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Edited Transcript of GCLA.BA earnings conference call or presentation 15-Aug-19 3:00pm GMT

Q2 2019 Grupo Clarin SA Earnings Call

Buenos Aires Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Clarin SA earnings conference call or presentation Thursday, August 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Oscar Agustín Medina Manson

Grupo Clarín S.A. - Head of IR

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Conference Call Participants

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* Gerard Chua;Resurgence Investment Management;Analyst

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Presentation

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Operator [1]

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Good morning. My name is Carolina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Grupo Clarín Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

This call is for investors and analysts only. Therefore, questions from the media will not be taken. If you are a member of the media and have questions, please contact i-advize following the call.

I will now introduce our speakers on behalf of Grupo Clarín. We have Mr. Agustín Medina Manson, Head of Investor Relations; and additionally, Mr. Iván Acevedo, Controller; and Mr. Marcelo Boncagni, Audit Manager, who'll also be available for today's Q&A session. The team will be discussing the results as per the earnings release distributed last Monday. If you are have not received the report or need any assistance during today's call, please contact i-advize in New York at (212) 406-3695 or the company in Buenos Aires at +54-11-4309-7215. Clarín has also posted a webcast presentation to follow this conference call. This presentation can be found at www.grupoclarin.com/ir.

Comments made by management today may contain forward-looking statements about Grupo Clarín's future performance, plans, strategies and targets. Such statements are subject to uncertainties that could cause Grupo Clarín's actual results and operations to differ materially. These uncertainties include, but are not limited to, the effects of new or ongoing industry and economic regulations; possible changes in demand for Grupo Clarín's products and services; and the effects of more general factors such as changes in general market, economic or in regulatory conditions. We ask that you refer to the disclaimer in the earnings report or presentation for additional information regarding forward-looking statements.

It is now my pleasure to turn the call over to Mr. Agustín for his presentation. Please go ahead, sir.

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [2]

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Thank you very much. Good morning, and thank you for joining us today. It is a pleasure to present the results. Let me put the outline, the agenda for today's call. We will start with a brief macro overview followed by the discussion of the company result from financial position. Later, we will review the current ownership structure of the company. Having gone through the agenda, I will now go over a brief macro description on Page 4.

As we mentioned in previous call, the economy has still shown weak result in term of exchange rate stabilization and inflation reduction. Although the fiscal and monetary goals of the program agreed upon with the IMF were strictly achieved during the first half of the year, exchange rate pressures and high levels of inflation led the Central Bank to reconsider its monetary policy and announce new measures.

During the second quarter of 2019, together with the FX and monetary measures, the government suspended utility price adjustment in order to contain inflation. Successfully, the CPI has decreased monthly since March 2019.

On the FX market side, the nominal exchange rate closed the second quarter at -- of 2019 at ARS 42.49 per USD 1, decreasing 2% and increasing 47% compared to the previous quarter and the same period of 2018, respectively. Regarding the reference rate, it closed the period at 62.7%, decreasing approximately 550 basis points as compared to the previous quarter.

In the second quarter, GDP showed some signals of recovery in the activity mainly due to the agricultural season. But with the primary election or partial result in which the opposition ticket has taken 47% of the vote followed by the current administration ticket with 32%, the level of uncertainty has skyrocketed. And given this uncertainty, it is difficult to predict the economic decisions to be taken by the next government. So there are no clear market expectation at this moment. After the election, FX and reference rate jumped to ARS 0.52 and 75%, respectively. All in all, this could result in an extended period of higher inflation, financial volatility and a slower growth recovery or an economic downturn process.

Having gone through the macro overview, let me continue with the company performance. Please turn to Slide 6 so that we may briefly review some of the Grupo Clarín financial highlights for the first half 2019 period.

First, it is important to highlight that Argentina has recently crossed the threshold of 100% inflation accumulated during the last 3 years period and became a hyperinflationary economy. Briefly, the presentation of the financial statement flowing -- following inflation adjustment implies the restatement of nonmonetary assets and nonmonetary liabilities, the restatement of shareholder equity and all items in the statement of comprehensive income. The gain or loss resulted from the difference between those items is a monetary gain or loss, which could also be estimated by applying the rate of inflation to the net monetary position during the year.

During the first half of this quarter, the company had a very good operating performance -- sorry, revenues for the first half grew by 39% to ARS 9.3 billion in historical pesos, lower than 56% inflation. So with the IRS adjustment, revenues decreased by 15% from ARS 11.8 billion to ARS 10 billion in real pesos. EBITDA in nominal terms increased by 9% to ARS 698 million mainly driven by better performance in the Broadcasting and Programming segment that was partially offset by a negative EBITDA in the Printing and Publishing segment. Taking into account the effect of inflation, EBITDA dropped 24%.

Net income for the period attributable to equity shareholders in real pesos was negative around ARS 174 million.

On Page 7, revenues for the second quarter 2019 grew 33% to ARS 5.3 billion in historical pesos and EBITDA dropped 13% to ARS 467 million in historical pesos. If we consider the inflation adjustment, revenues decreased by 13% while EBITDA did it by 32%.

On Page 8, we showed that the impact of inflation accounted -- generated lower revenues and cost in real terms. But comparing the second quarter 2019 versus the second quarter 2018, revenue were reduced more than cost, so we've generated an EBITDA margin contraction. The company has been taking actions to gain operational efficiency and manage its cost structure, but economic downturn has impact negatively in the revenue side.

We will discuss the breakdown by segments shortly, but first, I will like to review the debt financial position. As per Slide 10, the total debt in the first half of this year increased to ARS 1.4 billion due to higher bank overdraft with a net cash position of ARS 57 million as of June 2019. The average debt cost was approximately 7.3% in dollars and 71% in pesos, and the average maturity is around of 1 year. Approximately 50% of our total debt is in U.S. dollar and around 24% of the cash and equivalents are in U.S. dollars. Overall, we continue to show a very healthy debt profile with low leverage.

Moving on the segment breakdown. We begin with the Broadcasting and Programming division on Slide 15. (sic) [Slide 12] As we mentioned in our previous call, the company downturn impacted our company across all business segments and this segment performed well considering the current macroeconomic conditions. Revenue decreased by 6% to ARS 2.6 billion in constant pesos in 2019 compared to the ARS 2.8 billion in the second quarter 2018. This was due to a lower advertising revenue in constant pesos in Channel 13, our open TV station.

Cost of sales increased by 1% to ARS 1.6 billion. The increase was mainly caused by higher programming costs due to our main entertainment show, Dancing With The Stars, was launched in the second quarter. And when we compare with the same period last year, we didn't have this show on our screen. That was partially discussed -- was partially offset by the effect of restatement in salaries for the second quarter 2018 versus the second quarter 2019.

Selling and administrative expenses decreased by 22% to ARS 450 million in the second quarter 2019 compared with the ARS 578 million in 2018. The decline was primarily the result of the greater effect of the restatement of the salaries, marketing expenses and fee for services of second quarter 2018 versus the current quarter in order to be expressed in homogeneous currency as of June 30, 2019. During this period, adjusted EBITDA totaled ARS 630 million and EBITDA margins stood stable at 24%.

On Slide 12, in terms of audience share, on Channel 13, the prime time audience increased by 2% and the total time increased by 4%. This was the result of a more appealing content, a better soap opera and the early beginning of Dancing With The Stars. The more attractive content that improved our audience performance has allowed us to increase our advertising market share to 39.6%, a 7% increase compared to the second quarter 2018.

Now let's move on to Printing and Publishing on the next slide. Total revenue decreased by 11% to ARS 2.6 billion in the second quarter 2019, mainly as a result of lower circulation and advertising revenues in real terms. And in spite of solid customer subscription base, circulation decreased in real terms due to the price adjustment was lower than inflation. Inflation was 56% from the second quarter 2018 to the second quarter 2019, while the Sunday newspaper price increased 48% and on the rest of the week on average was 39%. Also, advertising revenues in current pesos increased by approximately 29%, lower than inflation.

Total adjusted EBITDA for the second quarter 2019 was negative in ARS 173 million. This negative EBITDA was the result of lower revenues in real terms due to the economic crisis and also due to higher severance payment and was partially offset by lower salaries. We continue stabilizing our operation and deploying actions with the expectation of improving the company's long-term sustainability.

Cost of sales increased by 3% to ARS 1.7 billion in the second quarter 2019 compared with the second quarter 2018. The decrease was mainly -- sorry, the increase was mainly the result of higher severance payment that was partially offset by lower salary and printing costs that was the result of a greater effect of the restatement -- of the inflation restatement for the second quarter 2018.

Selling and administrative expenses decreased by 12% to ARS 1.1 billion in the second quarter 2019 compared to the ARS 1.3 billion reported last year. This was primarily the result of lower salaries, marketing expenses and fee for services due to the inflation adjustment effect in the second quarter 2018.

Please turn to Slide 14 where we show the key ratio for this segment. Comparing quarters, total circulation increased to 234,000 average daily copies. These figures include approximately 65,000 digital subscribers while printed circulation market share stood at 41%. Printing advertising share reached 53%.

Regarding Digital Content and Others segment on Slide 15, during this period, net sales decreased by 46% to ARS 474 million and EBITDA resulted positive in ARS 34 million.

To conclude, I will review the current capital structure on Slide 16. As of today, the shareholder composition is 80% owned by the Argentine shareholders and a public float of approximately 20%. Regarding the composition of our float, as shown in the slide, approximately 44% is in international market while 56% in the local market.

That concludes our comments, and we will be pleased to take your questions. Operator, we are ready for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Gerard Chua with Resurgence.

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Gerard Chua;Resurgence Investment Management;Analyst, [2]

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I'd just like to check in terms of the severance payments. This amount has decreased over the years, but I wanted management's kind of outlook for the upcoming years. Is it going to continue at the certain run rate or how is it going to be like?

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [3]

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Okay. One second. We're going to answer you back. As you know, we have started a rightsizing process in 2016, and this process has been extended for at least these 3, 4 years. The printing business is trying to fine and reshape every time. It's a learning-by-doing process because if you are trying to find the best software that fits to your businesses, sometimes like these crisis reduce your source of income and then you have to adapt again. And we are in this process right now. So it's hard to know when these severance payments are going to be reduced. And it's hard to know when the Argentine economy will start to grow again. So it's difficult for us to give you some guidance or some color related with the Argentine economy right now and with the -- what is the best structure for the company in the coming years.

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Gerard Chua;Resurgence Investment Management;Analyst, [4]

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I understand. Okay. Maybe just one more. Corporate overhead. I think previously when we -- there was some correspondence, it was averaged at about $20 million in 2017. Is that number changed? Or what is the corporate overhead like -- contracting it is varied within the Digital Content and Others division?

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [5]

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Well, in Digital Content and Others, you have Gestión Compartida. That is a company that offer services to Grupo Clarín subsidiaries and to Grupo Clarín and to third-parties.

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Unidentified Company Representative, [6]

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BPO.

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [7]

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It's a BPO. And also, you have included there Grupo Clarín that is a holding company, and you have some small operations that retail company that is very small businesses. Those revenues increased lower than inflation because also salaries related with those services increased lower than inflation. That is why also you see a gain in EBITDA comparing quarters.

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Gerard Chua;Resurgence Investment Management;Analyst, [8]

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Okay. All right. How about these noncontrolling interests? I think it's been growing in terms of the negative value in absolute terms. What does this comprise and what is it actually? Is it inflation-related or what is this?

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [9]

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In noncontrolling interest, we have some companies that we don't consolidate. That could be a paper mill and also that company reshaping, transforming its businesses. And you have also a company that has pay TV signals that is very profitable, so you have a mix there of companies that are relating with the Printing and Publishing businesses and with others with the Broadcasting and Programming. And as you see in our business segment, the first one, Printing and Publishing, are not performing as well as the other one. So that is the figures that you see there. On one hand, we consolidate -- we don't consolidate the paper mill. And on the other hand, the pay TV now signals so those are the figures that compose the noncontrolling interest.

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Gerard Chua;Resurgence Investment Management;Analyst, [10]

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I see. Okay. And sorry, just one last one. How about the capital expenditure? Is there any expectation what it's going to be like as a percentage of sales?

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [11]

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It's going to be very small as it has been since we split our cable business. Only you could have some small CapEx in Broadcasting and Programming when you need new cameras and those kind of things, but it's going to be completely marginal for at least for the rest of the year.

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Operator [12]

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(Operator Instructions) And there are no further questions at this time. I will now turn the call back to Mr. Agustín for any closing remarks.

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Oscar Agustín Medina Manson, Grupo Clarín S.A. - Head of IR [13]

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Thank you very much for your attendance today. We appreciate your interest in our company and your questions. Please do not hesitate to contact us if you have any further question. We look forward to speaking with you again regarding the results of the third quarter of 2019 next November. Thank you, and have a nice day. Bye-bye.

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Operator [14]

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And this concludes today's call. Thank you for your participation. You may now disconnect.