Nielsen N.V. Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the 2020 Nielsen Holdings third quarter results call in to discuss the sale of Global Connect. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. We ask that you limit yourself to one question and re-queue for any additional questions. please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Sarah Gibbons, Senior Vice President, Investor Relations and Treasury.

Good morning, everyone. Thank you for joining us to discuss Nielsen's announced sale of the Connect business and our third quarter 2020 financial performance. I'm joined by our CEO, David Kenney, our CFO, Linda Zoukakis, and the CEO of Connect, David Rawlinson. A slide presentation that we'll use on this call is available under the events section of our investor relations website. Before we begin, I'd like to remind all of you that our remarks and responses to your questions today may contain forward-looking statements, including those relating to the proposed transaction, 2020 guidance, and the impact of COVID-19. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, November 2nd, and we are under no obligation to update. Our actual results in future periods may differ materially from those currently expected because of a number of risks and uncertainties, including those identified in the risk factor section of our most recent annual report on Form 10-K, as amended, and in subsequent reports filed with the SEC, including our third quarter 10-Q that will be filed today, which are available on our website. We assume no obligation to update any forward-looking statements except as required by law. On today's call, we will also refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are available in the earnings press release, which is available at the investor relations section of our website at Nielsen.com. For Q&A, as always, we ask you to limit yourself to one question so that we can accommodate everyone. Feel free to join the queue again, and if time remains, we will call on you. And now to start the call, I'd like to turn it over to our CEO, David Kenney.

Thank you for joining the call today. We have three main topics to cover. First, the sale of our Global Connect business to Advent International and Jim Peck. Second, our strong third quarter results and updates on our progress. And finally, our updated outlook for 2020, starting with the sale of Global Connect. Yesterday, we announced the sale of the Global Connect business to Advent International, a highly regarded private equity investor, and their partner, Jim Peck Ventures, for approximately $2.7 billion plus performance-based warrants tied to long-term performance. Before I get into the details of the transaction, I want to make a few comments about Nielsen Connect. Nielsen Connect is a leader in its industry. It has a strong global franchise and a 97-year-old history, providing measurement and analytics to the fast-moving consumer goods and retail industries. Our Connect team has done an incredible job driving its transformation, strengthening its competitive position, and improving its financial performance. I want to personally thank each and every colleague on the Global Connect team for their hard work and dedication, especially during this global pandemic. Advent's investment in Connect is great for Connect, its clients, and its people. This investment will allow Connect to operate as a privately held company and work with an experienced investor who is keen to invest in the business to accelerate its growth and help Connect achieve its long-term potential. I certainly look forward to seeing Connect's continued success. Now, let me turn to the details of the transaction, which was unanimously approved by Nielsen's Board of Directors. The sale price represents a multiple of approximately seven times Connect's trailing 12-month adjusted EBITDA on a standalone basis. We expect the transaction to close in the second quarter of 2021, subject to customary closing conditions and regulatory approvals, and a Nielsen shareholder vote. We expect the Global Connect segment to be reported as a discontinued operation starting in the first quarter of 2021. This transaction is a terrific outcome for Nielsen and our shareholders. The sale of the Global Connect business will deliver substantial value to shareholders with greater near-term certainty than would have been the case with a spin-off. The proceeds will be impacted by debt-like items, other adjustments, and taxes, and we plan to use the net proceeds of approximately $2 billion, primarily for debt paid out. This strengthens our Nielsen balance sheet and it reduces other liabilities on the balance sheet, such as pension obligations and equipment leases. It results in net leverage on a pro forma basis at year end 2020 of approximately four times. That compares to our expected leverage of roughly five times at the time of the spinoff had we gone down that path. we'll have greater financial flexibility to execute our growth strategy and expand our role in the global media marketplace. I look forward to sharing more about our outlook and strategy at a virtual investor day coming up on December 9th, and I hope you will all join us there. For today, we want to focus on the great progress we made in the third quarter and our outlook for the rest of the year, so let's now turn to the results. In the third quarter, we had strong performance with all key metrics in line or ahead of expectations. We are building a consistent track record of successful execution. Our revenues declined 3% in constant currency, which was in line with our expectations. What I would say is we have a strong and resilient business model with high client retention rates and 70% recurring revenue, providing visibility in a dynamic and COVID-influenced environment. Our adjusted EBITDA grew 6.1% year over year, which is the highest growth rate of that metric since the second quarter of 2016, with significant margin expansion higher than we expected. Free cash flow was also above our expectations. These results reflect decisive actions and discipline, which permanently changes the way Nielsen operates. We are prioritizing resource allocation to our faster growth opportunities, and we're zero basing our cost structure and our capital expenditures. We have made good progress on the optimization plan announced in July, and this is expediting our transformation to a more efficient, agile, platform-based organization. Notably, we exited several smaller international markets in the third quarter, and we continue to tightly manage headcount. Our teams have worked incredibly hard and adapted so well in what is still a challenging environment in order to deliver these results, and I'm truly appreciative of my colleagues' efforts. Following another strong quarter, we have refined our 2020 guidance We raised our target ranges for adjusted EBITDA, adjusted EBITDA margin, and free cash flow, and we tightened the adjusted EPS range. I'm confident in our ability to deliver on our 2020 goals. That said, we are monitoring the COVID pandemic very closely. It is, as you know, a fluid situation, especially for a global organization, and the health and safety of our employees continues to be our first priority. But we've also shown a proven ability to adapt and execute in a dynamic market, and we are well positioned across a range of scenarios. I'll now turn the call over to Linda to review the financials. and then I'll come back to review highlights and progress in both Media and Connect.

Thank you, David, and good morning, everyone. As David highlighted, we continue to execute against our plan in this unprecedented time. Overall, Q3 results were better than our forecast, including greater margin expansion and higher free cash flows than expected. And this comes in spite of continuing top-line pressures related to COVID. I'll start with slide eight to review the third quarter results. COVID continued to put pressure on top-line revenue, though at a lesser pace than in Q2. Overall revenue declined 3.3%, which includes an FX drag of 30 basis points. Constant currency revenue declined 3%, or 3.8% organic, in line with our expectations. Adjusted EBITDA was ahead of our expectations of 277 basis points constant currency driven by disciplined cost management, including temporary COVID-related cost takeout and permanent savings from the optimization plans we announced in July. Our adjusted EBITDA margin of 32.1% was the highest third quarter margin in Nielsen's recent history. Our Q3 revenue was down 53 million year over year, while adjusted EBITDA was up 25 million. Adjusted EPS was 43 cents compared to 51 cents in the third quarter of 2019. Higher adjusted EBITDA year over year was more than offset by higher taxes and depreciation and amortization. Free cash flow of $336 million was above our expectations and was up from $301 million in the prior year. These results exclude $32 million of separation-related cash payments in the quarter. Key drivers of the year-over-year improvement include higher EBITDA and lower cash taxes, partially offset by higher restructuring. Cash collections remain solid. Let me update you on the optimization plan. In July, we announced the plan to drive $250 million of annual run rate permanent cost savings in the second half of 2020 and beyond. And we began to generate savings from this plan in the third quarter. On top of the $84 million restructuring charge we took in Q2, we incurred $50 million in restructuring charges in the third quarter. We expect the charge in the fourth quarter to be more modest. We've begun executing on the business transformation efforts and remain on track to realize about half of the savings in 2020. We have also begun to exit certain markets and businesses. Our organic revenue growth adjusts for the impact of exit, which was relatively small during this quarter. Before I turn to the segment results, I also note that we were active in the debt markets during the third quarter. We issued 1.75 billion in unsecured bonds, maturing in eight to 10 years, and refinanced 240 million of Euro senior secured term loans during the quarter. In October, we used the bond proceeds to partially redeem 2021 and 2022 bonds. We now expect net leverage to be 4.1 times at the end of 2020, down from our prior expectations of 4.3 times due to stronger free cash flow than previously expected. Turning to slide nine, I'll review the segment results, starting with media on the left. Q3 revenue was $836 million, down 4.2% constant currency or down 3.4% organic, generally in line with our expectations. COVID continued to impact media revenue, though this lessened somewhat compared to Q2. Audience measurement revenues declined 1.6% constant currency and 1.1% organic, which is adjusted for the Q3 sale of the social business and market exits. We saw ongoing pressure in local television and continued COVID-driven pressure in sports and ad hoc products. Plant-optimized revenue declined 10.8% constant currency, with organic revenue slightly stronger, down 9%, which adjusts for the Q4-19 divestiture of our music business. COVID continued to impact sports, grace note auto, and short cycle revenues. Though revenue decline, media's adjusted EBITDA was up 2.6% constant currency to 392 million. Margins of 46.9% were up 313 basis points in constant currency. As you can see, the temporary cost actions we put in place in the first quarter and the benefit of the permanent optimization plan savings are driving margin expansion. Shifting to Connect on the right side of the page. Q3 revenue was $727 million, down 1.6% constant currency, with organic revenue down 4.3%, which adjusts for the impact of Precima, the loyalty analytics provider we acquired in January 2020, and the impact of Q3 market exits. This is a significant improvement from 10.2% organic revenue declines in Q2. The 4.3% organic decline includes a 1.4% decline in developed markets and a 9.3% decline in the emerging markets. Measure revenue declines 0.6% constant currency, reflecting some continued but lessening impact of COVID. Predicts activate revenue decline 4.2% constant currency with organic revenue down 13.6%, which is just for the PREFMA acquisition. COVID pressures continue to impact our businesses where work is conducted face to face and in store, but to a lesser extent than in the second quarter. Similar to media, Connect had impressive margin expansion. Margins of 17.1% were up 285 basis points constant currency, and adjusted EBITDA was up 18.1% constant currency to 124 million. Revenue pressures from COVID were more than offset by both the temporary cost actions we put in place late in the first quarter and the benefits of the optimization plan. Overall, this quarter demonstrated solid performance with a clear focus on driving permanent cost efficiency. Turning to slide 11, I'll discuss our 2020 outlook. We are updating our 2020 guidance, maintaining revenue, raising adjusted EBITDA and margin guidance, tightening adjusted EPS, and raising free cash flow guidance. Our guidance includes total company constant currency revenue declines of 4% to 2%. This continues to include a decline of 3% to 2% for media. As we look at the fourth quarter, we continue to expect ongoing impacts from COVID, largely due to a slower return of sports, auto, and ad hoc analytics. For the businesses we plan to exit, we are also seeing slowing revenue trends. In Connect, we continue to forecast the decline of 4% to 2% for the year. We currently expect a lessening COVID impact in Q4 as some markets open and demand improves, but uncertainty remains in the global environment. Last quarter, we talked about the impact of exits being about 50 basis points to revenue in 2020 and an additional 150 basis points in 2021. The timing of a few exits has shifted closer to year-end, and so this relationship is now looking closer to 25 basis points in 2020 and 175 basis points in 2021. Including exits, our revenue forecast includes approximately 80 basis points of net benefit from acquisitions and divestitures completed in the last 12 months. We are raising our adjusted EBITDA guidance to a range of $1,850,000 to $1,880,000 and tightening our EBITDA margin guidance range by 50 basis points to 29.5% to 30% given solid EBITDA performance in the third quarter and permanent cost takeout. Our optimization plan will have an even greater impact in the fourth quarter, and we forecast strong year-over-year margin expansion in both Media and Connect. In spite of revenue decline, we expect to drive strong EBITDA growth in the fourth quarter. We're also raising the low end of our adjusted EPS guidance by 4 cents, and the range is now $1.54 to $1.62. This reflects higher EBITDA, partially offset by higher depreciation and amortization, driven by the timing of capabilities coming into the market and the acceleration of depreciation and amortization related to certain exits. we are increasing our free cash flow range to 530 to 550 million. This implies a year-over-year decline in the fourth quarter. While we expect adjusted EBITDA growth, we are also incorporating higher restructuring payments and a working capital drag on a challenging comparison from Q4-19 and an expectation of lower collections. As a reminder, adjusted EBITDA, adjusted EPS, and free cash flow guidance ranges do not include the impact of one-time separation related costs or any incremental costs of beginning to operate as two separate companies. We remain diligent in managing separation-related expenditures. These cash costs are 56 million year-to-date and will increase as we approach separation. We now forecast 175 to 225 million in cash separation-related costs in 2020. This is down from our prior estimate of $275 to $300 million, and we expect roughly another $75 to $125 million in 2021, depending on the timing of costs in 2020. To wrap up, we remain confident in the full year and believe our outlook evidences the effective way in which we have managed the business in this uncertain environment. Of note, the midpoint of our updated adjusted EBITDA guidance is only $5 million lower than the pre-COVID guidance that we gave back in February. And the midpoint of our updated free cash flow guidance is only $15 million lower than the related pre-COVID guidance. And that's after we took on the optimization plan, which drove a directional $60 million more in restructuring costs than we had originally planned. We continue to closely monitor the impact of the pandemic, but this year has reinforced our ability to adapt and take rapid and decisive action to manage our business. I'm very proud of the work the team's done on our optimization plan and on delivering these results. We look forward to updating you on our continued progress as we go forward, including at our December 9th Investor Day. I'll now turn the call back to David Kinney for a business update on Media and Connect.

Thanks, Linda. Let me start with the media segment. Nielsen has an essential role in the rapidly changing global media ecosystem. To remind you, approximately 80% of media's revenue is contracted, and we have a high client retention rate. Clients also continue to renew in this environment. While the media industry has seen unprecedented changes few years, audience behavior trends have been drastically accelerated by the stay-at-home reaction to the pandemic around the world. The amount of disruption and innovation that we have experienced in the past few months would normally happen over the course of a few years. Understanding these changes creates an even greater need by our clients for Nielsen's measurement and analytics. In audience measurement, as media fragmentation continues and streaming through connected devices surges, the industry is increasingly demanding a currency-grade solution that provides media buyers and media sellers holistic cross-media metrics. Cross-media measurement is Nielsen's North Star, unifying linear TV, advanced TV, and digital solutions to provide clients with a clear understanding of their total deduplicated audience. We are collaborating closely with the industry to build alignment between media buyers and sellers, and we are seeing strong demand from our key industry players. During the third quarter, we made big progress in currency quality measurement of connected TV. Specifically, we are expanding our connected TV footprint to include YouTube and YouTube TV in the first half of 2021 for upfront. This builds on our existing coverage, including Roku, Hulu, Amazon, and others. We've further rolled out the screening meter, which is now installed in roughly 5,500 households, and we are tracking to be in roughly 10,000 households over the next two to three months. These advances in our product roadmap and our panel footprint mark important steps to deliver true, deduplicated cross-media ad and content measurement and comparability between connected TVs and linear TVs. Comparable, resilient, and full coverage measurement is underpinned by the Nielsen ID, which allows us to validate big data with panel research from real people. And we've made great progress on improving the efficacy of our methodology. The Nielsen Audience ID fosters more resilience in measurement by diversifying third-party data sources, reducing our dependence on unreliable digital identifiers, and ensuring comparability across platforms. The Nielsen Audience ID will be bolstered by our alignment with the Unified ID 2.0, which is an open-source ID led by the Trade Desk. operating across advertising channels. This creates a stronger environment for precision and measurement in a way that puts the consumer in control, protects her privacy, and drives innovation through an open source platform. In Plan Optimize, we are fundamentally enabling content discovery and predicting measurement outcomes. Both are essential in the changing media landscape. there has been an explosion of content and consumer spend on content is increasing, which is creating greater demand for discovery and improving the consumer experience across both SVOD and AVOD platforms. Content discovery is king in this environment, and that's where GraceNote makes a difference. Gracenote is already the worldwide leader in metadata, and we are building on our global leadership position with the world's most popular distribution platforms, as evidenced by our recent international wins with both Samsung and Liberty Global. Content discovery is underpinned for our distribution clients by the Gracenote ID, which is a unique identifier that enables standardization and settlement throughout the value chain. This is extremely powerful for any content owner on the planet, and our aspiration is to get the great code ID tagged to every single piece of professional content. On top of measurement, marketers need to understand and predict outcomes as they look to optimize the effectiveness of their marketing spend. We're focused on addressing marketing needs across all advertising categories, not just consumer packaged goods, which has historically been a bigger focus. To that end, in September, we launched Nielsen Compass, which is a norms database designed to establish syndicated standards for campaign outcomes measurement across platforms. This was important to launch because it covers 100 categories in 50 countries. I would also note that media is an increasingly global industry which creates more growth opportunities for Nielsen. Every market around the world is aiming for the same cross-media vision, and Nielsen has the most resilient and comparable solution. Content discovery is essential as streaming platforms expand worldwide. And outcomes products like Nielsen Compass are needed around the globe as marketers must find more efficiency during and after this global pandemic. To sum up, at Nielsen, the audience is everything. And the audience's behavior is changing rapidly. We are executing well on our go-forward digital strategy and keeping pace with industry change. Our investment in key initiatives such as connected TV measurement are driving client wins with leading players across the media ecosystem. And we are underpinning our measurement with the Nielsen Audience ID to ensure resilience and flexibility. GraceNote is becoming the global metadata standard, which is critical for the best streaming experience. And our outcomes business is expanding both categories and geographies with solutions like Nielsen Compass. Nielsen is well positioned to drive accelerated revenue growth, attractive margins, and growing free cash flow