Vantiva S.A.

Ladies and gentlemen, welcome to Technicolor's conference call, chaired by Richard Motte, CEO, and Laurent Carozzi, CFO. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you would like to register a question, please press 0 and 1 on your telephone keypad. Just to remind you all, this conference is being recorded. We would like to inform you that this event is also available live on Technicolor's website with synchronized 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. I'm very pleased to be with you today to report Technicolor's first half 2021 results, which are positive and in line with expectations. The group is experiencing growing demand across all of its businesses and is benefiting from improved profitability as a result of our disciplined operational focus. All Technicolor activities are benefiting from sustained market demand and the creation of Technicolor Creative Studios is well-timed for the upcoming surge in content. It is led by a strong new leadership team focused on redefining content experiences through a powerful combination of storytelling and innovation. So if we turn to the presentation, let's start on slide four. In the first half, despite the continuing challenging environment, we delivered positive results and significant improvement in profitability in line with expectations. During this semester, Technicolor Creative Studios has been awarded numerous new projects, securing approximately 95% of its expected 2021 sales for film and episodic visual effects and animation and games. Connected Home experienced continued strong demand in North America and in Eurasia, but the division has been impacted by component shortages leading to sales being pushed to the second half and a challenging Latin American market. DVD services benefited from strong catalogue demand and continued growth in non-disc-related supply chain activity. Overall for the group, our revenues of €1.36 billion were at 1.2% at constant rate, reflecting a good performance in creative studios driven by demand for VFX technology, a 1% decrease in connected home sales as a result of key component constraints, and continuing revenue resilience in DVD services with a 4% increase in total replicated disc activity. Adjusted EBITDA of 100 million euros, double last year's figure at constant rate, was driven by the positive impact of efficiency measures across all activities, particularly in creative studios and DVD services. Adjusted EBITDA of 15 million euros represents an 83 million euros year-on-year improvement at constant rate. This is the result of the EBITDA increase as well as lower depreciation and amortization. Our free cash flow before financial results and tax was higher by 35 million euros at current rate, driven by higher EBITDA, working capital improvement in Technicolor Creative Studios and DVD services, and despite the negative impact of the normalization of payment terms in connected home. Based on business activity for the first half and the continued successful optimization of the businesses, the group is confident of achieving its outlook in 2021 and 2022. So let's turn to slide five. Technicolor Creative Studios revenues amounted to 295 million euros in the first half which was up 9.9% at constant rate. Adjusted EBITDA amounted to 40 million euros, up 38 million year on year at constant rate. The disposal of post-production, which closed at the end of April, refocused our portfolio of activities on our growth sectors. TCS is benefiting from the recovery in demand for creative technology and experiential content across its film and episodic VFX and animation and games divisions, combined with an outstanding performance from the advertising service line. Here's some key highlights. VFX teams worked on over 18 theatrical films for the major studios, including Cruella and the Lion King prequel for Disney, Mortal Kombat for Warner Bros. New Line, and Transformers Rise of the Beasts for Paramount. They also worked on over 35 episodic or streaming projects for HBO, Netflix, Disney+, and Amazon. In July, Mr. X received an Emmy nomination for Outstanding Special Visual Effects for its work on Vikings, The Signal. And this is Mr. X's seventh nomination for the Vikings franchise since 2013, with a trophy last year. Our advertising businesses delivered nearly 1,900 commercials, including approximately 20 Super Bowl spots. It won several prestigious industry awards, such as three Cannes Lions, three Visual Effects Society Awards, and two Adweek Experiential Awards. Animation and Games delivered more than 2,100 minutes of animation for film and TV, including the delivery of Spin Master and Paramount's Paw Patrol the Movie, which comes out in August. It received an Annie Award nomination for Best FX for TV Media with Fast and Furious Spy Racers. In June, TCS announced the consolidation of the animation businesses under the Micross Animation brand, with a new senior management team led by Andrea Milloro, who joined as president of Micross Animation earlier in the year. Despite the risks of the spreading COVID-19 variants, the media and entertainment industry continues to increase production throughput and invest in greater capacity around the world under relatively successful and strict COVID-19 protocols. TCS was awarded numerous new projects, securing approximately 95% of the expected 2021 sales pipeline for film and episodic visual effects and animation and games. As capacities to deliver remains one of the main challenges, TCS continues to adjust capacity limits by accelerating recruitment and developing remote work policies. Over on slide six, connected home revenues totaled $770 million, almost stable at constant rate. Demand was strong in North America and in Eurasia, but the division has been negatively impacted by key component shortages and a difficult Latin American market. Adjusted EBITDA amounted to 56 million, up 6 million at constant rate, driven by continued cost-efficiencies achievement. The division further strengthened its leadership in key market segments. It reached the milestone of over 20 million RDK broadband gateways deployed, and one deals with major operators across Europe and Latin America, confirming its leadership across the RDK community. On Android TV, it reached over 10 million set-top boxes worldwide, winning customers in Europe and Latin America. It demonstrated its innovation capabilities by launching with Sky Brazil the first hands-free voice-controlled set-top box, integrating Google Assistant. On Fiverr, Connected Home has won new customers in EMEA and a first deal outside of Brazil in Latin America. Looking forward, The worldwide supply chain disruptions will have multiple consequences for the connected home business. Continued difficulties in obtaining components, challenges in finding transportation, and cost increases across multiple categories of components and logistics. But connected home continues to work with its partners and customers to minimize supply disruptions, maintain a high quality of services, and offer cutting edge innovation. On slide 7, DVD services revenues totaled €283 million, stable at constant rate. Total replicated disc activity was up 4% year on year, which is unprecedented in recent years when the movement has generally speaking only been down. There was a 12% increase in standard definition DVDs, driven by the ongoing push of back catalogue products. But this was offset by a 13% reduction in Blu-ray due to the lack of new release content and an 11% reduction in CD volumes, a combination of expected structural declines and COVID retail impacts. The decrease in volume was partially mitigated by pricing improvements following the studio contact renegotiations and by growth in non-disc related supply chain activity. Adjusted EBITDA amounted to 11 million euros at current rate, which was better than expectations. The division continued to adapt to distribution and replication operations and related customer contract agreements in response to continued volume reductions. Two significant North American facility closures were affected in the first half of 2021 as part of the ongoing transformation plan. Executive and management teams have been implementing multiple cost reduction and business improvement and efficiency programs, and these were ahead of plan at first half and expected to deliver the full year savings and efficiencies projected. Going forward, theatrical new releases demonstrated an accelerating trend of improvement. In the second quarter, multiple major releases generated significant box office results, demonstrating strong consumer interest. While studios continue to experiment with various premium video on demand and day and date strategies, in almost all cases, studios are still electing to have a DVD BD release in the normal windowing sequence. With limited new release content, retailers are continuing to allocate shelf space to catalog and library content promotions, which has helped to support DVD replication. In half two, the specific timing and extent of the reopening of movie theatres will impact the level of new disc release activity. DVD services has therefore accelerated aspects of its future restructuring plans in an effort to adapt to these potential impacts. On slide eight, to conclude, all Technicolor activities are benefiting 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. Thanks to the ongoing transformation initiatives begun over a year ago, we have been able to invest more in hiring and unleashing top talent while consolidating, sharing, and harmonizing best practices. Our vision for transforming the future of film, episodic, gaming, and integrated marketing and advertising campaigns gives us the confidence that we will continue to deliver improved operational and financial performance through 2021 and 2022. With already 42 million euros cost savings realised in the first half, we're well on track to achieve the projected 115 million by the end of 2021, as planned, and to deliver a cumulative 325 million by the end of 2022. For 2021, we confirm Revenues from continuing operations broadly stable versus 2020. Adjusted EBITDA of around 270 million euros. Adjusted EBITDA of around 60 million euros. Continuing free cash flow before financial results and tax at around break even. And net debt to EBITDA covenant ratio below four times level at year end. And we are maintaining our previously issued 2022 guidance. Now I will hand over to Laurent, who will go into our first half performance in more detail.

Thank you, Richard, and good evening all. So I will now provide you with further details, as mentioned, regarding our H1 results. So overall, and I think it's been mentioned already, they show a significant improvement versus last year. It's been driven mainly by sales growth, despite the supply constraint we had to experiment with. and also quite significantly by improved margin due to the efficiency efforts we are making. So if we now look at the slide 10, you can see here our consolidated P&L. As usual, I will give you a bit more color per division, and we will go faster with the following slides. So starting with the revenues of $1.3 billion, the increase by $17 million at constant rate. All my comments will be made at constant rate. representing an increase of plus 1.2%, a slight increase. Giving you a bit more color per division, so in production services, CCS revenues amounted to 295 million in the first half of 2021. It's up close to 10% at constant rate, 5.8% at current rate. More specifically, we know that film and episodic enjoyed a double-digit year-on-year growth during the first half, driven mainly by clients' return to live action shooting, beginning in the later half of 2020, and also, it's to be noted, by the expansion of MPC Episodic, launched in the first quarter of 2020. MPC Episodic, to be more specific, has as main clients all the streamers, the likes of the BBC, the Netflix, and the Amazon of this world. Advertising, as Richard has mentioned, has recorded a strong first half performance, And this has been mainly driven by one of our two agencies, MPC Advertising. Admission and game, double-digit growth year-on-year driven by strong work for higher volume, in addition to the prior year period being negatively impacted by a temporary studio closure because of the pandemic. So easier comparison. Post-production is 15 million lower than last year as the division has left the perimeter at April end. So here you have mainly a perimeter impact on your overall performance. If we now turn to connected home, the connected home revenues totaled $770 million in the first half of 2021, flat year-on-year at constant rate. And what we can say is that despite demand remaining very strong, particularly in North America and in Eurasia, the division has been negatively impacted by the key component shortages and a difficult Latin American market. The sales missed because of COVID-related issues, could be estimated at more than $150 million for the first half. If we drill down per region, so the Americas, North America, the revenues remain strong, driven by increased demand from cable customers for upgrades, of course, to higher power broadband. Latin America, conversely, the difficult macroeconomic situation, the foreign exchange, and component costs continue to create difficult trading conditions there. As far as Eurasia is concerned, in Europe, Middle East, and Africa, we enjoyed a good semester with 10% growth year-on-year, driven by strong demand for DOCSIS 3.1, Android TV, and fiber product. But the shortages were creating a significant backlog. In other words, we could have delivered a lot more if we had had the components. We scored new wins in the three technologies in several markets, including Poland, Israel, and Australia. In Asia Pacific, the constraints were experienced in broadband technologies for the Australian market in spite of, again, very strong demand. The Indian market remains solid, maintaining growth year on year in traditional and Android TV technologies. Manufacturing for Indian customers is now taking place in India. So overall and together, long story short, we've been penalized by a problem of shortages in key components that prevented us from delivering sales the demand was we should have beaten these numbers in H1, and demand was even higher than what we were expecting at the start of the year. So hopefully we'll catch up with that in the second part of the year and in 2022. In DVD services, the revenues totaled $383 million in the first half of 2021, in line with 2020. So revenue resilience was driven predominantly by continued strong demand for back catalog titles, and that continues as we speak. Well, adjusted EBDA at 100 million, as Richard mentioned, has doubled at concentrate. It reflects operational improvements across all activities, and particularly in creative studios and DVD services. The adjusted EBDA margin for the group expanded from 3.7% to 7.4%, with all three main technical divisions reporting a significant margin improvement compared to the first half 2020. Looking at TCS, Adjusted EBITDA amounted to $40 million, 13.7% of revenue, up $40 million year-on-year at concentrate. The efficiency progresses have benefited mainly the firm and the advertising divisions. Turning to connected home, adjusted EBITDA amounted to $56 million in the first half of 2021, or 7.3% of revenue, so up $6 million at concentrate despite the sales shortfall. but thanks to continuing reductions in OPEX. DVD services, the adjusted EBITDA amounted to $11 million at current rates, so 3.7% of revenues, versus $1 million only in H1 last year. So given stronger than anticipated disc volume, and the acceleration of cost savings actions, partially offset by continued labor and material cost pressures, but clearly a very strong performance here. Adjusted EBITDA, 15 million represent an 83 million year-on-year improvement at constant rates. So this resulted from the EBITDA increase, of course, and the positive impact of efficiency measures, in particular lower DNA, lower capex, following lower equipment spend for creative studios, and lower IP depreciations for DVD services. These IP depreciations relate to the contract renewal we successfully managed last year. P&L non-recurring item at 1 million, negative 1 million, are better due to, if you compare it to last year, lower impairment and write-off. Remember, last year we had an HES Goodwill impairment of around 70 million, lower restructuring cost, and accounted for negative 26 million at current rate. Change in working cap, an important element to comment here, of 210 million negative reflects mainly the payment terms normalization. We've talked to you about it many, many times. It has continued and is finding its final point at this first half end. And the seasonality also, it's also marked by the seasonality also of the connected home sales, which has been amplified by sales delays from second quarter to third quarter. So in clear, We've sold less in Q2 this year than in Q2 last year, and that hasn't really helped the working gap. This will return reverse in the second half, and we see the improvements already. Remember that with a cash-out impact of $120 million in the first half of 2021, Connected Home has finalized its cycle of payment term reductions, as I've mentioned, benefiting now from a normalized and de-risked working cap contribution. as well as positive seasonality in the second half, partly subject to, of course, the evolution of component shortage. But at present, we do expect this to loosen up a bit, allowing us to recoup the sales we had lost in the first half in the second half. Free cash flow, so before financial results and tax from continuing operations, is therefore a negative 208 million. So we have a positive OCF, negative workup, so therefore we have this negative free cash flow. But still, it represents an improvement of $35 million year on year, despite all the cash outflow I've mentioned earlier. The net debt at nominal value amounts to $1.1 million, and IFRS net debt amounts to $1 billion. The net debt has upped a little bit versus the amount you had at the end of last year, mainly because of the accrual of peak interest we need to pay. And we also drew a little bit on our line at the end of the year, so that's part of this. I think with that, it concludes sort of a very thorough review of this slide. Let's move on now faster through the following one. So in slide 11, you see the work of EBITDA from basically last year to this year. So we have a 53 million increase in adjusted EBITDA at concentrate, mainly TCST. and you can see that very clearly on the picture, has provided with 40 million of increases in the main booster, but also 10 million coming from the DVD services, 6 million finally from connected home. Corporate costs decreased by 2 million, and Forex impact has basically had a negative impact of 6 million. Moving to slide 12, and I'll go faster on each one of these slides because we've I already told you a lot about these. So technical creative studios revenue, they amount to 295 million. They are 10%. The recovery and the growth comes mainly from recovery in live action shootings in film and episodic and a good performance in Mr. X, so in the episodic part of the department, but also, and of course, an outstanding performance from advertising. The EBDA, the adjusted EBDA, it amounted to 40 million. It is up 40 million year on year, so quite a strong performance. And the EBITDA is even up more than that, at 57 million, as the division has put more strength and control on its CAPEX and therefore on its depreciation as sort of a new norm of leading the company. Slide 13, a few words on connected home. You know already everything about the revenues, $770 million flat year-on-year, very strong demand everywhere. I repeat that in every market, North America and Eurasia in particular, but of course, negative impact of key components. The multiple consequences are basically being supported by this division because of the overall market situation. So we have continued difficulties in obtaining components, and that's delaying production to our final customers. It has hurt us quite a bit in the first half of the year. It's still constraining ourselves in the second half, but less. Challenges in finding transportation, of course, is also one of the problems for the components and finished goods, and that's delaying the delivery to our customers. We're finding alternative routes. We're using air freight when necessary, but it's also a challenge. And finally, third element, the cost increases across multiple categories of components and logistics are also impacting the profitability of the division. So Connected Home constantly works on trying to improve everything we can do to improve our situation versus these three elements. So therefore, the adjusted EBITDA, and particularly the performance of the first half, should be looked into this context. So the 7.3% of revenue... The 6 million increase in absolute terms has been achieved despite all these three elements slowing down the activity of the division. If we look at the EBITDA, it has increased by 11 million compared to last year at 29 million. And again, you can see here some effects also of reduced capex and better cost control in between EBITDA and EBITDA. Slide 14, DVD. So revenue resilience here was driven predominantly by continued strong demand for back catalog titles. We also saw the significant positive impact of new pricing and ongoing growth in non-disk related supply chain activity. That has to be noticed. Now the numbers start to be a bit significant and it seems that there is a pattern here that keeps starting. The COVID-19, however, has continued to have a negative impact in the first half with a significantly lower level of new release activity. which in turn resulted in a reduced mix of higher-priced Blu-ray volumes as compared to the first half of 2020 and has negatively impacted the year-on-year revenue trend. But it should be noted that the Q2 sales are showing some improving signs with Blu-ray replication slightly up, and that's a sign that a growing number of new releases are being used. The adjusted EBITDA amounted to 11 million, 3.7% of revenue, slightly better than our own expectations, and given mainly stronger demand than expected from standard disk volumes, and also the acceleration of cost-saving actions. That has been, in turn, partially offset by continued labor and material cost pressure, but clearly the results are, I think, quite satisfying. Lower depreciation and amortization and also the renewal of contracts have helped to deliver a net city BDA of a negative 10 million. to be compared to a negative 30 million a year ago. So I think still also an impressive improvement in a difficult context. Slide 15, you have a quick walk from EBIT-R to EBIT because we've discussed everything between EBIT-A to EBIT-R. Nothing major to note here. You have basically two main items, 19 million of PPE amortization. Not much to disclose here. It's almost a quasi-mechanical calculation. The restructuring cost accounted for 26 million at current rate. They include 15 million in relation to the DVD services. As you know, they are very active in optimizing their site footprint. The other non-currents are up to 24 million. Here, it's a non-cash item. It's linked to the close down of a Singaporean entity and the, let's say, the re-rating and the the grating of its equity. It's non-cash, so please do not consider that as an element contributing to the activity to the free cash flow whatsoever. It's also a one-off event. So slide 15. So finally, the EBIT from continuing operations amounted to a loss of $4 million in the first half 2021. You need to compare that to a loss of $194 million last year, and that's in relation, of course, to better operational performance. the DVD services impairment that we had to recall last year and not this year, and higher restructuring accruals, as already described. The financial results totaled a negative 63 million. It has to be compared to 67 million last year, so not much of a change. Net interest costs, they amount to 61 million. They are up from last year, 40 million, primarily because of the fact that we're paying higher interest rates on our new debt structure. and other financial income improved to negative 2 million in the first half of 2021. They were negative 28 last year, and last year we had to pay a lot of financial fees incurred in the bridge loan and also in the financial restructuring that no longer happened this year. So that's how we managed to have more or less the same level of financial results. The income tax amounted to 11 million, so we paid slightly more tax than last year, mainly in Canada and in India, nothing major to relate here. And therefore, we have a group net income amounting to a loss of $79 million to be compared to the loss of $265 million of last year. So a significant improvement, although we're still not at $3 million here. Slide 17, the free cash flow. So as shown previously, the free cash flow. So we are here before financial results and tax. From continuing operations amounts to a negative $208 million, but it's a $35 million improvement year on year. What has been driving this is, of course, the BDA improvement of 53 million, as you can see on the left-hand side of the chart. Lower capex, 11 million. Better financials and forex impact, and that's been mitigated by a higher restructuring cash-out of 23 million. We are cashing out more this year than last year, because last year we booked in the P&L all the restructuring charges. We cashed out last year half of the 2020 amount, and we told you that who will be cashing out the second half in 2021. This is happening. And also you have a 29 million of work cap consumption that's linked mainly to the payment term normalization and also the seasonality trend that Connected Home, which has been amplified by the sales delays from the second quarter to the third quarter. As already mentioned, but I think it's worth repeating that, Connected Home has finalized its cycle of payment term reductions, benefiting now from a normalized and zero-risk working cap contribution. as well as positive seasonality in the second half, partly subject to the evolution of component shortage, of course, but we have good hope that our second half will show significant improvement here. Slide 18, you will find presented our debt structure. I think you're familiar with the spreadsheet. I think the element we haven't commented there is the 99 million of cash and cash equivalent we had at the year end, and we have a nominal debt of 1.1 billion. If we move to slide 19, You can see that our liquidity overall amounts to $164 million, out of which you have $99 million of cash on hand. We have still available $65 million of the West Fargo line. We drew a bit, only $35 million, $34 million on it. We also worth noting, the team has managed to sign a new factoring deal, $40 million factoring deal. with the critical leasing entities. We've used 20 million of that at the end of June, so not even entirely the full plan, and we still have 40 million available for West Fargo. So in conclusion, we are okay in terms of liquidity, well into our plan, and we've managed to absorb these lower sales than expected in H1 and still meet all the criteria and all the covenants we have. With this, Richard, this marks the end of my presentation.