Agora S.A. (AGO) Earnings Call Transcript

Good morning. It is the meeting devoted to the financial results of Agora Group in Q1 2023. My name is Bartosz Hojka. I'm President of the Board and together with other members of the Board, I will have a pleasure to discuss these results for you today. [Operator Instructions] Certainly, we are [indiscernible] disposal. Also after the end of this meeting, you can contact us by e-mail at agora.pl. Secondly, you can contact Krzysztof Mazur directly, our Manager for Investor Relations. Agata Staniszewska is also available to you. She is our press spokesperson and she is our PR manager. So now I would like to ask you to move on to the agenda, the most important event of the past quarter. This quarter was a period which gave us several reasons for satisfaction in our company. First of all, in February, the court of appeal upheld revocation of decision of the antitrust office on taking over of the Eurozet Group by us due to the positive result of the verdict for us, we finalized the taking over of the control package of the Eurozet Group and thanks to this, we became the second Radio group in Poland and the result of Eurozet since March have been consolidated in the results of Radio segment and the whole Agora Group. The second important event was that the extraordinary general assembly of shareholders of Agora -- is the conditional consent to allocate organized part of the business to the subsidiaries of Agora, it includes Gazeta Wyborcza, Gazeta.pl and Agora publishing house plus auxiliaries and this process will allow us to optimize the activity of the group, increased efficiency of individual businesses as well as it will facilitate the achievement of financing of partners of our investors for individual areas of our operations. In these events, you can find strategic reference of development of Agora Group for the period 2023, '26, which were published a month ago. And I will revisit the subject later on during the presentation. And now let us discuss the market environment in what we operated in Q1. We had very positive presentation of advertising market, the value of which was higher than before the pandemic. It also increased by 5% as compared with the same period of the previous year. The dynamics of the market for the time being is above our expectations for the market. So it is a very pleasant sign for the coming quarters. As far as turnout in the cinemas is concerned, it was much better than a year ago. And it was built mainly by the 2 films, the second part of Avatar and the second part of Cat in the Boots. We hope that the significant number of Hollywood films for second part of the year will also have positive impact on the number of audience in the coming months. And now let us talk about the financial results. And here, let us pause for a longer moment. We want to say that the revenues from the sales of Agora Group in that quarter went up in almost all the areas, except for the film activity, a significant impact was made by the consolidation March 1 with Eurozet Group. We increased the revenues from the sales of advertising services, and it is also thanks to this consolidation, but also better sales in outdoor advertising as well as film and book. The decrease of the sales of advertisement was noted in Internet -- digital and print press. The revenues from the cinema activity increased mainly due to the fact that there are no pandemic restrictions anymore and higher turnout. And I would like to remind you that in Q1 last year, we operated with limitations connected with the pandemic. The value of revenues from the sales of applications went up by 1.5%, mainly due to higher revenues of Book Publishing Agora and the revenues from the traditional additions of Gazeta Wyborcza went down with growing revenues from the sales of digital subscription. The revenues from food and beverage activity were higher, and that was mainly connected with the growing number of Pasibus point, but the revenues from the film activity went down. That was caused by lower popularity of the films which made to the movies in Q1 of 2023. The remaining revenues from the sales went up and it is just as in the previous period, and it was under the influence of printing services. Net operational cost was higher in all the areas, except for Internet, and it was under the impact of consolidation with Eurozet Group as of March 1. In almost all the areas of the group, the cost of remuneration went up mainly in the segment of Radio in the result of the consolidation, while the cost of remuneration went down in digital and print press as well as film and the book in the result of restructuring conducted there. The growth of the cost of the usage of materials and energy as well as the value of sold materials was caused mainly by the increase of prices of energy as well as the increased cost of the purchase of products for the -- the food and beverage activity, cinema activity as well as higher cost of materials mainly paper. Q1 was also a period of lower cost of representation and advertisement in almost all the segments, except for the outdoor advertising and radio. And in the radio, we know it is mainly the result of consolidation. Revenues and financial costs had a significant impact on the results of Q1. It is mainly connected with revaluation of shares in Eurozet Company, and we noted that the revenue of almost PLN 48 million. But we have to remember that it is just an accounting procedure, which does not influence our cash position. A lesser impact was connected with the interest rates as well as exchange rate. And we noted net profit at the level of almost PLN 35 million. Please note the growing digital and Internet revenue of the group. It is our record high quarter from that perspective for the last 4 years. Those revenues went up by 12% on average annually. And in Q1, their value was almost PLN 94 million. Let us up the activity of individual business segments. First film and book. In Q1, the revenues of this segment were higher than last year by almost 19%. The revenues of cinemas from the sales of tickets and food and beverage sales went up. There was also higher sales of advertisement in the cinemas, also due to taking over the full sales of advertisement in the cinemas by Helios from Agora Group and 18% higher worth of revenues from food and beverage activity as compared with Q1 2022. It is connected with a higher number of outlets with Pasibus brand. We have 12 of them. We have to note that as with cinemas, food and beverage is also connected with the impact of the pandemic and the remaining limitations of the activity connected with COVID. The revenues of Agora Publishing House went up by 8%, best sellers of the publication house is poszukiwaniu wewnetrznej wolnosci book and Czula przewodniczka. Kobieca droga do siebie by Natalia de Barbaro, Maxima Culpa. Jan Pawel II wiedzial by Ekke Overbeek as well as Dziady i dybuki by Jaroslaw Kurski. The revenues from film activity went down. I already mentioned that, and it is connected with lower popularity of the films which we distributed in Q1 2022. The operational cost of Film and Book segment went up by less than 3% in Q1. This increase was a result of higher turnout under the return of the cinema activity to full operations. The highest category of cost was third-party services within Q1 increased as compared with the previous year, and it was connected mainly with higher cost of cinema activity including higher cost of the purchase of the films with lower cost of remuneration paid to producers of films as well as lower cost connected with film production. The cost of remuneration and benefits to employees went down and it was connected with the lower cost of remuneration in film and cinema activity in the result of the restructuring that was conducted in this segment at the end of 2022. However, the cost of remuneration in the Agora Publishing House as well as food and beverage activity were higher in connection with the step inside business development, which is an operator of Pasibus. The growth of the cost of energy and materials was connected mainly with higher sales of food and beverage operations and bar sales. It's also worthwhile noting that there are several positive trends in the cinema market. During the previous meetings, we already mentioned full recovery of the number of audience in the cinemas in the most popular than Hollywood productions. As far as the forecast of the American box office shows, 2023 should be even better from the perspective of American movies. And you can see this in the graph, the beginning of the year has already shown that such large productions as Avatar or Cats in the Boots can really bring many people to the cinema rooms and in May and June there are going to be new films, blockbusters, Fast and Furious, for example. And today, we also have the first night of the 2 movies for children, which are always very popular and already in June the fifth part of Indiana Jones. And another Spiderman is coming to be followed by other large Hollywood productions. And we believe that it will have a very positive impact on the turnout of people in the cinemas in the coming months. So let us move on to the Radio segment, which is the second largest in the group after the merger with Eurozet. In Q1, the revenues of this segment were higher by almost 76%. This growth is certainly caused by the consolidation with Eurozet Group. Let me stress once again, although I have been trying to do this since the very beginning of this presentation, the numbers that you can see for the previous quarter take into account Eurozet results for March only. The full impact of consolidation will be visible only in Q2. Please note the stations of the former Agora Group also noted higher revenues from sales of radio advertisement. At the same time, let me remind you that from the radio segment, we deducted the revenues from the cinema advertisement, which was moved to the film and book segment. We also received higher revenues from premium TOK FM as well as the advertisement online. The operational cost of the radio segment also increased in every category, which is also the result of consolidation. Let's have a look at the situation of radio. After the merger with Eurozet, we are having to do with a significant increase of Agora Group position in the radio market. Thanks to this deal, we became the second largest radio group in Poland. And our market share is 26% of listenership. We are also a leader in all Polish towns populated by over 100,000 population. In our portfolio, we have now stations with high share of listenership and potential radios and in Q1, noted 13.6% of the market share. It is the second most popular of Polish radio station and our music stations had over 9% of the share in the listenership market. We also increased the number of TOK FM premium subscriptions exceeding 33%, which is 26% higher result than in the same period of the previous year. Now print and digital press. In Q1, we had the increase of revenues from the subscription of Wyborcza.pl as well as the sales of printing services. The result of that, the total revenues of the digital and print press increased the revenues from the paper versions of Wyborcza as well as sales of advertisement went down. The total operational cost increased slightly. But in this segment, we can see very clearly the allocation of general cost, which we report since the beginning of the year. And this impact is visible mainly under the line of third-party services and it is mainly connected with IT, finance, HR and administration service. The cost of the use of materials and energy as well as the value of the sold materials and goods were higher mainly due to the prices of paper. The cost of remuneration went down mainly due to the restructuring at the end of the previous year. The cost of depreciation went down mainly because of the completion of the depreciation period of development product of Gazeta Wyborcza initiated in the earlier period. Please note that in Q1, the digital revenues of Gazeta Wyborcza constituted over 44% of the total revenues from the sales of the daily. At the end of the quarter, the number of permanent subscribers was 300,000. And as noted, the increases compared with the same period of the previous year. Now, let us have a look at the outdoor advertisement. In Q1, the revenues were higher in AMS increased by 20%. And mainly due to the spendings on campaign city like digital and big board and city transport. Some growth was also observed in terms of operational costs, which went up in all the categories of expenditures, except for depreciation. The growth of third-party services result from the higher cost of keeping the system as well as the execution of campaigns. The functioning and maintenance of digital indoor carriers went up together with the maintenance as well as operation of advertising carriers. The cost of print as well as the replacement of posters in connection with the increased number of campaigns also increased, and there was also higher sales than -- it was assumed the higher cost of representation advertisement is mainly connected with barter connected with sponsorships of different social initiatives. I also would like to note that in the previous quarter, we noted a record high level of revenues from the digital carriers as compared with the previous quarter, and it went up by 75%. Internet. The total revenues of the segment were lower by almost 15% as compared with the previous year, mainly due to lower sales of Yieldbird due to the trend in the portfolio of clients as well as focusing on cooperation with those clients with higher profit margin. However, the revenues from the advertisement in Gazeta.pl portal were higher. The operational cost of the portal was lower mainly because of the lower cost of the lease of the advertising space by Yieldbird. Just as in the case of the print and digital press, the allocation of general cost is here under third-party services, and that is mainly connected with the activity of Gazeta.pl. The cost of remuneration and benefits to employees were higher mainly because of the increase of employment as well as orders in Gazeta.pl. And in Q1, Gazeta.pl team continued optimization actions to improve the quality of traffic and our Internet sites, including on mobile devices. In Q1, just as in the previous quarter, Gazeta.pl was a leader of program market from the perspective of your ability, display, and it also kept the position in thematic segment and Yieldbird has been systematically developing tools from marketing automation area. We can see the increase of significance of sales in SaaS model in the revenues of Yieldbird. And it has been migrating to it for some time. On the 26th of April, a month ago, we announced strategic developments for the period 2023, '26. In the coming 4 quarters, we will concentrate on the development in a number of most important directions for us. We will increase effectiveness by introducing annual structure of the group and allocating main businesses of Agora Group to the subsidiaries. We will make the structure of the capital group more homogeneous as in goes for the relations with the support. We also want to focus on the relations with investors and partners to execute unique development ideas under the strategies for individual segments, and in order to increase the value and popularity of different brands of Agora Group. Our aspiration is to continue to expand the reach and become, within the next 4 years, one of the top 3 largest Polish media brands. The subjective will be executed mainly on the basis of strong brands of Agora Group like Gazeta Wyborcza, Wyborcza.pl, Gazeta.pl, Radio TOK FM, Radio ZET, Helios or AMS. Thinking about the increase of value for shareholders, the Board wants to focus on the recovery of profitability at the level of EBITDA that would allow for further development of organization as well as the return to the dividend policy. The planned EBITDA in 2026 is going to be over PLN 200 million. That's what we prepared for you in this presentation. It also contains additional slides. And as always, it is available on our Internet side. You can find also other slides there with other interesting information and supplementary information to the main lines of the presentation. And now we can move on to your questions. And now the floor goes to Krzysztof Mazur who is going to be the host of the Q&A session.

Thank you very much, Bartosz. Krzysztof Mazur, PR Manager of Agora and we are now going to answer your questions. Let us move on to the first question, which came to our inbox. These questions are of Mr. Bartosz Hojka. The first question, how Agora value edge the interest in the advertising proposals of Eurozet?

This offer was received very well. It was introduced in March this year. And in March, we can see that it was accepted in the market, enthusiastically. The results of April and May are also quite good due to the presence of this offer in the market. So for the time being, we are very satisfied with the results.

It is also about radio. But this question will be about TOK FM and then National Broadcasting Board. In for radio company that appeal on the decision on the penalty on Radio TOK FM by the President of the Board, it would stay, does it?

Yes, it appealed on the decision. And today, it's the day of expiry of the time for us to appeal and our appeal was launched within the time lines.

All right. Next questions are of Anna Krynska-Godlewska. The first question is about the process of the allocation of ZPC and at what stage you are now in terms of allocating Gazeta Wyborcza or Gazeta.pl to separate entities. Did the Board have a meeting with trade unions?

As you can imagine, this process of separation is quite tedious. We have 18 months to complete it according to the decision of the general assembly. I do not imagine that we will be reporting individual small stages of the whole process, but we appointed teams that are working on it, and it is mainly about some legal aspects. You can imagine, it's connected with the fiscal subject tax-related issues. We have 18 months. I don't think that we will be talking in detail about all those pages one by one, but we will report the finalization of the process.

Thank you. Another question is of you Anna as well. At which stage is now the work on the development of anti-mobbing procedures in Agora. Solidarity has recently noted that as far as the prevention of undesirable behavior is concerned, nothing has improved.

At Agora, we have the recently updated procedure of reporting irregularities. For example, it is about the reporting of any irregularities not only connected with mobbing, but also discrimination and different financial abuses or the abuse of authority. We are committed to adjust our procedures to the law. We are a public company, and we take into account the guidelines of the European directive on the production of whistle blowers. It's also about the regulations implementing the directive. The works are underway, but I believe that the procedure that has been updated is adequate, and it will work properly. We also have an anti-mobbing procedure in place. As I said, we are going to adjust it to the changing legal circumstances as well as the directions taken by the European directives. It is a constant process, and I understand that the evaluation of trade unions may be perhaps premature about it. We are changing these procedures on the ongoing basis.

And there are more questions now. The first one is about the radio segment. So I would like to ask this of the President. What can you say about the current sales policy of the merged Eurozet Group and Agora. What can we, as analysts see in the coming quarters in the revenues of this segment against the readings of the whole market?

When there is such a question, we always have to stress at the beginning of the answer that we are having that significant unpredictability of the advertising market. However, as you know, we expect that there will be positive advertising market this year, and we believe that it is going to be between 2% and 4%. And the same dynamics is assumed for the radio market by us. For now in Q1, the readings were better. But as I am saying, we are still having to do with great uncertainty. Clients are not prone to make far going declarations pertaining their advertising spending for months ahead, they react on the ongoing basis to the market situation. So when we take into account all the question marks, I think that we can expect positive readings. We expect that there will be a single-digit dynamics, but it is still going to be positive in the whole advertising market. And we have aspirations to increase our share in that market. We believe that the popularity of our joint sales offer Eurozet and Radio Group of Agora as well as the whole Agora will make these dynamics to be better than in the market.

Helios. So the question will be asked of Tomasz Jagiello. My first question, can you share your reflections on indexation of cost of rents for Helios network. And thus Helios really experienced the increased rent rates for the cinemas. And what is going to happen in the next quarter? Will the cost go up?

Well, Helios and myself personally have very negative attitude for the indexation of rents, because the rents are higher than they used to be. And we totally disapprove of it. This is something I really dislike but they also dislike that the rate due to inflation is higher than 10, whether it is in PLN or euro, it's a very unpleasant phenomenon. We all know the situation of the cinemas. So we have been saying many times that the post pandemic recovery is not as we would like to see. We realize that those rises are very unpleasant for us. That is why we talk without the landlord. Although the absolute majority introduced the indexation, and it is not only about the cinemas, but all the tenants in the shopping malls. But at the same time, we talk about different discounts [indiscernible] and some other measures to facilitate the burden of the rent for the operation of the business not to be threatened. That is why answering the question about the coming quarters, I would expect that due to the generally positive reaction of landlord to our positions, the cost of rent should not go up in connection with Q1. We can even take into account a small decline because everyone can see that with difficult situation of the cinemas, the level of rents as compared with the pre-pandemic period, it's not possible to accept -- some of the landlords can see that we are having to do with some transition period. And in one year or in 2 years, the cinemas are going to bloom as it was before 2020. But we can't be sure of that. So we enter into short-term agreements.

What business model is going to be in the future like?

Well, it will simply be decided when the agreements are extended and the terms will certainly be very much different.

Another question, it is also about the cinemas. In April, the 54th cinema of the Helios chain was opened, and it is in Koszalin. At the end of 2023, can we expect there will be a significantly different number of cinemas of the Helios chain. I'm here talking about the possible decision about closing down some of the cinemas which do not meet your earlier business assumptions under the current conditions.

I can guarantee the adjustment of the number of the cinemas by the end of this year will not be about increasing the number of cinemas. The one in Koszalin was the last one that was planned before the pandemic. And as of today, we do not have any plans to open new cinemas in the short term or medium term period. As far as closing down of some of the cinemas is concerned, the situation is much more complicated. And the majority are all the shopping malls the contractor concluded for the period of 10 years, let me remind you that 2 years ago, the length of those agreements on the basis of the law was extended by the period when the cinemas were released from the necessity to pay rent in the shopping mall. So all the cinemas had the extension of their agreements by 2, 3 years. So the agreement that is going to expire, the fastest will expire in 2025 or 2026, so we cannot say unilaterally that we are going to close down the cinema. And we cannot do this with impunity. So we are involved in some talks. Well, there are some cinemas which we could consider closing them down. However, this situation -- this economy situation is not permanent. People believe that the cinema sector will recover to the situation before 2020. This is what landlords say. So when we are saying that we have some doubts about the landlords simply mitigate our rents and the situation of the cinema is not improving. So I think that it's going to develop in the negotiation process and in mid term and long term, we will see the adjustment of the number of the cinemas, and we will not see those changes in short term.

Another question about Internet. And it is a question of Tomasz Grabowski. The only operational segment of the group in order to revenues lower year-on-year was Internet. You say that it was mainly due to the decrease of the sales of Internet advertisement in Yieldbird. Revenues from sales of Internet advertisement was noted by Gazeta.pl. Can you please give the dynamics of growth that was noted by Gazeta.pl in Q. What do you think about when the situation in the Internet segment will change to the extent that you will be able to show positive dynamics here on year-on-year both in Yieldbird as well as Gazeta.pl? Do you think that it is possible that it will happen during one of the quarters of 2023?

Let me start answering this question with the last part. Yieldbird, as you know, because we talked about it many times during our meetings with you is going through a process of transformation, and we plan to complete this process by the end of this year. The transformation is about the migration from the mixed service product model to a fully product-based model. Already today, we can see very positive outcomes of the transformation. The first positive results in the P&L will be seen from Q2, Q3 of the current year. As far as the question about the whole sector or the whole segment is concerned, I don't have here exact numbers pertaining to the dynamics of changes in Gazeta.pl, but we will answer this question directly to the person who asked it. I can supplement the answer because I am involved very much in Gazeta.pl. I can say that the dynamics of advertisement in Q1 was positive, but it was just slightly positive. It was a very small single-digit increase. In general, the Internet market, Internet advertisement in the main Polish players, the main portals is difficult. In recent months, it has been the case, especially as far as the open market of programmatic advertisement is concerned, we can see that a big chunk of advertising barter during the pandemic moved to Internet now. These barters partially return to other media. That is why, in general, for all the players, this market constitutes a big challenge. And you know there's also from other company's publications against this background, Gazeta.pl is decent. With low but still positive dynamics of growth in the Internet advertisement.