Crown Media Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Crown Media (CRWN)

Crown Media Holdings (NASDAQ:CRWN)

Q2 2013 Earnings Call

July 31, 2013 11:00 am ET

Executives

Allison Bennett - Director of Corporate Communications and Media Relations - Crown Media Networks

William J. Abbott - Chief Executive Officer, President and Director

Andrew Rooke - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Charles L. Stanford - Executive Vice President of Legal & Business Affairs and General Counsel

Analysts

Michael V. Pace - JP Morgan Chase & Co, Research Division

Salvatore Muoio - SM Investors, L.P.

Richard Lee - Post Advisory Group, LLC

Peter Okin

Operator

Good morning, ladies and gentlemen, and welcome to the Crown Media Second 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 positions 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 Allison Bennett. Please go ahead, Allison.

Allison Bennett

Thank you so much. Good morning, everyone, and welcome to Crown Media's Second 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 and 6 months ended June 30, 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 10-Q will be filed today. I will now turn the call over to Bill.

William J. Abbott

Thank you, Allison. Good morning, everyone, and thank you for joining us this morning. I am pleased to report positive results for second quarter 2013 and the year-to-date. We experienced growth in advertising revenue and subscriber revenue, driving a 3% increase in total revenues. We were able to deliver this to our bottom line as well, with adjusted EBITDA increasing by 11% quarter-over-quarter. Now I will review quarterly operating highlights.

In the area of content and ratings, in the second quarter Hallmark Channel premiered 4 new original movies, 2 of which ranked among the top 3 movies of the day on all of cable. Third quarter is off to an outstanding start with the 2-hour pilot for Debbie Macomber's Cedar Cove, our first original scripted series for primetime, scoring a 2.4 household rating with over 2.6 million total viewers. The premiere of the series ranked third in its genre for all drama series on all of cable among households this summer to date. Viewers' true engagement with the program was demonstrated by an avalanche of social media activity on a variety of platforms during the broadcast, making the world premiere of Cedar Cove the most buzzed about primetime television program overall and #2 cable programming on social media for Saturday, July 27 according to Charter research. In the week leading up to the series debut, Cedar Cove reached nearly 8 million fans on the Cedar Cove Facebook page that generated approximately 16 million impressions on Twitter. And just this past Saturday, the success of Cedar Cove's pilot was reinforced by stellar ratings for the series' first 1-hour episode, which garnered a 2.2 household rating, averaging 2.4 million total viewers. Furthermore, the program served as strong lead in for the premiere of the Hallmark Channel original movie, Second Chances, which delivered a 2.5 household rating and averaged 2.8 million total viewers. Together, the 2 programmings made Hallmark Channel #1 in Saturday primetime across cable for July 27.

The early success of Cedar Cove gives us great confidence that our strategy to integrate original primetime series into our lineup that also features quality original movies our audiences have come to know and love will pay off. We have strategically scheduled our lineup to ensure that we will continue to be a ratings leader in cable on Saturday nights in primetime. Between Cedar Cove's full 12-episode run, pilots for new series in development and a strong slate of original movies, we have brand new original content airing on Hallmark Channel every Saturday through the end of the year and well into 2014.

In other Hallmark Channel programming news, we just kicked off production in Vancouver for the backdoor pilot for Hallmark Channel's next potential original scripted series for primetime, The Mystery Cruise, based on a book by bestselling author, Mary Higgins Clark. The premiere of the 2-hour pilot is scheduled for Saturday, October 5. We also made casting news recently when we tapped popular actor, Eric Mabius, from Ugly Betty for the pilot of Dead Letters, yet another Hallmark Channel original scripted series in development. The series based on a concept by Martha Williamson, the Emmy Award-nominated television producer and creator of Touched by an Angel, follows a group of postal detectives, whose mission it is to deliver lost letters or packages from the past to their intended recipients. The 2-hour pilot is slated to air Saturday, October 19. Hallmark Channel's daytime programming continues to gain traction. For third quarter-to-date, the block is up 81% in women 18-49 delivery and up 15% among women 25-54 versus the same period a year ago. We have continued to fine tune Home & Family and anticipate ratings improvement in daytime as we further build the show in season 2 beginning this October. While we greatly enjoyed working with Marie Osmond on her 2-hour -- on her 1-hour daytime talk show, we recently announced our decision not to renew the show for a second season. On close examination of our daytime slate, an analysis of cost versus benefits, we determined that the best direction for this daypart is to develop more service-oriented lifestyle shows similar to Home & Family, which not only entertain and inform our viewers and provide us -- but provide us with ownership of the content, which we can potentially monetize on multiple platforms and offer as unique content to our distribution partners.

On the Hallmark Movie Channel side of the business, the network continues to see distribution and ratings growth. For the second quarter, HMC marked its highest-rated quarter in network history for total day and primetime among household delivery and registered increases of 35% in total day and 37% in primetime household delivery compared to the second quarter of 2012 average. The network is also pacing ahead of the competition, with its household delivery growth marking the third largest increase of all 100 Nielsen measured ad-supported cable networks. In addition to household growth, the network continues to resonate with its key demographic target of women 25-54, marking a 38% increase in total day and 21% increase in primetime over its average same home performance in second quarter of 2012. Further building on its record-breaking streak, in the 6-week period of April 1 through May 12, Hallmark Movie Channel delivered 4 of its top 10 highest-rated weeks among women 25-54 and 6 of its top 10 highest-performing weeks among households. The channel also scored its highest-rated day in network history among women 25-54 on May 5, and its second-highest rated primetime ever on May 12. As viewers become more aware of the network, the audience delivery continues to grow. These results are a clear indication of the network's value to our audience and its significant potential for future growth. On the distribution side of the business, Hallmark Channel's Nielsen universe for July is at 86.3 million, a slight decrease from the June 2013 universe estimate as Hallmark Channel was just 1 of 81 cable networks that incurred a monthly decrease from the June 2013 Nielsen estimate. In keeping with the rapidly changing distribution environment, we recently announced the launch of Hallmark Channel's TV Everywhere website, giving authenticated subscribers from Time Warner, Verizon, Cablevision and Bright House Networks access to a variety of our family-friendly content. With viewing patterns continuing to migrate on occasion from the traditional TV screen, further expansion of our TV Everywhere platform has become a key priority for our business, and we are actively exploring new opportunities for growth in this area.

Hallmark Movie Channel's Nielsen universe estimate is now 51.7 million homes, representing an increase of 75,000 homes from the June 2013 universe estimate and a decrease of 4.4 million homes since July 2012. During second quarter, Hallmark Movie Channel SD launched nearly 850,000 actual new subscribers and on the HD, Hallmark Movie Channel HD launched 415,000 new subscribers on Time Warner Cable, Midcontinent and Sublook [ph]. In the area for advertising sales, I am pleased to report that Crown Media Family Networks completed its 2013, '14 upfront negotiations ahead of many of its cable competitors. A demand for family-friendly programming bolstered by our recent entry into the original scripted primetime series business, gave us a strong position in the marketplace, resulting in double-digit revenue growth in volume for both Hallmark Channel and Hallmark Movie Channel. Our CPM growth was at/or above the overall cable marketplace, growing by mid- to high-single digits. Our increased commitment to original programming on Hallmark Channel in daytime with our lifestyle block and in primetime with our original series and movies played a key role in securing new advertisers in this season upfront from key categories, including automotive, retail and home improvement. Hallmark Movie Channel experienced exceptional growth in upfront revenue with total upfront revenue increasing by 30% due to high advertiser demand, strong ratings and expanded production of original movies for the 2013, '14 season. The scatter marketplace remains strong with total Crown Media advertising revenue retained by Crown growing by 7% in the second quarter and scatter volume up 39% over same period compared to a year ago. While scatter pricing is slightly down versus last year, current scatter CPMs are up 26% on Hallmark Channel and 20% on Hallmark Movie Channel versus upfront. We are off to a solid start for the second half of the year and expect strong advertising results driven by Cedar Cove, our popular holiday programming on Hallmark Channel and Hallmark Movie Channel in fourth quarter.

Now I'll turn the call over to Andy to review financial results.

Andrew Rooke

Thank you, Bill. As Bill mentioned, we continued to drive strong bottom line growth with adjusted EBITDA through the quarter up 11% and net income up 23% from the same period a year ago. In particular, revenue from Hallmark Movie Channel grew 23%, on the strength of almost a 40% increase in our key audience demographic. Overall, advertising revenues increased 3% to almost $69 million from $66.5 million in the second quarter of 2012. Subscriber fee revenue also increased over 3% quarter-over-quarter due to contractual rate increases. For the 6 months ended June 30, growth in distribution and ratings on the Hallmark Movie Channel has led to the overall 3% increase in advertising revenue to $134 million. Programming costs have declined just over $2 million or 6% in the quarter as the number of licensing agreements have expired and our revenue sharing agreement with Martha Stewart Living ended in the third quarter of 2012. Year-to-date, our programming costs have also declined 7% period-over-period. Our selling, general and administrative expenses increased 6% in 2013 to $15.5 million for the second quarter and to $31 million for year-to-date. We have experienced increases in performance-based employee cost, research expenses and incurred a $300,000 expense related to the amendment of the company's credit agreement in first quarter of 2013. Growth in revenues over the first 6 months in 2013, 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 to 43% from 40% for the first half of the year.

Interest expense decreased $1 million for the second quarter of 2013 as compared to the same period of 2012 due to a decline in the outstanding balance on our term loan. A $17.5 million principal payment made in March 2013 and the reduction in the interest rate from 5 3/4% to 4%. Interest expense from the term loan was $2 million during second quarter of '13 as compared to $3 million during second quarter of 2012. Year-to-date, our interest expense has decreased by almost $1.5 million. Our provisions for income tax of $8.3 million and $9.7 million for the quarters ended June 30, 2013, and 2012, reflect effective tax rates of 38% and 37%, respectively. We expect to utilize available NOLs to offset our 2013 federal tax liability. Although at the beginning of the second quarter of 2012, we paid Hallmark Cards $4.3 million in satisfaction of our first quarter 2012 obligation under the then in effect federal tax sharing agreement.

Cash flow provided by operating activities during the second quarter of 2013 increased to $27.5 million from $12.8 million a year ago. During the first half of 2013, we used $20 million in financing activities, primarily reducing the 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 3.3x adjusted EBITDA as of June 30, 2013, compared to 3.6x at December 31, 2012. We are pleased with our results for the second quarter and look forward to continued growth in 2013. We expect to continue or increase our investments in both programming and marketing throughout the rest of the year to continue driving revenue and earnings growth and are pleased to reaffirm our previous guidance of mid-single-digit growth in both revenue and adjusted EBITDA for the full year 2013.

William J. Abbott

Thank you, Andy. Over the past -- first half of 2013, Crown Media Family Networks has built a solid foundation on which to grow the business further in third quarter, throughout the rest of the year and into 2014.

At this point, I will turn these proceedings over to the operator to assist us in facilitating the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from line of Mike Pace with JPMorgan.

Michael V. Pace - JP Morgan Chase & Co, Research Division

A few questions. Bill, I couldn't quite hear a few items from your prepared remarks. Did you say that Nielsen numbers for the Hallmark Channel were down in June? And I guess that would also mean for -- during the second quarter, so I'm just wondering what happened there? Was -- an affiliate contract didn't get renewed? Or is that more counting from a Nielsen perspective?

William J. Abbott

Mike, that's a good question. 81 -- Hallmark Channel was just 1 of 81 networks that experienced a slight decline. It's really more of a Nielsen issue in terms of how they calibrated the subs throughout the second quarter, and so it was absolutely not a result of anything that was an internal issue with distributors.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. And then you also -- you mentioned some data points on the upfront. I heard you said about CPMs, can you just repeat what you said on volumes? I apologize, I missed it.

William J. Abbott

Yes, we grew volume by double digits all-in and on both networks individually and CPMs were -- mid- to high-single digits was where we netted out, which was at or slightly above the market.

Michael V. Pace - JP Morgan Chase & Co, Research Division

And across both channels, roughly how much inventory did you sell in the upfront?

William J. Abbott

It's all in the neighborhood of 45% to 50% all-in across Crown Media Family Networks.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. Need to ask this one, Hallmark Cards filed something with the -- I think a 13D with the SEC about their expiration of the standstill agreement at year-end '13, I guess. Can you share any color on any conversations that you had with them following that filing?

Charles L. Stanford

This is Charlie Stanford. We can't comment beyond the 13D. And we've had -- our -- we've had -- anything that Hallmark has [indiscernible] to is in that 13D.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. And then maybe for Andy then. You're continuing to deleverage the balance sheet. Barring anything with your owner, do you continue to expect that to continue to trend downward?

Andrew Rooke

Yes. The simple answer to that, Mike, I think we are still committed to deleveraging our balance sheet and the first use of cash is certainly towards lowering our debt.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. And then your guidance of mid-single-digit revenue and EBITDA growth for '13 just generally speaking, I think that would imply that you expect revenue growth to accelerate the rest of the year a little bit. But you're also saying then adjusted EBITDA will decelerate for the back half of the year. I'm just wondering if you could: one, confirm that; and two, what's driving both of those dynamics?

Andrew Rooke

Yes. Certainly, as Bill mentioned, we had a good upfront. So that helps with fourth quarter. We also have a fair amount of original programming, which Bill talked to, which we would obviously hope would aid our revenue in the second half. Against that, there is obviously further investments in marketing both towards programming in fourth quarter and even into some of the originals that we expect in first quarter of 2014.

Operator

Our next question comes from the line of Brad Brigan with Brigan Hayes [ph].

Unknown Analyst

I wanted to pick up on a question that Mike had for Andy. Do you guys actually have a target for your leverage ratio?

Andrew Rooke

We had a target of 3 to 3.5x. We're obviously in that range right now. And we continue to consider our forward-looking strategy.

Operator

[Operator Instructions] Our next question comes from the line of Salvatore Muoio with Muoio LLC.

Salvatore Muoio - SM Investors, L.P.

What were cash taxes? I'm trying to figure out cash taxes in the quarter?

Andrew Rooke

They were fairly insignificant as we have the NOLs. The last payment was -- they've been insignificant this quarter.

Salvatore Muoio - SM Investors, L.P.

Right. That's what I was -- that's what I was thinking, but then when you read the income statement.

Andrew Rooke

Yes. It's [indiscernible] and state taxes as a part of being party to the Hallmark Cards consolidated return. All of our federal is now made as a standalone entity. And as you know, we are -- have a significant amount of NOLs available for us in that regard.

Salvatore Muoio - SM Investors, L.P.

All right. Okay. Just another question on Hallmark's 13D filing. I guess what struck me as unusual about it was just the timing of it, being that it was the middle of the year. And I mean, it would -- I mean, have they -- what can you say? Have they essentially approached the board with anything other than, "Hey, we're thinking about this stuff." I mean, they just basically listed a laundry list of options.

Andrew Rooke

We have no -- we unfortunately have no information other than what they have disclosed in the filing.

Salvatore Muoio - SM Investors, L.P.

So they haven't approached the board? I mean, there's nothing that triggered the filing other than their own internal machinations?

Andrew Rooke

We are unaware of anything. And I'm not in a position to speculate.

Operator

Our next question comes from the line of Richard Lee with Post Advisory.

Richard Lee - Post Advisory Group, LLC

I just want to follow up on the previous caller's question about leverage -- previous leverage target was 3 to 3.5x. But then Andy, you sort of tailed off when you said, going forward you may readjust that? I was wondering then if the company were a private, would you look to maybe change your leverage target?

Andrew Rooke

It is not a conversation that we've had at this point.

Richard Lee - Post Advisory Group, LLC

Okay. So would you be able to say if the company would be comfortable increasing leverage for strategic opportunities?

Andrew Rooke

Again, something that we have not discussed in detail and continue to pursue our capital strategy.

Operator

[Operator Instructions] Our next question comes from the line of Peter Okin with Stifel, Nicolaus.

Peter Okin

I just have a question in reference to the 13D. You guys do realize you're a public company and there are public shareholders and there's a filing by the majority holder, and you guys come out here with no comments? So just can you clarify that for me? Because I just want to know if you realize you guys are public?

Andrew Rooke

We do realize, Peter, and we have no information outside of what was disclosed in that filing.

Peter Okin

Does the CEO, Bill Abbott, speak to the majority shareholders? A regularly run public company would never run like this. It's just -- it's unfathomable to me that you -- there's a filing like that by the majority ownership, ownership for the public -- for the minority is not favorable. And we have to sit here with our hands tied for years and years get diluted and just wait and wait. And you guys -- how does it feel to be a puppet for these guys? I know, Charlie, now you're going to comment, right? Mr. Charlie, the lawmaker? Is that your turn now?

Charles L. Stanford

That's it, Peter.

Peter Okin

I just don't understand, Charlie. You're a lawyer. You're like -- you're a public company, it's like a joke. I can't wait -- I don't have to waste my time out there, but it's just -- it's entertaining to me.

Charles L. Stanford

Hallmark as an investor has no obligation to make the disclosures beyond what they've made in the 13D. We don't necessarily know what the intentions of our investors are. We don't know what your intentions are. So we have no information, and we can't comment.

Peter Okin

You realize that like come out here, and you have great results. And you know, why I bought this stock originally, but it doesn't really effect the price of the stock that much because the ownership is so unfavorable to the minority. I have no further comments. I don't really want to hear anything else.

Operator

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

William J. Abbott

Thank you very much. We look forward to joining you again in the fourth quarter with great third quarter results. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!