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Manchester United plc (NYSE:MANU)

F3Q 2014 Earnings Conference Call

May 15, 2014 08:00 ET

Executives

Ed Woodward - Executive Vice Chairman

Michael Bolingbroke - Chief Operating Officer and Director

Hemen Tseayo - Head, Corporate Finance

Samantha Stewart - Head, Investor Relations

Analysts

Matthew Walker - Nomura

Bryan Goldberg - Bank of America

Randy Konik - Jefferies

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Manchester United Third Quarter 2014 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. (Operator Instructions) And we would like to remind everyone that this conference is being recorded today.

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 cautionary notes 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 call over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead, sir.

Ed Woodward - Executive Vice Chairman

Thank you, operator, and thank you everyone for joining us today. With me on the call are Michael Bolingbroke, Chief Operating Officer and Director; Hemen Tseayo, Head of Corporate Finance; and Samantha Stewart, Head of Investor Relations.

As you maybe aware, Michael Bolingbroke will be leaving the company at the end of June and his responsibilities, including stadium operations and finance, will be assumed by current members of the board and management team. I’d just like to say Michael we wish you the best with your new role and thank you for all your hard work over the last seven years. Hemen, who many of you may have met in investor conferences or meetings, will take us through the financials. And he and Michael will be available for questions and answers following the prepared remarks.

Before I address this quarter’s performance, I would like to discuss the team’s results this season. The ‘13/14 premier league season obviously completed last weekend and we finished a very disappointing seventh, which means we will not be playing any European football next season. Be assured that everyone in the club is working hard to ensure that our performances on the page next season will be what we and our fans expect of Manchester United.

As you are aware, we made a managerial change at the end of April. Following David Moyes’ departure, Ryan Giggs, the club’s most decorated player, assumed responsibility for the First Team as an interim manager. We are very grateful to Ryan for holding the reins during this period and the exemplary manner in which he has conducted the role. We are now focused on bringing in a new manager who will help Manchester United return to the top of English football and challenging in Europe. We expect to make an announcement in due course. In the meantime, we continue to be active in the transfer market.

Returning now to the third quarter results, we have again generated record revenues in EBITDA reflecting strong performance across all of our businesses. Our commercial business continues to perform very strongly with revenues up around 19% and sponsorship revenues up close to 44%. We announced two new sponsorship deals during the quarter: Aperol, our new global spirits partner and EuroFood of Thailand, the club’s first confectionary partner in five territories in Asia.

During the quarter, we also launched an official club smartphone app developed solely for use in 17 of our telecom partner markets. The app includes content such as news, fixtures, player profiles, short-form video, a live match center and links to other Manchester United apps. It’s free to download with a subscription based premium content section that includes exclusive video footage. We first released it for an iOS and Android platform, with Nokia, BlackBerry and Windows versions being launched in the next few months. This club app is outperforming any other football club in all of our launch territories.

We believe this launch will provide very important lessons for our digital media offering, such as user content preferences, subscription price sensitivity and best marketing channels to drive acquisition. During the quarter, we also announced details of our U.S. tour this summer. We will play matches around the United States starting in Los Angeles. On the 10 of April, we released tickets for our match against Real Madrid in Ann Arbor, Michigan on the August 2. This game is sold out with the pre-sales tickets selling within 48 hours and the general public tickets selling out within one hour of becoming available. The stadium holds around 110,000 people and is expected that the match will break the U.S. record for the highest attendance for a soccer game ever.

I will now turn the call over to Hemen.

Hemen Tseayo - Head, Corporate Finance

Thank you, Ed and hello everyone. I will review our results for the third quarter fiscal ’14 and for anyone new to our announcements, please bear in mind that looking into 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 as usual unless I say otherwise all figures are in UK pound sterling. Total revenue was up 26% to a third quarter record of £115.5 million with adjusted EBITDA of 60% to £40 million.

Our EBITDA margin for the quarter was 34.6% compared to 27.3% in the third quarter of 2013. Consistent with previous announcements, we have included both adjusted net income and adjusted earnings per share as we believe that in assessing the true comparative financial performance of the business it is useful to strip out the disclosing effects of material debits and credits unrelated to the underlying business and then to apply a normalized tax rate of 35% to both the current and prior periods. And we provide a reconciliation of this in the earnings release. Adjusted net income then was £13 million for the third quarter compared to £4.1 million for the third quarter last year.

I won’t address every line item here, but we will highlight the items that we believe are worth discussing on the call. In our commercial business sponsorship revenue increased by 43.5% to £30.7 million due to a combination of new deals coupled with uplifts from renewals of existing relationships. Merchandising, apparel and product licensing revenue was down modestly for the third quarter, but is up 0.4% for the year-to-date.

New media and mobile revenue decreased £1.7 million as we continued to develop our broader digital media strategy. We believe the recent launch of the smartphone app which Ed referred to earlier will help to strengthen our relationship with our telecom partners providing them with tangible value from improved content, increased customer engagement and higher data usage.

Broadcasting revenues were up 64.1% due to increased revenue from the new Premier League domestic and international rights agreements as well as two additional home league games and having five more League games broadcast live in the quarter versus the prior year period. Matchday revenues were up £3.1 million in the quarter reflecting the additional two home League games and one home Capital One Cup match which were partially offset by three fewer FA Cup matches.

Operating expenses then increased 15.8% due primarily to player acquisitions and renegotiated player contracts. Our net finance costs at £5.9 million were £12.4 million lower in the third quarter of last year due to interest savings as a result of our refinancing in June last year and our hedge accounting strategy which reduces the FX fluctuations in our income statement.

Looking ahead to the fourth quarter, we expect the full year fiscal ’14 wages will be up in the high-teens percentage wise, slightly higher than we had previously indicated largely due to player contract negotiations and increased appearance fees. Based on our third quarter results, seventh place finish in the league and current visibility, we remain confident that we will achieve our previously stated guidance for the fiscal year ’14 of revenue between £420 million to £430 million and adjusted EBITDA of £128 million to £133 million.

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

Ed Woodward - Executive Vice Chairman

Thanks Hemen. Anticipating some of the questions that are frequently raised let me just briefly touch on a few of them. First of all, we continued to have very good discussions with a number of parties regarding our technical partner, global retail, apparel and product licensing business. As advised on several previous calls we will update you when we have something to say on that matter. Secondly, excuse me, due to the relatively high broadcasting revenues in fiscal year ’14, we estimate that the isolated impact on fiscal year ‘15’s EBITDA from not qualifying for European football will be in the mid-£30 million. This includes a 15% reduction in the price of executive facilities next year which we recently announced.

Finally, recent news has indicated that UEFA is a taking a strong line on clubs that breach FFP rules. We continue to support FFP and believe it will help control player CapEx and wage inflation. We also believe the quality of the club’s academy will be a key differentiator as FFP begins to take effect.

With that, I will complete our remarks and invite your questions. Thank you.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) And your first question comes from the line of Matthew Walker from Nomura. Please ask your question.

Matthew Walker - Nomura

Thanks very much. The first thing is I was wondering if next year’s guidance is going to include for ‘16 is going to include re-qualifying immediately for the Champions League. Second question is can you walk us through how you get to mid-30s EBITDA impact for no European football as I thought the impact was probably a bit less than this? And also can you address the issue of player wages, notwithstanding FFP, but are there going to be any big payoffs this year for the manager etcetera? I was anticipating bonuses maybe being a bit lower in Q4 than last year. So, maybe if you can walk us through why wage growth is going to be in the high-teens? Thanks.

Hemen Tseayo

Okay. I think I got those questions down, Matthew. First question then relates to our assumptions on, I think we said next year, you said financial year ‘16. So, are we assuming to go back and gear up? Clearly, we are in the next call we have in September, we will be guiding for financial year ‘14/15. So, next year, when we aren’t in Europe, so the guidance will relate to next year on the next call and we won’t be guiding the following year beyond that. Did I understand your question correctly?

Matthew Walker - Nomura

Yes, basically, I mean I know that you are going to guide for ‘15 when you went to your next year, but just for modeling purposes, it makes a big difference to the ‘16 multiples whether people assume that you get back into the Champions League within one season or not? I am just wondering whether that’s realistic.

Hemen Tseayo

The club’s expectations and you will see this reflected in the transfer market. And what we have recently done from a managerial perspective, our aim absolutely is to get back into the Champions League. So, I will leave you to decide how you input that into your model. The second question relates to, I think your question was the mid-30s reduction aimed to next year and that is off the high base this year relating to broadcast money in the Champions League, because we won the league in 2012/13. That triggers a much higher percentage of broadcast money that comes to us through our participation in Champions League this year. So, the delta isn’t a normalized year, it’s actually a relatively high number this year as the one-off. And then I think your last question…

Matthew Walker - Nomura

On the wage growth, yes.

Hemen Tseayo

Your last question the wage growth, I think first piece of it I think was Q4 related.

Michael Bolingbroke

Yes. So, Matthew, we mentioned on the call that due to the appearance fees, together with player wage renegotiations, we expect the fiscal ‘14 full year wage increase to be more like high-teens rather than mid-teens that we said earlier.

Hemen Tseayo

And otherwise, we expect the number to go up in Q4 in terms of the wages.

Matthew Walker - Nomura

I understand that. I mean, I was asking really why that should be the case, because I was assuming that bonuses might come down a bit. And is there a payoff for the previous manager within your – within those numbers?

Michael Bolingbroke

No, there is not. And it’s appearance fees, so, appearance fees are not bonuses, so you will be weighted with the number of different players obviously the player wage calculation is different, so for lots of different players, you got to have a base wage component. You do have bonus components for different things, principally for the Champions League. And then you got appearance fees. And clearly, if some of you are very young players and some of you are very old players, the appearance fees components tend to be higher, because obviously you go for more of a pay-as-you-go rather than a flat, a large salary if you like. So, that is something that it’s difficult to forecast and it’s something that we don’t specifically guide on. Frankly, it’s difficult to do so.

Hemen Tseayo

Those are renewals of contracts. And then into next year, I think we will guide when we guide, which is in September and you will be able to look at what we are assuming through your highly visible revenue model, you will be able to understand roughly where we are heading with regard to player wages, but it will be an increase year-on-year. We still expect there to be inflation in player wages, that’s partly due to the market and obviously we are looking at investing in players a little bit this summer anyway, mitigated a bit by what we are saying in financial fair play. But we are not going to guide any percentage increase year-on-year at this point. Thank you.

Matthew Walker - Nomura

Okay, alright. Thanks so much.

Operator

Thank you very much. Your next question comes from the line of Bryan Goldberg from Bank of America. Please ask your question.

Bryan Goldberg - Bank of America

Hi. Thanks. Just a couple of quick ones, your focus on reinvesting in the squad, I guess from a capital allocation perspective, how should we be thinking about the timing of your rollout of your growth initiatives like new media, I mean could your moves this summer with respect to the squad potentially shift timings, is there any potential for that. And then my second question is I think you called out the ticket price announcement for the executives seating product next season, but could you just update us on your announced ticket pricing plan for the other seating products at Old Trafford next season and do you expect to see any noticeable changes in season ticket subscription rates given the season’s performance?

Hemen Tseayo

Okay, first question I mean there is no immediate tangible connection between investment in the squad and the impact on the rest of the business with regard to the growth areas that we have. The opportunity with regard to coming to the end of the Nike contracts and doing a new deal there exists separately the opportunity with regard to digital media. We will continue to update you quarter-on-quarter. Both of these we expect to be seeing not in next year but in the following year, so financial year ’16. So I don’t think there is a meaningful direct impact between the two, clearly there is a relationship between how much we can go and do certain deals based on investment in squad, but there is no direct tangible link.

Michael Bolingbroke

And with respect to the tickets questions everything else besides the exact facilities the 15% reduction that Ed referred to earlier is as normal, so season tickets are held flat on last year and there is no other change.

Bryan Goldberg - Bank of America

Thank you very much.

Hemen Tseayo

How are they selling and they are selling well ahead of last year. And exact sales, is just very early at this stage, but it’s going well as well.

Bryan Goldberg - Bank of America

That’s helpful. Thank you very much.

Hemen Tseayo

Thank you.

Operator

Thank you very much. (Operator Instructions) And your next question comes from the line of Randy Konik from Jefferies. Please ask your question.

Randy Konik - Jefferies

Hi, can you hear me?

Hemen Tseayo

Yes, we can. Thanks Randy.

Randy Konik - Jefferies

Alright, great guys. Thanks. I guess my first question is regarding the sponsorship revenue line, the increase of about 40%, can you give us a little flavor about in terms of the contribution from renewals versus new deals. And then how do we think the contribution of renewal rate increases versus new deals to that line item growth rate going forward, that’s my first question?

Hemen Tseayo

Okay. I mean I don’t have that breakdown for you right now, but it would be mostly new deals that are contributing to the increase. Renewals are very important and we expect them as we grow the business in terms of the number of sponsors we have the number of categories that are covered, I expect renewals as a ratio to new deals to increase but at the moment we feel relatively low.

Randy Konik - Jefferies

Okay, but as a follow-up to that is there any kind of I guess yardstick or benchmark growth rate that you are sort of seeing on the renewal rate increases, is it a single digit increase, a double digit increase any kind of color there?

Hemen Tseayo

No we don’t benchmark it in that way. I mean with – because we are so far away from a mature business, it isn’t something that – and because it can be lumpy with regard to the number of deals that drop in at a particular point in time. At the moment we have other benchmarking that’s relevant. We are looking at size of countries, size of market and the type of revenue we can generate by category carving up categories in a tiered manner so that we can estimate the expected value and then benchmarking against that. But we aren’t looking at particular growth rates on a line by line basis like that.

Randy Konik - Jefferies

Got it. Okay. And then with regards to the questions that have been coming in around player wages, is there any type of color, I know you are going to give guidance later in the year, but any type color you can give on, should we expect given your comments that you have been very active in the transfer market, would be safe to assume that the growth rate of expense on a year-over-year basis in fiscal year ‘15 could be above the growth rate that we were expected to see in high-teens rate in fiscal year ‘14 or should we not assume that, I am just trying get some perspective there?

Hemen Tseayo

I can’t comment on what growth rate it will be it’s – you are saying we are active in the transfer market. We will be active in the transfer market. As the window is upon us and deals are being done but not been done in terms of the past tense. So there is nothing announced, we haven’t committed yet, so it’s really something you are just going to wait and see as we go through the window. And we assess how active it will be really from the 1 of September.

Randy Konik - Jefferies

Okay. And then I guess lastly the David Moyes contract, what have you – where do we see the impact of his whatever he is being paid, where does that show up in the numbers and when?

Michael Bolingbroke

I will take that one. So we will – that will show up in the numbers for Q4 this year and we are expecting that to be…

Randy Konik - Jefferies

Okay.

Michael Bolingbroke

Single-digit million pounds, given that it was basically a post balance sheet event to Q3. Then we expect to probably have a disclosure in our interim accounts which will be available next week. And clearly they are an exceptional line item, so they are below the EBITDA line.

Randy Konik - Jefferies

Great. Thanks guys. Really appreciate it.

Hemen Tseayo

Thank you.

Operator

Thank you very much. There are no further questions at this time.

Hemen Tseayo - Head, Corporate Finance

Okay. Well, thank you very much everybody for dialing in. Much appreciated.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

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Source: Manchester United's (MANU) F3Q 2014 Results - Earnings Call Transcript

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