Q2 2024 Earnings Roundup: Mixed Results and Cautious Outlooks Across Industries

Hammerson plc (HMSNF) Q2 2024 Earnings Call Transcript

Hammerson plc (OTCPK:HMSNF) Q2 2024 Results Conference Call July 25, 2024 3:30 AM ET Company Participants Rita-Rose Gagné - CEO Himanshu Raja - CFO Josh Warren - IR Conference Call Participants Pranava Boyidapu - Barclays Rob Jones - BNP Paribas Vincent Willink - Kempen Rita-Rose Gagné Good morning, everyone, and thank you all for joining today's webinar on such a busy day. And welcome back to those who joined us on Monday. As usual, I'll start with the summary of our progress, then pass to Himanshu, who will run through the numbers and I'll be back to cover operational trends. Let me start by saying that I'm pleased to report we've had another strong first half, as we are realizing the benefits of our investments in recent years. I'm particularly pleased by the strength of our leasing activity, showing high demand for our destinations. I'm pleased also with the underlying growth in GRI and earnings, and I'm glad it enables us to increase the dividend by 5%. And while the big news this week was our agreed disposal of Value Retail for cash proceeds of around GBP 600 million, we have a strong operational grip on the business and that comes through the numbers. Our dominant city center destinations are in high demand as shown by steadily improving KPIs. Footfall was up 6.5% in Bullring, 5% in Westquay and Cergy, 3% in Les Terrasses du Port. Overall, up 1%, reflecting the ongoing repositioning we are doing elsewhere on the portfolio. We've welcomed a host of new occupiers, and are pleased to see these best-in-class brands generate sales densities that are 20% higher than their predecessors. When I look on a like-for-like basis, France and Ireland are up, but U.K. sales are down 3%, as the benefit of these new openings is not yet coming through in the like-for-like. Non like-for-like U.K. sales are actually up 1%, and follow a similar pattern to footfall. Where we have made investments, sales are up. For example, Bullring is up 4.6% on footfall and it's up 4% on total sales. Occupancy is robust, even while we continue our program of repositioning with heavy lift at Cabot and Oracle this year. We'll come back to that. This is all driving another year of increase in leasing. We printed GBP 23 million from 140 deals. That is up 24% in value, once again at a strongly positive spreads to previous passing and ERV. This momentum already continues into the second half. We're generating top line growth with more to come. The underlying GRI is, therefore, up 4%. So, that all shows you the positive impact of the repositioning we're doing and the flight-to-quality that is playing out. Then it's about adapting our product to both generate and responding to the evolving demand. At the same time, we delivered another outperformance on costs, down 16% year-on-year. Now, we have a strong, scalable platform as we look to further drive operating leverage. All this resulted in adjusted earnings of GBP 50 million, a new base to grow from, following the completion of our GBP 500 million disposal program. Turning now to the right-hand side of this slide. The agreed disposal of Value Retail is transformational for the company and it is a key driver of what is to come. So, I'll spend a few minutes recapping the key points for those who weren't able to join on Monday. It generates GBP 600 million of cash proceeds on an EV of GBP 1.5 billion, which represents an attractive EBITDA multiple of 40x and an exit cash yield of 3.4%. It's a clean exit and it removes a significant overhang on Hammerson shares. The proceeds go further -- sorry, the proceeds go to further strengthen the balance sheet, investing for growth and enhancing distributions with the buyback of up to GBP 140 million announced earlier this week. Furthermore, the Board intends to adopt an 80% to 85% payout ratio post-completion of the sale of Value Retail, in line with U.K. market REITS. Looking forward, after 3 years of intensive turnaround, we're entering a new phase with the capacity and capability to invest, to accelerate growth and focus on quality. We gave a new medium-term financial framework with all this in mind on Monday. I believe this business is able to achieve an annualized TAR of around 10% going forward, and that's assuming yields stay as they are. I'm really excited about the opportunity ahead and very confident we are growing the top line and earnings off our new base. Now, over to Himanshu for the numbers. Himanshu? Himanshu Raja Thank you, Rita-Rose, and good morning, everyone. I'll run you through the half-year performance, as well as provide the update to the pro forma numbers for the disposal of Value Retail based on the 30th of June actuals. Now let's jump straight in. We posted another period of positive underlying GRI and NRI growth of 4% and 5%. Our new base for adjusted earnings at the half year is GBP 50 million, following the completion of the disposals program. And let me deal right up front with full-year guidance. The second half is always a bit stronger and we will, of course, see some benefit from earnings from Value Retail until completion. The loss of earnings post-completion will be offset by interest receivable on the net cash proceeds. I'm, therefore, comfortable with where market consensus is today. The IFRS loss of GBP 517 million, and the associated NTA per share reduction to 38p, largely reflects the write-down of Value Retail to the agreed disposal price and the effect of earlier disposals and a modest revaluation loss in the half. Those are the highlights. Now let's look at the adjusted earnings walk. Starting from the left-hand side, we disposed of GBP 10 million of net rental income and fee income, leading to our new baseline for 2023 of GBP 46 million. From there, like-for-like NRI added GBP 1 million. The reduction in gross admin costs was GBP 4.2 million, and net finance costs of GBP 6.4 million, which benefited from interest receivable on our cash balances. Value Retail earnings were disappointing, GBP 1.7 million down year-on-year. And we also had non-recurring items of GBP 6.1 million, rounding out to our half-year '24 earnings to GBP 50 million, so a 9% uplift on an underlying basis off the new base of GBP 46 million. On to valuations. This chart shows the peak to now by geography for both yields and ERV, and the spreads to the underlying sterling and euro 5-year swaps. U.K. and French yields are again stable. You can see on the chart the continuing widespread to U.K. and European swaps, with the U.K. at 400 bps and France at 240 bps. Whilst Ireland remains economically tied to the EU, we have seen some outward yield movement there despite the lack of transactional evidence, with the spreads to 5-year swaps approaching those of the U.K. Turning to ERVs. All 3 territories posted positive ERV growth, with the U.K. up 1.5% and France and Ireland, up 1%, respectively. Now for the obligatory NTA walk. Starting with the 51p at FY '23, the dominant movement, of course, is the effect of the disposal of Value Retail of 11p per share. Revaluations and disposal losses and the FY '23 dividend are offset by adjusted earnings, bringing you back to 38p at the half year. Let me now turn to the balance sheet, credit metrics and debt stack. Reported net debt at GBP 1.2 billion was 8% lower than at the full year. Pro forma for the disposal of Value Retail, this falls to GBP 0.6 billion, 71% lower than we were at in FY '20. The resulting pro forma net debt-to-EBITDA is 5.3x compared to 14x at FY '20. And pro forma LTV is 25%, 15 points lower than FY '20. And of course, with the disposal, our FPC measure falls away. On to debt maturities. You know that we maintain cash on balance sheet as it is more accretive than settling lower coupon debt. And with the disposal of Value Retail, pro forma cash will be GBP 1.14 billion and total liquidity up to GBP 1.74 billion. This puts us in a great position to access capital markets and to fund our future growth. And what a turnaround that is from when I arrived in early 2021, and we faced a EUR 1 billion wall of refinancing from a much weaker position. Today, we have a strong balance sheet and a strong capital structure to go on the front foot. So, back to Rita-Rose to tell you some more about that. Rita-Rose Gagné Thanks, Himanshu. So within the -- with all the repositioning we've been doing over the last 2 years and are undergoing now, we can see that the value is flowing into the portfolio. So let's now look at the opportunity before us. Those who joined us on Monday will remember this slide, where you can see we now have a portfolio that comprises a unique footprint in some of the U.K., Ireland and France's fastest-growing cities. Our destinations are focused on high-growth urban catchments with young, affluent and growing populations. This is a high-quality, highly regarded portfolio, with 93% of our destinations rated A by Green Street following recent upgrades where we have reinvested and repositioned. In addition, there's also that significant untapped potential of our 80 acres of strategic land where we continue to create optionality. And at the bottom of the slide, you can see our current scale and the potential for growth through existing asset enhancement initiatives through JV consolidations and other investments. So, there's a lot of upside in our reach here. The quality of our portfolio and our work on the assets has driven and continues to drive our strong leasing performance. We'll talk about that now. The trends we've seen in recent years are continuing. Occupiers are investing significant sums for the long-term, including new concepts and refurbishments. Over 80% of leases signed in the first half were on a long-term basis with a WAULB of 7 years. As you know, I pay a lot of attention to the passing rent, to the cash. Our leasing spreads remain positive, 61% ahead of previous passing, or 29% ahead if you exclude units with nil passing. Since the second half of '21, leasing has consistently been ahead of previous passing. We also continue to lease ahead of ERV, plus 10% in the first half. Note that in the U.K., we're leasing 15% over ERV and this provides another 6 months of solid evidence of rental growth to our valuers. It's pleasing to see this start to be reflected in the values as Himanshu just spoke about. So, another half of positive portfolio ERV growth. We're now in a positive reversion in all territories for the first time since 2018. The mix is diverse with top quality occupiers. We've seen the recent news on M&S coming into Cabot and Sephora coming into Bullring. And I'll come back to that. We've made a great start to the second half with 20 deals exchanged. And when you look ahead, the pipeline is very strong with around GBP 23 million in negotiation and more than GBP 10 million in solicitors' hands. Let me pull a few highlights for you on that front. The strategic relationships we've built with best-in-class brands continue to pay off. For example, we've completed the repurposing of the former Debenhams space in Bullring by bringing in an upsized Zara. JD Sports have also upsized, both at Brent Cross and Dundrum. And we have brought Pull&Bear and Les Terrasses du Port. That asset in Les Terrasses du Port is an asset that continues to outperform our expectations. We've now completed more than 80% of the leasing WAULT at its 10-year anniversary. We also renewed with Sephora at Les Terrasses du Port and therefore, leveraged that relationship to bring them into Bullring. And this is a first for Birmingham. Community and local relevance are vital for us. So, I was delighted, we've continued our relationship with Charity Super.Mkt, bringing them back to Brent Cross, and they've just been very successful with footfall and sales across our properties. So, congratulations to them for their concept. We also look to brands outside the norm to tailor to local taste and demand. As you can also see, particularly if you look on the right-hand side of this slide, we've continued to enhance our leisure and F&B offer because there is a strong demand for these. We are able to bring in this diverse mix of quality occupiers because of the attractiveness of the assets and their ability to house these concepts. And we are putting more and more emphasis on the quality of the mix. So, let me now talk about 2 assets where we've invested in recent years, significantly improving the mix, and we are now benefiting from strengthening KPIs and recognition from the market. And those are Dundrum and Bullring. And I know you've heard about those assets already, but they are continuing to evolve very positively and to have more and more impact and continue to benefit from the investments we've made. So it's important to understand that it's not just deals, but it's how deals materialize in time. So in Dundrum, as a reminder, we invested GBP 31 million to generate GBP 70 million of contracted rent on long-term leases with premium occupiers, Brown Thomas, Penneys, Dunnes Stores and Nike. The last was a first for Ireland. The impact of that in time has been that we're now seeing a younger demographic with higher spending conversion and average spend. Including the halo effect on ERVs, the overall uplift to passing rent has given us a total IRR of around over -- actually over 20%. In Bullring, we've invested around GBP 26 million in recent years, both in the department store repurposing, but also the wider repositioning and new offers. You've heard about this, but this has generated GBP 39 million of contracted rent with again, great occupiers we've announced recently, such as M&S, who is now open very successful; TOCA Social, Inditex and Lane 7. We're driving significant footfall and ERV growth, the latter, in particular, driving a project IRR of over 40%, given the low base. I'm pleased that both these super-prime destinations have recently been visited and upgraded by Green Street, both now in the A++ category alongside a handful of others in Europe. And there is more to do on these assets. There are incremental opportunities at both these destinations. For example, we just signed with Lane7 in Dundrum last week and are looking at upgrading the F&B offering. We're exploring bringing a cultural anchor in Bullring and a potential residential opportunity in an underutilized car park adjacent to the asset. So let me now turn to show how we are replicating the success of Bullring and Dundrum into Cabot Circus, we are currently in repositioning. In June, we exchanged with Marks & Spencer to take the former House of Fraser space, aiming to hand over in the second half and open in the spring of '25. We had already put House of Fraser on a short-term occupancy. So, we were ready to seize the opportunity and to execute this at pace. We took vacant possession of the cinema box space, where we anticipate bringing a new offer alongside increased leisure elsewhere, including bowling with King Pins. Together, we are already seeing this generating further occupier demand. Overall, we anticipate around GBP 3 million of uplift per annum in NRI and strong returns well above our cost of capital. ERVs are already up 3% in the first half of '24, with all this activity. Looking further ahead, there's an opportunity to refresh the historic Quakers Friars area within the estate. We expect to be in for planning later this year. Cabot Circus is at the heart of the city center of Bristol, with a strong catchment of over GBP 1 million. It is surrounded by several development projects at the moment, which will continue to grow and grow further the city center and densify the catchment area and we're going to be part of that. We also complement these larger projects across the portfolio by investing in better placemaking, not only to drive footfall and improve the vibrancy, but also to generate income in its own right. To pick out a few highlights from the first half, we hosted Dizzee Rascal album launch at Bullring and at Cabot, which generated about 7,000 extra visitors. The passing of the Olympic Flame at Les Terrasses du Port saw same-day footfall up 40%. We're increasing our marketing and commercialization efforts, both with existing partners and new brands as they enter our destinations or new geography for the first time. And we've continued our digital marketing transformation, now generating some strong KPIs. As an example, our TikTok following is up 8%, with Bullring having a particularly strong month of May. Looking ahead, we have an active summer, so a summer of sports that is already underway. 3 of the 10 team GB Fanzones will be in our U.K. assets, while Cergy will host a sports village for the duration of the Olympic Games. We're also in the process of refreshing our individual asset brands and corporate identity. In time, this will open further avenues to monetize our digital assets, particularly as we continue to invest and improve our data analytics capability. Just this week. we became the first operator in the U.K. to deploy AI analytics in the Bullring to quantify customer engagement across stores and media. This will provide a more robust and transparent measure of brand value for current and future occupiers and advertisers in Bullring. We will be rolling this technology out across the estate. I mentioned before the importance of our communities, and this intersects with our placemaking efforts. We remain committed to all our ESG goals, but have redoubled our efforts to drive our social impact in the first half of the year. We are progressing our Net Zero asset plans with a further 5% reduction year-on-year in carbon emissions. And that follows a 35% like-for-like reduction from full-year '19 to full-year '23. In June, we held our Annual Giving Back Day with colleagues across the group, supporting 15 local charities and organizations and building stronger links with our communities. We actually won 2 awards at the International CSR Excellence Awards for Bullring and Grand Central for their mental health support and awareness project in collaboration with Birmingham Mind. We're, therefore, not just paying lip service here. Because of the nature of our assets and their important footprint in city centers, social impact is an important part of our strategy for me and our team. Let's now go on to capital allocation. You will be familiar with this slide. I think we've showed this slide since mid-2021. This is our approach to capital allocation that we've been following in a very disciplined way. And now we are going to go into explaining further the opportunity that lies ahead for us. The key messages are, again, very disciplined and committed to a sustainable and resilient capital structure through the cycle. Our waterfall is as follows; further strengthening the balance sheet, investing for growth and value creation, which are with a bias to organic investment and consolidation within the existing portfolio and enhancing returns to shareholders. On this slide, you see the extent in some more detail of our opportunities in time. There's a lot of information on this slide, but it shows that we already have a wealth of opportunities to scale up Hammerson. So on the left side, you can see the JV consolidation for which we've earmarked GBP 350 million of capital with the agreed sale of VR. But we also have capacity on balance sheet, and we have a wealth of opportunities to scale up Hammerson. Doing that, doing some repurposing and enhancing existing assets, I've described what that is and the opportunity in the medium term to bring forward projects that are immediately adjacent to our assets. So, this slide again is a good slide to refer to when we're talking about timing and sizing of capital allocation, which, as you know, is not a linear thing. All that is at returns comfortably ahead of cost of capital. Again, we'll stay disciplined, selecting the best adjusted returns -- risk-adjusted returns for our shareholders and exploring alternative funding or liquidity where appropriate. To bring this all together and conclude, 3 years in and with the agreed VR transaction, a material portion of the strategy laid out to the market at half-year '21 has been successfully implemented. The balance sheet is fixed. The company is focused on a core quality portfolio of leading city center destinations. Our ways of working have been overhauled, digitized, automated and are cost reduced. Rents are increasing off a new base, and we are investing to accelerate growth. And we are far from done. I strongly believe that with all our work, we will grow in a sustainable manner, our income, our earnings and our NTA to deliver the best total returns to shareholders. This all underlies my confidence in our medium-term financial framework. Just take a second here and look at this picture you have in front of you, which describes as well an amazing crowd, energy, nightlife music -- this is a music event that we held in Westquay. And this is what we are investing into. These are city center living spaces. So, thank you for your time this morning. And now we will take a few questions. Back to you, Josh. Josh Warren Thanks, Rita-Rose. Let's turn to the phone lines first. Question-and-Answer Session Operator [Operator Instructions] We have our first question from Pranava from Barclays. Pranava Boyidapu I just wanted to get a bit more detail on the Dundrum secured loan. I know you mentioned that you're in advanced stages. But I was wondering, did this require you to put in any extra equity into the JV, also considering that Ireland is the segment that has seen a valuation decline this year in spite of other segments showing stronger valuations? And also, if you can give more information on the LTV or margins on that transaction? Rita-Rose Gagné Sure. I'll turn that question to Himanshu, actually. Himanshu? Himanshu Raja Thanks for your question. We referenced on Monday, we're in the advanced stages of completion and we expect to sign in early August. So, we'll make an announcement in due course. It will be inappropriate really to talk about it ahead of signature. So watch this space. Pranava Boyidapu And if I could also ask, in terms of redeployment of cash from the sale of Value Retail, you've put around GBP 95 million for debt reduction. Do you expect to see some tender activity? Or is that for the future when you have to deal with more debt maturities, including, for example, Dundrum? Rita-Rose Gagné Yes. Okay. So again, a nice question on debt, Himanshu, if you want to pick this one up? Himanshu Raja Again, you're not going to like the answer. It would be completely inappropriate for me to talk about intentions on tenders and the like. I think the key takeaway is that we now have a strong balance sheet. We're in a great position to access debt and capital markets at the right time. Operator Our next question is from Rob from BNP Paribas. Rob Jones Hopefully, a couple of questions that are more appropriate. One was on trust support. Obviously, great to see [8%] in the leasing or lease expiries in '24, you've now dealt with. In terms of the anniversary leasing, have you got a greater than kind of normalized run rate of lease expiries in '25 as well? I'm just thinking about if there's a kind of elevated level of expiries there, and I guess some of those may have started to be dealt with, but just a bit of color there. And then secondly, a less exciting question, probably for Himanshu on interest receivable going forwards. Obviously, GBP 600 million or circa GBP 600 million of net proceeds from VR sale. I appreciate that some of that's going to get utilized for buybacks. Some of that will get utilized for debt paydown. But on day 1, I guess that's going to be sitting on deposit. I think you said 4.4% annualized interest, so a significant percentage of your earnings. Do you pay or will you pay tax on that interest as it kind of counts as non-retail income and therefore, there's a net interest receipt that is taxable? Just some color on that would be helpful for my modeling. Rita-Rose Gagné Thanks, Rob, for your questions. So the first one on TDP, well, as I mentioned in the presentation, we've done a big part of the lease cycle in terms of that asset, and it's actually, as I said, been better than expected. It's doing really well. And the recent -- the leasing profile that lies ahead is just really -- it's really flat. There's no spikes and the pipeline is good. And we expect to finish that smoothly and continue to increase performance of the asset. And Himanshu, question on.... Himanshu Raja Yes. I mean, on the interest question, Rob, thanks for your question. There's just 2 two components to draw out. The first is, of course, when we think of the VR proceeds, I'd just reference, to start with the hedging position, we're 90% hedged on euro assets. So, we have to top up the hedging on the euro assets equally. We have to put hedges in place for the Bicester element, all of which we've done. So as you unwind those on completion, we'll lose some interest on those euro swaps. But net-net, this will still be accretive compared with VR earnings. On the tax piece, it stays within the REIT wrap-up. There's no material tax effect for your modeling. Josh and I can take you offline as to then how to think about the rates that you apply. Operator Our next question is from Vincent from Kempen. Vincent Willink Three questions from my side. Firstly, on France, I see valuations are perfectly flat. So, just wanted to make sure if there was a revaluation round and could you perhaps highlight what discussions you're having with appraisers? Because in light of the lack of evidence, one could say there should be write-downs. Second would be on the like-for-like rental income. I see a big contribution from surrender premiums. Would you say this is a normal level of surrender premium? And third one on like-for-like in France. I see 2.4% and last year the ILC index was 6.5. Of course, there's a cap for SMEs, but that's still at 3.5. So, could you add more color there as well, please? Rita-Rose Gagné Yes. Thank you, Vincent. So the first question around the yield in France that has remained stable. Listen, again, I'm reminding everybody that we were now down to 2 assets that we hold 100% and that are really high-quality prime assets. The reference transactions that have taken place, for example, Italie Deux, has been done at a 4.7% net initial yield, 5% net equivalent yield. So the market for those types of assets is very strategic. And I think that these valuations have held stable for that reason. I mean, France has a longer-term view, if I can say, of assets. And I think that as the market comes back -- at the moment, we're seeing more interest. But I'm also aware of some processes ongoing, and I think that for very prime assets, you will see those yields coming back. And there's a question of polarization at the moment for the very best assets. These yields will come back and they're healthy versus the swap, the 5-year swap. So it's stable. Can it move a bit? Maybe, but I don't see any material move given the market, given what we've been able to achieve as transactions and what we know with the experience of these transactions and the solidity of these assets. So, we're comfortable at this point and they're in line with the overall market. Again, I feel, however, we're lucky to be concentrated on high quality. That's what I would say, because, again, I do feel there's going to be a lot of polarization and differentiation between top quality prime versus secondary, regional or those types of assets. So, that's what I would say on France. And actually, I think that addresses the 2 first questions. In terms of the like-for-like, surrender, Himanshu, do you want to take that up? I mean, it is -- you have to bear in mind that, as I said in my presentation, we're at the moment being extremely proactive. If you want to understand what we're doing in the last 3 years versus before, we're being extremely proactive in the asset management. I've talked to you about Oracle. Well, Oracle is another one we're repositioning at the moment. But Cabot, I mean, what we're doing now happens because we've been proactive in taking possession and securing deals, enabling us to do our repositioning. So, surrender premiums are part of our -- we don't shy away. If we have to do it, we do it because we have a better strategy. So personally, I don't think these are that exceptional. But Himanshu, maybe you want to add something on that? Himanshu Raja 100% agree. I'd just point out that it's not big numbers in absolute terms either. It's big sort of percentage swings. And then your last question was on like-for-like sort of France movement. You will know predominantly that's the effect of CVAs in France, which are coming through in the numbers and that's what explains the movement from the 6% last year to 2.4%. Operator [Operator Instructions] Josh Warren Okay. I think we have no further questions on the telephones, and we have no further questions online. So, I'll hand over to Rita-Rose very briefly to say thank you. Rita-Rose Gagné Thank you very much, everybody. As you know, we are always available. It's been a big week for Hammerson with the announcement earlier on and these results. So strong momentum, but also a big transformation ahead, extremely positive. So, we remain available if some need additional answers or feedback. Himanshu, Josh are always available for that. And again, thank you for your time. And also for those who did the 2 calls, thanks for that. So have a good week. Thank you.

Earnings call: Ipsos reports steady growth with cautious outlook for 2024 By Investing.com

In their 2024 Half Year Results, Ipsos demonstrated a resilient performance with a 4.7% growth rate and 3.8% organic growth, though the second quarter showed a slowdown at 3.1%. Despite challenges in North America, particularly a -2.2% organic growth in the United States, the company achieved positive growth in other regions and is focusing on its technological advancements, including AI-powered products. Ipsos has revised its annual growth guidance to approximately 3%, aligning with the previous year's figures, while maintaining an ambitious operating margin target of 13% or above. Ipsos (ticker: IPS), in its 2024 Half Year Results, has shown a mix of positive and cautious indicators, with overall growth and a focus on technological innovation, particularly in AI. While the company faces challenges, particularly in the North American market, it remains optimistic about its strategic initiatives and its ability to rebound in the latter half of the year. Ipsos continues to navigate a complex global landscape with a clear focus on maintaining profitability and growth. Ben Page: Welcome to the 2024 Half Year Results for Ipsos. And it's good to be joined by you. I'm here with my colleague, Dan Lévy, our CFO. And I want to take you through where we find ourselves halfway through the year in this Olympic city of Paris. So, overall, we've seen good growth at 4.7% overall, organically that is at 3.8%. And if you look at Q2, it was a little weaker particularly at the end of Q2 at 3.1%. We have a positive scope effect, because of the acquisitions that we have successfully made over the last 18 months, and those are working well and adding to our growth, but a negative FX effect at minus 1.8%. The profitability is good 10.1% versus 8.7% for the same period last year. And we've also done well on our free cash flow, which is up nearly €60 million, is €80 million now for the first half. What I'd like to do now is pass over to Dan, who will take you through more detail behind some of those figures in a second. But one key thing that we need to remember is the mixed situation in the United States. Now here organic growth is negative at minus 2.2%. Outside the U.S. 6.5% growth, but in the U.S. negative, and that's a very mixed picture. It's caused by on the negative side the electro cycle, the end of some of the major contracts that we have which are one-off in our public affairs work, and of course, the restructuring that we're seeing in the pharma industry there, I think, 20,000 layoffs in the pharma industry in the U.S. in the first part of this year. On the positive side, of course, the business is facing CPG clients are in growth and in some of those cases double-digit, strong growth in our Ipsos.Digital business. So it really is a very mixed picture. We've seen as you will see in a minute recovery in growth in some of our big tech clients. And I just spent last week in the U.S. with our new CEO, Mary Ann Packo, our new management organization. And what we're expecting now is stabilization in H2 and a return to growth at the beginning of next year. So, outside the U.S. pretty good growth, but the U.S. is a challenge at the moment. But now Dan, please take us through the detail of the numbers. Dan Lévy: Ben, thank you very much. Ladies and gentlemen, hello. As usual, I'd like to start by looking at a geographic breakdown of revenue. So we had a very good period in EMEA of 7.6% organic growth for the first half, and that was actually driven by Continental Europe and the Middle East. Good performance in Germany, where the new managerial structure is starting to bear fruit also solid performance in Italy. So, these two countries with double-digit growth. We're talking about organic growth. Talking about acquisitions, major acquisitions in Europe, I&O in Netherlands, Jarmany in the U.K. and an acquisition in Ireland. So, all solid performance for those acquisitions. And when we look at the scope effect of those acquisitions, we now have overall growth for EMEA at 10% for the first half of the year. Turning now to the Americas. It was slightly down 0.6%, Latin America is still doing well. However, the United States, they have a 2.2% negative growth. So, I won't spend too much time talking about that. Asia-Pacific now we have 4% organic growth for the first half of the year. Growth in China is still quite weak given the macroeconomic context, which is quite murky. For the rest of the zone, we had a pullback of business for the first half, despite a solid quarter here there. And the second quarter and the third quarter should see some of our contracts coming through which should buoy business as we go into the end of the year. And that's particularly the case for India. If I now look at revenue breakdown by audience, our consumer side business is still doing very well. Organic growth up 8% over the half and that reflects all of our business lines, our consumer side business lines so that is brand tracking, innovation, advertising creation content. And all of that needs to be compared with the major consumer division, which is also doing very well, and which buoys up the Consumer division. Talking about clients and employees, citizens doctors and patients. They are still being hard hit by business in the United States as we -- as Ben just mentioned. So if we were to remove the United States from those figures, all of those three segments -- all of those three audiences sorry I should say, they should be up 5% organic growth. Now looking at revenue by sector as a breakdown, I'll quickly sit through this because it's not quite repeating myself. We continue doing very well, when looking at major consumer divisions, because we had a huge inflation in 2022 2023 and we're able to stave off the effect of that inflation. We have 60% growth in TMT and that is predominantly thanks to the major tech companies in the United States coming back. For the rest, as I said, the Pharmaceutical division and public sector division, they are what they are. We're still having solid performance in new services with 13% organic growth for the first half of the year. Ipsos Digital in particular, is up 37% and all of the new services reflect 21.5% of overall total revenue. Let's now move to accounts. We have 6% growth on gross margin, which is 80 basis points up. So the margin there can be explained for two reasons. First, a solid digital business, which has a margin which is above the group average and that is still showing solid growth. And on top of that, we have also been doing a lot within Ipsos to internalize a lot of our panel and data collection work. So because of that, our data is now more reliable and it also costs less to collect all of that data. 3.3% growth compared to 6% for our gross margin. So what that means is, that we need to be a bit more cautious and we have an overall ratio, which is actually significantly up on last year, which is 68.3% compared to 70% last year. Now, overheads. Overheads are at €8.3 million. So that is predominantly due to a lot of tech and IT spending. Now for the first half of the year, we are 10.1% overall which is up considerably on last year. Now, when we look at the adjusted net profit group share, so that's roughly 18% up. Let's now, look at cash generation. So we are €35 million up in terms of contributions compared to the same time last year. As we saw, there was solid inflows in the first quarter and that's because we had solid revenue in the fourth quarter of last year, so 8% organic growth over that time period. In terms of investment, we have both tangible and intangible assets and we've still been investing in things such as, IT and our data sections. So we had €33 million in investments and this is in line with our tech road map. In terms of free cash flow, we are roughly at €80 million, which is up €56 million compared to last year. Moving on to M&A. We spent about €28 million in the first half of the year, by buying up Jarmany and I&O in the UK and the Netherlands. And we spent about $39 million on buying back of shares and that is predominantly due to the share -- employee shareholder program that we have been rolling out. And overall cash position is 28 -- sorry €280 million give or take. So we have a strong financial position. When we look at our leverage effect, 0.3 multipliers which is compared to 0.4 for the same period last year. So we're doing very well. We have no debt maturities coming in this year. We have €300 million in 2025, which is a public bond, which will come through in autumn. And we have strong liquidity position of roughly €500 million of undrawn credit lines, with our banks. And again, they will have maturities over one year. Well, that's it for me. I'll hand over to Ben now, who will go over our tech roadmap. Ben Page: Thank you, Dan. And I'd just like to take you through where we are on our tech, our digital backbone and the changes we're making there, which are helping improve our profitability and also, of course, Generative AI, where we have some new products that we've talked about before, we can -- these are now going into the market, and receiving really positive responses from our clients. So whether it's PersonaBot, where we are creating synthetic profiles for different consumer segments that our clients can talk to directly using Ipsos Facto, our own proprietary platform or Signals Gen AI, which is allowing us to mine billions of social data points into insights in just a few seconds. All of those show real promise and are helping us engage more deeply than ever with our clients. So, I wanted to talk just a little about a few of those before we talk about the outlook. So, Creative Spark is a way of looking at ads based on 18,000 data points, previous cases that we have built now into Ipsos Facto, and it allows our clients to very quickly understand how a potential execution for TV or for social video might perform in real life. Could we run the launch video, please? [Video Presentation] Ben Page: Thank you. And that's an example of a product that is helping our creative excellence business grow across the globe including very well in the United States itself. So, it's a reminder that innovation is fundamental to what we're doing here. PersonaBot. Ipsos PersonaBot is an AI-powered solution to use to enhance our segmentation research. And again, here, I won't run another video for you, but it's interesting to, for example, we're using it for launch in France to look at how different segments of the market react to different low-carbon solutions. And again, giving our clients faster decision making over how they position their brands, how they communicate, and how different segments of the market might react and really bringing to life using human intelligence, combined with artificial intelligence, masses of data at speed. So, again, a really important AI-led solution. And finally, HP (NYSE:HPQ), for example, has been using our Signals Gen AI and this allows them to take millions of social data signals about their brands, different categories, using thousands of different ratings to look for trend detection, allow them to benchmark themselves and see where there are opportunities for innovation, and their head of marketing, what do they say you gave us the insight that people want to save time to be able to focus more on the strategic, creative and fulfilling work. And I think that's a key point the fact that the Generative AI allows humans to do the more interesting and strategic work. That's precisely what we're trying to do internally with Gen AI at Ipsos, where the vast majority of people are now using it regularly and outside. So in terms of our outlook for the rest of this year, I think where we are at the moment is that we can see continued growth. We have -- the acquisitions we have made have been successful. Dan has already shown you the profitability and cash generation. We are rolling out our tech road map but we do have, of course, as you've seen headwinds, particularly in North America. We've strengthened the managerial organization there. I think, overall, having seen what we have seen in our review at the end of June and then in July when we start to analyze those numbers, our guidance now is that growth will be close to that of last year rather than what we originally thought at the beginning of this year. So, at around 3%, we have just kicked off a new strategic review for the next four years from 2026 to 2030 and I will be updating you on that. But we also are able to, of course, maintain and hit our operating margin guidance of 13% or above. So, thank you for your attention. Very happy to take questions and just talk through exactly what's going on. Operator: [Operator Instructions] Our first question is from Emmanuel Matot from ODDO. The floor is yours. Operator: The next question is from Line Fort Marie from Bernstein. Please, the floor is yours. [Operator Instructions] Our first question is from Emmanuel Matot from ODDO. The floor is yours. Emmanuel Matot: [Foreign Language] Yes. I hope you can hear me now. I actually have three questions if I may. So when I look at your new guidance for revenue, it seems that there is a bit of risk given that there is a very high level compared to the first half of last year. So, I mean, can you give us a bit more information just to reassure us on that, especially as we go into the second half of the year? Next question. I remember that you were good in advisory services -- sorry, in the health services. Could you please give us a bit more insight into your business in the health sector, just to reassure us on that to see if you can get back to levels quickly? And final question, for the United States, can you tell us a bit about market share? I get a feeling that it's quite a tough market for all operators. But if you can tell us a bit about Ipsos' market share and is the new management there going to buck the trend, especially given that you are going to be incorporating the new teams of -- with the new management there. Tell us a bit about that. Dan Lévy: Maybe I'll take the first question. I will answer it in English, because Ben has just had the translation. So, on the first question about the risk around the guidance, what I would say is that it's true that we have been slightly surprised by the slowdown in Q2 and particularly at the end of Q2. We have done a new forecast exercise with all our countries mid-July. And this new exercise has obviously led us to this new forecast of around 3 -- around the level of last year. Obviously, when you do a forecast, there are always some incentives around the forecast. So it could be 2.6, 2.7. It could be 3.1, 3.2. In terms of what we see, there are reasons for -- I mean for some element of rebound in H2. First of all there is the question that we have mentioned before, which is the fact that in Asia, particularly, we have had some contracts which were booked earlier last year and which are going to be booked in Q3 this year. So that should fill our growth in H2. We obviously have made the assumption of a stabilization in the US, which is what we see. We also have a good performance as you have seen in Europe, and we do think that this will continue during H2. And there is a very important point as well, which is the fact that as you have noticed there are a lot of elections around the world. And this election means for us electro cycles, which is basically lower growth on public affairs before the elections and then a rebound after the elections. And that should be happening particularly in the UK, in India as well, which should drive our public affairs business in the second part of the year. So I would say the new guidance obviously is a central scenario but there are obviously risks around it. On the healthcare sector, we had said when we released our Q1 results and it's still the case that the pharmaceutical sector it seems to be struggling in post-COVID restructuring, particularly in the US. You have probably noticed that in Q1 particularly but also in Q2 there has been some layoffs in the US on the pharmacal sector. Lower drug approvals as well by the American authorities. So these are obviously headwinds for health care business. But we do see some early signs of recovery which will be to be confirmed in H2. A - Ben Page: I'd also just add on healthcare that this is an area where data analytics is moving incredibly quickly. There are all sorts of new opportunities. And actually for example there some of the Gen AI solutions are already attracting revenue and interest from clients. So it's a complex picture but overall the fundamentals of that market in the longer run is such that we are still confident about healthcare over time. On America, which you asked about specifically, our market share is tiny, probably between anything between 1% to 4% of a very large market. And that means that if the new management who are now in place and they're not all brand new, many of them have been with us for over a decade but they have a new leader and we've restructured the team that team really has plenty of opportunities. And what's so interesting when I was there, I spent a week with them last week is that you can see the parts of the organization that have got things working, doing the right things growing well and other parts of course need more attention. So again, I feel absolutely confident about the United States overall particularly, given our relatively small market share in the biggest market in the world. Emmanuel Matot: Thank you very much. Operator: The next question is from [indiscernible] from Bernstein. The floor is yours. Unidentified Analyst: Good morning. I'd just like if you could come back to your operating margin targets. I imagine there's going to be a bit of bounce back for the second half of the year. But what in terms of investments for the second half of the year is that how you're going to bounce back? And second question I have about China. Do you expect that to be a bit of a bounce back? And what sort of opportunities are you seeing there? Dan Lévy: Okay. Quickly about our operating margin, I think it was shown quite clearly in the presentation that we just gave you that we have some key drivers structural drivers to boost our operating margin be it Ipsos.Digital or be it internalizing our panels all the productivity against that we can bring through with AI type solutions. So that's our mid- to long-term solution which is really going to drive operating margin in the months and years to come. Now for Gen AI-type issues, but also when talking about our panels platforms we need to continue to invest in them. And we are doing that. And that is why we have our operating margin which would be high, if we were investing but we absolutely have to invest. Ben Page: In China there is the beginning of some return to growth in China but the market remains depressed very competitive. The economy is still very uncertain. You've seen the rate cut by the bank in China. So I don't think, we're seeing -- expecting anything like a post-COVID rebound which of course we were all wrong footed about when China finally reopened in 2023. But we are seeing some recovery. The auto sector is busy et cetera, et cetera. But it is muted. And that's why again that I think we are being cautious about -- we would be pretty cautious about China. Dan Lévy: I mean there are a lot of questions, macro questions about China. Obviously the unemployment for the young people is very high. There are questions about the real estate sector, whether the fiscal policy is going to help the growth come back or not is not clear and what the government going to do is not clear from that perspective. So we do face in China more macro challenges than anything else. Ben Page: So on the M&A pipeline, it's very healthy. We're -- there are lots of interesting deals, exactly when they'll come through. However again there are lots of unknown. So, lots of activity but timing on that I think again really can't comment on. In terms of the new managerial organization in the US, of course I hope that it comes in the next few months. But I think realistically it's good to say the start of 2025, because if I look at Germany where after a long period of very low growth indeed we now have double-digit growth in the first part of this year. That manager there and then the changes that he made of course happened in the first part of 2023. So Christophe and the team are doing a good job but it takes time for these things to come through. So I would definitely say, the first part of 2025 onwards hopefully. Dan Lévy: Are there any more questions on the chat, because Ben was answering some questions on the chat about M&A and the US? No more questions?

Vivendi SE (VIVEF) Q2 2024 Earnings Call Transcript

Arnaud de Puyfontaine - Chairman and CEO Francois Laroze - Member of the Management Board and CFO Good evening, everyone, and welcome to the Vivendi Half Year 2024 Earnings Presentation. This conference call will be hosted by Mr. Arnaud de Puyfontaine, Chairman of the Management Board and CEO; and Mr. Francois Laroze, Member of the Management Board and CFO. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Arnaud de Puyfontaine. Please go ahead, sir. Your line is open. Arnaud de Puyfontaine Thank you very much, and hello, everyone. Welcome, and thank you for joining us for the Vivendi 2024 first half earnings presentation. Before handing over to Francois, I would like to highlight the robustness of our results with excellent revenues of €9 billion, up 5.8% at constant currency and perimeter. Our EBITA also increased significantly plus 13.5% at constant currency and perimeter. This performance confirms our group's momentum. It places our entities in the best possible position to embark on the next chapter in our history. First, Canal+. All of its segments are growing. Meanwhile, Canal+ has recently made significant moves pushing its international expansion one step further. In June, the group increased its stakes in Viu, Asia's leading streaming platform now owning 36.8% of the group. In the same month, it launched the mandatory offer for the MultiChoice Group shares, not already owned. Africa and Asia are two decisive regions for achieving a real change of dimension, which would open up exciting prospects for Canal+ Group, if any one listed. Second, Havas, while continuing to experience solid performance, strong commercial and creative activity as well as dynamic external growth, the group has launched a new strategic plan named Converged. A lot has already been done under the leadership of Yannick Bolloré to better integrate teams and expertise. This new plan will take the group even further. Converged involves the launch of an operating system and major investments in technology, data and AI, which will represent €400 million over the next four years -- €400 million investment. This announcement made in Cannes a few weeks ago has been extremely well received by the entire ecosystem. The solution has already been implemented by a number of clients and initial feedback has been very positive. More than ever, Havas is home of creativity powered by technology. Third, Lagardère and Prisma Media. The Lagardère Group just published excellent results, posting double-digit growth. The group's two main divisions, Lagardère Travel Retail and Lagardère Publishing are well positioned to capitalize on further growth opportunities. Today, the group led by Arnaud Lagardère is stronger than ever, and the transfer of the majority stake held by Vivendi in the Lagardère Group along with Prisma Media to a new company called Louis Hachette Group, would enable the company to continue its growth dynamic and ensure its long-term influence both in France and internationally. Prisma Media would also open up an exciting new chapter by joining Louis Hachette Group. The group would have the opportunity to innovate and develop by drawing on its publishing, travel, retail and media business. The last few months have demonstrated Prisma robustness under the leadership of Claire Léost. The company has proved its ability to navigate effectively in a complicated print market by acquiring or launching new titles such as the design and lifestyle magazine Ideat and The Good Life. Ideat has also demonstrated its capacity to embrace new business segments. For example, digital affiliation activities and advertising revenues on social networks have grown by more than 10% compared to the first half of 2023. Lastly, Vivendi will pursue its mission of developing and transforming Gameloft as it did during the first semester, combining a clear cross-platform strategy, a stronger focus on a few high potential franchises and better cost management. All in all, our business has once again demonstrated their solidity in recent months. More than ever, they are ready to be independent to go public and to seize all of the opportunities that this new chapter could offer them. As you have seen, this week, on Monday, we gave an important update on the feasibility study of the split project. The study has confirmed the feasibility under satisfactory conditions of the project, the launch of proprietary work for its implementation and has identified the most suitable listing venues for the transactions. For Canal+, the choice of the London Stock Exchange as a potential listing venue reflects the international dimension of the group with Dailymotion, GVA and the ongoing MultiChoice acquisition. Havas would be listed on the Euronext Amsterdam Stock Exchange, a market which would enable the group to stabilize its share capital, ensuring its sustainability for its talents and clients. It also reflects the group's global exposure with the majority of its activities being carried out, internationally. Louis Hachette Group would be listed on the Euronext Growth in Paris consistent with the continued listing of its subsidiary, Lagardère SA on the regulated market of Euronext Paris. It is important to emphasize that the three companies would keep the decision-making center of their activities as well as their operational team and tax residency in France. As for Vivendi, it would remain the leading player within the creative entertainment industry listed on the regulated market of Euronext Paris. In line with the strategic plan and enabling the group's different businesses to seize investment opportunities post-split, Canal+ and Havas would have virtually zero net debt with the exception of the debt put in place by Canal+ for the MultiChoice public tender offer. Louis Hachette Group would have no debt of its own, except Lagardère and the debt of approximately €2 billion, which has recently been refinanced. Following the split, Vivendi could have a net debt of around €1.5 billion to €2 billion. Concerning the timeline, the relevant employee representative bodies are now being consulted and informed starting this week. This consultation as well as other important steps, including a shareholder vote must be carried out before the project can be implemented, which could take place by the end of the year. Once listed on the stock market, our businesses would benefit from stronger visibility within their markets with clients and partners and with investors as well as from an increased agility to carry out external growth transaction. The share price performance since the announcement of the split project in December, plus 20% is the best illustration of the project relevance. The share price has decreased today, but this is due to the market's other reaction to Universal Music Group's Q2 results. We are fully aligned with Lucian Grainge's vision for the company's significant growth prospects for the medium and long term. Exciting times lie ahead for Vivendi. We are looking forward to the next milestones of our split project. Thank you for your attention, and now let me hand over to Francois. Now I will walk you through the first half performance of the Vivendi Group. As Arnaud said, we have a very sound figures for this first half. Let's remind you that for the first time, we are consolidating the Lagardère Group for the six months of the first half and compared with zero months last year first half, which explained the evolution in gross figures of the revenues and EBITA. That's why we'll focus more on the organic growth, restating the perimeter impact. And you see that the revenue went up by 5.8% for the first half, which is a very positive figures. Same for EBITA, which is up by 12.7% in the same time, our adjusted net income went up by 1.5%, and the net earnings group shares down by 8.3% to €159 million, mainly due to the settlement of very old, 24-years-old litigation for €95 million. If we have a look at our financial situation, it's still very solid with shareholders' equity of €16.9 billion and a net debt of €3.9 billion. The cash flow from operations has been solid as well from our business with €160 million during the first half, and we still have €2.9 billion of available credit facilities. If we focus on the H1 revenues, you see that all our main three business units, Canal+, Lagardère and Havas are delivering very positive revenue, 4.6% evolution on Canal+; 10.1 on Lagardère; and Havas 3.6% in gross figures and 0.3% in organic. The other business unit have done roughly at the same level than the previous half. Let's also focus on currency impacts, which are slightly zero with 0.8 points of impact of the currency impact during this first half. The second quarter has been in the same trend, even accelerating a little bit compared with the first quarter as we have reached 6.1% for the second quarter and with the same positive trend on our three main business units, Canal+, plus 5%; Lagardère 11% and Havas, 1.4% in gross figures, minus 2.3 in organic. If we look at the EBITA, it's a 12.7% decreased for our controlled business. And if we add the UMG impact, it's 13.5%. Canal+ very solid at €337 million, stable; Lagardère, up by 65% to €200 million; and Havas, increasing by 6% compared with last year at €125 million. Let's have a rapid look at the UMG result, even if you have all seen the evolution of stock price during this Thursday. Nevertheless, the figures in terms of consolidating earnings have been very solid. The net earnings group share went up from €625 million to €914 million as we do restate the stock price impact on the figures, what we compute in Vivendi is a net profit of €485 million compared with €393 million, and it's an increase from €39 million to €48 million if we take the 10% of Vivendi's stake in UMG. The net income, we have already commented revenues and EBITA. And then when we go down to the earnings attributable to Vivendi share owners, we see this decrease by 8.3%, which is mainly due, as I said, to the settlement agreement with the institutional investors. As I said earlier, 24 years old litigation, which is now ended. If we look at the adjusted net income, which reflects our recurring result, we see it's going up by 1.5% compared with last year to €329 million. If we have a look at our financial net debt evolution, it went from €2.8 billion at the end of the previous year to €3.9 billion at the end of the first half, it's an increase by €1.1 billion. Important to point out that the increase mainly come from investments that we did in many stocks among which MultiChoice, Viaplay and Viu by Canal+ but also Havas, which has achieved many bolt-on acquisitions. Lagardère in which we have increased our stake, acquiring €120 million of shares during this first half, but also the share buyback, which we have achieved for €155 million. So if we add all these investments, it's roughly €1 billion of new investment, which explains the evolution of the net debt, knowing that in the same time, the different business units have delivered sound cash flows on €0.2 billion. And we have also realized the disposal of the festival and ticketing operation for €0.3 billion. This €3.9 billion net debt comes from €1.6 billion to Vivendi legacy business and €2.2 billion from Lagardère business. And we have the ambition to reduce this net debt before the end of the year, both in Lagardère and Vivendi. If we look at our portfolio assets, no major evolution compared with the previous presentation. In terms of stock percentage, we're still exactly at the same level during our previous communication, Universal, Prisa and the other. The total value of our asset was €8.4 billion at the end of June. As you know, we have suffered today the strong impact on our UMG stake, which is at the moment, which is roughly €1.2 billion below the one at the end of June 2024, and we have received €105 million of dividend from these different stakes during the first half. Canal+, as Arnaud said, has done very well in terms of revenues. All the business units have largely contributed from International to Studiocanal, including Mainland France with the increase of the subscriber base and very profitable operation cost Studiocanal with -- among which the Back to Black movie. In terms of subscriber base, we went up from 25.1 million at the end of June 2023 to 25.7 million, out of which 18.9 million comes self-distributed and this positive trend can be shown in all the geographies, including France, to 1.5 million; Europe, 16.2 million; and Africa, 7.6 million. The main events of the Canal+ Group with the acquisition of OCS and Orange Studio. The distribution agreement, which has been signed with Warner Bros and the extension of the broadcasting rights for rugby TOP 14 and PRO D2 in France. Concerning the different stake, you know that now we have a 45.2% stake in MultiChoice since May the 16. 36.8% stake in Viu after a new share capital increase in June 2021. And we are now the first shareholder of Viaplay with a 29.3% stake in this Nordics operation. Lagardère, Arnaud commented, all the business units have done very well. You may have seen the presentation two days ago but this first half was extremely solid in terms of revenue and EBIT evolution. For Havas, again, a very positive evolution of EBITA, which is up by 6% from €118 million to €125 million. The organic growth is stable during this first half with a positive Q1 and negative Q2. The main evolution of the organic comes from the partial loss of a big client in the U.S. and the reduction of COVID vaccines by main label which are Havas clients. That explains the evolution of the North America organic performance during the first half, which is negative by 6.5%, knowing that this client was mainly based in the U.S. But in the same time, Europe has delivered 3.8% of positive organic growth. Latin America still accelerating at 8.8% and Asia Pacific was up by 0.5%. Beyond Converged that Arnaud has already commented, let's tell you that we are -- Havas is still working on bolt-on acquisition and have finalized four of them during the first half, being one of the most active network of the industry: two in the U.K., Ledger Bennett and Wilderness. One in France called Ted. And the fourth in Middle East called Liquid. Prisma Media has quite positive figures in terms of revenue from €153 million to €147 million, has been able to mitigate the negative impact of the disposal of Gala by new launches, Bazaar -- soon Bazaar Intérieurs and Mortelle Adèle as well and by some acquisition in 2023. M6 Digital Services and [indiscernible] but also in the beginning of the year 2024 the evolution of the EBITA is negative because today, the new launches and the acquisition are not as profitable as Gala was and the ambition of Prisma management is to reach this level of profitability in the coming half. Gameloft is still negatively -- half -- two important things to point out. First, one that it includes some restructuring costs to reduce the cost base of Gameloft all over the world. And the second, it does -- Gameloft makes most of its profit during the second half and through the performance of the first half must not be projected on the second, it will be strongly better for the second half. Dailymotion and GVA have done very, very well with a growth of 39% of the cumulative operation. Both industries have done well. Dailymotion is a real success with the new launch, which has been proceeded in 2023, and GVA is -- keep on increasing all these businesses and is now eight countries and soon nine countries opening before the end of the year. So that's what we can rapidly sum up for this first half. And we are with Arnaud now at your disposal to answer your questions. [Operator Instructions] And first off, we have Adrien de Saint Hilaire from Bank of America. Please go ahead. Adrien de Saint Hilaire Yes, good evening everyone. Thanks for taking the question. So three of them, please, on various different topics. Can you please discuss the tax implication for Vivendi shareholders of the split. There is a comment that you make on Page 4, but I'm not sure I understand the point you make about the tax treatment of the reimbursement of capital after that was potentially tax-free. Secondly, on Canal+, could you discuss the impact that you expect from the negative arbitration on VAT and the discontinuation of French football rights for second half of next year? And then the third topic. There was quite a sharp deterioration in organic growth between Q1 and Q2 at Havas. Francois, you gave us some factors, but it seems that there was some underlying deterioration there. How do you think about the second half for organic sales growth at Havas. Francois Laroze Okay. Thank you, Adrien. Thank you for your questions. First of all, the tax implication, I think we have given some flavor in the previous meeting. But what we can say today that we have not stabilized the level of tax for the shareholders. If we focus on, I would say, French shareholders, we see that roughly the level of tax will depend on the level of reserves compared with the level of share capital. And today, what we know is that, when we look at the figures of our reserves and share capital at the end of the first half, that the impact of tax for the shareholders will be far lower than it was for the UMG operation two years ago as the reserves compared with the share capital are really in minority. So we can't put really into figures the level of tax because it will depend on the level of valuation, the day of the listing. But today, we consider that it will be below 50% of tax. So the base of taxation will be below 50% on which will be applied to the rate, let's say, of 30% if we consider the flat tax. So what is important is that most of our -- more than 50% of our distribution will come for share capital and less than 50% will come from reserves. So more than 50% won't be taxed and less than 50% would be taxed. That's roughly what we can say today. For VAT, there are still some good news, bad news discussions. So today, the game is absolutely not over. There are still discussion with the French tax authority that will end, hopefully before the end of the year. But today, we do not consider that the decision which has been disclosed two or three days ago is a final one. So there are still discussion, and we have also some positive signals that make us quite confident to convince the tax authority that Canal+ is really a TV operation that should have most of this revenue taxed at a 10% rate. So we'll see in the second half, the evolution that we are still confident that we will be able to convince the tax authority that we are really operating a TV operation and not a streaming one. Concerning Havas, yes, I think I gave some data. I think we still have an organic growth impact by the partial loss of this client during the third quarter. We hope we'll be able to bounce back during the fourth quarter or next -- first quarter 2025. So it's a strong impact on our organic growth. But let's remind that all the Havas teams has been able to adapt their cost structure to this negative evolution of the organic growth, which explains the fact that we have been able to deliver sound results ahead of last year increased by 6%, even with this stable organic growth during the first half. So we'll still struggle in terms of organic growth, but we are still very confident in terms of ability to increase our margin and increase our figures growth at the end of the year. And we now move on to our next question, which comes from Conor O'Shea from Kepler Cheuvreux. Please go ahead. Conor O'Shea Yes, thank you very much. Thanks for taking my questions. First question on Canal+ with the nonrenewal of the DTT license for [CVT]. There was some quite high annual losses mentioned in the press relating to this channel. What are the plans going forward for this? And could those plans mean lower annual net losses or not? That's the first question. Second question on Havas, I think the contribution from M&A and ForEx combines was about 400 basis points positive in the first half with the acquisitions that you mentioned, Francois, in the first half. Should we expect a similar boost to reported revenues in the second half or maybe even a bit more. And then the third question, just in terms of Lagardère, obviously, well ahead of expectations in the first half, particularly on margins, don't think they raised their full year guidance. But can you give us a sense of what you expect in the second half of the year for that business? Thank you. Arnaud de Puyfontaine Conor, it's Arnaud de Puyfontaine speaking. So on the decision yesterday, you're referring to on [CVT]. It's very early stage, should I say. The two words which have to be kept in mind are -- it's a shock and it's sadness. Let's remind that this is the number one DTT channel in France. And that this decision is, I would say, strange to say the least. So it's too early to comment anymore, to dwell on the situation. The team at Group Canal+ led by Maxime Saada are currently working on the situation. And I'm sure that this is something that will, in due time, report to you with substance. Maybe I'll take the -- you take the second one. Francois Laroze Second question on the Havas acquisition just to confirm that, Conor, that we are -- we should be on the same trend during the second half. We have a still several bolt-on acquisition in the pipe. And we consider that we still try to aim, I would say, roughly 10 acquisitions for the whole year as we did last year. So it's roughly the same trend than the first half. Arnaud de Puyfontaine And on your third question on Lagardère, there is a confident sentiment with regard to the performance of the group in the second half. And up next, we have Jérôme Bodin from ODDO BHF. Please go ahead. Jérôme Bodin Yes, two questions on my side. The first one on Canal+, I see that the subscriber base is down in H1. So could you give us a bit more details on what packages our offers are concerned? And do you think that this is due to an elasticity link with the recent price increase that you made last year in France, which is overall positive and net-net. So that's my first question. And second one, on the free cash flow for Havas. I see it's down in H1. So I was wondering if this is due to CapEx to working cap or to any other items? Thank you. Francois Laroze Okay. Jerome, thank you. On Canal+, we have to remind that it's -- there is a strong seasonality, which explains the fact that we are above last year's same moment and below the end of the previous year. Nevertheless, what is very important that the evolution in France is very favorable and we keep on increasing our subscriber base in France. We have some ups and downs in Africa, mainly depending on the type of promotion we do and sometimes they are before or after the end of the first half, which explains this. But important to point out that it was clearly a very positive trend in France. And we also have written off some accounts with very low or above zero ARPU, which were accounting, and we have decided not to account anymore because it was not reflecting the impact on our revenues. On Havas, you're right, the evolution of the cash flow is negative, which is noncommon, even if the first half of Havas is always not as good as the second. We made all -- most of our cash flow during the second half. Nevertheless, during the first half, we have some acquisitions and not only the one we have launched today, but the finalization of a previous acquisition with buyout, which has been paid for several agencies Gate One but also [Buzzman] in France. And for these reasons, we have had big cash out during the first half in terms of M&A which is the main reason, but no main evolution on the working capital. When we look at our over-dues in Havas, there are no things to worry about. [Operator Instructions] And we're now moving on to Christophe Cherblanc from Bernstein. Please go ahead. Christophe Cherblanc Thank you. Good evening. My first question was on the French football situation. BeIN is retaining some rights through the Ligue 1. So what is your exposure to BeIN for the new cycle? Are you still paying any distribution fee what is the situation? The second question is also on rights. You have a very deep European competition portfolio. Do you plan to sublicense part of it as you were doing in the past? And should we hear about that very soon. And the last one is on also Canal+ on the free-to-air business. CNEWS has had a very good run. So I would assume that coming closer to breakeven, C8 was loss-making in the past. So net-net, what is the contribution of the free-to-air that would lead to the EBITA that you're expecting for the full year? Thank you. Francois Laroze Thank you, Christophe. Confirming the French football, we have a distribution agreement with BeIN until May 2025. Nevertheless, we are not sure today of the impact of this distribution impact with this type of agreement they are signing. So we do not know exactly how it will be broadcasted if they find this agreement with DAZN. Today, we are still in discussion. Concerning the sublicense, the file is open. Today, we have not signed any sublicense, but we may sign one in -- if we find interesting agreement with partner. And concerning CNEWS, yes, you're right, the audience are up, and we consider that we will be more than breakeven in the coming half. And from Deutsche Bank, we now have Silvia Cuneo with our next question. Please go ahead. Silvia Cuneo Thank you. Good evening, everyone. A few questions from my side. The first one is on the timeline for this split potentially based on the latest communication, it sounds like -- we are working through the shortest timeline possible that was previously indicated for December 2024. Can you please share more color about what are the next steps from here and whether you still see some risks that actually the potential split could complete instead in H1 next year? And second question on the offer for MultiChoice after reviewing the offer documents, we noticed that there is potentially an option to adapt to the consideration with a combination of stock and cash. So just wanted to ask for more color about what would you consider to potentially revisit this offer and whether the listing of Canal+ is somewhat related to this? And then final question, just briefly, if you had any updates on the capital allocation for Vivendi. Thanks for providing indications of what the net debt position will be post-split. Just wondering, if you are in a position already to comment on potential priorities for future capital allocation. Thank you. Arnaud de Puyfontaine Thank you for your questions. So I'll take the first one. So when we announced the project in December 2023, we gave a timeline between 12 months and 18 months. What we did announce on Monday is threefold. Number one, a, as far as offer as we are -- there is no red flag as regarded to making real this fleet operation, which obviously is going to be subject to a, approval and advance from the different employees bodies, number one. And we started the different consultation on Monday post the communication we made in the morning. That's point number one. And point number two, a final agreement from the supervisory Board of Vivendi that should, if it were to be so, convene an Extraordinary General Meeting that could be held in the very first part of December. If we were to follow those different stages and from the kind of hypothesis from today, there is a timeline as regard to the operation. That could enable us to get the operation implemented by mid-December. Again, this is only subject to the different parameters that I just developed, number one. But this is the plan within which we are currently thinking and working. And I'm reiterating that as we speak, there is no -- there are no red flags as regard to the possibility to reach that objective, has developed. Yes, concerning your second question, which was on MultiChoice type of takeover. For the moment, we have proposed this €125 million proposal in cash. And there is an option which was given maybe the day when Havas -- when Canal, sorry, is listed. So it's not for now, and it's true that there is -- Canal could open an option after their listing. But today, it's not what we have proposed to the shareholders. We have proposed this level of €125 million round in cash. Your third question was on the capital allocation priorities. And let's remind that our intention today is that the final debt of the Vivendi after the split will be between €1.5 billion and €2 billion, which is acceptable compared with this level of assets, which will be above €7 billion. Thank you. As there are currently no further questions in the queue, I'd like to hand the call back over to you, Mr. de Puyfontaine for any additional or closing remarks. Arnaud de Puyfontaine Well, thank you for your attendance to the call. And we, at Vivendi, wish you a fantastic summer. Good Olympic Games and very much looking forward to the next steps. Thank you very much. Have a good evening. Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.

Ocean Power Technologies, Inc. (OPTT) Q4 2024 Earnings Call Transcript

Robert Powers - Senior Vice President & Chief Financial Officer Philipp Stratmann - President & Chief Executive Officer Conference Call Participants Jeff Grampp - Alliance Global Partners Shawn Severson - Water Tower Research Peter Ruggiere - Dawson James Securities Good morning and welcome to the Ocean Power Technologies Fourth Quarter and Full Fiscal Year 2024 Earnings Conference Call. A webcast of this call is also available and could be accessed by a link on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after its completion. On the call today are Dr. Philipp Stratmann, President and Chief Executive Officer; and Bob Powers, Senior Vice President and Chief Financial Officer. Following the prepared remarks, there will be a question-and-answer session. Thank you and good morning. After the market closed yesterday, we issued our earnings press release and filed our annual report on Form 10-K for the period ended April 30, 2024. Our public filings are available on the SEC website and within the Investor Relations section of the OPT website. During this call, we will make forward-looking statements that are within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These statements are based on assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks, uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. Additional information about these risks and uncertainties can be found in the company's Form 10-K and subsequent filings with the SEC. The company disclaims any obligation or intention to update the forward-looking statements made on this call. Finally, we posted an updated investor presentation on our IR website. Please take a moment to review it as it provides a nice overview of our company and strategy. Now, I am pleased to introduce Dr. Philipp Stratmann. Philipp Stratmann Thank you, Bob and good morning. We appreciate you joining us. Fiscal 2024 was a great year and a significant step towards positive cash flow in calendar year 2025 for our company. This year saw substantially complete the research and development stage in our journey to profitability and build upon the significant increases in revenue, gross margin, pipeline and backlog we achieved during fiscal 2023. Today, I will focus on the significant developments occurring over the past year and the resulting confidence they provide toward achieving further material progress in fiscal 2025. First, we had several technological breakthroughs. During Q2, we revealed a ground-breaking milestone, the successful demonstration of the WAM-V attaching itself remotely to a buoy and establishing a connection that will enable charging. This achievement underscores our commitment to reshaping autonomous maritime operations by leveraging renewable energy for sustainable charging solution and paves the way for a future where autonomous vessels can operate for extended durations, opening doors to various applications within the maritime domain. We also recently announced we are approaching 15-megawatt hours of renewable energy production from our family of PowerBuoys. The recent launch of our next-generation PB off the coast of New Jersey has materially accelerated average energy production by combining solar, wind and wave energy production capabilities. These numbers show that non-grid connected marine energy production is not just for the R&D community but is a commercially available solution. Finally and potentially most significantly, we announced "Merrows", our ground-breaking Artificial Intelligence capable Consolidated Solution offering comprehensive ocean surveillance. Through "Merrows", we're able to integrate OPT's roaming technologies such as OMV with resident technologies like the PowerBuoys to offer an unparalleled level of surveillance and data analysis capability. Merrows sets OPT apart because of its ability to enhance data collection capabilities and provide artificial intelligence capable solutions. With the launch of Merrows, we're not just introducing an overarching solution offering but a pivotal shift in how we view and protect our oceans. Ocean security is national security. And through Merrows, OPT is dedicated to providing their technologies and insights necessary to secure our maritime domains by safeguarding the world's oceans through advanced technology and innovation. Each of these innovations stands as a testament to OPT's dedication and leadership role in supporting the security and protection of global waterways and positions us to capitalize on the expected growth in these areas while solidifying the company's unique position as a ground-breaking systems provider. In addition, we advanced strategic alliances with a number of complementary industry leaders. In April 2024, we announced a strategic alliance with Red Cat Holdings, Inc., a leading aerial drone technology firm specializing in the integration of robotic hardware and software across military, government and commercial sectors. This corporation signifies a material step forward in enhancing maritime domain awareness capabilities for air, sea and subsea defense and security missions. Through this relationship, OPT's PowerBuoy and WAM-V platforms will be integrated with Red Cat's drones, facilitating a new era of autonomous vehicle deployment by combining our sustainable ocean powered solutions with Red Cat's advanced drone technology, we are setting a new standard for naval and border protection operations. Also, in April 2024, we signed a teaming agreement with a major international defense contractor to provide our Merrows suite of solutions with a focus on certain geographic regions. Under the terms of the agreement, the defense contractor will have exclusive rights to provide OPT's MDAS solution within certain international geographic regions. Leveraging OPT's cutting-edge technology alongside the international contractor's extensive expertise in defense, homeland security and commercial programs, the collaboration should strengthen the contractor's' capabilities in maritime security and surveillance. This collaboration underscores the opportunity and our commitment to enhancing maritime security globally and positions us to achieve remarkable advancements in this field. In June 2024, we announced the signing of an Original Equipment Manufacturer agreement with Teledyne Marine, a key supplier in maritime technology, inclusive of connectors, instruments and vehicles. This strategic partnership should enhance OPT's product offerings and drive innovation within the industry, providing customers with a turnkey system. Joining forces with Teledyne allows us to leverage Teledyne's best-in-class offerings to deliver superior sensor and ocean technology products to our customers. We believe this partnership further accelerates our growth and enables additional revenue streams. We recently partnered with Unique Group, a UAE headquartered global innovator in subsea technologies And engineering, to collaborate to deploy OPT's WAM-Vs in the UAE and other regions in the Gulf Collaboration Council region. Integrating OPT's commercially available vehicles with Unique's leading position in the offshore energy industry in the UAE should accelerate the adoption of USVs in the region. Working with Unique Group should further accelerate our efforts to deploy USVs globally. The GCC in general and the UAE specifically are rapidly becoming a major focus area for us as we continue our growth in both the defense and security and offshore energy industries. Back home in the USA, we signed a reseller agreement with Survey Equipment Services, Inc., a specialist in the supply of Marine Survey and Navigation equipment. The agreement focuses on the provision of OPT's WAM-Vs domestically. This agreement allows us to leverage SES' offering of survey and navigation equipment and deploy WAM-Vs to SES' customer base. This partnership further accelerates our growth and enables additional revenue streams. Most recently, we entered into a memorandum of understanding with AltaSea at the Port of Los Angeles. The joint aim is to explore exciting opportunities within the blue economy and partnering with AltaSea provides additional opportunities for staging our renewable energy PowerBuoys and WAM-V Unmanned Surface Vehicles for projects in the Pacific Ocean. Lastly, we continue to work closely with various departments and agencies of the U.S. government. With many veterans in our workforce, we are proud and humbled to support our brave war fighters, be that in the areas of mine countermeasures, counter unmanned underwater vehicle efforts or autonomous swarming. Now I would like to transition to another topic. As many of you are aware, during fiscal 2024, we faced challenges from a disciplined shareholder who engaged in the proxy battle and initiated 3 lawsuits against the OPT Board and the company in an effort to seek control of the company without following appropriate governance standards and without offering fair value to the stockholders. Despite his efforts, the dissident shareholder is unsuccessful in this attempt to influence the company's strategic direction. His proposals did not gain sufficient support from other shareholders, reflecting their confidence in our current leadership and strategy. The dissident shareholders subsequently filed to dismiss one of the lawsuits he had initiated. It has become clear that he is attempting to advance his own agenda at the expense and to the detriment of the broader shareholder base. His actions included disseminating misleading information and attempting to undermine the company's reputation. Addressing this situation incurred significant costs, impacting our results for fiscal 2024 which Bob will detail momentarily. Moving forward, we have taken steps to strengthen our corporate governance and improve our shareholder engagement strategies to prevent similar situations in the future. Our focus remains on driving growth and delivering value to all our shareholders. We are committed to maintaining open and constructive communication with our investors to ensure their concerns are addressed proactively. Despite the challenges posed by the dissident shareholder, we have remained resilient and focused on our long-term goals. We will continue to channel our resources and attention towards executing our strategic plans and capitalizing on growth opportunities. In closing, our business is performing well. As a result of the foundation and opportunities I've just described, we remain on track to achieve our previously stated goal of attaining profitability during the second half of calendar 2025. To achieve this, we have very recently implemented a set of measures that include further head count optimization, material reductions in third-party spend and efforts to tightly control and contain costs. These measures are fully implemented and focused particularly on non-revenue-generating engineering and G&A. These measures enable us to continue delivering for our customers, operate the business and execute the strategy we have laid out. Moving forward, we plan to leverage the opportunities in front of us to increase our market presence, expand our geographical focus and improve operational efficiencies. We are confident that these efforts will drive sustainable growth and create long-term value for our shareholders. Thank you. Before I hand back to Bob for his update on the financials, I want to remind you that we are holding a special meeting of the shareholders on August 30 to vote on an increase in our authorized shares to enable us to participate fully in the rapidly evolving autonomous ocean operations market. Now, I will hand over to Bob to discuss our financial performance in more detail. Robert Powers Thanks, Philipp. Let's begin with revenue. In Q4 '24, our revenues were $1.6 million, bringing total revenue for our fiscal year ended April 30, 2024, to $5.5 million and representing a 102% increase in revenue over fiscal year 2023. Combined with the 55% growth in revenue we experienced in fiscal 2023, fiscal 2024 revenue increased in excess of 3x over the past 2 years. This growth can be attributed to the conversion of backlog from our strong performance in WAM-V sales and strong growth in orders and pipeline. Our orders were $6.6 million for the year and growing. We expect -- we continue to expect order activity and revenue to ramp for fiscal 2025. Our gross profit for Q4 '24 stood at $0.9 million, bringing full year gross profit to $2.8 million, a significant increase over the prior year's full gross profit of $0.2 million. Again, this improvement marks the second year in a row in which our year-over-year gross margin has improved dramatically as we registered a movement from negative gross margin to positive gross margin in fiscal 2023. This improvement is attributed to our unmanned vehicle business, particularly the higher-margin WAM-V leasing business. I'm enthused about the progress we've made in this area and our momentum heading into fiscal year 2025. Our operating expenses for Q4 '24 amounted to $7.5 million and $32.2 million for fiscal 2024. The year-to-date figure includes approximately $3.9 million and extraordinary expenses related to the company defending litigation and other sales offensive [ph] tactics relative to the dissident shareholder activity previously described by Philipp. These costs include legal fees, advisory expenses and other related costs. We hope for these to be onetime cost, although there can be no guarantee that we will not incur similar costs in the future. As for the net result, we reported a net loss of $6.7 million for Q4 '24, bringing net loss for fiscal 2024 to $27.5 million as compared to a net loss of $26.3 million for fiscal 2023. This is despite the materially higher extraordinary expenses I just noted. We continue to manage our costs tightly making targeted investments in the personnel and structure needed to support our strategy and plans for growth. We expect our operating expenses to decrease materially going forward and as a result of our plan to achieve profitability. Finally, our backlog at April 30, 2024, stands at $4.9 million as compared to $4 million in the prior year. A significant portion of this increase is driven by our previously announced recent expansion into Latin America as well as the recurring revenues to be generated under long-term leasing contracts. On the balance sheet front, our combined cash, unrestricted cash, cash equivalents and short-term investments as of January 31, 2024 totaled $3.2 million. Notably, we continue to maintain a debt-free balance sheet with no bank debt in our financial structure. You will also note our liability titled earnout payable for $1.1 million. This payable is due to the strong performance of our unmanned vehicles business during fiscal 2024 and represents the completion of the final earnout period as defined in our purchase and sale agreement related to our acquisition of MAR in November 2021. In terms of cash flow, the net cash used in operating activities for fiscal 2024 amounted to $29.8 million. This primarily reflects our net loss, the payout of employment bonuses accrued during fiscal year 2023, the payment of the earnout accrued during fiscal 2023 as well as the payment of expenses related to the dissident shareholder activities, as I just mentioned. Finally, you will note that our inventory balance increased by approximately $3.8 million to $4.8 million versus the prior year. This investment in inventory was necessary in order to satisfy backlog as well as our planned growth in revenue for fiscal 2025. That covers our financial update. Before we enter Q&A, I'd like to remind everyone that the purpose of today's call is to discuss our fiscal year 2024 results as well as our financial outlook. As we head into the Q&A, we ask that you limit your questions to these topics. Thank you. At this time, operator, can you open the floor for questions? [Operator Instructions] Our first questions come from the line of Jeff Grampp with Alliance Global Partners. Jeff Grampp Thank you for the time. I was curious, first off, maybe we can start on the backlog side of things. You guys had some nice growth sequentially and even over the last few months since that number, you guys have continued to announce some nice ones publicly. So just wondering if there's maybe a more recent backlog number that you guys can share? Or maybe we need to wait, I don't know the month or so for the next earnings release. Philipp Stratmann Jeff, thanks for being on. Yes. You're entirely right. Obviously, there's been -- the growth has been fairly evident and steady and we keep on scaling up. As Bob said, we have just under $5 million of backlog at the end of the fiscal year that we're taking into the current fiscal year. We will be providing updates on that as that progresses at the next earnings call. But I think what's encouraging from our side. As we said, we put out guidance that we think contracted orders for fiscal '25 are going to be $12.5 million [ph]. And I think revenues will be very similar to that. If you look at the fact that we've entered the year with about $5 million of backlog plus what we announced, I think we feel very comfortable that the targets we put out there are achievable and we'll continue on the growth trajectory. But we'll certainly provide updates as we go through the year. Jeff Grampp Fair enough. I appreciate that. And with respect to that, contracted order KPI that you guys put out there. What do you guys view as kind of the biggest risks to achieving that, whether those are external things that are perhaps out of your control related to customer decision time lines, things of that nature versus things that you guys are focused on internally. Like what keeps you guys up at night with respect to meeting that KPI that's not out there. Philipp Stratmann I think part of the things that we're obviously constantly looking at is conversion from initial conversations through to getting the PO in hand and then delivering for our customers. It is important for us to continue to deliver high-quality products because, as you've seen, several of our sales over the year have come from repeat customers. The benefit of repeat customers is obviously that, that also materially reduces the time that we get from the conversation through to the next delivery. I think we're also very targeted in the geographic expansions that we're looking at. We've had several recent announcements for Latin America and you've seen several announcements for the Middle East. And I think we are targeting those specifically. On those, there might be a slight delay that you see from contracted order [ph] to revenue because you're obviously going to have to go and ship systems that we currently assemble in the United States over to those destinations. And I think that's obviously always something we're looking at in terms of timing and where it sits within our kind of quarters and fiscal year. Jeff Grampp Great. That's helpful. And if I could just sneak one more in. OpEx trended down nicely for -- to wrap up the fiscal year. You guys mentioned in the prepared remarks continuing to evaluate some ways to perhaps improve that. So is it fair to think that relative to that Q4 run rate that there's still some potential for OpEx improvement as we look into fiscal '25? Or how should we think about the overall expense profile of the business moving forward? Philipp Stratmann Yes, I think that is a fair statement to make. I mean, as we said, we've further controlled and contained third-party expenditures. We've gone through a further head count optimization and really focusing on what is needed to be delivered. And what's needed to be delivered is converting our systems -- system discussions into backlog into revenues, operating our systems for our customers and maintaining an edge where we continue to integrate solutions. And I think you would have seen a noticeable trend in us bringing on board more solution delivery partners, people like Teledyne, people like SES, work we're going to be doing with Unique and others. And I think all of those are going to help us bring down OpEx further and keep very tight control on the costs. Jeff Grampp Great to hear. Looking forward to tracking the progress. Our next questions come from the line of Shawn Severson with Water Tower Research. Shawn Severson Philipp, you've talked a little bit about the commercial inflection point having hit and we've seen a lot of that showing up in the results and the items you discussed. But -- what I'm trying to get at is understanding, was this just related to the time in the market and the commercialization of the product? Or was it related to greater sales effort? Or are there certain things you can point to that really seem to have pushed the commercialization inflection point through quickly here. And I'd say, like the last 6 months, it's really been noticeable. Philipp Stratmann Yes. I am noting, Shawn and thanks for the question. I think you're right, there's definitely been a change in pace that we've seen but I wouldn't just put it down to market conditions. Obviously, I think we all know what's going on in the markets in terms of autonomy, robotics and artificial intelligence. But I think at the heart of it lies the fact that we developed a set of solutions that were targeted at specific segments of the market. We brought on board a very targeted commercial team and obviously, with Matt Burdyny, our Chief Commercial Officer, really focusing on the ocean technology, defense and security and offshore energy markets and targeting customers and regions where we know that there is an actual market for our systems and solutions. I think the other thing that we did and is one of the reasons why we announced at the end of calendar 2023 that we had substantially completed all of our R&D activities is we focused on making the product and solution that we have, something that customers find easy to use and that actually provide a solution that saves them money and saves them carbon emissions instead of trying to perfect something that isn't yet operating. So I think we just became a lot more targeted and tenacious in going after opportunities in the market and working with our customers to help them solve their problems. Obviously, in a general market trends towards acceptance of autonomy help. But I think a lot of it has been down to a very targeted effort and focusing on doing what we do well instead of adding a much broader base of products that we could bring to there. Shawn Severson And kind of a follow on to that. You've mentioned shorter sales cycle with existing customers which makes sense, right? They're familiar with it and we would expect that. Are you seeing a shortening of the sales cycle with new customers as well? So I guess, always the concern is anything government-related or project-related like this, the sales cycles are very long and tenuous in some cases. But what are you seeing with nonrecurring customers but new customers as it relates to that? Philipp Stratmann Yes, it's a great question. I mean, Bob mentioned in his remarks, obviously, you can see it on the balance sheet, our inventory number has gone up. And that's helped us reduce the sales cycle that we're seeing with new customers as well. Because what we can now do is -- and actually, I just have my team in the middle of the night, do a demo phone overseas customer just tonight -- just last night, is the fact that having systems out and deployed under being able to bring a demonstration system to a customer when they're saying, "Hey, this seems interesting. How does this work?" We can turn around and going, "Well, why don't you come and see us and we're going to demonstrate it to you because we have one in the water," or we can go in the case of the vehicle, ship it to a customer and saying, "Well, why don't you try it out for a week. We'll come along and we'll provide our technicians." And it materially shortens that cycle because you're no longer going through paper exercises and then feasibility studies and then you're going to the next round -- the kind of the longer project approach that I think you sometimes see on kind of renewable developments per se. It enables us to go and step into what is more of an OpEx consideration at our customer side as opposed to them needing to squeeze it as CapEx into a larger project. Shawn Severson My last question is related to any political risk. I know it's such an emerging market, there probably isn't a lot but we do have questions sometimes. Is there any difference to you what happens in November as far as rollouts for commercialization? Philipp Stratmann I appreciate the question, Shawn. We look at the fact that we provide systems that strengthen National Security. And in our view, no matter what happens in November, National Security, as part of that Ocean Security, is going to be remaining a paramount importance to the United States and to our allies. At the same time, if you're looking at it globally, population keeps increasing globally and there is an increasing demand for energy. So, whether -- and the fact that our systems can be used for oil and gas producers, or by offshore wind producers. So we don't see a material political risk; and that's really because we provide dual-use technologies that enable any and all operators that are in the ocean to keep operations secure, cheaper and if so desired by them reduce their carbon footprint as well. Our next question is come from the line of Peter Ruggiere with Dawson James. Peter Ruggiere You guys have growth, it sounds very great. I have a lot of questions, actually. Just a question on the oil and gas part of it. It was a contract where some of you're working on several years back in the Gulf of Mexico with oil and gas decommissioning, are you guys still working towards that? Philipp Stratmann Peter, I appreciate the question. I think that contract might predate most of us here. In general, we do still work with many of -- or we provide systems to many of the oil and gas operators. As you've seen, a lot of the work that we've done is instead of us going and working with the large oil and gas operators directly, we are working through their service providers. And that is what's helped us increase the pace with which we are getting to sales and orders. If you're looking at the work we've been doing with Samara, Samara does work for all of the large oil and gas providers. So as a result of that, our vehicles are now starting to operate in that area. We are in ongoing discussions with various Tier 1 and Tier 2 service providers to look at buoys to work on work for exclusions and monitoring, like we did in the North Sea, do work on wellhead monitoring and so on and so forth. So it's certainly a segment we keep an active look on. But I think the approach to the segment has changed from going directly with the large oil and gas customers to the service providers because the service providers have a greater need for our systems and are able to spec them in more quickly. Peter Ruggiere Okay. Because we're working with Premier Oil for a long time in the Adriatic Sea, that was for a while. Are you still -- is that buoy still empowering that research facility in Chile? Philipp Stratmann No, that contract was completed last year. And the buoy was returned to us, has been refurbished and is currently being prepared for other deployments and projects that we are finalizing. Peter Ruggiere Okay. I heard you say that you're -- the buoy has more power now than it did before, or producing more power. Is that correct? Philipp Stratmann Yes, that is correct. What we've done is, as we launched our next-generation buoy in order to become the follow-on model to the PB3. What we did is we reduced all externally moving parts on the system and move the wave energy conversion system entirely inside of the buoy. What that's enabled us is the ability to provide solar panels and small wind turbines on top of the buoy which provide additional power generation capabilities. It also means that we have opened a much broader range of regions that we can now supply product into. We recently announced that we are providing a buoy into the Middle East. There's very little wave activity in the Gulf region. But having the ability or now having the solar and wind systems on there means that we can also service those markets. We still work on the same principle that any power we generated is used to be stored as energy in the battery packs and then we power all the payloads on the batteries that we have inside of our buoys. Peter Ruggiere Okay. How many buoys do you have in the water right now? By any chance? Philipp Stratmann I'd have to double check that number for you. I think it's -- we have a couple of demonstration systems out and we are shipping a couple of systems over for various customers. Peter Ruggiere Okay. What do you see the biggest market because the WAM is sort of really interesting with the drones and stuff like that. Is that going to be the biggest market? Or is it the oil and gas possibly or the illegal fishing -- I know you did a big study in Japan and you have [indiscernible]; I guess, in the Philippines a couple of years back. And then the COVID thing happened and everything kind of got delayed, I believe, that's correct. Philipp Stratmann I think yes, we would -- we look at this under Merrows, this kind of overarching umbrella that we put together. We look at illegal fishing really being part of defense and security. And we do see defense and security as a major market and it so happens that the bulk of defense and security is the government as the end customer. But again, similar to oil and gas, we are approaching that by working with larger prime contractors that are able to help navigate the contracting mechanisms that exist within the government, so we can provide systems more quickly into that. And we do see opportunities for both of our underlying platforms, vehicles for autonomous roaming and buoys for permanent resident monitoring and intelligent surveillance and reconnaissance. I think offshore energy which includes oil and gas, is going to continue to be an important market for us. But what is interesting to us is that many of the applications that are being utilized by -- our customers use our systems for in offshore energy are similar to the applications that the defense and security side users which is around monitoring, using the ability that we could launch aerial drones, using the ability we can launch underwater drones to do offshore energy infrastructure inspections and also doing general survey work. So we have found that the solutions to provide overlap in those areas but I would see us continuing to service big markets. Peter Ruggiere Okay. On your -- like a couple of questions on the backlog, I understand but the pipeline you have on April 30, is it $71 million? And in the quarter before, it was $77 million, at the end of the third. Are you -- the size has went down a little bit. Is that because you're converting it into actually revenue at this point? And what does that pipeline consist of? My question on that. Philipp Stratmann Yes. So part of it is because we are converting opportunities in the pipeline into backlog and then obviously from backlog into revenues. I think we put our new IR deck last night. current pipeline is at $85 million and it consists of opportunities under negotiation, opportunities where we have submitted proposals, opportunities where we've executed NDAs with customers and are scoping what a future program project contract could -- would look like. So there will always be some fluctuation. But what is encouraging to us is on the basis of the size that we've got, as long as we keep on pulling down a small percentage of what we've got in the pipeline and then keep on refilling the pipeline, we get a really nice churn that we can start seeing that is going to translate into year-on-year growth and a steady baseline of revenues. Peter Ruggiere Okay. And your margins are about -- gross margin of 50%, correct? Around there? Philipp Stratmann Yes, gross margins have stabilized for the last few quarters in that 50% to 55% region. I think you're correct. I think -- and a lot of that has got to do that. We've changed from doing demonstrations or chasing research and development grants to having a set of commercially available solutions and platforms that we're providing to customers who are wanting to use these and it's becoming much more of a -- it's a commercial service offering that we provide. Peter Ruggiere Right. And it might be the last question but the contract orders that you put on the '25 guidance, $12.5 million. Does that include everything? Or you -- is that just a low number of certain -- could you do $50 million, $100 million in revenues. $12.5 million, that's not the number for the entire year. Is it for total revenue? Philipp Stratmann $12.5 million is what we're putting out there as guidance for this year. If you look at it, it will be 2.5x scale over the last year, now we did just over 2x from the year before that. And that is certainly what we see -- that's sustainable growth that -- that we can go and fulfill by maintaining tight control over costs and delivering high-quality products, because, ultimately, we are still needing -- these things need to be built and need to be shipped. But we are maintaining an ongoing focus on growth by doing growth without sacrificing quality and the ability to maintain margin. No. Thank you, Peter. Appreciate your question. Thank you for being a long-term shareholder. As we have reached the end of our question-and-answer session, I would now like to turn the floor back over to Dr. Philipp Stratmann for closing remarks. Philipp Stratmann Thank you for being a shareholder and for supporting our ongoing growth and execution of our strategy. We are excited and look forward to continuing to deliver for you, our customers and all of our stakeholders. Thank you. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.