Vocento S A : C. Call Results 1H20

CONFERENCE CALL

TRANSCRIPTION

29 JULY 2020

Investor Relations

Transcription of Conference Call on 1H20 results

LUIS ENRÍQUEZ

Good morning and welcome to our conference call on 1H20 results. In the 1Q call we already discussed the Covid pandemic and the impact it could have on our top line, as well as the cost measures that we were taking in response in areas such as personnel expenses, fixed salaries and bonuses across the group. At the time of implementation of our response plan, we expected an even worse outcome and we carried out a stress test to test the limits of our financial and industrial capacity. In fact, with each month that goes by we are moving further away from these limits and we are seeing improvements both in costs and in revenues. In June and July we were almost in line with our forecasts from the beginning of the year.

Before going into more detail about the numbers, we should note that these trends could become meaningless depending on possible outbreaks in August and September, as there are already some signs of lockdowns of varying degrees and some borders closed. So everything could change in two weeks. I know you are all aware of this, but we need to recall that this conditions everything that I will say about the possible outlook for the rest of the year.

Despite everything, Vocento recorded a drop in circulation revenues of 9% in 1H, after 15% in the quarter of greatest impact from Covid. By reducing some fixed costs and controlling marginal costs, we were able to exceed our budget targets for the margin on circulation in each of the months in 1H, not just in 1Q but in April, May and June. This will also be the case in July. So while circulation revenues fell by 9% in 1H, we offset this decline with cost measures and the margin fell by only €800,000. This is better than our expectations at the beginning of the year, when we finalised our budgets.

In advertising, we saw a decrease of more than 30% in 2Q, mainly in April and May. In June advertising fell by 21% to 25%, while in July we are expecting a decline of 3% YoY. In July we saw some advertisers return, and they are already planning their campaigns for September, especially in magazines. Although we do not know what will happen in the rest of 2020, if this trend continues of converging towards last year's figures then we will be back on track with our original budget. There has been a major contribution from branded content and from campaigns focused on reputation, branding and corporate responsibility rather than on sales of products and services. We have been able to respond to the advertising needs of our major advertisers, and the contribution from branded content has been huge. In programmatic advertising, we overhauled our pricing structure after the initial collapse of unit prices and were able to restore prices. In programmatic advertising, it is straightforward to increase unit prices for digital and we are now recording figures that are higher than last year's numbers, not only in open auctions in the months of April and May, but also in private. This shows that quality advertising is returning to normal.

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Investor Relations

Transcription of Conference Call on 1H20 results

I also want to highlight the performance of Classified advertising. In June we were seeing similar declines, of around 21%, while in July the decrease was just 4%. If this return to our target range continues, it will be thanks to the major effort that we have made to maintain our market shares and client portfolios, preserving our Classifieds business intact for the summer and for the years to come.

Moving to one positive impact of the crisis, the increase in subscriptions, there was a rise in ON+ subscriber numbers at all our regional newspapers. This major increase is now stabilising in line with our expectations. We have three advantages for the rest of this year and for the future.

1. The government has confirmed it will adopt the European rules for reduced VAT. This will support ON+ revenues.
2. We still intend to raise prices in 3Q and 4Q, to be in the market range of around 7 to 10 euros, including the reduced rate of VAT.
3. We will also launch ON+ at the three remaining regional newspapers and at ABC in September. Then we will have completed the full roll-out of the paid service, as defined in our strategic plan one-and-a-half years ago. This will deliver significant opportunities for us, such as compensating for falling margins on print circulation.

In northern Spain, our print editions have performed exceptionally well compared with last year, even recording increases in revenues, as fewer points of sales were shut down and the impact of Covid was less than in Madrid and southern Spain. However post-lockdown this trend has unwound and the performance, while still better than in the south, is more in line with previous years, declining by single digits. So we are no longer defying gravity in northern Spain.

Finally, cost controls. Some of these are temporary, such as the reductions in salary expenses thanks to the ERTE agreements which expired in July. When we explained the ERTE furlough plan to our workforce, we explained that these cuts would only be applied when they were absolutely necessary. Our workforce and their official representatives have responded in an exemplary manner. Some cost cuts will become permanent. At the Board we will discuss measures to extend working from home and to continue these cost cuts into the last quarters of the year and into the future.

Joaquín Valencia will now discuss the financials and tell you about our cash generation in more detail. When he has finished we will take any questions you may have.

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Investor Relations

Transcription of Conference Call on 1H20 results

JOAQUÍN VALENCIA

Many thanks Luis. Luis has summarised nearly everything, so I will just give some more detail about the performance at regional, ABC and at group level, and also about the financial side.

Looking at the regional newspapers, let me highlight the strong performance of the margin on circulation. We were able to offset nearly all of the fall in revenues with cost savings, maintaining the margin almost stable. As Luis said, if we add the margin we are receiving from ON+ digital subscriptions, we can see that at group level the margin from circulation revenues plus the margin from ON+ in the year has fallen by only 0.4 million euros. Our long-term strategy is to continue to offset decreases in print margins with the margins that we generate from the ON+ digital service.

In contrast, ABC was not able to offset the fall in the circulation margin, and combined with the decrease in advertising this resulted in a lower level of EBITDA. Please note that the main factor in the decline in the circulation margin was the 9% rise in the paper price in 1H. We expect this to normalise in 2H, when we should see the paper price falling below the level of 2H19.

Luis has already summarised the performance at Classifieds. Our strategy is to look to the long-term rather than the short-term. This means that we have accepted a decrease in profitability because of Covid, in order to defend our market share or increase it. In fact we have been able to increase our customer base at Sumauto, reinforcing the business in the long-term and accepting a small drop in profitability in a difficult 1H. We believe that this strategy will increase our market share in the long- term.

At the company level, Luis has already explained the fall in EBITDA, which was mainly a result of the fall in advertising and was partly offset by multiple savings in variable costs and sales costs. We have saved personnel costs using the ERTE mechanism, so our EBITDA performance has been acceptable. In 2Q we managed to record positive EBITDA, which is very positive and was not easy to achieve.

In terms of cash generation, 1H20 was satisfactory, while Net Financial Debt excluding leases such as the one for the new building in Madrid was practically stable - the increase of 15.5 million is due mainly to the Madrid offices. In the first quarter and in the second quarter we generated positive ordinary cash flows, totalling 6.6 million euros in 1H, and recorded a moderate level of leverage, at 1.7x including leases and 1.2x without. We are comfortably in compliance with the covenants of the syndicated loan. Looking at liquidity, we have fully unused credit lines (45 million plus 23 million in cash) and are in a very comfortable position. To reinforce our liquidity we concluded two ICO loan agreements for a total of 11.2 million euros. These loans are of 1-5 years and are attractively priced, diversifying our sources of financing.

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Investor Relations

Transcription of Conference Call on 1H20 results

Moving to the P&L and looking below the EBITDA line, we have complied with the recommendations from ESMA and other organisations, with all our companies reviewing their intangible assets for possible impairments. These have included all the tax credits, all goodwill and all the brand licences. The only impairment that we have identified is 3 million euros at Federico Domenech, in addition to the regular 1 million euros writedown we make at the film catalogue because of the expiry of the film rights.

Those are the main points of the 1H performance. We will now open the Conference Call to any questions you may have.

Q&A SESSION

JAMES MCKENZIE - FIDENTIIS

Good morning and well done for the results, which seem to reflect a massive effort on the cost side, so very well done.

First I would like to ask Luis about the outlook for advertising in July to September. I think you mentioned 3% advertising growth in July, but I am not sure I heard correctly.

And also the outlook for advertising in Vocento media in 2H, assuming there is no second wave.

I also wanted to ask about the events business and the agencies. It does not seem that mass events are possible without a vaccine. How do you see the future of these businesses? In 2H and the medium-term, will they generate what they have generated in the past? For the agencies, where it is not so clear if physical presence is necessary, how do you see the future of this business?

Lastly, I wanted to confirm that you spoke of increasing the prices for ON+ to 7 to 10 euros per month, from 4 currently, is that right? So three questions in all.

L.E.: Thanks for your comments James. Let's answer your questions one by one.

I said that for July we are expecting a decrease of 3%. We have not closed the month yet but it should be around that. What I said was that the curve was converging with last year. The next step is to get closer to our targets for advertising. For EBITDA we are already achieving our budget, so we are performing in line with our expectations from the start of the year. We are no longer working to an emergency budget. In terms of

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Transcription of Conference Call on 1H20 results

an outlook for the end of the year, I think that any future lockdowns will be local, maybe in certain regions or at certain times, but they will not be as radical as a second national lockdown. If that does occur, it might be limited in regions or in time periods or in activities, and this could impact our outlook. I find it hard to make more detailed forecasts than to say that, if things continue as they are, we are seeing normality or near-normality in July and we have positive indications. We will have to see what happens by September. A return to normal life would take us closer to our budget and give us peace of mind.

In the events area we have been trying to transform the business. There are two parts to this. Firstly, we organise events that comply with all the necessary safety measures. Events will come back and life will come back. We saw this at the ceremony for the Cavia awards. The King and Queen were here, as well as many members of the Government and all the opposition, plus important figures from culture, the arts and sports. We were able to bring them safely here to the opening of the new building and transmit the message that we are cautious but we will continue to organise events.

Secondly, as I said on the last call, we are converting and adapting our events. We have already started in the Gastronomy area, with a new format, Gastronomika Life, with 15,000 registered guests. So we are inviting specialists to participate in online conferences for registered users only, using the technology we used at the Congreso de los Dos Mares. Margins are lower but are not disappearing. We are maintaining 60% to 80% of the margins. For the Gastronomika event in San Sebastián, which is more or less confirmed, we are preserving more than 70% of our margin. Events will be mixed, with some physical presence, using all the safety measures needed, and some virtual elements such as the Congress. We think there will be opportunities from moving to virtual, as we can make the most of user registrations to make sales or to win subscribers, as well as to extend the event brand internationally.

We are trying to transform the area. We have the technology and there is a lot of potential. We have had to invest some of the capex that we wanted to save, but the transformation of our events division and in particular of Gastronomy has never stopped. We never implemented an ERTE agreement sending everyone home in the events business because of any lack of activity. We have maintained the business since the beginning and will continue to do so.

Moving to the Agencies, we expect to see a comeback as advertising returns and as our clients start promoting cars, sponsoring events and rolling out strategies to capture more customers with strategic marketing. As marketing and advertising come back at our clients, this activity will return. I can tell you that the teams at Tango and Pro Agency are doing a fantastic job in maintaining their client portfolio. We are not overly concerned, as this business is very linked to marketing and marketing will come back. In fact it is already coming back.

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Investor Relations

Transcription of Conference Call on 1H20 results

J.M.:At the Agencies it has always seemed to me to be a very physical business, where people work together physically. Is that the case or are there more possibilities than other areas?

L.E.: The agencies are creating specific content and creating stories for brands which have their own content, as well as distributing content on social media or on our own media. It is true that there is a presential element, but if you create a campaign using Minis in the Madrid metro, your purpose is to record it - you are not closing the Retiro for people to see it in person. Everything that goes into content creation for brands does not require physical presence. The activity of the agencies goes beyond events, which is another part of our business. What Tango and Pro Agency do is 360 strategic marketing, so this business has more to do with the return of marketing and advertising to companies than with the events, which are continuing as I said before. We are not sure that events will return to what they used to be and we are trying to create an events business for the future.

Moving to ON+, our prices are at the low end of the range, so now we are charging

4.95 euros and we will increase this by around €2. The starting price for ABC will be at the higher end of the range, as it is a national title. The price factor is very important for us in digital advertising and in content sales. We were the first. We have been implementing and developing our premium strategy for more than 4 years at some of our newspapers. Now we are adapting, with prices in the low end of the range but still in the range.

J.M.:Many thanks, very interesting.

L.E.: You're welcome, thank you James.

IÑIGO EGUSQUIZA - KEPLER CHEUVREUX

I.E.:Hello Luis, Joaquín and Javier, thanks for the presentation and for taking my questions. I have three questions.

I am a bit surprised by the advertising data you shared for July, a fall of only 3%. Could you clarify what is happening with new campaigns or new advertisers? I am interested to find out what is going on as we have not seen a recovery in many sectors in July. That is my first question.

The second is about opex and the efforts you are making there. Could you quantify how much is temporary, such as the ERTEs, and how much is permanent, and give a percentage?

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Transcription of Conference Call on 1H20 results

The third question, if I understand you right Joaquín, is about the one million euros impairment for the film rights and the three million euros from another business which I did not understand.

And finally the fourth question is the usual one about consolidation. Luis, could you give us an update about this? Covid will impact many companies severely, and even if we hopefully recover quickly, this could accelerate consolidation in many sectors. Could this also occur in the media sector? Thanks.

L.E.: Thanks Iñigo. In advertising, we are reporting what we are seeing and recording. There are some sectors such as automotive and telecoms which are testing new campaigns in July, and depending on the response and the situation in September they could return to the advertising market with their usual strength. But I should stress that all of this depends on how the situation unfolds. I want to share with you all the visibility I have and I will not hide behind the "I have no visibility" screen, but on the other hand I also want to be very cautious. Everything depends on things outside our control. However, we are seeing a rebound in automotive and telecoms, with an eye on September. We will have to wait and see. So far, our figures are the ones that I have shared with you.

The temporary savings are mainly the ERTEs. In June and July they saved us around two million euros a month. Everything else, except for leases which come below the EBITDA line, should be permanent savings. And we will respond again, depending on future Covid lockdowns that could be restricted to regions, sectors or times, and respond as we have done before. So apart from those 2 million euros, everything else should be permanent, and there are other measures we could take if necessary.

The impairment is for Las Provincias, in Valencia. It does not mean that it is underperforming the other newspapers, as in fact it is the best performing of the newspapers in southern Spain. It is because we accumulated a large amount of goodwill when we acquired the newspaper back in 2008. Over the last nine years we have recognised impairments and now we are going further with that. When we make forecasts about the business and goodwill for our auditors, we are conservative and this is the result. It does not mean that the asset is not performing well or is underperforming, in fact it is doing reasonably well.

J.V.: And there is a million euros at Veralia Distribución, which is the film catalogue, where we regularly make writedowns. Last year it was 1.5 million euros for the whole year. This year 1 million euros in 1H. We always say that this catalogue is a coal mine from which we are extracting coal and depleting the seam. When the rights expire, the value will be zero. This is all planned and has been agreed with the auditors.

L.E.: And turning to consolidation, everything is as it was before. We do not expect major movements. But as you said, I do not know how the others are doing, only how we are doing. I do not want to think about what it must have been like for other

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Transcription of Conference Call on 1H20 results

companies with a sporting newspaper, plus the change in advertising legislation for gambling. I suppose that any scenario of weakness will result in companies assessing changes to their plans and strategic intentions. But for now this is not happening.

I.E.:Okay, many thanks.

L.E.: Thank you.

DAVID GONZÁLEZ - SHAREHOLDER

D.G.:Good morning, I wanted to ask you about your forecasts for ON+. I think you said that there are 53,000 subscribers at the regional newspapers with an active paywall. Will you update the forecast for the total for all the newspapers, when the remaining regional newspapers activate the paywalls and also ABC? Do you have a combined forecast for when all the paywalls will have been launched, including at ABC? A total forecast for 2020 or 2021. Thanks.

L.E.: The forecast for 2020 will depend on the launch and on what is happening at the time. In principle it looks promising for ABC, given the level of registrations we have recorded since we locked some content for registered users only. The launch at the other regional newspapers will be in line with what we have seen at the rest. The only thing is that in the current market conditions and with the current uncertainty, normally we try to transparent when sharing data, but now I would wait until the actual launch and wait to see how the newspapers are performing before giving an estimate for the year. Probably we will give an estimate when we release our 3Q results, if we can provide a solid number.

D.G.:You had a forecast of 72,000 for the whole group, so is that being reduced?

L.E.: No, not at all, as we have seen an acceleration with Covid. We recorded a surge in subscriptions when we were charging a promotional price of €1 for one month, with 70% of new subscribers remaining with us. So the forecast will definitely not be lower. When I spoke about 75,000 adds, that was for 2022. Everything will accelerate. We were not aiming for the end of 2020 but for 2022. How much will it accelerate? We prefer not to give a number until we can be clearer in November.

D.G.:Perfect, thank you very much.

L.E.: Thank you.

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Transcription of Conference Call on 1H20 results

FERNANDO ABRIL - ALANTRA

F.A.:Hello, good morning and thanks for the presentation. I have a couple of questions which follow on from some previous questions. Looking at costs, I am not sure if my calculations are right, but you managed to offset 75% of the fall in revenues by cutting costs, I think you said by around 50%. In H2 you said there will be some down winds, Joaquin mentioned the cost of paper, and some head winds from the winding down of the ERTEs, so how much do you expect to save compared with the fall in revenues? A range like you gave for 1Q. That is my first question.

My second question is about getting some more colour at Classifieds. If my sums are right, revenues fell by 40% in the quarter and EBITDA was down by 80-85%, I know that part of this is because of the market performance and part because of your strategy. Could you give us some guidance about H2, with the market as it is? Will you implement a more proactive price-cutting strategy to win clients or retain clients? What we can expect from this business in H2?

That's it, you have already answered my other questions.

L.E.: Thanks Fernando. For cost controls offsetting the fall in revenues, this depends on a number of factors outside our control in the second half of the year. But when we spoke of cuts of above 50%, we are taking about a minimum. We will not rule out that we will cut costs by more than 50%. The mechanisms we have are limited. It is not possible to carry out ERTEs one after the other, you cannot ask the workforce to accept pay reductions of 40% and 25% time and time again, as this would damage the corporate structure. We also have to match what is happening in the market and in society with what we do inside the company. For cost cuts, we have other levers. We can adjust our sales margins up and down, and now we are proposing to our sales teams to use different margins depending on what happens in 2H. I would be delighted to pay those margins if they achieve the targets. There are other levers. The drastic ones such as an ERTE reducing salaries by 25%, well I am not sure we could use those measures every time we run into a difficult situation. But we will never allow any fall in revenues not to be offset by at least 50% by cost cuts. We have managed 75%. I said at least 50% on the last call. We monitor costs continuously. I hope I have been clear.

F.A.:Yes, great.

L.E.: At Classifieds, everything that comes back to normal, e.g. in automotive, which performed a bit better than real estate in July, and returns revenues to normality, will help us return to our strategic plan. That is where we will be. The strategic plan has not changed. As I said before, for Events the rules of the game have changed and we will adapt and anticipate, but at Classifieds we do not expect a change in the rules of

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Transcription of Conference Call on 1H20 results

the game or in our strategic plan. As revenues converge to our plan, there will be no changes from the plan. I said this at the last call and I will say it again. We are not worried by our prices. The price cuts you mentioned were those that we implemented in March and April to support clients. We cut prices before the market. Our client portfolio is practically intact or even larger. Our market shares are intact or higher. We have the opportunity to improve all of our market shares based on the guaranteed presence we have achieved, supported by the media we have in the regions. In each of the two markets, we have to be leaders in the regions where we have a leading newspaper, and that is what we are working to achieve. Everything continues to be in place for this.

F.A.:Okay, I would like to ask one more question. Looking at the 3% fall in advertising you mentioned, can you break this down into online and offline? Is offline worse, or are the two sectors similar?

L.E.: In print media we are seeing a fall of around 9.5%, while digital media is up 4.2% compared to last year.

F.A.:Okay, many thanks.

L.E.: Thank you.

FERNANDO CORDERO - BANCO SANTANDER

F.C.:Hello and thanks for taking my two questions. The first is about your strategy for subscriptions and is about how Kiosko y más and ON+ will coexist and your strategy for this.

L.E.: They are two different products. One thing is ON+, which is the website and the news feed. Another is the newspaper, which can be either physical or distributed for tablets using Kiosko y Más. Normally our strategy is for the print subscriber to have everything, including both Kiosko y Más and ON+, while the Kiosko y Más subscriber has ON+ and the ON+ subscriber has just ON+. We intend to roll out a strategy for capturing and retaining clients, which is something we have seen especially in the US, and to make bundles. Subscriptions to the print edition will probably be limited to weekends and linked with ON+ subscriptions for weekdays, and this subscription could be adapted for Kiosko y Más. Our aim with this approach is to bundle our products and maximise the margins for the products delivered by our editorial teams. We will see promotions from the third quarter.

F.C.:I understand the strategy somewhat. Also about ON+, I wanted to understand the reason for the slowdown in the second quarter, after the acceleration in 1Q.

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Transcription of Conference Call on 1H20 results

My other question is about the diversified areas, and about how the Government's Digital Agenda for 2025 could lead to opportunities to become more active or to diversify in online education.

L.E.: At ON+, there was an incredible demand for information and we saw this across our websites, so we launched a promotion. There was some debate as to whether the paid media should be free because of the crisis. We were always clear that an accessible price was the way to go and we maintained our strategy. We also launched a strategy to capture subscribers for one euro a month, which worked very well, with increased traffic and increased demand for information. The good news is that the retention of those customers has been around 70%, well above the level of similar campaigns. Of course, this demand for news and the promotion did not last for ever. So we have returned to a more moderate pace of net adds, similar to the level before March but still retaining the new users who joined in March.

For us, diversification is permanent. It goes beyond the Government's agenda for 2025. We are always on the look-out for areas to diversify in, which are in some way connected to our company's business. They must be businesses which can thrive alongside our core business of information. I have said before that education, online or not, is one of the areas that would perfectly match our aspirations for diversification. So yes, as we look into any of these businesses we will report back. There are assets related to training and education which would complement our portfolio very well, whether online or not.

F.C.:Very clear, thanks Luis.

L.E.: Thanks Fernando.

Many thanks to everyone and enjoy the summer.

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