Mediaset Espana Comunicacion SA

MAD:TL5

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Mediaset España First Quarter 2022 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I'd now like to hand the conference over to your speaker today, Mario Sacedo. Please go ahead.

[Mario Arriola, executive]

Hello. Good evening, everybody, and welcome to 2022 first quarter results presentation of Mediaset España Comunicación. This is Mario Sacedo, Head of Investor Relations. Massimo Musolino, General Operations Manager, is going to present the highlights and main topics of the period. After his presentation, it will be a Q&A session where Massimo; Quico Alum, Publiespaña General Manager; and Javier Ura ía, company's CFO, will answer all your questions.

Massimo, please, you have the floor.

[Massimo Musolino, executive]

Hello, everybody. Welcome to Mediaset España's 2022 First Quarter Results Presentation. I will go over the main figures and events of the period first. Then you can ask any question in the Q&A section at the end of the presentation.

Let's start on Slide #2 with some of the operational highlights of the January-March period. As you know, we are currently under a tender offer being launched by MFE. Following the guidelines required in this type of corporate operation, we have to maintain a passive position so that we do not affect any shareholder decision. For this reason, I will not be making any reference to the tender offer bid in this presentation, nor will we be able to take questions on the matter, even though, obviously, it's the most relevant event of the quarter for us.

Mediaset España's audience share from January to April reached 26.2%. In terms of commercial target, our 29.3% figure, which represented a positive conversion rate of 3.1%, allowed us to maintain our leadership position in terms of TV market share, which according to Infoadex stood at 41.7%. We achieved this, thanks to our long-standing approach of maintaining focus on the most valuable viewer segments. We will elaborate on this later.

Following the figures reported by Infoadex, the total TV advertising market grew by 1.1% in the quarter, which Mediaset España reaching a leading market share of 41.7%, as I mentioned before.

Moving on to financials, on the left-hand side of the page. Total net revenue in the year grew by 2.2% to EUR 188 million. Operating costs amounted to EUR 153.7 million, in line with our internal forecasts. And as we will see later, with normalized figure for the first quarter of previous years. The exception was last year due to the COVID pandemic.

EBITDA during the period amounted to EUR 34.3 million while net profit stood at EUR 23.7 million. The healthy EUR 8 million of free cash flow generated grew the final cash position at the end of March of EUR 312 million.

Let's look at the commercial target now. You can see how the company worked very hard to monetize our audience share on Slide #3. First, let me remind you once more the commercial target includes those individuals from 16 to 59 years old that live in areas with a population of more than 10,000 inhabitants and belong to all but lower socioeconomic index. Commercial target is the most valued part of the audience, and therefore, advertisers are willing to pay higher prices for it.

The graph on the left-hand side of the slide shows how our commercial target improved on a monthly basis, thanks to the balanced programming grid directed towards the most valuable segments.

Although the audience share in terms of total individual was leveling off, we are actively managing our content in order to maximize this conversion as a key element for increasing prices. As a result, the positive conversion maintained its accelerated trend consistently above 3 points. Be more accurate, the average conversion ratio in the period from January to April was a positive 3.1 percentage point for Mediaset España, while our competitor had negative conversion averaging [indiscernible] negative 0.6%.

On Slide 4, there are a couple of graphs that we show the quarterly evolution of both the TV and digital market throughout the beginning of the year. On the left side, there is a visual explanation of the TV advertising market on a monthly basis. January was strongly affected by the pandemic, with the massive Omicron wave. February posted a healthy 5.3% growth once the health care situation improved. Again, in March, volatility returned to the market due to the beginning of the war in Ukraine and the transport strike in Spain.

As a result, the first quarter of the year grew by 1.1%. The growth did not include any contribution from the 3 main sectors: automotive, telco and food. The lack of investment from them is a one-off situation, and we expect that as soon as we begin investing again, the market will improve accordingly. This is why we maintain our positive outlook for 2022 if the market normalize.

Regarding the digital advertising market, if we use the business, we have operations as a reference, search engines excluded, the market grew by 11% in 3 months period.

Moving on Slide 5. Details our TV advertising performance in the year. As Infoadex reported, Mediaset España TV advertising revenues amounted to EUR 159.9 million, maintaining the leadership position in the TV advertising market. The positive conversion ratio mentioned in previous slide is allowing us to increase our prices as the only way to offset reduction in TV consumption that free-to-air operators also are experiencing.

In this sense, in the table on the left side of the slide, you can see how the price evolution in the first quarter of the year saw an increase of 4.8% and allowed us to believe this internal price. It's our aim to keep the current strategy as a way of improving the monetization of our audience share and increasing our profitability. We have a clear ambition when the market recuperates that some specific period of [ 2022 ] with increases higher than those of the first quarter of the year.

On the right side of the slide, you can see how we kept the [indiscernible] TV advertising market share with 41.7%.

In conclusion, and as we have said in previous calls, this is the result of focusing our strategy in the -- on the highly valuable audience segments and the consequent price increase.

On Slide 6, we want to explain how Mediaset España is managing the digital opportunity. As you can see, our growth in the period was more than twice that of the market. Mediaset España digital advertising revenues went up by 24% and the digital market grew by a healthy 11%. Profit from digital business has doubled compared to last year, thanks to the digital market's strong performance and our continued strong position in Spanish media market.

Our approach to the digital world is not the result of one single tool. We moved from the content produced on our traditional TV channel and thanks to new technologies, we developed an innovative group of new services and tools for monetizing our reach and extended audiences. We have come a long way in recent years, and the last step is the hybrid model introduced by HbbTV. It gives us the best of both worlds, the large audiences coming from the TV channels and the segmentation for the digital world, which allow us to feel optimistic about the future.

We cannot look at our business today as we did before. Nowadays, content is created and distributed through different windows, with the aim on monetizing on the opportunities. As well as the -- as well as this, we have taken more steps toward being a leading company in the digital ecosystem. The acquisition of BE A LION brought a social media reference into our group, and we also maintain a continued strategy of launching innovative solution for our customers.

For the [ Centro ] -- the last one, [indiscernible] store for connected TV, which is capable of measuring the advertising impact at the point of sale. This product is built from the modeling of Mediaset España big data with the aim of linking different devices in order to generate 360-degree audience that unify inventories of connected television, mobile phones, tablets and PCs through data and technology.

And now let's move on to some financial figures for the quarter. On Slide #7, you can see how the company has been managing the cost base over the last few years. As I mentioned in our February full year conference call, the comparison base of last year is not a comparable one, being more specific for Q1 2020 could be considered as an almost normalized year. COVID crisis started in the second half of March, while Q1 2021 was, let's say, a pandemic period.

The EUR 153.7 million in costs in Q1 2022 is 5.4% lower than the last comparable fourth quarter in 2020. Last year, our costs were concentrated in June and July because of the Euro Cup. This year, our costs are more linear. We forecast gradual return to the normal programming grid, which means we will only see slight lower TV costs versus 2021 at the end of the year. Nevertheless, an increase in costs related to cinema activities is expected, difficult to quantify at the moment because the number of premier releases expected for the year is now between 2 to 4. We have not made a definitive decision on this yet. Also, we are expecting a reasonable increase in digital costs due to the new projects we have planned. In any case, let me say that the cost increase linked to cinema and digital activities should also be reflected on the revenue side.

Looking at the cash generation, if we make the same comparison as we did with OpEx, the EUR 80 million figure achieved in Q1 2022 brought an 8.3% increase over the last comparable first quarter, which was again in 2020.

Finally, on Slide 8, before we move on to the Q&A section, let's quickly review what we have said and what we expect for the rest of the year. Our primary objective is profitability and we confirm our target. In order to increase profitability, we need to increase TV revenues. And in a world where TV consumption is declining, the only way to do this is by increasing our prices. In order to increase prices, we have to continue concentrating on the quality of our audiences. And in this context, we will focus on commercial target.

Our pricing policy will begin to reap its rewards as soon as the 3 big sector, automotive, telcos and food return to the market, also considering that automotive and telcos are the sectors which create the highest prices. In terms of advertising markets, after the full year results release, we saw a huge geopolitical shock with Ukrainian war, the inflation rate and the pandemic was still relevant. Today, we remain cautious but moderately optimistic about the market performance in the coming months, and we are expecting the advertising market will make a recovery.

With regard to the digital business, we will maintain our expansionary strategy, reinforcing our presence, growing organically and keeping an eye on the market for any corporate opportunities that may potentially arise. As we mentioned in the previous results call, we expect this year to see an increase in digital costs due to the new projects we have scheduled for launch, which will improve our services with a more customized proposition and larger reach.

With regards to TV costs, we expect the gradual return to the normal programming grid with slightly less costs compared to last year. However, we have a certain amount of flexibility to adjust our costs depending on how the market is doing. As we previously mentioned, we also expect to generate cash and accumulate financial resources in order to benefit from potential opportunities that may arise in our audiovisual world, where there is a lot of movement at the moment.

And now let's move on to the Q&A section. Thank you.

[Mario Arriola, executive]

Thank you, Massimo, for the presentation and remarks. As we announced, now we will move into the Q&A session. Operator, please, let's proceed to open the lines.

[Operator]

[Operator Instructions] Your first question comes from the line of Annick Maas from BNP Paribas.

[Annick Maas, analyst]

So my first question is just -- I think you just said that your cost -- total cost should be slightly below what you had last year. That is assuming what TV advertising revenue growth on a full year basis.

My second question is, I guess, comparatives are getting much tougher. So how do you think about Q2 or more -- what do you see so far in terms of TV advertising revenues for Q2? And then I might have missed it, but can you give us absolute digital advertising revenue number for Q1, please?

[Massimo Musolino, executive]

We can start from the first question about costs. Finally, there are no changes in our forecast for the year. We expect, what I said in the February call, our estimate is a slightly lower TV programming cost and overhead with respect to last year. And at the same time, we estimate an increase in costs in the digital business and cinema distribution activity, but linked -- these [ 2 increases ] are linked to the revenue line.

Regarding TV cost, we need to return to the normal programming grid. And on top of that, we need to renew some programs that are at the end of the cycle. So this is why we will [ absorb ] faster Euro Cup costs over last year. The real difference between this year and last year is the fact that this year we will see a more linear seasonal periodicity with respect to last year. Last year, we concentrated an important amount of cost in June, July. This year, every quarter, we will -- similar to -- in terms of periodicity similar to the normalized year.

Regarding cinema business cost, last year we premier -- we released only 2 movies. This year, if you remember, I was talking about 5 movies. Today, we can say that the movie forecast for the year are 4, but this is an estimate. The first one was premiered on March, honestly, with lower box office we expect our forecast. Now we have 3 other movies, but we haven't still decided when we will premiere them. This is why, at this stage, it's very difficult for me to quantify the impact in the cost line because I don't know if will we premiere 2, 3 or 4 movies this year.

The same scenario regarding the digital business. We have many projects for growth in this area, all of which are new activities, including new channels for Mitele PLUS, new digital projects for the web and something around [indiscernible] and development, of course, of the HbbTV and branded content. These new plans and activities will entail some more costs but also more revenues, of course. So it will depend on the time frame. So at this stage, we [indiscernible] quantify them.

In summary, try to simplify this, we can say that an increase in the total cost is expected, but in line with increase of the line of the revenues. This is the forecast we have at the moment.

[Quico Alum, executive]

Okay. About of the pricing expectation for the second Q, I mean, I don't have any -- I can't give you any number of that because we are growing almost week by week. We can say that in April, as everybody knows, we knew that it wasn't going to be an easy month just because of the fact that the Easter week took place just in the middle of the month, and this was not good news. And the other fact that happened in April is that telecoms and cars have moved forward their campaigns to May and June and the rest of the year.

This is what was really happening in April. We knew that April was going to be a difficult month and we are now negotiating May and June. One thing I'd like to underline about telecoms and automotive that we have already negotiated, we have already got agreements with these clients, and we are waiting for the campaigns that it could be next week, May, June, but we are waiting for these campaigns and they have been postponed.

Note -- and the other thing we are optimistic for that -- we are -- is that information we are having from the agencies and clients is that due to the current situation, the campaigns have been postponed but that's important. Annual budgets remain unchanged and have not been reduced. They are just waiting that the situation to normalize. And this is what we can say about the [ second ] week. We have got also a good news from the energy sector set to make a strong start soon, and we know that. But we have to go week by week.

[Operator]

Your next question comes from the line of Julien Roch from Barclays.

[Julien Roch, analyst]

First question. I know you said no question on the offer, but my question is only on timing because I think the CNMV approved the prospectus. So when do you think the offer will start? And what would be the length of the offer so we have an idea when it closes? I think you should be able to tell us that. So that's my first question.

And the second question is, I understand why autos is not in the market because they don't have any car to sell because there's no parts. But why are telecoms and food not in the market? I think Spain is the only market like that. And how much of these sectors' total revenue -- what percentage are there of your total revenue? And then lastly, on April for Quico, I think media buyers are putting April down 15%. Is -- do you agree with that?

[Massimo Musolino, executive]

Okay. About the first question. It is public that the CNMV has received the prospectus from Mediaset. The time they need to approve this is something that, honestly, is not on our end. So we -- I don't know. I can't answer that honestly. I have no element to say, 1 day, 1 month, 1 year. So I don't know. I don't know. I'm sorry.

[Quico Alum, executive]

Yes. About the -- I don't have here the exact numbers of the weight of telecoms and automotive. But I think maybe they are together 15%, 16% of our total revenues. I mean they have declined their investment, but they have invested. So it's not just 0, maybe they have declined by -- the sector by, we think, 30 -- 35% in April, but they are there. But we are waiting for that campaigns.

The reason of telecoms, really, I don't know because we have -- I cannot disclose the -- I mean, or reveal the names of the companies. We have 1 company that is doing really, really well and we have 3 or -- the other 2 that they are waiting. I don't know waiting for what, but they're waiting. And one is really -- I think this one is going to push the market. And the other 2, they have to wake up. We think so, but we have to wait.

And about the 15% of April, I don't have this exact information, but I think it is really difficult to estimate the decline. We think that is a double-digit decline, but I don't know if 11%, 12%, 13%, 14% because I don't have this number. It's due to the fact that when you have the -- Easter within the middle of the month, you have 3 different periods. You have the first week, the Easter week and the second part of the -- or the last part of April, with different prices that is really difficult to estimate. 15% -- maybe 15% is too much. I will say double digit, but no more than that because I don't have information, not because I don't want.

[Julien Roch, analyst]

And can you actually tell us current telecom is 15% to 16%, but I think Massimo also said that food was not in the market. So how much is food and why are they not in the market?

[Quico Alum, executive]

Food is not in the market, yes, we think in April is the -- I mean the reason is the inflection. The inflection and price of the, how you say, raw materials. That is the reason of the food sector. One important thing for these sectors are they need to be because they are -- mainly they are brands. Nestle, Danone, Ferrero, Campofrio, ElPozo, their brands, and they need to make a lot of investment and they are really TV companies. And they are waiting for them.

The reason in April is that the increased cost of the raw materials, I think they are going to be back, I don't know when. That's the question. We don't have [indiscernible] because the agreements are closed. We are waiting for the campaigns. And they say that we are going to keep -- we are going to fulfill the agreements at the end of the year, but we don't know when.

[Operator]

Your next question comes from the line of Nizla Naizer from Deutsche Bank.

[Sarah Simon, analyst]

I have a couple of questions. The first is, could you kindly tell us a bit more about the impact of inflation in Spain? And what are your advertisers -- are they worried about consumer wallets being constricted as discretionary spending comes under pressure? Some color there would be great.

Secondly, you mentioned digital is getting more and more important. What are your priorities when it comes to digital and what's trending on -- some color there would be great.

[Francisco Iglesias, executive]

Okay. On the first point, inflation in Spain. In Spain, just here, as everyone else, inflation came as a surprise in the second half of last year. Some people thought at the time that it was going to be temporary that once the situation improved or went back to normal in the supply chains and everything else, things were going to go back to normal. Unfortunately, the evolution of things has not taken us in this direction, especially with the war in Ukraine and everything else. So inflation seems that it is here to say, at least for the first half of the year. And then we would see if the situation changes in the second half.

Specifically on us, inflation is not -- it has some impact, but it's not very relevant because a significant part of our contracts are not linked to inflation. It's something that -- probably because of the fact that we are -- as we have discussed in the past, we are based in in-house production. And therefore, we have agreements with our suppliers and things like that, which are not necessarily the ones that you have with a third party that come to you and forces you to accept new price. That's not part of our business model. So inflation will affect some contracts partly on our labor agreements. But by and large, it would not really hit as hard as you could expect or as we know it's going to be the case in other businesses.

[Massimo Musolino, executive]

Yes. About digital, we can -- summarizing, say that we have 3 main objectives. First of all, our main objective is to increase the coverage of our campaign. It means that digital enable us to compensate the part of coverage that we are losing in the linear television. In this sense, all our size and the sites and the OTT platform [indiscernible] us to increase the coverage of our content.

The second main objective, regard the HbbTV, which is something which will be really important in our future, because as I stated in my presentation, it's enabled us to join 2 worlds. From one side, the television, from other side -- with higher coverage. And from other side, the world of Internet.

Just to give you an example. HbbTV enabled us to segment our advertising also geographically, something that our television cannot do by law. So in this area, we are studying different developers because we think that this is an area that can enable us to create real value for our company. And finally, the third area in which we are -- which is really important for us is the SVOD. Mitele PLUS, which is something different in our main -- our core business. We always say that we use television to sell advertising. In this case, there is no advertising. There are subscribers.

And in Mitele PLUS, we have a unique approach with respect to the market because at the end of the day, we -- our objective by the moment is not to maximize the number of subscriber, but is to have profitable subscribers. So Mitele PLUS is a profitable business for us from the year 2. During the first year, we invested in the football rights to launch the product. And then into 2021, we had a profit. And in the first quarter of this year, we had doubled the profits over the same period last year.

We don't need to have huge amount of subscribers to make profitable the business because this is no intensive cash business for us. At the end of the day, we use most of our TV program, production -- produce internally for our company, Megamedia, so at a reasonable cost. And this is something -- another area in which we can have good results in the future.

[Operator]

Your next question comes from the line of Sarah Simon from Berenberg.

[Sarah Simon, analyst]

I just have one question. If we look at Mediaset or -- sorry, Media For Europe's rationale for [indiscernible] company, they talk about revenue synergies due to enhanced tech on targeting [ and things ]. I know you can't comment on the bid, but I'm just wondering, on a scale of, say, 1 to 10, how well positioned do you think your existing technology setup is to go after things like HbbTV and digital targeting?

[Massimo Musolino, executive]

So talking now the synergy in some way, talking about the tender offer, honestly, this is not my intention. I don't think that this is the right place and the right moment, especially to talk about.

[Sarah Simon, analyst]

Yes. But I'm not talking about the bid. I'm saying -- I'm asking you whether you think your existing investment in technology is sufficient to make you able to fully capitalize on the digital and targeting opportunities that you see as a stand-alone company? Do you think you're investing enough? And is your existing technology sufficient?

[Francisco Iglesias, executive]

Well, I think as you say, without getting into the specifics, but really, in the last years, we have made movements in terms of investing in technology. And honestly, we think that with all the difficulties of the new technologies and the adaptation and everything else, but we honestly think that the money that we have spent, the moves that we have made and the investment that we have made in general is really what we needed at this particular time.

And I don't think that this is hindering our ability to succeed here. I think that we are allocating the right amount of resources here. So I don't know on a scale of 1 to 10, whether you can say that is 9 or 10. But certainly, I think that we will be in the high part of the scale in terms of the investments and the efforts that we have made in this respect.

[Operator]

Your next question comes from the line of Fernando Abril from Alantra.

[Fernando Abril-Martorell, analyst]

I have only 2. First is with regards to the in-house production. It has fallen by 1 percentage point only, but I don't know what is the driver behind this. And what should we expect with your content mix going forward?

And then second question is with regards ProSieben. I don't know what are the next steps on this front now that you have supported the Supervisory Board election.

[Massimo Musolino, executive]

Okay. Regarding the content mix of our channels, we are -- there was no news in the sense that Telecinco is practically 100% in-house program. What we have done during the last couple of years has been to increase the in-house program in the channel [ Quatro ]. And this is something that we continue to do. So in my mind, I made that [ Quatro ] will reach the same level of in-house program than Telecinco in [indiscernible].

About ProSieben, it is something about the -- our route, next steps. We are a long-term investor in ProSieben. So we share the -- and honestly, we are also satisfied with the objective, the [ business plan ] that the executive committee set [ for themselves ], an increase in revenues and free cash flow. And so I mentioned dividends that also -- we expect that this plan will reflect the -- we expect that the share value will reflect the results of this plan.

This is, let's say, a short, midterm projects. On top of that, there is the interest of long-term shareholders. There are other interest, not only to maximize the shorter term, but also the -- look higher at the business model. We expect that the change of the president and the fact that the time will help us to know better them, and them to know better us can help both to generate a good climate and good results.

So in this moment, we don't want to say anything that can create polemic with them. We are happy to see the management focus on this short, midterm objective that we share. So we have received -- today, we have paid a good dividend. So as a shareholder, it's not a bad news to receive an important dividend. So this is the situation at the moment.

[Operator]

Your next question comes from the line of Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Just 2 quick questions. The first regarding the advertising market you expect recovery and the campaigns are still there. In the first quarter, you were able to increase prices by 5%. Do you expect to be able to have the same trend also in the forthcoming quarters due to the decline in viewers that probably will go ahead in the rest of the year?

The second question regarding the guidance on cost. You said that you will come back to a normalized level of cost. Could we refer to the level of 2019 cost there of around EUR 660 million as a reference in the long term? And considering the level of EUR 630 million you recorded in 2021, could be the '22 level something in the middle between these 2 figures?

[Massimo Musolino, executive]

About costs, I can say that it's clear that the increase of the first quarter is not -- it's not something that will continue during the year. If I look at our estimate for the first half of the year, our cost base will be absolutely in line with the last year. So the TV cost will remain stable, if the market remain normal, of course. As I said in my presentation, we have some margin to manage our cost depending on the advertising market.

Then there are some part of our business, which generated revenues and cost. If we premiere 4, 5, 6 movies in a year, of course, you will have revenues on these movies, but also the cost. And this is the same for some digital activity. So at the end of the day, the -- let's say, the forecast for the year is pretty clear. TV cost in line with last year, something less and the other variable costs, depending on the new project.

In all this, under the umbrella of the advertising market, of course. If we see that the advertising market goes down significantly, of course, we will try to reduce at maximum our cost. On the other hand, if we see that there is market -- advertising market and we need to produce more audiences and more GRPs, we will invest something more.

So just to close, the line of cost is not something starting on something that we can separate from the revenue line. So I subject the cost base together with the revenue base.

[Quico Alum, executive]

Regarding to our pricing policy, yes, our goal is to increase prices by 4%, 5%. And I think we can do -- we can make high price increase in the main sector, telecom and automotive, as we expect, come back. Then I think we will be able to increase the price more than 5%.

[Stefano Gamberini, analyst]

Just a quick follow back, sorry, on the OpEx. So you said the TV cost will be flat. Could you give us an idea of the breakdown between TV cost and the other cost? Or you usually do not supply this information?

[Massimo Musolino, executive]

No, when I say -- when I talk about TV cost, I'm talking about all the costs with the section of movies and digital. So I include not only programming cost, but also [indiscernible]. This is slightly lower than -- our estimate is that this year the TV and [indiscernible] will be slightly lower than last year, that's 2021. So this is with the same number -- with the same business, we will spend less.

Then the difference with last year is that this year we will have more movies and probably some new projects on digital. This is 2 different things, but I'm not talking over EUR 100 million cost increase. Movies if we broadcasted 4 -- if we premiere 4 movies, we are talking about EUR 15 million to EUR 20 million costs, more or less. EUR 3 million to EUR 5 million for movie, and we ought to recover them with the revenues. Digital cost increase is lower than this, of course.

[Operator]

Thank you. I will now hand the call back to Mario for closing remarks.

[Mario Arriola, executive]

Thank you. It's now time to close this conference call. Thank you very much to everybody for attending at our presentation. Usually, if you have any further questions, please contact with the Investor Relations Department. Goodbye.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.