Zinc Media Group (LSE:ZIN) — Results for the 18 months ended 31 December 2020

0:03 Good morning, ladies and gentlemen, and welcome to the ZINC Media Group results for the eighteen months to the 12/31/2020 investor presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Please just simply type in your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate

0:33 to do so. These will be available via your investor meet company dashboard, and we'll notify you by email when they are ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll. If I could ask your attention to that, we would be most grateful. And I'd now like to hand over to Mark Browning, CEO and Will Sawyer, CFO from ZINC MEDIA GROUP PLC. Good morning to you both. Thank you, Mark. Good Good morning, everyone. Good to see you. Good to see ECU, as it were. So I'm Mark Browning, yep, the CEO of ZINC Media Group, and Will is with me, our CFO. So thank you for your time this morning. We're going to give you this presentation which updates you on all the progress within the group since we last met in February.

1:19 We will look back at the eighteen month reporting period, give detail on 2021, how the market is developing, how trading has been, look ahead to the next six-eight months. I am going to talk a little about ZINC's shareholder base and some of the ambition for the future. So, let's start with some highlights of the period that we are going to talk about. First thing to say, I think, is that the group has continued to win new business in lockdown three in effect this first period of this year. We are sitting on £12,200,000 revenue at the moment, which will deliver all things being equal in this world which will deliver in this calendar year. This is up from 9,300,000 reported in January.

2:06 And as I alluded to last time, there was good momentum in the run up to Christmas twenty twenty. This saw the group deliver significantly more revenue in the second half of last year than in the first half of last year, up 33% to 9.7%, and I gave some steer on that last time we spoke. Diversification is progressing well. The Group is broadening its client base. It's widening the price points we operate in both television and in the new ZINC communicate business. We launched last week a new label in another new market and I'm going share some details on that at the moment. Our share of the market, our buying points are increasing. Cash is good, currently 6.6 as of April 13.

2:57 Gross margins, critical to profitability going forward, have continued to improve. They were up in the reporting period and they're up further in this year, currently tracking 6% up on the full year 2019 before we started this transformation project. And margin growth is critical to future profitability. Pipeline for the year is good. Next year, two building, and we're gonna discuss that in a minute. So, you know, while lockdown three has slowed the market in 2021, we have a good pipeline. The critical issue is speed of business conversion and the group books revenue into our P and L on activity.

3:42 So we need to win the business and the business needs to be starting work on those productions for it to hit our numbers in the year. So let's just look back, first of all, and understand a bit more about the annual report and the numbers that we put into the market last Friday. In effect, this was my first eighteen months in the role. I started in May 2019, and this period is July 19 to December 19. Perhaps the first thing to talk about is is the market, and this really is about 2020. I think it's helpful to understand what's been going on in television and television production because COVID's caused a whole load of financial challenges across our sector. Just remember production stopped completely for three months in 2020, and it resumed in July, but remained pretty suppressed during the back end of last year and then we've had lockdown three, of course, we'll come on to. So revenues and profits in the production sector seem to have been, based on what we can read, 40 to 50% down. If we look at ITV Studios, which is their production side, you can see on the slide here, ITN, obviously my former employer, Fremantle, Tenopolis. There's lots of data points that we're starting to see now for what's been going on in the market in 2020.

5:01 And, you know, factual definitely fared better than sport or drama,

5:06 which stopped entirely and struggled to get going even in the back end of last year. But it still relies on us, factual producers, getting access to places, institutions, places where people are and having people there to film. So obviously, while we've got some of this stuff on our pipeline, if the people aren't there or the places aren't open or the two don't go together, it's made it very difficult to win the business and convert it. We can film. We've done fantastic workarounds for social distancing. I'll show you some television that was filmed under social distancing, including international stuff. But we need places, people, places to be open for us to really drive forward on our pipeline. Commissioning has remained a bit slow. That's because in effect, there is commercial uncertainty. I'll give you an illustration. I spoke to the Director of Commercial Activity at ITV and they're sitting on orders. They're sitting on orders that they want to process. But that commercial activity is slow, which, of course, leads to the commissioning team who are our buyers saying to their commercial team, look. I've got this budget. Can I get all in commission to the budget? And the commercial team is saying, well, we don't know if the budget's gonna work yet because we haven't got the orders from the clients. And, of course, that commissioning team then say to our teams, when our teams say, can we get on with that show? Are you commissioning that show from us? There's hesitancy.

6:25 So it rolls all the way through the chain, which affects the ability and the speed with which we can get some of these pipelines into production. Let's just look at the financial numbers. It's probably best if I let Will just pick up on this slide. So our accounting reference date changed from the June 30 to the December 31. So we're reporting an eighteen month period and the comparator is a twelve month period. But if we compare calendar years 2020 and 2019, and of course the majority of 2020 was COVID impacted, we see that our revenues were down 40% year on year. And that's in line with the market.

7:11 In 2019, our revenue was £29,000,000 And that's really important, because our first milestone now is to get back to 25,000,000 to £30,000,000 of revenue, where we'll be profitable and cash generative. And that's absolutely doable based on that pre COVID performance. The 40% reduction in revenues in 2020, they were mainly driven by COVID, but we also planned to refresh some new business winning roles across the group, and therefore we anticipated some of that reduction.

7:53 We made new hires in London TV and ZINC MEDIA PLC, and we actually launched three new businesses in 2020. And those new hires and businesses have been building their pipelines, and they're beginning to book new business now. In terms of gross margins, they were up 4.6% in the eighteen month period. And they were driven by the increase in London and Manchester TV production margins. And they increased by almost 5%, and that was as a result of the investment that we made in post production equipment and changes in production management. And we expect a further increase in gross margins in 2021, as we get a full year's benefit from those changes.

8:42 The adjusted EBITDA loss of £800,000 in the eighteen month period, That was of course driven by the reduced revenues due to COVID, but we did make £700,000 of cost savings in the period from a combination of furloughing staff, staff being on reduced hours, and the board and employees taking pay cuts. And as a result, the adjusted EBITDA loss in the period was almost halved. And in addition to that, we closed two loss making businesses, the ZINC Communicate division that produced corporate social responsibility content, and the Manchester based TV business Playway North, and they together made £500,000 of losses during the period. Finally, just a reminder that we completed a comprehensive balance sheet restructure during the period to provide longer term financial stability. And that included raising equity funds, it included converting all our preference shares and reducing the long term debt and extending the debt term.

9:49 And one consequence of this is a strong cash position at period end, with £6,800,000 of cash in the bank and net cash of 3.4 Okay, so let's just remind ourselves of the four strategic priorities that we addressed in this period. I laid these out in May 19, and we completed them in September last year, so during the COVID period. And in effect, these four strategic priorities address the reasons why the group had not been able to deliver the expected level of profitability and cash generation really in its historical past five or ten years. So we needed to address each of them because combined they are the solution to future profitability and cash generation. All of them were delivered despite the COVID challenges.

10:44 When taken as a whole, that means that we know now we fixed the issues that were preventing the group from being cash generative and profitable, and therefore when revenues return, we know we will now be in a positive position. So margins were critical. The group had struggled to deliver margins at the necessary levels and in line with the market. So that growth is a big swing forward on like for like revenues. Revenue growth and diversification. Clearly, revenue growth was impacted, but diversification continued well. We're getting a greater share of spend, a greater share of wallet, a greater number of people buying from us. Three new clients in television in the period from UK TV, Smithsonian, A and E, launch of the new popular factual label Red Source, and two new businesses in the news inc Communicate side of our group.

11:36 Culturally and creatively, we refreshed a lot of stuff. Everybody is rewarded now on margin and profit rather than revenue. And there are shared workflows for creative work and commercial work and so forth. There's real synergies across the group. And we've obviously invested in a cheaper London premises and better technology to drive margins and so forth. The the problems have been addressed, and that gives us the confidence that when revenues return, we know we can be profitable and cash generative. And I think it's worth underlining as a group in terms of our awards and our customers that this is a premium television production company. It does make some of the world's best TV, and it continued to pick up critical acclaim and awards in the eighteen month reporting period.

12:26 You can see some of those on the slide, and it produced for all of the main UK broadcasters, PSBs and others, and a good, good portion of international as well, even though that was significantly impacted. Just in terms of the range of TV, I mean, hundred and fifty two hours of original production was broadcast in 2020 across our TV divisions. That's a lot of TV. It's only twenty hours down actually on the prior year, which was about a 170 odd. And it's a very, very broad range, and it's getting broader. We've got high volume, lower cost television in some parts of our output.

13:06 We've got prime time, ITV in other parts of our output and then premium factual in other bits. So that slide gives you an illustration of the flavour of television that we make. Just looking to the more recent and perhaps some of the forthcoming programmes that are coming up, just a flavour of them, on this slide. The top row are programmes that have broadcasted in this year so far. You may have seen some of these on BBC one. You may have come across the Blitz with Lucy Worsley or on BBC two or internationally now you're seeing it, the the fantastic Trump series that got incredibly good access to the inner workings of Trump's White House, particularly in relation to foreign policy and the Far East, all filmed under under COVID, of course. Grand tours and the hunt for Gaddafi's Billions, just some of the illustrations of the programmes, which there were many in the period that we've just been through in the first quarter.

14:05 And a flavour of what's coming up. Well, there is a big programme on BBC One in early May. This has started to be trailed by the BBC already. There's an article in the Times, I think, this week on it. It's very much in their wheelhouse. It's celebrity, it's football, it's mental health, it's diversity issues. That is an Ian Wright programme coming out on BBC one. Channel five, we believe, are planning a sort of eighties themed program schedule at some point in the late spring, early summer, and they've asked us to make program on Thatcher and the miners' strike, and and it's fifty years of the missed event. Who'd have thought it? So there's a program from Tern with Matt Lucas there. So I just wanted to play you one of these. I wanted to alert you to them all, but let me play you one of them. One of them is the BBC one Ian Wright program, and it's worth just watching the pretitle sequence of this to give you a flavor of what's coming up in this program. So we'll watch that video now.

15:20 My name's Ian Wright. You might know me best as a footballer. Ian Wright. Yeah. And I hope I'm someone who's always tried to do his best for club and country. But the thing I'm most proud of is just being a daddy.

15:42 In many ways, I've been lucky, but it's not always been easy. Growing up, our home was not a happy one. There was a lot of violence. I only recently started talking about this. Life at home for you when you were little was obviously incredibly difficult. Mhmm. Anything would happen. I'd get a smack or get a clip or something would happen. So when I was younger, growing up, you know, I was very angry and confused little guy. I spent fifty years trying to avoid what happened. There was one time my mom her eye was like under it was just cut. She said he punched her. But now I've decided it's time to go back, to put the pieces of my childhood together and to see what others had gone through.

16:31 I'd be sitting at my breakfast sometimes. He'd just come in and punch me. I'd beat me cornflakes and nix them on the floor. In The UK, in the last year, one point six million women experienced domestic abuse. And in ninety percent of domestic abuse cases, there's a child present. My daughter remembers one time where he was strangling me, had me over the banister. Always used to promise that I'm gonna I'm gonna get us out of it. You know what I mean? But I just didn't know how. I wanna understand the impact this kind of childhood can have on kids growing up now and on the adults they will become. You were a child. You had no choices then. You were trapped. You're not trapped any longer.

17:20 I'm nervous about doing this, but it's something that needs to be done. You can see why the BBC are getting behind that programme. It's fantastic television. It's absolutely bang in the centre of what many of these TV labels are known for. Really impressive access and proper filmmaking. It's excellent. So let's turn to 2021 and understand a bit more about what's going on and what we're looking to do in the next eight or nine months. So we had those four strategic priorities of what we call the transformation plan that have been done. We won't talk about those again, we're now talking about these new five strategic priorities.

18:12 Some of them are familiar from last time, but where margin was the absolute priority prior to COVID, revenue growth is obviously the priority now having fixed the margins or largely fixed them. So revenue is good, as I say, 12.2 for the year. In normal times, we would expect this to be higher. In all honesty, we would be more comfortable if that was 15 or 16. But it's 12.2 and it's going up and it has gone up since we last met despite the lockdown three. Diversification is going well. As I say, three new clients last year, two already in for this year. Amazon Audible, I announced last time, and a new client that sits outside TV in the brand world that's come along with our new launch of Super Collider that I'll come on to. And more in the pipeline, at least five clients that never spent with ZINC before on our pipeline at the moment in television and dozens more in the ZINC Communicate side of the business.

19:12 Margins we've talked about, but just to put it in context, on like for like revenues, when those revenues return to what this group has done before and is capable of doing, that is an improvement, which will go to the bottom line, obviously. Cash is good. Talked plenty about cash and performance wise, I've mentioned before, we've put a big amount of effort and focus on performance and rewarding everybody and incentivising everybody on the same objectives that we're all keen to see. And in that sense, we've got new starters joining too, a new managing director of ZINC Communicate, a new Creative Director for Super Collider and a new CTO starts in June. Shareholder engagement is very, very high on our list. We are very fortunate to have such a good, strong, supportive shareholder base. We've got significant new shareholders that I'll come on to in a second.

20:07 And everybody sees the progress that is being made and believe this group is a long term investment opportunity. Looking at the diversification point, I think I shared this slide with you last time. We have a clear set of targets of new buyers in television that we want to talk to and want to win business from, from the lower price ends to the higher volume ends. We've got our first commission with UK TV. I'm hopeful that by the late summer we'll have our first commission from Sky. We've got a lot in with Channel five and the Viacom stable. On the SVODs, Discovery plus are launching a new subscription service at the end of this year and they are in the market at the moment talking to production companies to fill their hopper up, ready to launch that channel and series of channels on subscription.

20:58 Obviously, work with Discovery already, and we've hired a former commissioning editor of Discovery as a consultant for us to help drive that focus to our business ready for the end of the year. And in the brands or the partner side of ZINC MUNICA, I've mentioned Audible, we've got a number of B2B partners building our pipeline for the year ahead. Just on one of the initiatives we mentioned in our annual report, which is Super Collider. It's a new label operating in the TV world, but it sits almost in a third space. When we did the raise in November, we said it was for two purposes. Firstly, to ensure we could trade through any COVID related lockdowns in 2021. This was before the Kent variant, when we thought there wouldn't be any more and actually it was all looking quite positive to flow into 2021.

21:47 But we were like, look, if something goes wrong in 2021, we need to make sure we are robust. And three weeks after the raise, the Kent variant was found and three weeks after that, obviously, started. We also said at the same time it was for talent acquisition. And I think I mentioned that I've been talking to a lot of opportunities, a lot of people who could bring with them immediate revenue and an immediate pipeline and bring themselves into the business. And Mike Christie is one of those. So we launched this two or three weeks back. Mike takes us into new markets and brings that immediate revenue and that pipeline with him. He's a he's a producer director, different to the rest of our senior business winning team, but complementary with a background in factual and directing programmes.

22:36 But he's also worked with brands in live event production, in sport, in music and for clients including Red Bull and Apple and Pepsi, and was one of the directors for London 2012. So I'm gonna play you a film that gives you a flavor of sort of work we're gonna produce in Super Collider. In here, you've got the launch of an event that he directed for New Order's Education Recreation, which is released, I think, in a week's time. Danny MacAskill's Imagine8 for Red Bull. It's on YouTube. It's just under 100,000,000 views. Jump London, which is perhaps what he's most famous for, as well as a brand film, an advert for Pepsi, and a big stadium event that he was the director for in The UAE, and a and a film for Apple that was commissioned by Tim Cook.

23:21 So let me play you this. It gives you a flavor of the new space we're in and why we've decided to move into Super Collider.

25:48 So you can see there that that is complementary to what we do already, it plays on some of our strengths but it takes us into a new space as well. And we are involved in the first production, which is booking revenue into this year. So let's look at some other new hires that are joining in 2021. I'll just turn that slide over.

26:12 Three new hires are joining, two of starting in April. Damon Westbury is the new MD for ZINC Communicate. Worked in media sales for for the likes of MSN and Clear Channel, knows the agency world very well and a strong sort of media and strategic leader. He joined two weeks ago. He's gonna oversee three of the ZINC Communicate businesses in publishing and video marketing and branded content. Ollie Strauss, I think I mentioned this last time, joins from ITN. He joins in June and he helped me grow the commercial production wing of ITN through outstanding technology delivery, really, as well as taking out costs. In the last couple of years, particularly, won post production contracts for ITV's Dancing on Ice and I'm a Celebrity, as well as cost savings and innovation. We see this as a business generating role, starts in June.

27:02 And David Marshall is new to TURN. As commissioning budgets continue to move out of London, TURN is obviously a high performing division for us. We've added additional business winning firepower in the area of factual entertainment. He's a young talent and he's produced programmes including X Factor and Big Brother. So he will start to build his pipeline as of now. Finally, on TV, we've continued to modernise and simplify our proposition in the market. You'll see on the left this is how the company presented to the market historically. Not only did our visual impact suggest uniformity rather than differentiation, actually there was an awful lot of overlap and cannibalisation with labels because we had four MDs in effect chasing much of the same work.

27:56 So you can see in Brooklapping, for example, there was specialist factual and current affairs and investigations and access docs, which was very similar to what Blakeway and films of record did. And we had two popular factual labels competing for that that share of the market in Blakeway North and in Reef. So on the right hand side, we visually updated them, and they have new websites with their work on them. And we've we've defined each one more clearly for the buying market. If you want popular factual, it's red sauce. If you want serious TV and investigations, it's bootlapping and so forth. Looking ahead to the market and the outlook for the year, this is what some of our clients and the buyers are saying in terms of the recovery that is coming.

28:44 There is optimism, there's still caution, but there's more optimism. Fremantle talk about a bounce back. ITV talk about it getting much steadier ahead. In fact, you'll see I don't if you follow, but some of the agencies reported their numbers this week and they are seeing the advertising market coming back faster in quarter one than they had anticipated. ITN, my former employer, is seeing improvements this year and also continuing to improve next year. So what does that mean for us? Well, let's look at the pipeline. I've shared this with you now for the last three meetings. So if you'll see on the right back in November, we were on ��4,100,000 revenue booked into this year.

29:29 And we said there was good momentum in the market at the end of last year, and that was able to jump forward significantly to 9.3 by January. And there we are on 12.2. So we're showing you this every time so you can see the historical performance on the right hand side and then our current performance. And in the last two months, obviously, at the back end of last year, there was 5,000,000 commissioned when was no lockdown and so forth. Then we've booked £3,000,000 in lockdown three. So you can see the kind of steps that go forward in line with how the market opens up and then closes again. These amounts show revenue that would be booked in 2021. I really want to impress on everyone so we understand this, that this is about revenue that can fall in the year and hit our accounts. It's not total bookings. It's about what will happen this year, and that's why we're starting to talk about the pipeline for 2022, which stands at 21,000,000.

30:24 And next time we meet, I'll show you two pyramids, that will show you the two years side by side as we look forward to the year ahead. And the issue for us is speed of commissioning, speed of decision making. It's too slow and I've explained why it's

30:38 suppressed at the moment. We suspect it's COVID. That's what our clients are telling us. They're saying that they don't have the confidence yet to make some of these decisions because their revenues aren't as confident as they want them to be. But we're not complacent about COVID. We've got to ask ourselves, are we doing everything we can to bring revenues into this year? Are we giving the clients the reason to buy now? Are we asking the direct conversation to say, what would it take for this to be a commission today, not next month or the month after? So we're very alive to needing to make sure that we're doing everything we can in our gift to bring revenue forward into this year. And that's the remaining issue to resolve in the group. Volume. We need volume. We need scale. We need to get these revenues back. But once that happens, with the changes we've made, the margin improvements, the cost reductions, the efficiencies, we know we can be cash generative and profitable on revenues this group has done before. And we know that if we can get back to 2019 levels, whether that is this year, next year, or whenever it comes, we will generate 7 figures of cash on the new improved efficiencies.

31:43 So let's just close on a little discussion on shareholders. I just want to lay a few thoughts out for you. We have a very strong shareholder base, really respected heavyweight institutional investors in the likes of Herald and Canaccord, MITREN, Premier MITREN, EDAL and Ruffa. And since the beginning of 2020, all of these are either new to ZINC, in the case of Canaccord or Premier Miten, or have significantly increased their holding. One institutional investor, one institutional shareholder had to sell in the last few months due to a change in their investment strategy that they revised, as everybody revised their strategies during Covid.

32:29 But there was enough demand in the market for this to happen without it negatively impacting the share price. Our share price is broadly held at the same price as the last raise at the end of last year despite that change going on. So we have a very large, very supportive shareholder base. They're in this company for the long term. They see the progress that's being made. They understand the challenges of the past. They see this as a long term turnaround story, and they have the ambition to take this group to scale. In terms of our competitive set, I think this is useful for everyone to see. This slide compares ZINC with seven other AIM listed media companies, and ZINC's valuation is 0.5x revenue.

33:16 That's based on the twenty twenty revenues that we've reported in the annual report, so £17,000,000 The average of our competitive set of these comparative companies is 1.8x revenue. And we know, we all know, we're all frustrated that zinc is valued at a low multiple of revenue currently, and it's for totally understandable reasons we're trying to address, we have addressed, that will come through. And the last few years, of course, it's made it's going back before my time and some years it's made small profits, some years it's made small losses, it's had to raise funds, it's had a longer history of change in senior management. So it's understandable. But when you look at the opportunity, you can see that when revenues return, profitability comes and it will be significant profitability and cash generation when we get back to levels of revenue the group's done before.

34:10 We know that because of those underlying changes, if ZINC was valued at one x eight, in line with the competitive set, on current revenues that would be a £31,000,000 valuation, and on pre COVID revenues, take the '29 2019 year when we did 29,000,000, that would be 52,000,000. So it has high growth potential. So let's conclude on why what are the reasons to believe?

34:40 Lockdown three has been a pain. There's no there's no getting away from it. It's been a pain. There was good momentum at the back end of last year. We continue to book, but, you know, there's been a a slowdown in that momentum. That will come back. The group will be profitable and cash generative on 2019 revenues. We know this because we've addressed the underlying challenges. So it's about when. And for those that are still familiar to me, I've been in post just under two years. I've turned around two companies, much larger than this one in the last fifteen years. It took two or three years to do. This one will turn around as well because revenue is growing, albeit not as fast as we'd like. It's growing. It's diversifying. We're in new markets. We've got new buyers. We've got a bigger share of the spend that's going on. Margins are where they need to be now. For profitability, cash is good. Pipelines are strong, and we're strengthening our squad. We've got a clear plan, and we have a fantastic supportive shareholder base. The overriding issue is volume.

35:37 When the volume returns, then we will be profitable and cash generative, and it will be it will be a good outcome for all of us. And you can see there the size of the opportunity.