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Edited Transcript of NEC.AX earnings conference call or presentation 25-Feb-20 10:30pm GMT

Half Year 2020 Nine Entertainment Co Holdings Ltd Earnings Call

Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Nine Entertainment Co Holdings Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hugh John Marks

Nine Entertainment Co. Holdings Limited - CEO & Executive Director

* Paul A. Koppelman

Nine Entertainment Co. Holdings Limited - CFO

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Conference Call Participants

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* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Entcho Raykovski

Crédit Suisse AG, Research Division - Research Analyst

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* Eric Choi

UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst

* Fraser McLeish

MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Lucy Huang

BofA Merrill Lynch, Research Division - Analyst

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Presentation

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [1]

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Well, good morning, everyone. I am Hugh Marks, the CEO of Nine Entertainment, and I'd like to welcome you to the Company's First Half 2020 results briefing. Paul Koppelman, our Chief Financial Officer, is also here with me today. In terms of the agenda for this call, I'll touch on our operating results for the past 6 months before handing over to Paul to talk through the results in more detail. I'll then say a few words about our broader strategy and give you some color on how we're continuing to transform our earnings at pace towards our digital media future. Finally, of course, I'll update you on current trading and our outlook for financial year 2020.

Now, as we discussed in our AGM in November, the market has been against us in this half both in terms of advertising and property. In addition we also carried some one-off costs in television relating to the World Cup Cricket and UK Ashes. In total, group EBITDA declined by $21 million for the half. So, while we were faced with some cyclically weak markets across the business, there were some very strong operating highlights and they include a $35 million EBITDA improvement at Stan, $11 million of EBITDA growth in 9Now, and a further $5 million EBITDA step-up in the Metro Media business.

We've worked hard to position Nine to grow into the future. We've successfully built a digital media business that is unique in the Australian market and that accounted for around 40% of our group EBITDA in this result. And through this digital business [audio gap] those ad markets that are in strong growth, while at the same time, also growing our subscription revenues across video and publishing. This broad mix, coupled with the operating strength of our businesses, gives us great confidence in the longer-term growth prospects of Nine. Now for season 2019, Nine's television business had one of its best years ever, our strongest year since [Oz Ten] began 18 years ago. Across the 6 months and full ratings year, Nine was the #1 network in the key demographics of people 25-54, and people 16-39, as well as winning total people, improving its relative position across all demographics from 2018.

Nine's primary channel was also the most watched channel in all of those key demographics. In fact, Nine's primary channel actually increased its audience in thousands in prime time across the ratings year against an overall market decline in thousands of around 7%.

We were, it can be said, however, very disappointed by our Half 1 revenue share. We have clearly yet to fully capitalize on our ratings performance. Our BVOD business, 9Now, has continued to establish a significant and incremental business from the core of the Nine television content. And while the BVOD market overall continues to grow strongly, we believe there is further potential for 9Now in the broader digital video segment currently dominated by YouTube and Facebook, and the estimate is worth more than $1 billion a year already. We expect to see our strategy start to deliver results across this calendar year, which will further build 9Now's revenue potential. We've recently made some additional content investment to support this strategy, and we're already seeing promising audience results. We're confident of the size and speed of the payback of that investment.

It was a poor result for 9Radio, but not overly surprising given the weak ad markets and Macquarie-specific issues experienced during the period. We remain confident that under Nine's ownership and the revised operating structure we have in place, we can markedly improve the operating performance of our radio business looking forward. We've already delivered substantial cost out and we anticipate an enhanced ability to convert our audience success into revenue through FY '21.

Metro Media continued to perform strongly with growth in digital subscriptions and advertising offsetting much of the decline in print. We continue to gain share and focus on improving the quality of the product through a focus on distinctive journalism and excellent user experience as well as expediting that transition to an increasingly digital business.

Stan has again prospered in a market with both growing penetration and subscriptions per household. Stan currently has active subscribers of more than 1.8 million households, and recorded a $35 million EBITDA improvement for the half. Stan is well positioned to capitalize further on the strong growth in streaming demand and available content opportunities.

To Domain -- Domain has had a tough period against the backdrop of an unprecedented downturn in property particularly in its core markets of Melbourne and Sydney. With house prices and housing credit returning to growth, Domain has seen early signs of improving property market activity since the Australia Day weekend. The levels of cooperation between Domain and Nine continue to improve, and we remain excited by the opportunity presented by the combination.

Chart on Page 5 shows the key contributors to our first half EBITDA, a created economy between the growth and cyclical arms of our business. And while at Domain, the decline is being driven by the cycle, we can see significant growth opportunity at this business by extending further in a property purchasing lifestyle goal from both an agent's and consumer perspective.

The chart on Page 6 highlights our progress as we migrate our business to a digital base. In this 6-month period, profit from our digital businesses, so that's 9Now, 9Digital and Stan, as well as the digital components of Metro Media and Domain contributed almost 40% of total group EBITDA. That's up significantly on the prior period and equates to growth in total digital EBITDA of more than 100% or $45 million in the half. That's confirmation of the strategy we began 4 years ago, when we began to evolve the business towards our digital future, investing in Stan and 9Now as well as 9Galaxy. And of course, we furthered with the merger late in 2018. We now have cornerstone assets across all of our key markets, focusing on video through the 9 network, 9Now and Stan as well as radio, publishing and the property market through Domain.

So in summary, we've had a strong period of growth from our digital businesses, offsetting much of the cyclical challenge that we faced. Once again, vindication of the strategy behind the Fairfax merger and emphasizing the clear opportunities for our business as we look forward.

At this point, I'd like to introduce Paul, our new CFO, who'll talk through the financials of these result in greater detail. He's been with us now almost 6 months, and I'm pleased to say he's doing a great addition to the team. Over to you, Paul.

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [2]

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Thanks, Hugh, and good morning, everyone. The reported results are shown on Slide 9. The FY '19 numbers are, of course, not directly comparable as they only include the Fairfax and Stan results for 25 days. FY '20 also includes the impact of the introduction of AASB 16 and purchase price accounting. The discontinued business line reflects the performance of ACM and events in the previous period, up until completion of their respective sales, so with no contribution in half 1 FY '20. It also includes the performance of Stuff New Zealand in both periods. Nine reported group revenue of $1.2 billion, and net profit after tax and before specific items from continuing operations, of $114 million. We also reported a net specific item cost of $12 million, resulting in a statutory net profit for the year of $102 million.

Slide 10 details the composition of specific items, the gain associated with Domain and detailed in their accounts last week more than offset by restructuring-related costs, including the costs associated with asset sales and acquisitions. For the rest of this presentation, we will be focusing on the group results which are presented on a continuing business basis, that are presented on a reported and pre-AASB 16 purchase price accounting basis to best reflect the underlying performance of the group. All variances are calculated on a consistent pre-AASB 16 purchase price accounting basis and against pro forma half 1 FY '19 results. So comparing like with like.

On this basis, as shown on Page 12, Nine reported revenue of $1.2 billion, down 2% on prior comparative period. Group EBITDA on a pre-AASB 16 basis was $231 million, down around 8% on prior comparative period and broadly in line with the guidance given at the AGM in November.

On a reported basis, EBITDA was $251 million. Group net profit after tax and minorities was $105 million for the year or $115 million pre the impact of AASB 16 and purchase price accounting. We have declared an interim dividend of $0.05 per share, consistent with what Nine shareholders received at the interims last year. Page 13 shows the components of the accounting impacts of AASB 16 and purchase price accounting. It was a positive $20.3 million increase in EBITDA, resulting from the implementation of AASB 16 as rental costs were reclassified as depreciation and financing costs. Pretax profit was impacted by $8.6 million from purchase price accounting and $5.7 million from AASB 16.

Turning now to Page 14. Nine's broadcast division comprises of Free To Air business, 9Now, and what we have now called 9Radio, the old MRN. You will note that we have grouped the 9Now with Free To Air, which clearly makes sense as Nine's core content is available on both platforms and our audiences are becoming increasingly agnostic as to how they consume that content. Together with broadcast contributed around 56% of group revenue and 60% of EBITDA for the half.

Page 15 steps through the performance of our Free To Air television business. Free To Air television revenues were $531 million, which equated to a decline of 6%, consistent with the overall market. Metro Free To Air revenues declined by 7% across the half. Nine's share of Metro ad revenues for the year was 38.7%, which is marginally down on the prior comparative period. Given the very strong ratings performance of Nine on both the main channel and network basis, this revenue share was disappointing and reflects, in part, an industry pricing structure which delays on a calendar year basis the flow-through of writings to revenue. Our strong season 2009 ratings performance and the start to this current year should result in improved 2020 revenue share.

Free To Air costs were 6% or $25 million higher. The broadcast of the Ashes and World Cup cricket, coupled with the contracted setup of NRL costs accounted for around $23 million of this increase. Many other costs were broadly flat. Full year costs are still expected to be no worse than up 2.5%. EBITDA for the half was $111 million or $104 million and down 36% on a pre-AASB 16 basis. The chart on Page 16 illustrates the key component of the Free To Air results. As you can see, the biggest negative impacts for our result were the weaker Free To Air market and the contracted sports costs, both which were factors that could not be influenced during the period.

Page 17 gives us a little more color on Nine's premium ad revenues. Across the half, premium revenue was up 7% excluding the impact of one-off cricket broadcast with both growth in NRL and general entertainment, notwithstanding Metro Free To Air market that was down 7% for the period.

Turning to Slide 18. The BVOD market grew strongly, up 43% for the 6 months. 9Now has strong growth in all key metrices, including a 37% increase in monthly active users as well as strong growth in minutes streamed and continues to dominate with close to 50% share of revenues and 43% share of BVOD minutes. 9Now delivered EBITDA growth of 65% for the half, and at $27 million is now a meaningful contributor to group EBITDA.

The next chart, on Page 19, illustrates what we call television combined. As the name suggests, this is the combined result of 9Now and our traditional Free To Air business. As audiences and content become increasingly platform agnostic, this is a useful way to reflect on our business. On this basis, Nine had the #1 share of a market which is down by around 5%, reflecting the weak linear market. Combined EBITDA was down 26% after 2 years of growth.

Going into FY '21, we estimate that the growth in revenue at 9Now would offset around 3.5% of any market decline in Free to Air. Hugh will speak further to the opportunity of 9Now, particularly in light of the impending VOZ launch in a moment. We completed the acquisition of Macquarie Radio, now 9Radio, late in the half. Suffice to say, the results for the period were disappointing, but helped to justify our need to buy out the minorities. The 63% decline in EBITDA highlights the issues Macquarie was facing. As Nine consolidates ownership through this half, we expect a marked improvement from both the cost and, in time, revenue share perspective.

Moving to Page 21, the Digital & Publishing business comprises Metro Media and Nine digital. Together these contributed around 26% of group revenue and 19% of group EBITDA for the year. There have been summary statements to this division, which are highlighted in Appendix 3.

As you can see, a breakdown of the Metro Media result on Page 22. Metro Media reported another period of growth with EBITDA up 13%, further consolidating on a very strong FY '19. Most notable was the 8% growth in digital publishing revenue with growth across both subscription and advertising. This went part the way to offsetting the print decline, the very soft print ad market masking Nine's share growth during the period. Continued discipline enabled a further 5% reduction in costs, helping push the EBITDA growth to 13% or $44 million or $50 million under AASB 16.

Of course, Domain reported last week, and Page 23 summarizes this result. It was another challenging half for Domain, during the cyclical property environment. Pleasingly, Domain continued to grow both price and depth penetration in its core residential listings business, which partly offset the impact of double-digit decline in listing in Domain markets. The total costs declined by 8% like-for-like in the half. The group did a good job managing its cost base with savings in print costs and other efficiency measures while continuing to invest in growth initiatives. This resulted in a 16% decline in EBITDA pre-AASB 16.

Now turning to Stan on Page 24. As Hugh mentioned earlier, we were very pleased with their operating performance of Stan this half. Active subscribers are currently more than 1.8 million, which compares with 1.5 million this time last year. We have had consistent subscriber growth across a period with increasing competition and notwithstanding the price rise of last year. Stan's leverage to subscriber growth is again evident with revenue growth of 79%, well in excess of cost, which grew by 18%. This led to significant improvement in operating performance with the EBITDA delta of more than $35 million. The business continues to consistently exceed our expectations. Over summer, average weekly viewing hours per sub increased by 25%, highlighting increased usage by the growing subscriber base. We have provided an estimate of the pro forma operating cash flows on a continuing business basis.

On this slide, we are focused on the wholly-owned business. So it ties into the wholly-owned net debt, which I'll talk to on the next slide. In short, underlying operating cash was $156 million.

Page 25 details adjustments made to cash flow from non-wholly-owned assets as well as the adjustments relating to AASB 16 to enable like-for-like calculation of cash conversion. On this basis, cash conversion was around 85%. And while CapEx does not impact the cash conversion, the move to North Sydney will have a marked impact on the debt this year, with FY '20 CapEx for the wholly-owned group expected to be around $141 million.

On Page 26, we have reconciled the net debt position of the wholly-owned group from the starting position at the end of June of $121 million. Beyond the operating cash flow movements from wholly-owned businesses, Nine distributed dividends of $85 million to shareholders and invested nearly $200 million through acquisitions and CapEx partly offset by nearly $30 million in proceeds from the Weatherzone sale. There was also a $20 million catch up tax payment in the period. On a wholly-owned basis, our leverage at December end year was -- year-end was around 0.8x EBITDA. Looking ahead, we still have around $55 million of CapEx relating to the North Sydney relocation to come in Half 2. And we are expecting a further incremental buildup in working capital in the second half mainly reflecting the seasonal build-up at TV, both in terms of debtors and programming inventory.

As a result, wholly-owned net debt will step up at the full year, and we expect to exit FY '20 with leverage just over 1x EBITDA, with all business now EBITDA positive, and the bulk of our investment costs already incurred. I'll leave it at that and hand back to Hugh.

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [3]

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Thanks, Paul. It's a marathon. So before I get to current trading, I wanted to touch on the evolution of our business. So as you'll have seen in our presentation, 40% of our EBITDA in this year's results have come from what we call pure digital revenues -- an earnings number that's doubled over the prior corresponding period, a number that's grown by $40 million -- $45 million in that time, and that's notwithstanding the weak listing environment that has impacted Domain in the period. So this is a great validation of our ongoing strategy to utilize our strong traditional media businesses, to help drive the scale of our growth assets in categories that are not only significant on a domestic basis, but globally positioning us for the future of media. Of course, Stan and Domain are 2 great examples of what can be achieved with powerful content and a marketing and a clear strategic focus. But we've also decided, over the last 6 months, to increase our investment in the future of 9Now to reflect the move by consumers to increase on-demand video consumption, and knowing that in April, we would see the release of Virtual Oz, which is Australia's first all-screen integrated total TV database.

Virtual Oz will revolutionize the BVOD market in 2 pretty fundamental ways. Firstly, we know from early test data that BVOD adds more than 10% weekly reach to television, for a combined rates of around 80%, which is comparable to linear television reach 10 years ago. This de-duplicated reach is a metric that cannot be replicated across any other video combination. So where previously advertisers would buy YouTube or Facebook video to augment the reach of linear television, we now know this incremental reach can only be delivered and measured across TV and BVOD.

In addition, the VOZ panel will ensure more accurate estimate of VOD audiences. At the moment, measurement of streams assumes one audience member per device, probably correct if that's a mobile phone but more likely understated if the device is a smart TV. And currently, smart TVs account for around [50%] of streams. So not only will estimates of VOD audiences likely increase, but for the first time, the television industry can legitimately sell combined reach. Since 2016, we've seen strong growth in users and streams at 9Now, and this has manifested itself with growth in revenue. The CAGR of more than 60% for both users and streams over that time period. In the first half, 9Now contributed nearly 12% of group EBITDA, growing at 65%.

Now we estimate that the total market for video in Australia is around $9 billion. Of course, close to $4 billion of that is subscription revenue, of which SVOD is a significant and fast-growing component. The advertising segment includes Free To Air television at $3.6 billion and paid TV at $400 million, but also includes the digital video market that's about $1.2 billion. Now BVOD at the moment, a relatively small subset of this broader digital video market. But we can see in the data already and our response we received in the market from advertisers that BVOD has significant potential beyond the already strong growth it has experienced. At Nine, while we had already invested in the technology and the data capabilities to compete in the broader digital video market, we knew we needed to invest in a few key areas to further drive our revenue potential. Data and content.

On Page 31, we look at data. Nine's monthly unique digital audience is well over 10 million Australians, the perfect springboard for ambition to grow our share of the digital revenue pie with our first-party database enabling us to access consumers on both the broad market and importantly, an addressable basis. And in content, through the half just gone, as I said, we commenced incremental investment, announcing the acquisition of the NBCU content, which became available on 9Now in December, and we have plans to further invest in content through 2020. Bringing more people to 9Now more regularly will allow more effective advertising opportunities. All of this is designed to enable Nine to access a bigger cut of a $1.2 billion market, a market growing at around 30% to 40% per year. Now that's exciting to us and, of course, to our shareholders. And the early results are very encouraging.

AFR has similarly evolved. We've invested selectively in the product and are focused on growing its subscription base. The latest [MR] readership data tells the story of a publication with a growing digital presence in business Australia. In November, total readership increased by 6% year-on-year with growth in both print and digital additions. Subscription and circulation continues to be a growing proportion of the AFR revenue base, consistent again with our focus on premium content and the consumer. And digital is now the dominant source of distribution, accounting for more than 80% of subscription revenue and growing strongly. The AFR is another great example of a business which has taken its traditional strength and successfully evolved into a digital business.

But of course, we continue to invest in these growth assets. We must also ensure the returns from our traditional businesses are optimized. For linear television, this means focusing on the content that works across all platforms and on delivering that content as efficiently as possible. With the current strength we have in the market, we believe now is the right time to look hard at our efficiency of our traditional assets, particularly FTA to web television, also with the move coming next year -- this year, in fact. So to that end, we will execute, over the next 3 years, a plan to decrease the cost base of our FTA business by a net $100 million of annualized costs, focusing on areas of decreasing importance to the future of the FTA business: international content, one-off sports rights that deliver limited incremental revenue as well as changes in operations as we move, as I said, into our new premises in Sydney. Some of these funds will be reinvested in our growth platforms, but we expect the vast majority to be reflected in our shareholder returns.

Now before I get to current trading, also want to update you briefly on the progress our industry is making, implementing the recommendations of the digital platforms inquiry. We have already had constructive meetings with Google under the framework established by the government for the introduction of the code of conduct. And we're due to meet Facebook in the near future. We feel increasingly positive about the potential outcomes of this process to deliver incremental digital revenues to our business as we're recompensed for the value of our content in a social media environment. Again, an additional platform to Nine, to engage with audiences using our content for incremental returns.

Turning now to current trading, overall advertising market conditions across most categories have remained softer-than-anticipated for the start of 2020. Notwithstanding, Nine's March quarter FTA revenues -- FTA revenues are expected to be broadly flat year-on-year as Nine's superior ratings performance in 2019 and the start of 2020 has underpinned clear growth in revenue share in FTA. For the June half, Nine expects the FTA market to decline by around 5%, which, for us, is offset by growth in share, we think, of around 2 points. After Half 1 cost growth of 6%, FY '20 guidance of cost growth of no more than 2.5% equates to a second half cost decline in FTA television. Continued strong growth is expected at 9Now with EBITDA growth tempered by increased investment in content as the business expands into the broader digital video market. The market is expected to continue to grow around current rates and from Nine to remain at the forefront of this growth.

Second half results of radio are expected to show a marked turnaround as the cost base is reset. Revenue performance has been impacted by the rate of advertiser return to 2 GB, which is expected to improve as we move into 2021, financial year, that is. In the second half, digital trends at Metro Media are expected to continue to improve, albeit somewhat masked by the loss of Weatherzone EBITDA and the cycling of previous significant cost initiatives. As Domain's commented with its result last week, trading started slowly in January, but there are encouraging signs in property market activity in February. Domain will remain disciplined in managing its cost base to take account of the trading environment, while continuing to invest in growth initiatives. Current momentum is expected to continue at Stan, albeit at a slower rate as last year's price increase and strong subscriber growth of 2019 is cycled.

So in terms of the financial year '20 results, assuming the above, Nine expects to report group EBITDA at a similar level to the FY '19 pro forma result of $423.8 million. Now I think I've said well enough now, so I will open the line to questions and hand over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from Kane Hannan of Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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Just 3 for me, please. Firstly, just that television cost reduction target, the $100 million. Just confirming that's on the $877 million TV cost in FY '19? I suppose, just given that setting yourselves are both on those pretty aggressive cost-out plans, do you think that, that's going to accelerate the declines in the traditional TV market?

Second, just in terms of the TV guidance for the second half, and that negative 5% decline. Just interested in what you think is driving the improvement in the rate of decline, given the challenging macro backdrop and the virus uncertainty?

And then finally, just Metro publishing, obviously, another good digital growth performance. Can you just comment on the trends you're seeing on the print side, I think that the rate of declining obviously accelerated in the first half? And whether there's anything less you can do with the margin in that business or whether we should be thinking that further peak margin, too?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [3]

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Yes, I think you have more than 3 in there. So look, I think the $100 million is a really interesting place to start. And I'll give some high-level at this point on that because, obviously, there's a -- more work to do as we get through to the detail of that. But I think as we look at our business and we look at how we spend money, we've become a lot more focused on the return that you get across our whole business from every dollar that we spend in the business.

So if we look at some categories, which are reasonably large still in FTA, so I'll take international content, for example, international content, which is a significant, north of $100 million cost in FTA per annum. If I look at that, that is a category that is really starting to suffer in terms of the new environment. So that becomes an area of focus. If I look at one-off sports rights, you will have seen we had some one-off costs in the first half associated with the Ashes and the World Cup. And while we got great ratings, if I look at our revenue at the end of the day, you have to really question whether those one-off sports events are able to be realized into a revenue proposition on a consistent basis in FTA going forward. It's a pretty big area where we spend quite a bit of money, and that's another area we need to target.

And if I look at the third area, third large area, as we move into the new premises we really have to look at the whole operations of our business and work out what are our future operating model for our operating business through all sorts of categories which you would not see when you see television, are going to be focused as we go forward. So I think there are areas that actually are substantial rooms. And that's before we even start to think about the sales costs. So in all of that, effectively, what we're saying is, we remain focused on investing in the content that drives revenue outcomes. Domestic local content, news/current affairs, regular sports. So I'm anticipating that cost out, but none of those areas are impacted. And that's, I think, a big opportunity for us as we go into this next period of growth demand.

And in terms of the 5% decline, I certainly accept that it's a difficult environment in which to provide predictions at the moment with a number of things that are going on, but certainly, as I said, in FTA, what we see in the first quarter is Nine's revenue likely to be flat year-on-year. So if our revenue is flat year-on-year, you would expect that there is somewhat of an improving trend in the FTA market, but as yet, of course, I haven't seen Seven's or Ten's results. So it's really from our own experience, just saying, you know what, we see some improvement in the market, financial services, insurance, a few of those categories starting to do a bit more spend. So it's not a huge improvement, but it's certainly a trend that we would hope to continue.

And I think then that deals with a couple -- and I think then the Metro Media side of the business. I mean, the strategy there, as we've said before, is how do we ensure that the digital revenues of the business outpace what we see as a decline in print? And I think you could see titles like the financial review. Okay, well, they also had some growth in print, but you're saying that as long as you can move the business, its reliance on revenue more to that digital future, you start to see opportunities for the future of what that business looks like. Then when you go to the cost base, there are still opportunities in cost as we move forward, particularly in printing, in distribution, you will have seen some announcements about [AIP]. Again, as a business, if you think of us in 2 ways, aggressively growing our digital revenues and optimizing our traditional businesses from a cost base perspective, it's a good way to think about the business going forward. As I've said before, seek to maintain profitability in our traditional businesses and aggressively grow profitability in our growth businesses. I don't know if you want to add anything to that, Paul, or?

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [4]

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You've hit it.

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [5]

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I've gone on a roll then.

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Operator [6]

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Your next question comes from Eric Pan of JPMorgan.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [7]

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A few questions for me as well. Television revenue share declined in the period, this is PCP. Are you seeing Seven or Ten making a comeback? How is the upfront received by advertisers, given your competitors have more new show launches planned for the year?

And then just a follow-up on the $100 million of net cost out. Over what timeline can we expect that to come out? And then lastly, what was the churn impact post the loss of the business content at Stan? And did you see a rebound in subs after signing the new content there in December?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [8]

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Okay. I'll talk about the rev share question, and I'll talk about the churn and Stan, and then I'll hand over to Paul and the timing of the cost-out program.

In terms of rev share environment, we were very disappointed in our first half result. We'd had a outstanding calendar year first half, we were cycling a slightly weaker 2018, I guess, second half calendar year. So we weren't hoping for a significant rev share, but we should have done better than we did in that half, particularly with the Ashes and the World Cup. So we were disappointed in the half. I guess there's a bad thing and a good thing in that. The bad thing is, we didn't do as well as we should have; the good thing is, there's opportunity for us to grow as we go into this next calendar year.

I think as we look into 2020, particularly with the start of the rating season we've seen, again, consistent strength at Nine, consistent strong audience shares north of 40%. We anticipate that turning into revenue share north of 40% as we move through this year. We do have the Olympics in the middle of the year, which will take some revenue across to Seven, hopefully, also put a bit of revenue into the market. But we anticipate, notwithstanding the Olympics, to continue to grow rev share through this year, and that's really a result of 2 years of consistent ratings performance by Nine. And no doubt, Seven would not be pleased with their ratings performance at the beginning of this year.

If you look at Ten, Ten are making some good investment in some content. That will get them off their weak performance last year. Their challenge in terms of extension beyond their key programs is the depth of their schedule is not as strong as Seven or Nine in terms of news and current affairs and sport. Obviously, that comes with cost as well. But that just puts a limit on their ability to really aggressively grow rev share, but Ten is certainly performing better as we move into this year. And with Ten's performance, that's also something that we hope also starts to reflect in that slightly improved market outcome.

In terms of churn at Stan, I think the way to look at this is, there was a pretty significant entry into the market, not just Disney+, but also Apple TV+ as we went through Christmas time or summer this year just past. I think the pleasing thing for us, and I think what the numbers show is that consumers have decided, okay, yes, there were some who may have been heavy Disney consumers on Stan, but it was a relatively small number of the overall subscriber base. And so Stan's ability to continue to grow subs through that period, I think, reflects the fact that consumers are going, you know what, Disney+ is a great service, but maybe it's incremental to Netflix and Stan as a service.

And then you've got Apple TV+ entering the same period. Again, a much significant increased competition, but Stan's ability to continue to grow at a more moderated rate than we did earlier in the year, but to continue to grow over summer, I think, is a reflection of the strength of the brand and really the possibility for that business for the future. There's no doubt that audiences are loving on-demand content. And Stan has established itself as the clear #2 player, leading local player in the market, and we're really pleased by effectively our ability to transition through what was a pretty increased competition period.

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [9]

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And then on the $100 million, as Hugh alluded to, it's over a 3-year time span, commencing next financial year. And what we've looked at as we've tracked that cost out of the business is the natural evolution particularly of the international content contracts over -- particularly over those 3 years. And the building move enables us from a technology perspective and from a property perspective to start doing some of those moves commencing sort of the back end of the calendar year. So when you look at a very high level of where the $100 million comes out over those 3 financial years, probably a little lower in the first year and then accelerates into the second and third year.

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Operator [10]

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Your next question comes from Eric Choi of UBS.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [11]

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Sorry, just a few for me as well. Firstly just a simple one. I guess, can you confirm that Nine's TV revenues in January is sort of in the order of mid-single digit declines, and therefore, we're expecting a sort of, I guess, a few months or a couple of the February and March months being up?

And then just a second question, [Steve] has been doing a lot of work educating advertisers [on VOD], trying to bring some of those digital screen dollars back to TV. Just wondering how much of that's being baked into the TV outlook on it? So whether there's some upside from that?

And then so just on cost again, sorry to drill into that again, but I guess if you just strip out like the tennis -- just the sporting costs from the first half and your implied second half cost base, it looks like it's going to be pretty static at about $360 million per half. And so do we think that, that's sort of still a good guide going into FY '21? I know that there's this new $100 million spread over 3 years, but just thinking about natural content inflation, do we still kind of think it's just going to hold on that kind of steady $360 million per half level?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [12]

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Yes, okay. Well, look, on the by-month data, I mean, we're not too keen to get in by-month data. We tend to like by-quarter data, but -- and if you look at the Oz Open this year, it was a week later. So we probably had some revenue that moved from January into February for the market and for Nine. So yes, some decline in January compensated by growth in February. And as I said, as we get to the first quarter, we end up basically flat on PCP. So I think a good result that sort of -- certainly, growth in share and perhaps a slightly better market than what we've seen, but acknowledge the -- some of the uncertainties coming forward.

In terms of the YouTube, Facebook, how we're going at sort of generally getting into the broader video market versus just television, and where will we see that flow through, we've certainly had some very encouraging arrangements with a number of our major trading partners, which have set the framework for some ability for Nine, subject to us delivering on particular audience numbers in 9Now to be able to grow our share of the total video market. So the framework is there.

The job for us now is to do, as I said in the presentation, 2 things. One, make sure that we, in a very focused and not a hugely significant way, but make the right content investments to continue to grow those users and streams. Basically, we get big peaks as we have our big shows on. What we have to do is level out the troughs at a higher number, and that's really our focus across the year, should we do that. And as I said, we saw some really encouraging signs over summer where we saw growth in streams in that period beyond what we had the previous year. Then we're in a position with those arrangements we have with the major groups to start to see, hopefully, some of that flow back of revenue into total television which is why we've sort of moved to that category because we may see a bidding market in FTA or we may see it in 9Now.

I expect 9Now, as you'll see in the numbers, the audience is still growing faster than the revenue base has. So there's still potential upside in 9Now in terms of, I think, that revenue. So it will be -- it will come through in a mixture probably more slated to 9Now. And Paul, in terms of the cost basis.

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [13]

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So in terms of the cost basis, there's obviously a step-up in the sports cost for both tennis and rugby league. And then as we look in at how to use that, that gets baked into the numbers. In terms of the total, what we said was the cost base of Free To Air TV will be no more than up 2.5% on the prior comparative pro forma numbers. When we're looking at the $100 million, we're looking at that number being the exit point and the $100 million coming from that number.

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [14]

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Yes. And Eric, you'll note, we've got, unfortunately or fortunately, it's probably going to be a great tournament. I don't know if it delivers the incremental revenue, but we've got the T20 World Cup of Cricket in Australia in October, November this year, calendar year, which will be in FY '21. So that's a cost that we still have in to bear, that we haven't written down in any way whatsoever. So that cost just tempers our ability to take some of those costs out of sport in the FY '21 year. It's about 20 million [bucks].

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Operator [15]

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Your next question comes from Lucy Huang of Bank of America.

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Lucy Huang, BofA Merrill Lynch, Research Division - Analyst [16]

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I just have three. So firstly, around BVOD. So you've got really strong share, 50% of the BVOD market. I'm just wondering if there's any potential for this to go any higher, given the signing of the NCD deal, whether you're seeing recently any lift to that BVOD share there?

And then just secondly, with BVOD growing so strongly, 30% to 40% per annum, do you think this will accelerate the declines in the Free To Air ad market over time?

And then just thirdly, on Stan, you've done a really great job, given the competitive landscape. Just wondering how you're thinking about HBO Max coming into the market, given that they have delivered some pretty good content as well?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [17]

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What is it with you guys, 3 questions, and always end up being 4 or 5. In terms of the 50% share, again, an interesting thing that we're seeing in BVOD is, we are seeing an increase in live viewing as well, at the same time as we're seeing an increase in effectively the catch-up or the on-demand environment. And in fact, the live viewing growth has been faster as a percentage terms than the BVOD market.

So when you get months like January, when we got tennis, and we have the NBCU content. Yes, then we are getting north of a 50% share outcome in that month. So yes, I think that will depend on month-to-month. And I don't think as -- we think of it as a broader, digital video market rather than the BVOD market. As we go forward, we're concentrating on getting a bigger share of that broader market. And I hope and I expect our competitors, traditional competitors will come along on the same journey. So can our share be north of 50%? Yes, if we deliver the audience results. There aren't the traditional constraints that there are probably in more so in linear.

Does it accelerate decline in FTA viewing? Not necessarily. In fact, what we find is, again, for the big shows, you're actually seeing growth in viewing in linear and BVOD because it's a better user experience. You don't miss out. You don't have to go into a complicated set top environment, set box top environment, you can actually consume the show at your leisure. And so what we find is that depending upon the particular show, some shows favor more live viewing, some shows favor more on-demand viewing. But generally, if it's a good show, your total viewing numbers for those programs is increasing. So where we're more competing with that investment, as I said, is in those troughs. How do we take the troughs out? Now there will be some incremental impact on FTA, but it's generally in areas that are less important to us from an FTA revenue basis, if that makes sense. We're targeting, I guess, again, the total video market in that space rather than necessarily targeting the higher revenue FTA slots.

Stan, HBO Max, yes, we've done a bit of work on this. And again, Disney+, clear global strategy, direct-to-consumer. They've been very clear on that, and they've rolled that out around the globe and they're having some great results. If we look at the other players, and if you look at the Australian market, I think our intel at this point is, we're not going to see any new entrants in the near term, the reason being the big battle is the U.S. market, they're all focused on, first of all and foremost as they should, what happens in their preeminent local market, where the big dollars are. That's a big source of where the competitive environment is and they're actually looking for if there are smart deals to be made with partners or where they can generate great cash flows from international markets, then a lot of the other studios are more than prepared to look at that environment, and I'd say for possibly up to the midterm with the Australian market being a traditional pretty significant player for that content in the Australian market and with the success of Netflix then, it's more likely at least in the short to near-term and to the midterm, that we'll see those players continue to license into the Australian marketplace.

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Operator [18]

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Your next question comes from Entcho Raykovski of Crédit Suisse.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [19]

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Entcho here. Now I'll speak to a couple, both on Stan. Firstly, if I can have a go at the Stan churn question again, are you able to comment on the subs growth or just the absolute subs at Stan over the course of the first half? I'm just interested on whether you actually saw perhaps stronger growth early in the period and then a drop-off post the loss of Disney content? So I have that 1.8 million active subs, may have tracked.

And just secondly, the cost number of just over $100 million for the half. Should we view that as indicative of the underlying cost base going forward? I mean, I appreciate it depends on content deals that you signed, but is that kind of a reasonable base or -- and as you're thinking about it longer term, is there -- do you have a margin target in mind? Or is it more a function of costs and obviously subs?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [20]

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Yes. Look, obviously, we don't release monthly subs numbers. So I'll be just a little bit cautious about how I talk about what happened over the year. But I think if you thought about it logically, you can expect that with the launch of Disney+, there's probably a one-off churn event. And I think that was, as I said, in a relatively small in the scheme of the entire Stan sub base. And Mike and his team are very good at tracking this, and then they continue to measure churn, as Michael has said to you all many times over the past, on a cohort basis. And what we're seeing is those churn rates returning over the course of the year to their long-term characteristics.

So a one-off churn event, obviously, with the Disney+ launch, Apple TV+ launch at the same time. And then obviously, churn over the course of the year returning to more normal levels. So I think that's kind of indicative of what we're going to continue to see going forward. We had, obviously, some very large subscriber growth over summer 2018/'19. That was more tempered across summer 2019, '20. We're probably now back to the more of the long-term Stan subscriber growth as we move forward from this point.

In terms of the cost base, Stan, obviously, great result in the half, amazing transition through to EBITDA and cash flow growth. But obviously, Stan's in a position now with the scale and size it has to go, well, what's next for Stan? Where are we going to see the next level of growth in subscribers and what are going to be the components that might contribute to that as we go forward? So you'll see the result in terms of EBITDA and cash will differ a little bit based on when available opportunities come to market or not. So some markets might be more cash, some 6 months -- more profitable and cash generative, some we may invest more in content or marketing. It will just depend upon how we take that forward, because, obviously, our target and our goal with Stan is to continue to aggressively grow its subs numbers and to really increase the penetration of Stan, both in terms of number of households, but also the number of households that acquire multiple services.

So our focus still remains in a business like Stan subscriber growth, revenue growth and looking for opportunities that are going to continue to provide those next step-ups in growth for Stan. So don't think of Stan as linear path. It will differ as those opportunities come to market. But if we look long-term for the business, I think what we would say now is we feel that the subscriber potential for Stan based on our knowledge of what's happening in the market and with Disney+, the number of available subscriptions, the number of -- so the penetration in terms of number of households and the number of subscriptions by household, we continue to feel more positively that those 2 statistics are moving in the right direction, as in up. And I think that with Stan and its success it's had, gives that business a great future. I don't know if you want to add any, Paul?

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [21]

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Yes. I think the only other thing I would say is, as it is a growth business, I think the key focus around disciplined expenses is as you said, was around when content is available, whether we get the right content. And then when you don't have as much content, you're obviously going to spend more on marketing. But the trajectory of success of this business is to take it -- last year, we went from 1.5 million subscribers to 1.8 million. It's sort of when we sit here next year, that we've got -- we're over 2 million.

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Operator [22]

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Your next question comes from Fraser McLeish of MST Marquee.

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Fraser McLeish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [23]

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Great. And well done on result in a tough market, obviously, and Stan result particularly. Just -- Hugh, just given what you just said on Stan, and on your plans for the second half on marketing, et cetera, is there any reason why that $14 million EBITDA you did in the first half isn't repeatable in the second half? And that's my first one.

Secondly, just on the AFR, that's helpful disclosure you've given us there. Is there any chance of a revenue number for the AFR? And finally, the Sydney move costs that you've highlighted, is there any more to come in FY '21?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [24]

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Do you want to take your FY '21 move cost first?

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [25]

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Yes, okay. So on the Sydney move costs, you'll see in the document in the appendix that there's still an FY '21 cost around $30-odd million. So -- and that's -- has an impact. That's why I was sort of highlighting that out. That's probably the one big impact, as we go into FY '21, that has an adverse impact on the overall cash of the business.

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [26]

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I think in terms of Stan, I expect second half is traditionally a more intense marketing period for Stan. So Stan, again, as we've said before, carries the full cost of marketing in its books, including whatever it borrows from the Nine group. So you'll see, I think, that step up in marketing and possibly as well as some incremental content investment in what is traditionally a lower subscriber addition period. So I wouldn't necessarily again see Stan as a linear progression. I think you really got to look at it on that longer-term basis, so that that gives you a little bit of guidance.

We don't really hand out revenue numbers for the AFR. If you want to ring Nola and see if you can pester her into some sort of data, I would encourage everyone to do so. But I think what we tried to do was -- sorry, Nola -- I think what we tried to do was really to start to point out how we look at the business, which is how can we aggressively transition ourselves from linear advertising reliance to a combination of digital advertising and subscription. And the AFR is a great example of a publication that is really going very successfully at that transition with, by the way, an events-based in the AFR as well that we retain post the sale of the events business we did last year.

So they're changing their revenue base to go to a model that represents the next 50 years of those particular assets, and that's really what we do aggressively as part of all of our business opportunities.

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Operator [27]

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Your next question comes from Brian Han of Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [28]

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Hugh, in the BVOD space, are there many advertisers who go purely on BVOD and not linear TV? Or is that even possible?

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [29]

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Yes, it's possible. And there are some that go purely on BVOD. And again, as we progress with that platform and we roll out more of our technology from a sales sense, where we can start to provide an even higher level of addressable advertising solution, which VOZ, again, will more enable, you'll see advertisers who will come into that -- only into that BVOD space.

Obviously, it's up to our sales team then to try and seek to -- talk to the advertisers and get them to spend as much as they can across the Nine group, but it's a management exercise of volume and price and yield. So -- but yes, there are some advertisers who do commit only on BVOD.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [30]

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And Paul, while I have you there, just a question on cash flow. For the Metro Media assets, would the EBITDA to cash flow conversion be way over 100%? Like 120%, 130%?

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [31]

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No, it wouldn't be. Yes. But when we're looking at sort of Metro Media at the moment, I mean, there's -- I look at the total, but the conversion of Metro Media is closer to neutral than that number.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [32]

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Right. But in terms of CapEx below that would be quite minimal?

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [33]

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Well, there's -- in Metro Media, there's an investment in capital around their digital growth.

But in terms of capital, obviously, our prime capital spend is not in that business.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [34]

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Right. But compared to, say, the past -- the CapEx, overall CapEx for that division will be considerably lower?

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Paul A. Koppelman, Nine Entertainment Co. Holdings Limited - CFO [35]

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Well, I mean, the division's smaller. So let me get back to you on just on the detail, but the division's obviously smaller. And then there's obviously a larger amount of CapEx in the future as we go to the move, particularly in North Sydney for the linear TV and television business. But in the -- in that business, there is not the same level of capital, but it's a smaller business as well.

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Operator [36]

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There are no further questions at this time. I will now hand back for closing remarks.

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Hugh John Marks, Nine Entertainment Co. Holdings Limited - CEO & Executive Director [37]

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Okay. Well, thank you, everyone, for attending. Thanks for attending our first half results briefing, for your continued interest in Nine. And of course, we look forward to reporting back to you at our August results. We'll talk to you then. Thank you.