Edited Transcript of 035760.KQ earnings conference call or presentation 7-May-20 7:00am GMT

SEOUL Jun 3, 2020 (Thomson StreetEvents) — Edited Transcript of CJ ENM Co Ltd earnings conference call or presentation Thursday, May 7, 2020 at 7:00:00am GMT

CJ ENM CO., Ltd. – CFO

CJ ENM CO., Ltd. – Senior EVP

CJ ENM CO., Ltd. – CEO & Director

CJ ENM CO., Ltd. – Head of Media Solutions

Daishin Securities Co. Ltd., Research Division – Analyst

[Interpreted] Good afternoon. This is [Kay Che] from CJ ENM IR Team. First of all, I thank investors and analysts for participating in this earnings release session.

We will now commence the 2020 Q1 earnings release session of CJ ENM. Please note that the financial and management results presented today have yet to undergo an independent auditor’s review and, therefore, are subject to possible future changes.

Today, we have CEO, Heo Min-hoi, and heads of different divisions with us. We have Executive VP, Ha Yong Soo; and also Executive VP, Mr. [Hong Ki Song]; and from Media, we have Mr. Lee Myung-Han. Also from Media, we have Mr. Lee Seong-Hak; and from Commerce, we have Mr. [Chong Yang Tan]. From Pictures division, we have the President, Mr. Cho Young-ki. And from Music, we have the President [Mr. Song Jong-Yoon]. And from Studio Dragon, we have CEO, Choi Jin-Hee, with us today. First, CEO Heo will deliver his remarks (inaudible) strategy.

Min-hoi Heo, CJ ENM CO., Ltd. – CEO & Director [2]

[Interpreted] Good afternoon. This is CEO Heo Min-hoi of CJ ENM. Despite the difficult market in the first quarter of 2020 with dampened TV ad market conditions and slow consumption, the company continued to enhance its business competitiveness. With COVID-19 uncertainties increased, but we were able to minimize external shock by strengthening commerce and digital businesses. With the media broadcasting ad market contracting, TV ad sales decreased with social distancing measures due to revenue and music concert sales numbers inevitably saw changes. However, media digital sales witnessed a rapid growth of 29% as did music albums and singles and pictures ancillary sales. Commerce revenue also rose steeply, reconfirming the company’s capability when it comes to untact and digital. External volatility and uncertainties have increased in 2020. But CJ ENM plans to maintain its business competitiveness with preemptive measures and enhanced risk management.

First, the company will raise operational efficiency by decreasing media content production costs. The company will also strengthen liquidity and financial stability. With those measures, the company will enhance content and commerce competitiveness and fortify profit-oriented management. We will continue to get good results from our new content in the second quarter and with stronger products, we will do our best as the representative media and commerce company in the nation that grows in the global market. I sincerely thank investors and analysts for their participation.

Next is the results presentation. The quarterly and yearly financials are based on consolidated results and follows the K-IFRS standard. With the sales of CJ Hello, Y-o-Y comparisons are pro forma estimates. Now CFO Baek will give us the results of Q1.

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Jae Min Baek, CJ ENM CO., Ltd. – CFO [3]

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[Interpreted] Good afternoon. This is Baek Jae Min from CJ ENM. The consolidated revenue of CJ ENM in the first quarter is at KRW 810.8 billion, which is a decrease of 5.7% Y-o-Y. With the outbreak of COVID-19, TV ad market saw a slowdown and pictures revenue was sluggish. However, with continued growth of digital and commerce, the company was able to defend off the market volatility with a slight decrease in the overall revenue numbers. Operating income decreased 49.7% at KRW 39.7 billion, but profit growth in commerce and improvement of music business numbers were positive results. Market uncertainties will continue in the second quarter, and the company will focus on profitability with cost reduction from content production and others and preemptive risk management. With stronger emphasis on commerce and digital business strategies, the company will aim to continue its firm competitiveness in a changing market.

Page 5, Media. In the first quarter, this business saw revenue of KRW 340.8 billion, with operating income of KRW 3.9 billion. With the slowdown in the broadcasting market, TV ad revenue decreased 29.3% Y-o-Y, whereas digital revenue increased by 29%. The digital business grew strong as is illustrated by an increase in TVING paying subscribers and YouTube subscribers. The company continues to enhance this business foundation. Drama content such as Hospital Playlist, Oh My Baby and the TEAM BULLDOG: OFF-DUTY INVESTIGATION were continuously enhanced and the company will strive for good results with seasoned programs and new nonscripted entertainment programs such as THREE MEALS A DAY: FISHING VILLAGE and Voice of Korea 2020. With re-branding of MNET, OCN and others, we will expand our influence and with stronger ROI measures in place for TV and digital ad products, the company will continue expanding its ad customer pool.

Page 6, Commerce. The commerce business recorded revenue of KRW 375.9 billion, with operating profit of KRW 37.9 billion in Q1. Profit-oriented portfolio and fortified PB strategy led the top line growth. Operating income saw a decrease of 9.8% Y-o-Y. However, there was a one-off profit that was recognized in Q1 2019. Considering the one-off effects, the business continued its steady growth. The company continues to focus on its business competencies with reinforced product lineup and seasoned leading portfolio strategy. The business will enhance PB-centered T-commerce and continue to expand mobile channels and video commerce, including ETV.

Page 7, Picture. Pictures recorded a revenue of KRW 54.2 billion, with an operating loss of KRW 2.0 billion in the first quarter. With a high base effect from last year and with the onset with COVID-19, theater revenue decreased 81.9% at KRW 13.8 billion. However, library sales continued strong with titles such as Ashfall and Parasite. Ancillary revenue increased 111% at KRW 15.2 billion, and other revenue, including overseas sales of Parasite, grew [16.3%] with KRW 19.9 billion.

New releases are still being delayed in the second quarter, but the business will continue to enhance its global planning and development of hit IPs, such as Extreme Job and Exit to expand its overseas results.

Page 8. Music. With revenue of KRW 39.8 billion in the first quarter, Music business was at a breakeven point. With the pandemic, content revenue plummeted, but album and digital single sales of artists such as IZ*ONE and Kim Jae Hwan gave the business a revenue number of KRW 31.7 billion, which is a 46.8% increase Y-o-Y. The OST Albums also performed well and the successful debut of JO1 in Japan also positively contributed to the business. With Belift Lab programming and expanded activities of JO1 in the second quarter, the company will focus on global-bound artists. The business will continue to enhance its competitiveness with stronger mixed media programs such as Good Girl, Voice of Korea 2020 and Road to Kingdom.

Now we will invite CEO Choi Jin-Hee from Studio Dragon to give her results.

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Jin-Hee Choi, CJ ENM CO., Ltd. – Senior EVP [4]

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[Interpreted] Good afternoon. This is CEO Choi Jin-Hee of Studio Dragon. The revenue of Studio Dragon in Q1 was at KRW 120.3 billion, which is a 7.6% increase over the previous year. Crash Landing On You was a hit and the sales of My Holo Love to Netflix led the fee income growth at KRW 11.6 billion, an increase of 5.5% Y-o-Y. Our profit grew with more overseas sales, a better ASP from OTTs and cost stabilization. We will continue to focus on growth in the second quarter with diversified portfolio, expanded global sales and added business efficiencies.

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Jae Min Baek, CJ ENM CO., Ltd. – CFO [5]

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[Interpreted] Next, we will continue to the Q&A. Due to time constraints, please limit your questions to 3 each, centering on core issues.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) The first question will be given by Kim Hoi Jae from Daishin Securities.

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Hoi Jae Kim, Daishin Securities Co. Ltd., Research Division – Analyst [2]

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[Interpreted] 3 questions. First is a question on the current status of the LiveCity Project. Could you please give us an update of where the projects stand? And could you also give us an update of how (inaudible) ongoing with the LiveCity Project? And now the second question. I think I’ve heard in the presentation that there is a possibility that you may decrease your investment when it comes to content. So is there a possibility to decrease your investment with tentpole projects? And the third question goes to Studio Dragon. I know that you have lined up your tentpole titles for the year. And I know that some of them would be concurrently aired through Netflix as well. And that means that you have procured some type of profit or margin already. So could you please give us some kind of guidance as to the type of margin that

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Jae Min Baek, CJ ENM CO., Ltd. – CFO [3]

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[Interpreted] So number 1 and number 2 will be addressed by CFO. First, to the LiveCity-related question. We’re currently in discussion with the province of Gyeonggi-do when it comes to design and also change of business purpose with LiveCity. It’s to reflect the changes in our business scope and also our business environment. We hope to increase the proportion of (inaudible) where we could create our content and also have plans for an arena business there. And it’s too early to talk about an investment attraction today. If any decision is made, we will communicate that to you.

So if I may take your second question, which is related to the possible decrease in our investment for content, well, from the very beginning of our year 2020, we’ve been talking about enhancing our hit ratio when it comes to our content and also going for efficiency when it comes to content production. Well, you can think of our investment plans going ahead in the same vein. So if you would look at our 2019 figures for investment, plus amortization and depreciation from our content property, well, it stands somewhere around KRW 610 billion. And having said that, even if we do make adjustments to our investment for content, it will be within the scope where it does not influence our quality or in a scope it does not influence any of our tentpole projects. We are thinking of having better efficiency when it comes to programming, and we could think about the deduction of cost programming, too. And with all these measures in place, I think we could go for a decrease in our investment numbers by 10% to 15% compared to the previous year.

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Unidentified Company Representative, [4]

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[Interpreted] So this is Studio Dragon. If I may take your Studio Dragon-related questions. In the case of China, we are seeing some signals of normalization. But — and do — we do get many inquiries and suggestions. But I think it’s not complete yet. So we are keeping a keen eye on the situation. Well, as you’ve rightly mentioned, there are some formats that are co-aired through Netflix and some sales are related to our library content, and this all differs case by case. But if I have to give you a ballpark figure, the increase rate is a high single-digit number or a low 2-digit number.

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Operator [5]

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[Interpreted] The following question is by Park Sung-Ho from Yuanta Securities.

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Sung-Ho Park, Yuanta Securities Korea Co., Ltd., Research Division – Analyst [6]

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[Interpreted] Yes, three questions. First is related to your Media business. We’ve heard your presentation on the media results. And well, I assume that in the first quarter, your TV ad has been impacted negatively by KRW 40 billion and operating profit negatively by KRW 10 billion. And you’ve also talked about a 15% possible decrease in your investment that I think would translate into an impact of KRW 90 billion per the whole year and roughly speaking, about KRW 20 billion per each quarter. So could you give us some more flavor on your media results?

And my second question is related to your digital performance. As you’ve mentioned in your presentation, there was an excellent result when it comes to digital content. And TVING and YouTube, well, I believe that they have grown significantly. And with that, what was your contribution like from your digital business? So I would like to know that contribution.

And my third question goes to or is related to the securitization or your sales of your Studio Dragon stake through a block deal. Well, home shopping business, your commerce business is generating enough cash. I don’t think there is a big issue when it comes to liquidity. So why did you do the block deal? And well, if you are contemplating a block deal, why not do a block deal of your other stakeholdings such as Netmarble? Because I believe that business is less connected to your core business.

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Jae Min Baek, CJ ENM CO., Ltd. – CFO [7]

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[Interpreted] So questions number 1 and 3 will be addressed by the CFO now. So yes, the TV ad, we have seen minus 29% number for the quarter. Well, traditionally, the first quarter is a low season. And with COVID-19, uncertainties have really increased in the market. And with that, the advertisers have been very conservative in executing their actions. And well, we told you in the onset of the year that production costs will increase probably at a low single-digit number. And if you look at the first Q number, actually, it has been a slight decrease. And with the outbreak of corona or COVID-19, we will be more prudent in executing our production costs starting in the second quarter, and we will be going for added efficiency and with all these measures in place, as was mentioned, we hope to see a decrease by 10% to 15% when it comes to production costs. But we would be very flexible when it comes to actual execution in considering the move of the TV ad market.

And as to your third question on our SD share, Studio Dragon shares. Well, it has been communicated the possibility of Studio Dragon stake sales ever since 2018. And we’ve mentioned back then that we will be searching for strategic investors to work with. And at the end of last year, we had a 5% deal with Netflix. And this time around is a follow-up deal following the 5% deal last year. And with the uncertainties presented with COVID-19, we wanted to be extra cautious.

And you’ve also mentioned the name Netmarble. Well, as we’ve communicated in our previous meetings, well, we could use our stake holdings to enhance our content and commerce, which are our core businesses. So we have been working with our invested assets with which we could actually see some speedy news. But nothing has been decided for our stake holding in Netmarble as of today.

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Seong-Hak Lee, CJ ENM CO., Ltd. – Head of Media Solutions [8]

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[Interpreted] Yes, now I will be addressing your second question, which is related to our digital ad sales. Well, my name is Lee Seong-Hak with the Media division. Well, in the first quarter, the digital ad saw a rapid rise of 29%. It grew 29%. It’s because we tackle the preference of the younger generation very well. We knew what their content preferences were. And also, the businesses with the COVID-19 break, they had a big need for untact marketing activities. So we saw great achievements with platforms such as [MCN and TVING]. And the digital subscribers grew 125.6% over the previous period. And TVING paid subscribers, they saw a real rapid rise of 78.85%. Our business strategy going forward is, of course, to secure our profits, and we will be working with digital content brand for YouTube, but we will also be working with branded content and other platforms. So with this strategic direction in place, we’ve introduced [Signal], a digital mash-up channel and for tvN D, we go for digital-only season and mash-up and other clips. So with all these activities in place, the number of searches

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Y-o-Y. And on a Q-o-Q basis, well, the number of subscribers grew 125.6%. So the company as a whole has powers when it comes to content creation. We have the know-how in-house, and we hope to transplant this know-how to our digital platform. Of course, in the process, we will be securing our profitability, and we hope to enhance our influence.

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Operator [9]

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[Interpreted] The following question is by (inaudible) from [Heungkuk Securities].

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Unidentified Analyst, [10]

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[Interpreted] Yes, I have a question for Studio Dragon. Do you have any tangible tentpole titles or you’re expecting (inaudible) that are lined up to be released in the second quarter? And what kind of impact does it have on your programming fees?

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Jin-Hee Choi, CJ ENM CO., Ltd. – Senior EVP [11]

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[Interpreted] Yes, if I may give you some flavor as to our lineup. Well, in the month of June, we have a title called [I’m a Psychopath] and also Stranger 2 and Start-Up that would be aired during the weekend. And we also do have a title starring Park Bo-gum that will be aired. And we do also have a title that is based on a Korean traditional legend featuring foxes. And as to your question pertaining to programming fees, there are no substantial changes.

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Unidentified Company Representative, [12]

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[Interpreted] And your question related to our nonoperating results, well, we did get some kind of an influence with the foreign currency exchange movement because of our receivables denominated in foreign currency. We did have a slight positive effect from that, but it isn’t that significant.

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Operator [13]

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The following question is by Hong Sejong from Shinhan Financial Investment.

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Sejong Hong, Shinhan Investment Corp., Research Division – Research Analyst [14]

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[Interpreted] Yes. I have two questions. First is directed to your commerce business. I noticed that your commerce results were quite good for the first quarter, and I believe that your results were somewhat helped by the outbreak of COVID-19. And what is your expectation going forward for the month of April? Do you think this good results will continue into the following months as well? And with better results, I believe that you might have a tougher negotiation when it comes to platform commission negotiation. So could there be any influences to such talks?

And now my second question goes to ENM as a whole. Well, are there any meaningful nonoperating influences that you’ve witnessed in your numbers? Well, and as to your disposal of SD, or Studio Dragon stakes, will it be booked in the second quarter numbers?

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Unidentified Company Representative, [15]

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[Interpreted] This is (inaudible) from the Commerce business. You rightly mentioned, of course, the big rise in need for untact business did provide some help in the first quarter. But we also worked on adding more efficiency to our private brand, and we had a multilayer strategy (inaudible) to the mobile platform. So all these strategies in place gave us the positive results. And going forward, we will continue with our multilayered strategy, and we will do best with our seasonal offerings.

And as to the second part of your question, which is related to our negotiation with the platform providers, well, we are in discussion with the platform providers for platform commission. But please understand that we are not at liberty to disclose the negotiation content.

So all in all, our nonoperating saw a positive number of KRW 1.3 billion. So it’s a positive number compared to the previous year. And as for nonoperational spending or expenses, it saw an increase by about KRW 10 billion. As you’re well aware of, after the produced program last year, we had to contribute about KRW 5 billion to promote the Korean music industry. And we also spent about KRW 9 billion in terms of consultation fee because of our divestment related to CJ Hello, and we were helped by our financial standings. And all in all, as was mentioned, our numbers stand positive at KRW 1.3 billion.

And your question related to the stake sales of Studio Dragon, will it be recorded in our second quarter numbers? Yes, on a stand-alone basis, it would be recorded, but not so on a consolidated basis.

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Operator [16]

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[Interpreted] The following question is by Kim Min Jung from HI Investment & Securities.

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Min Jung Kim, HI Investment & Securities Co., Ltd., Research Division – Research Analyst [17]

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[Interpreted] Yes, two questions. Well, is it inevitable that you make changes in your guidance numbers due to COVID-19 outbreak? You did mention that you had witnessed some influence from COVID-19 when it comes to your TV ad sales. And will this influence your overall numbers? So would you inevitably change your guidance? And well, I think COVID-19 has hurt the pictures industry the most. So when do you think things will be back to normal when it comes to your Pictures business? And even if the theaters are reopened because of the delayed production, I think there would be some influences to your release date. So could you give us more flavor on that?

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Jae Min Baek, CJ ENM CO., Ltd. – CFO [18]

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[Interpreted] Yes. The CFO will provide the first part of your question, followed by an answer from the Pictures division. So your first question pertaining to the possible changes on our guidance due to COVID-19. Well, the unfavorable market conditions posed by COVID-19, it’s a different fact. And because of this given fact, given environment, we did see glitches in our plans. And we should have — we must make some strategic changes in our direction going forward, and we will be more prudent in executing our expenses. We’ll be seeking more efficiency, and we’ll be very prudent in our spending to defend the current market conditions. And given all the volatility and uncertainties surrounding the global world now, it’s rather not meaningful to give you a reused number when it comes to our guidance. And should there be a meaningful change in our guidance numbers, we would be making sure to convey the message through — to you through our communication.

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Cho Young-ki, [19]

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Yes. This is Cho Young-ki from Pictures division. Well, to your question related to possible disruptions in a production. Well, 2 titles, the [Deliver Us From Evil] and [Hero.] These 2 titles required overseas shooting, but the overseas shooting has been done last year. So we had no glitches when it comes to overseas shooting with these 2 titles. And as for domestic production, we have no issues with domestic production. And as to the release dates of our new titles, well, after the second quarter, we did have expectations to launch 7 or 8 titles. But inevitably, there were some delays. But having said that, we still do hope to release about 7, 8 titles in the second half of this year.

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Operator [20]

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[Interpreted] The following question is by John Yu from Citigroup.

Since we didn’t hear the question from John Yu from Citigroup, we’ll move on to the next questioner.

The following question is by Kim Sunghwan from Crédit Suisse Securities.

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Sunghwan Kim, Crédit Suisse AG, Research Division – Associate [21]

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[Interpreted] Three questions. First related to Studio Dragon production. Well, I think that you’ve mentioned that you will be creating 33 titles in 2020. That’s 5 more compared to year ’19. But having said that, CJ ENM did not add on any new channels. So I think it means that the added on 5 more titles will be going for the non-captive channels or maybe to Netflix. So could you please explain what your plans are for your non-captive customers when it comes your titles?

And my second question is related to the new drama, The King. What is the depreciation schedule related to The King?

And my third question is related to your planned spinoff of TVING, what would be the business model be like after the spinoff? Could you please give us some guidance?

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Unidentified Company Representative, [22]

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[Interpreted] Yes, nothing has been decided — the number of titles that we would be creating this year. If COVID-19 is prolonged, of course, there would be some influences to our production plans when it comes to really [mega-specific] scale titles. And for our captive channel, we do have library titles and also we could use the (inaudible) channel for our [potential sales].

And for our fixed project bound for Netflix. Well, it’s a Netflix Original called Sweet Home that would be for the fourth quarter. That has been fixed.

And as for the deprecation related to The King, well, programming sales, it’s expensed in a single shot, and the rest amount is amortized or depreciated over the lifespan. But I will be giving you the corrections, if I’m not 100% correct today.

Yes, for TVING, well, our joint venture plans is on schedule as was planned. And as for the mentioned spinoff, we do have plans in place to wrap up the process within Q3 this year. And it’s a very important decision for us, and we’re in the midst of establishing our strategy. And once things are made more concrete, we will be delivering the message to you in another earnings session.

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Operator [23]

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Currently, there are no participants with questions. (Operator Instructions)

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Unidentified Company Representative, [24]

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(foreign language)

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[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

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