Technicolor SA (THNRF) CEO Richard Moat on Q2 2021 Results - Earnings Call Transcript

Technicolor SA (OTCPK:THNRF) Q2 2021 Earnings Conference Call July 29, 2021 12:30 PM ET

Company Participants

Richard Moat - Chief Executive Officer

Laurent Carozzi - Chief Financial Officer

Conference Call Participants

David Cerdan - Kepler Cheuvreux

Fiona Orford-Williams - Edison Group

Thomas Coudry - Bryan Garnier

Operator

Ladies and gentlemen, welcome to Technicolor’s Conference Call chaired by Richard Moat, CEO and Laurent Carozzi, CFO. At this time, all participants are in listen-only mode. Later, we will conduct a Q&A session. [Operator Instructions] 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 slide show.

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 filings with the French Autorité des marchés financiers.

I would now like to hand over the call to Richard Moat. Sir, please go ahead.

Richard Moat

Good evening, ladies and gentlemen. I am very pleased to be with you today to report Technicolor’s first half 2021 results, which are positive and in line with expectations. The group is experiencing growing demand across all of its businesses and is benefiting from improved profitability as a result of our disciplined operational focus. All Technicolor activities are benefiting from sustained market demand and the creation of Technicolor Creative Studios is well-timed for the upcoming surge in content. It is led by a strong new leadership team, focused on redefining content experiences through a powerful combination of storytelling and innovation.

So, if we turn to the presentation, let’s start on Slide 4. In the first half despite the continuing challenging environment, we delivered positive results and significant improvement in profitability in line with expectations. During this semester, Technicolor Creative Studios has been awarded numerous new projects, securing approximately 95% of his expected 2021 sales for Film & Episodic Visual Effects and Animation & Games. Connected Home experienced continued strong demand in North America and in Eurasia, but the division has been impacted by component shortages, leading to sales being pushed to the second half and a challenging Latin American market.

DVD Services benefited from strong catalog demand and continued growth in non-disk-related supply chain activity. Overall for the group, our revenues of €1.36 billion were up 1.2% at constant rate, reflecting a good performance in Creative Studios driven by demand for VFX technology, a 1% decrease in Connected Home sales as a result of key component constraints, and continuing revenue resilience in DVD Services, with a 4% increase in total replicated disk activity.

Adjusted EBITDA of €100 million doubled last year’s figure at constant rate was driven by the positive impact of efficiency measures across all activities, particularly in Creative Studios and DVD Services. Adjusted EBITDA of €15 million represents an €83 million year-on-year improvement at constant rate. This is the result of the EBITDA increase as well as lower depreciation and amortization.

Our free cash flow before financial results and tax was higher by €35 million at current rate driven by higher EBITDA, working capital improvement in Technicolor Creative Studios and DVD Services and despite the negative impact of the normalization of payment terms in Connected Home. Based on business activity for the first half and the continued successful optimization of the businesses, the group is confident of achieving its outlook in 2021 and 2022.

So, let’s turn to Slide 5. Technicolor Creative Studios revenues amounted to €295 million in the first half, which was up 9.9% at constant rate. Adjusted EBITDA amounted to €40 million, up €38 million year-on-year at constant rate. The disposal of postproduction, which closed at the end of April, refocused our portfolio of activities on our growth sectors. TCS is benefiting from the recovery in demand for creative technology and experiential content across its Film & Episodic VFX and Animation & Games divisions, combined with an outstanding performance from the advertising service line.

Here is some key highlights. VFX teams worked in over 18 theatrical films for the major studios, including Cruella and The Lion King prequel for Disney, Mortal Kombat for Warner Bros new line, and Transformers: Rise of the Beasts for Paramount. They also worked on over 35 episodic or streaming projects for HBO, Netflix, Disney+ and Amazon. In July, Mr. X received an Emmy nomination for outstanding special visual effects for its work on Vikings, The Signal and this is Mr. X’s seventh nomination for the Vikings franchise since 2013 with a trophy last year.

Our advertising businesses delivered nearly 1,900 commercials, including approximately 20 Super Bowl spots. It won several prestigious industry awards, such as 3 Cannes Lions, 3 Visual Effects Society Awards, and 2 Adweek Experiential Awards. Animation & Games delivered more than 2,100 minutes of animation for film and TV, including the delivery of Spin Master and Paramount’s PAW Patrol: The Movie, which comes out in August. It received an Emmy award nomination for best effects for TV media, with Fast & Furious: Spy Racers. In June, TCS announced a consolidation of the animation businesses under the Mikros Animation brand, with a new senior management team led by Andrea Miloro, who joined as President of Mikros Animation earlier in the year.

Despite the risks of the spreading COVID-19 variants, the media and entertainment industry continues to increase production throughput and invest in greater capacity around the world and a relatively successful and strict COVID-19 protocols. TCS was awarded numerous new projects, securing approximately 95% of the expected 2021 sales pipeline for Film & Episodic Visual Effects and Animation & Games. As capacity to deliver remains one of the main challenges, TCS continues to adjust capacity limits by accelerating recruitment and developing remote work policies.

Over on Slide 6, Connected Home revenues totaled €770 million almost stable at constant rate. Demand was strong in North America and in Eurasia, but the division has been negatively impacted by key component shortages and a difficult Latin American market. Adjusted EBITDA amounted to €56 million, up €6 million at constant rates driven by continued cost efficiencies achievement. The division further strengthened its leadership in key market segments. It reached a milestone of over 20 million RDK broadband gateways deployed and won deals with major operators across Europe and Latin America confirming its leadership across the RDK community. On Android TV, it reached over 10 million set-top boxes worldwide, winning customers in Europe and Latin America. It demonstrated its innovation capabilities by launching with Sky Brazil, the first hands-free voice control set-top box integrating Google Assistant. On fiber, Connected Home has one new customers in EMEA and our first deal outside of Brazil in Latin America.

Looking forward, the worldwide supply chain disruptions will have multiple consequences for the Connected Home business. Continued difficulties in obtaining components, challenges in finding transportation and cost increases across multiple categories of components and logistics, but Connected Home continues to work with its partners and customers to minimize supply disruptions, maintain a high quality of services and offer cutting-edge innovation.

On Slide 7, DVD Services revenues totaled €283 million stable at constant rate. Total replicated disk activity was up 4% year-on-year, which is unprecedented in recent years when the movement had generally speaking only been down. There was a 12% increase in standard definition DVDs driven by the ongoing push of back catalog products. But this was offset by a 13% reduction in Blu-ray due to the lack of new release content and an 11% reduction in CD volumes, a combination of expected structural declines and COVID retail impacts. The decrease in volume was partially mitigated by pricing improvements following the studio contract renegotiations and by growth in non-disk related supply chain activity. Adjusted EBITDA amounted to €11 million at current rate, which was better than expectations. The division continued to adapt to distribution or replication operations and related customer contract agreements in response to continued volume reductions.

Two significant North American facility closures were affected in the first half of 2021 as part of the ongoing transformation plan. Executive and management teams have been implementing multiple cost reduction and business improvement and efficiency programs and these were ahead of plan at first half and expected to deliver the full year savings and efficiencies projected. Going forward, theatrical new releases demonstrated an accelerating trend of improvement. In the second quarter, multiple major releases generated significant box office results demonstrating strong consumer interest. While studios continue to experiment with various premium video on demand and day and date strategies, in almost all cases, studios are still electing to have a DVD BD release in the normal windowing sequence. With limited new release content, retailers are continuing to allocate shelf space to catalog and library content promotions, which has helped to support DVD replication. In half two, the specific timing and extent of the reopening of movie theaters will impact the level of new disk release activity. DVD Services has therefore accelerated aspects of its future restructuring plans in an effort to adapt to these potential impacts.

On Slide 8, to conclude, all Technicolor activities are benefiting from a strong and growing demand driven by the urge to equip homes with strong broadband access, the need for original content from studios and streamers, and appetite for catalog DVDs. Thanks to the ongoing transformation initiatives began over a year ago. We have been able to invest more in hiring and unleashing top talent, while consolidating sharing and harmonizing best practices. Our vision for transforming the future of film, episodic, gaming and integrated marketing and advertising campaigns gives us the confidence that we will continue to deliver improved operational and financial performance through 2021 and 2022.

With already €42 million cost savings realized in the first half, we are well on track to achieve the projected €115 million by the end of 2021 as planned and to deliver a cumulative €325 million by the end of 2022. For 2021, we confirm revenues from continuing operations broadly stable versus 2020, adjusted EBITDA of around €270 million, adjusted EBITDA of around €60 million, continuing free cash flow before financial results and tax at around breakeven, and net debt to EBITDA covenant ratio below 4x level at year end. And we are maintaining our previously issued 2022 guidance.

Now, I will hand over to Laurent who will go into our first half performance in more detail.

Laurent Carozzi

Thank you, Richard and good evening, all. So, I will now provide you with further details as mentioned regarding our H1 reserves. So, overall and I think it’s been mentioned already, this show a significant improvement versus last year. It’s been driven mainly by sales growth. And despite the supply constraint we had to experiment and also quite significantly by improved margin due to the efficiency efforts we are making.

So, if we now look at the Slide 10, you can see here our consolidated P&L. And as usual, I will give you a bit more color per division and we will go faster with the following slides. So, starting with the revenues of €1.3 billion, they increased by €17 million at constant rate. All my comments will be made at constant rate, representing an increase of plus 1.2%, a slight increase. Giving you a bit more color per division, so in production services, TCS revenues amounted to €295 million in the first half of 2021. It’s up close to 10% at constant rate, 5.8% at current rates. More specifically, we know that Film & Episodic enjoyed a double-digit year-on-year growth during the first half driven mainly by clients return to live action shooting beginning in the latter half of 2020. And also, it’s to be noted by the expansion of MPC Episodic, launched in the first quarter of 2020. MPC Episodic, to be a bit more specific, has as main clients all the streamers, the likes of the BBC, the Netflix and the Amazon of this world.

Advertising, as Richard has mentioned, has recorded a strong first half performance and this has been mainly driven by one of our two agencies, MPC Advertising. Animation & Game double-digit growth year-on-year driven by strong work for higher volume in addition to the prior year period being negatively impacted by the temporary studio closure because of the pandemic, so easier comparison. Post-production is €15 million lower than last year as the division has left the perimeter at April end. So here you have many perimeter impacts on the overall performance.

If we now turn to Connected Home, Connected Home revenues totaled €770 million in the first half 2021 flat year-on-year at constant rate. And what we can say is that despite demand remaining very strong, particularly in North America and in Eurasia, the division has been negatively impacted by the key component shortages and a difficult Latin American market. The sales mix, because of COVID related issues, could be estimated more than €150 million for the first half.

If we drill down per region, so the Americas – North America, the revenues remain strong, driven by increased demand from cable customers for upgrades of course to higher power broadband. Latin America conversely, the difficult macroeconomic situation, the foreign exchange and component costs continue to create difficult trading conditions there. As far as Eurasia is concerned in Europe, Middle East and Africa, we enjoyed a good semester with 10% growth year-on-year, driven by strong demand for DOCSIS 3.1, Android TV and fiber product. But the shortages were creating a significant backlog. In other words, we would have – we could have delivered a lot more if we had the components. We scored new wins in the three technologies in several markets, including Poland, Israel and Australia.

In Asia-Pacific the constraints were experienced in broadband technologies for the Australian market in spite of again very strong demand. The Indian market remains solid, maintaining growth year-on-year in traditional and Android TV technologies and manufacturing for Indian customers is now taking place in India. So, overall and to cut the long story short, we have been penalized by short – by the problem of shortages in key components that prevented us from delivering sales. The demand was we should have beaten these numbers in H1 and the demand was even higher than what we are expecting at the start of the year. So hopefully, we will catch up with that in the second part of the year and in 2022.

In DVD Services, the revenues totaled €383 million in the first half 2021 in line with 2020. So, revenue resilience was driven predominantly by continued strong demand for back catalog titles and that continues as we speak. While adjusted EBITDA at €100 million, as Richard mentioned, has doubled at constant rate. It reflects operational improvements across all activities and particularly in Creative Studios and DVD Services. The adjusted EBITDA margin for the group expanded from 3.7% to 7.4%, with all three main technical divisions reporting a significant margin improvement compared to the first half 2020. Looking at TCS, adjusted EBITDA amounted to €40 million, 13.7% of revenue, up €40 million year-on-year at constant rate. The efficiency progresses have benefited mainly the film and the advertising divisions.

Turning to Connected Home, adjusted EBITDA amounted to €56 million in the first half of 2021 or 7.3% of revenue, so up €6 million at constant rate despite the sales shortfall, but thanks for continuing reductions in OpEx. DVD Services, the adjusted EBITDA amounted to €11 million at current rates, so 3.7% of revenues versus €1 million only in H1 last year, so given stronger than anticipated disk volume giving – and the acceleration of cost savings actions partially offset by continued labor and material cost pressures, but clearly very strong performance here.

Adjusted EBITDA €15 million represent an €83 million year-on-year improvement at constant rates. So, this resulted from the EBITDA increase, of course and the positive impact of efficiency measures, in particular, lower D&A, lower CapEx, following lower equipment spend for Creative Studios and lower IP depreciations for DVD Services. This IP depreciation is related to the contract renewal we successfully managed last year.

P&L, non-recurring item at €1 million – negative €1 million are better due to – if you compare to last year lower impairment and write-off, remember last year we had an each year’s goodwill impairment of around €70 million, lower restructuring cost and accounted for negative €26 million at current rates.

Change in working cap, an important element to comment here, of €210 million negative reflects mainly the payment terms normalization we have talked to you about it many, many times it has continues and finding its final point at this first half hand. And the seasonality also, it’s also marked by the seasonality also of the Connected Home sales, which has been amplified by sales delays from second quarter to third quarter. So in clear, we sold less in Q2 this year than in Q2 last year and that has – didn’t really help the working capital. This will return, reverse in the second half and we see the improvement already. Remember that with a cash-out impact of €120 million in the first half 2021, Connected Home has finalized its cycle of payments and reductions as I have mentioned, benefiting now from a normalized and derisk working cap contribution, as well as positive seasonality in the second half, partly subject to of course the evolution of competent shortage with that presence. We do expect these to loosen up a bit allowing us to have to recoup the sales we had lost in the first half in the second half.

Free cash flow, so before financial results and tax from continuing operations is therefore a negative €208 million. So, we have a positive OCF and negative work cap. So, therefore, we have this negative free cash flow. But still it represents an improvement of €35 million year-on-year despite all the cash outflow I have mentioned earlier. The net debt at nominal value amounts to €1.1 million and IFRS net debt amounted to €1 billion. The net debt has upped a little bit versus the amount you had at the end of last year, mainly because of the accrual of big interest we need to pay. And we also drew a little bit on our line at the end of the year. So that’s part of this. I think, with that, it concludes sort of a very thorough review of this slide.

Let’s move on now faster through the following one. So in Slide 11, you see the work of EBITDA from basically last year to this year. So, we have a €53 million increase in adjusted EBITDA at constant rate, mainly TCS and you can see that very clearly on the picture, as provided, with €40 million of increases being the main booster, but also €10 million coming from the DVD Services, €6 million finally from Connected Home. Corporate costs decreased by €2 million and ForEx impact has basically had a negative impact of €6 million.

Moving to Slide 12, so – and I’ll go faster on each one of these slides, because we have already told you a lot about these. So, Technicolor Creative Studios revenue, the amount of €295 million, they have 10%. The recovery made – the recovery and the growth comes mainly from recovery in live action shootings in Film & Episodic and a good performance in Mr. X, so in the episodic of the part of the department, but also and of course an outstanding performance from advertising. The EBITDA, adjusted EBITDA amounted to €40 million – is up €40 million year-on-year, so quite a strong performance and the EBITDA is even up more than that at €57 million as the division as more stringent control on its CapEx and therefore on its depreciation on its depreciation as sort of a new norm of leading the company.

Slide 13, a few words on Connected Home, you know already everything about the revenues, €770 million flat year-on-year, very strong demand everywhere. I repeat that in every market North America and Eurasia in particular, but of course, negative impact of key components. The multiple consequences are basically being supported by this division because of the overall market situation. So, we have continued difficulties in obtaining components and that’s delaying production to our final customers, it has hurt us quite a bit in the first half of the year. It’s still constraining ourselves in the second half but less. Challenges in finding transportation of course, is also one of the problems for the components and finished goods and that’s delaying the delivery to our customers. We are finding alternative routes, we are finding – we are using air freight when necessary, but it’s also a challenge.

And finally, third element, the cost increases across multiple categories of components and logistics are also impacting the profitability of the division. So Connected Home constantly work on trying to improve everything we can do to improve our situation versus these three elements. So, therefore the adjusted EBITDA and particularly the performance of the first half should be looked into this context. So, the 7.3% of revenue, the €6 million increase in absolute terms has been achieved despite all these three elements slowing down the activity of the division. If we look at the EBITDA, it has increased by €11 million compared to last year at €29 million. And again, you can see here, some FX also of reduced CapEx and better cost control in between EBITDA and EBITA.

Slide 14, DVD. So, revenue resilience here was driven predominantly by continued strong demand for by catalog titles. We also saw the significant positive impact of new pricing and ongoing growth in non-disk related supply chain activity that has to be noticed. It – now the number start to be a bit significant and it seems that there is a pattern here that’s kick starting. The COVID-19, however, has continued to have a negative impact in the first half, with significantly lower level of new release activity, which in turn resulted in a reduced mix of higher priced Blu-ray higher volumes as compared to the first half of 2020 and as negatively impacted the year-on-year revenue trend. But it should be noted that the Q2 sales are showing some improving signs with Blu-ray application slightly up and that’s a sign that a growing number of new releases are being used.

The adjusted EBIDA amounted to €11 million, 3.7% of revenue slightly better than our own expectations and given mainly stronger demand than expected from standard disk volumes and also the acceleration of cost saving actions that has been in turn partially offset by continued labor and material cost pressure. But clearly, the results are I think quite satisfied. Lower depreciation and amortization and also the renewal of contracts have helped to deliver an adjusted EBITDA of a negative €10 million to be compared to a negative €30 million a year ago. So, I think still also an impressive improvement in a difficult context.

Slide 15, you have a quick walk from EBITDA to EBIT, because we have discussed everything in between the EBITDA to EBITA. Nothing major to note here, you have basically two main items, €19 million of PPA amortization, not much to disclose here. It’s almost a quasi mechanical calculation. The restructuring cost accounted for €26 million at current rate. They include €16 million in relation to the DVD Services. As you know, they are very active in optimizing their site’s footprint. The other non-current are up to €24 million, a word here, it’s a non cash item, it’s linked to the closedown of a Singaporean entity and the, let’s say, the rerating of its equity, its non-cash. So, please do not consider that as an element contributing to the activity of the free cash flow or whatsoever. It’s also a one-off event.

So, Slide 16. So, finally, the EBIT from continuing operations amounted to a loss of €4 million in the first half 2021 you need to compare that to a loss of €194 million last year and that’s in relation of course to better operational performance. The DVD Services impairment that we had to recall last year, not this year and higher restructuring accruals as already described. The financial results totaled a negative €63 million has to be compared to €67 million last year, so not much of a change. Net interest cost there amounted to €61 million, they are up from last year, €14 million primarily because of the fact that we are paying higher interest rates on our new debt structure. And other financial income improved to negative €2 million in the first half 2021, they were negative €28 million last year and last year, we had to pay a lot of financial fees incurred in the bridge loan and also in the financial restructuring that will no longer happen this year. So, that’s how we managed to have more or less the same level of financial results. The income tax amounted to €11 million, so we pay slightly more tax than last year it’s mainly in Canada and in India, nothing major to relate here. And therefore, we have a group net income amounting to a loss of €79 million to be compared to the loss of €265 million of last year, so a significant improvement, although we are still not at breakeven here.

Slide 17, free cash flow. Walked, so as shown previously, the free cash flow so we are here before financial results and tax from continuing operations amounted to a negative €208 million, but it’s a €35 million improvement year-on-year. What has been driving this is the, of course, the EBITDA improvement of €53 million, as you can see on the left hand side of the chart, lower CapEx €11 million, better financials and ForEx impact and that’s been mitigated by a higher restructuring cash out of €23 million. We are cashing out more this year than last year, because last year, we booked in the P&L all the restructuring charges, we cashed out last year half of the 2020 amount and we told you that we will be cashing out the second half in ‘21. This is happening. And also you have a €29 million of work cap consumption. That’s been mainly to the payment term normalization and also the seasonality trends at Connected Home, which has been preferred by the sales delays from the second quarter to the third quarter. As already mentioned, but I think it’s worth repeating that, Connected Home has finalized its cycle of payment term reductions benefiting from now from a normalized and derisk working cap contribution as well as positive seasonality in the second half partly subject to the evolution of component shortage, of course, but we have – we hope that our second half will be a – which shows significant improvement here.

Slide 18, you will find presented our debt structure. I think you are familiar with the spreadsheet. I think, the element we haven’t commented there is the €99 million of cash and cash equivalent we had at the year end and we have a nominal debt of €1.1 billion.

If we move to Slide 19, you have – you can see that all liquidity overall amounts to €164 million, out of which you have €99 million of cash on hand, we have still available €65 million of the Wells Fargo line. We drew a bit, only €35 million – €34 million on it. Also worth noting we – the team has managed to sign a new factoring deal, €40 million factoring deal with Credit Agricole leasing entities. We have used €20 million of that at the end of June, so not even entirely the full plan and we still have €48 million available for Wells Fargo.

So in conclusion, we are okay in terms of liquidity well into a plan. And we have managed to absorb these lower sales than expected in H1 and still meet all the criterias and all the covenants we have.

With this, Richard, this marks the end of my presentation.

Richard Moat

Thanks very much, Laurent. So we will turn it over to you for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we have our first question from David Cerdan from Kepler Cheuvreux. Please go ahead.

David Cerdan

Good evening, gentlemen. Thank you for taking my questions. I have a few questions for you, please. First question is just a clarification the revenues for Technicolor Creative Studios, does it include post-production over the 6 months or just from January to the end of April? And secondly…

Laurent Carozzi

Yes, that’s right. It’s January through April.

David Cerdan

Okay, so only 4 months. Okay. Okay, so this is my first question. And second question related to that, is there any impact on the EBITDA margin that this business is outside?

Laurent Carozzi

It’s minimal. I think it is €2 million.

David Cerdan

€2 million, so it means that the EBITDA at €14 million will be €38 million or €42 million, sorry?

Laurent Carozzi

No. The – sorry, the – in the €100 million of EBITDA of the group to make it simple, you have €2 million of production. So therefore, it’s what has impacted also the – so the TCS ex-post production is €38 million.

David Cerdan

Okay. Great. Thank you. Second question is regarding your guidance for the free cash flow. So, you expect continuing free cash flow to be at zero? And if I am correct, it was around minus €200 million in H1, so it means that H2 should be at €200 million, is it correct?

Laurent Carozzi

Basically yes. We are – that’s absolutely correct. We are – the guidance is around breakeven, so it’s not going to be exactly zero, which is such a very large company might progress a bit, but that’s not going to be much. And yes, you are absolutely correct. Free cash flow before financial tax – financials and tax, the negative – is negative €218 million in the first half. And obviously, to reach the breakeven point it means that we are going to generate a positive €200 million in the second half. But do bear in mind that – and that was the point I was trying to highlight that the bulk, OCF is already positive, and the bulk of the negative in the first half comes from work cap. And in the workup, you have a lot of money being cashed out for the payment terms. That won’t happen obviously in the second half, first element. And the second element is, as usual, in the second half, we boost a better and increased free cash flow. And this year with a slide of some sales of Connected Home from Q2 to Q3 and more importantly, Q4, we will have that contributing. And that we also have again, the World Cup that now that it has been normalized, this company when the sales are going up the work cap is actually positively contributing. So, this is how – this is the fuel to the expected improvement in free cash flow and the positive significant free cash flow expected in the second half.

David Cerdan

Okay. So, in this direction, your net debt at the end of June was close to €1.1 billion. So, with some positive free cash flow in H2, that it means that the net debt at the end of December 2021, should be something like €100 million below net debt at the end of June. Is it a correct assumption or not?

Laurent Carozzi

This is you are doing additions in mathematics. So yes, it sounds reasonable.

David Cerdan

Okay. So, it means that below 4x net debt to EBITDA is it highly cautious?

Laurent Carozzi

I won’t comment on your highly cautious. I need to see where my EBITDA will be. So, we still have a half a year to go. But, that’s where we are heading.

David Cerdan

Okay. Thank you. And last question, if I may regarding to the business for – I am trying to remember the name, yes, Technicolor Creative Studios for this division? When do you see – when do you think that you will be able to return to your activity before the crisis, is it in 2022 to 2023 or never?

Richard Moat

So, I think that we will be returning to 2019 levels either in 2022 or 2023. I mean, it depends how quickly the work of the division expands. We have a significant proportion of the forward pipeline secured already for 2022, which gives us good confidence in the prospects for the Technicolor Creative Studios division. And so therefore, it just depends whether we manage to beat the projections which we have for ‘22. But it will be in one of those years. We are definitely going to exceed the EBITDA, which we made in 2019.

David Cerdan

Okay, great. Thank you.

Operator

So we have another question from Fiona Orford-Williams from Edison Group. Please go ahead.

Fiona Orford-Williams

Thank you very much. Good evening. And first of all, can I ask on Connected Home? Obviously, the component situation has affected all the participants in the market? If you have got any feelings for how your allocations have been working in a relative way, and is it – has there been any shift in the competitive landscape of services that you were indicating that you felt there would be some amelioration in the second half? Can you just expand on that, please? And my second question is on TCS, you have referred to labor shortages, is that soluble? And is it just soluble by throwing money at it? My third question was on DVD services. Are we now seeing all the benefits of the contract with renegotiations or is there more of some game to come? Thank you.

Richard Moat

Okay. So, on your first question with respect to the key components crisis, I think that we are getting a good allocation of components in comparison with our competitors. Obviously, I don’t know exactly. But I think that from what we know, particularly with a major chip supplier, Broadcom, there are constraints because they are now looking for orders going out a minimum of 1 year. But nevertheless, we have reached agreement with them on the component supply, albeit at a higher price than had originally been anticipated. And so I think that we are achieving our fair share of allocations. I mean, clearly we are not the largest player in these types of markets. I mean, we are not Apple, for example, but at the same time we do spend a significant amount on semiconductors, something like €650 million per annum. And so we do have some power in these markets. And in terms of the half two performance, I think that we have seen problems in the first half such as, for example, factory closures in Vietnam of the back of the latest wave of COVID, which has been sweeping the country. We are now starting to get through that. And production is normalizing and the indications that we are getting from a number of different suppliers. And I would emphasize that, as you probably know, this is a key component crisis is not limited to semiconductors. It also affects memories and several other types of components. The indications that we are getting is that the position is stabilizing and possibly improving slightly. So, I don’t think that in common with anybody in this sector of the market, we can claim victory as yet. But certainly, I think we have reached a more stable position. And we are looking forward to hopefully an improved second half. Then you talked about Technicolor Creative Studios labor shortages, I mean, I would characterize it as the need to increase our workforce in order to keep pace with the amount of business which we are gaining. And we are recruiting substantial numbers of artists at the moment. And we need to reach a peak of recruitment by the start of the fourth quarter, which is when we anticipate that we will be reaching the greatest amount of work, which we need to perform during 2021. And then that will provide the platform forwards into 2022. But as we stand at present, we are on track with the number of people which we need. And we see no problem in coping with the amount of work which we have taken on. And as I said a couple of times in my presentation, we have now got a forward pipeline of 100% of our revenues secured for 2021, a substantial proportion of the revenues we project for 2022. And then on DVD, could you just remind me the question you asked on DVD? Yes, whether we had seen all of the pricing effects coming through. I think that we have recently extended one of the contracts with the major studios. We signed it this week. And so that will be an incremental benefit which will come through in future years. But it won’t be significant. And therefore, I think that in the results which you are seeing today, broadly speaking, most of the price improvements, which came from the contract negotiations are reflected in those numbers.

Fiona Orford-Williams

Excellent. Thank you very much.

Operator

We have another question from Thomas Coudry from Bryan Garnier. Please go ahead.

Thomas Coudry

Yes. Good evening. Thanks for taking my questions. My first one is on Connected Home. When we hear the main CEOs of the industry talk about the shortage issue, they are referred to more stabilization of the situation in 2023. So, my question about that is, what are your expectation when you are guiding and when you are reconfirming your guidance? What are your expectations in terms of the crisis, shortage crisis coming to an end? More specifically, I guess that probably when you disclose your initial guidance at the beginning of the year, didn’t expect this crisis to last so long? Can we have some indication of in your EBITDA bridge between 2022 and 2021? How much of that is carried by the Connected Home business? And is there a risk? Should the crisis last longer? And then my other question is about production. There has been a number of very significant merger in the industry lately, Amazon with MGM, and Time Warner with Discovery. How do you think this type of mega merger can affect your business? Is this a risk for you that these customers are getting together or is this not significant or not a significant event for you? Thank you very much.

Richard Moat

Okay. Well, I will start with the answer to your first question. So, you are saying that other people that you are speaking to in the market are talking about stabilization of this key component crisis coming in 2023. I think that it is clear to us that the crisis, in terms of its impact on the industry is almost certainly going to last throughout 2022. And some commentators I have seen are suggesting they might be resolved in the middle of 2022. I think of being very optimistic. And we have assumed in our projections that the significant elevation in prices, which we saw at the beginning of this year for semiconductors and for memories, and indeed for several other key components, those prices are going to remain elevated throughout 2022. So, I think I agree that – well, I think the stabilization is coming. So certainly, conditions are far more stable today than they were at the beginning of the year. And I think further stabilization will occur during this fourth quarter. But that does not mean resolution of the crisis, or the fact that the unpredictability of developments is going to be removed. I think that will continue through 2022, the possibility of new negative developments. But we have factored into our projections, these elevated prices, the fact that we can pass a certain proportion of them through to our customers, but not all of them and allowed some room for contingencies for unforeseen events. So, I think that we are in a relatively strong position. And that’s why we reaffirming our guidance. Is there anything you would like to add to that Laurent, before I move on to the second question.

Laurent Carozzi

No. That’s exactly that high level of pricing plan on 2022, in the same token that what we had in ‘21. So, you don’t have much of a change, but because prices, what we have in our projections, prices continuing to grow in Q3 and Q4, plateauing in 2022. At the moment, it’s going on in line with all expectations as we just mentioned. So, that’s it. But bear in mind, you have two things. You have price increases impacting your cost. But the other element are the shortage of sales. And at the moment we are quite prudent to be even in the recovery we had in this second half. And we haven’t touched our 2022 sales forecast or i.e., we do not plan on any sales coming out of ‘21 into 2022 or the demand is still here. So, if we had the components, we could have that. But this is not in our 2022 results.

Richard Moat

And then in answer to your question about creative studios and the potential impact of the mega mergers, the Amazon and Discovery moves. PwC published their report into the media entertainment industry quite recently and they forecasted a 5% increase in spend over the next 5 years up to a total of, I think, €2.6 trillion altogether. And obviously, we want to take up our fair share of that market and an increasing share of that market and all the projections which we can see from the commitments which we have got for ‘21 and for ‘22 indicate that we are going to keep or expand our market share, and achieve the projections which we have, for those years, providing a very good platform for years beyond that. And I don’t think that these particular strategic moves, which we have seen in the market are going to have a major impact there. We are getting an increasing proportion of our revenues from streaming and episodic. It grew during the – during 2020 to meet or exceed the amount of revenue which we were getting from the tentpole, marquee film market. And that has continued through into 2021. We are getting a lot of work from the episodic and streaming players, the big players like Netflix, but also from Amazon, from HBO, Max, Apple, Apple TV, Disney Plus. So, I think that the – one of the key developments in the market has been, as we have seen that some of the streaming players have recently seen a slight reduction in subscribers, which I guess is what you would expect as lockdowns relax, and people can go out and we have got a far wider number of things that they can spend their money on, rather than sitting at home watching box sets. And therefore, if the episodic streaming players want to remain relevant, then they have got – they got to spend more, in order to create compelling content, which is going to be a hook for people to maintain the subscriptions, which they already have. We can see that trend developing. And so therefore, as a result of that the type of content which the episodic and streaming players is producing is becoming much more sophisticated, it’s much more VFX heavy. And that means there is higher spend on VFX, which feeds into a greater pipeline of activity for us. So, I think that’s the general trend, which I see. And these strategic moves within that trend and not going to have a major impact on the general direction of travel.

Thomas Coudry

Okay, thank you very much.

Operator

So we have no further questions. [Operator Instructions] Okay, we have no other questions.

Richard Moat

Okay. Well, if there are no further questions, thank you very much for joining us this evening. And look forward to speaking to you again for our third quarter results. Thank you very much indeed.

Laurent Carozzi

Thank you.

Operator

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