Annie Howell - Executive Vice President of Corporate Communications and Media Relations
William J. Abbott - Chief Executive Officer, President and Director
Andrew Rooke - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Crown Media Holdings (CRWN) Q1 2013 Earnings Call May 2, 2013 11:00 AM ET
Good morning, ladies and gentlemen, and welcome to the Crown Media First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
Today's presentation includes forward-looking statements regarding the company and its performance. The forward-looking statements may concern, for example, expected financial position and operating results, its business strategy, its operating and financing plans and other matters. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in or implied by any forward-looking statements and should be considered in conjunction with the cautionary statements included in our press release and our most recent reports filed with the Securities and Exchange Commission, including our most recently filed annually and quarterly reports.
Any forward-looking statements are made only as of the date of this conference call based on information known today to the company's management. The company is not undertaking any obligation to update any forward-looking statements.
I would like to turn this call over to Annie Howell. Go ahead, Annie.
Thank you, and good morning, everyone. Welcome to the Crown Media's First Quarter Conference Call. With me today are Bill Abbott, President and Chief Executive Officer; and Andy Rooke, Executive Vice President and Chief Financial Officer. Bill and Andy will comment about the operating results and financial performance for the 3 months ended March 31, 2013, and then we will open up the call for questions.
I would like to remind everyone that our press release, which contains information on non-GAAP measures, was distributed this morning and is available through the Investor Relations section on our website at ir.crownmedia.net. In addition, our Form 10-Q will be filed later today.
Now I'll turn the call over to Bill.
William J. Abbott
Thank you, Annie. Good morning, everyone, and thank you for joining us today. I am pleased to report positive results for first quarter 2013. We experienced growth in advertising revenue and subscriber revenue, driving an increase in total revenues. This increase carried over to our bottom line, with adjusted EBITDA increasing by 10% quarter-over-quarter. Since our last call, we have made a number of exciting announcements, including several at our annual upfront lunching last month, around new programming strategies that will dramatically change the profile of both our networks and ultimately increase our value proposition in the marketplace.
For Hallmark Channel, we are reinforcing our commitment to expand the network's spectrum of original programming with primetime scripted series. The 2-hour pilot for our first series, Cedar Cove, based on the book series by best-selling author Debbie Macomber, will debut July 20, with the 1-hour series commencing July 27 and culminating in a September 28 season finale. We also recently green-lit 6 episodes of our second series, When Calls the Heart. Based on the immensely popular book series by Janette Oak, the series will kick off with a 2-hour movie event, October 5, with 1-hour episodes beginning on January 5, 2014.
Further building on this foundation, we have green-lit a pilot for 1 additional scripted series and are in development on another. The pilot for River Boat Mystery, based on a book by Mary Higgins Clark, will premiere on September 28, strategically scheduled to air immediately following the season finale of Cedar Cove.
In addition, we are currently in development on a pilot for a fourth potential series, Dead Letters, based on a concept by Emmy Award-nominated television producer and creator of Touched by an Angel, Martha Williamson.
All of our series projects are rooted in the work of master storytellers with devoted fan bases, and we are confident that they will put Hallmark Channel on the map as a destination for compelling, original episodic programming in primetime.
In other news from Hallmark Channel, we renewed our 2-hour daytime lifestyle program Home & Family for a second season, which we just learned yesterday was nominated for a daytime Emmy. It increased our slate of original movies to 33 for 2013, including 14 in fourth quarter alone, and signed a deal that will make Hallmark Channel the exclusive cable home for The Good Wife, a top-rated series on CBS, which will begin airing on the channel in January 2014.
Additionally, we recently collaborated with Walmart, P&G and Walden Media around the creation of Walden Family Theater, a new Friday night movie franchise for families on Hallmark Channel, including 6 new Walden-produced family films. The franchise kicked off on March 15, with the world premiere of Return to Nim's Island, the sequel to Walden Media's 2008 action-adventure and worldwide box office hit, Nim's Island.
On the Hallmark Movie Channel front, we are paralleling the channel's rapid distribution and ratings growth with a substantially increased programming slate, including 10 new original movies for 2013. In addition, as a complement to Countdown to Christmas, Hallmark Channel's successful holiday franchise, we are launching Hallmark Movie Channel's own seasonal initiative, The Most Wonderful Movies of Christmas, which will include Christmas with Tucker, the network's first-ever original holiday movie. Starring James Brolin, Christmas with Tucker is the prequel to the 2009 Hallmark Hall of Fame hit movie, A Dog Named Christmas. The Most Wonderful Movies of Christmas will also feature exclusive airings of some of Hallmark Channel's most popular holiday titles, as well as an array of licensed classics.
Now I will review quarterly operating highlights. In the area of content and ratings for the full quarter of first quarter, Hallmark Channel registered growth over the same period in 2012 among women 25-54 with a 6% increase in total day. Home & Family has seen considerable growth among the key demographic of women 18 to 49, recording a 20% jump in first quarter delivery over fourth quarter 2012.
Original movies, the cornerstone of Hallmark Channel's programming, continue to be a major draw. We aired 4 new original movies in the first quarter, 3 of which were in the top 5 for the time period in key demo and household ratings. We have great expectations that our ratings momentum will continue to build throughout the rest of the year with all of our additional original content and our strong branding effort.
Hallmark Movie Channel continues to show progression in audience delivery and ratings. For first quarter, Hallmark Movie Channel marked a 4% increase among women 25-54 in total day and 7% in primetime over first quarter 2012.
Meanwhile, in household delivery, the network was up 22% in total day and 26% in primetime for first quarter versus the same time period in 2012. This momentum carried over into second quarter with a record-breaking April, the network's highest month for household and women 25-54 delivery in total day and primetime.
In addition, Hallmark Movie Channel's April 2013 primetime audience increased year-over-year from April 2012 by 87% among households and 96% among total viewers, the largest increases among all 100 Nielsen-measured, ad-supported cable networks during that time period.
Overall, Crown Media Family Networks maintains an edge in Rentrak's Stickiness Index, a key metric that measures audience engagement. For first quarter 2013, Crown Media Family Networks combined to deliver 15 of the top 20 cable movies, 9 of the top 10 and the top 4 overall, including the cable premiere of Hallmark Movie Channel's Jesse Stone: Thin Ice; the debut of the Hallmark Movie Channel original movie, Our Wild Hearts; the premiere of Hallmark Channel's original movie, Be My Valentine; and the cable premiere of Hallmark Hall of Fame movie, The Lost Valentine, on Hallmark Channel.
On the distribution side of the business, Hallmark Channel's universe estimate is 86.4 million for May 2013, a slight decrease from the April 2013 universe estimate. Our affiliate sales team continues to expand carriage of Hallmark Channel HD, launching 12,000 new subscribers among 20 different NCTC systems throughout the first quarter -- throughout the country in first quarter. Hallmark Movie Channel's universe estimate is now 50.4 million homes, an increase of 169,000 from the April universe estimate. The network's UE has shown a yearly increase of 3.3 million homes over May 2012. This growth can be attributed to our affiliate team working hard to secure SD and HD launches on a variety of systems. During first quarter, we launched 497,000 new HMC SD subscribers among 91 unique systems.
The advertising sales market progressed each month in first quarter as marketers continue to see the value of Crown Media Family Networks and invest in strong cable brands. Total combined revenue for Hallmark Channel and Hallmark Movie Channel grew double digits since first quarter, increasing by 11% over the same time period a year ago.
Due to an increase in ratings, scatter volume is up 23% for Hallmark Channel and 115% for Hallmark Movie Channel versus a year ago. While scatter rates are down slightly versus last year, current scatter pricing continues to be strong versus the upfront, with both networks experiencing 24% to 26% CPM gain and scatter CPMs over upfront.
Crown Media Family Networks is delivering a strong message to the 2013, '14 upfront marketplace, and we have been extremely well-received by the advertising community. Our ongoing commitment to building our programming lineup, including family-friendly movies, daytime lifestyle programming, holiday fare, classic-acquired series and, most recently, scripted primetime series, positions us as a unique and valuable proposition for the cable marketplace. And based on our growth in ratings, the caliber of our programming, the demand for quality family entertainment, we anticipate we will secure a 20% increase in volume for this year's upfront.
Our second quarter marketplace is off to a solid start as well, with both price and share on par to meet our goals.
I now would like to turn this call over to Andy to review the financial results.
Thank you, Bill. As Bill mentioned, we continued to drive strong bottom line growth, with EBITDA for the quarter up 10% and net income up 18% from the same period a year ago. In particular, revenue from our Hallmark Movie Channel grew 17.5%, driving an overall increase in advertising revenue of 2% to just over $65 million from almost $64 million in the first quarter of 2012. Subscriber fee revenue also increased modestly quarter-over-quarter due to certain contractual wage increases.
Programming costs declined $2.5 million or 7% in the quarter as we no longer have a revenue sharing agreement with Martha Stewart Living, and the costs of licensed syndicated programming declined.
Selling, general and administrative expenses increased 5% or almost $700,000 to $15.5 million for the first quarter of 2013, due mainly to increases in performance-based employee costs of $0.5 million and third-party costs related to the amendment of our term loan, which I'll talk about in a minute, of $0.25 million.
Growth in our revenues, together with a decrease in our programming costs, has resulted in a 10% increase in our adjusted EBITDA and an increase in our operating margin from the quarter to 42% from 39% last year.
Interest expenses decreased almost $0.5 million for the first quarter of 2013 as compared to the same period of 2012, due to a decline in the outstanding balance on our term loan. Interest expense on the term loan was $2.9 million during first quarter of '13 as compared to $3.3 million during first quarter of 2012.
On March 29, 2013, we amended our credit agreement to reduce the nominal interest rates on our term loan by between 150 and 175 basis points and extended the maturity date of the revolving credit facility to January 2018.
Provisions for income tax of $8.6 million and $7.3 million for the quarters ended March 31, 2013 and 2012 reflect effective tax rates of about 37% for both periods.
At the beginning of the second quarter 2012, we paid Hallmark Cards almost $4.5 million in satisfaction of our first quarter obligation under the federal tax sharing agreement. In 2013, we will utilize available NOLs to offset our federal tax liability.
Despite an 18% or $2.5 million increase in net income, cash flow use in our operating activities increased just over $1 million to $6 million from $4.8 million a year earlier as we continue to invest in owned original programming and paid amounts due under existing programming contracts.
During the first quarter of 2013, we used just over $19 million in financing activities, primarily reducing a principal balance under our term loan to $172 million as part of the March 29 credit amendment. This reduction in debt, together with our increased earnings, has reduced our leverage ratio to 3.4x adjusted EBITDA as of March 31, 2013 compared to 3.6x at December 31, 2012.
We are pleased with our results for the first quarter and look forward to continued growth throughout the rest of 2013. We expect our programming and marketing expenses to increase over the rest of the year, driving gains in both revenue and earnings, and can reaffirm our previous guidance of mid to high single-digit growth in both revenue and adjusted EBITDA for the full year 2013.
With that, I'll turn it back to Bill.
William J. Abbott
Thank you, Andy. With the combination of a strong and productive first quarter behind us and some extremely exciting prospects on the horizon, we are well-positioned to capitalize on the many strategies we have in place to build our business throughout the rest of the year and well into the future.
At this point, I will turn these proceedings over to the operator to assist us for the question-and-answer portion of the call.
[Operator Instructions] Our first question comes from Mike Pace of JPMorgan.
This is actually Max Kaufman [ph] stepping in for Mike. So last fourth quarter conference call, you guys talked about mid to high single digits guidance for revenue and EBITDA. EBITDA is actually -- obviously looking pretty well, but with revenue only 2% growth, what gives you the confidence the top line can accelerate the next couple of quarters?
Thank you for the question. We are certainly optimistic about the upfront that's coming ahead, which will help drive our revenue in fourth quarter. And as Bill mentioned, the gains that we've seen in April already in second quarter growth help underline our expectation.
Okay. Great. And then the leverage question you guys get a lot, especially from us. You guys are using a lot of free cash flow, and your profile, in general, is significantly better. What do you think you guys would be using your free cash flow going forward? And on top of that, what point do you think it makes sense to stop reducing balance sheet leverage?
We have, at this point, nothing to say on either of those matters.
[Operator Instructions] I'm showing no further questions at this time. I'd like to turn the conference back over to management for any closing remarks.
William J. Abbott
Thank you for joining us today. We look forward to a productive remainder of 2013 and to the second quarter earnings call in the beginning of August. Thank you.
Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.
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