Aug 27, 2015 (Thomson StreetEvents) -- Edited Transcript of Nine Entertainment Co Holdings Ltd earnings conference call or presentation Thursday, August 27, 2015 at 12:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Gyngell Nine Entertainment Co Holdings Limited - CEO * Simon Kelly Nine Entertainment Co Holdings Limited - COO and CFO * Peter Wiltshire Nine Entertainment Co Holdings Limited - Group Sales Director * Alex Parsons Nine Digital - Managing Director * Amanda Laing Nine Entertainment Co Holdings Limited - Commercial Director ================================================================================ Conference Call Participants ================================================================================ * Entcho Raykovski Deutsche Bank - Analyst * Eric Choi UBS - Analyst * Fraser McLeish Credit Suisse - Analyst * Jarrod McDonald JP Morgan - Analyst * Alice Bennett Commonwealth Bank of Australia - Analyst * Brian Han Morningstar - Analyst * Justin Diddams Citi - Analyst * Sacha Krien CLSA - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [1] -------------------------------------------------------------------------------- Good morning, everybody, and welcome to Nine Entertainment's 2015 full year results. I'm David Gyngell and I'm joined today by Simon Kelly the CFO and COO, Alex Parsons the Managing Director of our Digital business, Amanda Laing our Commercial Director and General Counsel of Nine Entertainment and Peter Wiltshire, Managing Director of Sales and Marketing at Nine Entertainment Co. On that note I'll hand over to Simon to get us started with the full year results. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [2] -------------------------------------------------------------------------------- Thank you David and good morning everyone. On the first page of the presentation pack you'll find the standard disclaimer which I'm sure you're all familiar with and doesn't warrant any further comment. Turning now to the summary of the results we've announced today. At the EBITDA the AUD287 million was in line with the AUD285 million to AUD290 million guidance given in June. This includes the earnings of Nine Live which was sold post year end. Net profit after tax was AUD140 million, was down marginally. This is before a net AUD732 million of specific items mainly relating to non-cash impairment charges. I'll provide more details on these in a moment. The operating result reflects a challenging advertising market offset in part by an improvement in our revenue share. Metro free to air markets declined 1.5% over the year while regional markets fell some 3.2%. Our Digital business reported strong growth partly benefiting from an extra quarter of Microsoft default traffic which we had not expected. After adjusting for this the underlying business still performed ahead of our expectations. We remain very focused on cash flow with conversion a very strong 103%, well up on our medium term 80% to 90% target. Interest costs halved reflecting the benefits of the debt refinancing completed at the end of last financial year. A final dividend of AUD0.05 per share which will be fully franked brings total dividends for the year to AUD0.092 representing a 61% payout of earnings before specific items. Since April we've been actively in the market buying back shares and to date have spent AUD67 million of the AUD150 million buyback program we previously announced. Despite this net debt declined marginally and following receipt of the Live proceeds on July 31 we have moved into a net cash position which underpins our capital management program. Let's discuss aspects of these results in more detail. Here on page 4 we breakdown the specific items. There were three key components, the net impairment charge of AUD792 million reflects a non-cash reduction in the carrying value of our metro and regional free to air intangibles. As you know we are required to value these on a DCF basis every 12 months. The key drivers of this change were reduction in the assumed long term market growth rate and the impact of rebasing the market size following the actual FY15 outcome. Further details on the impairment charge are included in the notes to the accounts. AUD57 million relates to inventory write-offs and onerous contract provisions. AUD13 million of this results from a one-off cost associated with settling legacy inventory contracts. The balance represents provisioning of inventory on the balance sheet at June 30. This inventory relates to loss making overseas content under our major outlet deal which will expire early next year. Given we now have clearer visibility of the tail of this contract we've accelerated the availability of this loss making content to the extent we can so that we can put this behind us as fast as possible. The losses on this inventory arise either due to the content not being aired at all or as a result of expected revenue generated being lower than the actual cost of the content. This reflects the general declining appeal and value of overseas content. To assist in understanding this expiring contract the chart to the lower right here illustrates how its future P&L profile is likely to look over the next five years. Prior to any provisioning the FY16 P&L expense under this contract approximates AUD120 million. You can categorise the contract content into broadly two elements. The first element, the profitable component shown here in blue is the inventory that currently bills air time and generates revenues and exceeds its cost. As the series that comprise this profitable content are cancelled the P&L cost will step down but we will of course need to backfill that content. It's unlikely we'll need to pay as much for the backfill but it's too early at this stage to determine the level of any associated cost savings that will flow through. The second element is the content which is loss making shown in red. Even though the outward deal expires in January 2016 we are committed under licensed series to continue to buy future seasons of four shows that achieve certain performance criteria in the US whilst ever those shows are made. The chart here shows how we expect that loss making inventory to taper off over the next five years as series are cancelled. To the extent the loss making inventory fills air time we'll need to acquire backfill content. Again it's likely we'll be able to do so at lower rates than what we are paying under the legacy output deal. As I mentioned a moment ago at June 30 we provided for that part of the loss making inventory we were allowed to under accounting rules, basically that inventory which is available and held on the balance sheet. This will benefit operating earnings in FY16 by approximately AUD35 million year-on-year represented by the red segment of the 2016 bar in the chart here. In future years we will immediately write-off specific items loss making inventory as it becomes available and hits the balance sheet. Based on our current estimates of the likely cancellation of loss making seasons we expect to record specific items totally a further AUD100 million to AUD120 million over the next five years, basically the sum of the future year loss making annual inventory shown here. Finally, putting all that together, the opportunity for us is the growing gap in the middle of the chart. This represents the dollars which will either need to be reinvested in backfill content or will fall to the bottom line. One word of caution on this chart, while it is illustrative and broadly proportionate, it does rely on our expectations as to the likely longevity of series which of course will change over time. The final component of specific items worth noting is tax. This predominantly relates to the unbooked capital losses which we will utilise against the gain on sale of Nine Live so we have now been able to recognise these losses as an asset at June 30. On page 5 here we look at the operating results of continuing businesses excluding Nine Live. TV revenues were down 1% with a 0.2 percentage point increase in Nine's metro revenue share to 38.9% offsetting the weakness in the overall metro free to air market. Regional markets recorded a revenue decline of around 3.2% and have become progressively softer than metro markets over the past six months. Television EBITDA declined by 14.7% reflecting the combination of the lower revenue base and higher costs. Pro forma costs were up 2.3% but this includes the cost associated with the Cricket World Cup of around AUD16 million. Excluding this costs were up just 0.6%. Our digital business reported double digit revenue growth in both search and video with video in particular up 24%. EBITDA growth was a strong 40% when compared to the prior year pro forma but this includes around AUD5 million of benefit due to the later than expected diversion of Microsoft default traffic. Rigorous cost control offset the margin impact of a changing advertising mix as it shifted away from owned and operating sites where we book our 100% margin to third party inventory where we effectively receive a commission. Overall however, this was a really pleasing result and demonstrates we have a resilient digital business of scale which we will increasingly use as a platform to further monetise our premium video content. The other notable line here is the 25% reduction in corporate costs reflecting lower incentive payments in the year following our below target financial results. Turning to page 6, again on a continuing business basis we look at operating free cash flow and conversion. Operating free cash flow was up strongly as we carefully managed our working capital as well as benefiting from some favourable timing differences relating primarily to offshore program purchases. These timing benefits are expected to reverse over the first half of FY16. We continue to target an average 80% to 90% conversion ratio over the medium term. As you can see here, capital expenditure was up by around AUD7 million due primarily to the fit out of the new Adelaide facilities which we will be moving into later this quarter. Overall it's less than half of its level prior to the Nine Live sale. Underlying capital expenditure in future is likely to be around AUD30 million per annum. Post the Nine Live proceeds we had pro forma net cash at June 30 of AUD115 million. I've not factored into this pro forma the net AUD135 million we will receive following the completion of the Willoughby site sale, although of course from that point we'll also incur an annual lease cost of around AUD10 million per annum. A combination of strong cash flow and a very healthy balance sheet provides us with significant flexibility. It's our objective to maintain a conservative but efficient balance sheet and to that end following the dividend we've just announced, our intention remains to lift our dividend payout ratio to 80% to 100% of earnings pre specific items with effect from the FY16 interim dividend. We expect all future dividends will be fully franked. We also intend continuing our previously announced on market share buyback. Today we've completed approximately 45% of the AUD150 million program and as previously flagged we're proposing to supplement this program once it is completed. By way of illustration, say AUD200 million buyback at current prices using pro forma FY15 earnings would be around 15% EPS accretive. To provide the flexibility we will require to execute such programs it's our intention to seek shareholder approval at our November AGM to lift the ASX imposed annual buyback cap to 20% of issued capital. I'll now hand over to Peter Wiltshire to discuss in greater detail the market, our ratings and revenue share and also touch on some of our key programming for the balance of FY16. Peter. -------------------------------------------------------------------------------- Peter Wiltshire, Nine Entertainment Co Holdings Limited - Group Sales Director [3] -------------------------------------------------------------------------------- Thanks, Simon. Well hello, everyone. It's certainly been a pretty tough year for both Nine and the free to air industry generally. Free to air advertising revenues finished the year down 1.5%. A soft first half which was down by 3% was followed by a very modest growth of 0.2% in the June half. Free to air TV generally underperformed against the broader ad market as the industry faced structural headwinds. In an increasingly competitive ratings market Nine retained its mantel as the number one network in the key advertiser demographic of people 25 to 54 for the fourth consecutive year and a close second in all people just 1.2 share points behind the number one position. Nine's share of the market for revenue was up 0.2 points to 38.9%, a result which was on track to be higher had we not experienced ratings challenges as we progressed through Q3 and more significantly into Q4. Despite this we achieved a positive power ratio of 105% for the year. It is also worth noting that within this five city performance our Perth and Adelaide operations have continued to narrow the gap with revenue share growth outperforming against the east coast by 2.2 points and 0.4 share points respectively. Let's just touch on the dynamics of the second half. We finished the March quarter with strong gains in revenue share up from 36.8% to 39% in what is traditionally our weakest quarter but our ratings performance in the quarter fell short of expectations which placed downward pressure on our revenue share into Q4, which was also impacted by the deferral of our marquis show The Voice. It was also during this period that Nine's ratings were affected by the impact of the two leading networks programming formats of the same genre head to head. To some extent we were our own worst enemies as we competed aggressively. This caused pressure on overall audiences for free to air TV and specifically Nine's share of that audience. The size and magnitude of these changes coincided with advertisers turning to shorter term buying decisions based on immediate ratings history to support their actions. This clearly worked against us as buyers look to Q3 ratings in allocating Q4 revenues. Perhaps we didn't pick up on this changing dynamic fast enough as we perceived the overall market to be weaker than it really was but the result was the same. Our revenue share and hence revenue in the June quarter was below our expectations. Fortunately we had a few wins in the current quarter. Our audiences are back and our revenue share will follow. Looking to the foreseeable future however, the television advertising market will continue to operate on a short to medium term basis with client approvals for campaigns running to tighter deadlines giving limited visibility. Our digital ad sales performed well in an increasingly competitive and cluttered market. Having the privilege of Australia's number one publisher and digital audience aggregator according to Nielsen's Online Ratings in July this year and access to premium video through content extensions from Nine, we are well placed to capitalise on the revenue mix as it moves towards premium online video and as mobile consumption increases. Representing Microsoft and Daily Mail also provides the diversity of content and inventory to be broadly attractive to advertisers as we work to solve their marketing challenges. Trading technologies are improving the automation of digital inventory and the stigma that exists around programmatic trading of digital has reversed and we are now benefiting from premium inventory being traded this way. The future will see automation of linear broadcast ad trading improve and with the advancement of measurement and technology we can expect to see TV and online video converging. As I mentioned before our content for FY16 is off to a strong start with The Voice returning to higher than anticipated ratings coupled with our coverage of the Ashes test series and successful launch of our new cooking format The Hotplate. If you look to the screen you'll see the full repertoire of our leading content by genre which will underpin our schedule over the next 12 months. We expect our broad appeal programming will deliver the right mass audience mix that makes free to air TV the leading destination for reach and effectiveness. Over the balance of the calendar year we have The Block, Celebrity Apprentice, the NRL finals, the 2015 Rugby World Cup, House Husbands, Kings Cross ER and our summer of cricket which will include two day-night test matches telecast in prime time. Next year we will launch with Australia's Got Talent followed by another series of The Voice, The Block and Married at First Sight. In addition we have a number of exciting new drama projects and formats to be announced later this year. Underpinning this great sports and entertainment programming is our market leading news and current affairs offering. The six o'clock bulletin remains Australia's most watched news program delivering over one million viewers every night. 9News has already taken an early victory in the 2015 ratings year in our two largest cities, Sydney and Melbourne, by winning all 25 weeks of the 40 week official ratings calendar to date in these two markets. With the stalwarts of A Current Affair and 60 Minutes together with the resurgent Today show our commitment to news remains as strong as ever and provides us with a guaranteed audience lead into our prime time schedule. I'd now like to talk about some of the dynamics playing out in the free to air market and where we are heading. The underperformance of free to air TV as a medium over the past 12 months raises a number of issues but opportunities alike. TV is going through a major evolutionary change driven by the availability of new technology and changing consumption patterns. We are seeing an unprecedented fragmentation of audiences but the perception is worse than the reality. Put simply, as an industry we no longer have the measurement systems in place to accurately record the consumption of our content. A recent example of audiences -- of how audiences are accumulating over the life cycle of a program is our drama series Love Child. It's live broadcast delivered an average national audience of 1.2 million viewers. Time shift viewing added another 300,000 whilst with online catch-up the total audience exposure is close to 1.6 million viewers. That's an average 22% uplift on the live number which is not captured in the overnight numbers everyone focuses on on a daily basis. This trend is set to continue. Our industry measurement body OzTAM has a very clear roadmap and expects to deliver a standard industry metric for long form online video consumption later this year. As an industry this will be a welcome outcome which will enable buyers to understand and us to better monetise the consumption of our content. We know that audiences remain passionate about television content. They are simply connecting with it in a new way. As a broadcast and digital business focused on the delivery of premium video content we are well placed to take advantage of this. Our aim is to broaden and exploit our content offering through various distribution platforms always keeping an eye on returns to our shareholders. We are uniquely placed in this regard. Owning our digital business and capturing AUD100 cents in the dollar of our digital revenues means we are focused on providing the optimal viewing experience for the consumer. Increasingly you will see us providing media and device agnostic delivery of our content. Our recent acquisition of the NRL digital rights is a good demonstration of the way we are thinking. As experiences offshore guide us we are confident that free to air industry will ride through its period of uncertainty. We have the content, live local sport, news and quality local franchises to ensure we remain relevant to both television audiences and advertisers. Free to air remains the most effective place to reach a mass audience and in a world of fragmentation the value of an engaged mass audience can only increase. In summary, we remain optimistic about the long term health of free to air and the ability to leverage our market leading content wherever and however it is distributed and consumed. Thank you. I'll now hand over to Alex Parsons to talk about our digital product and platform. -------------------------------------------------------------------------------- Alex Parsons, Nine Digital - Managing Director [4] -------------------------------------------------------------------------------- Thanks, Peter. FY15 was a solid year for our digital businesses delivering on or above expectations in most areas. The financial performance was a result of strong focus through the year delivering positive revenue and earnings growth for NEC and really starting to capture the value in this space now that we take 100% of our digital revenues and importantly are no longer strategically constrained by complex shareholdings. Digital revenues increased from just over AUD122 million in FY14 to well over AUD160 million in FY15 while earnings increased from AUD16 million in FY14 to AUD22 million in FY15. The leadership team drove determined and deliberate top and bottom line growth through the entire course of the year. New products, innovative commercial models and an effort on operational efficiencies all culminated in this result. I might add importantly it has also set us up on a great platform to enable continued future growth across digital as it becomes an intrinsic element to our all up company approach. We have transitioned our all up focus to content and audience rather than purely on channels such as TV and digital. At the end of the day we are an excellent content company and want our leading content brands to deliver amazing similar experiences across consumption mediums. Our focus and success in news is a great example of this. News continues to outpace the market as Australia's leading multi-medium news brand, 9News. We don't operate multiple business units based on medium but a single 9News focus content unit which operates under one leader, Darren Wick, across all mediums. In FY15 we also launched three new brands into the Australian market with our focus on content which Australians want, when they want it and how they want it already delivering great results. Honey, already the number one Australian fashion and beauty digital brand in Australia; Coach, we teamed up with Instagram inspiration Kayla Itsines to deliver an innovative approach to this important content category; and Pickle, a site so unique we can't find a content category for it but it has been a massive hit with our audience with close to a million Australians consuming this content each and every month. Video is the most important area of our business both now and into the future. FY15 saw us continue to outperform the market leading and innovating in online video consumption. A 24% increase in video revenue coupled with over 345 million streams in FY15 and the number one catch-up site is the result of our strong focus in this area. However, despite our strong current position this is an area where we see huge potential upside for our future business and believe we are uniquely positioned in the Australian market to take full advantage of this. We also have a number of important strategic partners. We spent time in FY15 refining our content and sales partnership models to focus on fewer but more strategically important relationships, specifically Daily Mail and Microsoft. This has helped increase our returns with these businesses and deliver a more seamless commercial approach across the entities. We will continue to refine this model to ensure it delivers top and bottom line growth and benefits our core business. As previously mentioned we continue to also look out for new inorganic opportunities where they make sense. Areas of interest will tend to be around businesses which in a complementary manner deliver new audiences, new revenue or preferably a combination of both. Earlier this year we made an investment in Pedestrian TV, Australia's leading youth publisher website. We're excited about this offering and a segment of the market, youth, where we have traditionally not been as strong and look forward to working with the founders to continue to grow this amazing business. We also launched APEX this year, a joint venture with Fairfax, which is Australia's first premium publishers advertising exchange, enabling advertisers to connect with their audiences across a range of premium brand safe environments. The opportunities which APEX afford us in the market are vast and overseas experience suggests that the ability for brands to connect in a programmatic fashion across premium brand safe environments leads to dramatically improved results for both the brands and the publishers. Through FY16 you'll see us continue to innovate and deliver across these key themes of video, content across all channels, amazing consumer experiences and partnerships or acquisitions where they make sense, all leading to the delivery of continued top and bottom line growth. Our market position and strategy, namely owning all our digital assets and therefore owning our future, coupled with our content acquisition strategy focusing on delivery of all our content to all consumers across all devices places us in a unique market position and one which we are really excited and inspired to deliver against. Back to you, Simon. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [5] -------------------------------------------------------------------------------- Thanks, Alex. I'd now like to cover off the comments we've made on our current trading and outlook. Encouragingly the metro free to air advertising market has recorded growth in July. This is expected to continue through August but the market remains very short and makes the outcomes quite volatile. Our internal forecasts are premised on metro free to air market growth of around 1% for the year while we expect regional markets will continue to underperform. Nine's ratings performance has improved markedly since the beginning of July. This improved performance should help to underpin revenue share over the half. However, it is likely that our full year share will be marginally down on that of FY15 given the intensely competitive marketplace and the profile of major events over the next 12 months. We remain focused on our operating cost base and improving programming efficiencies while at the same time we are working on initiatives to enhance the monetisation of our premium video content across multiple platforms. In FY16 we expect television programming costs to increase by around 2% before the benefit of the inventory provisioning I mentioned earlier. Virtually all of this increase relates to higher contracted NRL and cricket costs. Non-programming costs will be flat. The digital business is expected to record modest growth despite the transition away from default traffic which benefited the first quarter of the FY15 result. While we're focused on maximising the operating results of the businesses we're also well advanced in developing and implementing our medium term strategies for evolving the business in a fragmenting digital environment, ensuring we fully leverage our premium video capabilities and our unique cross-media assets. At the same time with a conservative capital structure we will continue to deliver our capital management initiatives whilst maintaining significant strategic flexibility. With that I might now hand over to Amanda Laing our Commercial Director and Group General Counsel. Amanda has been with the business for more than 15 years and has led virtually all of our big deals over the past five years. Amanda led the strategic and commercial negotiations on our recently concluded NRL rights agreement, which is transformational for Rugby League, its supporters and Nine. Amanda, over to you. -------------------------------------------------------------------------------- Amanda Laing, Nine Entertainment Co Holdings Limited - Commercial Director [6] -------------------------------------------------------------------------------- Thanks, Simon. Well we were very pleased to lock away the NRL rights for another five years through to 2022, making Nine the home of the NRL for the next seven years. The NRL had a very clear view that they wanted more games on free to air television in order to increase the accessibility of the code for their fans. We think we've achieved a win-win outcome. Under the new contract we'll have four live games each week. Three of them will be in prime time on Thursday, Friday and Saturday nights with the fourth on Sunday afternoons. The matches to be played in these prime slots will be the best games of the round. We also of course retain the State of Origin and the finals and the grand final which is some of the highest rating programming on Australian television. State of Origin one and two were the two highest rating programs in 2014 and the 2014 NRL grand final was the highest rating NRL grand final of all time. In the year so far the three State of Origin matches are the highest rating programs of 2015. Under the new deal Nine will broadcast more than 270 hours of live NRL action each season, double the live hours under the current deal. With the significant increase in games broadcast across the week and the improved time slots NRL will become the backbone of our winter schedule. The new broadcast times will also enable us to complement each game with more of Nine's pre and post game analysis and commentary, mainly because we no longer have to move directly from the live Friday night game onto the second Friday night game being broadcast on delay. Our live Sunday game will continue to provide an important lead in to our Sunday night news, which remains one of the strongest performers of the week. Being the home of the NRL also means that NRL fans will continue to come to Nine's news for the best insights and interviews and every aspect of the NRL competition. The package we've agreed is far superior to the one we have today for the game, the players, the clubs, the fans and Nine. Four live games per week up from two and improved time slots for these games. We know how important live sport is. We have seen a 33% increase in viewership of the Sunday afternoon game since going live. With the reach we can give NRL fans we are confident that the appeal of the game will broaden. In fact the cost per hour of live NRL coverage under the new deal is marginally lower than under our current arrangement. In addition to the free to air rights of course we secured the free digital rights to our games, something we don't have under the current contract. This gives us enormous flexibility in the period when viewing habits are evolving rapidly and it was a crucial part of our deal. Nine will be providing NRL fans with our coverage live and free anywhere, anytime, across all devices. This is a great win for NRL fans everywhere. For Nine the large stable audiences which live sport delivers are increasingly valuable as media consumption continues to fragment. In overall terms we're confident that the increased hours of NRL on free to air in better time slots and with the ability for fans to see the game on any device anywhere at any time will add to the reach and popularity of the sport. Our four premium time slots allow Nine to provide greater exposure to more NRL clubs. Together with our expert commentary live at the games and of course our award winning NRL Footy Show, Nine's commitment to the NRL, its fans and clubs will deepen and strengthen even further under the new rights agreement. As Simon said we think this is a great outcome for League supporters. I can answer any further questions on the mechanics of the rights after the presentation but I'll hand over now to David to say a few words about our subscription video on demand service Stan. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [7] -------------------------------------------------------------------------------- Thanks, Amanda, and congratulations on what is an outstanding deal. Well done to you. Regarding Stan, still continue to be surprised by the growth of this category. It's a bigger category than we thought it was going to be, definitely bigger than I thought it was going to be. Stan is running ahead of what we thought it was going to be but then the category is. Are we getting our share? I think we're probably keeping in touch, just. We're up against the hottest brand in the world right now in Netflix. We have the deepest library, the largest library. We've launched the most original shows this year. Every day we've virtually put up a new show to Stan so I'm really pleased and proud of the offering that the team's put together. Mike Sneesby the Managing Director down there is doing an outstanding job. I think we're in the right position in what is going to be a tough category. No bones about it, consumers are diving into streaming services and whatever else is streamed out there. They're adapting to it very quickly so we're very pleased that we entered a partnership with Fairfax and I must admit they've been fantastic partners, really deliver from cross promotion and marketing to their subscriber base so we're pleased that we did that. There's a myriad of new shows coming on every day that they'd like me to talk about but go and get a subscription to Stan, it's only 10 bucks so you should do it yourself. I don't need to sell it to you now. We've got gross signups of about 300,000 plus at the moment. We have added 800,000 people have joined the site but like any business it's who is actually paying you every day. We're heading up to a couple of hundred thousand of those. You have people signed up but then you've got dormant people and you've got people who are active the whole time. Like any business it's what rings the till on a daily basis is the only mathematics you should be concerned about but the trajectory of that business is beyond expectations. The chief question's going to be how profitable they're going to be in the long term in a crowded market. Netflix will continue to pour in investment into its owned and operated programming. We will have our first local program up in late October, early November, another drama up in Easter next year and we're commissioning new locally produced shows every three months. Again this is going to be our differentiate. The difference between us and our competitors is we're going to have a much more Australian tone to it. Learning this business from recently in the last six months and really understanding a subscription business, there's a lot of similarities. You want to have locally produced. You want to have stories that are told that you have already been given marketing benefits from by people knowing about that subject matter, that actor, et cetera, et cetera. There's a lot of similarities there. There's a lot of wash back benefits for the Nine Network through advertising, from Stan advertising on it and also jointly commissioning shows where appropriate. We're pleased there's an economic value coming back to the Company there. This is the space to watch and is going to cause us a lot of sleepless nights on free to air until we get a really good understanding of it. What we're finding in free to air (inaudible) chats about what content and there's no better content in this place than news and current affairs. The sports are expensive. They go upwards of 30%, 40%, 50%. We don't feel like geniuses buying those. We just buy them because we have to buy them and you're in trouble if you don't have them and it's expensive when you do have them. News and A Current Affair and especially this country, we are far, far beyond our competitors in doing a good job in News and A Current Affair. The top three shows both nights of the week are News, News 6:30 and A Current Affair. It builds an amazing base and an amazing culture. We have got 1200 fulltime staff and about 900 of them work in News and A Current Affair so that's the proudest thing that we are in this organisation. That'll be the thing that we continue to own and the IP that drives all the next original ideas that we have and keeps us control of the IP from an inflationary point of view as well. It's like rotten fruit, it goes off pretty quickly if you don't use it. We'll replay it, we'll sell it to multiple devices which Alex is benefiting from, et cetera. That is really the backbone of our organisation. The 9News case is the backbone of the News Corp organisation, it's the backbone of the FOX organisation. These organisations, this is what you own and control and you don't have to pay any price increases on. That's what we will continue to put a lot of investment in and a lot of investment in local programming too. On that note I'd like to throw to the -- I guess no one here's going to ask a question? We might throw to some people on the phones. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Unidentified Audience Member [1] -------------------------------------------------------------------------------- Are we ready to go? -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [2] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Unidentified Audience Member [3] -------------------------------------------------------------------------------- To Peter, you've got a ratings forecast decline for this year for Nine Network. Could you give us some quantification of that and having probably done a quantification of your rating to client, could you give us your estimate of the other two networks' ratings to get to your decline? -------------------------------------------------------------------------------- Peter Wiltshire, Nine Entertainment Co Holdings Limited - Group Sales Director [4] -------------------------------------------------------------------------------- Look I haven't got a crystal ball in front of me so consumers will make that decision as the year unfolds. Our state of play at the moment is there is a slight resurgence in the Ten Network which is obviously redividing the audiences in terms of how you make up 100%. Does that mean our overall volume's necessarily decreased or does it mean more people come back into free to air as more content is offered more broadly? I can't give you a number. I can't give you a prediction of what the ratings will be. What I can say is, like I said, free to air I think will benefit from more choice and more diversity. As David pointed out, six months ago I think he was quite honest about where free to air was at from a programming perspective and I think the industry in the last six months has done a lot to address that. I think you'll probably find more people will come and search for new formats, trial new programming and all networks have got some new product up this year and it's encouraging for us. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [5] -------------------------------------------------------------------------------- Mate, he gets in trouble if he gives this up but I don't get in trouble. We'll be at 38%, Seven will be at 38.5%, 39% and Ten will be at 23%, 23.5%. We've got a couple of Voices in there so we'll hold up. Seven will pull forward some revenue because of the Olympic Games coming along in August and I'd like some extra advertising and Channel 10 will pick up bits and bumps around the MasterChefs but they're going to fall into a bit of a hole coming into the backend of the year. They've got a couple of decent shows at the moment but that's about it. So that would be a fair assumption of where it's probably going to end up. Most of that's on a calendar - you could do the fiscal but a lot of my headspace is on how the calendar plays out next year. So you can put a little bit more in for us, a little bit more in for Seven, a little bit for Ten and Ten gets a bit of momentum during the calendar 2016 but that's probably where I reckon it'll land. -------------------------------------------------------------------------------- Unidentified Audience Member [6] -------------------------------------------------------------------------------- Can I just ask a second question to you David on Stan? Is it possible that you guys will consider a dip in tiers, let's say joint venturing the sports tier with somebody internationally and how flexible are you in terms of splitting a 50/50 share with Fairfax to invite new people in? I understand Seven is free to deal in two years' time out of Presto live and maybe they will find an advantage moving to another platform. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [7] -------------------------------------------------------------------------------- We haven't got flexibility in our joint venture and I'm actually happy about that with Fairfax. Where we go with that business we'll be going there with Fairfax. In regards to sports rights, to be frank I don't want to be locked and loaded to sports rights in everything we do. I'd like to make more original things, own more IP. If you look around the world, free to air's really going to survive on the bones of news, current affairs and sports. Premium cable's going to be news and current affairs and sports and general entertainment's going to be the home of these devices and you're going to have to be -- reality shows are actually going to come more important to free-to-air television, especially the 7:30 block, just to be a point of difference because you're not going to make reality shows for streaming services. We don't envisage us getting into sports rights in the streaming space. When you know the maths of what Fox Sports invests in rugby league and AFL, it's - I don't want to lose any more money on sport. I don't think that's a good advice for our company. I'm not saying that we shouldn't have the rights we just bought but we should be making more of the things we own ourselves and controlling more of our own rights. It's not because there's this incredible opportunity overseas to sell Australian content but there's an incredible opportunity to have a different relationship with advertisers, which we have to keep proving to them. While they're looking around, they're slightly distracted by programmatic and videos and all these sorts of things, they're shaving off bits of money, I believe they will come back and especially the large advertisers who are trying to get out in front of their competitors who are nipping at their heels and because they're larger and they've got more money they'll spend on television and buy exclusives and buy those things that us having more locally-owned content is actually going to create more value and it's what's going to define us. The streaming business is going to be having ourselves access to that market and seeing if we can carve out a profitable alternative and a local alternative to what Netflix will bring, and that's yet to be seen. Netflix is yet to be seen if it's going to make money. Once you start getting into a million subscribers where we would like to be and you put prices up, because we're still very efficient and you get three devices for AUD10, you start putting AUD1 a month, AUD2 a month onto things and you hold most of your audience. All of a sudden your revenue can grow by AUD10 million or AUD12 million a year. We don't see Stan being the saviour of this company long term and being where we're going to be. We see it as an adjunct to content acquisition, original content deals. So things might be bought for Stan first then played on Nine three months later, two weeks later, three months before. That's where we see it sitting. The long way round to your question is I think it'd be naive for people to think that we're going to start getting into AUD10 a month and sports rights which you all of a sudden try and get AUD300 out of someone when they're paying AUD10. They're getting used to not paying a lot of money and that's the challenge for premium cable. -------------------------------------------------------------------------------- Unidentified Audience Member [8] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [9] -------------------------------------------------------------------------------- Do we have something from the phone lines? -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Yes, you have a question from the line of Entcho Raykovski from Deutsche Bank. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Entcho Raykovski, Deutsche Bank - Analyst [11] -------------------------------------------------------------------------------- Hi guys. I've got a couple of questions around costs. The first one is just a bit of a clarification around the costs guidance into FY16. You've spoken about -- so you said that excludes the benefit of the specific item provisioning. Should I read that as you're going to get an additional AUD35 million benefit after that 2% cost increase? So that's the first question. Secondly, obviously you had the Cricket World Cup in FY15 and you won't have those costs in 2016. Again, is the uplift in NRL and cricket? Reading from the guidance it is substantial and obviously well exceeding those costs which were incurred in 2015. It won't be there in 2016. And just finally, do you have much flexibility around costs if the ad market growth is substantially different from what you're expecting at the moment? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [12] -------------------------------------------------------------------------------- I might take those first two and then hand over to David for that last one. Entcho, the 2% cost inflation is on the core cost base of the programming cost base before you make any adjustment for the inventory that we're providing upfront. So effective year to inflate that cost base which is around -- programming cost base -- around AUD800 million by 2% and then you can deduct the benefit of the provisioning, around AUD35 million off of that inflated number. In relation to the Cricket World Cup, yes you're right, the Cricket World Cup cost us around AUD16 million in FY15. The Ashes and the Rugby World Cup are coming -- effectively offset what would otherwise have been a reduction in our costs. So net-net, those two things wash out. So you're not seeing the benefit of the Cricket World Cup dropping out but you're seeing the benefit of having the Ashes and the Rugby World Cup to come in terms of our viewership and audience numbers. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [13] -------------------------------------------------------------------------------- In regards to what can you do about your costs, around AUD450 million of our cost base, let's call it 50% of our cost base now, this is one of the major reasons we were moving away from these overseas output deals. It's just another contracted cost. So news and current affairs and local production this year will be -- this budget you're forecasting, we're talking about. Let's call it AUD370 million before you have any add-on costs of studios and the places we're in now. Around AUD400, we can pull levers on those things at a relatively quick speed. I wouldn't want to touch too much news and current affairs and we'll be spending more on local production, not less, hence my last explanation. But the fact is that if the world goes to hell in a handbag you can pull things pretty quickly. I've never been that person to do it. I still believe in free to air long term. If it gets tough, it gets tough; you don't change what you're doing as a business just to hit a number the whole time. You rely on providing consistency to an audience and an advertiser in the traditional free-to-air models. It'll have to get pretty tough for us to radically pull those things but frankly in the back of our minds one of the reasons we're going away from not -- the only fixed contracts we've really got now is sport. There are no overseas fixed contracts. We're the first network, our two major competitors in the free-to-air space both have two contracts that they have to live through, Disney and Sony at Seven and Fox and CBS at Ten. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [14] -------------------------------------------------------------------------------- I might just add on the cost inflation point. Obviously from the programming schedule that we talked to earlier, there will be two Voices falling in the FY16 year, the one we're just partway through now and one later in the year. Obviously ourselves and Ten not having the Olympics, we'll be looking to program around the Olympics. So you will find from a jamming shows in perspective, FY16 will potentially be quite unusual and you shouldn't necessarily think that's the norm going forward. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [15] -------------------------------------------------------------------------------- Just to clarify that, this year we had about three weeks of -- on a like-by-like basis we only had half a dozen episodes of The Voice. Next year you're going to have 35 or 40 episodes, 50 episodes of The Voice in the financial. So that gives us confidence to do a 38-plus share because we've got more Voice action. The reason it's coming forward is because in August -- late September, early August you've got the Olympic games so you wouldn't be able to get it away. Not late September; late July, early August you've got the Olympic Games next year so The Voice is coming forward. -------------------------------------------------------------------------------- Entcho Raykovski, Deutsche Bank - Analyst [16] -------------------------------------------------------------------------------- Okay, that's great. Thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Your next question comes from the line of Eric Choi from UBS. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Eric Choi, UBS - Analyst [18] -------------------------------------------------------------------------------- Thanks guys. Can I please ask three questions? The first one's just on NRL. Given the additional live programming hours, just wondering how much extra scope that gives you to reduce costs in other programming, for instance overseas? Then maybe one for Alex. NEC's obviously capturing share of non-traditional video viewing even if OzTAM doesn't capture it. You've said the video revenues are up 24%. Just trying to get a sense of how big those revenues are now. Obviously if you're expecting the traditional TV market to grow modestly, does non-traditional video add another 50 or 100 basis points of growth on top of that? Then maybe one on the affiliate deal. You've flagged a potential for higher returns but just wondering how that negotiation's going and if there's any mechanism to share an increase in the sports cost with your affiliate? -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [19] -------------------------------------------------------------------------------- I'll answer the first and the last. The first one was what? NRL cost -- -------------------------------------------------------------------------------- Eric Choi, UBS - Analyst [20] -------------------------------------------------------------------------------- NRL. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [21] -------------------------------------------------------------------------------- Considering that we regard most of the overseas stuff you've got that doesn't really work on a volume basis and we've made that choice to get away from contracts, it won't be overseas savings. But at the same time, in the quirky world of Australian sport, especially winter sports, rugby league works on the east coast and doesn't work on the west coast and vice versa for AFL. You still have to provide, especially in markets like Melbourne, on a Thursday night when we'll have football and let's all be realistic here, we're talking two and a half years away, so God knows what's going to happen by then is that we'll have football shows which they're the number one show on television in Melbourne, Adelaide and Perth and for its timeslot. So we'll continue with that. There'll be a 7:30 slot to fill in those outer markets. We'll look for efficient programming but more likely news and A Current Affair-style programming during those periods. We don't see there are any savings because the other thing you're going to have is there's going to be a whole world of extra channels in regards to we could have a high definition channel in that time. We have the rights to do that. Nine might continue on its merry way at 7:30 with more female-skewing programming and have the football in high definition on a Nine HD channel. We'll look at that balancing act. What we're most excited about that football is that we have -- the difference between our deal which I regard as we paid a lot of money and my competitors have paid a lot of money for their side is that we move forward. We have an extra 100 hours of live sport and trust me, in two and a half years' time you'll be begging for that and [what's] the world of certainty. So we have 100 hours in two and a half years of live sport in the middle of ratings that we don't have now. So that is going to give us a tremendous benefit. What shows we build around that will really come -- we've obviously got to look to be as efficient as possible but you can't just disregard this other market. On the last question of affiliates, we'll have robust discussions with our affiliate partner. We'll have robust discussions with anyone else who wants to have a discussion about it. Incumbency is some form of loyalty of course and so that will always be front and centre of our mind. But our costs of the major things aren't going backwards so we would expect that our partners would have to share in that pain. -------------------------------------------------------------------------------- Peter Wiltshire, Nine Entertainment Co Holdings Limited - Group Sales Director [22] -------------------------------------------------------------------------------- On the video piece, so a material part of our digital revenues, I'd say around 2% of free to air. However that said, I think where we are today, those experiences are just not where they need to be. I don't think we're matching consumer expectations. There is a demand for videos outstripping supply. So when we think about the future and we think about NRL rights and everything else that's going on, we think it could be a very, very large part of our business, AUD300 million to AUD400 million in four or five years' time and so quite a big opportunity for us in the future. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from the line of Fraser McLeish of Credit Suisse. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Fraser McLeish, Credit Suisse - Analyst [24] -------------------------------------------------------------------------------- Great, thanks. Simon, I was just wondering if you could go back to the cost chart -- I think it's on page 4 -- with impairments, et cetera. Can you just confirm what's -- I think the Warner deal was previously AUD160 million or is AUD160 million. Can you explain exactly what's left of that and the cash savings rather than -- I know there's going to be a difference between cash savings and how they go through the P&L but the cash savings. That would be helpful. Thanks. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [25] -------------------------------------------------------------------------------- The difference between AUD120 million we've talked about here on slide 4 and the AUD160 million that people have had in their heads previously is there's a -- the balance is more discretionary spend, predominantly with Warners. It's back catalogue reruns in excess of what we have under the contract itself. So that's AUD40 million of discretionary spend we can deal with as we see fit. Obviously because we've been spending it to date and it's discretionary, it does make commercial sense but as the value of overseas content does decline over time there's probably some cost savings there but we're certainly not banking anything at this point. In relation to cash, part of the reason why our cash was very positive this reporting period was that we did get some favourable timing benefits out of overseas. What that does mean is the P&L profile you see on page 4 and the way it steps down, that is pretty much in line with the way the cash profile works. Obviously the unknown in that chart there is how much of the white gap between the -- as the unprofitable and the profitable steps down, how much of that we'll need to reinvest. Broadly you can take the P&L profile as being broadly representative of the cash profile of the contract from now on because we have had that one-off benefit in the FY15 year. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [26] -------------------------------------------------------------------------------- So in layman's terms you're saying the AUD35million of write down is going to be AUD35 million less cash? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [27] -------------------------------------------------------------------------------- Yes, to the extent -- absolutely. The provision basically just brings forward the accounting expense; it doesn't actually change the cash profile of the contract at all. -------------------------------------------------------------------------------- Fraser McLeish, Credit Suisse - Analyst [28] -------------------------------------------------------------------------------- Yes, sure. So there's AUD120 million savings you're going to get over the next four years there in cash terms. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [29] -------------------------------------------------------------------------------- Well yes, less than -- it's probably more like AUD90 million if you actually look at the bar. There's some residual amounts still back in 2020 as you can see. -------------------------------------------------------------------------------- Fraser McLeish, Credit Suisse - Analyst [30] -------------------------------------------------------------------------------- Yes, okay. Alright, thanks. That's helpful. Just one other one, just on the NRL rights and the digital rights. Do you have the ability to on sell them if you wanted to? -------------------------------------------------------------------------------- Amanda Laing, Nine Entertainment Co Holdings Limited - Commercial Director [31] -------------------------------------------------------------------------------- We've got rights under the contract to sublicense the rights that we have which is the free media rights. -------------------------------------------------------------------------------- Fraser McLeish, Credit Suisse - Analyst [32] -------------------------------------------------------------------------------- Great thank you. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [33] -------------------------------------------------------------------------------- On the side, I might add Fraser, I'm not sure why strategically -- apparently our thinking is, I think we've all been very consistent here, we see free to air evolving into a premium content anywhere, anytime, any device. The acquisition of the free digital rights was absolutely critical to us buying the rights and to have the value proposition. We think that is a very powerful proposition to the supporters, the game itself and to Nine to be able to distribute our content across any medium in the future. It's just the way the market's going. I wouldn't assume that even though we have the rights that we have any inclination to actually sublicense those rights. -------------------------------------------------------------------------------- Fraser McLeish, Credit Suisse - Analyst [34] -------------------------------------------------------------------------------- Fair enough, thank you. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Your next question comes from the line of Jarrod McDonald from JP Morgan. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Jarrod McDonald, JP Morgan - Analyst [36] -------------------------------------------------------------------------------- Thanks. I just wanted to get an idea of the level of visibility you've got currently on your TV bookings. Can you see four, six, eight weeks out? Just to give us an idea of that. I was also interested in the audience issues we've seen in calendar year 2015 and obviously your outlook for revenue share. Are you confident of a CPM increase in calendar year 2016 at rate negotiations? Just wondering if you could give us an idea of what you're expecting there. -------------------------------------------------------------------------------- Peter Wiltshire, Nine Entertainment Co Holdings Limited - Group Sales Director [37] -------------------------------------------------------------------------------- Jarrod, g'day. The visibility is in that 8 to 12 week window where you can navigate out about that far, particularly as you come to this time of year where things start to firm a bit pre-Christmas. Advertisers tend to go a little further out to cement their campaign to that period. Given the retail category's growing as it is at the moment in this last couple of months, I think that provides a more solid base going into Christmas so therefore that visibility stretches out a bit. If you go back only two months ago, the visibility was probably down to six weeks. I don't think that's a fundamental change in the market. I think that's just a timing-based issue. Second question around -- -------------------------------------------------------------------------------- Jarrod McDonald, JP Morgan - Analyst [38] -------------------------------------------------------------------------------- Obviously you have some audience issues, especially on some of the main channels earlier this year and obviously I just want to try and work out audience versus rate and how that actually comes into the discussions in calendar year 2016 with some of the media buyers when you go and they come back and talk about the audience and you come back and talk about the rate, Peter. -------------------------------------------------------------------------------- Peter Wiltshire, Nine Entertainment Co Holdings Limited - Group Sales Director [39] -------------------------------------------------------------------------------- Yes, it's always a lot of fun. What we're experiencing at the moment obviously is with the audience performance in the first half, based on pricings set on the previous calendar year, there is some inflation in the market which I think we've all been calling out as being a challenge for us. We've been managing it as effectively as possible with advertisers by giving them some level of compensation where we can. Going forward, whilst this year, the first half was difficult in ratings point of view, the second half feels to be a lot more positive and by the time you get to the end of the year some of those shortfalls that you were accumulating up to June 30 should start to wash out. I think the conversations going into 2016 won't be as challenging as they would seem right now with the improvement of ratings. However, I think inflation in the cost of buying eyeballs on television is a fact of life. Our business is not getting any cheaper to run and I think that reach is becoming tougher for advertisers and as reach becomes tougher it probably becomes more valuable. We're going to have to try and find our way through those sorts of dynamics. But bearing in mind, I think future ad negotiations won't be just limited to free-to-air television. There'll be a combined negotiation of revenues across our platform which means when you start to look at amortising the cost of access of eyeballs across a broadcast and a digital business, particularly with video, you can find your way into a different metric of how you negotiate your CPMs. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Thank you. Your next question comes from the line of Alice Bennett from CBA. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Alice Bennett, Commonwealth Bank of Australia - Analyst [41] -------------------------------------------------------------------------------- Thanks. Just wondering, the discussion around TV anywhere, anytime, Channel 7's obviously talking about launching -- -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [42] -------------------------------------------------------------------------------- I didn't say that, so we're not going to be sued by them again for any sort of plagiarism. That's just a common word in the vernacular. -------------------------------------------------------------------------------- Alice Bennett, Commonwealth Bank of Australia - Analyst [43] -------------------------------------------------------------------------------- Alright. I guess they're talking about their three channels being streamed. I just wonder how close you are to doing something similar and do you have enough streaming or digital rights to go down that path any time soon? -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [44] -------------------------------------------------------------------------------- Technically yes, we're all capable of doing that. There's going to be lots of different channels and all sorts of rights and those things will play out over the next six months. I don't see it as a game changer. I just see this as where you have to be to where your audience is. I don't think it radically changes the world. It's a nice thing to talk about and say you're going to do but it's just a fact of life. It's just another distribution chain of your existing content. Good content distributed lots of places is great; bad content distributed in lots of places is no good at all. We will be looking at all those things. Yes, you've got to go through lots of streaming rights. Most of the rights that in the recent times we've been negotiating we have streaming rights on. So we are working through that, Alice. I don't believe that sort of stuff is a game changer. That is just the world we're in. That's a given. So take it as a given that we'll be in whatever they said but we didn't say it, same places. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [45] -------------------------------------------------------------------------------- Alice, we've actually been streaming the Today show and the 6:00 pm news for well over a year but I guess we haven't made a song and dance of it. -------------------------------------------------------------------------------- Alice Bennett, Commonwealth Bank of Australia - Analyst [46] -------------------------------------------------------------------------------- Alright, okay. Thanks. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Your next question comes from the line of Brian Han from Morningstar. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Brian Han, Morningstar - Analyst [48] -------------------------------------------------------------------------------- David, my apologies but just one more question on the NRL. When we think about the cost increase in the new deal, how much of it can be attributed to the new digital streaming rights or is that not how you look at it? -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [49] -------------------------------------------------------------------------------- I'm sure someone a lot more analytical than me would look at it like that, like Amanda or Simon, but I don't because I think you need to own all rights. It's like just a random -- when we were negotiating this I just kept on banging on that you have to own everything everywhere for exactly the same reason we just spoke to Alice about. There is a number against it and it's probably AUD5 million a year, AUD10 million a year. But really, going back to the other questions about CPMs, we have to have all these rights because the challenge we've got now is all our shows we're talking about that people are worried about, they're all pretty close to the same numbers they were doing a year and two years ago. They're coming in in catch-up. They're coming in on an AVOD service. They're coming in but we can't charge for them. This is a worldwide problem. It's something we're dealing with OzTAM and everything now. All we can deal with right now is that we've got to go and keep all those rights. So what Seven said and what we're saying, it's 100% right. I don't think it's a game changer economically for what you guys are. I equally don't think the numbers are as bad as you guys think they are and it's going to be more difficult to get the CPMs to get the deals done with the media buyers. Because there's a negotiating point, because if we can't prove the numbers, they don't have to pay for them but if you really know they're there, you can always just hold your line and say this is what the numbers are. We look at -- all rights that we buy and a lot of it's all free catch-up rights always covered everything we buy. We are doing those deals and we've got those rights with cricket and we've got those rights with rugby league, so they're the two sports that matter to us. So we're comfortable with that. Our news we own so that'll all be streamed. We don't have any US contracts. We won't buy any US shows unless we have streaming rights. So everything we're buying going forward -- but it would be false for me to say that, come to the end of the year when everything's being streamed, we've got all these rights because we won't. We might have 50% or 60% of the rights that we would need. But we intend to have all of our channels on all of our platforms on an AVOD service so you can watch it when you want. It's not about destroying any value for regional television. It's all about just be where consumers are. We're a platform business that's called TV now and there's TVs everywhere. It's not a strategy to undermine regionals or anything like that. It's just a strategy to make sure that people can watch our stuff when they want to watch it because they have so much choice now. -------------------------------------------------------------------------------- Brian Han, Morningstar - Analyst [50] -------------------------------------------------------------------------------- Okay, that's great, thanks. Simon, just one little question. I noticed that you guys spent about AUD20 million on investments. Can you shed some light on what those investments are? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [51] -------------------------------------------------------------------------------- Thanks for that one, Brian. Off the top of my head we participated in a further investment in Yellow Brick Road during the year. There was a small investment in Literacy Planet, Pedestrian that Alex referred to earlier. So there was a list of small adjacencies that we invested in during the year. -------------------------------------------------------------------------------- Brian Han, Morningstar - Analyst [52] -------------------------------------------------------------------------------- Right, okay. Thanks guys. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Your next question comes from the line of Martin Leong from Citi. Your line is now open. Please go ahead. -------------------------------------------------------------------------------- Justin Diddams, Citi - Analyst [54] -------------------------------------------------------------------------------- Morning, David and Simon. It's Justin Diddams from Citi. Just a couple of questions from me. Firstly, I just wanted to get an idea on your revenue share for the second half of this year and in particular whether you've now come through all the make-goods required from some of the audience misses in the first half and we're now back to steady state in terms of your ability to drive share and where there would shake out. I guess the follow-up question to that is, what's working capital going to look like then over the next couple of years just with some of the provisions? Should we still expect working capital outflow each year around those content costs? Thanks. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [55] -------------------------------------------------------------------------------- Justin, I'll pass you onto Peter on the dreaded make-goods. You can probably get a clearer answer than I've ever been able to get. -------------------------------------------------------------------------------- Peter Wiltshire, Nine Entertainment Co Holdings Limited - Group Sales Director [56] -------------------------------------------------------------------------------- In that case I'll pass back to David. Justin, we've managed to largely get through all of the challenges for the first half and the payback time is right now. The audiences are up dramatically year on year through July and August and should continue. From a revenue share point of view, anything north of our natural audience is obviously our ambition and our goal. We're currently travelling at 105% of our ratings share for revenue share and we expect to keep that mantra alive all the way through to the backend of the year. The performance of July and August is starting to show dividends into October, November from a revenue share point of view, playing catch up to the ratings cycle. So somewhere between 38% and 39% is the number for the half. -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [57] -------------------------------------------------------------------------------- Justin, on the working capital front, we're still thinking 80% to 90% drop through of, I call it underlying EBITDA to cash flow is appropriate but there will be a blowback cash drag of the cash cost of that bad inventory that I referred to earlier. If you take what's sitting in the balance sheet as a provision at June 30 plus that extra AUD100 million to AUD120 million that's going to come at us over the next four to five years, there's about AUD150 million cash drag which will obviously need to be funded out of our 80% to 90% conversion. -------------------------------------------------------------------------------- Justin Diddams, Citi - Analyst [58] -------------------------------------------------------------------------------- Okay, thanks guys. Cheers. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [59] -------------------------------------------------------------------------------- Thanks Justin. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- Your next question comes from the line of Sacha Krien from CLSA. Your line is open. Please go ahead. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [61] -------------------------------------------------------------------------------- Morning guys. Just had a couple more questions on slide 4 and that chart. First of all can we just confirm that we're talking about financial years there in that chart? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [62] -------------------------------------------------------------------------------- Yes, they are financial years. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [63] -------------------------------------------------------------------------------- Yes, okay. Just in terms of the red content which is uneconomic, does that mean that you're actually playing that or you're not actually playing that content? Maybe you can give us a bit of an indication of what proportion of that content is currently being played on the multi-channels? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [64] -------------------------------------------------------------------------------- The majority of it is not being played. Where it is being played it is generating a de minimis amount of revenue. So the vast majority -- -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [65] -------------------------------------------------------------------------------- Okay, great. So if it's not being played, is it reasonable for us to assume then that you're going to save 100% or AUD100 cents in the dollar on that content as it rolls off? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [66] -------------------------------------------------------------------------------- As that red, bad inventory rolls off there'll be a 90% -- there should be about a 90% drop through to the bottom line and 90% cash saving. I won't say 100% because there will be a small amount we'll need to backfill, but absolutely. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [67] -------------------------------------------------------------------------------- Okay. Then in terms of the blue content, in terms of the way you're shopping for extra content at the moment in the market, what sort of trends are you seeing in terms of content and the pricing given all the streaming services that are out there now? Are you expecting content costs to increase over the next few years? -------------------------------------------------------------------------------- Simon Kelly, Nine Entertainment Co Holdings Limited - COO and CFO [68] -------------------------------------------------------------------------------- No. Good content, the value of good content is increasing. So we will certainly find as that good inventory drops out of the contract and we need to backfill it to the extent it's good, it is going to -- selling prime time slots, it's going to be expensive to extend it to filling non-prime time slots, there most likely will be a saving. Net-net, I think there'll be some saving out of that. It's just too early to determine how much -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [69] -------------------------------------------------------------------------------- Just to give you an indication though, we've been so way overpaying for free to air because it's been such a lucrative market for Hollywood studios, et cetera that an episode of something that Nine would buy for AUD150,000, Stan would pay AUD15,000. What Foxtel would pay for it would be AUD100,000. Every now and then you get this really targeted -- you know, Fear of the Walking Dead and Stan will want it. Channel 9 wouldn't pay AUD300,000, AUD350,000 for Fear of the Walking Dead. Stan might want to pay for that because it could put on 25,000, 35,000 subs that just stay with you for the next two or three years. So there's certain shows and certain things but sports rights is the outlier. So I don't see this huge crash coming from -- there's a world of -- in every world in the US and the UK where you've got classification issues with free to air which have to be providing free to air. The BBC is what it is. ITV is what it is; NBC, CBS, ABC. You have to make a certain style of content that really fits a broader audience for free television. That content isn't going to be more expensive in two years' time. It's going to be less expensive to free to air. There will be pockets of hits in both sorts of things but nothing works. Seven launched Aquarius last night and had a big -- it is a little bit edgy but it hit 425,000 overnight. So let's say it does 100,000 in catch-up, it's done 500,000-odd viewers in its first ep. That's been promoted heavily through Presto and heavily on bus backs. So the brand awareness is quite high. There's just not an appetite for it. Good thing for Australians. Utopia on Channel 7, Charlie Pickering on Channel 2, they did 700,000 viewers in metro overnight. So there's an exciting opportunity to come. You can do a good panel show for AUD150,000 an hour or Australian (inaudible). So I don't think you should be factoring escalations in other content rather than sports rights. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [70] -------------------------------------------------------------------------------- Okay. The increasing size of that white gap is just pretty significant savings on that deal over time. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [71] -------------------------------------------------------------------------------- Yes but sports can be pretty significantly expensive too, though, going into those years also. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [72] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [73] -------------------------------------------------------------------------------- We like to think we're going to tread some water over the coming years and that would be our goal. We did bad deals years ago so we could do bad deals in the future that don't cost us as much. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [74] -------------------------------------------------------------------------------- Just one last question if I can. I was surprised that you said you weren't expecting any savings on other content as a result of picking up extended hours for the NRL. Maybe you can give an indication of the increase you're expecting in prime time hours as a result of this new deal. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [75] -------------------------------------------------------------------------------- It's 100 hours of primetime content. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [76] -------------------------------------------------------------------------------- Increased primetime? -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [77] -------------------------------------------------------------------------------- Per year, 100 hours, yes. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [78] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [79] -------------------------------------------------------------------------------- You have an extra Thursday night and you have an extra -- this is live hours. You can classify it as 50 television hours if you want to because of Friday night but the live hours, as Amanda said to you before, we're up 25-odd%, 30% and Sunday afternoons with live. Take into account everyone's looking at the headline numbers of our agreement, the NRL have the rights to put a simulcast deal back to us which will cost us headline ratings because you'll be sharing it with Foxtel like the same as Channel 7 does now. We have the right to put our ads on there so we've protected the revenue line but our ratings rate will come off 25% if that's the case but then the cost of those rights will come down by AUD150 million-odd, AUD100 million. We're comfortable on the maths. The maths works for us in either case. But for us generally, we look at it as getting another 100 hours each year of primetime content. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [80] -------------------------------------------------------------------------------- The simulcast savings that you will make if Fox Sports signs up, are they set in stone or do they depend on the price that's negotiated (inaudible)? -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [81] -------------------------------------------------------------------------------- No, they're set in stone. -------------------------------------------------------------------------------- Sacha Krien, CLSA - Analyst [82] -------------------------------------------------------------------------------- Okay, thanks guys. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- There are no further questions from the phones. -------------------------------------------------------------------------------- David Gyngell, Nine Entertainment Co Holdings Limited - CEO [84] -------------------------------------------------------------------------------- Alright, thanks everyone.
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