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Back to basics on driving business performance

Technicolor 19 November 2020 Update
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Technicolor

Back to basics on driving business performance

Q3 results

Media

19 November 2020

Price

€1.77

Market cap

€397m

Net debt (€m) at end September 2020, IFRS

955

Shares in issue

224.4m

Free float

100%

Code

TCH

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

50.1

(33.0)

(91.9)

Rel (local)

34.7

(39.9)

(91.3)

52-week high/low

€21.61

€1.16

Business description

Technicolor is a worldwide technology leader operating in the media and entertainment industry. Its activities fall in three business segments: Production Services, DVD Services and Connected Home.

Next events

FY20 results

11 March 2021

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Dan Gardiner

+44 (0)20 3077 5700

Technicolor is a research client of Edison Investment Research Limited

With the financial reconstruction complete and the group’s credit ratings upgraded as of end-September, Technicolor is now focused on improving its underlying profit and cash generation. The Q3 narrative was in line with earlier updates: Connected Home benefiting from the strong demand for reliable home broadband and Wi-Fi; Production Services seeing a partial resumption of live action filming; and DVD Services held back by the lack of new releases. Run-rate targeted cost savings have been edged ahead to €325m by FY22, up €25m. FY20 and FY22 guidance, and our revenue and EBITA forecasts based on that guidance, are unchanged.

Year end

Revenue (€m)

EBITDA
(€m)

EBITA
(
m)

PBT*
(€m)

EPS*
(€)

EV/EBITDA
(x)

12/18

3,988

266

98

7

(3.07)

5.1

12/19

3,800

325

42

(73)

(4.92)

4.2

12/20e

3,100

169

(64)

10

(0.08)

8.0

12/21e

3,460

338

104

(21)

(0.18)

4.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Divergent segmental performances

Q3 revenues from Connected Home were ahead 10.6% year-on-year at constant currency rates. Growth was particularly strong in North America (+41% q-o-q), with cable customers upgrading their kit to cope with the demands of working from home and more entertainment consumption. The impact of COVID-19 on Production Services has continued to be severe, with little live action filming in Film and Episodic during the quarter. Revenues were down 51.6% year-on-year and adjusted EBITDA dipped to a small loss of €2m. There are signs that the situation is improving, with the pipeline filling and insurance and union agreements facilitating a return to filming. DVD Services’ Q3 revenue was down 22.7% on Q319, reflecting the paucity of new film releases, although adjusted EBITDA margins increased to 14%, from 12% last year, as the benefit of renegotiated contracts kicked in.

Improving free cash flow

Free cash flow guidance for the current year remains at an outflow of €115–150m, which implies a strong Q4 in this respect. Year-to-date free cash flow to end September was an outflow of €335m, implying a strong inflow in Q4. Management’s target is to be free cash flow positive to the tune of €259m in FY22. Cost savings remain on track for achieving €160m for the current year, with €109m realised by end September. The permanent workforce has been reduced by nearly 30% from the previous year-end. The target for savings by FY22 is edged up slightly by €25m to €325m. IFRS net debt at end Q3 was €955m (€1.04bn nominal), on average interest rates of 8.3%.

Valuation: Off the lows

The share price bottomed out at €1.16 in late of September, with completion of the financial reconstruction. We would expect it now to start better reflecting underlying trading prospects, albeit that the equity remains dominated by the value of the debt. News flow on improving conditions in Production Services, which carries strong longer-term performance potential, should help the share price recovery further.

Focus back on underlying performance

The combination of a complex financial reconstruction and a global pandemic has been demanding, but one is now completed and there is hope that the other will have a less dramatic impact on the business in FY21 and on.

Exhibit 1: Summary results for continuing operations

Q320

% change

YTD

% change

Revenue (€m)

Production Services

111

-52%

390

-41%

DVD Services

193

-23%

495

-21%

Connected Home

488

11%

1,327

-5%

Other

6

N/A

18

N/A

Total

798

-16%

2,230

-18%

Adjusted EBITDA (€m)

Production Services

(2)

N/A

0

N/A

DVD Services

27

-10%

29

-31%

Connected Home

31

N/A

85

N/A

Other

(3)

N/A

(8)

N/A

Total

53

-45%

106

-47%

Adjusted EBITA (€m)

Production Services

(24)

N/A

(75)

N/A

DVD Services

15

37%

(14)

28%

Connected Home

15

N/A

35

N/A

Other

(4)

N/A

(11)

N/A

Total

2

-97%

(65)

N/A

Source: Technicolor

Strong US demand for Connected Home

Connected Home has now surpassed its original pre-COVID-19 budgets for the year, buoyed by particularly strong demand from the North American market as customers upgrade to meet their greater domestic needs. North America has generated 56% of segmental revenues over the first nine months of the year. Elsewhere, the trading situation has been more difficult, with lockdowns affecting the ability to access premises in Europe, Asia-Pacific with strong comparatives, and some supply constraints and currency weakness undermining price competitiveness in Latin America. Broadband and Android-based solutions are driving the growth, with video broadly flat.

The benefits of cost cutting are now showing through more strongly, with an adjusted EBITDA margin for the year-to-date of 6.4%, from 1.9% over Q1–Q319.

DVD Services margin improvement in weak markets

The lack of major releases across all formats continued to have an impact on the DVD Services segment, as it had in Q220, with revenues down 23% at constant currency. Catalogue sales have held up better than had initially been expected, given the constraints on the retail sector globally in the pandemic. There will be some lag before any boost from the front list, particularly since several anticipated blockbusters scheduled from the studios have gone straight to streaming rather than theatrical release.

A more aggressive stance on site closures and costs helped improve adjusted EBITDA and EBITA margins, as did earlier contract renegotiations with major studios. That with Paramount has not been renewed, but the distribution part of the agreement has been extended.

Production Services seeing first glimmers of green lights

Film and Episodic productions have moved back into tentative production in Q3, but at small scale. The US studios have now reached agreements with insurers and the unions on how to proceed. Planning is therefore now starting to step up and the pipeline is building encouragingly for FY21, with some productions that are particularly heavily skewed to computer graphics on the slate. The management team has been realigned internally. They have been tasked to deliver greater leverage of the group’s brands and technical capabilities, while delivering a better return in terms of profits and cash.

Updated earnings estimates

We have revised our estimates to incorporate Technicolor’s adjustments to its financial figures following the completion of the financial restructuring, with new debt and equity accounted at fair value as opposed to the nominal values announced during the transaction. While these adjustments only have a small impact on the cash flow, the income statement has been more visibly affected, due to a $164m one-off charge as well as some interest adjustments, all predominantly non-cash. We have also adjusted the number of shares to bring it in line with the latest disclosure. These changes have brought our PBT and EPS estimates lower. However, we maintain our underlying segmental assumptions.

Exhibit 2: Financial summary

€m

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

3,988

3,800

3,100

3,460

Cost of Sales

(3,521)

(3,375)

(2,841)

(3,042)

Gross Profit

467

425

259

418

EBITDA

 

 

266

325

169

338

EBITA

 

 

98

42

(64)

104

Amortisation of acquired intangibles

(81)

(54)

(59)

(59)

Exceptionals

(127)

(79)

(145)

(20)

Reported operating profit

(119)

(121)

(268)

25

Net Interest

(51)

(84)

(90)

(125)

Joint ventures & associates (post tax)

0

(1)

0

0

Exceptionals

0

0

164

0

Profit Before Tax (norm)

 

 

7

(73)

10

(21)

Profit Before Tax (reported)

 

 

(170)

(206)

(194)

(100)

Reported tax

(54)

(3)

(20)

(20)

Profit After Tax (norm)

(47)

(75)

(10)

(41)

Profit After Tax (reported)

(224)

(208)

(214)

(120)

Minority interests

(1)

0

0

0

Discontinued operations

157

(22)

(20)

0

Net income (normalised)

(48)

(75)

(10)

(41)

Net income (reported)

(68)

(230)

(234)

(120)

Average Number of Shares Outstanding (m)

15

15

120

224

EPS - normalised (c)

 

 

(306.94)

(492.18)

(8.41)

(18.10)

EPS - normalised fully diluted (c)

 

 

(306.94)

(492.18)

(7.33)

(16.77)

Dividend per share (c)

0.00

0.00

0.00

0.00

Revenue growth (%)

(6)

(5)

(18)

12

Gross Margin (%)

11.7

11.2

8.4

12.1

EBITDA Margin (%)

6.7

8.6

5.4

9.8

EBITA Margin (%)

2.5

1.1

(2.1)

3.0

BALANCE SHEET

Fixed Assets

 

 

2,101

2,082

1,761

1,625

Intangible Assets

1,591

1,483

1,274

1,140

Tangible Assets

233

476

364

362

Investments & other

26

40

40

40

Deferred tax and other

251

84

84

84

Current Assets

 

 

1,659

1,126

1,365

1,470

Stocks

268

243

208

232

Debtors

677

507

558

592

Cash & cash equivalents

291

64

286

333

Other

423

312

312

312

Current Liabilities

 

 

(1,909)

(1,542)

(1,343)

(1,367)

Creditors

(1,135)

(825)

(694)

(718)

Tax and social security

(34)

(41)

(41)

(41)

Short term borrowings

(20)

(95)

(81)

(81)

Other

(720)

(581)

(527)

(527)

Long Term Liabilities

 

 

(1,385)

(1,604)

(1,532)

(1,578)

Long term borrowings

(1,004)

(1,203)

(1,131)

(1,177)

Deferred tax

(193)

(27)

(27)

(27)

Other long-term liabilities

(381)

(401)

(401)

(401)

Net Assets

 

 

466

62

251

149

Minority interests

1

0

0

0

Shareholders' equity

 

 

467

62

251

149

CASH FLOW

Net profit

(224)

(208)

(214)

(120)

Depreciation and amortisation

234

322

292

281

Working capital

2

(69)

(202)

(33)

Tax and interest

(53)

(76)

(90)

(81)

Exceptional & other

159

101

21

145

Net operating cash flow

 

 

118

70

(193)

192

Capex

(113)

(169)

(110)

(145)

Acquisitions/disposals

1

(2)

0

0

Equity financing

0

1

60

0

Dividends

0

0

0

0

Other

28

3

(40)

0

Net cash flow

34

(97)

(283)

47

Opening net debt/(cash)

 

 

778

733

1,234

926

FX

1

(10)

0

Discontinued

105

(35)

(20)

0

Other non-cash movements

(95)

(369)

621

(46)

Closing net debt/(cash)

 

 

733

1,234

926

925

Source: Company accounts, company guidance, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Technicolor and prepared and issued by Edison, in consideration of a fee payable by Technicolor. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Technicolor and prepared and issued by Edison, in consideration of a fee payable by Technicolor. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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