Technicolor: First Half 2020 Results
PRESS RELEASE TECHNICOLOR: FIRST HALF 2020 RESULTSParis (France), 30 July 2020 – Technicolor (Euronext Paris: TCH; OTCQX: TCLRY) announces today its results for the first half of 2020.Richard Moat, Chief Executive Officer of Technicolor, stated:“This first half of 2020 has been a period of intense activity for Technicolor. On the one hand, our teams have been working hard to face the Covid-19 crisis, and to adapt quickly in order to ensure the continuity of our operations and the ongoing delivery of our high value added services to our customers. On the other hand we have successfully structured a comprehensive financial restructuring plan, which will provide a much stronger framework for the long-term sustainability of the Company. The implementation of the restructuring plan is going according to schedule, with the first €240 million tranche of the New Money already received, the second €180 million tranche on its way following the approval of the Commercial Court of Paris on July 28th, and the two capital increases to be launched in the coming weeks. I am proud of the work done and I would like to warmly thank all of our teams, both internal and external, for their commitment and our shareholders for their support.
In the first half, the Group’s activities have demonstrated resilience to the Covid-19 pandemic. Our business units are well positioned to take advantage of the increased demand for original content, the strong increase in digital media consumption, and the significant growth in residential broadband access. We continue to have valuable assets and global leadership positions in each of our business units. We intend to become a stronger company for our employees and a stronger partner for our suppliers and customers. I am confident that there is a bright future ahead for Technicolor”First half 2020 results:After a strong first quarter, the Group’s activities have demonstrated resilience to the Covid-19 crisis in the second quarter:Production Services activities were most affected due to the halting of live action shooting, impacting Film and Episodic Visual Effects and Post Production. Increased demand in Animation and resilience in Advertising helped mitigate the impact of Covid-19;DVD Services were hit by the lack of new film releases following cinema closures, partly compensated by strong back catalog demand;After facing supply shortages, Connected Home’s Asian activities are now back to normal. Consumer demand for better broadband and wifi helped drive strong demand in the United States.Consolidated revenues for the Group were down 19% at current rates to €1,433 million, as the impact of Covid-19 on Production Services and DVD Services was partially compensated by an outperformance in Broadband, particularly in North America (+15% compared to the first half of 2019).The Group maintained a strong focus on the delivery of previously announced cost savings through the Strategic Plan, and is well on track to achieve total savings in excess of €160 million this year and €300 million by 2022. To date, €67 million of cost savings related to the Strategic Plan announced in 2020 have been achieved, whilst detailed plans are in place to achieve the remainder.The financial restructuring plan approved by the Group’s creditors, shareholders and the Commercial Court, provides a framework for Technicolor`s long-term sustainability. The first tranche (c. €240 million) of the “New Money” facility under the financial restructuring plan has been received, and the second tranche (c. €180 million) of the “New Money” facility should be received at the end of August by the Group.The updated outlook is broadly in line with the base case presented in the press release issued on June 22nd .First Half Year 2020 Key indicators from continuing operations:Figures at current rate, including IFRS 16H1 2020 Group updateSales of €1,433 million were impacted by Covid-19. Decline in demand in Connected Home linked to a slowdown in Eurasia, volume decline in DVD Services and lower activity in Film & Episodic Visual Effects were partially mitigated by a strong performance in Broadband, driven by higher demand in North America, as well as by Animation, which reported double digit revenue growth.Adjusted EBITDA of €53 million, down 49% at constant rates, was impacted by lower business volumes in Film & Episodic Visual Effects and in DVD Services related to Covid-19 activities interruption, partly compensated by operational and financial improvements across all divisions, particularly visible in Connected Home where Adjusted EBITDA grew 126% to €54 million at current rate.Adjusted EBITA of €(67) million was lower by €(23) million at current rates, mitigated by lower D&A and reserves.A €68 million impairment charge was booked, mainly related to DVD Services due to Covid-19 revised assumptions.Restructuring costs accounted for €(41) million at current rate, including €(17) million in Production Services on cost streamlining actions, €(15) million in DVD Services, mainly resulting from distribution sites optimization, €(5) million in Connected Home, pursuant to the three-year transformation plan, and €(4) million for Corporate and Other.Free cash flow1 of €(286) million was lower by €(24) million at current rate.Net debt at nominal value amounts to €1,607 million, and will be reduced significantly by the debt restructuring planned under the terms of the Accelerated Financial Safeguard (SFA) plan (see below).The Group is targeting €300 million in additional run-rate cost savings by 2022. At the end of June 2020 the group had already realized €67 million of these cost savings.OutlookThe trading environment remains highly uncertain – Covid-19 induced businesses disruptions are still affecting Production Services activities, in particular in North America and India. The outlook provided below relies solely on currently available market forecasts, and remains subject to changes in case of further evolution of the pandemic.Also, the financial restructuring undergone by Technicolor, and the very significant strengthening of its financial capabilities as a consequence, remain to be fully took into account by its stakeholders. This should improve, following the successful conclusion of the SFA process, which closed on July 28th. The outlook below does not not take into account any improvements coming from the restructuring. Conversely it does include some of the negative impacts associated with the entry into an accelerated financial safeguard procedure.
After a strong first quarter and a second quarter demonstrating a better than expected resilience, Technicolor expects: Adjusted continuing EBITDA of €169 million and Adjusted EBITA of €(64) million in 2020;Adjusted continuing EBITDA of €425 million and Adjusted EBITA of €202 million in 2022;It should be noted that more than €15 million of Covid-19 related cost will be included in the Group’s EBITDA in 2020.Continuing free cashflow (before financial results and tax) is anticipated to be in a range between €(115) to €(150) million in 2020 and will improve to €259 million in 2022. Following the entry into the SFA procedure, a faster than expected shortening of payment terms was requested by suppliers, which will lead to early payments in 2020 vs. the following year. This should impact 2020 and 2021, but mitigating factors will help 2021 to remain in line with strategic plan. The positive side of these changes is that the Group’s ambition to very significantly reduce payment terms by 2022 will be achieved as early as beginning of 2021. As these are timing adjustments, the Group’s liquidity needs remain unchanged overall. Update on the announced financial restructuring planOver the last few weeks, the Group has successfully accomplished the required steps to implement the announced financial restructuring plan:22 June: opening of the SFA;5 July: approval of the draft safeguard plan by the creditor’s committee;20 July: approval of the financial restructuring plan by a large majority of shareholders;28 July: approval of the SFA plan by the Commercial Court;As a consequence, the Group is preparing the partial debt equitization (up to €660 million) which, as announced, will include:a rights issue of the Company, with shareholders’ preferential subscription rights, for a total amount of €330 million, at a subscription price of €2.98 per share, fully backstopped by the Term Loan B and RCF lenders by way of set-off of their claims at par under the existing credit facilities; Bpifrance Participations will subscribe to the rights issue in cash pro rata its current shareholding (c. 7.56%) on a non-reductible basis (souscription à titre irréductible) for an aggregate amount of circa €25 million; any cash proceeds of the rights issue will be used in full to repay the Term Loan B and RCF lenders, at par value;a reserved capital increase of the Company, for a total amount of €330 million, at a subscription price of €3.58 per share, reserved for the Term Loan B and RCF lenders and which will be fully subscribed by way of set-off against their claims at par under the existing credit facilities;free warrants granted to New Money lenders (« New Money Warrants »), exercisable during 3 months, with an exercise price of €0.01 with a strike price equal to the nominal value of the shares and representing 7.5% of the share capital of the Company (after the capital increases and New Money Warrants exercise, but before dilution from the shareholders’ free warrants).shareholders’ free warrants,to be allocated to all shareholders providing proof of a book entry of their shares on the date retained for the detachment of the shareholders’ preferential subscription rights under the right issue, with a 4-year term, at the same price as the reserved capital increase (3.58 euros per share) and representing 5% of the share capital of the Group after all capital issuances (i.e. after capital increases, New Money Warrants exercise and shareholders’ free call options). Each existing share will be granted with 1 free warrant, and 5 free warrants will give right to subscribe to 4 new shares.These issuances have been approved today by the Board of Directors of the Company and will be subscribed according to the conditions detailed in the prospectus dated July, 10, 2020 approved by the French market authority (l”AMF”) under number 20-343 related to equity issuances as part of the Group Accelerated Safeguard Plan (the “Prospectus”). The Prospectus is composed of the Company’s 2019 Universal Registration Document filed with the AMF on April 20, 2020 under number D.20-0317 (“The Universal Registration Document”), of the Amendment to the 2019 Universal Registration Document filed with the AMF on July 10, 2020 under number D.20-0317-A01 (“The Amendment to the Universal Registration Document”) and a securities note (“the Securities Note”) (including the summary of the Prospectus).Due to, inter alia, the publication of the half-year financial report, the Prospectus will be updated and completed by a supplement, to be approved and published on August 4, 2020, according to current schedule (“the Supplement”).Copies of the Prospectus and the Supplement are and will be available free of charge at Technicolor’s registered office, -10 rue du Renard – 75004 Paris, on the Company’s website (https://www.technicolor.com) as well as on the AMF website (www.amf-france.org).Segment Review – First half 2020 Result Highlights(*) Figures at current rate, including IFRS 16Production Services revenues totaled €279 million, down 35.3% year-on-year at constant rate and down 34.8% at current rate, driven by the previously anticipated (pre-Covid-19) delays in awards coming from one key client, and mostly by the subsequent pandemic-related impacts on production around the world:
Film & Episodic Visual Effects: revenues were significantly lower year-on-year, mainly due to the anticipated reduction in studio tentpole volume in MPC Film referred to above, which was further amplified by the pandemic. VFX teams worked on approximately 20 theatrical films from the major studios, including projects like Cruella (Disney), Ghostbusters: Afterlife (Sony), Godzilla vs. Kong (Warner Bros./Legendary), Top Gun: Maverick (Paramount), and West Side Story (Fox/Amblin); and over 30 Episodic and/or Non-Theatrical (i.e., Streaming/OTT) projects, including The Alienist season 2 (TNT/Paramount), American Gods season 3 (Starz/Fremantle), Cursed (Netflix), Eurovision Song Contest: The Story of Fire Saga (Netflix), The Old Guard (Netflix). During the second quarter, Mr. X and Mill Film were merged under the Mr. X banner in order to consolidate resources and sales efforts.Advertising: lower revenue compared to the prior year due to the impact of Covid-19 on client spend and live-action production shoots, despite a strong first quarter driven by high Super Bowl demand (Technicolor contributed to over 40 commercials, including the two-minute opening film for the NFL). Technicolor’s Advertising businesses received numerous industry accolades during the latest quarter, including MPC winning VFX Company of the Year at the Ad Age Creativity Awards. In Televisual’s Commercials 30 annual survey voted on by Ad Producers in the UK, four of the Best Colourists Top 10 come from MPC or The Mill, including the top two colourists; while The Mill ranked #1 in the ‘Rated Highest’ and ‘Used Most’ categories in the Best Post Houses Top 10. Highlight projects delivered during the second quarter include EA Sports ‘Feel Next Level’, Heineken ‘Solar Power’, McDonald’s ‘Lights On’, Mercedes-Benz GLA ‘Surfer’, and PlayStation ‘The Last of Us Part II’. Animation & Games: double-digit revenue growth compared to prior year, due to higher volume in feature work-for-hire animation services, more than offsetting the Q2 temporary closure of the studio in Bangalore due to the lockdown in India. In the second quarter Mikros Animation delivered Paramount’s The SpongeBob Movie: Sponge on the Run and continues in production on Spin Master’s PAW Patrol: The Movie, while beginning production on two other animated features. In episodic animation, Technicolor completed delivery of Disney/Wild Canary’s Mira, Royal Detective and the latest orders from DreamWorks Animation on The Boss Baby: Back in Business and Fast & Furious Spy Racers; and maintains a strong pipeline from key clients;
Post Production: lower revenues compared to the prior year, driven primarily by declines in the North American facilities. Compared with the other service lines, Post Production was immediately impacted during the semester by Covid-19 from the sudden shutdown of productions globally, due to its reliance on receiving live-action footage (e.g., over 50 sets of dailies stopped overnight in March). During the second quarter, Post Production worked on projects like NOS4A2 (AMC), Private Eyes (Entertainment One), The SpongeBob Movie: Sponge on the Run (Paramount), Tiny Pretty Things (Netflix), and The Twilight Zone (CBS All Access).Covid-19 situation update:Starting from March 2020, Production Services Film and Episodic VFX took a major hit as all live-action film shoots were suspended and movie theaters closed. As a result, new projects were put on hold with a negative impact on the order book;Advertising activity weakened during the second quarter due to the global macro-economic situation, causing major advertisers to delay campaigns and reduce marketing budgets;Animation and Games activity, with the ability to efficiently continue production from home and without the dependency of live-action film shooting, had a strong topline performance in the first half versus the year-ago period despite the temporary shutdown of the Bangalore studio;Post Production was also significantly impacted by the live-action production stoppages, but is expected to ramp-up to normal operations more quickly than Film and Episodic VFX once key clients re-start production;Production Services organized itself to be able to deliver on existing contracts and take new ones with as much as possible of its workforce working remotely. Main impediments came from the strict lockdown in India and progressive ramp-up of work from home capacity. This resulted in idle labour costs and related fixed costs, as many Technicolor artists were either not able to work or had no work. On the other hand, the Group benefitted from government support for furloughed employees in Australia, France, Canada, US and the UK;As key industry participants anticipate productions to restart filming in the third quarter (some smaller productions have already restarted; while major studio pictures are relaunching productions in locations that have been successful in their Covid-19 responses— e.g., the Avatar films in New Zealand) and theaters to reopen progressively over the second half of 2020, Technicolor has adapted its workforce to the reduction of the market and therefore increased its efforts in restructuring its cost base.Adjusted EBITDA amounted to €2 million, or 0.8% of revenue, down €79 million year-on-year. The Adjusted EBITDA reduction was mainly driven by Film & Episodic VFX. This negative evolution has fully impacted Adjusted EBITA compared to prior year.(*) Figures at current rate, including IFRS 16DVD Services revenues totaled €302 million at current rate in the first half 2020, down 20.3% at constant rate and 19.3% at current rate compared to 2019, primarily due to lower volumes across all formats driven by year on year secular decline and the impact of Covid-19, which impacted the second quarter 2020. Total combined replication volumes reached 326 million discs, down 27% year-on-year. Nevertheless, back catalog volumes were considerably higher than antipated during the Covid-19 crisis, which partially mitigated the loss of the new release volumes.
Standard Definition DVD volumes were down 26% in the first half year-on-year driven by overall expected demand reductions for the format, compounded by a comparatively weaker release slate for selected major studio customers as compared to first half of 2019;Blu-rayTM volumes were down 25% year-on-year on similar drivers as DVD;Ultra HD Blu-rayTM volumes were down 24% year-on-year;CD volumes were down 39% year-on-year.As a result of ongoing industry-wide pressures, DVD Services continued its structural division-wide initiatives to adapt distribution and replication operations, and related customer contract agreements in response to continued volume reductions. Multiple successful contract renegotiations were announced in 2019, and similar efforts with other customers are ongoing.Volume data for DVD ServicesCovid-19 situation update:The impact of the stay-at-home orders varied by region (i.e. by country, state, and city) and in timing/duration. The level of retailer shutdowns varied by country / region, but where retailers were open, catalog sales were relatively robust. Online sales were strong after a brief slowdown in demand as e-tailers temporarily adjusted their supply chain for increased activity for essentials;Some production facilities were impacted by short term closures and temporary staffing shortages, but the overall impact was low;The level of ongoing impact throughout 2020 and beyond will be dependent on the extent and duration of ongoing restrictions (driven by rate of new Covid-19 case growth). The specific timing and extent of the reopening of movie theaters will impact the level of new release activity on disc. DVD services has accelerated certain aspects of its future restructuring plans in an effort to adapt to these impacts.Adjusted EBITDA amounted to €1 million at current rate, or 0.5% of revenue, broadly in line with expectations given the anticipated volume reduction and normal seasonal weakness in the first half. Margin was bolstered by ongoing cost savings and a positive impact from contracts renegotiated in 2019.###
