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Edited Transcript of VIV.PA earnings conference call or presentation 25-Jul-19 4:00pm GMT

Half Year 2019 Vivendi SA Earnings Call

Paris Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Vivendi SA earnings conference call or presentation Thursday, July 25, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arnaud Roy de Puyfontaine

Vivendi SA - Chairman of Management Board & CEO

* Hervé Philippe

Vivendi SA - CFO & Member of Management Board

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Conference Call Participants

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* Adrien de Saint Hilaire

BofA Merrill Lynch, Research Division - VP & Head of Media Research

* Conor O'Shea

Kepler Cheuvreux, Research Division - Head of Media Sector

* Julien Roch

Barclays Bank PLC, Research Division - MD & European Media Analyst

* Laurence Davison

Deutsche Bank AG, Research Division - Research Analyst

* Lisa Yang

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Matthew John Walker

Crédit Suisse AG, Research Division - Research Analyst

* Omar Farooq Sheikh

Morgan Stanley, Research Division - Equity Analyst

* Richard Eary

UBS Investment Bank, Research Division - Executive Director and Head of European Media Team

* Thomas Coudry

Bryan Garnier & Co Ltd, Research Division - Financial Analyst

* Thomas A Singlehurst

Citigroup Inc, Research Division - Director and Head of European Media Research

* William Henry Packer

Exane BNP Paribas, Research Division - Executive Director of Media Equity Research

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Presentation

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Operator [1]

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Good evening, ladies and gentlemen. Welcome and thank you for joining Vivendi's First Half 2019 Results Presentation. This call is webcast on vivendi.com. Today's call is hosted by Mr. Arnaud de Puyfontaine, Chairman of the Management Board and Chief Executive Officer; and Mr. Hervé Philippe, a member of the Management Board and the Chief Financial Officer. As a reminder, this call is being recorded. I would now like to turn the call over to the Mr. Arnaud de Puyfontaine. Please go ahead, sir. Your line is open.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [2]

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Welcome, everyone, and thank you for joining us today. I would like to briefly review some of Vivendi's key achievements during H1 before handing over to Hervé Philippe who will give -- who will go through the figures.

So I'm very pleased to report that the results delivered in the first 6 months of 2019 confirm Vivendi's positive momentum. The figures speak for themselves. At constant currency and perimeter, our revenues for the first half of 2019 grew by 6.7% compared to the first half of 2018, while our EBITA increased by 27.6% on the year-on-year basis. As a result, the earnings attributable to Vivendi shareholders actually tripled between H1 2018 and H1 2019. This strong operating performance was fueled by our main activities, especially Universal Music Group and by the positive contribution of Editis since its integration in February.

For Universal Music Group, the first half of 2019 was a continuation of what we saw in 2018, which was described as a historic year by Sir Lucian Grainge himself. Streaming and subscription, physical sales, publishing and merchandising, all of the businesses contributed to UMG's outstanding performance, plus 18.6% in revenue and 43.6% in EBITA at constant currency and perimeters. Universal's artists keep topping the charts. On the Spotify global chart, Universal Music Group achieved an amazing 8 of the top 10 songs for the first half of 2019, including all of the top 6.

On the TV side now, Canal+ Group in France is preparing to face the arrival of new content players with huge financial resources such as Disney, who is likely to launch its new streaming service early next year. To adapt to this new competitive landscape, the group is pursuing its transformation plan. Recently, the management presented the details of this plan for France to its employees. Outside France, growth remains strong, especially in Africa where the broadcasting of the Africa Cup of Nations has led to a very satisfactory increase in the subscriber base.

In communication, Havas continued to generate both growth and profitability in the first half of 2019 compared to the first half of 2018. Its creativity was recognized at major advertising festivals.

It is worth mentioning that the theme of this year's Cannes Lions International Festival of Creativity was entertainment. This confirms the relevance of Vivendi's strategy. Today, we are the only player in the market to offer such a value proposition in both advertising and content.

In addition, the last few months have been marked by a number of new developments at Vivendi. Our targeted acquisition strategy is bearing fruit. Point number one, Editis. As you know, we completed this acquisition on the 1st of February this year, Editis being the second largest French publishing group. Its integration within Vivendi is proceeding according to plan, even better actually. The first joint project between Editis and other group entities have already become a reality. Lizzie, Editis' audiobook brand, has been included in the Canal+ offer. And Editis is working closely with Studiocanal on the development of audiovisual projects based on books. (foreign language), as we say in French, the autumn literary season, looks promising for Editis with the release by best-selling authors such as the new Harlan Coben and the sequel to The Handmaid's Tale by Margaret Atwood.

Point number two, M7. In May, Canal+ Group announced the planned acquisition of M7, one of the largest independent pay-TV companies in Europe. This acquisition would allow Canal+ Group to expand into 7 countries in Benelux and Central Europe and to increase its global subscriber base to nearly 20 million. The closing of this transaction is expected to take place in September. While expanding its European footprint, Canal+ Group strengthens its presence in English-speaking Africa with the recent acquisition of a major Nollywood player, IROKO Media.

Last, but not least, the first half of 2019 has demonstrated that Vivendi is fully committed to delivering value to its shareholders. The shareholders' meeting in April approved the payment of a EUR 0.50 dividend per share, representing an increase of 11.1% compared to the dividend distributed last year.

Following this authorization given by the shareholders at the AGM, we successfully launched the share buyback program. 5% of share capital was repurchased between end of May and end of July.

Let me now say a few words on the evolution of Universal Music Group's share capital. When we announced this operation in July 2018, we said that it could be completed within the next 18 months. The opening of Universal Music Group's share capital for the acquisition of a minority interest is progressing in line with the original time line. The advisory banks that will assist us in finding the best partners for Universal Music Group have been selected. The vendor due diligence was presented to the Supervisory Board at the end of May and will be updated by PwC with the first half 2019 financial statements. And several contacts have been established with potential strategic partners.

As you can see, we are working on creating the best conditions for an efficient sale process. There is a French proverb, which states (foreign language). This basically means that there is no need to rush. We must take things step by step. This is especially true for such an important transaction.

To sum up, we are very proud of what we have achieved over the last 6 months, and we are confident about the 6 months to come. With the support of our main shareholder, the Bolloré Group, and the Supervisory Board, we are accelerating the building of a unique media and entertainment company. Vivendi is currently the only major player in Europe and no doubt one of the world's only players to be at the junction between the different creative industries: music, TV, cinema, communication, games, books, platforms. And Vivendi is an integrated group that values the common potential of all its assets. Unlike many other players in the sector, our group is just not a collection of businesses. It is absolutely our intent to grow them together. This is unique to the Vivendi.

Thank you for your attention. And now I will hand over to the Hervé Philippe. Hervé?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [3]

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Thank you very much, Arnaud. Good evening to all of you. It's my pleasure to present to you our results for the first half of 2019.

Let's begin on Slide 7 with the changes in currencies, scope of consolidation and IFRS. Regarding the change in currencies, the euro was down 7% against the U.S. dollar and 5% against the Japanese yen, which had a favorable impact on Vivendi's figures for the first half of 2019. The main change in the scope of consolidation was obviously the consolidation of Editis since February 1, 2019. The second table of this slide shows the impact of the exchange rate and payment changes on our growth rate.

Before going through the results in detail, let me remind that the first half 2019 results reflect the initial application of IFRS 16 related to lease contracts and that the comparative periods have not been restated. I will elaborate on this impact and this application at our H1 results later.

On Slide 8, we have a summary of the key financial metrics for H1 2019. As you can see, Vivendi's performances were quite strong. During the first half of 2019, revenues grew 6.7% organically, reaching more than EUR 7.3 billion. EBITA reached EUR 718 million on organic growth of around 28%. This increase in profitability was supported by our 3 main businesses as we will see. Universal Music Group posted growth of 47% thanks to the strong operating leverage. Canal+ Group posted growth of 5.4% despite the unfavorable evolution of its revenues in France. Havas posted growth of 5.8% at the end of June including IFRS 16 impacts.

As a result, adjusted net income grew by more than 40%. As we will comment on later, the IFRS net result reached EUR 520 million or more than tripled relative to H1 2018.

Finally, at the end of June 2019, Vivendi's net debt amounted to about EUR 2.1 billion against a positive net cash position of around EUR 0.2 billion at the end of December 2018. It's worth noting that the net debt calculation does not include IFRS 16 lease liabilities.

On Slide 9, we can see the evolution of cash during the first half of the year, which is mainly explained by the Editis acquisition in January, the cash received from the sale of the remaining Ubisoft stake in March, and the shareholders' returns for a total of EUR 1.6 billion including dividends and share buybacks. And over the 6 months, the business units generated positive operating cash flow, which was offset by the taxes and interest paid during the period resulting in CFAIT of minus EUR 0.3 billion. Note that the taxes paid notably included the EUR 239 million repayment by Vivendi to tax authorities pursuant to a court decision, which is now pending before the French Council of State, the Conseil d'État, for a final decision.

Before going through the performance of the different businesses in detail, let's move to the consolidated P&L on Slide 11. As commented earlier, the operating performances remained strong during the first half of the year with revenues growing by 13.6% and EBITA by 32.4%. EBIT increased on par with EBITA. You have all the details in the table. Income from nonoperating equity affiliates correspond to our share in Telecom Italia's earnings.

Other financial income and charges were a net income of EUR 91 million compared to a net charge of EUR 42 million last year. This item mainly includes a revaluation of our stakes in listed companies for an aggregate amount of EUR 155 million. Last year, it included the write-down of the value of the Telecom Italia shares for EUR 512 million.

Taxes decreased by EUR 83 million. The effective tax rate at the end of Jun dropped to 21% against 30% a year ago. This represents a 9-point decrease mainly reflecting the increase in the profits recorded in the United States, notably by Universal Music Group, where the tax rate is lower.

Finally, adjusted net income, which better reflects the group's operating performance, increased by 40.8%.

Going to Page 12 on revenues by business units. In H1 2019, Vivendi's revenues amounted to over EUR 7.3 billion compared to EUR 6.5 billion, an increase of 13.6% resulting from the growth of Universal Music Group's business as well as the consolidation of Editis since February. In organic terms, Vivendi's revenues increased by 6.7% compared to the first half of 2018, mainly due to Universal Music's organic revenue growth, plus 18.6%. Canal+ Group's revenues decreased slightly on a global basis. Havas revenues were stable. And revenues from the other businesses amounted to EUR 203 million. They include Gameloft, Vivendi Village and New Initiatives as well as intercompany elimination.

On Page 13 now and -- as seen before, Vivendi's profitability significantly improved in H1 2019. EBITA amounted to EUR 718 million, an organic increase of EUR 155 million, primarily driven by Universal Music's contribution. Please note that the organic growth reported did not eliminate the impact on 2019 EBITA of the initial application of IFRS 16. For the group, it resulted in an EUR 18 million favorable impact, of which EUR 8 million for Universal Music and EUR 8 million for Havas Group.

Canal+ Group's EBITA before restructuring charges amounted to EUR 236 million, a decrease of EUR 13 million in 1 year. After restructuring charges, EBITA grew by 5.8%. (inaudible) the restructuring charges amounted to EUR 28 million. Canal+ Group recently announced a plan to transform and reorganize its activities in France. We'll see that later.

Havas EBITA reached EUR 108 million, including the favorable impact of IFRS 16. Editis' EBITA contribution for the 5 months' period was EUR 4 million. Finally, the aggregate EBITA of the other businesses was EUR 108 million loss.

Moving to the consolidated balance sheet on Slide 14. The operating balance sheet was restated with the changes to accounting standard IFRS 16 on April 23. Favorable changes

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offset by the revaluation of interest in Spotify and Tencent Music. To conclude, this is a very sound balance sheet with a low level of net debt.

Let's turn to the liquidity and capital resources on Slide 15. At the end of June, the gross cash position stood at almost EUR 4.2 billion, and the bonds amounted to EUR 6.2 billion. In June, we placed a EUR 2.1 billion bond comprised of 3 tranches with maturities of 3, 6 and 9.5 years, respectively, at very, very attractive rates. The first tranche of EUR 700 million carried a 0% coupon and the average rate was 0.66%. As you see on the bond maturity chart, the maturities are well balanced over the years with an average maturity of 5.4 years against 5.3 years at the end of December. The bond issue will finance Canal+ Group's acquisition of M7 and also refinance the EUR 0.7 billion bond maturing next December. It is also worth mentioning that Vivendi has credit lines available for EUR 3.5 billion as of July 23, 2019, and the market value of the listed equity portfolio amounted to EUR 3.7 billion as of June 30, 2019.

Now let's turn to the business unit performances, starting with Universal Music on Slide 18. Yet again, Universal Music's revenues experienced high level of organic growth, increasing 18.6% over the first 6 months of 2019. This performance is all the more impressive considering that the comparison basis is very high. This continued strong progression comes in particular from the recorded music segment with the growth of streaming and subscription remaining very dynamic with an impressive plus 25.5% jump in H1 2019. The streaming and subscription revenues rose to EUR 1.6 billion in H1 against less than EUR 1 billion in H1 2017. Recorded music also benefited from strong physical sales, plus 15% in H1 2019, due to continued sales of the soundtrack from A Star Is Born and multiple albums from Queen as well as new release from the Japanese bands, King & Prince and Back Number.

Universal Music generated EBITA of EUR 481 million, an increase of 43.6% in organic terms thanks to the continuation of strong operating leverage. Thus, the EBITA margin rose to 14.8% in H1 2019.

Going to Slide 19, Universal Music key financial figures for the half year. As already mentioned, recorded music revenues grew by 16.9%, thanks to the growth in subscription and streaming revenues and strong physical sales in the first half of this year, which more than offset the continued decline in download sales. The merchandising segment also delivered a good performance, plus 82.3%, due to more touring activity. Music publishing grew by 10.5%, also driven by increased subscription and streaming revenues. Universal Music Group's CFFO reached EUR 166 million in H1 2019, a slight decrease year-on-year, which is due to the phasing of advances received from major digital platforms as well as an increase in artist advances.

Moving to Canal+ Group, starting on the overall subscriber base on Slide 21. As shown in this chart, total subscribers to Canal+ offers worldwide reached nearly 16.2 million at the end of June 2019, a net growth of 105,000 year-on-year, mainly due to the continued strong growth of its international activities as we will see in the next slide. Impacted by the decline in French pay-TV revenues, the Canal+ Group's EBITA before restructuring charges amounted to EUR 236 million in H1 2019 against EUR 249 million in H1 2018.

Regarding the French market, which is still difficult, Canal+ Group has continued its cost optimization efforts. On July 9, Canal+ Group announced a plan to transform or reorganize its activities in France. This is a new organization who would lead to the departure of up to 492 employees thoroughly on a voluntary basis. Negotiations haven't started yet and we will determine the terms of this voluntary departure plan. So restructuring charges would probably be accounted for in H2 2019 after the negotiation with the employee representative, approval of the plan and precise calculation. The relative cost will be communicated when the reliable estimate will be available.

Let's look in more detail at the evolution of the international subscriber base on Slide 22. The international subscriber base continued to post sustained growth with 361,000 new subscribers, mainly thanks to the strong sales in Africa with the Cannes effect, which lasted between mid-June and mid-July as well as in Poland. The growth in Africa was partly offset by the results from Asia where the comparison basis is tough due to the broadcasting of the FIFA World Cup during the same period in 2018. Canal+ Group is pursuing its international development strategy in all its territories with targeted acquisitions such as M7 in Europe and Rok Studios in Nigeria.

Moving to the Canal+ Group subscriber base in Mainland France on Slide 23. In Mainland France, the individual subscriber portfolio stood at 7.7 million in H1 2019. Including collective subscribers, the global portfolio reached 8.2 million at the end of June 2019. This evolution is notably due to the end of the 2 years' commitment period for the first cohort of clients who subscribed to the new offer launched at the end of 2016. This negative effect mostly impacted the subscriber base during Q1. However, in Q2, the recruitment dynamics improved and the number of cancellations stabilized. As a result, the churn rate reached 15.3% at the end of June 2019 against 13.3% at the end of June 2018. Note that this rate was 17.6% at the end of June 2017.

Nevertheless, we'll point out that Canal+ is still profitable in France and the number of subscribers to the Canal+ channel, which is the nucleus of our business, grew by an additional 45,000 year-on-year despite a tough comparison landscape. The group's OTT offers without commitment, including Canal+ Series, which was launched last March, are confirming their success.

Turning to Canal+ Group's key figures on Slide 24. In H1 2019, Group Canal+ revenues topped EUR 2.5 billion. Revenues from international operation increased by 3.7% due to the growth in the subscriber base, which notably benefited from the Cannes broadcast. Revenues from television operation in Mainland France declined due to the decrease in the global subscriber base as we saw before. Studiocanal's revenues decreased compared to the first half of 2018, which saw a larger number of movies released and higher video sales. The Canal+ Group's CFFO was almost stable at EUR 174 million.

Going to Slide 26 and Havas Group performances. Havas delivered solid performances in H1 2019. Havas experienced an improvement of organic growth year-on-year, plus 0.2% against minus 2.9% in H1 2018. Havas posted another quarter of positive organic growth, 0.4% in Q2 after the 0.1% in Q1. This was achieved despite the still challenging competitive environment for agencies. This positive organic growth is mainly sustained in the United States by the health and wellness communication division and the media business. The EBITA improved from EUR 102 million to EUR 108 million and included an EUR 8 million impact in H1 2019 resulting from the initial application of IFRS 16.

Moving to Slide 27. By region, the North American agencies experienced good economic growth this half, improving by plus 1.7% due in large part to the performance of Havas Health & You, the media businesses, performance marketing like Havas Edge and financial and institutional communication with AMO. Business in Europe held up, albeit with mixed performances depending on the country and on the media and creative businesses. The countries providing the biggest contribution were Germany, Italy, France with plus 1.1%, thanks mainly due to BETC, and the U.K. with 1% thanks to the digital business with Havas Hélia. Business in Asia-Pacific and Latin America is still recovering.

Turning to Havas key figures on Slide 28. In H1 2019, Havas net revenue reached EUR 1,061 million, representing 0.2% in organic growth and 4% reported growth, including a positive ForEx impact of 2.8% and a positive consolidation scope effect of 1%. CFFO improved, going from EUR 104 million to minus EUR 72 million, thanks to the improvement of the working capital. For information, Havas typically generates most of its cash in the second part of the year as you can see in the appendices on Slide 44.

Going to Slide 30 and Editis. Vivendi has fully consolidated Editis since the beginning of February. Editis' contribution to Vivendi's revenues amounted to EUR 260 million for 5 months, up 1.2% compared to 2018. EBITA amounted to EUR 4 million on a 5 months' basis and was impacted by the editorial and marketing costs linked to the high school curriculum reform that was also the case in 2016. Editis is structurally and heavily weighted to the second half of the year in EBITA and cash flow. This year because, for example, novel sales been strongly linked to the new releases in the autumn as well as the Christmas sales, this year, H2 will also be favorably impacted by the high school curriculum reform.

This concludes our H1 results presentation. Thank you very much for your attention and we are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we take our first question from Omar Sheikh from Morgan Stanley.

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Omar Farooq Sheikh, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got a couple of questions, if I may. First of all, I want to ask you about the comment you made about contacts with potential strategic partners, and I wonder whether you could maybe just define key words in there. If you could define several, that would be helpful, because we don't know approximately how many contacts you've made or potential strategic partners you have contact with. And then it will be interesting to maybe, if you can, give us some color on what sort of contact you'd had, are these initial discussions you've had down the road. Just some help on those would be good.

And then secondly, I wanted to just touch on the streaming revenues in the second quarter, which were about 23%, I think. Did anything change in the terms of the contracts? Was there any phasing issue in relation to the payments that you see from the distributors that might have impacted the second quarter?

And then looking into the back half of the year, the second half of 2019, could you maybe update us on where you are on the negotiations with distribution partners? I understand the agreement, for example, with Spotify expired during Q2. So if you could give us an idea of whether you think the outcome of that particular negotiation might involve any changes in the economics for the second half? Those are my 2 questions.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [3]

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Thank you for your question. It's Arnaud de Puyfontaine speaking. I'm going to hand over to Hervé as regard to your second question. But as regard to the first one, I will stick to our communication that we made in our press release. And at this stage, I'm not in a position to provide any further information as regards to those contacts. Hervé?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [4]

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Well, to answer the question (inaudible) in Q2, just can say that there is no specific exceptional one-off in the revenue or in the -- at the EBITA level, I would say. But we had some exceptional [variable] of the CFFO because we had some slippage from the end of June to the beginning of July in the collection of advances paid by some big platforms. So that's why particularly the CFFO was a little bit low in the first part of the year. This is also due to the very high level of advances paid to artists at the beginning of the year. So there's absolutely no problem regarding the CFFO, which will be very good in all the year.

Concerning your question on the negotiation with platform, I cannot give any comment from that because, obviously, those negotiations are confidential. But we are very, very confident for the possibility to conclude the negotiation with them, and especially with Spotify. And we are also confident that Universal Music is in a very good position in terms of power negotiation with the platform. And taking also in account that as a market leader, we have to take account of everybody and to favor -- favorable and positive growth for everybody.

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Operator [5]

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We take our next question from William Packer, Exane BNP Paribas

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [6]

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It's Will here. Three for me, please. Firstly, could you comment on the sustainability of physical growth into the second half of the year? We've had another positive surprise there.

Secondly, just to kind of extend Omar's question, could you just confirm if there are any one-offs at all on the cost side or on the revenue side across the whole business rather than just the streaming business?

And then finally, could you help us a little bit within the streaming business? How is paid streaming versus ad streaming and other streaming performing? And how is paid streaming progressing compared to this period last year?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [7]

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Thank you, William. As regard to your first question and physical sales trend, the physical strength in the first half was driven by Japanese acts, King & Prince and Back Number, and continued sales of the soundtrack from A Star Is Born and the multiple albums from Queen. But while physical results can be release driven, the trend on the basic is still downward over time as the industry continues to transition to streaming. We've got also, I must say, this trend as regard to the vinyl, which is growing even from a slow base. But as regard to the ongoing trend, we see it over time as a downtrend.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [8]

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Maybe to answer the questions on streaming and subscription. First, there was no specific one-off in the first half regarding revenues or EBITA for the streaming and subscription businesses. Just I wanted to highlight that from the CFFO point of view, we have some slippage from collection from the end of July to -- from the end of June to July. But this had only an impact on the cash and absolutely not on the result of this business during the first part of the year.

To answer your question on the split between streaming and, I would say, ad-funded streaming and subscription, we do not give the split between those 2 parts of the business. But obviously, they are growing, and you can see in the different communication made by some major platforms, which are the development of their base of subscribers. So we not give the detail, but they are all growing.

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [9]

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Okay. Maybe just a quick follow-up. Would it be right to think that ad streaming and paid streaming are decelerating at the same rate? Or is paid streaming proving more resilient? And just to confirm, should we expect H2 physical to be negative?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [10]

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To answer, on the second part of the year, we feel we have very good growth in streaming and subscription in this part -- in the first part of the year. It has also been supported by a very good result in physical sales. The trend on physical is logically to be a decline. So -- but you can have some ups and downs from 1 quarter or 1 art to the other and -- but logically, we should have -- we could have a decrease in the physical, which is a normal trend. This being said, we are very satisfied when we have very good success and the success is linked to the geographical part with Japan mainly, but also to some releases of old songs like Queen, which has been favored by the biopic on Queen at the end of last June. So it's very difficult, in fact, to predict what can be the figures for the physical in the second part of the year because maybe there are new movies or new factor which can be a positive for this part of the business.

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Operator [11]

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We take our next question from Richard Eary from UBS.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [12]

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Can I just -- 3 questions for myself just as clarity. The first one in terms of the margin side, obviously a very strong margin expansion at UMG in the first half. I don't know how much you can maybe elaborate how much of that was driven by the strong physical performance, particularly in Japan where obviously margins are there. And therefore, if physical sort of slows in the second half of the year, are we going to see a slower expansion in margins? So just clarity in terms of how much the margin expansion was driven by physical out of -- by margin markets like Japan and Germany.

The second question just coming back to the UMG sale process. You said that you're confident of still getting the deal done within 18 months. Is that -- just to be clear, is that announcing a deal or completing a deal? Just so we got some clarity on that.

And then just lastly on Editis. As we go into the second half, we still don't have full year numbers or pro forma numbers for Editis. So I'm just wondering whether you could help us in terms of thought process in terms of growth into the second half and profitability for the asset.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [13]

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As we keep on saying as regard to the announcement for the transaction, we are on plan. And as regard to the 12 to 18 months, we said about in a position to announce deal. As regard to completion, you can imagine that there are kind of a momentum, which is not under our watch. So I'm not going to elaborate of what may be post the announcement of the deal, the difference of timing between announcement and completion. But when I -- what I can say is that as regards to what we said literally 1 year ago, we are doing things according to plan. We're managing the process in a very controlled approach, should I say. And we are sticking to the initial announcements we made in July 2018.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [14]

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To answer the more financial question, I would say, on the margin expansion for Universal Music, obviously, we have very good leverage effect. In this very good leverage effect, physical takes its part. This being said, we will have probably a good second part of the year. We are very confident in the development of the business for the second part of the year.

It's always difficult to predict what will be the level of the margin also because probably as you know, we have some changes in the season '18. In the past, we had the last part of the profitability of the business, which was in the second part of the year. On some streaming and subscription changes, we have more on average profitability through the year. But we are quite confident.

On Editis, it is difficult for us to give more precise figure on the full year. First, difficult to give figures for 2018 because it was not exactly the same perimeter when Editis was inside the Planeta Group. So we have bought the company, but they have kept some assets. So it's quite difficult. But we can say -- what we can say is that obviously, there was a big seasonality effect in this business with movies in September, I would say, and Christmas sales, which are always very, very important. And this year, will have a specific effect on the Q3, thanks to the educational part of the business in France. So difficult to predict, but obviously, you have to take account of the seasonality and the positive impact of the reform in high school. Thank you.

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Richard Eary, UBS Investment Bank, Research Division - Executive Director and Head of European Media Team [15]

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Could I just ask a follow-up on Editis? If we look at the numbers, I mean what sort of margins do we expect for that business for the full year? And how big is the seasonality impact between first half and second half typically?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [16]

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The profit of the first part of the year is absolutely not significant of the profitability of the full year, which is largely, I would say, put on the second part of the year. And when we have paid, you'll see we have paid EUR 833 million at the beginning of 2019. You can imagine it really what could be the sort of multiple which has been paid. So you can make the calculation to find what could be the operational profit of -- for the year then of the second part of this year. This is my suggestion.

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Operator [17]

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We take our next question from Adrien de Saint Hilaire from Bank of America.

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Adrien de Saint Hilaire, BofA Merrill Lynch, Research Division - VP & Head of Media Research [18]

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Back to the streaming growth in quarter 2. So I'm just wondering if you have any thoughts whether the strong growth that you see in physical, does that cannibalize streaming at all.

Secondly, your release mentions that you've established contact with potential partners. I know you can't give much detail, but I'm just curious if it's more you contacting partners or if it's the other way around?

Third question on the deal. I think in the last year you mentioned that the valuation framework for UMG would be based on the full year '18 numbers. Is that still true? Or would the H1 performance be factored in?

And then I have a last question around UMG, if I may. Do you have any view whether a deal with, for example, the Chinese digital platform, would that go through with the U.S. administration given the trade tensions? I know it's a bit philosophical, but I'm just interested in your thoughts here.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [19]

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Adrien, I will repeat myself. I'm sorry for my poor English, but I think that a few minutes ago, I said quite literally that I wouldn't comment anymore as regard to the statement, which you can read on Page 3 of our press release. So that's the reason why I'm not going to provide any more comments. That's your second question.

And as regard to your fourth question, I am -- we intend to sell a minority stake and to keep control of UMG. So we do not expect to face that kind of issue. So we are confident as regard to the point you were making.

I'm now going to hand over to Hervé to answer your other question. Thank you.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [20]

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To the first question, on the physical and streaming and subscription, very difficult to believe that there is some cannibalization effect between physical and streaming to contrary which is happening. And look to the Japan side of the business, there's been very big development in physical in Japan, it's that against subscription and streaming or the opposite, I would say.

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Adrien de Saint Hilaire, BofA Merrill Lynch, Research Division - VP & Head of Media Research [21]

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And on the point about the evaluation of UMG based on full year '18 or inclusive of H1 '19.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [22]

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What do you mean the evaluation of Universal Music, in the sales process?

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Adrien de Saint Hilaire, BofA Merrill Lynch, Research Division - VP & Head of Media Research [23]

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Yes, I think I -- it's what you said at the full year results presentation that the disposal process would be based on the full year '18 numbers of UMG. So now that you've got 6 months in the bag, I'm just wondering if, well, this will be used as the starting point for discussions.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [24]

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No, just for clarification, as regard to the momentum in terms of the process, we said in terms of the time line when we were asked about the length of the time line that we wanted to get the process organized very efficiently. And as regard to the numbers, the more we could have numbers as regard to showcase and to prove the trend within the business, the better it's going to be. So now we've got the results for the first half 2019. What we said is that as regard to the work that has been done in the vendor due diligence, we will have Pricewaterhouse working on an update of this vendor due diligence based on our numbers for the first half 2019. Is it clarifying your question, Adrien?

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Adrien de Saint Hilaire, BofA Merrill Lynch, Research Division - VP & Head of Media Research [25]

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Very clear. Yes. Absolutely. Well, I don't think you can really ignore the performance. So I'm not surprised at this, I just wanted to confirm.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [26]

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No, no, no. Very clear. Thank you very much.

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Operator [27]

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We take our next question from Lisa Yang from Goldman Sachs.

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Lisa Yang, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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I have a few questions as well. First on UMG, maybe could you comment on the pipeline of new releases we should be expecting in the second half and how that might compare versus last year? And therefore on that basis, how do you see your market share in the second half?

My second question is on the sale process of UMG. I understand the current process about selling a minority stake. But I'm just wondering, I mean, in order to make the asset more attractive especially to a U.S. buyer, would you be willing to put some form of shareholder agreement where you could eventually sell the entire asset over time and make that high evaluation?

And the third question is on Canal+. I think you previously said your 2019 EBITA would be higher than 2018 ex the restructuring. First half obviously was down 5%, but would you still think that's going to be the case especially with the cost savings?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [29]

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This is Hervé speaking. I will just answer the third question on Canal+. Obviously, the final figure for 2019 will be impacted by the restructuring charges linked to the organization plan. But if we exclude the impact of this voluntary plan, I would say, we expect Canal+ Group to continue to improve its profitability in 2019 and also to keep investing in programs and commercial initiative to boost its revenue growth. So we have not changed our vision on Canal+ performance in 2019 before, I would say, restructuring charges.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [30]

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So on your first question, we are excited about the remainder of our 2019 release schedule with the upcoming releases from, for instance, Taylor Swift, Lionel Richie and Mabel and a number of original soundtracks like The Lion King, like Star Wars: the Rise of Skywalker and Frozen 2, which as you may remember has been a very good performance if I do recall in 2015, '16? Well, the Frozen 1 was very good, so we expect Frozen 2 to be even better. I also need to mention the planned release on second half for the Havana and also DJ Snake.

So to answer your question, Sir Lucian King -- Sir Lucian Grainge always puts the very high level of creativity and the capacity of our team worldwide in terms of A&R to be able to attract the very best performer. And based on the releases of the past quarters and the planned release for H2 2019, we expect the momentum to prove that it is exactly what Universal Music Group is really second to none at.

Could you repeat your second question, please?

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Lisa Yang, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Yes, I think just on the sale of UMG, I understand now it's about selling a minority stake. But I guess if you're dealing especially with a U.S. buyer, I mean they would want at some point to fully have the control. So would you be willing to put some form of shareholder agreement where you could sell the assets, the entire asset over time, 100% of the asset over time?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [32]

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Thank you for your question. We have an expression in French, we say (foreign language), which doesn't translate in English. But we can't speculate. What are we absolutely sure about is that the process is to get the sales process up to 50%. And you know exactly what has been our regular statement as regard to the process and our objective. And as we speak, it has absolutely not changed.

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Operator [33]

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We take our next question from Matthew Walker from Crédit Suisse.

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Matthew John Walker, Crédit Suisse AG, Research Division - Research Analyst [34]

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Just firstly I guess a philosophical thing is which is about sort of reinvestment of proceeds. Clearly, the business is going extremely well on UMG. So just philosophically, why recycle capital from that business into other businesses? And if you could just remind us what other types of businesses you are likely to be attracted to and recycle capital into?

The second thing is on tax rate. You made some comments on the effective tax rate. If you could be helpful and give us an effective tax rate going forward for '19 and '20 in the light of the increased UMG profit, that would be helpful.

And then finally around Canal+, what is the plan for the football when you get to that point with Mediapro? I think in the past, you've commented that you're confident of striking an agreement with Mediapro. They seem to be equally confident that they're going to go alone and set up a channel. If you could tell us your thoughts around what are you going to do about the French football rights when it comes to it?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [35]

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Thank you. On your question number one, as we said in the past and we are exactly sticking to our initial statement, the proceeds could be used for significant share buyback program, but we will also, when it occurs, see what could be the potential bolt-on acquisition that could reinforce our position in the different operations which are making Vivendi. So priority, proceeds will be used by significant share buybacks and second in terms of taking opportunities on bolt-on acquisition, but always based on very strict financial discipline as we do.

Second point on tax rate, maybe I hand over to Hervé.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [36]

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Yes, thank you. Well, you have noted we have decreased now effective tax rate. This being said, it also depends to profit in different countries and so, so. It's not a guess, but if we take something between 20% to 25% of effective tax rate, I think that we are not far from the reality. It can depend from one quarter to the other, but I think this is a good level.

On -- to answer the question on Canal+ on the football rights in France, just to say that we are still the right for the League One for the coming season from '19 to '20. So this is only after, so it's more than 1 year that the question comes. And Canal is always confident that there will be some League One matches on Canal+ after 2020, mainly because Canal+ is the best distribution offer on Canal+ unique broadcasting capabilities in France. So we cannot comment more, but this is the strength of Canal+ on the subject.

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Operator [37]

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We take our next question from Laurie Davison from Deutsche Bank

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Laurence Davison, Deutsche Bank AG, Research Division - Research Analyst [38]

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You mentioned your restructuring costs at Canal associated with the headcount reduction. But given you're getting rid of about 20% of the workforce, can we have an idea of what the EBITA benefit could be from this restructuring once -- or from the headcount rationalization once those restructuring costs have cleared? So are you going to give out any kind of new EBITA targets for Canal+ in 2020? That's the first question.

Second question is just on the music publishing side. That's accelerating. It looks like it's done 15% in the second quarter, and it's been on a steady acceleration path. Is this just catch-up because of the delays in royalty collection from streaming platforms? Or is there something else going on in the music publishing revenues that we should be aware of in terms of market share?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [39]

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First on -- so the question on the Canal+ reorganization plan, I can say that we -- it's very, very early for us to give an idea of the magnitude of such a plan and also expected savings. We are just at the beginning of the process. And as we have said, this is a voluntary plan, up to 492 people. The condition of departures have not yet been discussed and negotiated. So we will come back to you later this year with the possible impact on the 2019 second half in, I would say, exceptional cost or organization cost on what could be the impact on the profitability of Canal+ in 2020 and later.

Regarding the question on publishing, we can say that this is -- the growth in publishing is mainly and directly linked to the trend in subscription and streaming, which favors also the publishing side of our business. Thank you.

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Laurence Davison, Deutsche Bank AG, Research Division - Research Analyst [40]

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Okay, just one final question as well. You have established a strategic partnership with Tencent Music for the Abbey Road China initiative. Would that qualify as one of the strategic partnerships that you mentioned in regard to the UMG sale?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [41]

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Thank you for your question. As I mentioned during this call, we are going to stick to the comment which I made in our press release, and I'm not going to comment any further on those potential partners. Thank you.

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Operator [42]

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We take our next question from Julien Roch from Barclays.

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [43]

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(foreign language) My first question is which banks have you appointed? I would not mind Barclays because my (inaudible) today, and being restricted means I can go home early, but probably not.

Then the second question is again on music. What margin do you get on merchandising and other? Growth is boosted by nurturing revenues, which you've never had in the past. But are they lower margin, 5%, 10%, or actually higher than the group average?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [44]

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The first part of the question, on the banks, we have not given the names of the banks. We are in the process of discussing with those banks. So we have no intention today to give the precise list of the bank advisers, but you can be sure that they are very good partners for us on that.

On the merchandising side in the music, very difficult to answer the question. It can depend on each too and so. But I can say that this is not above the average margin of the business. You know this is mainly PCs, [clothes], speaker or things like that. So there is -- but if when -- there's also some good business results. And we are happy to do it also because it's good with -- for the relationship we have with our artists to make also merchandising in their tour. So we are active with this business, which is quite small in fact regarding the royalty of the Universal Music.

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Operator [45]

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We take our next question from Conor O'Shea from Kepler Cheuvreux.

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Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [46]

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A couple of questions from my side as well, just come back on Universal and the growth. Is there anything you can help us out with in terms of forecasting in the second half on merchandising? I think you had a very strong quarter, fourth quarter last year. So should the kind of touring impact cycle out in the second half of the year and growth slow significantly?

And also on the music publishing, I think Spotify has come out and said they were overpaying music publishing labels last year due to a misinterpretation of a change in the U.S. legislation and that some of those labels owed them money. And obviously, your numbers are very strong again in the first -- in the second quarter after a slower first quarter. Are there any other risks to slowing growth in the publishing side at -- including obviously that comment from Spotify?

Plus on Canal+, can you help us out in terms of the pipeline for Studiocanal in the second half of the year? Is there anything to call out?

And on the restructuring costs specific to potential voluntary redundancy of up to 500 people, potentially very long-serving staff, so it could be quite a big restructuring charge. I think in 2017, you had about $50 million of restructuring charges. Could that be a similar number in the second half of 2019?

Just the very last question, Hervé, if you could just give us some help on the expected full year net interest costs on an underlying basis after the recent refinancing?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [47]

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Well, to take the financial question, I would say on the forecast on growth, it's very difficult to give precise figures on the merchandising in the second part of the year. It will clearly depend on the different touring activities we can have in the second part. We will have some good parties making tours like Ariana Grande, Travis Scott, Elton John, Post Malone. So you know we have good artists doing tours in the second part of the year.

For publishing, I would say there is no specific -- in my understanding, there is no specific reason or no specific risk, I would say, on the growth in publishing.

To answer the question on Canal+ voluntary reorganization plan, I would say you are making your own assessment, I would say, and calculation. I cannot comment more on that. Obviously, it will depend clearly on the people who will ask for leaving the company. But I would say there are more restructuring charges, probably there will be more savings later. So you have to balance that.

For the pipeline on Studiocanal, I have no specific information to give you our view. Arnaud, some ideas on that?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [48]

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Thank you, Hervé, for your question. The first half was a very small pipeline related to the first half 2018. We expect the second half to be with more release. As regard to the detail, they can be forwarded to you by our IR team.

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Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [49]

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Okay, just on the full year interest costs post-refinancing?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [50]

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Well, we have our interest cost, which is known for the first half of this year. We'll probably have some slight increase in the financial costs due to the bond we've issued in June, considering that the refinanced bond will be done on near the beginning of December. So we'll have a very good impact in 2020 from that pure side because this bond, which will be reimbursed in early December for EUR 700 million, is at the rate of 4.87%, I believe. So...

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Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [51]

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Okay, so for next year.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [52]

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That's all I can give you.

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Operator [53]

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(Operator Instructions) We take our next question from Tom Singlehurst from Citi.

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Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [54]

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It's Tom here from Citigroup. I had one question on UMG, obviously fabulous performance in the first half. But I did want to go back to the news in June about the -- about a buyer. I know it's a long time ago. I know you've been very clear in some of the public commentary about not having any financial impact. But it does look like there has been some sort of feathers ruffled with some of the artists. Can you just talk about the risk of that? And then specifically, whether any provision needs to be taken into account of any legal cost? That was the first question.

And then the second one on Canal+. M7 looks like a very sensible way of broadening the footprint. I was just wondering whether there are any more transactions along those lines that we should expect. I know in the last 18 months, there have been press reports that you're considering acquisitions in Africa. So I'm wondering whether there's any more we should be looking for in terms of international expansion from Canal+.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [55]

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Thank you for your question. As regard to your question number one, Sir Lucian Grainge has committed for full transparency to UMG's artists with respect to the status of its recordings. But it's important to note that the fire hasn't affected the commercial availability of music that was possibly stored in the vaults. But as regard to the legal process, which I'm not going to comment on. The thing which has been our position as regard to this matter is that we believe the law suit is without merit, and we do not expect any material impact on the business. Thank you. Question number two?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [56]

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Number two was about M7 and the possibility for Canal+ to do other acquisition in the coming 18 months. I would say it will depend clearly on the opportunities and the development at the international level. We have nothing very specific on the radar today, but it can happen in the coming quarters. It's always interesting to rely on the international development at Canal+.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [57]

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Globally when you put the current result in the context of what was said in 2015 as regard to Group Canal+, we have reorganized the operation in France, and we have kept good momentum on an international basis. If we were to be given the agreement to complete the transaction with M7, the Group Canal+ will then be comprised of more than 20 million subscribers. And as we already said, we at Vivendi with Canal+ are positive as regard to the prospects and the future of pay-TV. So any opportunities in due time that could arise and help us to be able to maintain the momentum by bolt-on acquisition done with strict financial discipline, that would be a project that we will work on with positive stance. Thank you.

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Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [58]

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One follow-on on that is just is there a geographic emphasis that we should look out for? Is Africa an area where you can do bolt-ons? So should we expect the focus to be closer to home?

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [59]

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No, not specifically, I would say we have.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [60]

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We have at international level, we've got Europe, we've got Africa, and we've got Asia. Those were all the 3 pillars of our priorities as regard to potential international development.

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Operator [61]

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We take our next question from Thomas Coudry from Bryan Garnier

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Thomas Coudry, Bryan Garnier & Co Ltd, Research Division - Financial Analyst [62]

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I have 2 actually. First one is a quick follow-up on the CFFO at UMG. I would like to know if you can give us some color on the contribution of the advances from platform topic versus the higher artist advances, one. And said otherwise, if it was only the artist advance impact, would we be actually growing the FFO or would still -- we still be down versus last year? And my question here is also should we look at this rising artist advance as a structural phenomenon in today's market, and thus expect CFFO generated by UMG structurally lower than in the previous years due to these new advances? That was my first question.

And my second question is actually on Telecom Italia. In the recent weeks or months, it seems that relationships between them, Elliott and Vivendi, at the Board are more peaceful, I would say. I would like to know if we can expect the Board to build a consensus around the major issues that Telecom Italia, such as network sharing, deal with Enel and also conversion of saving shares.

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Hervé Philippe, Vivendi SA - CFO & Member of Management Board [63]

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Well, I will take the one on CFFO of Universal Music. To give you just an idea of the advances to artists were more than EUR 100 million more important in the first half of this year than in the first half of 2018 due to the very specific, very good artists and proven artists that we have invested in. In fact, in my view, this is a very good news for Universal Music to develop this part of the business on proven artist to [fidelize] those artists and to make them work with us for the longer term.

You have also some information on the cash flow from operation and the seasonality of it, which is something which is very important at the group level because we have always more important CFFO in the second part of the year than in the first part, and this has in fact increased with the acquisition of Editis, which has also the same seasonality as at Havas and partly at Universal Music, too. So you have to consider that.

And frankly, I'm very, very confident in the possibility for Universal Music to have a very good CFFO. Keep also in mind that we have some slippage at the end of June for some dozen of millions of euros at that time. So the CFFO of the first part of the year is not really significant and comparable to the past.

Arnaud, do you want to answer on Telecom Italia with the music business?

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [64]

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So as regard to the Telecom Italia situation, as the first shareholder of the company, we've got a strong long-term commitment to the company. And we still believe that company has much greater potential than what is currently reflected in its share price. You know that Vivendi as #1 shareholder has always been with the pragmatic approach as regard to an approach based on the possibility to get Telecom Italia building strength around its network. And we are, as a shareholder, really ready to support any long-term strategic plan which will help Telecom Italia to regain the value that the company should be reflecting.

Post the AGM, end of March, there's been a kind of a call from the Amministratore Delegato Luigi Gubitosi as regard to the need to get better and efficient governance to create the best environment to support what he wants to implement. And we are absolutely aligned with this approach in the interest of all the shareholders.

As you have seen post the last Board of the company, there has been a first step with the arrival of Franck Cadoret at the level of the Board. And there's been also a rendezvous that has been stated by the company for the next Board on the 1st of August. So we expect the governance to be able to reach what we, at Vivendi, were -- are expecting, which is full transparency and efficiency in the context of the corporate governance of the company. And as regard to what is currently happening at Telecom Italia, we, at Vivendi, are supporting the different initiatives from the Amministratore Delegato and his team. And we are expecting to be able to build success for the company. Thank you.

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Operator [65]

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It appears there are no further questions.

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Arnaud Roy de Puyfontaine, Vivendi SA - Chairman of Management Board & CEO [66]

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No further question; I don't see any more on my screen. So I'd like to, on behalf of all of our team at Vivendi and Hervé, to thank you for your question, thank you for your interest in Vivendi and very much look forward in 6 months' time. Thank you very much. Bye-bye.

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Operator [67]

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