Mediaset SpA (OTC:MDIEF) Q1 2019 Earnings Conference Call May 14, 2019 12:00 PM ET
Simone Sole - Head of Finance, Investor Relations and M&A
Marco Giordani - Chief Financial Officer
Matteo Cardani - Managing Director, Publitalia
Conference Call Participants
Chris Johnen - HSBC
Sophie Julienne - Bank of America
Julien Roch - Barclays
Stefano Gamberini - Equita
Andrea Randone - Intermonte
Giasone Salati - Macquarie
Good afternoon ladies and gentlemen and thank you for standing by. Welcome to Mediaset 2019 First Quarter Results Web and Telephone Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you, this conference is being recorded today 14 May 2019.
And now I would like to hand the conference over to your first speaker today Simone Sole. Please go ahead.
Hello. Good afternoon and welcome to the 2019 first quarter result of Mediaset. I will immediately introduce the speakers today. Marco Giordani, CFO of Mediaset and Matteo Cardani, Managing Director of Publitalia.
As always and for the sake of time, I will hand over immediately to Matteo and we will follow up after for the Q&A session.
Okay. Thank you, Simone. Good afternoon everybody.
I start with a quick look to macroeconomic scenario and its impact on advertising market. But, I'd like to focus on gross domestic product dynamics combined with confidence index. The main factor we share also during our last call is the continuous downward review of gross domestic product forecast for 2019. All forecasts are below 0.5x into a number range around zero plus minus 0.2%. And these expectations combined with the political situation given the election campaign period for the European Parliament creates an environment of uncertainty due to limited visibility that is affecting advertising dynamics.
Over the past six months, forecast for gross domestic product has been amplified by declining business confidence index turning now into a declining advertising trend year-on-year on a market basis.
In the next chart, we see how this controversial economic situation has affected in the overall advertising market trend. Minus 0.1% year trend in 2018 was the outcome of a flat nine-month trend with a negative contribution of Q4 minus 0.7% and slowdown. This slight negative trend at the end of last year turns out into minus 3.5% slow start trend in Q1. Our addressable market segment TV, radio and digital is better than the overall trend, but anyway negative.
This dynamic is the combination of [indiscernible] growth in radio, while digital keep on growing as a positive single-digit, but most of all, it is the effect of the slow start of the year 2019 with minus 2.7% in TV ad spend.
In the next chart, we will take a look at our performance in terms of total advertising revenue. So, compared to minus 3.5% market trend, one should try to put our advertising revenue trend in the right perspective. That means discounting for football offer discontinuity in order to highlight the underlying trend.
So, the interesting thing in the next chart is that, if we take discontinuity into football out of the main reason in the comparison. Our trend in terms of let's say Mediaset the like-for-like trend is minus 0.6%. So, the underlying trend is broadly flat year-on-year showing a positive performance. I say positive because I'm considering that minus 0.6% is only €3 million below our Q1 historical basis. So just 1 million per month. So practically nothing.
If we compare our dynamics with our main competitors we are on the same track and even better. Yesterday, we had official release of markets [indiscernible], if compare free to air business, we are doing quite well contrast to our that of competitors. And last but not least, the third factor is that the Q1 impact on our market share is absolutely negligible because of our share is stable. If we compare Q1 with the 2019 with Q1 2018.
In the next chart we comment VoD's performance and of course, this read into market share performance has been sustained by a solid position in audience share with a clear leadership on commercial target and the combined outcome of the leading position in car making channel with a continuous improving market position on even on multi-channel side. Notwithstanding, the discontinuity in football, pay TV offering.
The other situation and in sharing the positive, we are fully aligned with our H1 editorial objectives of audience share of our core channel. We have continuous stream of original production throughout the world's screen time in summer. And we are consolidating the benefit of two additional market channel in our multi-channel domestic portfolio.
Then, with last chart, a typical view on 2019 early indicator for different advertising sectors. Here you see, we highlighted Mediaset relative performance versus the total advertising market. So, in the green box, you see our differential performance compared to the other major market trend for each sector.
So generally speaking we keep our leading position across all sectors both in terms of share and relative performance versus each sector and with the only exception of automotive where of course we have this discontinuity in football of particularly relevant for main target. In our key sectors, we are significantly performing better than markets improving our operating performance in all sectors notwithstanding the fact that three key sectors like fast moving consumer goods, telco and automotive, the dynamics of the market in the initial quarter is definitely not particularly brilliant.
So as a provisional conclusion, in the last chart for Q1, we could say that our Q1 performance excluding football offer discontinuities is totally in line with the market will be flat year-on-year in most of all with our expectation. The cross-media strategy, enabling stabilize the market share in Q1. We confirm our leading in the audience share of commercial target and therefore, our strategy is delivering results in line with our 2019 record.
So, I hand over to Marco. Thank you for the attention.
Good evening to everybody also on my side. And thank you for joining the call today.
I would take you all through the main financial highlights of the quarter and the quarter has been really good, honestly even better than our expectation. We ended the quarter with an EBITDA of almost €80 million, 3x better than last year -- almost 3x better than last year. And with a net profit it is almost [€400 million] [ph], 10x better than last year.
Even more remarkable is the performance of the financial position and that is a bit less than €800 million debt compared to almost [€1.4 billion] [ph] last year.
As you know and as we said in the full '18 accounts call, we are really changing the accounting following the IFRS 16, that is clearly waiting on the net financial position at the quarter and for €137 million. And if we exclude that accounting changes we can compare the two-group financial position in the '19 and the '18 one and you can appreciate the strong improvement in the cash position that move down from almost €1.4 billion to €700 million to €650 million with an improvement of €700 million in the last month.
Stepping down in the Italian business, Matteo has just took you through the advertising performance and as we said already and following [indiscernible] starting from June '19 we are expecting to maintain only no linear offer in pay TV in our perimeter. For that reason, as we said that clearly, we are not going to have any more of the pay TV line -- not of this anymore and everything would be accounted in the underwriting line. And clearly, we are improving our performance on the other revenue line, considering the discontinuity of [indiscernible]. We are confirming our guidance for the other revenue line saying that €350 million for full year.
Moving down to cost. We have very impressive reduction in cost €164 million reduction almost 25% lower than last year. We are confirming the guidance for '19 for the reduction of €150 million lower cost savings ending the year with that €1.880 billion total cost for a full year. Clearly, it's the first year without discontinuity and that would be the reflecting which is you cannot perceive the total, let's work in total projects we have carried out to reduce the cost base.
Below the EBIT line, we go for the guidance net connection charges for the full year €7 million. And as far as the tax rate in '19, we are expecting to be in traditional level of 34%.
Moving to investments, clearly the quarter can be also affected by phasing issue, but we are confirming the €420 million target for a full year. And then moving to cash, as we said we had a great performance in the quarter. Cash flow from core activities move from cash absorb from €60 million to cash generation of €60 million. So, with an improvement of 120.
As you can see the level of the net financial position on the quarter end was €850 million debt excluding the impact of the new IFRS 16. And clearly trying to set the guidance for the full year. And we're going to have a pretty good level the buyback of Telecinco revenue is closed and the dividend already paid by Mediaset España, but excluding the IFRS 16 accounting changes. For €140 million, we are expecting for the Italian net financial position at the end of '19 at the level below €800 million, confirming at the level really -- pretty much deleveraged in respect to the past year.
So, that's all my part. We can open the Q&A session.
Yes. Thank you, Marco. We have been very fast today. So, more time for your questions.
The first question comes from the line of Chris Johnen from HSBC. Please go ahead.
Yes. Thanks for taking my questions guys. So, first one, on the let's call it sector consolidation. Is there any news, I mean, obviously, nothing specific, but in terms of the progress that you can share with us? Second question on the guidance you have given for Q2 in terms of advertising, I understand you've given a similar or in-line guidance for Q2 incorporating both the football on the pay TV and the FIFA World Cup on a reported basis. Does that imply something around minus 3 for Q2, is that something you feel comfortable with?
Yes. Let's start from the first question. I mean clearly again you have nothing to say officially. As we said several times, we are working on a business model and we are also trying to see what can be -- let's say the effect on a consolidation looking inside the group. So, really looking at Mediaset España. As far as I said, no material thing to say. We still believe that there is room for that, but we are not getting a position to disclose anything on that as soon as we have anything to say, you will be the first to know.
So, timing wise, end of June still looks reasonable for meeting?
We said 25 July, the date in which we're going to approve first half, would be for us, last day.
Okay. I'll address the second question with regard to advertising. So, the interesting thing is in Q1 this year we are almost offsetting the discontinued effect of -- on advertising in the first part of this year. And the outlook for Q2 is absolutely in line. I can anticipate to you that we closed April, of course, and the underlying trend of our business is absolutely in line with priority compared to last year taking discontinuity and this our outlook for Q2 and so we are confident that in each H1, we keep on offsetting that discontinuity effect on advertising. Notwithstanding, the adverse let's say market conditions.
So can you remind us again about the World Cup impact that we shoot or that you are assuming and your figures for June?
Commented that probably had [indiscernible] two or three quarters ago and Marco stated that our let's cost -- net cost basis was 45 million and the revenue or the incremental revenue created a double-digit margin on top of that. So that's our -- let's say quantitative reference for the impact of World Cup.
Right. And the last one quick one probably on Vivendi. Is there anything to be said on this?
No. I mean we have no news. We have no meeting. We have no contact. No, that's a core
event has been passed out, so no news of that.
Okay. Thanks guys.
Thank you. The next question comes from the line of Sophie Julienne from Bank of America. Please go ahead.
Oh, hi. Thank you. Thank you for the call. A quick question. We've seen that Netflix is increasing its number of subscribers across Europe. They will multiply by 2 in Spain for instance in 2018. And meanwhile, the number of users is declining. How do you see the future of TV in 2019? That's my first question.
It is difficult. So, I don't know if I would be able to convince you. In any case the theory is something that is going to be, let's say more and more material also in Italy and I believe also in Spain. At least, we don't have any official number for Italy. Clearly, they are growing. As far as we know they are clearly taking share from pay TV operator. Clearly, they will be first impacted by the development of, let's say [VoD] [ph] business model. For the time being, they are not having advertising, so clearly they are affecting consumer ratings, before the viewer ratings but not yet our revenue lines.
[Indiscernible] SVOD offer is growing as well double-digit. Clearly, we are assuming that in terms of share, we are lower than that. But in any case, they are comparing the fact that, they are looking for strong local content, so which clearly, we are pretty dominant in terms of production. So, if we want to be also, an opportunity going forward. But I mean as far as the trend I believe that the general worldwide trends are the same also in Italy. Maybe speed is different, but the trends are not very far from the rest of the world.
But to summarize, we don't see that our business would be impacted materially in the short run. Clearly, we have to react and to offer state-of-the-art let's product to our customers. As I said, I mean they are not really collecting advertising and for time being we are in the key position on this market for our key business model.
Okay. And second question was a follow-up on the previous one around sector consolidation. In your answer you only talked about combination of Mediaset and Mediaset España. Are you still thinking about the 1 billion, M&A that you previously talked about at the beginning of this year, end of last year?
To be clear that was the answer to a question in terms of the size of the firepower we have. I mean size that vary the performance in terms of cash flow generation is confirming that in terms of firepower that the size of firepower we have. And so clearly, we did not say that we are going to use it, but I mean that's what we have.
No, I mean the answer is pretty simple. If we are not convinced by a business model insight, so between us and Mediaset España, there is no sense going forward. So, the first step of our project would be to convince in a different business model, in an industrial project and that clearly and the prospect for that would be Spain, if we are going to be convinced. If we are not going to be convinced with Spain, there will be no way -- so, that the way in which we are trying to analyze the issue. If we don't find the business model that is convincing to us, there is no sense to consolidate the sector that's where we stand. So, with the one region, it's just a theoretical weapon. But, we don't know if we are going to use it.
Okay. Thank you.
Thank you. Your next question is from the line of Julien Roch from Barclays. Please go ahead.
Yes. Good evening everybody. My first question is coming back on what Matteo had said on the World Cup, 45 million of cost incremental revenue double-digit margin. Are we talking 10%, 20%, 30% margin?
Okay. My second question is, what's the approximate split of the World Cup between Q2 and Q3. Was it 50/50 or was there more in Q3 because of the amazing end of that wonderful World Cup.
It's more in Q2 in terms of let's say quantitative distribution in the number of football matches if I remember, when they were 48 in Q2 and 69 Q3.
And we should roughly use that split so 40 divided by 56 for Q2. So about 70% of the revenue in Q2 and 30% in Q3?
Sorry, could you repeat please?
Should we use the split of matches for the revenue breakdown between the two quarters. So, if you add 40 matches out of 60 -- out of 56, i.e., 70%, should we use 70% for Q2 for the World Cup?
Approximately you could use this according to the number of total matches.
Okay. And then, my other questions are on Mediaset España. I'm confused by what you're saying Marco sorry. So last call or the one before last, you say it makes no sense to buy the minorities in Mediaset España. It's just a financial deal we already control it. But today you're seeing we are going to try to see what the impact of the consolidation inside the group is. We are to make a new business model work with Mediaset España. And if that works then we'll try something with another broadcaster. What do you mean exactly? What are you intending to do with Mediaset España? And can you do it by the 25 of July because there's only two months left?
Thank you for that question, because you are right, I was probably not so clear. I believe that approaching the media consolidation project, I mean in that decision has to be different on financial and corporate one. We don't think that the possible consolidation is the financial target, because as we said, we and others said several times that [indiscernible]. So nothing has really changed in that respect. And this is the reason for which we are looking for a different in that business model. And Spain, it's already part of the group. So, we don't need to do anything with Spain in terms of the financial less corporate action. What we have to decide is, whether we have an industrial business model that can work better in different set of environment and way to be more effective in addition to a media market, it's honestly a little bit different already today and it is going to be even more different in the future. So, I'm repeating myself, the previous question -- the previous answer was referred to that of business model, as far as the financial large corporate project Spain, it's already part of Mediaset. So, we don't need to do anything on that -- on the corporate side.
Okay. So, what you're going to do as a first step is, see whether the business model can work better be more effective, more efficient with Mediaset España. Could you give us a couple of concrete example of what you're trying to achieve? Is it like merging the streaming platform, so Infinity and whatever the Mediaset España platform is called. Sorry I forgot, are using the same technology, same thing for targeted advertising. I mean can you give us some concrete example of what you're trying to achieve?
Julien, too early. Once that we will have finished, you will know. What you said, it's clearly, I mean, we can read everything on that easily. But, I mean, I believe, it's too early now. So, I wouldn't comment. But I mean, clearly, we are trying to be better placed, more efficient and to create value for our shareholders. So, we have to find a way if there is any. Otherwise we're keeping going on, I think the way we are. So that's, but I mean it's too early.
Okay. So the last one is, so to-date it's too early to comment on that, but by the 25 of July you'll tell us?
If there is a project because…
If there is a project, we'll know by the 25th of July?
Okay. [Foreign Language]
Thank you. The next question is from Stefano Gamberini from Equita. Please go head.
Good afternoon. Sorry to come back again on the consolidation sector. Just getting to this date of 25 July. If you find us an agreement regarding, I don't know [indiscernible] some other German players on some aspects. Is this enough for you? And then, we will see what could be the project in the second step. Or as you said a few months ago, you want an equity deal?
Second question in this case without an equity deal, but just the first step of a project that could arrive later. Is still on the table a possible dividend, idea in the second part of the year or not? The third question regarding the slide number 14, I noticed that the working capital improved the last thing this quarter, could you elaborate a little bit why there was this strong impact? And still regarding the guidance on net debt below €800 million at year end. Is this clearly without any one-off dividend? Many thanks.
Sorry, Stefano about -- again, on the possible consolidation honestly, I wouldn't comment anything more. I mean as I said we are working and there are many, many things to decide, to evaluate the studies. So, honestly, I believe it's not really useful for anybody to talk about something that is possible eventually and not sure. What we have stated and we are affirming that by the 25th of July, either we will have something to say to the market in terms of what we are going to do? Or clearly if we don't have any projects that it is usual on the distribution of dividend we have taken because that's the commitment we have undertaken within the market and with the board and with our shareholders. As far as the rest, as soon as we will have something to say, we would promptly tell it. So, nothing on that.
On the working capital, yes, I mean that said if you want something that is [indiscernible] the first one is, the [indiscernible] business that probably was a little bit big in the previous year by pay TV in the sense of clearly seasonality expecting in the first quarter or the let's say revenue accounted in the last quarter last year. So that's clearly the effect can't let us cashing in credit -- and cashing in debt in the first quarter. Clearly last year distribution was different because we were still paying football and clearly, we are the opposite -- let's say effects or the difference in the two -- and the comparison is again related to not naming football anymore to pay.
The last question was -- I forgot it.
No. Just with the clarification regarding the guidance of net debt, again, that is clearly without any one-off dividend that you can distribute.
Clearly, the one decided by Telecinco include -- Mediaset España included, no decision on the media.
Okay. Many thanks.
Thank you. Your next question is from the line of Andrea Randone from Intermonte. Please ask your question.
Thank you. Good afternoon. Part of my questions have been already answered, about the premium at [TVT] [ph], you now consolidating in the other revenue line. Here tell me, if I'm right, you are shutting down the previous media's premium business. And you are maintaining a OTT business. If this is correct, I wonder if you can provide us an indication of the overhead costs which were still in the premium apart from content costs in order to understand the savings and what are the progress in your Mediaset play, so on-demand platform at program. Thank you.
Yes. First of all, we are not shutting down because of premium in terms of brand and let us say B2C let call it in this way activity. We are just transforming it. What we have closing is the traditional pay TV operation made by card's subscription, cash collection and all the related media television on pay TV, let us say operating activity. And we are adopting a more digital, let's say, if you want modern way of serving and providing the service to our customer using an OTT activity, it means that actually we don't have any more cards. We don't have any more decoder, we don't have anymore, CRM with call center. We are using what the Netflix “using”. So, it's sort of prepaid monthly payment using credit cards of PayPal and clearly cutting many of the costs that the traditional pay TV activity was including.
That more or like the result of not seeing football anymore because they're having a lower number of customer, the DTP platform was too expensive to reach a decent margin. So that is what is going to happen from 1 of June. So Mediaset premium service will be provided through digital offer.
As far as cost really not having anymore football we have no more cost to dedicated to that activity. And so, when we announce a €450 million cost reduction, it is all including because all the cost that now is used to serve the pay TV and VoD activity are rising costs that are already present in the group, and they are not really allocated to or decided to specific activities.
So, as far as Mediaset play is concerned, we are clearly following a model that [indiscernible] let's say deployed in the platform that is merely collecting, advertising and is serving and free or advertising the service with some pay services. And so there will be a mix composition of activity made by advertising and payment from the customers. All of these payments would be accounted in the revenue lines. So clearly [indiscernible] is pretty small, but it's part of development. It is made -- trying to be state-of-the-art to serve to our user and more than offer a modern experience.
Okay. I guess we have just time for the last question. Thank you very much.
Thank you. And the last question is from the line of Giasone Salati from Macquarie. Please go ahead.
Hi, good evening. Apologies for background noise in advance. Just two questions please. First, on the sector, advertising growth by sector. Can you give us a bit more color on the auto sector? How do you see that performing now and if you have any expectation in the future? And if there is any other notable sectors you mentioned.
And secondly, on Vivendi situation, it just occurs to me now that Vivendi especially not controlling Telecom Italia anymore, and I wonder what happened to the freeze on Vivendi shares on the Mediaset. The share has been unleashed and or expect still subject to some mutation? Thank you.
From Vivendi, I mean it is not the question of control. I mean that's the law in Italy is not really referring to a controlling stake, it's just the size, quantitative size of the stake. So, as far as we know they are still holding a little bit less than 25% of Telecom Italia. So in that level they are in breach with the law. So, as far as we know, we are in the same position they were one year ago. So, controlling or not controlling is not relevant as far as the media or anything.
In regard to the automotive sector, the automotive sector, as I said in expenditure, I just look for the past let's see four years and they are almost aligned with the trend in car sales. So, reflecting the fact that the last year and before the start of this year, the market is not doing so well in terms of car sales. They are reducing the overall spend -- a lot less in the first three months. The automotive sector is minus 8%.
So, we are still higher than average share because in automotive sector we have four points more than our average share in the market. Of course, we are -- let's see absorbing the fact that we don't have the football anymore. So, across all sectors is the -- let's say the less positive in our portfolio. The interesting thing in all other sectors like grocery, pharma, retail, finance and so on, we are keep on growing our performance. Honestly, this sector that this -- let's say miss in not for Mediaset, but for the whole market is telco. Telco is the missing contribution in Q1, [indiscernible] down not for us, but for the whole market. So, this is the situation with regard to sector.
Okay, Matteo. Thank you, Matteo. Thank you, Marco. And thank you everybody for joining the first quarter call. And as always, the Investor Relations department is available for any questions you may have. Thank you very much and good afternoon. Bye-bye.
And this does conclude your conference for today. Thank you very much for participating. You may now all disconnect.