Vantiva S.A.

And gentlemen, welcome to Technicolor's conference call, chaired by Richard Maud, CEO, and Laurent Carolzi, CFO. At this time, all participants are in listen-only mode. Later, we will continue to Q&A session. If you would like to register a question, please press 01 on your telephone keypad. Just to remind you all, this conference is recorded. We would like to inform you that this event is also available live on Technicolor's website with synchronized slideshow. During this conference call, statements could be made that constitute forward-looking statements 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 feelings with the French Autorité des Marchés Financiers. I would now like to hand over the call to Richard Mott. Sir, please go ahead.

Good evening, ladies and gentlemen. Technicolor's first quarter 2021 results are an encouraging signal that our turnaround strategy is going well and each division continues to redefine content experiences through innovation and improve its performance. However, the unpredictable headwinds and challenges caused by COVID aren't over yet. And I hope you and your families are keeping safe and secure. Thanks to the significant worldwide vaccination campaign, we're starting to see signs of improvement nevertheless. For example, the recent announcement in the US and France of upcoming reopening of cinemas. So if we move to slide four, key figures from continuing operations. In the first quarter, all of our activities benefited from a strong and growing demand driven by the urge to equip homes with strong broadband access, the need for original content from studios and streamers, and appetite for catalog DVDs. And in this context, our unrivaled talent pool across 25 countries has proven very nimble and innovative in delivering high value added services to our clients. So our revenues of €711 million were up 4% at constant rate, demonstrating a very positive first quarter 2021, primarily driven by lower revenue in film and episodic visual effects and DVD services, but a strong performance in connected home, particularly in North America and Eurasia. Adjusted EBITDA was up 72% at constant rate to €43 million, reflecting operational and financial improvements across all activities, in particular in connected home. The ongoing implementation of our cost transformation programme delivered €20 million of cost savings in the quarter. Adjusted EBITDA was almost break-even, a €33 million improvement as a result of the EBITDA increase and lower DNA related to efficiency measures. Our free cash flow before financial results and tax was still negative, but it was higher by €118 million at current rate compared to the first quarter of 2020, driven by that good performance in connected home, working capital improvement and the ongoing implementation of our cost transformation programme. Based on the profitability improvement in this first quarter, despite some challenges related to our capacity to deliver, relating to key components and recruitment constraints, we're confident of achieving the outlook presented in our full year press release, which we issued at the beginning of March. Turning to slide five, production services revenues amounted to 140 million euros, which was down 16.6% at constant rate due to slower than anticipated ramp up of projects following the pandemic related impact on production around the world. but this was partially mitigated by significant revenue growth for MPC Episodic, where sales have more than doubled in absolute value. Adjusted EBITDA amounted to 14 million euros, which is up 3 million euros year on year at constant rate. So just to give you a few highlights, in film and episodic visual effects, teams worked on over 12 theatrical films from the major studios, including Cruella and the Lion King prequel for Disney, Mortal Kombat for Warner Brothers and Nightmare Alley for Searchlight Pictures. Our teams also worked on over 25 episodic and streaming projects, including Chip and Dale Rescue Rangers for Disney, The Nevers for HBO and The Wheel of Time for Amazon. Revenues were significantly down due to the continued impact of the pandemic on live action film shoots. Our advertising businesses delivered over 1,000 commercials, including 20 out of 42 Super Bowl spots this year, whilst winning three Visual Effects Society awards and six British Arrows. Notable projects included Audi's Future is an Attitude and Samsung's Awesome is for Everyone 2. Revenues were lower compared to last year, but operating performance increased, showing the positive impact of the transformation program on margins. In animation and games, revenues were stable compared to the prior year. Mikros Animation was in production on multiple films, including Spin Master's Paw Patrol the Movie and Paramount's The Tiger Apprentice. It has also secured two additional projects in the recent past. On the episodic side, our teams continue to work on several series, including Chicken Squad and Mira Royal Detective for Wild Canary and Disney, Fast and Furious Spy Races for DreamWorks, and Camp Coral SpongeBob's Under Years for Nickelodeon Paramount+. During the quarter, we continued the harmonization of technology infrastructure to eliminate inefficiencies from what were previously siloed operations. We also further reinforced our top management, Josh Mandel was appointed CEO of The Mill, and Andrea Meloro was hired from Blue Sky as president of Micros Animation to expand our global feature and episodic animation services. Looking ahead, following the disposal of post-production, we have renamed production services as Technicolor Creative Studios to showcase our global family of leading VFX and animation studios servicing the theatrical, episodic, streaming, games advertising and experiential marketing industries we've been awarded numerous new projects securing approximately 90 of the expected 2021 sales pipeline for film and episodic visual effects and animation and games recent surges of the pandemic in india toronto and montreal have required a shift back to work from home for almost all staff during the second quarter in order that we maintain full operating capacity. Nevertheless, as vaccinations continue to roll out globally, the industry is optimistic about a steady return to normalcy during the back half of 2021. Turning now to slide six, connected home revenues total 428 million euros, which was up 18.3% at constant rate. driven by strong demand in North America and Eurasia to supply higher power broadband in support of pandemic-related remote work and education activities. Demand was, however, down in Latin America due to the difficult macroeconomic situation in the region. Adjusted EBITDA amounted to 28 million euros, up 14 million euros at constant rate, driven by the increased demand for the North American Cable Division and OpEx improvement initiatives implemented in 2020. The division maintained its market leadership in the broadband segment and in the Android-based video segment, where we achieved the deployment of over 10 million set-top boxes since the beginning of 2016. Adoption of DOCSIS 3.1 and Fibre Gateways is expected to continue through 2021. and we're already working with multiple Tier 1 operators in North America, Europe, and Latin America to meet current deployment demands. The next wave of the expansion will be driven by the next generation Wi-Fi technologies and higher speeds like 10 gig. Looking ahead, demand is going to remain strong throughout 2021, and we're going to continue to focus on selective investments in key customers, platform-based products, and partnerships to improve margins over the year. The COVID pandemic has, however, created distortions in the industry, with in particular global logistics disruptions in semiconductors. We're continuing to work with our partners to minimise supply disruptions, and we're engaged in commercial discussions in order to pass surcharges through to customers wherever possible. Now on to slide seven. DVD services revenues totaled €139 million, down 7.7% at constant rate, which I think is a very good performance when you consider that Q1 2020 was a quarter which was largely unaffected by COVID and when cinemas were open and new releases were taking place. Total replicated disc activity was down 11%. However, standard definition DVDs were up 1% year on year, driven by the ongoing push of back catalog products. However, Blu-ray was down 31% due to the lack of new release content and CD volumes were down 34% as a result of structural decline and the COVID-related impacts. The decrease in volume, however, was partially mitigated by pricing improvements following the studio contract renegotiations that we did and by growth in non-disc related supply chain activity. Majestic EBITDA amounted to €4 million at current rate, which was much better than expectations. The division continues to adapt operations and related customer contracts in response to continued volume reductions, and two significant North American facility closures were effected in the first quarter of 2021 as part of the ongoing transformation plan. Going forward, Theatrical new releases showed an increasing trend over the course of Q1 2021, as theatres began to reopen and major new titles like Godzilla vs Kong were well received by audiences. Studios continue to have DVD releases alongside their various experiments in video on-demand strategies, and most major retailers continue to remain open and to allocate shelf space to catalogue and library content promotions. With David Holliday as the new president of DVD Services, the division has already accelerated its restructuring plans to continue to adapt to the evolving situation. Over on slide eight, to conclude, we will continue to improve efficiency and productivity throughout 2021 and 2022. Thanks to the ongoing transformation initiatives which we began over a year ago, we've been able to invest more in hiring and unleashing top talent whilst consolidating, sharing and harmonising best practices. These efforts and investments are fuelling our vision for transforming the future of film, episodic, gaming, integrated marketing and advertising campaigns and give us the confidence that we will continue to deliver improved operational and financial performance. With already €20 million of cost savings realised in the first quarter, We're well on track to achieve more than 115 million in the year 2021 as planned and to deliver cumulative 325 million by the end of 2022. So looking at our guidance for 2021, we confirm revenues from continuing operations will be broadly stable versus 2020. Adjusted EBITDA will be around 270 million euros. Adjusted EBITDA will be around 60 million euros. Continuing free cash flow before financial results and tax will be around break even. And net debt to EBITDA covenant ratio will be below four times at year end. And we're also maintaining our previously issued 2022 guidance. So with that, I'll hand over to Laurent, who will go into our Q1 2021 performance in some more detail.

Thank you, Richard, and good evening all. So I will now provide you with further details regarding our Q1 results. So overall, as mentioned by Richard already, they show significant improvements versus last year, driven by sales growth despite the supply constraints, and quite significantly by improved margins. It should be noted, before we go into the details, that post-production has remained consolidated during this quarter. It says we're down quarter-on-quarter 24% at around €20 million, and its EBITDA remained flat at around breakeven. So if we move on now to the slide 10, I'm going to present you our consolidated profit and loss. So our revenues of €711 million increased by 26 million at constant rate, representing an increase of 3.6%. In production services, production services revenues amounted to 140 million in the first quarter of 2021, down 16.6% at constant rate and 20.8% at current rate year-on-year. More specifically, film and episodic visual effects Revenues were significantly lower year on year, mainly due to slower ramp up of projects following the continued impact of the pandemic on live action film shoots. Q1 2020 was still an active quarter for film and episodic. Advertising revenues were also lower due to the impact of COVID-19 on client spend and live action production shoots. Animation and games revenues were stable versus prior year, and post-production accounted for lower revenues compared to the prior year, driven primarily by the pandemic's impact on productions. In Connected Home, revenues totaled €428 million in the first quarter, up 18.3% year-on-year at constant rate, and plus 8.7% at current rate. This has been achieved despite the start of the negative impact on sales of supply shortages. So if you want to be more specific, in North America, the revenues remain strong, driven by increased demand from cable customers for upgrades to high-power broadband to support remote work and educational activities. Latin America encountered difficult macroeconomic environments and this has continued to drive the demand down, particularly in Mexico and Argentina. In Eurasia, Europe, Middle East and Africa enjoyed significant increase of revenues due to strong demand in Europe, both for broadband and video products, and expansion of new GWs and STWs technologies to a larger customer base. Asia-Pacific exceeded prior year revenues driven by demand in India and in the Australian and Korean markets. If we now turn to DVD services, their revenues totaled €139 million in the first quarter, so down 7.7% at constant rate and 13.4% at current rate compared to 2020. Our adjusted EBITDA at €43 million is up 72% at constant rate. This reflects operational and financial improvements across all activities, and particularly in connected home, despite lower business volumes in film and episodic visual effects compared to first quarter 2020. I remind you that the quarter at the time wasn't yet affected by COVID-19. Production services adjusted EBDA amounted to 14 million, or 9.7% of revenues, up 3 million year-on-year at constant rate, despite the lower sales. Connected Home adjusted EBITDA amounted to 28 million euros in the first quarter, or 6.4% of revenues, up 14 million at constant rate, driven by the increased demand from the North American cable divisions and OPEC's improvement initiatives implemented in 2020. Clearly, Connected Home enjoyed a very strong quarter. DVD services adjusted to 4 million, plus 3 million versus last year, despite lower volumes of sales. So the margins benefited from better replication pricing, better consumer mix, and cost-saving actions, particularly and partially offset by labor cost pressures and various impacts from severe weather events experienced in the U.S. in the first quarter. If we move on to the adjusted EBITDA, it is at breakeven and represents a 33 million euro year-on-year improvement at current rate as a result of on one hand the positive increase of EBITDA but also of the positive impact of efficiency measures in particular lower rendering spend for production services and positive impact of client contracts renegotiations for DVD services. The P&L non-recurring items at a charge of €15 million are mainly related to the restructuring costs and are accounted for €14 million at current rate. They include €11 million coming from the DVD services cost of footprint optimization. The change in working cap. of negative 192 million reflects the end, and that's very important, of the payment terms normalization at Connected Home. It is an 82 million improvement versus last year. And if we focus on Connected Home, it has to absorb 120 million euro impact of cash out to finish its cycle of payment terms reductions. It will start in the second quarter 2021 to benefit from a normalized and de-risked working cap contribution. It should also be noted that production services have started to benefit again from down payments, the mark of the return of studios to large orders. Free cash flow before financial results and tax from continuing operations amounts to a loss of 196 million euros and it represents still 118 million year-on-year improvements at current rate and that's driven by a significant improvement in connected home operational performance, working capital improvements in production services and DVD services and the ongoing implementation of our cost transformation program. So clearly a sign that the turnaround is underway. The net debt at nominal value amounts to 1.1 billion euros and IFRS net debt amounts to 1.074 million euros. The difference mainly relates to the mark-to-market debt valuation on issuance and will be reversed through a non-cash interest charges over the life of the debt. If we move now down to the slide 11, I'll be now much more quicker on all the remaining slides. So on this slide, the 19 million increase in adjusted EBD at constant rates is due, as you can tell, mainly from the 14 million increase in connected home, followed by the 3 million increase in production services and the same amount at DVD services. Corporate and other decreased its contribution by 2 million and was driven mainly by lower revenues at Trademark versus last quarter. The Forex impact was a negative 3 million on EBITDA. Slide 12 provides you a bit more details on production services. So revenues amounted to 240 million in the first quarter, down 16.6% at constant rate. This reduction is due to a slow ramp-up of projects following pandemic-related impacts on productions around the world. The revenue decline was partially mitigated by significant revenue growth at MPC Episodic, where sales more than doubled in absolute value. MPC Episodic, to make it clear, serviced mainly what we call the streamers, so the Netflix and Amazon of this world. Advertising revenues were also off. Adjusted EBITDA amounted to 14 million, of 3 million year-on-year at constant rate, and adjusted EBITDA was a negative 2 million, up still 13 million year-on-year as a result of cost optimization, primarily in advertising and lower cloud rendering costs. Advertising EBITDA and EBITDA, despite a sharp drop in its revenues linked to the pandemic, increased in absolute terms compared to 2020, showing the positive impact of the transformation activities on its margin. Moving down to the slide 13. Let's have a look at Connected Home. Revenues total €428 million, up 18.3% year-on-year at a constant rate. The division continues to experience supply challenges due to COVID. Demand is strong, very strong in North America and in Eurasia, but Latin America is continuing to prove difficult because of currency weakness and supply constraints. The division is maintaining its market leadership in the broadband segment, and in the Android-based video segment. Although demand will remain strong throughout 2021, I'm talking about final demand, customer demand, the COVID pandemic has created distortion in the industry with disrupted global logistics. Shortages in semiconductors, and Richard has touched upon this, which started in the second half of 2020, are affecting many industries and will continue to impact the remainder of 2021. In particular, difficulties with component supply due to high overall demand is increasing the price of some component costs, and component shortages could delay sales during the coming month. In consequence, Connected Home will continue to work with its partners and customers to minimize supply disruptions. Technicolor has engaged in commercial discussions in order to pass surcharges through to customers. The situation is currently in line with expectations used to set the 2021 guidance, but they are not improving. Adjusted EBITDA amounted to 28 million euros in the first quarter 2021, or 6.4% of revenues, up 14 million at constant rate, driven by the increased demand from the North American Cable Division and OPEC's improvement initiatives implemented in 2020. Adjusted EBITDA €10 million, increased by €12 million at a constant rate compared to the prior year. This positive evolution in profitability is the result of the significant transformation plan launched three years ago. Moving to slide 14, DVD revenues, they totaled €139 million in the first quarter. They're down 7.7% at a constant rate. This reduction is mainly driven by a 10.7% reduction in total replicated disk activity. This negative trend was partially mitigated by pricing improvements following the studio contracts renegotiation and by growth in non-disk related supply chain activity. COVID-19 continued to have a negative impact in the first quarter, predominantly related to a significantly reduced level of new release activity as compared to the first quarter of 2020, which was largely unimpacted by COVID-19. The adjusted EBITDA amounted to 4 million or 3.1% of revenues. The 3 million improvement year on year is explained by better replication pricing, cost saving actions, partially offset by labor cost pressure and various impacts from severe weather events impacting the US in the first quarter. These overall positive actions more than offset the negative impact of lower volume sales. So clear improvement here of profitability thanks to the hard work being implemented by the new management team. Lower depreciation and amortization and positive impact of past contracts renewal helped to deliver an adjusted EBITDA of negative 6 million. to be compared to a negative 16 million in the first quarter 2020, so a plus 10 million euro improvement in a tough year, in a tough quarter. Non-recurring items at minus 12 million euro have remained high as the transformation plan is being currently further implemented. Slide 15. This slide takes us from EBITDA to EBIT. Nothing major to note here. So between adjusted EBITDA of negative 1 million euro and continuing EBIT of negative 26 million, we have only two items. 9 million of PPA amortization, non-cash as you know, and restructuring costs amounting for 14 million at current rate and mainly coming from 11 million of cost optimization at DVD. Slide 16. We're moving from EBIT down to the net group results. So the EBIT amounted for a loss of 26 million in the first quarter of 2021. Financial results totaled a negative 32 million in the first quarter again, compared to 25 million in the first quarter of last year. The change reflects net interest costs of 31 million. They are up from last year by 17 million. primarily due to the higher interest rates on the new debt structure. And we have other financial income. They improved to negative 1 million in the first quarter of 2021 compared to negative 9 million in the prior year. And that's mainly due to financial fees on the bridge loan put in place in March 2020. Income tax amounts to negative 1 million compared to breakeven last year. Group net income, therefore, amounted to a loss of 61 million in the first quarter of 2021 to be compared to a negative 87 million loss in the first quarter of 2020. Slide 17. As shown previously, the free cash flow after financial results and tax from continuing operations amounted at 227 million negative, and they represent 111 million year-on-year improvement at current rate. They are driven by significant improvement in connected home operational performance, working cap improvement in production services and DVD services, and by the ongoing implementation of a cost transformation plan. In particular, it should be noted that the working cap variation has absorbed 120 million negative charge of payment term reduction in Q1 2021, And this same movement was only 40 million in Q1 2020. So we absorbed a negative 18 million through this quarter. And despite that, we managed to improve. As mentioned previously, the group has now reduced its payment terms to a competitive level. And the working cap, starting in H2 2021, we no longer reflect the negative adjustments recorded in the past few years. Slide 18. Provides you with the debt structure. So we have 102 million of cash and cash equivalents and our net debt amounted to 1.074 million under IFRS 16. Liquidity, so in the slide 19, our total liquidity amounted at the end of the quarter to 175 million euros. with 102 million of cash on hand and 73 million of undrawn Wells Fargo credit line facilities. This concludes my presentation, and with this, Richard, I hand over to you the microphone. Thank you.

Yeah, thanks very much, Laurent. So let's go for your questions.

Ladies and gentlemen, if you wish to ask a question by phone, please press 01 on your telephone keypad. We already have some questions. The first one comes from Thomas Coudry from Brian Gagne. Please go ahead, sir.

Good evening, everybody. Thanks for taking my questions. I have a few. First of all, you mentioned some challenges in the recruitment. I would assume that you refer to production services here. Can you give us some more color on the potential issue here? And in particular, what is the situation in India? We know that you intend to use Indian people a lot in your production services. The COVID-19 situation is pretty bad there. So it would be nice if you could give us some information and update on the situation here and the recruitment challenges as a whole. That was my first question. Second question on production services. So your margin has increased year on year. Still, it's rather low as compared to Q4 last year. Can you give us some more color on whether we're talking about specific seasonality impact here as far as Q1 is concerned? or if there is a specific, let's say, impact on margin from the higher episodic contribution this quarter, and how we should look at this EBDA margin in production services going forward in the year. And last question, please. Just on the component issue, I would just like to understand, indeed you're sticking to your guidance, but it seems that you're giving a little bit more color on what you're expecting the impact to worsen in the year until Q4 before you were mentioning that you might have some sales going maybe from H1 to H2. Has your confidence in your guidance deteriorated since you first announced it with the full year results because of this component issue lasting maybe longer than what you thought initially. That was my last question. Thank you very much.

Okay, well, I'll take questions one and three, and then I'll pass back to Laurent in terms of the production services margin question. So, With respect to recruitment, yes, you're right. The reference to recruitment refers to production services. During the period of the pandemic, particularly during the early part of 2020, we significantly reduced our headcount, especially amongst contract staff, because the the amount of work fell off a cliff when live action shooting stopped at the end of March 2020 and we needed to trim our cost base because obviously we needed to protect our cash flow. But as was stated in the presentation there, the pipeline which we're establishing across the entire division is very robust. So we've now got more than 90% of our 2021 pipeline secured across film, episodic, and animation and games. We can't see so far forward in advertising, which is always the case, but we can see that the second quarter is going to be very good, and it seems that advertising activity is rebounding as lockdown restrictions relax. So, you know, there is a significant demand for incremental work coming now in production services, and we need to ramp up our recruitment in order to keep pace with it. I guess the real, it increases gradually over the course of the year, over the quarters, and then 2022 is looking as though it's going to be a real blowout year for the industry as a whole and for us in particular. So we need to ensure that we've got the right number of staff on board. And we're recruiting them across the world. And as you say, India is an increasing feature of our activities in this context because we referred again in the presentation to previously siloed operations. And one of the major strategic drives which we have is to get as much work back to India as possible and to have one delivery pipeline behind the sales forces which operate for the individual brands and individual business units so that we can drive the highest possible margins. Obviously, because of that, at the moment in India, the lockdown situation and the progress of the pandemic is very severe and that sort of slows down recruitment activities somewhat. However, they are nevertheless proceeding apace And we're confident of having the staff on hand that we will need when the time comes to fulfill all the projects which we have on the blocks. But it was simply a reference to the fact that that is one of the key initiatives which we have facing the business right now. But the number of people that we have on hand is building up week on week. And so that is progressing in accordance with plans. Now, in respect to your third question on the question of components and the guidance which we're giving today, where obviously we're reconfirming our guidance for the group for 2021 and 2022, which obviously means that we're confirming the guidance for connected home because that's a significant proportion of group results. Our confidence has not deteriorated. I think obviously the situation has evolved And we've got more data now in terms of what impact that we think we will experience from the lack of availability and increase in prices in semiconductors and memories and other key components. And basically, I think you could say that the assumptions which we built into our original business plan and the guidance which was built from it remain pretty robust and we track them carefully and I think that we're moving very close to the projections which we originally made. There are some elements which are more difficult to predict because the situation is evolving and you know, more and more different types of components are becoming under stress. But nevertheless, subject to that, from what we can see today, we have enough information and enough data to be able to reinforce the guidance which we previously made. Laurent, would you like to handle a second question on production services margins?

yes um so so you're correct there is a variation in terms of of a margin from quarter to quarter at production services but uh i would say in a nutshell nothing to worry about this is this is logic and linked to the cycle of the activity in in q1 2021 um as mentioned we have um the teams have uh built up a very very strong pipeline i think it's Probably the strongest I've seen in the two and a half, three years I've been in the company. And we are recruiting. We are recruiting, therefore we are putting in costs at the moment. We're bringing in people in India, in Canada, also in London. But we are not yet getting the revenues. The team starts to work and you know we are being paid on milestones. So whenever we deliver, and before that we cannot recognize the revenue. So it's logic to have a low quarter in Q1. If you look at production services, and that's mainly of course pivoting around FED, also human episodic, we were expecting and we expect and then we continue to expect a big improvement in absolute terms and in margins from one quarter to the other, and from one half to the other. So the peak of the activity for production services will be in the second half of the year, once the team are fully on board and deliver. So we expect very significant Q3 and Q4 contribution, and the ramp up from Q1 to Q2. So yes, and you will see fluctuation of margins, so obviously you will see improved margins. coming in for quarter to quarter basis. Q4 last year, we benefited, we had still a bit of work coming through and we benefited from that. So that explains the difference in terms of margin. Maybe just to add one comment on what Richard has mentioned as far as the components are concerned. We know that we don't know. So we know that this is a sector that is quite complex to grasp, in particular in the context of components going up. So we build up a lot of stress case and we're trying to make sure that we have enough reserve and prudence in our forecast so we can weather more than one heat. So that's what gives us, at the moment, the sort of confidence that we should be able to get through and deliver 2021 guidance.

Thank you very much. That's very clear.

We have another question from Fiona Oxford-Williams from Edison. Please go ahead.

Thank you very much. Good evening. Thomas took my component question and my India question, so we'll go with others. First of all, on production services, you mentioned in the statement that MPC episodic had doubled. Is that a significant number that I ought to be accounting for separately? And also, on production services, you've talked about the ambition to expand the animation activity. Is that through gaining market share, or is it moving further up the supply chain? Could you just give us some some color around that would be helpful. And also if labor recruitment is difficult, is there signs of wage inflation already coming through? And on VVD services, just a quick one. You talk about the non-disc distribution. Is that also now becoming a significant element of the equation?

Laurent, would you like to kick off with the MPC episodic question?

Yes, I mean the MPC episodic has indeed had a strong quarter and is planned and programmed to have a As you know, MPC episodic is, that's basically the, I think you're referring here to more to the episodic side of FEV. That's my understanding of your question. And so this is a division that's servicing Netflix and Amazon. And indeed, I think Richard has indicated in the past that it was one of the axes of growth for the division. It is. Clearly, there are a lot of contacts being made currently. We can't disclose to you, and we have no plan in the short term to disclose its sales separately, but from 25% a year or so ago, it's going to grow up quite significantly this year. Maybe Richard will give you more color on that, but there are various conversations held with a lot of people in this field. They are all looking for content, and we are obviously one of the main providers here. So can't give you a specific number in terms of each share targeted at the end of the year, but it's going to be significantly above 25% where it was before. That's for sure.

I'll pick up the question on animation. So animation has been running at pretty much the same sort of scale for quite some time. And our ambition is to grow its scale substantially and in so doing to acquire market share. And at the moment, we're currently working on four titles consecutively, which I think is historically probably the largest volume of work that we've done at one time. And we've just been awarded a fifth. And the recruitment of Andrea Meloro from Blue Sky, who's a real big hitter in the animation space, I think shows the commitment which we have to expanding that division. And she, in turn, has been bringing in a number of people that she worked with previously to strengthen our management team and our approach to animation and to provide confidence to the big animation studios that... that we're serious about this play. So I think in 2021, you're going to see a significant improvement in revenues from animation compared to 2020. And it's also our ambition to continue to improve the margins in that business also. Now, the third question you asked was about wage inflation relating to recruitment. I think that's a very good question. I think that inevitably with the amount of work which is out there across the industry as a whole, particularly the amount of work which we've gained, because I think we're getting work at the expense of some of our major competitors, and the scale of recruitment which we're undergoing, and indeed all of our competitors are simultaneously, there is bound to be upward pressure on wages. I don't think we've seen that come through yet, but I think that it is inevitable that it will arise over the next 18 months. Laurent, would you like to take the one about non-disc activities in HES?

Yes, I think you're referring probably to the distribution part of the business, and in particular the non-DVD distribution. So as you recall, it was Like a year or so ago, it was in a region of delivering, it was north of 100 million, 120 million of sales. Clearly, it's growing nicely at the moment. I think your question is a tricky one because I think it's a nice add-on business in the sense that we have, the bulk of our distribution activity is dedicated to delivery of the DVDs. Because we have capacity, we have a network, we have logistics, and we have a knowledge of how to do that, and these are complex operations, because you're talking about delivering millions of DVDs in small packages, different components, to 5,000 Walmarts in the space of a week or two weeks. So you don't have so many people that are good to do that. So therefore, this has driven us to open up this as a segue, sort of a non-DVD activity here, and with COVID-19 and with the surge in mail order, we have more and more clients that are coming to us, and indeed even some of the very large operators, the Amazon or whatever, when they are short in terms of capacity or whatever, they use us. Today, the way the team looks at it, it's a nice to have, we're happy to have it, we have this capacity, we are going to benefit from it probably a bit more than what we were expecting in the past. Is this going to be an independent, full-scale autonomous division? I think it's probably a little bit early to say that. It's a little bit premature. It's going to be a nice add-on. But again, COVID has made clear that there is value in there. And the team is doing everything they can to basically service new clients that are coming along. But I don't think it's going to be as significant. I doubt that it's going to be a $300 or $400 million business in a few years. But it's going to continue to grow probably in 2021, maybe 2022.

Yeah. So it basically means that we shouldn't get too obsessed by just looking at the declines in volumes of the traditional distribution.

Yes, because you have – well, the equation around DVD is the following. You have, indeed, volume decline, yeah, mainly in relation to what's really – Two or three things are moving the needle here. One, as Richard has mentioned, we have renegotiated contracts, all the contracts. So basically that has led to price increases. So this is compensating a lot, and sometimes we had very significantly loss-making activities. Now we've brought them back at a very given point. So that's point number one. And there will be new contract renegotiations starting in two to three years. Point number two is distribution. Distribution is, you know, you have the edge factor coming from this non-disk growth that is coming here. And I think the third point, not to be disregarded, it's the fact that David Holliday, the new CEO, has, let's say, fast-track accelerated the regroupment of the activities. mainly in North America and in Mexico, in Guat, so in low-cost countries. And it's starting also a transformation work, so that basically means to deliver the same services at a lower cost. So, you know, nobody's going to deny the fact that this is a declining activity, but it is very, very obvious that there is a long, long tail here.

Yeah, I think that's helpful. Thank you.

Ladies and gentlemen, as a reminder, don't hesitate to press 01 on your telephone keypad if you wish to ask a question by phone. We have another question from David Cerdan, Kepler Shiver. Please go ahead.

Yeah, good evening, gentlemen. I have a few questions for you. The first one is regarding connected home. So how do you explain this problem? this strong demand in the US and how long is it sustainable to be so much up in this region? The second is related to your competitive environment. Have you any indication to give us regarding your capacity to better negotiate than your competitors with your clients in this industry? And my last question is regarding production services. Do you think that there is a potential for you to start a consolidation in this sector? Is it something that could happen in 2021, 2022? Thank you.

Sorry, can I just clarify that second question when you said, are we in a better position to better negotiate with clients? That's a connected home related question, yeah?

Roughly, yes, it's connected home first. And secondly, are you in a better position to negotiate first with clients?

if you make a comparison with the rest of your competitors is it the same situation for them in other words okay okay sorry okay so uh so connected home uh this this strong demand in the uh in the us um comes from comes from the fact that uh people were locked down obviously in large numbers. They needed to work from home. They were at home with their families using multiple devices over extended periods for the first time. And so, therefore, people want to upgrade their broadband and Wi-Fi experience, and they're trading up to the sort of high-end products which we supply to our cable and telco customers. So we saw very strong demand across North America throughout 2020 with... Comcast, one of our largest customers, having several consecutive quarters of extremely strong demand, record demand. And that, according to results they published recently, has continued through into 2021. So clearly this wave of upgrade, this desire to improve Wi-Fi and broadband experiences has not yet been extinguished. And certainly if you look at the lead times which we have for orders, which have necessarily become very elongated because our major suppliers have forced us to provide lead times and forecasts for products going out much further than we ever have previously. So, you know, 50 weeks in many cases. we can see through into the second quarter of 2022 in terms of demand. And so therefore, you know, demand is very robust in the US in particular. And so certainly through until the middle of next year, we see no change in these kind of trends, which obviously is very positive. And I think it's one thing to note that when there have been these types of component-related crises previously, they've sometimes been at times when demand has not been as predictable or as robust. So now at least I think we can say that the top line is there, that the actual timing of delivery may be uncertain because of some of these factors which we've been discussing, but it remains for the foreseeable future. Now, in terms of the competitive environment, can we negotiate better with clients? I think that when we put together our assumptions concerning what impact the semiconductor and memory issues we're going to have on our business, we made the assumption that we were going to be able to pass through a certain proportion of the costs to our clients, and we are achieving the level of pass-through that we predicted, which is why, as I said earlier, we feel that the projections, the assumptions we made, which we built into our business plan and into our guidance, remain robust. And I don't think that necessarily... Well, we are obviously one of the largest players the market in fact probably the largest now outside of China and that gives us that gives us some clout with our major suppliers and and therefore we can to some extent try to make sure that we get a fair allocation or more than our fair allocation of these components that we need in order that we can we can maintain a manufacture and supply to our major customers. So I think that that puts us in a good comparative situation compared with our competitors. And with respect to clients, I think that probably everybody has been experiencing this, but with uncertainty arising about the resiliency of supply, clients obviously don't like paying higher prices but ultimately I think they recognize that with this demand remaining so robust they have to have the product otherwise they're going to be disappointing customers and therefore ultimately they're prepared to pay in order to guarantee that they achieve it and certainly again the fact that we're one of the biggest players in the market and a player who's provided reliable supply over a number of years gives our customers good confidence that we will continue to do so this time around as well. And your third question about potential to start consolidation. Well, I mean, obviously, we're the market leader in terms of visual effects for the film industry and our position with episodic and streaming is growing. We've got the largest brands with respect to advertising visual effects in the world, The Mill and MPC Advertising. So, you know, we're in a strong position. And I guess we have to be realistic, however. We went through, we restructured our balance sheet last year. We got new money into the business. We have been working hard on making sure that businesses that we improve our working capital, that we maintain very robust cash flow, and that we transform the business and improve margins in every single area of our activities. That's been our major area of focus. We have no plans at the moment to look at consolidation opportunities, but obviously we will see how things evolve. Okay, thank you very much.

We have no more questions, so ladies and gentlemen, one last reminder, if you wish to ask a question by phone, please press 01 on your telephone keypad. Well, it seems that we have no further questions.

Okay, well, if no further questions, thank you very much for your time this evening, and we will... Look forward to continuing to improve our performance in the coming quarters and to maintain the guidance which we've set tonight. Thank you very much.