Manchester United's Management Discusses F2Q13 Results - Earnings Call Transcript

| About: Manchester United (MANU)

Manchester United Ltd. (NYSE:MANU)

Q2 2013 Earnings Call

February 14, 2013, 08:00 am ET


Ed Woodward - Executive Vice Chairman & Director

Michael Bolingbroke - COO



Good morning ladies and gentlemen and thank you for standing by. Welcome to the Manchester United PLC Second Quarter Fiscal 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions. (Operator Instructions). I would like to remind everyone that this conference call is being recorded.

Before we begin, we would like to inform everyone that this conference call will include estimates, and forward-looking statements which are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Any such estimates or forward-looking statements should be considered in conjunction with a cautionary note in our earnings release regarding forward-looking statements and risk factor discussions in our filings with the SEC. Manchester United PLC assumes no obligation to update any of the estimates or forward-looking statements.

I will now turn the conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead sir.

Ed Woodward

Thank you very much. And thank you everybody for joining us this morning for the call. With me on the call today as before are Michael Bolingbroke, Chief Operating Officer and Hemen Tseayo, Head of Corporate Finance.

I am pleased we have delivered another quarter strong results as we continue to successfully execute the great strategy outlined during our IPO. Our recent performance was fuelled by the addition of central, global and regional sponsorship signed over the last 12 months. Together, with double digit growth in our retail merchandizing and licensing business and an increasing broadcast revenues total revenue and adjusted EBITDA rose to £110 million and £50.2 million pounds respectively. Both record levels for the second quarter.

These results demonstrate the unique position of our company. We've Matchday broadcasting revenues forming the basis to support our operating activities, we've been able to further develop a high margin commercial revenue stream by monetizing the Manchester United brand in a considerate and strategic manner. We are confident that the combination of our fast growing commercial operations, the increased value for sports broadcasting rights and the year-on-year consistency of our Matchday business will create significant long term value for all of our stakeholders.

I am delighted to report that we've signed an eight year sponsorship agreement for our training kit. When we made this strategic decision to buy out the remaining two years of the DHL deal, the goal was to secure a new long term agreement reset to market value. We are delighted with the conclusion of this key sponsorship agreement and at the request of our new training partner who has agreed to withhold further details pending a formal announcement in the coming months.

During the quarter, we executed six new sponsorship agreements adding to our already strong portfolio of global and regional partners. Of the six, two were global, Kansai and Singha, the last of which is renewal of an existing deal that was extended by another three years; two of them are regional deals, Wahaha and Multistrada and two are financial services, China Construction Bank and Denizbank. You should have seen the base on the start of these agreements that combined financial contribution will not be material to our current year fiscal results.

On top of the financial benefit the additional sponsors allowed us to capture critical consumer information. In the past year, our CRM database has nearly doubled to over 25 million names providing us with the opportunity to connect directly with more and more of the teams’ fans around the world.

Another important development in our long term strategy was the recent purchase of BskyB’s stake in MUTV. This gives us full control of our global television channel. While strategic, it was also opportunistic. As a result of the acquisition, we now have further opportunities and flexibility ahead with regard to the digital media offering. In order to strategically integrate this major acquisition into those plans, we are now expecting to launch MU digital media products in calendar year 2014 and we will update you more in the coming quarterly calls.

As you will see in the key two interim financial report to be filed over the coming few days, the consideration of paying to BskyB with £2.6 million for their equity stake plus £7.4 million in repayment of shareholder loan, plus a great interest.

Moving to the international rights of the Premier League, we realized the expectation was that by the time we reported Q2 results, we would know the final tally. At this point, however the league has not finished contracting with all of the licensees and until that process is complete, the details will remain confidential.

You will also see from Premier League press release last week that the clubs have agreed to assisting enhanced financial regulations, including FFP. The key elements of those regulations include a short-term cost control protocol, which limits the amount which clubs can rate their player cost from centrally distributed revenue.

Finally, the first team has continued to perform at a very high level. We currently sit at the top of the Premier League, 12 points ahead of Manchester City. We progressed to the fifth round of the FA Cup and are in the middle of that two-legged match in Round 16 of the Champions League, having drawn last night with Madrid.

During the recent January transfer window, we acquired one of the most promising young talent in English Football, Wilfried Zaha. He is being laying back to his prior club, but we look forward to his special contributions when he joins the squad this summer ahead of next season.

I will now turn the call over to Michael.

Michael Bolingbroke

Thanks, Ed, and good morning everyone. I am going to review second quarter 2013 financial results and provide the relevant comparisons with the same period 12 months ago, along with explanations as to any material movements. Then what I will do is I will hand the call back to Ed to review our guidance for fiscal 2013 and then we will open up the call for questions.

Now just as a brief reminder and those of you who have been on this calls before will be aware of this, we account from the 1st, July each year to June 30th, of the following year, as this follows the pattern of our playing season. So when I refer to fiscal ‘13 for example, I am referring to the year ended June 30, 2013. This reports I am about to give covers the period October 1, 2012 to December 31, 2012.

Finally, I would be grateful if you bear in mind that looking at our business on a quarterly basis and in particular comparing quarters from different years can sometimes be misleading due to the timing differences of various games and various fixtures. And of course unless I mention otherwise all the figures I am giving you are UK pound sterling.

So from a high level, I would reiterate what Ed had said. This was another strong quarter and it was a great quarter for results and in several key metrics was a record quarter. Our total revenue increased to £110.1 million and that’s from a £101.3 million in the equivalent quarter last year; that is an increase of 8.7%.

Our adjusted EBTIDA, which is the measure we use to monitor ongoing operations, finished at £50.2 million which compares to £44.9 million in the prior year; that is an increase of £5.3 million or 11.8% underscoring the points Ed made regarding a very strong quarter.

Net income was £16.2 million which compares to £42.1 million in the second quarter fiscal 2012. Now the difference here is due primarily to a tax credit of £22.9 million realized in the prior year quarter compared to a tax charge of £12.2 million in this year’s second quarter and I will discuss tax in more detail in a moment. What’s critical to note though, at this juncture is that the profit before tax increased from £19.2 million in the prior year quarter to £28.4 million in this quarter, an increased of 48%.

Now looking at our revenue of £110.1 million in more detail and this is most usually done by looking each of our three sectors; and that’s of course commercial, broadcast and Matchday. Commercial revenue for the quarter increased 29% to £35.6 million. All three components of our commercial revenue showed increases. Firstly, sponsorship revenue increased by 48.6% to £20.8 million and this was due to the addition of the new global and regional partnerships that Ed noted and also the step up in some existing deals. These figures also include recognition of the pre-sponsorship payments under our new share deal with General Motors.

Secondly, Retail, Merchandising, Apparel and Product Licensing revenue increased 13.1% to £9.5 million and this increase is as a result of an uplift in the recognized amount of surplus profit generated through our joint venture with Nike.

Finally, New Media and Mobile revenue increased 1.9% to £5.3 million as a result of the negotiation of new mobile partnerships and the step ups in existing deals.

So now moving to broadcast revenues. For the second quarter, broadcast revenues increased 4.8% to £39.5 million due to one extra Champions League Game being played and also two additional live Premier League TV appearances compared to the same period last year.

Finally and briefly, Matchday revenues for the quarter decreased by 2.8% to £35 million and this was mainly due to having one less Domestic Cup game played at home, this period compared to the periods last year.

So moving down to operating expenses, these totaled £73.2 million for the quarter, an increase of 4.6% on a cost of £70 million in the previous year. And there are three key elements here that I think it's worth highlighting.

Firstly, player and stock compensation. These totaled £44.2 million, an increase of 14.2% over the prior year period and that's primarily due to new player signings, player wage increases and the growth in commercial headcount. As mentioned on our first quarter call, we expected the run rate for this item to be higher in the second quarter and over the remainder of the year as the first quarter wage build only included a portion of expenses associated with the players that joined the team towards the end of the summer transfer window. And when we look at the first six months of fiscal 2013, player and stock compensation increased at a lower rate of course of 10.5% which is in line with our expectations.

The second thing that's worth noting is other operating expenses decreased 11.3% to £15.7 million, primarily due to a reduction in gate share costs as we played one less Domestic Cup home game compared with the same period last year.

And thirdly, amortization of players’ registrations for the quarter increased 8.1% year-on-year to £10.7 million. Increases in amortization due to player acquisitions such as Robin van Persie and Shinji Kagawa were partially offset by reductions due to contract extensions and departed players.

The unamortized balance of existing players’ registrations at the December 31, 2012 was £125.9 million. Now after taking account of the above and also £0.7 million of profit on disposals of players’ registrations and that's for conditional payments received on players sold in prior periods, we generated an operating profit in the second quarter of £37.6 million, compared to £31.5 million in the period a year ago, an increase of 19.3%, a very strong result.

Net finance costs for the quarter totaled £9.2 million, a decrease of 25.2% from the prior year and there are two main factors behind that movement. The primary reason for the decrease was a favorable foreign exchange movement of £2.3 million year-on-year on the translation of our US dollar denominated senior secured notes.

As detailed on prior earnings calls, these foreign exchange gains or losses are not a cash benefit or charge and could reverse depending on dollar sterling exchange rate movements. Any gain or loss on a cumulative basis will not be realized until 2017 or indeed earlier if our senior secured notes are refinanced or redeemed prior to their stated maturity.

Now the second factor that's relevant to net finance costs is the decrease in the finance costs that was caused by the repurchase and retirement of the sterling equivalent of £62.6 million pounds of senior secured notes comprising $101.7 million of our US dollar denominated notes which we did with the proceeds from our IPO.

Now with regards to the tax line, the group recorded a non-cash tax charge for the second quarter of £12.2 million. This chart primarily reflects the movement in deferred tax for the quarter and this resulted in an effective tax rate of 42.8%, which is higher than the US statutory rate of 35% due to a current mismatch in the recognition of UK and US deferred tax assets and liabilities.

Now I would stress that all these are non-cash tax charges. In the prior year fiscal 2012 period, the group recorded a one-time tax credit of £22.9 million due primarily to the recognition of another deferred tax asset relating to pre-existing UK losses.

So to summarize the overall position, our total revenue is at £110.1 million. Our adjusted EBITDA is at £50.2 million and our net income is at £16.2 million. This equates to an earnings per share of 10p based on an average weighted diluted share count of 163.8 million shares compared with an EPS of 27p based on an average weighted dilutive share count of 155.4 million in the prior year period.

Now turning briefly to cash flow and to notable balance sheet movements, at the end of the second quarter, our cash balance stood at £66.6 million and we had no outstanding borrowings on our £75 million revolving credit facility. We generated £25.4 million over the three month period, an increase of £31.7 million compared to prior year and this is primarily due to year-on-year differences in working capital movements following a small number of upfront payments received in respect of commercial agreements and also the increased profit on ordinary activities before tax.

Net capital expenditures on for our property, plants and equipment for the quarter was £5.9 million consisting mainly of ongoing investments in the team’s training facilities at Carrington. This represents an increase of £4.3 million from the same period a year ago. The facility improvements are now complete and final payments should be made in the third and fourth quarters.

Next, player capital expenditure for the second quarter was £2.4 million, an increase of £1.6 million compared to the £0.8 million in the prior year quarter. This consists of outflows relating to existing players and inflows from players disposed in this and prior years.

Net cash used in financing activities for the quarter was £1.6 million, a decrease of £3.7 million from the £5.3 million in cash used in the prior quarter. The current year quarter includes expenses of £1.5 directly attributable to the issue of new shares from the prior year quarter includes £5.3 million relating to the repurchase of senior secured notes.

Lastly; as at 31 December 2012, total borrowings were £366.6 million compared with £439 million a year earlier, that is a decrease of 16.5% following the September 2012 repurchase and retirement of £62.6 million worth of our senior secured notes with the proceeds from our IPO.

I will now turn the call back to Ed for closing comments.

Ed Woodward

Thanks Michael. With half the year completed, we remain on track to achieve our original targets of fiscal 2013 of revenue between £350 million to £360 million on adjusted EBITDA between £107 million and £110 million. And as a reminder, our guidance predicates on the team reach in the quarter finals of the Champions League, i.e. the next round.

The second leg of this round will be played at all Old Trafford on 5 March, and this stage of competition is worth noting with each round (inaudible) approximately personally £5.5 million in revenue and approximately £4 million in EBITDA. We feel very good about the results we delivered thus far as a public company, and looking ahead, we are very encouraged about our great prospects.

At the same time, UEFA’s commitment to enforcing financial fair play combined with Premier League desired to adopt similar financial regulations leaves us optimistic about our ability to expand future EBITDA margins as we continue to unlock the power of our unique business model.

Operator, we are now ready to take questions.

Question-and-Answer Session


Thank you. (Operator Instructions) And the first question comes from the line of Michael (inaudible). Please proceed.

Unidentified Analyst

Just a follow-up on the new rates controls that were passed by the Premier League, we reviewed the two different provisions the short-term and the longer-term and in particular to do with the short-term, how do current player contracts that are signed on getting [corporate] because presumably those some increases that may take place or may go on during like contracts already signed and those are going to be grandfathered in a certain way.

And then the second thing, I know that only the top handful of players are international star players if you will, and I was wondering how you feel the regulations would implicate the EPL teams from competing with teams from other countries for those top players.

Ed Woodward

Yeah let me take that. So first of all the detail is yet to come on that although its quite clear that its being passed in the Premier League and there will be some time now where the details are actually documented and no doubt there will be some little bit to come out of that. But as things stand there is no expectation of any grandfathering rules or anything in a (inaudible) relating to existing players or anything like that. This is a very simple calculation with regard to the cost control that looks at the ’12-’13 plan of wage bill and then it restricts it from that level going in for ’13-’14 based on what you've seen documented which essentially a 4 million pound increase plus whatever other revenues that you've managed to generate new in that year excluding those essentially paid to the clubs by the Premier League. So that's the answering the first question, obviously the second one with regard to the competition for players. We at Manchester United don't believe this will have a negative impact on us and our transfer policy at all. So without entering anymore specific detail I think that is definitely our view. We've done a lot of analysis as you can imagine on that.

Unidentified Analyst

And just on the $4 million from the new TV deal and then any 100% incremental revenue non-distribution, is that based on the prior year’s revenue.

Ed Woodward

Yeah, first of all its 4 million pounds. So that's based on the current year and then looking into next year. This is the reference year ,’12-’13, this current fiscal year ’12-’13 is the reference here and then its plus 4, plus new revenue on top of that.


And the next question comes from Doug (inaudible).

Unidentified Analyst

This is Brian for Doug. Two questions the first is given that you have two bonds that are callable that can carry relatively high interest rates in the current environment, do you have any plans to refinance these in the near term, and second question kind of related since somewhere to those switches. As we kind of look at your business model and the ability to generate free cash flow in the future, it seems quite substantial opportunity. So we are wondering how you think about capital return strategy at some point and maybe what your ideal target leverage for the company could be thanks.

Ed Woodward

A very good question that have been asked before and unfortunately I'm not going to give you that much detail response. But just taking them one by one, from a bonus perspective, clearly we recognize the yield on those and we recognize the market obviously is receptive at the moment to refinancing. It is something that obviously we are monitoring, but there are not current plans to refinance those. We still have obviously call protection sitting there attached to those bonds. So no current plans on the bond refinancing.

With regard to the cash flow generation, you are absolutely right. As we look forward this is a very cash generative business and as we said in the IPO we have no current dividend policy and if that change that is [saying] today, if that changes, we will communicate that at any appropriate time, presumably the next earnings call if that happens. But we recognize that we need to come for landing on appropriate level of leverage in this business and related to that then is what we're going to use of our excess cash.

Unidentified Analyst

Is there an ideal target leverage that you think about in the future when you kind of have brought down the debt somewhat?

Ed Woodward

There is no target leverage level at the moment.


And the next question comes from Randy (inaudible). Go ahead.

Unidentified Analyst

I've got a couple of questions. Just number one would be, can you give us any perspective on, update on the Nike deal given that we're now in the exclusive negotiating window. My second question would be, could you give us some color around the digital media strategy, when we could expect some new product roll out there? And then third, with Jamie’s team in Hong Kong how is he targeting the market. Is it more of, all over the region or is there a specific country by country strategy with one in particular and first over the other and then lastly, with the NBC deal coming for the US market, what is the update on plans to open up the US office and start to attack sponsorship opportunities in that market. Thanks.

Ed Woodward

Your testing my memory there, Randy. Okay, so, updates on Nike. You are absolutely right we are now in to six month exclusive negotiating window with them. There is no update, I will give you an update whenever there is something to tell you. What I won’t be doing is just giving you a piece mill small updates with regards to dialogues. So I will update you as and when, but obviously we are now in that six month window. Secondly with regards to additional media, I don’t know if you picked it up during the call earlier, but the acquisition of MUTV has resulted in us being focused on properly bringing that in-house and reevaluating some of the strategies that we have got in place with regards to additional media. So we are now guiding 2014 that’s calendar ‘14 with regard to the rollout of additional media product there are no changes regarding what that product will be and what our expectations are around that other than the acquisition of MUTV has pushed it up a little bit.

Thirdly with regard to Asia and our Hong Kong office how we are targeting the market. So that is as you know being set up predominantly as a regional office to focus on doing regional deals. So Jamie has looked at the geographies out there, there are clearly markets that make more sense to go after first than second and so there is prioritization of geographies. But the more important is the prioritization of categories, and so the first step is being to focus on categories say for example you are seeing some soft drinks deals being done and that will then rollout around the region and then other categories will drop in. But what you will be seeing first of all and you are seeing is a high priority product in the high priority geographies and then as those rollout you will see more products and more geographies added to the list.

And the final question was with regard to NBC as I knew broadcast partner from the Premier League perspective in the US clearly made investment for them, and we are excited to be on that platform. They have obviously reach out to a huge number of household in the state, a 115 million on the NBC itself. So yes, it helps often in terms thinking with our plans as you pointed out with regard to the US opportunity and doing regional and the media related deals in the US. That is still our strategy and there is no updated to MANU with regard to the US office but that’s very much in our plans.


(Operator Instructions) And the question is coming from [James Sullivan]. Go ahead please.

Unidentified Analyst

Just a quick question. Just in terms of commercial deals moving forward. It appears based upon the announced deals there has been at least to some degree a tilt towards Asia partly due to the opening of the Hong Kong office. So I was just wondering if you could comment on staffing levels in the Hong Kong office and whether there is any plans to increase the staffing levels about previous plans based upon the number of Asian deals that you have already signed.

Ed Woodward

Yeah, we clearly executing as our height out there in Asia, as evidence by the number of deals that we are delivering. So that’s been very successful the Hong Kong office. And I would say staff levels are increasing really as expected. When we open an office and the strategy is working, we obviously will look to add to that. What we are very careful about the people we bring those there is always a bit of a lead time to expand. We don't want to expand too rapidly and lose control of these kind of processes and that brand. So I think we are up to sort of 12-15 people in Hong Kong office already and we are always going to look out for talented additions.


I would now like to hand the call over to Ed Woodward for closing remarks.

Ed Woodward

Thank you very much everybody. We look forward to speaking to you again in three months time in May for Q3. Thank you.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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