TF1 SA (TFI) Earnings Call Transcript

Hello and welcome to the TF1 2023 Q3 and 9 Months Results Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]. I will now hand you over to your host, Pierre Len Gerard, Vice President of Finance, Strategy and procurement to begin today's conference. Thank you.

Thank you, Laura. Good morning, everyone and thank you for joining us on this morning's call, where we will be presenting results for the first 9 months and the third quarter of 2023. On today's agenda, a review of our activities, followed by a deeper dive into our financial results and finally, a reminder of our outlook and strategy. Let's begin with the key highlights of the period on Slide 4. First, increased audiences in key -- in our key commercial targets, reinforcing our leadership position and notably driven by record viewing figures for the Rugby World Cup. Second, media advertising revenues, which were up by almost 10% year-on-year at constant perimeter in the third quarter. And notably, circa 25% rise for MYTF1 streaming platform, highlighting the success of our digital acceleration strategy. Third, ongoing robust margins with the Q3 group COPA margin up 0.9% year-on-year. And finally, a good cash flow generation contributing to a solid financial position. I would add that based on this 9 months performance, our objectives for full year 2023 are confirmed. I will come back to all of these points later. Let's now turn to a detailed activity review around our Media and Newen Studio business. On Slide 6. As a reminder, TF1 group, reaches an audience of some 50 million viewers per week, offering a unique value proposition to advertisers. Since the start of the year, it has reinforced its leadership position on key commercial audience targets while showcasing its ability to manage its programming costs. In particular, TF1 channel achieved a solid audience share of 22.9% among women below 50, up 0.7% year-on-year, representing a lead on its closest competitor, plus 9.2 points, which gathered pace relative to H1. As for individuals aged between 25 and 49, the channel recorded a strong 20.1% audience share, a robust increase of 0.6 points. On a daily basis, the overall television reach remained at a high level of 74%, demonstrating its ongoing competitive pertinence. Within the French media landscape, TF1 group continued to dominate with a daily reach of 51%, higher than any other media, including YouTube and Netflix. All in all, we have maintained this reach, thanks to our unique program lineup built around ambitious regular event on TF1 and a distinctive complementary offer on our DTT channels. At end September, our flagship channel recorded 49 out of the top 50 best ratings amongst women below 50 and the 25-49 categories. During the third quarter, we generated record audiences, thanks to a strong and event-driven lineup, including, of course, the Rugby World Cup, recording the best audience of the year at end September for the opening match with 15.6 million viewers as well as associated sports bulletin or even news within the -- with the French presidential interview, which attracted 5.7 million viewers. On Slide 8, with advertising revenue up 16% for the first 9 months, the MYTF1 streaming platform further confirmed its growth potential. It delivered an average 27.4 million streamers over the 8 months to end August 2023 and recorded a total of 683 million hours of viewing, representing a rise of 8% year-on-year, twice the level of the broader market, which progressed by 4%. This performance was driven by the success of our strong linear franchises in streaming, such as the popular daily soaps, Ici tout commence and Demain nous appartient, as well as the groundbreaking medical drama, Les Bracelets rouges, the Red Band Society. Moreover, the Rugby World Cup provided the opportunity to successfully test new interactive features, notably with Top Chrono providing on-demand match summaries. Turning to Newen production studio. The first 9 months have proven challenging in revenue terms, reflecting a very tough 2022 comparison basis with the end of the popular daily soap, Plus belle la vie, for France Television, as you know, and the activity with Salto following its closure, accentuated by the delivery in Q3 2022 of flagship series, Liaison for Apple TV and Marie-Antoinette for Canal TV. This was specific for Q3 2022. It also reflects lower demand from broadcaster and platform in 2023. In this context, the current operating profit for our Newen studio for the third quarter amounted to EUR 6.6 million, representing a margin of 10.3%, stable quarter-on-quarter and above the level of Q3 2022. The focus for Newen studio in 2023 is to build on its competitive advantages, which include a diverse customer portfolio for premium content as well as recognized expertise in categories such as daily soaps, which fits strongly with the group's strategy of integration. Let's move to our financial performance on Slide 11. 9 months 2023, consolidated revenues for TF1 group amounted to EUR 1,548 million, down 8% at constant parameter. In the third quarter, consolidated revenues amounted to EUR 509 million, down 6% at constant perimeter. Total revenue for the Media segment amounted to EUR 445 million in Q3, up 11% at constant perimeter. Media advertising revenue stood at EUR 351 million, a robust 10% increase at constant perimeter, notably driven by an advertising rebound over the summer and by the Rugby World Cup in September. Within this, the media advertising revenue for MYTF1 pursued their strong dynamics with a 25% year-on-year increase to EUR 22 million. Nonadvertising media revenue stood at EUR 94 million, up 17% at constant perimeter. This performance was notably driven by the positive performance of interactive features proposed during the Rugby World Cup. Revenues of Newen amounted to EUR 64 million, down 54%, reflecting a tough prior year base effect. I will return to this. On Slide 12. For the first 9 months, current operating profit from activities, COPA, stood at EUR 204 million, down 16% year-on-year and implying a margin of 13%, close to that of 2022. Third quarter COPA stood at EUR 52 million, up 1%. It equated to a margin of 10.1%, up 0.9%. Within this, the media margin was up 1.1% in the context of the Rugby World Cup, demonstrating our ability to monetize major sporting events. Newen studio maintained a margin of 10.3%, up 0.3%, stable quarter-on-quarter and above the level of Q3 2022. Looking further down the income statement on Page 13. Current operating profit for the third quarter amounted to EUR 51 million. After other operating income and expense, operating profit stood at EUR 45 million. It included a net EUR 5 million negative impact of nonrecurring items. These items are mainly linked to the rationalization of our real estate with the consolidation of our HQ premises in Paris in the context of the recently launched cost optimization plan. Net profit attributable to the group was EUR 38 million, up 57% year-on-year. Let's now take a look at the evolution of our net cash position. At end September 2023, the net cash position stood at EUR 364 million, up EUR 296 million -- sorry, up from EUR 296 million a year earlier. It represents a 20% increase of EUR 69 million after -- I remind you, a dividend of EUR 105 million in April 2023. Over the first 9 months, free cash flow before change in working capital amounted to EUR 112 million and EUR 161 million after change in working cap, reflecting operating cash flow of EUR 316 million, down year-on-year, reflecting the decline in activity of both segments, a circa EUR 50 million improvement in working cap needs, a net CapEx of EUR 184 million down year-on-year, reflecting the slowdown in activity at Newen studio. The amount of lease obligation was roughly stable versus last year. So this led to EUR 364 million at the end of the quarter. Turning now to the outlook. The fourth quarter of 2023 will be marked by a strong lineup of premium programming. This includes, of course, the Rugby World Cup with 10 matches in Q4, including the final phases broadcast on prime time. The quarter final between France and South Africa attracted 16.5 million viewers, representing the best audience of the year. Elsewhere, we have the return of powerful brands in the [indiscernible] general entertainment segment, most notably the talent show, Star Academy or the new exclusive French drama, Master Crimes, which both high linear and streaming appeal. As a reminder, we are pursuing our strategy road map based on 3 pillars: Maximizing the value of our linear inventory by continuing to develop a high-quality offer of events; series and general entertainment to consolidate our reach; and maximize the value of our advertising inventories. At the same time, we will remain -- we will retain a strong discipline over programming costs. The MYTF1 streaming platform will pursue its ambition to be the benchmark French free-to-view streaming service, leveraging the synergies with the group's unparalleled content lineup and maximizing the value of its inventory through a reinforced data strategy. Newen studio will leverage its strong talent pool to develop projects to underpin growth in the years ahead. Turning to our outlook for 2023 as a whole. In the media segment, the advertising markets in the second half could return to a similar level to that of 2022 and we should more or less follow the same trend. TF1 group revenues will benefit from the broadcast of the final stages of the Rugby World Cup in Q4 as well as the return of major franchises such as the talent show, Star Academy, with both high linear and streaming appeal. In the media segment, we will further consolidate our linear leadership and accelerating digital. After delivering numerous flagship projects in 2022, 2023 represents a year of transition for Newen studio, during which it will leverage its strong talent pool to develop new projects, to adopting growth in the years ahead. In this context and based on the performance of the first 9 months, the group's objectives are confirmed, further cement its leadership position and maintain a broadly stable current operating margin from activities in 2024 -- 2023, sorry, generate strong free cash flow, underpinning a shareholder remuneration policy of growing of stable dividend in the coming years. A few words to sum up. TF1 delivered a robust performance in the third quarter, underpinned by major events like the Rugby World Cup, boosting audience shares and advertising revenues. Our margins remains solid across all business segments. The MYTF1 streaming platform confirmed its growth potential, leveraging the unparalleled content offer of the group. And our 9 months cash flow generation is solid, contributing to a robust financial position. Looking ahead, we have a strong lineup for the first quarter associated with ongoing meticulous cost control. And as a reminder, this is supplemented with a cost optimization plan aimed at achieving over EUR 40 million in operational cost savings from 2025 onwards, of which EUR 10 million to EUR 15 million will be reinvested in the digital acceleration plan. And our objective for fiscal year 2023 are confirmed based on our 9 months performance. Thank you for your attention and I'm now ready to take your questions.

[Operator Instructions]. We will now take our first question from Conor O'Shea at Kepler Cheuvreux.

A few questions for me. First, on the early signs in the fourth quarter, what are you seeing into advertising in terms of November, let's say post-Rugby World Cup in terms of demand, is that holding up? Secondly, in terms of studios, I understand the comp effect from last year on Q3. But you also mentioned channel -- weaker demand from broadcasters and maybe from the streaming platform, so what are you thinking about studios going into Q4 and particularly into next year? Can we get back to the positive growth that early? And then the last question on -- just, I think you mentioned that TF1 is undergoing a digital transformation internally. So maybe you could just explain a little bit, some practical examples of that, what's happening behind the scenes?

Okay. Thank you, Conor. Regarding Q4, you -- if you take the forecast for the agencies, the dentsu, the other sources like MAGNA, et cetera, you see that there is some kind of consensus around minus 3% decrease in the market overall for the year, which implies a second half of the year coming back to 2022 level. We should more or less follow this. Then if your question is referring to the geopolitical tension that we see, for example, at the beginning of -- since the beginning of October, we don't see any change at this stage in the figures that we have. So no, no, it's holding up to answer your question. Regarding studio, you know that since the beginning of the year and that's what we told you, with others during the call for the fiscal year 2022, the year for Newen is really -- is essentially made during Q3 and Q4. So Q4 will be a stronger quarter but within a year, which has a strong comparison basis with 2022. And as you know, you've seen the streaming platforms decreasing their investments during 2022 and broadcasters weathering the cycles and the decrease in the advertising market across Europe. So this is something for 2023. But we see a strong potential for 2024 and 2025. Newen has numerous discussions with the broadcasters and many projects in the pipe. So the market is sound -- the fundamentals of the market are sound. So 2023 looks like a specific year for Newen. Now regarding digital, this is mostly about moving to the streaming platform. We have to add several new skills within TF1. We have more than 100 positions -- job positions open within the group to add skills in ad tech, in data, several skills that TF1 was slightly lacking in the past. And we have a new Head of Data with Francois-Xavier Pierrel, who joined us at the beginning of October and he is building up this business within TF1.

[Operator Instructions]. We'll now take our next question from Christophe Cherblanc at Societe Generale.

The first one was on streaming. We are seeing Netflix launching an advertising-funded tier. Disney seems to be planning the same. Amazon is starting to insert ads. What's your best guess about the excess inventory or the additional inventory this will add on the French TV markets, not in Q4 but maybe 2, 3 years from now? And on the same subject, you -- on Slide 8, you mentioned 682 million, I think, hours being streamed. Is that for the quarter or the month? And could we have a sense of what is the total amount to which that 682 million could be compared? So that's the first question. The second one is on Newen. Can you give us the impact of the [indiscernible] whether that added any impact in 2023 and what you can expect for 24? And just a quick reminder on the impact of the sales to Salto last year. And finally, on working capital, sorry to add the last question, EUR 58 million positive inflow at the 9-month stage, should we expect the same kind of amount at the end of the year or a neutral working capital on a full year basis?

Thank you, Christophe. So regarding streaming, yes, you're right. Netflix is launching an ad-funded offer, Disney as well. They have announced that they will price their CPM for Netflix at around EUR 50, and we hear around EUR 40 for Disney. We see it as a positive price point for us. If the market can converge, that's good for us, we think. Since Netflix launched the offer, there has been less diversity among its advertising clients, 15 currently versus around 40, 1 year ago. It proved that no other medium can offer the unrivalled reach of TV. But overall, we see it as a positive sign regarding the strategy that we are launching. Then going back to your second question. It was 683 million to be precise. And it is the accumulated amount of hours during the first 8 months of the year, the number of hours streamed. And this is within a total of 8.5 billion hours for TF1 plus MYTF1. Then for Newen, yes, the [indiscernible] has no major impact on 2023. For Newen, for what you have to keep in mind is that 2023 has a tough comparison basis compared to 2022, as you know, with many deliveries in 2022 and specifically for Q3. And you might have noticed that for the Netflix and other platforms have decreased their investment during this year. But the rest of the market is sound and the demand is there for the years coming ahead. And we are not giving guidance on the working cap. What I can tell you is that it's a strong focus for the company about cash flow generation. This is part of our guidance, as you know. We aim at having a strong cash flow generation to support a stable or growing dividend policy. So this is a key focus for TF1.

Follow-up. Did you say that Netflix had only 15 clients, 1-5 advertising clients?

That's what we heard.

Okay. That's super low. Okay. And just to come back on the [indiscernible], the -- okay '23 is quiet but are you expecting to catch-up in '24 because I do remember the orders of magnitude being mentioned at the time of the [indiscernible] and given the level of investment, I would have expected given the new end market share in France to see some impact on your top line?

Yes. This is due to and to stimulate the top line growth, of course. What you have to keep in mind and this is something that we've been repeating since the beginning of the year that the production cycles within the production industry are pretty long. The good thing is that, as we said, 2023, Newen during 2023, Newen has been working on many projects but for 2024 and 2025. And probably part of it will come from what you are mentioning.

Okay. And maybe if I can squeeze a very last one, housekeeping question. The tax rate was low at the 9-month stage. What's your best estimate of the full year tax rate?