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Edited Transcript of MMB.PA earnings conference call or presentation 25-Jul-19 4:45pm GMT

Half Year 2019 Lagardere SCA Earnings Call

Paris Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Lagardere SCA earnings conference call or presentation Thursday, July 25, 2019 at 4:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arnaud Lagardère

Lagardère SCA - General & Managing Partner and CEO

* Dag Inge Rasmussen

Lagardère Travel Retail SAS - Chairman and CEO

* Florence Lonis

Lagardère SCA - Chief of IR

* Gerard Adsuar

Lagardère SCA - CFO

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Conference Call Participants

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* Charles-Louis Scotti

Kepler Cheuvreux, Research Division - Research Analyst

* Sami Kassab

Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Lagardère 2019 First Quarter Revenue Conference Call. I now hand over to Madame Florence Lonis. Madame, please go ahead.

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Florence Lonis, Lagardère SCA - Chief of IR [2]

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Good afternoon, everyone. Thank you for joining our conference call today. We have with us Arnaud Lagardère, General and Managing Partner; Gerard Adsuar, the Group CFO; Arnaud Nourry, CEO of the Lagardère Publishing division; and Fabrice Bakhouche, Secretary General and CFO of the Lagardère Publishing division; Dag Rasmussen, the CEO of the Lagardère Travel Retail division; and [Hugo Baron-See], the CEO of the Lagardère Sports and Entertainment division.

This afternoon, you will be presented the H1 2019 results. And as usual, the conference will end up with a Q&A session.

Please, Arnaud, the floor is yours.

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [3]

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Thank you, Florence. Hello to everybody. Just a very quick introduction to tell you that the first semester is in line with what we had in mind, resilience in Publishing, growth in Travel Retail, probably exceptional income and results on the Sports side. But that's the good news. It's mostly a calendar effect. We have good news on acquisitions. We just received the paper. I don't think you have the real press release coming from Travel Retail, but we will, in a few minutes, announce the acquisition of IDF, which is the activity -- the Travel Retail activity of the [Albert Frere] company. This is something that is significant for us that goes straight in the strategy that we presented to you. And so we'll be very happy to give you more details, both on Gerard and Dag side.

Concerning the disposal, we're still in line with our objectives. I told you at the very beginning that we would look at EUR 1 billion, around EUR 1 billion disposal to fuel the acquisitions of Publishing and the acquisitions also of Travel Retail. So we are in line. No, we will not announce anything special today, but it's still an ongoing process, and we have significant appetites on most of the major disposals that we want to do. TV production and Sports, obviously, we're not in a hurry. We will not feel any pressure from anybody. We just want to do it at the right price and at the right time.

We, obviously, also confirm the guidance for 2019 and feel still very confident that we will reach the window that we've announced to you. I will get back to you for the Q&A session. And now I leave the floor to Gerard. Gerard, go ahead.

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Gerard Adsuar, Lagardère SCA - CFO [4]

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Yes. Thank you, Arnaud. We are -- as an introduction, there's definitely -- we have a solid diligence, very satisfactory first half of the year from our 2 flagships, strong growth at Travel Retail, continued growth in Publishing from core activities and early positive signs from the diversification strategy. Remember, the games and the digital. So really, for me, this first stature showcased the intrinsic values of these 2 flagship divisions and confirmed that we have the right strategy for them.

So in view of this good performance and the outlook for the second half, as Arnaud said, we are confirming our recurring EBIT growth targets of between plus 4% and plus 6% based on the target scope. So, yes, in parallel with the disposal process, refocusing has also been provided good opportunities comes, we used the proceeds. And we did that on several acquisitions over the last month, also of various size. And now, again, with the acquisition of the IDF concession that Arnaud was announcing, IDF is the Travel Retail leader in Belgium, with a very attractive footprint and profitability, very good synergies and very important to us as well, a very good cash generation. But I guess, we will leave, maybe the first question of the Q&A, so that Dag can elaborate a little bit more on that.

On the first page, on the highlights. So we maintained in the first half a solid like-for-like growth of 6.7%. The group recurring EBIT was also up at EUR 143 million, driven by the business growth at Lagardère Travel Retail, as well as a busy sporting calendar for Lagardère Sports, which more than offset the impact of Lagardère Active disposal.

As regard Lagardère Sports, it's a significant contribution, again, as Arnaud said, is mainly due to the calendar and the, in particular, the Asian World Cup.

About the free cash flow, we -- as you know, the free cash flow is typically low in the first half. So it's not a proxy for the full year, as most of the cash generated in H2 due to the business and the working capital seasonality of both Publishing and (inaudible) but we see that later on.

Net debt at the end of the period is slightly higher than we had done last year. However, our leverage ratio, 2.3% remained stable, thanks to the recurring EBITDA improvement, which is good. And as we plan now to reinvest the proceeds of the TV channel disposal into the acquisition of HDF, the leverage ratio at the end of the year should remain still at the low end of our comfort zone, which is, as you know, is between 2 and 3, most probably similar to last year.

Let's go now to divisions. Publishing H1 review came in at EUR 1,444,000,000, up 1.3% like-for-like. In France, growth was driven by general literature and good momentum in mobile games business. As expected, we will begin to see the first impact of the curricular reform in the second semester.

Business is back a little bit in the U.K., where a good backlist performance and growth in digital sales, in particular, at Bookouture almost offset the success of the Fire and Fury title, you remember that we had last year in the first half.

Business in the U.S. also slightly contracted. The solid advance in digital order books, which are up 30% and the success of some new titles of, in particular, [Kevin and Harris] also partially offsets the unfavorable comparison linked to the success of the President is Missing, you remember last year, written by Patterson and Clinton.

The Spain and Latin America region was down. As in H1 last year, it was a little bit lifted by the early impacts of the tax campaign in Spain and Mexico. Finally, Partworks maintained a very positive trend in the first semester, driven by a busy program of new titles launches in Japan and in Germany, as well as a good performance of the backlist in Italy.

If we turn to the recurring EBIT, it's down EUR 9 million at EUR 36 million, mainly reflected to FX. One is the higher launch costs in the first semester for the Partworks, which, as I said, we launched very successfully, in particular in Japan and Germany, and a negative timing effect in France linked to the preparation of the curricular reform.

As you know, due to the seasonality, and you can see it from the graph, the bulk of our profit is every year in this business generated in H2.

Let's now turn to Travel Retail. So the revenue came in at slightly below EUR 2 billion, up 6.5% like-for-like. So delivering a really robust growth, lifted by the strong sales momentum, the network expansion and the store openings. Our balanced presence in the 3 business lines is really a very competitive advantage to capture the market growth.

In France, we had a very strong revenue growth, driven by good duty free trading, especially at the regional platforms, and by the growth in the food sales and the Travel Essentials networks.

The European and Middle East region also made some gains, up 5%, mainly with a good performance in Italy, growth in air traffic and solid performances in Eastern Europe, as well as network expansion in the Middle East with, in particular, the opening of the Dubai food Courts.

North America reported good momentum. They are up almost 3%, lifted by a growth in Foodservice and by robust passenger traffic, despite a small adverse short-term network impact.

The Asia Pacific region is up 6.5%, with a very strong momentum in China. In Pacific region, we are slightly down with some new openings, in particular, at the Christchurch airport, not fully offsetting an unfavorable network effect that we have in Australia.

If we go to the profitability. Now the recurring EBIT amounts to EUR 46 million, up EUR 12 million. This mainly reflects good performance from the North American region, lifted by strong business momentum and -- as well as, of course, the impact of the HBF acquisition.

Let's go to Sports and Entertainment business on Slide 10. So as expected, we have a sharp increase in sales, which is essentially due to the favorable calendar effect in Asia and in Africa, with one side the Asian Cup and the competition; in Africa, the African Cup of Nations.

If we go to the profitability on Page 11. The recurring EBIT amounted to EUR 67 million. So it's quite sharply up by EUR 37 million. So the sharp increase reflects the impact of these 2 events, mainly the Asian Cup and, to a lesser extent, the African Cup of Nations as mentioned previously.

Next page is Lagardère Active. So the revenue stood at EUR 254 million. So they are, obviously, sharply down on a consolidated basis by 40% because of the disposal process. Now if we look at the like-for-like basis, it's minus 4.6%, which is mainly due to a drop in the audience figure for the Europe 1 registration and a decline in the first half in circulation revenues for Paris Match and [GDD] in comparison with the very rich news flow that we had last year.

On the profitability now on Page 13. So Lagardère Active reported EUR 7 million, down EUR 26 million. So this reflects mainly the sale of the businesses that we disposed to date and to very much more extend the trends observed for the Europe 1 radio station.

Now if we go back to the group figures, page 15. Overall consolidated revenues was up 7.3%, including a positive currency impact of plus EUR 56 million, mainly due to the U.S. dollar appreciation and the negative scope effects of minus EUR 23 million, which includes, on one side, minus EUR 170 million linked to the disposal of assets at Lagardère Active, which are almost offset by the acquisition of Lagardère Travel Retail for EUR 150 million.

On the next slide, Page 16, we show you the bridge from the group recurring EBIT to the EBIT. So I will comment the major items, in particular, the restructuring costs. So as you can see, they are sharply down from EUR 45 million to EUR 12 million, mainly at Lagardère Active now to the disposals of the assets. The actual costs include EUR 7 million at Lagardère Publishing, mainly related to the streamline of the distribution centers in the U.K. and EUR 6 million at Lagardère Travel Retail resulting from the acquisition and the implementation of the synergies for HBF.

The third now or this next one, gains on disposal, that's EUR 37 million of gains, mainly relates to the disposal that we have made at Lagardère Active. If you -- as a reminder, last year, we had a very significant gain following the disposal of the François Première building.

Amortization stands at EUR 43 million. It chiefly relates to the amortization of the goodwill of the acquisition in Travel Retail, and the increase that you see from year-to-year is mainly related to the acquisition of HBF. So as a result, EBIT stands at EUR 158 million.

So under EBIT, net pension costs are excluding the ones from the IFRS, which we have spotted as we told you. Specifically and separately, the net finance costs are slightly improving at EUR 24 million. The income tax expense decreased by EUR 64 million at EUR 20 million. Again, in 2018, we had to pay or to incur for the income tax of EUR 84 million related to the disposal of the François Première building.

Now next item is the profit attributable to minority interest. They are up in the first half compared to last year, mainly due to the profit generated with the Asian Cup in Asia where we are the minority shareholder. As a result, profit group share [ended] at EUR 52 million. Now if we exclude, as we do regularly about every 6 months, the nonrecurring items, we have an adjusted profit group share, which is increasing from EUR 59 million last year to EUR 63 million for this year.

Let's go now to the consolidated statement of cash flow. So as I said, the free cash flow is traditionally negative in H1. This is due to the business and working capital seasonality in Publishing and Travel Retail. So for these 2 businesses, the cash flow is generated every year in the second half. Last year, the free cash flow was positive at plus EUR 147 million, but it included, as you remember, the one-off net impact of the real estate disposal, which was slightly above EUR 180 million, EUR 183 million to be precise.

Now if we go a little bit into the details. The cash flow from operations, which is the first line, are significantly up, plus EUR 51 million at EUR 237 million. So this is thanks to the significant higher earnings at Lagardère Sports, which this calendar effect, which earnings, which are up plus EUR 62 million. But also at Lagardère Travel Retail, which is up EUR 21 million. And this being offset by another EUR 24 million decrease at Lagardère Active due to the disposal in this division. That's positive, we replaced Travel Retail, growing EBITDA by decreasing Active EBITDA.

Now the change in working capital is minus EUR 173 million. It's in deterioration during the period, representing an outflow of -- sorry, EUR 173 million compared to an outflow of EUR 111 million in last year. The year-on-year change is chiefly explained by a EUR 74 million increase in working capital at Lagardère Sport, for which the significant earning, which they made in the first half, particularly on the ASC Asian Cup, will be mostly collected in 2020. That's how it is in the contract.

CapEx at EUR 127 million, reflects our continuing investment in the Travel Retail but also in Publishing.

Now if we go to the financial investments, purchase of investments amounts to EUR 51 million, which relates for broadly as (inaudible) acquisition at Lagardère Publishing and Travel Retail. You have the details, of course, in the CP, in the press release.

Disposal of investments at EUR 100 million are mainly related to the disposal at (inaudible). As a result of this, as I said previously, the debt amount at the end of June at EUR 590 million, which you can see on the next slide, which is the balance sheet.

I will not explain all the variances. They are mainly related to the asset disposals and assets held for sale reclassifications. Just to point out that the balance sheet now includes the IFRS 16 right of use and lease liabilities listed here, which mainly relates to the concession agreements.

So as I have already commented, the working capital changed. So let's go very quickly to the next slide, the financing policies. So the leverage ratio is stable year-on-year compared with June last year at 2.3%. As I said, reflecting the group's healthy financial position. The group liquidity position is also very solid, with EUR 2.3 billion available liquidity, either in cash or in undrawn amounts from our syndicated facility. The next maturity comes on the 19th of September for EUR 500 million. And as you have probably noticed, the EUR 250 million have been raised through successful in overall Schuldschein bond that we have made at very attractive rates.

Now let's go to the last slides, the group target scope. So here, we show a template that you are familiar with, on one side, the target scope and the non-retailing scope. We show here the H1 2019 performance compared to last year. And as a reminder of the full year, which you had also in the press release that we issued in March. So I will not comment that in details. We, as I said, in view of the good performance of the first half and the outlook, we reconfirm the guidance that we gave you in March, which is the following: Recurring EBIT growth for the target growth between plus 5% and plus 6% at constant exchange rate and excluding HBF. For the non-retail scope, we have still the same expected contribution between EUR 80 million and EUR 90 million on a full year basis despite the disposal, but it's fairly -- it's not very material despite the disposal of Mezzo. Since that day, we confirm still the same number. As regard to HBF, as I previously said, we expect some additional contribution to the scope, which would be somewhere between EUR 22 million and EUR 24 million. So nothing has changed here. So if you add up the targets, costs, HBF and the non-retailing business scope. So the total group recurring EBIT is expected between EUR 425 million and EUR 442 million with, of course, a full year contribution of the non-retailing business scope.

Now finally, as regards the impact of the ForEx on this guidance. The sensitivities are the same as previously said. So this is plus or minus 10% on the dollar equal EUR 16 million, and plus or minus 10% on the sterling equals EUR 5 million. As of today, if the dollar stays at the same level it is at the end of June, and the sterling as well, the impact should be around plus EUR 6 million overall for the full year. But this is only a sensitivity, of course.

This concludes my presentation. So we can start with the Q&A session.

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [5]

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Thank you, Gerard. Let's start with the Q&A session. First question, please.

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Questions and Answers

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Operator [1]

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We have our first question from Charles Scotti from Kepler Cheuvreux.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [2]

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On the working capital, negative working capital swing, you said that it's related to the AFC Asian Cup and that you expect to be paid only in 2020. So does that mean that this working capital swing will not revert in H2?

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Gerard Adsuar, Lagardère SCA - CFO [3]

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No, it will not. Yes, sorry. No, it will not revert in H2. So the impact of this, of the AFC, to make it simple, will be more for 2020. Yes, correct.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [4]

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Okay. And we can have an idea of the amount related to just this Asian Cup? Is it the full EUR 173 million or any part of that?

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Gerard Adsuar, Lagardère SCA - CFO [5]

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You mean for next year?

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [6]

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No. For this year. Can we have an idea of the working capital swing [related by your hand?]

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Gerard Adsuar, Lagardère SCA - CFO [7]

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It depends on the [currency] at the year-end. But it will be mostly in next year, 2020.

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Operator [8]

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Next question from Sami Kassab from Exane BNP Paribas.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [9]

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Can you update us on the situation with regards to the disposal around going with the Sports and TV production assets? Anything, perhaps, you may want to say on that front? And secondly, can you disclose the profitability of IDS in terms of recurring EBIT margins? And lastly, can you develop and discuss the Q3 Travel Retail trend as you see them currently? Can the 6.5% be maintained in Q3 for Travel Retail?

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Florence Lonis, Lagardère SCA - Chief of IR [10]

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Sami, we didn't catch your last question, sorry.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [11]

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Sorry. So the last question was on the Travel Retail organic revenue growth trends in Q3.

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Florence Lonis, Lagardère SCA - Chief of IR [12]

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Okay.

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [13]

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Okay. I'll start with the disposal, and then Dag and also Gerard, you will cover IDF and the Q3. On the disposal, it's very simple. As I said in my introduction, we will not follow any unnecessary pressure. We have ongoing discussions, had them for a couple of months -- more than a couple of months, on both TV production and Sports. They are doing well. We have some details to -- yet to cover. The goal is still the same, it's to get out of all the disposals so far, around EUR 1 billion. We've done around EUR 500 million, including the thematic channels so far. So there is 500 more to do, and we will do them. Now again, the idea is not to hurry and get the first buyer. We've been lucky enough to wait a little bit on TV Production since we've had some new buyers coming in. Substantially, one new one that seems very interested, which is good news for us. And again, since we don't have any significant acquisitions in the pipe regarding Publishing and regarding Travel Retail, I'm not saying that IDF is not important, but it's not significant in terms of size, since we don't have them right now [in the pipe], it's urgent for us not to hurry. So we'll take a little time on this, but we'll get back to you, obviously, Sami. Who's -- probably Dag on IDF. First of all, what it covers; and more specifically, the numbers.

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Dag Inge Rasmussen, Lagardère Travel Retail SAS - Chairman and CEO [14]

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Okay. Good afternoon. IDF is duty free retailer, especially in Belgium, both -- at both airports, Charleroi -- both main airports, Charleroi and Brussels, which is the big one. Sales in 2018 are EUR 183 million. The purchase price is EUR 250 million, which is 8x 2020 pro forma EBITDA, which means that you take the EBITDA and you include all the EUR 7 million synergies, which we plan to implement between 2020 and 2022. So this gives us 8x pro forma EBITDA. Sales in 2020, we think, should be in the range of EUR 190 million to EUR 200 million. And the recurring EBIT should be above 9%.

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Gerard Adsuar, Lagardère SCA - CFO [15]

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And I would like to add, Sami, that IDF also has very nice cash generation and a very nice cash conversion. So this EBITDA, with this EBIT, EBITDA but also EBIT, will be turning into a good generation of cash. Because most of the shops have been renovated so recently. And so that's also something which is important for us as the strategy is to obviously reinvest in and be relative in terms of profitability and also in terms of cash. Really a perfect profit target for us at the right time.

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [16]

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Yes, I don't forget your question on Q3. So we could expect that Q3 is a bit lower because you know that the basis was easier for Q2 and first half because of the strikes, which we encountered because of some issues. So I mean, we'll say that we cannot anticipate that it's so strong.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [17]

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But it will be above 5%?

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [18]

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It should be. Yes.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [19]

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And lastly, I'm sorry, I may have missed the beginning of the call. Did you disclose how much of the EBITDA did contribute in the first half out of the EUR 65 million for Sports?

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [20]

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Gerard?

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Gerard Adsuar, Lagardère SCA - CFO [21]

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No. No. No. We can't give contribution on a contract by contract basis.

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Operator [22]

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Next question from Mr. Charles Scotti from Kepler Cheuvreux.

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Charles-Louis Scotti, Kepler Cheuvreux, Research Division - Research Analyst [23]

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One follow up question please on your debt level at the end of H1. Can you help us quantify the impact of IFRS 16 on it?

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Gerard Adsuar, Lagardère SCA - CFO [24]

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No. There is no impact on IFRS, of IFRS 16. Because the IFRS 16 either we have on one side the right of use, and on the other side, these liabilities. They are not accounted into the definition of our essential debt. And they are -- and this is -- and this is also the case for our credit facility. So as many other issuers, we have renegotiated the covenants following the implementation of the IFRS 16. And so the leverage that I'm showing you here is in line with the definition that we agreed with the 20 banks of our syndicated credit facilities. As I explained during the call where we had a -- where I presented in detail the IFRS 16, it doesn't make sense at all to include these elements in the potential debt because it's related to long-term concession of Travel Retail. And that's, obviously, completely shared and agreed with by all the banks that are supporting us and are funding us.

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Operator [25]

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Thank you. We don't have any more question for (inaudible) (Operator Instructions)

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Arnaud Lagardère, Lagardère SCA - General & Managing Partner and CEO [26]

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I think we've been clear enough, and I will conclude this session unless there is a very, very last question. But I don't think so. Thank you for all of you. For those who will be on vacation, great vacation. We'll see all of you at the beginning of September, and good luck to all of you. Thank you so much. Bye-bye.

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Operator [27]

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