Viaplay Group AB (publ) (VPLAYB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for holding. [Operator Instructions] I will now hand the call over to your host, Matthew Hooper, NENT Group Chief Corporate Affairs Officer.

Thank you very much, operator, and welcome, everybody, to NENT Group's Q2 2020 Results Conference Call. We hope you're all well and managing always through these extraordinary times in which we're living. I'm joined here on the call today by our President and CEO; Anders Jensen; our CFO, Gabriel Catrina; as well as Stefan Lycke and [ Joel Gadin ] from our Investor Relations team. Presentation materials are available on our website as usual, and a Q&A session will follow Anders and Gabriel's comments. I will now hand the call over to Anders.

Thank you very much, Matthew, and a very good morning, everybody. Q2 was indeed an unprecedented quarter in many ways. Not only had we been dealing with the effects of the COVID-19 pandemic, but we have also closed the merger between Viasat Consumer and Canal Digital, launched Viaplay in Iceland, announced the expansion of Viaplay to the Baltics, teamed up with our partner Elisa in Finland, raised our Viaplay subscriber intake target again, delivered on our cost-cutting program, partially refinanced ourselves and launched an updated reporting structure that better reflects our streaming strategy. So all in all, a fairly busy quarter. I will go through many of these things in more detail in a few minutes. But before I do that, I would like to draw your attention to 3 key takeaways from this quarter. Firstly, we are well set up to succeed. The transformation program and the new operating model that we implemented during the second half of last year have clearly helped us to become faster, more accurate and more efficient, so that we can make sure that we capture the full potential of Viaplay while at the same time generating significant savings in other areas. This has been a major factor in enabling us to deal with the challenges of COVID-19. We have made a number of quick and, dare I say, brave decisions that will ensure that we emerge from this crisis even stronger and better positioned than before. Secondly, the investments we have made in Viaplay are yielding results. We have just delivered another quarter of exceptional subscriber intake. While some of this growth is undoubtedly related to the staying-home effects of COVID-19, we have continued to take market share. And the record high usage and low churn levels again demonstrates how much our customers love Viaplay. And thirdly, we are ready to expand Viaplay internationally. Our platform can compete with the best in the industry, and the successful launch in Iceland shows that we're ready to take this to the next level. We're now preparing to launch in the Baltics at the beginning of next year, and our vision is now to scale Viaplay even further. We could launch Viaplay in over 15 markets in the next 5 or more years. Now let me turn to what we are seeing across our business, and let me start with Viaplay, which added over 200,000 subscribers in the last 3 months and over 600,000 in the last 12 months. We've ended the quarter with over 2.7 million paying Viaplay customers. The growth came from our stand-alone rather than bundled base and was driven by healthy intake of both films and series as well as sports subscribers. Viaplay revenues were down 4% as temporarily lower sports package prices more than offset the subscriber growth and higher transaction revenues in the Viaplay store. Sports packages are now back at normal levels again, and streamed minutes of sports viewing were up 10% year-on-year in June and are now up 116% so far in July. We have raised our subscriber intake for the full year twice this year from 250,000 to 400,000 and then from 400,000 to 600,000, which would represent more than 25% growth in the Viaplay subscriber base in 2020. This full year target may seem conservative given the performance so far this year, but it's hard to judge how much of the growth in H1 is a pull-forward effect as a result of COVID-19, and we're also mindful of the upcoming Disney+ launch in mid-September. We don't expect increased churn levels, but more noise in the market will most likely impact sales at least temporarily. The number of streamed minutes was up 42% in Q2 when excluding sports. Usage is one of the most important metrics we have, and it's highly correlated with the churn rates. We premiered 8 new Viaplay Originals in the quarter, and the total viewing of our Viaplay Originals was up 41%. This was driven by the success of season 2 of The Lawyer and the very popular premiers of The Machinery and Big Lars. This is fantastic to see as our locally relevant originals are a key differentiator for us. 3 of the top 5 shows in Viaplay in Q2 were original productions. When measured by a number of unique users and 4 out of the top 7. This shows that the interest is broad-based and that originals are a great way to attract new customers to the platform. We also saw a huge increase in the viewing of season 1 of The Lawyer when we premiered season 2, which shows that the value of our originals library will only go up as we launch new seasons of successful series. Then moving on to other subscription revenues, which were down 34%. This reflected the deconsolidation of Viasat Consumer from the beginning of May as well as the temporary reductions in sports package prices by third-party networks that distribute our sports channels. The postponement or cancellation of sports events also reduced our sports rights sublicensing revenues. Sports package prices are now back to normal levels, and revenues from sublicensing are resuming. So revenue should, excluding the impact of the deconsolidation, follow more regular trends moving forward. And then moving on to our advertising business. Revenues were down 30%, which was in line with our expectations and reflected a broad-based drop in advertising demand due to COVID-19. All markets were down, both for TV and radio, with betting and gambling revenues, in particular, taking a beating when live sports were off air. We have now seen a substantial improvement in July, with revenues expected to be up slightly. August is looking okay so far, but September is the big sales month in Q3, so we will have to wait and see how bookings develop. Based on where we stand today, what we know and what we hear, we expect total advertising sales to be down substantially less in Q3 than in Q2. And then moving on to Studios. We have resumed the process to sell the noncore part of our Studios business. It is proceeding according to plan, and we have ongoing discussions with a number of interested parties, which is why we have now reported these companies as discontinued operations. The core part of our Studios business is scripted content production and distribution, which has now been integrated with the rest of the business, as it primarily provides scripted drama content for Viaplay and will be key to ensuring the continued quality of our regional production pipeline into 2021 and beyond. All scripted productions has been postponed to the second half of this year or first half of next year due to COVID-19. However, no scripted shows have been canceled, and the underlying demand for high-quality scripted programming remains very healthy. We still expect to premier approximately 30 Viaplay originals this year and up to 40 in 2021, provided that the gradual return to full production capacity continues. The final piece to discuss is Allente. The merger between Viasat Consumer and Canal Digital was completed in May, and we, therefore, deconsolidated Viasat Consumer from the beginning of the same month. This transaction has great strategic value for us for several reasons. Firstly, this will generate substantial cost synergies that will allow for the combined company to generate higher profits despite the structural headwinds that satellite TV is facing. Secondly, we will now be able to penetrate the Canal Digital with both Viaplay and our V-channels. And thirdly, this deal is an important foundation for us to be able to scale up our Norwegian presence, not least following the investments that we made in the skiing and the Premier League rights for years to come. And this brings me to my final point, which is expansion. The COVID-19 crisis has made it clearer than ever just how relevant our strategy to focus on streaming is. We have continued to take market share, and our content offering is stronger than ever, while our technology platform has again proven to be highly adaptable and resilient and even enabling us to launch in Iceland when in full lockdown. And please remember that from a tech point of view, launching in a small market is no different from launching in a bigger market. Scale is a great enabler to drive value, and the best way to drive scale is to offer the best user experience. The increased consumer engagement drives down churn and drives up customer lifetime value. We have, for a long time, stated that our focus is on Viaplay subscriber growth and not on maximizing short-term profits. The material margin expansion opportunity in the Nordic markets is clear and once we achieve critical mass and start to focus on value rather than volume. Innovative deals like the one we have recently struck with Elisa in Finland as well as the potential for Viaplay in the Allente joint venture will only get us to this point even more quickly. The very healthy trend we have in the Nordics, together with the successful launch in Iceland, make us confident that Viaplay is ready to travel to new markets, which is why we announced our intention to enter all 3 Baltic markets in Q1 next year. And my vision is that we will enter more than 15 markets in the next 5 or so years, with new launches being announced on a regular basis. Our content partners are very supportive, and we are in a number of very interesting discussions. And we know that our originals travel well given the international distribution deals that we have done historically. Not all launches will be the same as the profile of the markets that we're looking at are very different. It would be everything from full-blown stand-alone launches with or without sports to niche Nordic noir products offered alongside local partner services. We've created many innovative partnerships over the past year, including the most recent one with Elisa in Finland, and we are constantly open to opportunities to work with partners to accelerate growth, contribute investment and provide valuable local insight. This is the time to invest in the significant market opportunity that we see with Viaplay. The launches may well reduce overall group profitability short term, but they will also drive considerable long-term profitability, as the periods to breakeven will be relatively short and the margins beyond that point will be relatively high. And as I think you know by now, we are very disciplined when it comes to managing our cost and exposure levels. So each market we consider must prove -- provide a unique value opportunity, or we will pass on that market. I will now hand over to Gabriel for his comments on our financial performance and position. Over to you, Gabriel.

Thank you, Anders, and good morning, everyone. Let me start by quickly running through our Q2 performance. Organic growth in the quarter was down 13%, which reflected the impact of COVID-19 on advertising, subscription and Studios sales. Viaplay accounted for over 30% of group sales in the period despite the material impact of the temporarily lower sport package prices. The underlying performance continues to be very positive. Operating profits before items -- before associated company income and items affecting comparability were down from SEK 432 million to SEK 156 million, which reflected the lower advertising and sports subscription revenues, the deconsolidation of the Viasat Consumer business in May and the U.S. dollar FX headwind in the quarter. We have some cost benefits from the postponed or canceled sports events in the quarter, but also an FX headwind due to the depreciation of the Norwegian kroner. Viasat Consumer reported an EBIT of SEK 33 million in April compared to SEK 125 million for the whole of Q2 last year. This reflected the consolidation of the business in May. And after May, Allente revenues were adversely affected by the depreciation of the Norwegian kroner, the fall in subscriber numbers as well as the temporary reduction in sport package prices. Prices now are back to normal, and Allente's EBITDA before items affecting comparability amounted to SEK 166 million for the 2-month period after the consolidation of the business. Our associated company income from Allente amounted to SEK 51 million for the remaining 2 months of the quarter and included the net impact of Allente's SEK 31 million of restructuring costs in the quarter. The purchase price allocation has yet to be finalized, and no amortization was, therefore, made this quarter. But we do expect amortization charges of approximately SEK 350 million to SEK 450 million per year from May 2020 onwards, which will be taken from Q3 and forward. The majority of these charges will be adjusted for tax in the reporting, so have less impact on Allente's net income. The focus now for Allente is on delivering the SEK 650 million of cost synergies and the upselling of Viaplay to the Canal Digital subscriber base. These synergies will have full effect in 2022, and we do expect approximately SEK 100 million already this year and SEK 400 million of synergies next year. The integration and the restructuring costs are still expected to be approximately SEK 900 million and will be incurred during 2020 and 2021. Approximately SEK 250 million will be taken this year and the rest will be taken next year. Following the end of the quarter, Allente has secured a SEK 2.5 billion bank funding, which will be drawn down in Q4 this year, with the intention of paying down an extraordinary dividend to Allente's shareholders. Allente then plans to pay out quarterly dividends moving forward. The remaining costs for the 2019/2020 football seasons that were restarted in Q2 have been taken, including the costs for the Premier League, Bundesliga and Superliga. Sports events that did not restart until after the end of the quarter, such as the UEFA Champions League and Formula 1, will be taken from Q3. Overall, we expect Q3 sports cost to be approximately SEK 250 million higher than normal due to the movement of cost between the quarters. We received compensation for some sports events that were canceled, such as the ice hockey world championships, some of the European football leagues and the British Open golf. But based on the current situation, with the vast majority of events resuming, we do not expect any further material compensation from sports rights owners. The combined savings from the 2019 and 2020 efficiency programs amounted to SEK 300 million in the quarter. And the benefits from government actions, such as furloughing of staff and lower social expenses, amounted to approximately SEK 15 million. In addition and in line with government initiatives, we have been able to defer tax payments into 2021. Items affecting comparability amounted to SEK 2.4 billion and comprised the noncash and tax-free capital gain on the merger of Viasat Consumer and Canal Digital due to the difference in the book value of Viasat Consumer and the fair value placed on the business in the transaction. If you look at the cash flow. Cash flow from operations was down, but our net operating cash flow was up following a positive SEK 673 million change in working capital. This reflected normal seasonal patterns and continued investments in Viaplay Originals but with no significant sports rights payments, lower studio production volumes and the deferral of approximately SEK 400 million of tax payments into 2021. If we move now to the outlook. It is clear that the impact of the COVID-19 on the business will be material this year, which is why we withdrew our 2020 outlook for profitable growth when we announced our Q1 results in April. It is still very difficult to provide any clear outlook, as that depends on different factors, including the extent and duration of the crisis as well as the measures implemented by governments around the world in general and in the Nordics, in particular, as well as actions that we could take to mitigate any further impacts. Having said that, our ambition is to be as transparent as possible, so I want to try to help you with some of the line items where we have some visibility. We still expect full year savings from the 2019 transformation program of approximately SEK 200 million this year, of which we deliver approximately SEK 50 million in Q2 and SEK 100 million for the year-to-date. We also continue to expect to generate additional SEK 700 million of savings in 2020 from our COVID-19 initiative, of which we have delivered approximately SEK 250 million in Q2 and SEK 285 million for the year-to-date. In total then from both these programs, we have delivered approximately SEK 300 million of sales in Q2 and SEK 385 million for the year-to-date. The transactional headwinds from the U.S. dollar are now expected to be approximately SEK 160 million for the year. We have absorbed approximately SEK 20 million of this impact in Q2 and approximately SEK 80 million for the year-to-date. We also expect an FX transaction headwind of approximately SEK 75 million for the full year due to the depreciation of the Norwegian kroner, of which we absorbed approximately SEK 25 million in Q2. For the full year, we expect working capital development that is broadly in line with 2019, so that means between minus SEK 750 million and minus SEK 800 million. This is driven by prepayments for new and prolonged sports rights that we have secured during H1, such as the Premier League that was paid in Q1 and the UEFA rights that will be paid in Q3 as well as further planned investments in Viaplay Originals and the positive impact of deferred tax and other payments into next year. The total amount of deferred tax payments for the full year is expected to be SEK 470 million. Finally, a few words on our funding profile. We have recently successfully raised SEK 800 million in the capital markets by issuing 3- and 5-year unsecured bonds. The issue, which was oversubscribed, comprised SEK 150 million maturing in June 2023 and SEK 650 million maturing in June 2025. This helps us now to substantially lengthen the average maturity of our borrowings, as the proceeds are being used to reduce shorter-term debt. We now have SEK 3.1 billion of outstanding corporate bonds, of which SEK 500 million expire in October 2020 and with no further bond repayments until May 2022. We also have SEK 1.6 billion of short-term commercial paper. We ended the quarter with SEK 1.5 billion of unrestricted cash; a SEK 4 billion revolving credit facility maturing in August 2023, of which SEK 500 million is currently drawn; and an equivalent of SEK 280 million in undrawn overdrafts. Our net debt ended the quarter at SEK 4.2 billion, which is 2.6x our trailing 12-month EBITDA before items affecting comparability. Financial net debt totaled SEK 3.7 billion. Allente ended the quarter with a net cash position of SEK 751 million, and this new SEK 2.5 billion loan will enable Allente to pay the extraordinary dividend to NENT and Telenor in Q4. We will use this dividend to reduce our gearing levels and fund the expansion of Viaplay. In summary, we have a well-balanced capital structure. We have taken a wide range of quick and effective measures to counteract the effects of COVID-19, and we will continue to monitor the development of the pandemic and adapt the business accordingly. We have made considerable progress in line with our streaming-focused strategy, and the outlook is now improving. That's it for my comments. And so now back to you, Anders.

Thank you very much, Gabriel. Q2 was indeed a very eventful and challenging quarter with many moving parts. But the quick and decisive actions that we took are paying off, and we see clear improvements in the market now. The addition of more than 200,000 new Viaplay subscribers, the closing of the Viasat Consumer merger to create Allente, the partnership with Elisa in Finland and the successful entry into Iceland are just some of the highlights. As stated on the Q1 call that we would come out of this crisis stronger and even better than positioned than ever, and I am more confident of that now. The credit for this goes to the fantastic dedication, focus and the flexibility of our teams during these challenging times. We're now preparing for the expansion of Viaplay to the Baltics while also reviewing further geographic expansion opportunities. My vision for Viaplay is as clear as the considerable opportunity before us. I would like to take this opportunity to thank you all on the call for your interest in NENT and for the support that you have provided during these challenging times. It means a lot to us. That concludes our commentary on the results, and we'll now be more than happy to take your questions. So over to you, operator.

[Operator Instructions] And the first question comes from Johanna.

Johanna Ahlqvist from SEB. I have 2 questions, if I may. The first one relates to working capital. If I got you right, Gabriel, you guide for a negative SEK 700 million to SEK 800 million for the full year on working capital in the cash flow. I'm just wondering, does that include the SEK 400 million, SEK 450 million in positive sort of tax gain that you get this year but -- which will be postponed into next year? And then I'm wondering why sort of if we exclude this SEK 400 million positive, why working capital underlying will be more negative now than you expected in Q1? And the second question relates to the Allente joint venture. I'm also -- the question there relates to the extraordinary dividend that I -- that we should expect. And I know that you say that you will increase leverage by SEK 2.5 billion for Allente. I'm just wondering, do you -- we talk about deleveraging, so how much you expect of -- I guess you will receive half of the SEK 2.5 billion. And how much will you use to deleverage? And how much will you sort of pay out as an extraordinary dividend to shareholders? That's my 2 questions.

Thank you, Johanna. Yes, on the working capital, we have -- yes, the benefit of the tax payment is included in that number. As I mentioned on the outlook, we have the prepayments of the new sports rights that we have secured during H1. And now we have more visibility of those payments that we need to make now in Q3 as well. And then obviously, that is also affected by the continued investments that we have in Viaplay. So that's what is affecting that number. Then when it comes to the extraordinary dividend on the SEK 2.5 billion loan, I think you could expect the majority of that will be paid out to the shareholders in Q4.

And we will now take our next question from Mikael.

Mikael Laséen, Carnegie. I've got a couple of questions regarding Viaplay. Can you say something about the development, the subscriber development in June, July during the restart of the football leagues and the resumption of the season?

Yes, Mikael. Absolutely. During June and July, we had very low churn during sort of the lockdown in sports, thanks to the price reduction. So the returning customers wasn't that many because of very few had left. So the new -- but the new customers that came in during the quarter, the second quarter, was 22,000 roughly out of the 206,000 of new sports customers. And then the usage has been very high. So I think sports is now back to where it was before the crisis hit hard on the sports sporting event. And now we're seeing sort of gradual back to normal. So we are at higher levels now than we were going into the crisis, both in terms of usage and in terms of paying subscribers on the sports packages. I hope that answers your question or…

Okay. Great. And can you also say something about development of the subscribers? How you defined it before Q2? The stand-alone subscriptions, not included -- not including third-party and V-channel [ bonding ].

The development, is that your question? How the development was on the standalone?

Yes.

Well, if you look in Q2, the numbers, the 186,000 that comes from TM TV series and movies packages and then the 22,000 on the sports packages, they are typically from the stand-alone proposition. So -- and that development has continued strongly into the third quarter. And then we have the addition, of course, of B2B agreements, and we have yet to sort of fully integrate the upside from the Elisa agreement. So the mix will continue to be between B2B and direct-to-consumer. The bundles are outside that number. They are in a fairly steady state.

Okay. And just a follow-up there. Would be great if you can say something about the Allente upsell potential.

Yes. It is one of the major upsides in the whole joint venture above and beyond the cost synergies that we have quantified very specifically. The whole upside of upselling Viaplay is, of course, revenue synergy that we have yet to see the full effects on. And it's still early days but very positive. And there are also some -- also a hard coded requirement in our agreement with Allente on volume. So there is an opportunity both on the stand-alone Viaplay upsell and then there is the bundle up-sell opportunity with the V-channels. Both of them has been, as you probably know, under-penetrated for historic business reasons for many years. So this would give us a significant upside in general, and I would say, in Norway, in particular. And we'll see more of that in the second half of this year and early '21 as well. The integration between the 2, Viasat and Canal Digital, teams are more or less happening according to plan, but there is, of course, a little bit of a delay effect because of the current situation. But there is a significant upside in that, and that will come above and beyond what we see in the current outlook for Viaplay.

And the next question comes from Martin.

Martin Arnell with DNB Markets. So my first question is on the near-term outlook here in Q3. There's a lot of moving parts here still. And if you could just clarify the sort of timing of the sports rights cost effect, the FX and the cost synergies, so we get a full grip of the cost base in Q3.

Thanks, Martin. Gabriel, do you want to take that one?

Sorry. I had a bad line. Can you please repeat again the question?

Yes. If you could clarify the FX effect that you expect for Q3 and the cost synergies and the incremental sports right cost effect.

Yes. When it comes to the incremental sports rights effect, that is SEK 250 million additional cost in Q3 that we expect. Then when it comes to the currency, we're still looking at the numbers, so you should try to split the guidance that I gave on equally across the quarters. And then what was the other?

The cost synergies.

The cost synergies. Yes, those are also evenly distributed over the quarters, both in terms of the transformation program that we did last year and then what we expected the remaining savings from the COVID-19 initiatives.

Okay. Great. And then on the Viaplay outlook and your full year guidance, how is -- can you share some light on the breakdown of Viaplay subs on the Q2 figure and also in your guidance on sub intake?