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. This presentation contains certain statements that constitute forward-looking statements, including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives based on certain assumptions or which do not directly relate to historical or current facts. Such forward-looking statements are 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. 2021 Universal Registration Document (Document d’enregistrement universel) has been filed with the French Autorité des marchés financiers, AMF, on April 5, 2022, under number D-22-0237 and an amendment to the 2021 URD has been filled with the AMF on April 29, 2022, under number D-22-0237-A01. I would now like to hand over the call to Mr. Richard Moat. Sir, please go ahead.

Thank you. Good evening, ladies and gentlemen. It's a great pleasure to speak to you today to discuss our first quarter 2022 results. Overall, our results were in line with our expectations, and our 3 businesses each delivered a strong performance. We are challenged by ongoing headwinds, but today, our businesses are in a stronger position to address a difficult environment. Thanks to our successful transformation plan that we initiated 3 years ago. In addition, during the quarter, we made significant progress in the partial spin-off of TCS and with respect to our debt refinancing, both of which we announced on February 24, and we're on track to have 2 leading independent companies in Q3 of 2022. So let's turn to Slide 4 and go over our key figures for Q1. First quarter 2022 registered a good set of results despite a trading environment still marked by 2 conflicting trends. Strong demand for TCS and Connected Home products, but persistent industry-wide fulfillment difficulties. As you can see in the bar chart on the slide, we delivered an improvement in revenues, adjusted EBITDA and free cash flow. In Q1, we delivered revenues of EUR 756 million which was higher by 6.6% at current rate than last year's quarter. While this growth was positively driven by strong demand for TCS and Connected Home products, we continue to experience fulfillment difficulties given the ongoing challenges in key component supply, logistics and talent recruitment. Adjusted EBITDA for Q1 was EUR 55 million, which was 39.1% higher at current rate compared to last year's quarter. This improvement was mainly driven by higher revenues and improved performance of TCS and stronger EBITDA at Connected Home. The company's free cash flow amounted to negative EUR 126 million, which was an improvement of EUR 74 million compared to the first quarter of 2021. This largely resulted from better operating performance and a lower change in working capital requirements at Connected Home. In addition, our successful restructuring plan within our divisions has allowed the company to gain significant operating leverage, which is highlighted by our consistent progress in our margins and cash flow generation. So let's look at Slide 5. Continuing improvements within our divisions and robust demand across most of our businesses we're pleased to confirm our 2022 guidance. It's basically unchanged, but it's been adjusted to take into account the announced disposal of our trademark and licensing business. We're expecting our revenues from continuing operations to continue to grow. And specifically, we are targeting, excluding our Trademark Licensing business, adjusted EBITDA of EUR 361 million, adjusted EBITA of EUR 161 million and free cash flow of EUR 217 million. In addition, we're well on track to achieve our accumulated 3-year EUR 325 million cost-saving target. This reflects the significant cost savings and operating efficiencies that we've implemented across all our businesses, which have enabled us to deliver these strong financial results. So if we turn to Slide 7, I'll go into detail about each business' performance. Starting with Technicolor Creative Studios. Q1 was yet another outstanding quarter for TCS, reflecting its position as the independent global leader in tech-enabled content creation with an award-winning portfolio. Overall, all 4 divisions of TCS continued delivering strong performances by being at the center of the creation of the best original content in the industry. MPC Films -- MPC teams worked on approximately 20 theatrical and 30 streaming and episodic projects. And in recognition of the team's excellent work, they were rewarded with 1 BAFTA nomination, 3 awards from the Visual Effects Society and 1 César, the French version of The Oscars for Best Visual Effects. Mikros Animation was involved in 6 features and several episodic series or TV specials for major franchises such as Disney, and I'm pleased to also announce that we've got a new collaboration with Netflix on their upcoming animated event series, Charlie and the Chocolate Factory. The Mill team has contributed to approximately 1,000 projects and their outstanding work was also recognized by the industry with 6 wins of the British Arrows awards and 2 Visual Effects Society awards. And lastly, our Technicolor games team continued collaborating on major IP games, such as NBA 2K22. On Slide 8, let's look at the financial results of TCS. TCS delivered EUR 198 million in revenue in Q1, which is up 41.6% at current rate compared to last year's Q1. And if we exclude the postproduction business, which was divested in April 2021, revenue growth was actually 56.5% at constant exchange rate. The growth was predominantly driven by the significant demand that we see for original content and an increase in advertising spending. In fact, these 2 factors drove double-digit revenue growth for each business line compared with the first quarter of 2021. TCS delivered EUR 26 million in adjusted EBITDA, which is up EUR 10 million compared to Q1 2021 at constant rate. We continue to see margin improvement, thanks to the revenue increase and the positive impact of our transformation plan. However, that said, our quarterly margin was partly reduced by higher labor cost to complete major production projects given the shortage of talent the entire industry is facing. While we continue to increase our staff, with an approximate 1,100 net increase over the first quarter this year, the company is actively working on accelerating its recruitment and training efforts to deliver the strong pipeline that we have for 2022. Overall, through our multiple transformation initiatives, TCS is now in a very strong position. We expect a good 2022 as demand for TCS' highest quality VFX artistry and cutting-edge technology continues to grow. The division has already been granted multiple new projects and approximately 80% of the revenue pipeline for MPC and Mikros Animation has already been committed for the year. The animation business is also expected to grow as the number of feature animation projects in production moves from 2 in 2019 to 6 in 2022. So let's turn to Slide 9 and look at Connected Home. Our Connected Home business continues to see significant business progress with strong demand, in particular, for our broadband products as people seek to improve their connectivity. This demand is, however, still being challenged by the supply constraints and the chip shortages that have been going on for the last 15 months. By delivering technologically advanced high-end products, Technicolor's Connected Home is the worldwide leading provider of broadband access gateways and video set-top boxes and leveraging our innovative technologies, we partner with the world's leading service providers. Most recently, we've announced partnerships with Telstra in Australia and Bouygues in France to help them deliver seamless connectivity and premium entertainment experiences to their customers. Beyond our engagement to improve connectivity, we've also taken an important commitment with the Science Based Targets initiative, making Technicolor the only company in the Connected Home space, which has signed the 2050 Net-Zero Standard. Now over on Slide 10, let's look at the financial results of Connected Home. In Q1, revenues totaled EUR 408 million, which was down 4.6% at current exchange rate compared to the same period in 2021. Our sales volumes continued to be impacted by the global semiconductor crisis and supply chain disruption, which limited us from fully satisfying the strong demand we have from customers. In fact, the underlying demand for the first quarter was higher than our actual sales. As commented earlier, demand for broadband remained strong and broadband revenues were EUR 322 million compared to EUR 287 million in Q1 2021, and they now represent 79% of Connected Home revenues. Connected Home adjusted EBITDA for the quarter was EUR 31 million representing 7.7% of revenues, which was up compared to 6.3% of revenues in the first quarter of 2021. However, the margin improvement resulting from operating efficiencies and cost savings initiatives was partially offset by lower volumes and their associated margin impact. Moving forward for the rest of the year 2022, we expect the demand for Connected Home products to remain robust. We also expect the ongoing challenges from the shortage in components and pricing issues to continue throughout the year. In addition, the conflict in Ukraine has generated increased uncertainty in terms of supply, even though we do not have any assets or direct customers or suppliers in either Russia or Ukraine. We've seen an increase in transit times to some European customers as we transition from rail to sea transportation for products that used to move through Russia and there's some future uncertainty relating to supply of raw materials used in semiconductor manufacture. The Group is extending its existing action plans, and we are maintaining continuous discussions with both suppliers and customers to compensate for these potential factors. While we continue navigating a complex environment, the team has been doing an outstanding job implementing efficiency measures and collaborating with clients and suppliers to optimize deliveries. These efforts have helped us alleviate these headwinds and we will extend our efforts throughout the rest of the year. So turning to Slide 11. Let's look at DVD Services. In Q1, DVD Services continued to adapt its distribution and manufacturing operations as well as customer contracts in response to the ongoing decline in Disc volume. Through structural division-wide initiatives, the team is actively focused on a multifaceted diversification and growth strategy. Through this strategy, the division has had success developing new growth businesses and key new commercial avenues in non-disc activities. As we reposition the disc activity into a profitable volume-based business, we are accelerating diversification through manufacturing supply chain services, including microfluidics, vinyl and supply chain and fulfillment services and solutions. As an illustration, over the quarter, -- we've made good achievements with the vinyl business with the signature of 1 contract with one of the top 3 music companies and others expected to be signed by the end of the first half with the other 2 of the top 3. On Slide 12, looking at financial performance of DVD Services. In Q1, revenues totaled EUR 150 million, which were up 2.2% at constant exchange rate compared with the first quarter of 2021. Despite lower disc volumes year-on-year, revenue increased, thanks to the performance of the new growth businesses, notably transportation management and vinyl. In the first quarter, adjusted EBITDA totaled EUR 5 million versus EUR 4 million in the first quarter of 2021. The margin was flat compared to the first quarter because the significant footprint optimization, head count reductions and higher activity in non-disc activities were offset by the impact of lower disc volumes and higher labor costs in North America and Mexico. As we move forward in 2022, we expect higher year-on-year new release volumes as theatrical attendance continues to normalize. And whilst this will be slightly offset by lower catalog volumes, our cost efficiencies should mitigate this. Looking ahead, our transformation pursued since 2020 to continue facilitating the further expansion of non-disc growth activities. So I'll now turn it over to Laurent, and he will go into more detail on our performance.

Thank you, Richard, and good evening, everyone. I think we're turning now down to Slide 13, and I will now provide you with further details regarding our first quarter 2022 performance. So as mentioned, Slide 14. As mentioned by Richard earlier, our performance in Q1 was in line with our expectations despite the company facing industry-wise fulfillment difficulties given the ongoing challenges in key component supply, logistics and talent recruitment at TCS and Connected Home. Our strong performance was mostly driven by increased demand in TCS and Connected Home and through our successful turnaround plan across all divisions. So this slide presents the consolidated figures of the quarter. So as Richard has already commented, the results by division, I will only provide you with the consolidated division of our financial performance details by divisions are now available as an appendix in this presentation. One general comment to keep in mind in terms of scope and accounting method 2021 and 2022 financial results include IFRIC interpretation on SaaS implementation costs, a minor impact in Q1 2021 and Q1 2022 as well as Trademark and Licensing operations are now accounted for as discontinued operations as from January 1, 2021. So they do not appear in our numbers anymore in 2022. So our consolidated figures of Q1 revenues of $756 million increased by EUR 47 million at current rate, with ForEx impact representing EUR 49 million positive, meaning that at constant exchange rate revenues were broadly flat year-on-year. TCS recorded a strong growth, while Connected Home was impacted by industry-wide key component shortages and also supply chain challenges, which prevented the business from meeting the strong customer demand in full. Our adjusted EBITDA, EUR 55 million was up EUR 11 million at constant rate or 28.6%, mainly driven by TCS increase. This also reflects operational improvements along with cost savings and operational efficiencies. The adjusted EBITA of EUR 14 million represents EUR 16 million year-on-year improvement at constant rate. This resulted from the EBITDA increase, EUR 11 million and the D&A decrease by EUR 5 million. EBIT from continuing operations was breakeven, at EUR 1 million loss compared to a $29 million loss in the first quarter 2021. This resulted from better operational performance, as previously described, along with lower nonrecurring items, mainly related to lower restructuring cost of 12 million only with the end of the Panorama plan accruals. As a consequence, the net result from continuing operations at negative 39 million is up, EUR 24 million at constant rate versus last year mainly due to the EBIT improvement. Let's have a few words now on cash. The change in working cap is negative EUR 128 million. It should be compared with a negative EUR 193 million in Q1 2021. This improvement came from positive variation year-on-year at Connected Home. At first quarter 2021 last year working cap was not only impacted by negative impact of reductions in supplier payment terms. The free cash flow in the first quarter is always impacted by the seasonality of activities, mainly Connected Home and the DVD business. In Q1 2022, free cash flow before financial results and tax from continuing operations was better by EUR 81 million at constant rate compared to the first quarter of last year, mainly thanks to better EBITDA performance EUR 11 million, lower working cap requirements EUR 74 million, lower nonrecurring cash outflows, notably lower restructuring and despite increase in CapEx from EUR 23 million to EUR 35 million, mainly at Technicolor Creative Studios and mostly as a result of a payment -- paying notably higher cash out for IT related expense CapEx. As a summary, cash outflows over the period are mainly explained by negative free cash flow from continuing operations before financial and tax, EUR 126 million and EUR 29 million net cash interest paid over the period has to be compared to EUR 27 million in the first quarter of last year. The cash out for operating leases amounted to EUR 10 million compared to EUR 15 million in the first quarter of 2021. It reflects the continued strip-down of all the footprint, mainly in the DVD division. Not presented in this slide, but as a reminder, the net financial debt at nominal value amounted to [ 1,297 ] million -- 1.2 billion -- 1.3 billion, let's say, at the end of March 2022 to be compared to EUR 1.1 billion at the end of 2021. There is always a ramp-up of the debt in the first quarter. The free cash flow is negative before it comes off in the rest of the year. IFRS net debt amounted to EUR 1.2 billion as of March -- end of March compared with EUR 1 billion at the end of December. Note that the Cash position at the end of March 2022 was EUR 38 million. It will be compared to EUR [ 196 ] million at the end of December 2021. So let's now move to the Slide 15 with a focus on revenues. So as mentioned, the revenues was flat at constant exchange rate and up 6.6% at current rate, up to EUR 796 (sic) [ 756 ] million. The EUR 67 million revenue improvement at TCS from significant demand and EUR 49 million of positive ForEx impacts were offset by EUR 49 million lower revenue at Connected Home due to supply and component constraints. Technicolor Creative Studios recorded a revenue increase of EUR 67 million at constant exchange rate and at constant perimeter, i.e., excluding the sale of postproduction to reach EUR 198 million. TCS revenues now represent 26% of the consolidated revenues, and it was only 20% in Q1 2021. This improvement resulted from the significant demand from original content and rising advertising spend, which together drove double-digit revenue growth for each business line. Also as a reminder, Q1 last year was impacted by COVID. DVD Services increased slightly by EUR 3 million at constant exchange rate to reach EUR 150 million. DVD Services now represent 20% of revenues and revenue increase is driven by the performance of new growth businesses, notably transportation management and the record productions or new activities introduced by the new management over a year ago. Connected Home share in consolidated revenue decreased from 60% to 54% of revenue. Connected Home revenues amount to EUR 408 million and declined by EUR 49 million at constant exchange rate as it was impacted by industry-wide key component shortages. And again, they were prevented to fully service the strong -- very strong customer demand they were facing. Also note that revenues were negatively impacted by EUR 21 million of change in scope due to the sale of postproduction in April 2021. Excluding those impacts, first quarter consolidated revenues would have been up 9.8%, almost 10% and 2.7% at constant exchange rate. Let's move to the next slide, Slide 16, and comment rapidly EBITDA performance. So as shown in the slide, EBITDA improved significantly by EUR 16 million and currently representing an increase of EUR 11 million or 28.6% at constant exchange rate to EUR 55 million. This growth was driven by operational efficiencies and cost savings for all our divisions as illustrated by the EBITDA margin improvement of 169 basis points. I will not comment on each business performance as Richard has already done that before. So let's go to Slide 17 now. The adjusted EBITDA also reflects improvement in efficiencies and cost savings as it increased by EUR 16 million at constant exchange rate to a positive EUR 14 million compared to a negative $4 million in Q1 last year. The operational efficiencies also reflected in slightly lower D&A following lower equipment spend for Technicolor Creative Studios. Otherwise, nothing major to be noted here between adjusted EBITDA of EUR 14 million and continuing EBIT of negative EUR 1 million, we have mainly 2 items; the 10 million -- traditional EUR 10 million of PPA amortization, noncash of cost and restructuring costs reduced by EUR 12 million compared to Q1 last year, were up EUR 2 million at current rate. Finally, on Slide 18. EBIT for continuing operations amounted to a negative EUR 1 million compared to a negative EUR 29 million last year due to better operational performance. And while also Q1 last year was impacted by higher restructuring accruals. The financial result to negative EUR 34 million in Q1 this year compared to a negative EUR 32 million in Q1 last year, no major change in variation. Income tax amounted to a negative EUR 7 million compared to negative $1 million in Q1 last year, mainly due to the higher results at TCS. And as you know, we start to pay some taxes mainly in Canada and in the U.K. Group net income, therefore, amounted to a loss of a negative EUR 39 million in Q1 to be compared to the loss of EUR 61 million in Q1 2021. If we turn to Slide 19. As shown previously, Q1 2021 free cash flow after tax and interest from continuing operations amounted to a negative EUR 160 million, represents EUR 71 million year-on-year improvement at current rate, driven by improved working capital of EUR 76 million notably at Connected Home, we've commented that. An EBITDA improvement of EUR 11 million, lower restructuring cash out of EUR 12 million positive and mitigated by higher CapEx by EUR 1 million -- EUR 11 million, apologies, EUR 2 million rendering cash out at TCS as a result of higher activity, lower pension and other various elements and the ForEx impact. It's a negative rate. So as mentioned earlier, free cash flow in the first quarter is always impacted by the seasonality of activity. And as you know, it's highly volatile through the year. In Slide 20, cash and cash equivalents amounted to EUR 38 million and our total liquidity amounts to EUR 78 million. Note that EUR 40 million remain available at the Wells Fargo line, and we drew EUR 26 million towards the end of the quarter. So now I'll turn the session back to Richard, so he can quickly address the previously announced partial spin-off of TCS and the refinancing process.

Thanks, Laurent. While our teams have been doing a great job handling our day-to-day operations, we've also made good progress in the implementation of the spin-off of TCS along with the early full refinancing of our existing debt 2 years in advance of maturity. So we're well on track to have 2 independent companies by the third quarter of 2022. Along with our financial results, we also announced some key leadership appointments for both companies. The Technicolor Ex-TCS, Luis Martinez Amago, current President of Connected Home will be appointed as CEO. Lars Ihlen, Current CFO of Connected Home will be appointed CFO of Technicolor Ex-TCS. The DVD Services business division will continue to be headed by David Holliday and I will be appointed Chairman of the company once the transaction is completed. As for TCS, Christian Roberton, the current President of TCS will be appointed CEO. Laurent Carozzi, current CFO of Technicolor will oversee Finance and Strategy. The 4 business divisions will continue to be headed by the current brand leaders. And Ann Bouverot, current Chairperson of Technicolor will be appointed Chairperson of TCS. Regarding next steps, the extraordinary general meeting to approve the mandatory convertible notes will be held here in Paris tomorrow. We will be hosting a Capital Markets Day for both companies in London on June 14, 2022. The company's annual and extraordinary shareholders' meeting to approve the spin-off will take place on June 30, 2022. And we still expect to complete the transaction and list the distribution of TCS shares in the third quarter of 2022. This will be a historic moment for Technicolor and its stakeholders. The operation is a unique opportunity to ensure that both TCS and Technicolor Ex-TCS have the adequate capital structure to support their development, long-term ambitions and organic growth. Once the transaction is completed, we will have 2 independent market leaders in their respective sectors with solid foundations for long-term growth. I am confident the future is bright for the 2 companies. With that, we'll now answer your questions.

Operator?

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

Yes. First one on the transaction. In the press release, you are disclosing what the debt postrefinancing could look like at both TCS and Ex-TCS, but I guess this is a premandatory convertible bond of EUR 300 million. So could you just discuss with us what the debt at each entity could look like post those EUR 300 million? Then my other question on the business. Obviously, we've seen that we've been -- the results from Netflix have been disappointed -- disappointing, sorry, this quarter. Can you please share your views on that? How much do you believe this could put pressure on Netflix investments? And what are you seeing today with the discussions with Netflix? And then last question, please. More generally also on the, let's say, on the current context. We have seen a sharp increase in inflation as far as energy costs are concerned, in particular. Could you please disclose us how exposed you are in your different businesses to this concern. In particular, on Connected Home, maybe, are you exposed to a sharp hike in energy costs? Thank you very much.

I'll take the first one. So basically, what you have in the press release are indicative numbers. So there are brackets of what the debt could potentially be because as you probably understand it's -- we are right in the middle of the refinancing process. So we don't know yet what will be the overall amount of debt on [ Remainco ] and yes but these rackets are taking into account already the EUR 300 million of [ NTN ]. So you need to look -- but again, look at these with -- we just thought -- we thought it will be good to give an indication of more or less what are the quantum we are looking into it -- we are looking into. So I mean -- but again, the results will be known of that probably not before quite long. I mean I think, I believe that the -- really the end of the refinancing would be towards -- met towards June, maybe if we are lucky or even late in June.

Okay. The second question you had with respect to the Netflix results announcement. And the reaction of Netflix saying that they were likely to spend less on content over the coming years than the previously anticipated to be the case. And we know that there's also been some significant layoffs at Netflix already possibly with more coming. So I think that we'd already in our projections, been expecting the level of spend by Netflix over the coming years to not be growing at the same rate as in recent years. And that there would be increased spend by the other major streaming players. So Amazon, Disney+, Apple, et cetera. Now obviously, they too may be impacted by downturn in consumer spending driven by increasing inflation and cost of living. But nevertheless, the overall growth, which was projected over the next several years was independent observers were saying it could be close to 20% CAGR. So if some of the heat comes out of that, I still think it means that there's going to be a very good pipeline of activity because historically in sort of turbulent times, such as the ones we're going through at the moment, people tend to turn to entertainment as some kind of a source of normality and comfort. And so I don't think that the level of demand is going to collapse. I think it may just take some of the heat out of what was originally planned to be the growth rate. So I think we feel that our forward projections are still pretty robust.

So I might handle your last question on inflation. That is actually quite a broad type of question because inflation can basically affect staff cost, can affect the energy cost, can affect all sorts of different elements there. So let me take these one by one. I think in terms of -- you are mentioning energy in Connected Home, I think at the moment, this hasn't been -- we haven't seen anything coming in there. But maybe I should give you a little -- tell you a few words on how contracts are structured for the 3 divisions. So you understand that there is, overall, it's not perfect, and we will improve that by the way in the coming months, but we have an overall policy of pass-through of inflation in this group. So if you take Connected Home, and I think that was made public last year, the company was affected by all sorts of type of inflation, not energy, say, but on components there is. And they managed to pass a great majority of these to their customers, to their clients. And this is exactly the same thing. When we have like 100% of the cost hikes, the costs are being passed to the customer, so one. Two, if you look at DVD has in its contracts with the main clients and the studios. They have basically KPIs measuring inflation in all sorts of diverse type of nature of cost. And again, there is a constant revision of that. And so the factor there is embedded in the contract an element of pass-through. This is not 100% bulletproof as you know. If you recall, last year, we still had sort of EUR 6 million to EUR 7 million of labor cost inflation in inventories, but it was really localized in one town and on specific inventory in relation to strong competition with Amazon, and this is no longer the case today, but you have that embedded in the contract. And then the final one is TCS. So TCS very heavy in terms of staff cost and high attrition. Of course, policies in trying to retain people and there's -- there is some inflation, of course, in the salaries, and this is something that the team is monitoring very, very closely. So again, 2 elements of my answer are here. The first thing is, you know the way we're pricing our product is, we are using what we call rate caps. We are being paid per shot, and there is a price per shot and this rate card for these price. And in this rate card, it is built up. So we have -- all the costs are included, of course, including all the staff costs and these rate cards regularly, like quarterly and sometimes even more often than that renewed. So on new contracts and everything, you have -- this inflation is captured per se and is pass-through. In very long-term contracts, we don't have so many of these. This is more of a discussion you need to have with your clients because if you sign a contract for 1.5 years and then something is happening during the year. Okay, that's a conversation needs to happen or if you have a very specific policy you're applying at some point, then you need to open up the discussion with the -- with your client. But overall, this sort of a mechanism of discussion this has been opened up -- actually, we opened that up back in '18 or '19 with Connected Home, and this is something the group has been used to. It's not easy. It's not perfect. You're not 100% well put, but we have our exposure to energy so far overall is actually fairly limited, but I hope it answers your question.

Yes.

Next question comes from Fiona Oxford-Williams from Edison Group.

First of all, in terms of TCS, we've talked before about the staffing issues presumably a little bit of heat coming out of the demand content side might actually be helpful in terms of setting up timetables for these things. Is the 80% that you're talking about of the pipeline in place deliverable with the staffing situation that you've got. My second question was about Connected Home it. I've been interested to hear that the new contracts that you've got in Australia and with Telstra. Would those -- I mean, what were the deciding factors? Was it ability to sort of fill the orders or it tech spec? Is it price or mixture -- and are there other such contracts coming up? And my third was a quick technical one. Is it just the IFRIC adjustment on the SaaS that's changed the [ 35 to the 375 ].

Yes. So if I take the first question, so the short answer to your question is, is the 80% deliverable with the staff that we have on hand today? The answer is yes. And we are working hard to fulfill all of the pieces of work, which we've got contractual commitments to now and over the coming quarters. But obviously, if we have more people, then we could take on a larger pipeline. So in terms of -- if there's a slight pullback in certain areas, in demand, then again, as I said earlier, I don't think that's necessarily going to affect our forward-looking projections because it's really just -- it's just a question and we have taken only more people to fulfill even greater demand. So if demand is reducing slightly, as you say, that could actually be helpful in taking some of the pressure off -- but yes, we definitely will deliver our committed pipeline for 2022. And in terms of the reason why we run that recent business in Australia, as in many different geographic situations, price is always important. However, we spend a lot on R&D in creating the most high-end performance products in the sectors where we operate. And so it's a combination of specification, price and the building of long-term customer relationships.

And are there other such deals in the pipeline?

I mean there are a number of deals in the pipeline, but I wouldn't want to mention them specifically. There are many deals in the pipeline, yes.

We have another question from David Cerdan, Kepler Cheuvreux.

I have a couple of questions. The first one is related to the euro-dollar parity. So I would like to know which kind of euro-dollar parity do you use for your objective for 2022? And if the average rate for the rest of the year is around 1.05, what will be the new figures ? And my second question is regarding the performance of TCS in Q1. So the EBITDA was EUR 26 million. If I'm right, your objective is to be close to EUR 180 million -- so is it -- are you confident first in achieving this objective for the year? And second, does it imply a strong growth for the top line to get this number.

Okay. So on your first question, so usually -- basically and it was conducted publicly when we published the guidance the rate used is 1.15. No, I cannot tell you the impact of 1.05 unless someone is handing me a piece of paper. But look, I'll give it to you, but, certainly not -- we will give you the calculations also on that. But this 1.15 is starting point, we'll help you with the transition there. On the sequence for TCS -- but first of all, the first element you should know is that there is a high degree of -- I wouldn't say volatility, but even cyclicality, but this is not every quarter are the same at TCS. And obviously, -- this is a company that is growing, as you've mentioned. And the quarters are building up one after the other. And usually, the fourth quarter as they are the strongest. So there is a logic in the buildup in -- the EUR 183 million target, fine. I mean this is something that, yes, we need to capture some top line growth, obviously, and mainly if you understand the balance of waiting long in our business. It's -- a lot comes from MPC so in terms of returns. And as Richard has mentioned, we have committed -- sales are committed. And so we are delivering them and, I think, we have enough staff to do that. So yes, it does involve some type of top line growth. And in the end, we will record some top line growth, but yes, at this point in time, we are confident to get there. As you know, it's technical. So we never go for -- we always look for the top line. We always look for alternative plans. If we have potential issues, we always are preparing various scenarios. But as whether we've done that every year, and this is exactly the same thing we're doing this year.

So. yes. TCS is a key part of our guidance, and we're reiterating our guidance for '22. So we're confident in meeting the TCS number.

And just to -- maybe to continue on this just this point very rapidly. Regarding your staff, so you were at more than 10,000 at the beginning of the year. Do you think that you will be able to reach the required staff to achieve your objectives. So in other words, do you think that the recruitment is a key factor -- risk factor for TCS?

Recruitment is still going to be an issue, staying on track with the head count that we need to fulfill the pipeline. But as we said, we've taken 1,100 people since the beginning of the year. And we will continue to recruit through our academies through the system of training, which we have, which we think is unique in the industry. And I think that -- the first half has been very full. I think that the pressure may come up slightly as we move forward into the second half, and therefore, it will not be the continuous demand for further recruitment. So I think we will get to the levels that we need and we will deliver the projects which we've committed to.

Okay. And just to finish on that, if we compare Q4 last year and Q1 this year, -- so the revenues are up by something like 5%, if I'm right. So is it -- is there a direct correlation between the staff and the revenues?

Broadly speaking, yes, the more staff you have the more revenues you might get.

Next question comes from [ Vihren ] Jordanov from Cairn Capital.

Congratulations on the good results. I just wanted to ask you about sort of liquidity. I mean -- in terms of cash balance, it's kind of gone down quite a bit. You obviously have the Wells Fargo line. Just wanted to find out, are there any restrictions around drawing more of that? And then linked to that, obviously, a big improvement in the working capital. Was that to an extent of one-off or should we expect a somewhat similar improvement in the second quarter versus second quarter last year?

So there are no restrictions on the drawing of the Wells Fargo line in the ABN. And by the way, the fluctuation of cash for the year at TCS in particular, Connected Home, is a very traditional thing. To your point, in terms of working cap, quarter-on-quarter improvement. It's obviously -- obvious that here the strongest uptick is in Q1 because we had a lot of down payment we did last year for paying early our suppliers. If you recall, we -- and this is probably information by the end of January, we reported that we had paid EUR 120 million to our suppliers earlier than expected in order to reduce our payment and so -- so this big drawdown is in H1. We have less of that in H2. So you -- but overall, the management of the working capital is not hampered any more by, I would say, the legacy, it's been cleaned up. It's been now more driven like a normal business. Yes, you should count on some further improvement, maybe not to the token you've seen there.

[Operator Instructions] And we have another quest coming from David Cerdan again from Kepler Cheuvreux.

Rapidly, on Connected Home, do you think that there is a risk of counter effect related to the -- during the COVID before consumers have upgraded their equipment. So do you have some figures on this upgrade? And do you expect the demand to decelerate or to decline because of now people are quite equipped.

That's a good question. I think that we forecast that demand is going to remain strong for the foreseeable future. As I said when I was speaking earlier, the demand in 2021 was about 25% higher than we were able to supply because of lack of key components. As we've moved into 2022, it's remained at a similar level. And we believe that it's simply moving forward until the time when it can be satisfied because semiconductor supply improves. So I mean, certainly, during COVID, were large numbers of people who upgraded their broadband Wi-Fi experience, but we don't think that, that process has stopped yet. And certainly, the orders which we're getting, particularly from our major North American customers suggests that sales are continuing as they have been over the last 24 months. So I think indeed that as each new evolution of broadband, in particular, comes through. So Wi-Fi 6 is now being replaced very rapidly by Wi-Fi 7. You'll see people trading up in terms of their broadband routers in the same way that they move from one iPhone to another because they want to keep pace with the latest improvement in technology to get the best possible broadband download speed and Wi-Fi propagation experience. And so at the moment, we see no sign of demand slowing down. Our only problem is increasing production to meet it.

And -- last question I have in mind is related to the last deal with Bouygues Telecom. Bouygues Telecom is a small operator in the world. So is it a new strategy to address the small clients? Because I have in mind that you target mainly the large contracts and Bouygues is not for sure a large client.

I mean broadly speaking, we, as you know, have a platform-based approach to products where we have taken action over the last 24 months to make sure that we supply to large customers who are going to make large orders because that's where the higher margins are. In the past, there was too much attempt to bespoke products and especially to bespoke products for relatively small customers. I don't think that Bouygues falls into that category. And it's part of our strategy to increase our presence in Europe to increase our presence in France, and where we see a strategic advantage, then we will deal with customers who are not necessarily the largest in their particular geographical sector, but nevertheless, where we see the potential for development of the relationship in the future.

And also maybe, David, do you remember you might have small clients but what is of importance is the size of the order -- so you can have a client of medium-sized, but as long as the order is significant. And on top of that, combined with the product can be backed by a platform approach. This is the main criteria then is profitability.

Yes. As long as you develop products which you can sell to multiple customers of that size, then [ it's the same ] effect.

And in other words, are you -- I would say, okay, to attack some small accounts.

If we can adopt the platform-based approach, and we don't have to develop specific products for them then yes.

We have another question coming from Vihr Jordanov again from Cairn Capital.

Sorry, just a quick follow-up actually related to the previous investor's question. Do you still have visibility over your Connected Home orders, which is 52 weeks ahead? Has that stayed unchanged?

Yes. I think we've got 95% of purchase orders confirmed for 52 weeks ahead. So our pipeline is very strong. And there's no sign of that reducing in the future, there is still pressure on supply of semiconductors, and we think that will continue through '22 and into '23.

Yes. So the issue, again, as Rich has mentioned, is not really visibility or whatever we have, we've left to repeat the number again, EUR 0.5 billion of sales behind 2021, the quantum will be EUR 200 million to EUR 400 million probably still this year. So really, if they can put those boxes, they will be -- these boxes will be taken by the client, really the issue is to be able to meet the demand.

Dear speakers, we don't have -- we have no further questions. So I'll give you back the floor for the conclusion.

Well, thank you much, everybody. Thanks for listening this evening. And we look forward to speaking to you with our first half results, which will be in July. Thank you very much.