Vantiva S.A.

Ladies and gentlemen, welcome to the Ventiva's Q3 2022 results, chaired by Luis Martinez-Amago, Ventiva CEO, and Lars Ehlen, Ventiva 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 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 Ventiva's website with synchronized slideshow. I would now like to hand over the call to the CEO. Sir, please go ahead.

So this is Cirino speaking. Before handing over to Luis, I invite every participant to read the forward-looking statements regarding the forward-looking statements. Thank you. Luis?

Good evening, everyone. I am Luis Martinez Zamago, the CEO of Vantiva. I welcome all of you to this first Vantiva earning call. We are reporting for the first time as Vantiva, a refocused company after the spin-off of the technical or creative studio business. Vantiva is now entirely focused on its business with two divisions, the connected home division and supply chain solutions. Let's go to slide number three. Vantiva is offering an attractive value proposition based on our commercial positions, our technical and operational competence, and an experienced management team. As explained during our Capital Market Day, these businesses have been transformed over the last years. The ambitious objectives defined at the beginning of this transformation have been achieved under very turbulent market conditions. And the results that we are delivering as part of Technicolor until now and as an independent company from now are the consequence of this transformation. Our customers are trusting us. They are providing new business opportunity to our divisions. Our partners are aligned with us to execute together and to deliver products to our customers, finding solutions to the different market challenges. And our teams Invantiva are focused on the task with expertise, dedication, and ambition to execute our strategic agenda. And our main shareholders are supportive and motivated to accompany us in this new phase for the company. Our commitment to them is to translate our plans into sustainable profit and positive free cash flow generation. Q3 figures, as you will see in a minute, show that the company is delivering solid results in line with our guidance despite a still complex supply environment. Thanks to the spin-off, the financial leverage has been significantly reduced. However, the intention of the disposal of the TCS stake is now unlikely in the short term, but this is not impacting operationally Vantiva. As TCS and Vantiva are two separate companies now, we at Vantiva will continue to execute our plans over the next years, delaying the delivering plans we initially had. This new situation will not impact our operational plans since we can service our debt and run our operations as planned. Let's move now to our Q3 results. In slide number five, you see the Q3 results, and they have been good and in line with our expectations, if not a notch better. Revenue reached 765 million compared to 528 for the same period last year. This growth of 45% in the quarter came from the strong performance of Connected Home and a favorable exchange rate. At constant rate, the growth would have been 27%. Connected Home reported an impressive 77% growth in the quarter. On the SCS side, They saw its revenue declining by 8.6%. At cost and exchange rate, the drop would have been 18.2%. This drop is explained by a strong 2021 Q3 comparison basis and a lower demand for DVDs. The group suggested EBITDA increased by 40% and reached 6.5% of the revenues versus 6.8% a year ago. THIS SLIGHT DECREASE IN PERCENTAGE IS EXPLAINED BY THE LOWER SHARE OF SCS IN THE PROFIT PULL, AS MARGIN IN PERCENTAGE FOR SCS IS HIGHER THAN THE ONE FOR CONNECTED HOME. CORPORATE AND OTHERS WAITED FOR 9 MILLION IN THE QUARTER IN LINE WITH LAST YEAR. FREQUENT FLOW BEFORE INTEREST AND TAX WAS POSITIVE AT 10 MILLION, SHOWING A 21 MILLION IMPROVEMENT. MOVING TO SLIDE 6 FOR A VIEW OF THE FIRST MONTH OF THE YEAR. In the slide sheet, you can see the same picture, but for the first nine months of the year, the revenue stood at almost 2 billion euros versus the 1.6 billion last year. This 26.5% increase has been totally driven by Conectejon Division, which achieved a 35% growth rate, while CS Supply Chain Solutions was about flat. At cost and exchange rate, the group growth would have been 11%, with 20% for connected home and negative 9% for supply chain solutions. The group adjusted EBITDA amounted to $123 million for the first nine months of the year, when it was 86 a year ago. This led to a margin of 6.3 versus the 5.4 of last year. And the free cash flow before interest and tax was still slightly negative at minus $26 million, but it's $235 million better than the one for the first nine months of 2021. Moving to slide number seven. In this slide, we are showing our guidance for 2022 that we are confirming based on our current and expected performance in quarter four. This guidance is based on a 1.15 euro-dollar exchange rate, and it will be converted when we communicate the actual results in the current rate. We are also confirming our 2023 guidance as well in the same rate of 1.15, and we will update this guidance to the new exchange rate when we are communicating the results of 2022. Let's move now to the business update by division. In slide nine, we will start by the connected home division. Starting by the right-hand side of the slide, we keep executing the business in line with our strategic priorities. We are prioritizing the broadband business since we believe this is a key strategic priority for our customers and will remain so for the years to come. As you can see, this represents already 70% of our business from 58% last year and less than 40% several years ago. On the video segment, our priority is in the new and growing Android TV and RDK ecosystems, where we maintain a good performance. Our two pillars of value proposition are the technological leadership and our operational agility. On the technological leadership front, we are focused on the fast introduction of new standards. On the technological leadership front, We have always led the introduction of new standards. We led the market with DOCSIS 3 and DOCSIS 3.1, and very soon we are going to do the same with DOCSIS 4. We deployed the first product with Wi-Fi 6 and Wi-Fi 6C, and we have recently shown in the Broadband World Forum the first ever product performing Wi-Fi 7 technology. In addition to that, we have launched new commercial products with key customers, as you can see some few examples in this slide. We are very proud of all these deals, and we expect this to continue. At the bottom left corner of the slides, you can see our corporate social responsibility priorities, and we are working in these priorities already for several years. But the relevant aspect in this space is the company's commitment, but also the measurable results that we are reaching in this space. On the commitment front, we are the only company in our industry that has signed the 2050 net zero standard and also has committed for the climate change science-based initiative. On the results front, we have obtained the EcoBuddies Platinum status, which plays Vantiva It places us on the top 1% of the companies in terms of results achieved. We are really proud of all these achievements. Now moving to slide number 10. Despite the still challenging environment, we have seen the Connected Home Division has enjoyed a strong development in the quarter with revenues up 77% or 54% at cost and rate. And at yesterday's BDO at 33 million, representing 5.7%, of revenue versus 16 million and 4.9% in quarter three 2021. Beyond the exchange rate impact, this is explained by lower constraints on the supply and easing logistic issues that have allowed a better product availability and higher deliveries of our backlog. Concerning margins, it is worth to mention that our customers are leaning forward and helping us to absorb the additional cost of components than this industry is experiencing. This has allowed to protect our EBITDA, but it has a mechanical negative effect on the margins in percentage, as it has increased revenues with no incremental contribution to the margin. Nevertheless, this dilutive effect has been compensated by higher volumes and the highly efficient cost structure, allowing us to increase the EBITDA margins on 78 basis points. For the rest of the year, we expect the supply difficulties to remain and the cost of components to stay high. Moving now to the supply chain solution division in slide number 11. As you can see on the right-hand side of this slide, the DVD volumes were significantly down at 43%, and this is due to a high comparison basis versus quarter through 2021. and unexpected manufacturing order reduction from one of our big customers, which is reducing the high level of inventories they have. The retail market performance remain in line with the expectations with a gradual secular decline, which is taking into account in our plans. The division continues to implement efficiency measures to maintain this activity at the right level of profitability contribution. The vinyl market continues to show significant growth. Vantiva accounts already with two global players in this field among its customers, and we are in conversation with a third one to start business with them as soon as possible. While the group has proven its technical capabilities for pressing records, the current capacity in place remains limited. versus the demand. We are putting in place the additional capacity as quick as we can, and the situation is progressively improving. Fulfillment and transportation, which is another axis of our diversification in this division, is growing at a good pace and is benefiting from lower pressure from the freight pricing. In the next slide, you will see that in this context supply chain solutions revenues were down 8.6% in the quarter, and 18.2% at constant exchange rate. Despite lower volumes and revenues, as well as higher material costs, the EBITDA margin has shown good resilience, and they were down only 90 basis points at 13.7%. And with this, I will pass the floor to Lars Ehlen, our CFO, to walk through our figures.

Thanks, Luis. Okay. The table on page 14 shows the combined result for Q3 and the first nine months of the year. Louise has just explained the movement for sales and EBITDA, so I will not repeat those. EBITDA for the quarter is increasing from 9 million last year to 21 million this year and is explained in full by the improvement of EBITDA. For the first nine months, the EBITDA is 43 million versus 11 million last year. The free cash flow from continuing operations for Q3, before tax and financials, has turned positive and reached 10 million for the quarter. Year-to-date, we are also showing a significant improvement from last year, and the cash flow for the period reduced from a negative 261 million to 26 million. Let's now have a look at the free cash flow bridge in a bit more detail. So as just mentioned, free cash flow before tax and financials reached 10 million for the quarter and shows a 21 million improvement year over year. The improvement is explained by higher EPTA of 9 million and reduced net restructuring cash out of 8 million. This was partly offset by slightly higher capex of 2 million and a negative change in working capital of 6 million. Pension and other fees yielded a positive impact of 11 million, and this was mainly coming from intra-year timing differences. The detailed bridge for the first nine months can be found in the appendix of this presentation. On this last slide, you can find the debt and liquidity position at the end of September. We reached a cash position of 83 million and an undrawn credit facility of 125 million dollars, of which 83 million euros are immediately available. The net debt amounted to 369 million, and you can find the details on how the net debt is calculated in the press release we just released. So this ends our presentation, and Luis and myself would be happy to answer any questions you may have now.

Okay, operator.

Thank you, ladies and gentlemen. If you wish to ask a question, please press 01 on your telephone keypad. First question from from Brian Garnier. Sir, please go ahead.

I have three questions, please. Well, congratulations for these good results. Please allow me in my first two questions to ask you about read-across versus what's happening at TCF. So my first one would be the businesses and the companies are now fully different and distinct, yet part of the management were common between the two companies. How can you reassure us and how can we feel comfortable that the same managerial and operational issue will not happen at Bentiva in terms of quality of monitoring and reporting and the problems that we recently saw at TCS? That's my first question. Then my second question, again, as far as TCS is concerned. You said that probably it will be harder to sell the TCS stake and that your deleveraging plan will take a bit longer than planned. Can you please confirm to us that this doesn't raise any issue as far as your debt holder are concerned or anything specific about the debt that you would need to reimburse soon and that having difficulty setting the stake in Vantiva would raise any specific issues there. And please, then my last and third question is about, so Vantiva's cash flow, you generated or accumulated negative 26 million. To reach the guidance over the full year, you would need to generate at least about 85 million in Q4 versus 10 million in Q3. So what would be the bridge between Q3 and Q4 cash generation in order to reach your guidance? Thank you very much.

Okay, I'll take the first two questions, and Lars will take the last one. So on the first question related to the TCS, We are two independent companies. To answer your question, the management of Antiva, which is sitting here, we were running this activity, the connected home activity and the supply chains already in the past. And the only quick answer I can tell you is that you saw the results. We are transforming this activity already for many years, and we are fully focused on executing our plan. Okay, and as you have heard, we are confirming our guidance that we have already communicated for some time. And we are managing the business. We are really focused on that business. And I have nothing more to comment on this aspect. The second question was related... Deliverage.

Deliverage, yes.

So we had a plan as we communicated in previous communications of trying to deliver the company as soon as the conditions were the appropriate. As I'm saying, okay, the conditions are... worse than the last time we communicated, but this doesn't represent any operational issue for us. We can service our debts. We can run our company with no liquidity moving forward, and we need to wait a little bit over the conditions to maybe execute what we were planning to execute, but this represents zero impact in our focus and what we need to do in this business. It's only a change of a possible timing. And the last question, Lars.

The last question was on the pre-cash flow and how we were going to reach our guidance by generating 80 to 85 million in the port quarter. And Thomas, as you know, and if you have followed us for a while, you know that we have a heavy seasonality in both connected home and in supply chain solutions, where we generate systematically a lot more cash in the port quarter than we do in the remaining part of the year. So we are fully confident that this will also continue into 2022. On top of that, we also have the improvement of the supply situation for connected home, where we, as we have mentioned earlier, we have tied up a lot of inventory due to the longer transportation times in the first part of the year. This is now unwinding. Transportation times are back to normal, and this will also have a positive impact on the cash in the fourth quarter. So we are fully confident to get to where we have to be by the end of December.

Thank you very much.

Thank you. Next question from . Sir, please go ahead.

Good evening. I have a question related to TCS liquidity issues. The company says that they will discuss with their stakeholders, including their shareholders. So in the case of capital increase, what will be your position?

OK. Today, this is a question which is a speculation. We have heard what has been communicated. Again, our main objective is to remain focused on executing the Vantiva plan, and we need to defend our shareholders' interest. And when the moment arrives, this will be debated to see what is the position that we will take. Okay, but it's too soon, too early to comment on any position in this front. For me, the main message is first priority is to remain focused on the Vantiva plan and And second, yes, we are conscious of our responsibility as a major shareholder of TCS and responsibility of defending the interests of our shareholders, but we will address these possible scenarios when the moment arrives.

Okay, thank you. Thank you.

Thank you. Next question from Yari Fulana from Goldman Sachs. Please go ahead.

Good evening, everyone. Congratulations on the quarter and thanks for the helpful presentation. A few questions from me, if that's okay. Maybe if I start off just in terms of the success of the print, it seems like the connected home business is trending clearly above plan. You called out Deutsche Telekom, but are there any major contract wins that you'd be flagging at this point? Secondly, on the... Maybe I'll stop there and I'll come back.

Okay, you prefer, but I can answer this question. So I will comment on a number of them that we have announced publicly. We need to be conscious that some launch we cannot announce because we have confidentiality agreements with customers. But okay, you saw the reference on Deutsche Telekom. We are announcing also a new important gateway with Vodafone in the UK, which is a significant new product because it's bringing customers Wi-Fi 6C functionality, and it's the first one in the UK market. We have also announced a video with another operator that I cannot name in the UK. It's the first Android TV product that will happen in the UK. And we are announcing today, which belongs more to quarter four than quarter three, a new product with a VUIC telecom and on and on. It's a pity that we cannot communicate publicly some of them because, as I repeat, the confidentiality, but we have a significant pipeline of deals that is giving us a good prospectus for the future.

Very helpful. Thank you. And then maybe on the timing, perhaps on the slightly more negative side, on the contract loss in supply chain services, when did that come out and so when can we think about that lapping within financials and i think maybe connected to that could you maybe just give us a an understanding on where we are with respect to supply chains clearly they've been constrained all through the pandemic and then it feels like they've improved steadily from there and you've spoken about improvements that you've seen on the connected home side of things how far are we away from kind of a normal operating environment can you see that far out or is that are we too early to say that

Okay, thank you. So the first question on the supply chain solutions and the DVD business, we have not lost any contract. Sorry if that was misunderstood. We have run in contract with the main studios, almost all the studios. And the only thing, we have plans with them that they give us forecast for the year. And after that, they execute on the volumes gradually. What I said is that during quarter three, one of our customers they were not asking the production from us as they were committing. They were asking less, but simply because they wanted to deplete the inventory they have instead of asking new production. So it's not a contract loss. It's just the normal run rate of business that we have with them. That's some cases they ask for more because they have more demand. Some cases like this one in quarter three, They were asking less than they were committing, but it's not any loss of contract or change of topologies. We are running with them, and this is just an incident, but it doesn't have any long-term consequence. Going to the other part, which is supply chain for connected home. So we are still in a very consistent situation. The logistic part of it, transport, finding containers or moving goods, containers in the world. This is improving, as Lars has mentioned recently. So we see the lead times that went very, very, very long lead times in moving containers from one point of the world to the other is getting back to normal, I would say, even to pre-COVID situation. Not the prices yet. Prices are going down. But I think the lead time, which is important for our inventories in transit. This is getting in a much better situation overall. And on the component front, it's not getting worse. It's still constrained, but we are still finding difficulties. I think we are performing very well in this front, and we have very good suppliers, but we have a strategic partnership with them, and we are managing quite well. The forecast for the future, we consider that that will start easing a little bit in availability of components throughout 2023, almost certain for the second part of the year of 2023, but we are still not out of the woods. I think we need to keep our focus and we have our supply chain teams all over the world and mostly in Asia, in Hong Kong, Taiwan, China, very focused on keeping our flow of components to build our products. But overall, in 23, I am expecting certain improvements in this situation, a gradual improvement in supply and maybe a bit later on the price. But in supply, we will see some improvements moving forward.

Awesome. I appreciate it. I've taken up a bunch of time, so I'll keep it to two final questions. On the more operational side, I think there was an expectation that you were going to see more competition in and potentially some margin pressure, especially given kind of strong dollar and dollar-based cost base into next year. Could you maybe give us some color on the moving parts there, especially as some of those kind of COVID gains unwind in a less constrained market environment into 2023? And then finally, on the financial side, I think there's no escaping that the free cash flow outlook here is pretty compelling. but the guidance is on a pre-financial cost basis. So could you maybe give us a flavor of kind of what your expectations would be from an interest and tax perspective for the remainder of the year and into 2023 based on the PIC structure of the debt plus the recent refinancing?

Okay. I am not sure to have understood well the first question. I think competition stays very tight and we are competing in very competitive industries, but we are performing well, as you can see by the results. We don't expect major competition changes in the landscape moving forward. I think difficulties, let me put it in this way, in the market, when the market becomes difficult, is good for companies like us, like Antiva, because then our value proposition and our competitiveness is highlighted. In easy situations, more competitors can access the same type of performance, but in difficult situations, our value is highlighted. So I don't know if I'm missing any specific aspect of your question, but we consider competition stable over the next future, and the difficulties, in a way, not that we are happy with difficulties, But in a way, it's helping us in positioning us as a better performance than maybe many other competitors. And on the free cash flow?

So I think on the free cash flow, you need to think of the items below the interest and tax in three buckets. So you will have the interest, you have the tax, and you have the impact on the IFRS 16. So I don't think it makes much sense to look at this for 2022 because the legacy cost we had on the old depth and the cost we had of replacing the depth is not comparable with what we will have going forward. But if you look at what we will have with the new depth and a new business plan, I think you can think of each of these three buckets in the area of 20 million.

Very clear. And just a final one, perhaps this one's for you Lars, just on the covenants around your debt and that net leverage ratio, is that based on a net leverage that includes the value of the TCS stake as an asset held to sell?

No, we are not consolidating the debt or the results of TCS. Okay.

No, I mean, is the net debt net of the value of the asset you hold in your balance sheet for TCS, effectively?

Are we nipping the net debt to the value of the TCS for the governance?

No, we're not. So you can see how we are calculating our net debt in the press release. In Appendix 1, you have the full bridge from how we get to the net debt. And this does not include the value of DCS, okay?

Very clear, thank you.

Thank you. Next question from Aiza Halli from Bering. Please go ahead.

Hello, thank you very much for taking my question. Apologies, I'm a bit new to the name, but I was just wondering, my understanding was that one of the difficulties the business had faced in the past was not being able to pass on component inflation. Can you talk to how you've been successful in this in recent times, whether this is contractual or whether this is just unprecedented inflation triggering reactions from your customers, and whether we could expect them to continue to support you in this way going forward? Thank you.

Okay, look, the point is, as I said during the presentation, we are very happy of the support of our customers in covering the cost of the increase of components. I think they have understood that that was critical to have supply. And on the 2022 space, we have covered the cost and they have leaned forward. It's not always a contractual commitment, but it's, let me say, an operational commitment. And I thank all of them to be that flexible. So we have covered this. The other question, and maybe you're referring to previous years, the situation is the same, but the point is when we suffer a crisis of this kind, there is a component of speed. The component goes up in a ratio. And then we need to establish conversation with customers and agree with them on how they are going to compensate. And this may have a partial coverage for a period of time in which we keep serving products. And after that, when we agree, they start covering the cost. And this is where in the previous year, maybe the percentage was not totally, but as I said, in 2022, we have a very good support from our customers in covering the cost. Moving forward, one of our services that we provide is keeping our customers informed about market disruptions. We have experts in many aspects in the world and we are debriefing customers about situations, not only components, not only evolution of some new technologies, but also impact of COVID lockdowns in China, closure of factories, etc. We bring to them the situation and the solution that we are proposing to them to fix the situation. And normally, these help us in really executing quickly to guarantee supply, but also in being very transparent with our customers and facilitate that they participate in guaranteeing the supply. So we are pretty happy. And we thank all our customers for the help they have provided.

OK. Would I be fair in saying this is a step change from the Vantiva of old or the Technicolor of old? and that the relationship has strengthened in this manner going forward, or is the conclusion that unprecedented macro movements, such as Chinese COVID lockdowns, et cetera, you will get support for, but there is a range of supply chain disruption that you would still have to wear?

I don't understand why you made the link to previous company of Antiva. One thing I may say is that our customers are happy of this new topology because, okay, we are an strategic supplier. We are very critical for our customers because if they need to commercialize their product, their service, they need our product. And being in a group as before, some of them that they are very dependent on us, we're a bit concerned that maybe the priorities of how we allocate investment, et cetera, can be distorted with other businesses. Now with Vantiva they see a full play, a very core play in our core business and they are very happy because they can be sure that all my decisions are based on their interest and they have full transparency of the performance of the company. Now moving maybe to the second part of your question is this in terms of how we act in the market related to components has no impact and whatever is happening in the future will continue to have the same type of engagement with customers, okay? The world is not ending now, and it will not end when the supply will facilitate, and we're going to keep the transparency to our customers, working with them in guaranteeing supply and being transparent on all aspects involved in the delivery of the products.

Okay, thank you very much.

Thank you.

Thank you. We have no more questions for the moment, ladies and gentlemen. Just a reminder, if you wish to ask a question, please press 01 on your telephone keypad. Gentlemen, we have no more questions by phone.

Okay. Thank you very much to all of you, and let's talk in three months when we are presenting the full year results. Thank you.

Thank you, ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.