Vantiva S.A.

Ladies and gentlemen, welcome to Technicolor's conference call, chaired by Richard Mote, CEO, and Laurent Carotti, CFO. At this time, all participants are in listen-only mode. Later, we will conduct a questions and answer session. If you would like to register a question, please press 01 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 fillings with the French Autorité des Marchés Financiers. I would like now to hand over the call to Richard Mozart. Please go ahead.

Good evening everyone and thank you very much for joining us to discuss Technicolor's first half 2022 financial results. So let's start on slide four. During the first half, Technicolor's divisions continued to perform well, producing a good set of results and extending the positive momentum that we saw in our first quarter. So let's look closely at the results on this slide. Our revenues amounted to €1.601 billion, which was up 8.8% at constant exchange rate, driven by strong demand for products and services from technical and creative studios and connected home. Our adjusted EBITDA totalled €134 million, up €40 million from last year. and the adjusted EBITDA margin improved by 139 basis points at constant exchange rate to 8.4% of revenues, resulting from higher revenues and significant cost savings, as well as operating efficiencies achieved across all divisions. In addition, our free cash flow improved by €180 million thanks to better operating performance and lower change in working capital requirements at connected home, along with lower restructuring expenses, notably in the second quarter. Today, our businesses are strongly positioned as leaders in their respective markets, enabling them to face some of the ongoing industry-related headwinds. Specifically, our businesses have benefited from an improved cost base and strengthened operations to navigate continuing supply chain constraints, as well as a decrease in advertising spending. So let's move on to slide five. As we go forward, I'm pleased to confirm this year's technical guidance. We expect revenue from continuing operations to keep growing. Adjusted EBITDA of €361 million, adjusted EBITDA of €161 million, and free cash flow of €217 million. In addition, we are well on track to achieve our run rate cost savings target of €325 million by the end of this year. Through our successful initiatives, we have already achieved €317 million cumulatively in cost savings since 2020. Now taking a look at slide 6, we've made significant progress in the partial spin-off of Technicolor Creative Studios, along with the refinancing of our existing debt. Thanks to the overwhelming support we've had from all of our stakeholders, we're well on track to create two leading independent companies with solid foundations for growth by the end of the third quarter of 2022. Once a spin-off is approved, we will move forwards with the listing of Technicolor Creative Studios, through which Technicolor shareholders will receive one share of TCS for each share they own of Technicolor. As we move towards that goal, our next step is to host a shareholders meeting on September the 6th so that they can approve the spinoff and the new corporate name of Technicolor SA, which will be Vantiva. On slide seven, along with the strategic spinoff, we are refinancing our debt. As you know, our shareholders have overwhelmingly approved the issuance of 300 million euros unsecured, reserved, mandatory convertible notes, which amount is fully subscribed by a group of our investors. In addition, we've negotiated two distinct financing packages for the two separate entities. As part of the refinancing process, Technical RSA has finalized discussions for both Fantiva and TCS. For Vantiva, Barclays Bank and Angelo Gordon have committed to provide a €375 million debt package. In parallel, advanced discussions are underway with Wells Fargo to extend the asset-based lending facility for four years. For TCS, the group has obtained commitment for a €623 million floating rate first lien term facility. This facility is composed of two tranches. a 563 million euro tranche and a 60 million US dollar tranche. The maturity for both these tranches will be four years. In addition, the group has obtained commitment for a 40 million euro revolving credit facility. The terms of the refinancing of the technical and creative studios facility as well as the terms of the distribution are the subject of a prospectus to be approved by the AMF. This refinancing aims at providing both future companies with a more agile balance sheet and adequate capital structures in order to support their own development and their long-term growth ambitions. Now let's look at slide eight, where we dive into the performance of our divisions. And over on slide nine, starting with TCS, in the first half, TCS proved yet again why it's the independent global leader in tech-enabled content creation with an award-winning portfolio. During the period, all four of TCS business lines worked on many outstanding projects with leading players in the content industry, reflecting the strong industry demand for content, as well as the skills and expertise of our talent and our cutting-edge industry technology. MPC teams worked on approximately 20 theatrical and over 35 streaming and episodic projects. and their outstanding work was rewarded with industry nominations and awards. Micross Animation was involved in the production of six features and several episodic series, including Charlie and the Chocolate Factory for Netflix. The Mill contributed to more than 1,900 projects during the first half and won key industry awards. And Technicolor Games kept working with several AAA games companies. On slide 10, we look into the financial performance of technical accredited studios, and you'll see that we continue to benefit from increasingly strong demand for original content. In the first half, TCS revenues amounted to €408 million, which was up 29.6% at constant rate compared to last year's period. If we were to exclude the post-production business, which we divested in April of 2021, revenue growth was 43.7% at constant exchange rate compared to the first half of last year. This significant improvement was largely driven by a major increase in demand for original content despite the market shortage of talent and the deceleration of advertising spending growth as a consequence of the macroeconomic conditions. Our adjusted EBITDA margin totalled €61 million which was up 16 million compared to last year's period at constant exchange rate. On top of the increase in revenues, our margin improvement from 13.7% to 15% resulted from the positive impacts of multiple operational transformation programs in conjunction with permanent cost reduction measures. However, our first half margin was partly reduced by higher costs required to complete major projects, as the shortage of experienced talent caused delays and additional costs. In addition, lower revenues at the mill in the second quarter of 2022 reduced profitability. To address these headwinds, we have implemented mitigation actions, and MPC and the mill are actively working on accelerating recruitment and training programmes. Looking ahead to the rest of the year, we expect that demand for TCS VFX and animation services will continue to grow significantly. Specifically, MPC and Mikros Animation have already been awarded new projects with more than 85% of the pipeline committed for 2022. As for the mill, we are expecting slower growth than initially anticipated given reduced advertising spending. For technical games, we expect demand for games content to continue growing along with the expansion of our service offering. Meanwhile, across the board, delivering on all projects that are committed will remain the main challenge for the rest of the year. Now let's turn to Connected Home on slide 11. In the first half of this year, Connected Home continued to see business progress with strong demand, in particular for broadband products, as people seek to improve their connectivity. And we have seen an increase of broadband as a percentage of our revenue compared to last year's first half. Connected Home continues to deepen its leadership position by deploying open and innovative technologies for leading network service providers, such as VUI Telecom in France. Importantly, we are committed to the science-based targets initiative, making Technicolor the only company in the Connected Home space which has signed the 2050 Net Zero standard. Looking at financial results for Connected Home on slide 12, during the first half of the year, Connected Home managed to efficiently navigate a very challenging environment. Our revenues totaled 897 million euros, which represented an increase of 5.8% at constant exchange rate compared to the same period of 2021. While the supply chain constraints and the ongoing chip shortage limited the division's ability to fully satisfy customer demand, a solid second quarter revenue showed signs that there is improvement in the allocation of supply and in transit times. In addition, the increase of broadband revenue as a percentage of sales, with a strong rebound in North America, drove revenue even further. Adjusted EBITDA amounted to €70 million in the first half of 2022, up 14.4% at constant exchange rate or 7.8% of revenue compared to 7.2% of revenues in the first half of 2021. Our margin improvement was mainly driven by operating efficiencies and cost savings, along with an improvement in sales. Looking ahead, we expect that the demand for connected home broadband boxes will remain strong. While we're starting to see some improvement in supply and delivery, we will continue to collaborate with our clients and suppliers to optimize our processes and mitigate the potential impact on profitability and working capital. In addition, we're continuing to implement efficiency measures and delivery improvement initiatives in order to mitigate the shortage of components and pricing challenges. On slide 13, let's turn to Vanteva Supply Chain Services, formerly known as DVD Services. Throughout the first half of 2022, Vanteva Supply Chain Services continued to adapt its distribution and manufacturing operations as well as customer contracts in response to the ongoing decline in disc volume, with volumes reducing by 30% compared to last year's period. However, as part of its strategy to diversify its activities, Antiva Supply Chain Services has made considerable progress during the first half. In Microfluidics, our new lab in Poland is nearing completion as we've gone beyond prototyping. In Vinyl, we have executed contracts with two of the world's top three music companies, Universal Music Group and Sony Music. And we had the launch of our own commercial record pressing in May, which is enabling us to be recognized as a high quality player in the industry. In supply chain fulfilment and transportation, we have continued to add new customers, driving supply chain and fulfilment growth in the first half of 2022, as well as year-over-year growth in the freight brokerage business. On slide 14, our solid financial results show that our operational restructuring and diversification strategy is working. Mantiva Supply Chain Services revenues total €296 million in the first half of 2022, which is up 4.5% at current rate compared with the first half of 2021, but down 3.2% at constant exchange rate. While we experienced expected lower disk volumes, the impact of volume reductions was partially offset by disk price increases and pass-through cost increases, along with the performance of new growth businesses, notably transportation management and vinyls. In the first half of 2022, adjusted EBITDA amounted to €15 million, representing 5.2% of half-won 2022 revenues compared to 3.6% in half-won of 2021. EBITDA margin improvement was mainly driven by significant footprint optimisation, headcount reductions and higher activity in non-disc businesses. Moving forward, In 2022, solid year-on-year new release volumes are expected as theatrical attendance continues to normalise. But this will be more than offset by lower catalogue volumes driven by evolving customer and retailer behaviour. As part of the group's plan to accelerate the diversification of the business, the division is continuing to work on significantly expanding non-disc activities. In addition, our financial performance will be improved through continuing cost efficiencies. With that, I'll turn it over to Laurent.

Thank you, Richard, and good evening, everyone. So, I will now provide you with the further details regarding our first half 2022 performance. So, let's turn to slide 16 to review the key figures. So, as mentioned by Richard earlier, our performance in H1 was good, despite the ongoing challenges in key component supply, logistic, and time recruitment at TCS and Connected Hall. and also despite the restricted advertising spending. So our strong performance was mostly driven by increased demand in TCS and connected home, and through our successful turnaround plan across all divisions. So this slide presents the consolidated figures for the semester. One needs to keep in mind that 2021 and 2022 financial reserves include IFRIC interpretation on SAS implementation costs, and these were minor, in first half 21 and first half 22, and that also trademark licensing operations accounted for as discontinued operations. So OH1 revenues of 1.6 billion increased by 249 million at current rate, with the forex impact representing 129 million, meaning that at constant exchange rate, revenues were 120 million, or 8.8%. TCS recorded a strong growth, despite low advertising revenues in the second quarter, while connected home was impacted by industry-wide key component shortages and supply chain challenges, which prevented the business from meeting the strong customer demand in full. OIGCDB DA of 134 million was up 29 million at constant rate, or 31%, mainly driven by TCS increase. This also reflects operational efficiencies, in all divisions. Helped by the EBITDA increase, the adjusted EBITDA of 48 million represents a 33 million year-on-year improvement at constant rate. The EBIT from continuing operations rose to 8 million and should be compared to a loss of 11 million in the first half of 2021. This resulted from better operational performance despite higher non-recurring costs. Non-recurring costs amounted for the first half of 2022 to 20 million versus 3 million last year. The 20 million are composed of restructuring costs of 8 million, continuation of the restructuring of the DVD business in Poland in Memphis, and of 9 million related to the ongoing spin-off project. As a consequence, net result for continuing operations was a loss of 77 million, presenting still an improvement of 9 million at constant rate. Let's look at the free cash flow now. Free cash flow for continuing operations before financial and taxes improved to a negative 35 million. It has to be compared to a negative 215 million in the first half of 2021. So this 180 million improvement reflects the positive impact of several things. The improved operating performance at the CDBDA was up 40 million. The lower increase of working cap requirements an improvement of 135 million. The change in working cap was 76 negative million, compared with a negative 111 million in the first half of 2021. Certain improvements come from positive variation year on year, connected all mainly, as the first half of 2021 working capital was not only impacted by the negative impact of reductions in supplier payment terms. And finally, the lower non-recurring cash outflow, an improvement of 22 million, notably lower cash restructuring, 33 million, principally at the connected home and Vantiva supply chain services divisions. So these positive impacts were partially offset by an increase in capex, 16 million, from 40 million to 57 million. This is mainly located at technical or creative studios and due to the higher activity and higher headcounts and to payment phasing as well. So let me highlight here that over the second quarter, the free cash flow was positive at $90 million. The higher price debt amounted to $1.1 billion as of June 30, to be compared to $1.096 million as of December 31, 2021. Let's move to slide 17. So here we'll do a little bit of a focus on revenue. So revenues at $1.6 billion are up 11%. at constant exchange rate and constant perimeters, i.e. excluding the post-production contribution that was still there in the beginning of 2021 up until April 2021. The revenue increase of 250 million mainly resulted from 116 million revenue improvement at TCS, excluding post-production, plus 129 million of positive forex impact, and finally, 45 million improvement at connected homes. TCS revenues now represent 25% of the consolidated revenues, compared with 22% in H1 2021. At MPC, revenues more than doubled compared to last year, driven by the continued ramp-up in production of major theatrical projects, as well as increasing contributions from all the major streaming platforms. H1 2021 was still suffering from pandemic-related impacts on production. At The Mill, Advertising revenues decreased at around 6.6% in H1 2022 compared to last year at constant currency. At current rate, they were slightly up, driven by lower year-on-year revenues in the second quarter, as activity was restricted by decelerating advertising spending growth and compared with a high base in Q2 2021. At big cross-animation, the revenues were up, mainly as a result of higher volumes, in feature animation projects, then, taking color of games, revenue were also higher thanks to greater production capacity. Connected-home share in conciliator revenue decreased from 57% to 56%. Its revenues amounted to €197 million and increased by €45 million at constant exchange rate. The trades were still impacted by the component shortage crisis in the supply chain dislocation, but They also benefited from the first sign of improvement in the allocation of supplies and in transit time, and from increased share of broadband in revenues, notably in North America in Q2 2022. Ventiva's supply chain services decreased slightly, 9 million at constant exchange rate, but it was up 13 million at current rate, to reach 296 million. Ventiva's supply chain services now represent 19% of revenues, This volume declined 30% year-on-year, driven by expected market decline, but further exacerbated by inventories' depletion from studios in H1 2022. The impact of volume reductions was partially offset by disk price increases and pass-through cost increases, along with the good performance of the new growth businesses. Here, we mainly mention transportation management, of course, and the Also note that revenues were negatively impacted by 29 million of change in scope due to the sale of post-production in April 2021. Excluding those impacts, first half-conservative revenues would have been up 11% at constant exchange rate. So let's have a look now at slide 18 and comment rapidly on EBITDA performance, as I've given you quite a bit of detail already on all these changes. So as shown in this slide, EBITDA improved significantly by 40 million, 234%. million excluding the Forex impact EBDA will have increased by 28 million or 31% at constant exchange rate. Growth was driven by revenue improvement along with operational efficiencies and cost savings for all of our division as illustrated by the EBDA margin improvement of 139 basis points at constant rate to 8.4% of revenues. I will not comment on each business performance as Richard has done it already. So let's move to slide 19. We're going to take you now through all the other lines of the P&S. Legislative EBITDA also reflects improvement in efficiencies and cost savings as it increased by 33 million at constant exchange rate to a positive 48 million compared to 10 million last year. Otherwise, EBITDA from continuing operations of 8 million to be compared to a negative 11 million in H1 2021 improved by 17 million at constant exchange rate. Improvements, many results from improved EBITDA, partially offset by unfavorable change of non-current items. What we have here, two impacts going on different directions. So the first hand, you have restructuring costs, which reduced by 18 million compared to last year. We're going towards the end of the panorama plan. But it's been more than offset by other non-current items, 9 million this semester, mainly related to the ongoing spin-off project, and it has to be compared to a positive 25 million in H1 2022. Please remember that in H1 2022, we benefited from a non-cash capital gain linked to the liquidation of a legal entity. Otherwise, no major change year-on-year. The PPI amortization at 20 million remains broadly flat year-on-year. Slide 20. Here, the financial results totaled, you can see they totaled a negative $65 million. In the first semester, it has to be compared to $63 million last year. Income tax amounted to a negative $19 million. It was $10 million last year, and mainly it reflects the fact that we are increasingly paying tax in Canada and India. Group debt results from continuing operations, therefore, amounted to a loss of $77 million in each one, compared to a negative 84 million last year. Net gain from discontinued operations amounted to 63 million, compared to only 5 million in the first half last year. As you remember, on May 31st, the group completed the sale of its trademark licensing operations and received a cash consideration of approximately 100 million. As a result, the group has accounted for trading and licensing operations as discontinued operations as from January 1st, 2021. Slide 21. As shown previously, H1 2021 free cash flow after tax and interest from continuing operations is a 1989 million negative, improved significantly year-on-year by 169 million at constant exchange rates. This improvement is driven by, firstly, a lower decrease in working care requirements, plus 143 million, not to be thanks to Connected Home. Second, an EBDA improvement, $29 million. Thirdly, lower restructuring cash-out for $33 million. And finally, mitigated by higher capex, $12 million, $4 million rendering cash-out at TCS as a result of the higher activity and higher taxes and pension and other various elements in the product's impact. Slide 22. To finish off, we have cash-in-cash equivalents amounting to $168 million in total liquidity amounting to $216 million at the end of the quarter. Note that the West Fargo line was undrawn as of June 30. Few words on the NEP debt, which amounted to $1.2 billion, excluding IFRS 16 impacts, and in season $1.1 billion as per IFRS definition. And as a final word, as we are today, we've managed today to conclude the last part of our refinancing work around, you know, raising 623 million. For TCS, I would like very much to thank basically all the people who helped us, starting, of course, with the lenders and the shareholders that have proven by extending some of their loans with us that they believe in the story of the company and its development. Also, our advisors, you know, the likes of Rothschild, Goldman Sachs, Morgan Stanley, that helped us all through this journey to complete this. and of course the team at Technicolor that work a lot. We should also pay attention to our friends, the lawyers, that still continue to draft as we speak the paperwork and have been non-stop working for like two or three weeks. We have the likes of Bredin and Kian High and Gibson Dunn and all. So thank you very much, all of you, for your help because you've helped us to pass a very, very structuring point today. And with that, Richard, I think we are ready to take off.

Ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypad. Once again, ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypad. We have a first question from David Sardin from Kepler Chevron. Please go ahead.

Good evening, gentlemen. I have a question regarding TCS and the advertising activity. Do you think that the trend should deteriorate in the coming quarters? So this is my first question. Second question is related to the wage inflation. Which kind of wage inflation do you expect for the second part of the year? And do you have a vision for 2023? And the consequence of that, what is the mood of your client related to this inflation factor? Thank you.

Maybe if I take the first question, which is I think about the advertising trend, I think it's difficult to see exactly what the trend is at the moment. I think a lot of large advertising groups are reporting relatively flat trends at the moment, although obviously we have the World Cup coming up in the autumn. And that will be a big driver, we believe, of advertising spend. At the same time, there are some advertising-related groups which have made profit warnings recently. So it's difficult to know exactly which way the trend is going. I would say that growth has definitely slowed. But the future trajectory is going to be very dependent on how the global macroeconomy develops because advertising is very complex. closely correlated to the development of the macro economy. Do you want to talk about inflation, Laurent?

Yes, yes. And maybe just in addition to your comment, as you know, we have reduced our expectations of our advertising revenues like a few months ago. And the trend we observe at the moment is we are in line or even slightly better than what we have predicted. So we believe that where we are is the right place. On wage inflation, as you know, we have planned. So it's global here, so encompassing many different territories. But we are closer to 8% to 10% in India. We are slightly lower than that in the rest of the world, 6% to 8%. The trend is continuing more or less at the same pace. We haven't seen any specific deterioration recently. So it stays in line with what we had planned for. clients are fully aware of that but basically as you know mainly at TCS because the weight of the stuff is the heavier in the P&L because of the red card mechanism we're passing through the inflation and the clients do understand that so this is how it's being dealt with at TCS Thank you

Thank you. Ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypad. We have a follow-up question from David Sardin from Kepler Sovereign.

Please, go ahead. I have a question regarding one of your clients. Are you concerned by... by Netflix subscription base that was in decline in Q2 and the prospect for this client base. Do you see some platform in the mood to reduce or maybe increase their projects?

Well, I think that the... The decline in the base was less than some analysts and observers had been expecting. They also said in their press release that they were going to be maintaining their projected level of spend on content, which I think is good from a technical creative studios perspective. I think there is bound to be some people who will be reducing their spend on multiple streaming platforms as disposable incomes come under pressure because of continuing inflation. But nevertheless, I think there's going to continue to be competition amongst the platforms for those subscribers. And that is going to mean that the war in terms of original content, is going to continue, and that, therefore, demand will continue for the VFX services provided by technical and creative studios. And certainly, in terms of the pipelines, which we see for the remainder of this year and into 2023, we see no sign of a slowdown in terms of demand.

Okay. Perfect. Thank you.

Thank you. We have no other questions for the moment. Once again, ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone.

Okay, well, if no other questions, thank you very much for listening, and we look forward to speaking to you next time around. Thanks a lot. Thank you.

Thank you. Ladies and gentlemen, this concludes today's web conference. Thank you all for your participation.