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Crown Media Holdings (NASDAQ:CRWN)

Q2 2014 Earnings Call

August 01, 2014 11:00 am ET

Executives

Mary Dzabic -

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

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

Analysts

Peter Okin

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

Operator

Good day, 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 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 cautionary statements included in our press release and our most recent reports filed with the Securities and Exchange Commission, including our most recently filed annual 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 now like to turn the call over to Mary Dzabic. Please go ahead, Mary.

Mary Dzabic

Thank you. 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, 2014, 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 was filed this morning. Now I would like to turn the call over to Bill.

William J. Abbott

Thank you, Mary. Good morning, everyone, and thank you for joining us today. I am pleased to report double-digit advertising revenue growth of 10% and operating cash flow of 18% For the second quarter of 2014. Last July, we strengthened the foundation of Hallmark Channel with the successful launch of our first original scripted series, Cedar Cove. In 2014, we have continued to build on our achievements in the original series business, with the successful launch of When Calls the Heart and the second season of Cedar Cove. With the irresistible cast of enticing characters, Cedar Cove is once again captivating our viewers, garnering a 26% increase on our core demographic of women 25-54 over season 1 levels in its premiere episode. Our commitment to delivering content that resonates with our viewers, distributors and advertisers on any platform was reflected in advertising revenue growth in the past 2 quarters. Additionally, on our last call, we announced a partnership with ITV Studios America, to turn one of Hallmark Channel's most successful movie franchises, The Good Witch, into a 10-episode scripted series. Production of the first season of the series will start in Toronto this fall and will be led by Academy Award nominee, Daniel Petrie, Jr. We're also proud to Critics' Choice Movie Award nominee, Bailee Madison, to the cast as a series regular, as the daughter of Cassie Nightingale played by Catherine Bell, the lead character of the series.

In the second quarter of 2014, we announced the rebrand of Hallmark Movie Channel to Hallmark Movies & Mysteries. The channel will focus on the classic, lighter side of the mystery and suspense genres. Hallmark Movies & Mysteries will be the home of several Mystery Wheel franchises, each consisting of a series of movies. As part of the October launch of Hallmark Movies & Mysteries, the network will premiere original movies for 3 consecutive weekends, leading the way into the holiday season with 3 additional original movie premieres. Past success of Mystery programming on Hallmark Movie Channel makes this brand alignment a seamless evolution of the network and will help to further distinguish it from Hallmark Channel. Both advertising and distribution partners have had an overwhelmingly positive reaction to this new strategy.

Now I will review quarterly operating highlights. In the area of content ratings, in primetime, Hallmark Channel has increased 11% over women 25-54 -- among women 25-54, while in weekend primetime, the network is up 18% among women 25-54 quarter-over-quarter. Strength in weekend prime includes slightly stronger original movie premieres, which are demonstrated year-over-year progress in audience delivery for both the initial and subsequent airings. The first 8 movies of 2014 reflected an 8% increase among household ratings, while women 25-54 ratings remained consistent with the first 8 movies of 2013. The first half of 2014 showcased the strength of our brand in building an audience for our original scripted series. The first season of When Calls the Heart culminated with an average 1.7 household rating, reaching 13.7 million viewers, including 2.6 million women 25-54. As a result of its first successful season, When Calls the Heart will return in 2015 with a second season. The ratings momentum continued with the first season of Signed, Sealed, Delivered, our third original scripted series, which averaged a 1.4 household rating and reached over 10 million viewers through its 10-episode run, of which 1.8 million were women 25-54. Both series ranked among the top 5 ad-supported cable programs of their day in their respective time slots. From July 4 through July 13, Crown Media Family Networks featured Christmas-themed movies 24/7 throughout that period of time. Hallmark Channel averaged a 1.0 rating in households, a 36% increase compared to the primetime average of the event the previous year. Together, Crown Media Family Networks reached 20.5 million viewers over that course of 10 days.

Original movie, Angels Sing, staring Harry Connick Jr. and Connie Britton was the perfect close to a solid week on the Hallmark Channel, premiering to a 1.9 household rating and reaching nearly 3 million viewers. Angels Sing was the #1 rated ad-supported cable movie of the day and week among households and the second highest rated Hallmark Channel movie year-to-date. Daytime also improved with twice Emmy-nominated, Home & Family, reflecting significant increases across key demographics. After 13 weeks in the second quarter, the first-run broadcast of the program was up 46% among women 25-54, 39% among adults 25-54, 27% among households and 9% among total viewers over the corresponding time period average in 2013. We are very much looking forward to what season 3 will bring.

On the Hallmark Movie Channel side of the business, the network continues to see distribution and ratings growth. Year-to-date, the Hallmark Movie Channel registered double-digit increases in key demos, including women 18-49, was plus 13, adults 18-49 was plus 18 and households with plus 26% in total day, as well as among households with plus 26% in primetime. The May 31 premiere of The Color of Rain earned a 1.6 household rating, reaching more than 1.4 million unduplicated viewers and marking the channel's top-rated original premiere in key demographics including women 25-54, adults 25-54 and total viewers. The film also surpassed the network's previous best in key demo delivery, and the 11 PM encore of The Color of Rain marked the network's highest telecast to date of women 25-54. The Color of Rain is the quintessential example of the type of emotionally-driven, high-quality storytelling that has become the focus of Crown Media Family Networks over the past year. As we refine our strategy, it is our expectations that ratings and subsequent revenue will benefit from improvements to our content. The performance of The Color of Rain also reflects a noteworthy trend, the direct and immediate correlation of our original movie premieres with an increase in ratings and delivery on Hallmark Movie Channel. 2 days in 2014, we've debuted 3 of 10 new original Hallmark Movie Channel movies slated for the year, and in each of the weeks during which those films premiered, we saw significant upticks in total day and primetime delivery among households and all key demographics. We anticipate ratings and delivery momentum will continue to build as we roll out majority of the channel's world premier original movies throughout the second half of the year.

On the distribution side of the business, Hallmark Channel's universe estimate was 86 million in June 2014, a similar number to the year earlier, Hallmark Movie Channel's universe estimate was 54.1 million, an increase of 2.1 million -- 2.5 million homes from the same period last year, the 11th largest year-to-year subscriber increase and the 13th largest yearly percentage increase among all ad-supported cable networks. Crown Media Network's position heading into the 2014, 2015 advertising sales upfront was especially strong and well received by the advertising community due to our ongoing commitment to develop a more original scripted series, continuing our leadership in the original movie genre, growing our leadership position during the holiday season and maintaining our daytime lifestyle programming as we renew in Home & Family. We had even more exciting news for advertisers with the announcement of the rebrand of Hallmark Movie Channel to Hallmark Movies & Mysteries. The total television upfront market however developed much more slowly than expected and softer as well with total television volume upfront-to-upfront down year-to-year. However, we are especially pleased with our ability to grow our upfront business in a soft market. Demand for Crown Media Family Network's family-friendly programming and our valuable original programming allowed us to outperform the upfront market, resulting in a single-digit revenue growth of Hallmark Channel and double-digit revenue growth on Hallmark Movies & Mysteries. CPM growth remained consistent with the overall cable marketplace, which grew by an average of low to mid single digits across the board. At the same time, second quarter 2014 scatter results have been especially strong for CMFN, outpacing the marketplace in both volume and CPM growth. On Hallmark Channel, total scatter volume grew 8% over the same period last year, with CPM increasing 43% over upfront and 17% over scatter from a year ago. On Hallmark Movie Channel, total scatter volume grew 33% over the same period last year, with CPM decreasing 31% over upfront and 19% over scatter a year ago. Our confidence for the scatter market for the second half of the year is very strong and we are off to a solid start to deliver our 2014 full year targets. I would like to turn this over to Andy to review the financial results.

Andrew Rooke

Thank you, Bill. As Bill mentioned, in second quarter, our advertising revenue increased 10%, taking it to almost $76 million from just under $69 million in the second quarter of 2013, due principally to strong pricing on growth channels. This increase drove an increase in total revenue of 9% quarter-over-quarter to $97.5 million. Year-to-date, total revenue has grown 7% to $188 million, due to the strength of the advertising rates. Cash spent on programming in the quarter aggregated about $40 million, consistent with the same period last year. However, amortized programming costs increased 16% to $37.5 million during the second quarter, as we amortized the costs of our third original scripted series, Signed, Sealed, Delivered. Year-to-date, programming costs increased $13.5 million due to the cost of our original scripted series. Selling, general and administrative expenses increased 7% to $16.7 million for the second quarter due to increases in employee costs from workforce growth and contingent compensation, as well as increases in the amortization, depreciation and rent expense. Year-to-date, selling, general and administrative expenses have also increased 7% for similar reasons. Marketing expense increased $2.5 million to just over $3 million quarter- and year-to-date due to the timing of marketing campaigns around our original productions. Interest expense decreased $750,000 for the second quarter of 2014 as compared to the same period of 2013 due to decline in the outstanding balance on our term loan. Year-to-date, interest expense decreased $1.75 million. Our provisions for income tax of $9.75 million and $9.5 million reflect effective tax rates of 37% for both periods. However, we have not and do not expect to make any substantial cash payments for income taxes in 2014, utilizing available net operating losses to offset our federal tax liability. Our year-to-date provisions of income tax of $18.5 million and $16.5 million also reflected an effective tax rate of 37%. Despite the growth in revenue, the timing of the amortization of our original scripted series has resulted in a 3% decrease in our adjusted EBITDA to $37.5 million and a decrease in our operating margin for the quarter to 38% from 43% over the same period last year. However, cash flow provided by operating activities increased by almost $5 million to $32.5 million from $27.5 million a year earlier.

Year-to-date, adjusted EBITDA declined 8% to $68.7 million period-over-period, resulting in a 37% operating margin as compared to 43% in the prior period. However, year-to-date cash flow provided by operating activities increased by more than $15 million to $37 million, reflecting the advertising revenue growth over the last couple of quarters. We ended June with a cash balance of almost $74 million and our leverage ratio remained at 2.9x adjusted EBITDA. We expect to continue investing in programming and marketing throughout the rest of the year, driving revenue and earnings growth, and reaffirm our previous guidance of mid single-digit increases in both revenue and adjusted EBITDA for the full year 2014. And with that, I will turn it back to Bill.

William J. Abbott

Thank you, Andy. As we close out the first half of the year, we look forward to the strong content we have scheduled during the remainder of the year, including the return of Cedar Cove for a second season, a ramped-up slate of original premieres on the soon-to-be-branded Hallmark Movie Channel and our annual Countdown to Christmas franchises. We are confident this programming will drive ratings and further raise the value and profile of our brand for advertisers, distributors and viewers. At this point, I will turn these proceedings over to the operator to assist us for the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] All right. It looks like we have a question from the line of Peter Okin from Stifel Nicolaus.

Peter Okin

I think these are record results, right, Andy?

Andrew Rooke

They are certainly very impressive, Peter.

Peter Okin

Bill talked about outperforming on the upfront ad market. Your scatter results were strong. You have very strong confidence in the second half scatter market. Your revenue, up 9%. All things that are positive operationally. And I and -- many of my clients are shareholders, and part of management's job is to provide shareholder value. Let me ask you something. Why should I buy your stock today? Give me a reason why I should buy your stock today.

Andrew Rooke

Peter, I think that is a question that you as a shareholder need to answer yourself. We feel that we are generating value, an increasingly intrinsic benefit in the company, which we anticipate will be reflected in the long-term in the value returned to you and all other shareholders.

Peter Okin

Do you think the financial structure is beneficial for public shareholders? And also, what would you do and why haven't you refinanced your debt? Couldn't you refinance your debt so you would have a lower interest expense at this time, with all these great operational results? My concern is that management and the Hallmark family has no interest in increasing the price of the stock. If you'd answer all those questions, I'd appreciate that.

Andrew Rooke

I will take the one question that I heard in there which is regarding our debt, Peter. As you're probably aware of, there are penalties and make-whole provisions through the end of July of next year from refinancing notes. Our term loan is fairly attractive at this point and, if market conditions make it economically feasible, we will certainly consider buying those notes and paying down the term loan.

Peter Okin

Do you -- Carl Icahn was on CNBC recently in an interview and, obviously, he's an activist investor. And the first thing he does is he goes in and looks at management, and if management is not doing the job of providing shareholder value, he would get rid of everybody. So I kind of agree with him in reference to how you guys are handling shareholder value. Is there any interest in getting any analyst coverage? Any help in providing shareholders with some sort of -- someone else on their team instead of seemingly the management and ownership not really caring about the minority shareholders that they've really not taken -- given any consideration over the last 5 years when they diluted their holdings. You guys seem to be proud of the job with the stock at $3.38 after all you've done operationally. Part of your job is providing shareholder value. You guys don't do that. I'm done.

Operator

[Operator Instructions] Our next question comes from the line of Mike Pace from JPMorgan.

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

A couple for Bill to start. Bill, how much inventory did you sell in this latest upfront?

William J. Abbott

Michael, we sold a little bit less than we did last year, and that was intentionally in the neighborhood of half on both channels. The goal going in was to react to the marketplace. We saw the softness and then we weren't able to drive price to a level that we believe we can in the scatter market. So we didn't sell as deeply as we did last year or as typically we might.

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

And I'm sorry if I missed this earlier, did you say what the current scatter market is now versus last year?

William J. Abbott

Third quarter, we continue to pace that at double-digits over the last year, over both scatter and certainly over upfront. So the marketplace remains for us very, very strong. I don't think, overall, from an environment perspective, the advertising market necessarily reflects that type of growth. But again, our original content and our overall brand is resonating in a significant way.

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

And then as it relates to the change in strategy with the Hallmark Movie Channel, is there any thought there that maybe down the road, if the strategy doesn't work out, that you would talk to your affiliates and consider getting paid affiliate fees for the channel?

William J. Abbott

Certainly, it's -- let's say, it's a difficult environment right now across the board for our distribution partners, given the pressures that they're under for cost from retrans and sports rights. But certainly, we are always -- we believe building very attractive valuable assets that have great viewer demand that are positioned to drive our bottom line across all areas of our business. So there's nothing to announce at this point, but we believe we're building a very valuable service with HMM, as we would call it.

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

And then maybe for Andy, could you just add some color to the second half of the year as it relates to cash programming cost versus what you're going to see on the -- what we're going to see on P&L? Should we see similar trends for the first half of the year? And then the same question, I guess, for your marketing budget as we head into the holiday season, anything vastly different from what we saw last year?

Andrew Rooke

I don't think you'll see anything vastly different from what we saw last year, trends on programming are going to be much the same. We have one more original series which from where we are right now, the second season of Cedar Cove, which marries up to having Cedar Cove last year. We'll continue to see, I think, programming cash costs outstrip amortization as we have over the last few quarters. On the question of marketing, fourth quarter is certainly a big push for us. And I think you'll see a similar increase in marketing expense that you've seen in prior years leading up to fourth quarter.

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

And then just getting back to the capital structure from the prior question. Can you just tell us how you're thinking about and maybe even in the context of the volatility in the credit markets right now, how you think about the capital structure going forward when you have the ability to refinance those notes? With leverage below 3x, do you think about keeping a bank bond capital structure or going all bank or all bonds? Any color there would be helpful.

Andrew Rooke

We're certainly keeping an eye on the marketplace in what our options are. At the moment, with no decisions and nothing we can really comment on.

Operator

And at this time, I'm not showing any further questions. I would like to turn the call back over to -- for any closing remarks.

William J. Abbott

Thank you very much. We look forward to reporting third quarter results in November.

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.

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Source: Crown Media Holdings' (CRWN) CEO William Abbott on Q2 2014 Results - Earnings Call Transcript
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