intend to push them north of 20%. How do we know we can do that? We can do that because we are far from having fully put in place all the tools from time tracking to PBMs that are required in order to be...

Plus, we have brought together the 2 major advertising brands under one single brand The Mill, which will achieve synergies as we go into '22.

So that's the second element that is going to help us feed this growth. On Animation, basically the margins in animation are very high, and they've always been very high. The thing is because the volume of activity was pretty slow, pretty pretty low, apologies. It wasn't really impacting the average. But with the growth, we are seeing that as you know, we have a new management. 2 years ago, we were doing 1 movie per annum, in 2021, Andrea Miloro has managed to have the company perform 3 movies. And this year, in 2022, as Richard has already mentioned it, we're going up to 7 movies. So clearly, as you can see, the step change and the margins are staying at a high level. So that's that. As far as games is concerned, gains is small, it's very tiny, honestly. It's still a very nascent subdivision. But we -- Christian Roberton brought in new management team with high ambitions. And it's not going to impact a lot by 2022 numbers and 2023, because it's early days and because they are at work. Maybe we see we can give you more news in May. But clearly, there is a lot of ambitions here, and this will lead top line growth and margin growth as well. So we -- these are the 4 elements that will help to grow the margins of TCS.

I have another question it's regarding the deal. Have you received some interest for your TCS division?

Well, today, we are concentrating on the announcement of the spin-off. And obviously, the execution of the spin-off, as we said, is going to take -- for it to be completed are going to take through the third quarter of 2022. So creating 2 independent companies, which can fulfill their independent destinies and achieve valuations, which are in line with their market fundamentals, eliminating the conglomerate discount, which is inherent in the Technicolor share price today. And thus creating, we believe, significant value for all stakeholders is our main preoccupation. With regard to what may happen in the future with regard to any of these assets, I mean, that's nothing I can speculate on today.

Okay. One last question, this maybe in the press release, I'm sorry for that. For the Trademarks' activities, so the disposal is made at roughly EUR 100 million, but what is the contribution of Trademarks to EBITDA or EBIT or revenues?

In 2021, we had EUR 23 million of revenues, EUR 14 million, 1-4-million of EBITDA.

And -- yes.

About 7x multiple, and we had an independent valuation of the business and the price compares pretty favorably with that.

We have another question from Thomas Coudry, Bryan Garnier.

My questions, which will be mostly on the deal. First one, maybe an easier way to create the value that you will be creating here by doing this deal would have been to a straight sale of Connected Home. Should we interpret this spin-off deal as the difficulties to sell Connected Home? Or is this still an option on the table in the TCS company? My second question would be, there is some information in that in the press release, I guess, but could you please describe the tax impact for the shareholders and for the group itself. I'm not sure about that, but I guess you've looked much into the Vivendi deal spinning off UMG. And I understand this is not the same type of impact. So could you please run us through that? And last question, please. Did you consider listing TCS in the U.S., not in Paris, which could have seemed like an appropriate place given the business? And why did you choose to stay in Paris?

We looked at a number of different strategic options over an extended period of time with respect to what was the most appropriate approach to create the maximum amount of stakeholder value. And certainly, the sale of the Connected Home asset was a theoretical possibility. I think that there's a couple of issues there. We have very strong relationships with our customers, and we've got some very large powerful customers in Connected Home. And depending on how such a sale might have been to, we could have destabilized those relationships and destroyed value. So that wasn't a kind of favored approach, I don't think. Plus, if you sold off TCS, then you would still be leaving Technicolor Creative Studios, together with other assets within the group. And I think we believe that the best way of achieving the maximum value is to create a pure-play, visual effects player from Technicolor Creative Studios, which is not associated with any other company and can be seen to have the excellent potential, which we believe that it has. So therefore, that was the strategic option which was chosen. And we firmly believe that, that is the best one to achieve shareholder value creation. Would you like to handle the tax point, Laurent?

Yes. And I would just to add to Richard's point, as Richard mentioned, basically, the spinoff of TCS is way easier than the spinoff of Connected Home and that's for sure. But also the second element is, as you know, there is a conglomerate discount around Technicolor. And basically, when you think about value creation, you think about extracting assets out of under this conglomerate discount. And you want to extract the one that is the highest potential chances facilities to re-rate. And that is TCS over CH. I should add that CH -- Connected Home is faring extremely well, as you can see in '20 and '21. You have a look at the results of their competitors and you will realize that the performance they've done in 2021 is outstanding. They have left EUR 0.5 billion of sales and serviced in 2021. They will continue to go after that. It's a tremendously successful company that has transformed brilliantly. So we have absolutely no issue in terms of as far as the business plan of Connected Home is concerned. Tax impact, very simple. No, we didn't really look at the -- it's not that we didn't look at it, but we don't inspire ourself from the Vivendi deal. What we've managed to put together is that we -- taxation on the distribution of the shares should be probably very, very close to almost tax-free to the shareholders. So we've managed to find a way by distribute, if you want to go [ technical ] it's by distributing share premium to avoid taxation for the shareholders. So it's actually, we believe, also a point of attraction for this transaction. As far as the group is concerned, as you know, we're sitting on [indiscernible] generating, so there is absolutely no impact for us there. But the -- for the shareholders that should be that.

And then the third point about the listing, where would the listing venue be. I mean we looked at alternative listing venues. But basically, we are currently a French plc headquartered in Paris. We've got a very experienced group management team covering many different functions, which is based in Paris. And France is a center of excellence, for example, for animation, which as Laurent said, is a very fast-growing area of Technicolor Creative Studios and one where we will be hiring more people during 2022 and beyond. There are various reasons why we didn't think that the complexity of moving to another location would necessarily going to be justified. Clearly, if we were to list in the U.S., there would be a lot of bureaucracy, which we would have to deal with, which we think would be in excess of that, which is involved in continuing to be listed in France. So for all those reasons, we decided to stay on Euronext Paris at both of these assets.

We have another question from Alex Duval, Goldman Sachs.

Just a couple, if I may. Firstly, you talked about the opportunity in the past about video games and you've highlighted this again today is a dynamic area. Just wondering whether you need to attract different skills here as you take advantage of opportunities given the growth in that market and whether there would be incremental hiring involved or whether you can simply leverage a lot of your existing capabilities. Secondly, as a follow-up, you talked about continued strong growth in broadband, which is clearly an area of strength for the company and a technological enabler for the digital economy. However, just wondering whether as a return to office proceeds in some regions, different speeds, whether you could just update us on how you think about sustainability of demand as people spend less time at home and more in the office.

Okay. So in video games, as Laurent said, we've operated to date on a relatively small scale. But Christian Roberton has recruited Jeaneane Falker, who's got a very deep experience in the video gaming sector over a number of years. And we have scaled up our ambition, and so instead of just doing work for hire we want to move up the value chain in terms of becoming more of a partner to these gaming companies. And maybe outsourcing some of the continuing development, which is carried on with some of the most well-known games, which is where the higher returns lie. And the skills, which are necessary to create assets within games are pretty much the same as they are for visual effects or for films, episodic or visual effects for advertising, there are certain differentiating factors, but I think people can learn those pretty easily if they have the VFX skills already. It will require an incremental hiring and Jeaneane is on a push to get more people into the division because there's no doubt that the more people you have, the more work you can take on and i.e. revenues are going to be. But we have significant ambitions in that area, and we want to make it a major part of our operations rather than just a side share, which has been to date. And in terms of broadband growth, I don't think that return to the office is going to have a major impact on that. We can see very strong growth for the next couple of years. And I think that the people being locked down at home for long periods, especially with large numbers of their families trying to use many different devices simultaneously was a shock to the system and people realized that they needed to trade up in terms of the performance of their broadband and the WiFi experience which they were getting. And we provide higher-end products, including WiFi 6, which provide the best possible broadband propagation characteristics. And I think that people have realized that they just can't may do with the service, which we see had before, and they're continuing to trade up to more performance products in large numbers. And I think we see that continuing for the foreseeable future.

[Operator Instructions] We have another question from Fiona Orford-Williams, Edison Group.

Certainly, you've given me quite a lot to read through this evening. What I was trying to get my head around, was the outline forward-looking assumptions on Technicolor Ex-TCS and how to reconcile that with what you're telling me about the strong underlying growth? And further to that, maybe you could give us a little bit more, a feel for the timing of how you think Connected Home recovery is going to come through in -- particularly in terms of when you think the component issues will have worked their way through. And the other thing I'm just trying to get my head around a little bit, I can see that you will now have a CEO of Technicolor Ex-TCS and Christian Roberton in TCS itself. And what some other management, do those need to organize -- to be organized a separate entities? And what happens to you, Richard, it may be in the statement [indiscernible]?

Sure. Okay. Well, Laurent, do you want to talk about the underlying growth in Ex-TCS?

Yes, yes. First of all, I'm going to correct one of your comments. There is -- and I think maybe we didn't explain it very well, but we don't have a question of recovery for Connected Home. Let me just go back to what we said. First of all, what we've said is in 2021, basically, we sold less than what we could have. So we should have -- we should have been delivering more. We didn't, or EBITDA, nevertheless, has managed to increase because of efficiency measures or whatever. The demand is here. The problem is to get the components, to get the box and to the deliver. So our view today for 2022 is that this is going to continue for probably 3 quarters of the year. We believe that the key component constraints, and that's how we're building up basically our guidance will continue for the year. We think that we might have an improvement in in-transit sign of inventories towards the end of the year. So the time the boxes take to travel from Asia to America, for instance. It was usually 3 weeks 3, 4 weeks, it has gone up to 8 weeks, leads to higher inventories with us. We think that this is going to stay like that for 3 quarters and then ease on the fourth quarter. So to your question, timing really towards the back end of 2022 -- that's that. Then the nevertheless, nevertheless, basically, the company will continue to improve because still, they will be selling more than expected. They had ordered preordered more than for the year. So they will have that, you will have growth and you have EBITDA progression as well. So it's recovery of the market. Probably at the moment, we don't foresee before fully 2023. Of the company of Connected Home, they're in good shape and they continue and they will start investing. So they are on a good path.

I'll then take your third question, I think it's in the press release, but I don't think we covered it in this presentation that the CEO of Technicolor Creative Studios, as you say, will be Christian Roberton and the CEO of Technicolor Ex-TCS will be Luis Martinez Amago, who's currently Head of Connected Home. The Chair of TCS will be Anne Bouverot, who is the current Chair of the Technicolor Group, and I will be taking the role of Chair of Technicolor Ex-TCS. I will be remaining with the group in that role. Now you also asked about the rest of the management structure. Today, we're announcing the chairs of the 2 respective businesses and the CEOs. We will be working on the detailed management structure of both businesses in the coming weeks, and we will make an announcement about that in due course.

We have another question from David Cerdan, Kepler Cheuvreux.

A few questions regarding the mandatory convertible notes. So you say that this MCN is supported by selected subscribers who have committed to subscribe to the full amount. Is it some shareholders or new investors? First question. And secondly...

Shareholders, shareholders.

Current shareholders?

Existing shareholders.

Existing shareholders. And do we know how many -- or do we know -- how could I say, how many shares or how much of the capital is owned by those existing subscribers or existing sorry, shareholders?

Yes. Of course, we know that. The only thing we can tell you, and that is as much as we want to disclose is that we believe as we have a strong closer to the majority of support of our shareholders in this.

And is it correct that you need 2/3 of the voting rights to okay. So it's...

2/3 of those voting at the AGM.

For the first one, for the approval of the MCN.

Okay. And -- okay. Second question is just a technical question, if the MCN pays a coupon of 4.5%. Just to be clear, are you going to pay something for because after that, very rapidly, the debt should be transformed into new shares.

Yes, no. So no. Well, basically, the thing is in this deal, we will be first issuing the MCN, all right? So it will first appear as a converted we will do so. So we understand the mechanic. We will only do so at the time when we have also gathered the proper financing for Technicolor Ex-TCS and TCS. So on that very day, we will have the MCN financing 1 for TCS, financing 2 for Technicolor Ex-TCS because we have all that, we can go back to our current lender and repay everything in one go. So that's going to happen. And also once we have -- we will have first the approval of issuing the MCN, but we will not issue it immediately. We will wait until we have basically gathered the other thing and then we will issue it. When you issue it, you pay you 4.5, you pay your coupon, of course. And then shortly after, you're absolutely right. Shortly after, we will be calling the second EGM calling for the -- oh, before, by the way, calling for the spin-off. And on that day, we will declare that we will probably draw to that and then it will convert into equity. And of course, then we're not going to be paying any coupon after that, of course. This is almost an inclusion of EUR 300 million of equity, if you want to make it simple.

[Operator Instructions]

Okay. Well, if there are no more questions, thank you very much for attending this evening. And thank you for your questions. And we look forward to bringing more information about these transactions in due course as we've described. Thank you very much indeed.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may now disconnect.