FL Entertainment NV

AEX:FLE

Earnings Call Analysis

Earnings Call Transcript 2023-Q1

[Caroline Cohen, executive]

So good evening, everyone. This is Caroline Cohen, Head of Investor Relations, and welcome to FL Entertainment's Q1 2023 results webcast. Before we start, let me draw your attention to the disclaimer on Slide 2. I also want to remind you that this presentation is available on the company's website, and a replay of this call will be accessible in the coming days. Your speaker today are Francois Riahi, CEO and CFO, Sophie Kurinckx. First, you will hear from Francois, who will talk through our key financial highlights for the period, followed by a quick business update. Sophie will then go through the financials in more detail before Francois provides some concluding remarks. Over to you, Francois.

[Francois Riahi, executive]

Thank you, Caroline, and welcome, and thank you all for joining us on this call. So I would start with the fact that FL Entertainment has enjoyed a very good start to 2023. This was based on a solid group financial performance, driven by both businesses. Sophie and I will both elaborate a little bit about the key trends during this presentation. In content production and distribution, we saw a strong level of activity globally and with some remarkable successes with streamers, demonstrating the appeal of our [ unrevolved ] multi-format, geographic and language capabilities.

In 2022, Q1 and Q2 both benefited from higher levels of activity due to the post COVID catch-up. So it's an important element. Of course, when we look at comparison between Q1 2023 and Q1 2022 because we have a high basis for comparison for our Q1 2023 results in our content production and distribution. Usually, in this business, Q1 is lower than the other quarters. In Q1 2023, we saw the return, which was expected, of normal seasonality, and our performance is fully in line with expectations, and we are very satisfied with the underlying activity. On the online sports betting and gaming side, the good performance was driven by the high level of unique active players following the football World Cup that we mentioned last time. In April, we successfully extended by 3 years, an important component of Banijay debt while also securing new financing. So it's -- Sophie will explain more, but this is an achievement of the year so far and a clear demonstration of our financial strength, flexibility as a highly cash-generative business as well as investors' appetite for our business model.

Now in terms of our figures, we saw a solid performance forward by the 2 businesses. So revenues were up by 1.1%, a little bit more when you look at the fixed currency rates. And this reflects the growth in sports betting revenues and the effect of a return to normal seasonality in the content production industry. Again, we already mentioned that during the past quarter, there was a catch-up effect in Q1 2022. In 2023, we will see a return to normal seasonality in content production and distribution. This usually means higher revenues in H2 than in H1. And last year was different due to COVID some productions have been delayed, and we had a lot of deliveries in Q1, which is not usual. I will talk about some of the drivers of the online sports betting and gaming side shortly, but revenues were up almost 15%. Adjusted EBITDA was flat, while adjusted net income was up over 5%, and we maintained our high level of cash conversion also with a stable leverage.

So before Sophie takes you through the numbers, I want to talk through some key business highlights in the first quarter. Let's start with content production and distribution activities. Our linear broadcaster activity remains very strong with major new scripted and premium factual series as well as local relationships for our super brands IP. We are an attractive partner to both linear broadcasters and streaming platforms. Thanks to our diversified offer, our flexible approach to IP, our strong multimarket and language capabilities. It is very important for us in our business model that we are an independent player and agnostic to distribution channel. Now I want to focus a little bit more about Streamer because a key trend visible for Banijay in Q1 has been strong activity with in platforms. Global like Netflix, Amazon, Disney+ or Paramount+ or more regional or local like Videoland, for example, or ITVX.

If you remember from the full year, revenues from streamers were up 60% compared to 2021. In this competitive landscape and in the current economic context, streamers, as you know, are looking more closely at their offer and spend, and this is creating opportunities for us, which come by 2 ways. One is that in this more constrained budgets, there will be, we believe, a surge in demand for nonscripted because nonscripted has a very, very good value for money. And we are -- we have strong arguments when it comes to [indiscernible] scripted. The second element is that in this context, it's easier to find agreements about IPs. And as you know, we are very cautious about retaining IP rights in this discussion with streamers, with some of them has been difficult in the past, and the context makes them, I would say, easier. So for these 2 reasons, we see real opportunities in the context.

In Q1 2023, we delivered a number of new successful shows, which demonstrates the breadth and flexibility of our offer. I will name a few of them. Last One Laughing, or LOL, has become a real hit on Amazon Prime Video. The French version has become the best launch for our unscripted original on the Amazon Prime video platform, and we are producing new seasons in France and also producing Italian, Spanish, Mexican and Australian versions, which is a good example of how our geographical reach is meaningful to these global clients. On the premium scripted side, The Rig also for Prime Video was a popular show on the platform, and we will be returning for a second season. While in Italy, The Law According to Lidia Poet, which is inspired by the true story of Italy's first women lawyer is now the best Netflix launch ever for Italian -- so clearly, a must watch.

Lidia Poet was also produced by [indiscernible], which is interesting, as you may recall, that it's one of our 2022 bolt-on acquisition. I could also mention some other programs. But I think it's interesting to see how things evolve with streamers. And we will continue to improve and diversify our content offer as a valuable partner for both linear broadcaster and streaming platform. When it comes to bolt-on developments, you may have seen that we acquired during the Q1, a majority stake in leading Brazilian studio, A Fabrica, well known as a producer of many of the nation's top scripted series and films. Its content can currently be found on major networks and streaming platform.

Now turning to online sports betting and gaming now. At the full year, we talked about the positive impact of the Football World Cup on our unique active player levels, which is, in our view, the most important metric and the main driver of growth for this industry. This positive impact carried through into Q1 with UIP up 42% year-on-year. This resulted in double-digit revenue growth across all activities, the performance that also reflected greater gamification as well as the positive effect of new exclusive games. Sports book growth was strong and actually, we had some unfavorable football results in February, like all the industry. And despite that, the growth in Sportsbook has been very good.

Actually, every quarter, we mentioned that, too, because to prepare the idea that there is some volatility that can come with sports results, and this was the case in February where, I would say, the statistical results in sports were very unusual, and were felt across the entire industry. And again, despite this, we achieved an almost 15% growth of revenues, which shows the strength of our business. As a business, we will continue to capitalize on this increased player numbers, which bring a greater diversity and creates greater long-term sustainability. The key focus for this business is also ensuring the highest standards for responsible gaming. And as you can see, the proportion of revenue generated in locally regulated market was over 98% in Q1. 98% in Q1, so I think this is a clear strength of our better business, almost 100% of regulated, which is really a top achievement in the industry and 100% in online revenues. And these 2 elements are key to ensure the highest standards for responsible gaming.

That's all for me for now. I'll be back at the end, but I leave the floor to Sophie. Over to you, Sophie.

[Sophie Kurinckx, executive]

Thank you, Francois. So let's start with group revenue at 1.1% in absolute terms, reflecting the return to normal seasonality as expected in content production and distribution and a strong activity in online sports betting and gaming. So for business of content, as Francois mentioned earlier, normal seasonality here means higher H2 than H1. I As a reminder, in Banijay, Q1 2023 revenues are lower than Q1 2022 revenues because of the strong post COVID catch up we saw in the early part of last year. We expect this higher 2022 comparables to continue in Q2. Looking at adjusted EBITDA. External expenses rose by 4.7%, reflecting higher betting taxes on sports betting, given the increased activity. Personnel expense were down almost 5%, demonstrated the flexible cost structure of content production and distribution that allowed them to adapt to a lower level of activity. On that basis, adjusted EBITDA is almost flat compared to 2022.

Looking next at our consolidated P&L. LTIP and employment-related earn-out and option expense are up as we implemented new LTIP in both businesses. The increase in other finance costs is mainly explained by the change in fair value of financial instruments. As a result of the above, adjusted net income rose by 5.3% to EUR 70 million. Looking next at results by business, starting with content production and distribution. Revenue was down just over 3% in absolute terms, primarily reflecting the return to normal seasonality compared to Q1 2022, where higher activity reflected the catch-up after the COVID period as reflected by the variation of production revenue. Overall activity remains solid, driven by a continued comprehensive and well-adapted offering with firm demand from both linear TV and streaming platforms, as Francois mentioned earlier.

This was reflected in distribution revenues up almost 19%. I Overall, the number of content hours at the end of March 2023 increased by a further 4% to around 167,000 hours compared to 160,000 hours in December 2022. Looking at content production and distribution earnings mix, where adjusted EBITDA was down, reflecting the return to normal seasonality. The other key impact of the return of normal seasonality was the working cap, reflecting the high level of show deliveries in Q1 2022. On Slide 17, we show online sports betting and gaming revenues, which were up 14.5%, reflecting the trends outlined by Francois earlier with double-digit growth across all activities. Bet-at-home revenues have stabilized. In February, the Bet-at-Home Group rolled out its new betting and gaming platforms in Austria, which is expected to benefit all countries from Q2 2023 onwards. Adjusted EBITDA for online stock betting and gaming was up 8%, while the business delivered record adjusted free cash flow generation of 95%.

Adjusted free cash flow reached EUR 119 million in Q1 2023 -- this was driven by the business performance as well as a tight control of cash expenses and capital expenditures. This resulted in a cash conversion rate after CapEx and lease payments of 83%. Adjusted for changes in working cap, which reflects the return to normal seasonality for content production and distribution and income tax paid, our adjusted operating free cash flow was EUR 67 million in Q1 2023. The group's net financial debt remained broadly stable versus 2022 year-end figures. The financial leverage ratio remains stable at 3.1x. We have a strong cash position in addition to a significant undrawn secured credit line. As mentioned by Francois, the key highlight was the successful refinancing of Banijay's 2 term loan fee in euros and U.S. dollars to extend the maturity of this part of the debt by 3 years to March 2028.

The transaction was more than 2x oversubscribed and placed with high-quality institutional leaders -- lenders. Thanks to this oversubscription, Banijay also raised new financing in euros and in U.S. dollars to finance its future growth. In total, Banijay has refinanced and raised an amount close to EUR 1.1 billion, while also extending the maturity of its EUR 170 million RCF by 3 years to September 2027, at Euribor plus 3.75%. This demonstrates the group's financial strength and flexibility has a highly cash-generative business. That's all for me. I will now hand back to Francois for some concluding remarks.

[Francois Riahi, executive]

Thank you, Sophie. Just a few words in conclusion. We have seen a very satisfactory start to 2023. Our financial performance is in line with expectations, and we expect to maintain momentum across both businesses going into Q2. For content production and distribution, we will continue to see strong activity with all our clients and notably with streaming platforms. We will see the continuation of normal seasonality and we will benefit progressively from the growth of the bolt-on acquisitions delivered in 2022. For online sports betting and gaming, performance has been very positive as the main driver of this is player numbers, which is very healthy. We will continue to focus on attracting and retaining as a player and -- which will drive growth across all activities.

Then we are, as always, ready to capitalize on further external growth opportunities. All in all, we are fully on track to continue to demonstrate our proven ability to deliver profitable growth at scale. And then therefore, I can confirm our 2023 guidance and midterm objectives that we presented to you with the full year 2022 results. Thank you, and back to you, Caroline.

[Sophie Kurinckx, executive]

Thank you, Francois. It's now time for any questions. Please can I just ask you to state your name and company. Thank you. And I now hand over to Roberto, the operator.

[Operator]

Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions] We are now taking the first question. Please stand by. The first question from Aaron Watts from Deutsche Bank.

[Aaron Watts, analyst]

Thanks for hosting the call today and all the detail. Just 2 questions for me. It would be great to hear your latest thoughts on the ongoing writer strike here in the U.S., how long that would need to drag on before it impacts you in a material way? And relatedly, as the standoff continues, are you seeing any shifting of spend from scripted into nonscripted that may play in your favor? And then secondly, I would appreciate an update on the M&A pipeline at the moment and whether the current macro and media sector backdrops are acting to suppress or stimulate activity there.

[Sophie Kurinckx, executive]

Regarding the first question on the writer strike in the U.S. In fact, Banijay is not producing any scripted shows in the U.S. So we are not impacted at all by this strike. It's maybe even an opportunity as our customers will maybe have to switch to the nonscripted shows as long as there is this strike.

[Francois Riahi, executive]

So in terms of your question about the shift, something that we think could happen, yes. On the M&A, yes, we are always very active in looking at what is going on and what could be actionable. And we consider that the current situation, the current context is rather favorable. We expect to have some opportunities in the coming months. We are monitoring very closely how it goes. But yes, we believe that macro context could lead to good opportunities.

[Operator]

And the next question from Conor O'Shea from Kepler Cheuvreux.

[Conor O'Shea, analyst]

Yes. So a couple of questions from my side as well. Francois, you mentioned -- and Sophie, the tough comps on the production side, on the content business, which we're seeing for other peers. But just wondering into the second half, do you see a risk from some of your clients cutting spend, the free-to-air companies tactically in a weak advertising market? Have you seen much in terms of a pickup in project cancellation or delays so far this year? And the second question, can you just -- I may have missed the number, I think Francois said about the growth in revenues from streaming platforms, particularly within distribution. If you could just repeat that number?

And also whether the higher growth from distribution, can you remind us, is that margin positive in terms of the mix and the margins and distribution higher than in production and if that was a factor in the first quarter. And then the last question, just in terms of Betclic, I mentioned building a base and lots of new clients and users in the fourth quarter around the FIFA World Cup. Can you give us a sense of what degree of retention of those new lines you've been able to hold on to in the start of 2023?

[Francois Riahi, executive]

Okay. On your first question, as you mentioned, it's -- within the industry is a question of the tough comp. That's a good problem to have because in 2022, we enjoyed a 16% growth of our revenue. It was a very, very strong year and also benefiting from this impact of COVID in 2021. So it gives -- it has an impact on the comparison. But no, we are very -- we are not worried for the rest of the year. That's why we are maintaining or reaffirming our guidance. We were expecting the slight decrease in our revenues in Banijay at this quarter because of this comparison base. And what we see, of course, we see -- we are fully in the market. And also, the market is not different from what we were expecting in 2023.

On advertisement, et cetera, clearly, we don't have the type of discussions you were mentioning with our clients in terms of [indiscernible], delays and so on. So that's why we are confirming our guidance is because we are not worried for the rest of the year. And we see things that are evolving I would say, as we were expecting them to evolve on the production side.

On your second question, we are not giving evolution on the client base quarter after quarter, and we gave it at the full year. So the number I was mentioning was about the evolution between 2021 and 2022, and this was a 60% increase in our revenues. So we don't expect to hold to this space, but we expect the business with streamers to fuel our growth. And on the third question, yes, of course, the World Cup, the FIFA World Cup is a very important driver for the increase in number of periods. When you look at Q1 2023 compared to 2022, I mentioned -- 42% increase in the number of players. That's a very strong evolution. Of course, the FIFA World Cup has been important. And so that -- yes, the question is about retaining the player. And on that, we really rely on a very good technology or application Betclic as the best ratings in the countries where it operates. So we are, I would say, confident that once people are using our platform, it's the level of retention in this quarter.

[Conor O'Shea, analyst]

Okay. Yes, please, Sophie, it was on the margin on the distribution. If you could just please that...

[Sophie Kurinckx, executive]

Yes, you're right. The margin on the distribution is higher than on production, and it has been factored into this Q1 results. What is important to note also is that in production, the part of the scripted shows have been higher than last year. And as you know, the margin realized on the scripted shows is lower than on the non-scripted shows. So it comes to offset this increase of the margin done by the distribution. That's why you have an EBITDA margin stable.

[Operator]

We are now taking the next question. And the next question from Aaiza Ali from Baring.

[Aaiza Ali, analyst]

I just wondered to see if -- whether you had any updated thoughts to share with us with regards to refinancing activity with the secured debt advantage and whether that is likely to be at FL Entertainment level or at Banijay level as in the case of the loans. So any updated comments on refinancings that would be helpful.

[Sophie Kurinckx, executive]

Of course, following the successful refinancing of part of this debt, we still have in mind that there is a remaining part that we need to refinance. We are currently looking at the different opportunities we have within the group. We are not excluding something at FLE level even we think that it is more maybe more relevant at Banijay level. We don't know yet when we're going to launch this process on the remaining part of the debt.

[Operator]

Thank you for your question. We are now taking the next question. The next question is from [indiscernible] from Wellington.

[Unknown Analyst]

I just wanted to clarify, you mentioned the normalization in the Banijay business in the first quarter, which you expect will continue in the second quarter. You also confirmed the 2023 guidance, which is for mid-single-digit growth in revenues. Can you clarify, does it mean first half revenues you expect will be down, but then in the second half, you're going to more than make up for it? Is that the guidance you're confirming basically?

[Francois Riahi, executive]

Thank you. Well, the guidance we are confirming is the one we gave at the full year results, which is a mid-single-digit growth for content production and distribution activity and double-digit growth for the sports betting and gaming with an adjusted EBITDA around EUR 710 million at FL Entertainment level. So it's really all our guidance that we are reconfirming also the term outlook. So what we expressed is the fact that we are coming to a more normal seasonality for content production distribution, which means that you should expect H2 revenues for this business higher than H1. And again, the guidance we gave is reconfirmed. So mid-single-digit organic revenue growth.

[Unknown Analyst]

I understand. I was just trying to clarify the second half of this year because, I mean, you're basically -- just specifically on the Banijay, the content production business basically, not at the whole group level, but more at the content production.

[Francois Riahi, executive]

Exactly.

[Operator]

And the next question is from Jamie Bass from Redburn.

[Jamie Bass, analyst]

Just 2 questions from me, please. Firstly, going back to what you were saying on the Banijay margins and the unscripted versus scripted. So are you saying that as we move through into '22 that you'll see a higher proportion of unscripted shows, and that's what's going to influence the margin uplift? Second question is just whether you can give us a guide on what your visibility is at energy level again for 2023 at this point, whether you have a fear on how much of your revenue is already locked into the year.

[Francois Riahi, executive]

Okay. Maybe on the -- I take the last question actually the first for Sophie. Again, we just -- I just gave the guidance on the Banijay revenues for 2023. So I don't have the figure of how much is locked today. But based on our experience and what we see in the different countries and with our different clients. We reconfirm our guidance, which is mid-single-digit growth in 2023.

[Sophie Kurinckx, executive]

Yes. And just to remind you, we are quite confident in this guidance. And as you know, around 2/3 of our revenues are coming from return insurers. This is usually what we've seen in the past and what we see also this year. So we are confident with the guidance. On the Banijay margin, I don't know if I understood properly your question, but the margin on the unscripted shows are usually higher than on the scripted shows. And in Q1 2023, the proportion of scripted shows have been higher than Q1 2022. That's explained the lower margin on production side. But on the other side, the portion of the distribution revenue increased with a higher margin rate, so it offset this impact coming from the production revenue. That's why you have a stable EBITDA margin compared to last year.

[Operator]

There are no further questions at the moment. I will now hand back the conference over to Caroline for closing remarks.

[Sophie Kurinckx, executive]

Thank you, Roberto. So we are fine. We no longer have any more questions. So I -- so I think that we can conclude. Thank you, everyone. Thank you for the call and don't hesitate to follow-up questions if you have any more. Thank you.

[Francois Riahi, executive]

Thank you very much. Thank you.