Manchester United (MANU) Q2 2016 Results - Earnings Call Transcript

| About: Manchester United (MANU)

Manchester United Ltd. (NYSE:MANU)

Q2 2016 Earnings Conference Call

February 11, 2016 08:00 AM ET

Executives

Edward Woodward - Executive Vice Chairman

Hemen Tseayo - Head of Corporate Finance

Samanta Stewart - Head of Investor Relations

Analysts

John Janedis - Jefferies & Company

Alexander Mees - JPMorgan

Matthew Walker - Nomura Securities

Omar Sheikh - Credit Suisse

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Manchester United Second Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] We would like to remind everyone that this conference call is being recorded.

Before we begin, we’d 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 the 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’ll now turn the conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead, sir.

Edward Woodward

Thank you, operator, and thank you everyone for joining us today. With me on the call are Hemen Tseayo, Head of Corporate Finance; and Samanta Stewart, Head of Investor Relations.

As you can see from the numbers released this morning, our financial performance during the second quarter was very strong with record revenues and EBITDA. Hem will go through the numbers in detail shortly.

On broadcasting the Premier League indicated last week that almost all the international deals have now being completed and that the international rights price for the next three year cycle commencing next season will be just over 40%.

On the commercial front, during the quarter, we renewed our partnership with Thomas Cook and announced a deal with Cable and Wireless Communications in the Caribbean. We also announced licensing deals with New Era and Heroes.

Since the end of the quarter, we’ve announced partnerships with several leading global brands. In January, we announced a partnership with Sina Sports, the number one digital media platform for sports fans in China.

As part of the deal, Sina has secured exclusive rights to broadcast the club’s 24 hour MUTV channel. With 8.6 million followers, we also are the biggest football club on Sina Weibo, which is Sina Corps platform similar to Twitter.

In addition, we recently announced a deal with the YOU.C1000 as the club’s isotonic drinks partner in Indonesia. This week in conjunction with the launch of the movie Deadpool, we announced that we entered into partnership with 20th Century Fox as our official mentor for united feature film partner. The first partnership of its kind for Premier League club.

We also announced a licensing deal with Columbia Sportswear as Manchester United’s first official outdoor apparel partner. As part of the agreement, the well-known American outdoor brand will design and create dual branded outerwear.

Last week Leigh Bird [ph] joined the club to head our retail operation. Leigh has over 30 years of experience in the fashion retail industry and has worked with [indiscernible] brands. Worked for the money exchange and the time he joined to the time he left, the business grew from 17 stores in the U.S to 280 in 35 countries with $800 million in revenues and over 3,000 employees. We look forward to having Leigh drive the expansion of our retail business and bring our products closer to our fan.

As you recall, the working with HCL, the additional transformation partner, to change the way we engage with our fans around the world. The partnership is progressing well and we recently moved into product design and technical proven concept stage for our new digital offerings.

In summary, we’re pleased with our strong financial performance and importantly this is -- if this continues trend, it will enable us to compete at the highest level.

I’ll now hand you over to Hemen, to go through the numbers and we’ll be happy to take questions you have at the end.

Hemen Tseayo

Thank you, Ed, and hello, everyone. I’m going to review our results for the second quarter ended 31st December 2015. As usual, unless I mention otherwise, all figures are in U.K. pound sterling.

As I previously stated on an earlier call, year-over-year comparisons throughout fiscal 2016 will be driven by these three key themes. Contribution from Champions League Football, the commencement of the Adidas partnership, and bringing in-house our retail merchandising apparel and product licensing businesses, which were previously operated by Nike.

In terms of the headline figures, our second quarter 2016 total revenue was up 26.6% to £133.8 million and adjusted EBTIDA was up 32.3% to £56.1 million delivering an EBITDA margin of 41.9% in the quarter compared with 40.1% for the prior year quarter.

As with previous announcements, we’ve included both adjusted net income and adjusted diluted earnings per share as we believe that in assessing the true comparative financial performance of the business it is useful to strip out the distorting impact of items that are unrelated to the underlying business and then to apply a normalized tax rate of 35% for both the current and prior periods and we provide a reconciliation of this in the earnings release.

Adjusted profit for the quarter was £17.7 million compared to £4.4 million for the prior year quarter, due primarily to higher commercial and broadcasting revenues.

Turning to the key items of note in the financial statements, commercial revenues were up £19.7 million primarily as a result of the increase in retail merchandising apparel and product licensing revenues as we commenced our partnership with Adidas, which delivered a step up in minimum guaranteed revenues coupled with the contribution from the Old Trafford megastore, e-commerce, licensing and soccer schools.

Broadcasting revenues were positively impacted by participation in the Champions League, partially offset by two fewer Premier League home games and two fewer Premier League live broadcast in the current quarter, resulting in an £8.9 million increase over the prior year quarter.

Matchday revenues were down slightly as a result of playing the two fewer Premier League home games and hosting a friendly international game in the prior year quarter, which was largely offset by the two Champions League games -- two Champions League home games and one domestic cup from game in the current quarter.

During the quarter, total operating expenses excluding depreciation and amortization were up 22.7% with total wages up 14.4% due primarily to contract renewals of existing players and uplifts associated with participation in the Champions League.

Other operating expenses increased 50.7% due primarily to retail merchandise apparel and licensing costs now being recognized in our income statement coupled with higher variable costs from playing the two Champions League games in the quarter.

Net finance costs for the quarter were down £1.6 million primarily due to the reduction in interest payable on our senior secured notes and senior term loan following the refinancing in June 2015.

So based on our first half results, and activity during the transfer January window, we’re reiterating revenue guidance between ₤500 million to ₤510 million and raising adjusted EBITDA to ₤178 million to ₤188 million from the ₤165 million to ₤175 million.

The guidance adjustment is primarily as a result of four things. Firstly, the English Clubs received a higher than expected distribution from the Champions League market pool due to the -- due to England representing a greater proportion of the total broadcasting pool represented by the 32 clubs than expected.

Lower player costs anticipated due primarily to no acquisitions in the January transfer window, together with lower than expected appearance fees for the season. And finally we also have further savings from the timing of hiring various staff across the business. We also believe that amortization will be approximately ₤87 million for the fiscal year.

Finally we announced our third quarterly dividend for this fiscal year of $0.045 per share which will be payable on the 10th of March 2016 to shareholders on record on the 25th of February 2016.

And with that, I’ll pass you back to the operator and we’re ready to take your questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Janedis of Jefferies. Please go ahead.

John Janedis

Hi. Thank you. Just one question, I know there has been some talk about the pressure European clubs are facing in the transfer market from the Chinese Super League, which has been bidding more aggressively on players. So do you expect that could have any kind of noticeable impact on the summer transfer window?

Edward Woodward

I mean, of course it can. So far I think the -- this is the biggest window if you like in preparation for the next season, which is really also the real movement in interest following the previous comments on it. So, I do think there will be more activity coming in the summer, but it is very, very difficult to predict what kind of impact that will have. I mean, if nothing else, it’s another useful market if we’re looking to sell any club.

John Janedis

Thank you.

Operator

And our next question comes from Alex Mees of JPMorgan. Please go ahead.

Alexander Mees

Hi everyone, and thanks for taking the call. It’s a very good quarter. So that’s great, congratulations. Couple of questions, if I may, just on staff cost to start with, this seems to be one of the key reasons for increasing the guidance. Appreciate that there were no acquisitions in the January transfer window, but I just wonder if given the part of it is the timing of highs as you’ve mentioned, whether we should expect quarterly staff costs to increase as we go through the year? My second question is just with regard to the recent deals with Columbia and New Era. I wonder if you see any other opportunities for apparel, over and above fees and also Adidas in the future?

Edward Woodward

Alex, thank you very much for your comments on the quarter. I’ll take that, the first one on staff cost, and yes in terms of the trends for the second half, you’re right I would see Q3 and Q4 being a little higher than where we are now. Firstly, there are still player renegotiation contracts that can take place in the season which will add to that going up, but also we’ve already announced two hires, our CFO will be joining us from the end of March and obviously his remuneration will start coming from that point. And also the head of our retail operations will also again be joining together with lots of other staff across the business that they’re obviously smaller on an individual basis but collectively will start to write up. So, yes I would see that, that amount ticking up.

Hemen Tseayo

And your second question on Colombia and New Era, yes there are other opportunities in the future from a non -- I guess, a non-Adidas apparel expected but I’m not going to be guiding on that. I think as you’d expect we’d probably go after the bigger ones early which is what we’ve done.

Alexander Mees

Great. Thank you very much.

Hemen Tseayo

Yes.

Operator

And our next question comes from Matthew Walker of Nomura. Please go ahead.

Matthew Walker

Thanks. Good afternoon, everyone. I’ve got a few questions, if that's alright. The first is, what do you think of the ticket issues, and what impact could that have on our Matchday revenues going forward? So I have got in my model probably for the 3% to 4% Matchday growth sort of adding for Knighton. I understand you’re going to freeze ticket costs again. I was just wondering what you think of what’s happened to Liverpool, and what you think might happen to pricing of Away tickets and Matchday revenue in general, not including obviously, fluctuations on Champions League. The second thing is on player costs, and the philosophy around player costs. As BBC Match of The Day hopefully showed us the latest squad has been assembled for about the cost of £22 million. When you head into the transfer window in the summer, can you explain, why is it the case that the bigger clubs can't find relatively cheap players like [indiscernible]. And the last question is really on the academy. Can you just explain, what you have been doing with the academy through the last six months, and how effective you feel that’s been, and what you expect coming out of the academy in the future? Thank you.

Edward Woodward

Okay, thanks, Matthew. First question on ticket issues as you described them. No, I’m not going to comment on what other clubs have done from a policy perspective. But I guess what I can say is, I think you would have heard the Premier League is looking at options to help Away Fans. We had the Away Fan Initiative last year and obviously there is -- there are discussions happenings both at the last weeks Premier League meeting and indeed behind closed doors now and then into the next one in March which will deliver something more I expect to Away Fans. But I think from our perspective that’s only part of it for us. I think we are working with our supporters trust closely to assess what we can do for our fans. I mean, you will assume we’ve had our general admission season ticket prices frozen for the last five or so years, and I don’t see, as you say we’ve kept them frozen into next year as well. That’s as good a guide as anything in terms of where we are on general admission, hospitality and exec areas are a different matter which I think is subject to more year-on-year changes. But I think overall, the yield analysis on the stadium that you guys isn’t too far off, but it’s generally going to be around execs not necessarily around season tickets and general admission. Second question, philosophy on player costs. Leicester is a fantastic reference point for everybody this year. I think the philosophy that we have is, is to target quality of players based on huge amount of scouting that we do and analysis within the training ground, and then we do our best to do the best deal we can. And some players are bought by other clubs with an eye to, to them developing into something special in a few years time, where there is a bit more pressure perhaps on some of the bigger clubs to bring in players that are going to be hitting the ground running and top players verging on world class almost immediately. So there is a slightly different market perhaps in which people are buying. Third question then was around the academy, what have we been doing in the last six months. Its good question given some of the news flow around, I would say -- I mean, the academy continues to be in the heart of the club, giving you the chance is part of our philosophy, part of our DNA. We took the departure of Brian Mcclair last summer as an opportunity to do a root and branch review of the academy, that’s now complete and changes are underway. Announcements will follow in the coming days. I think in terms of the future our key competitive advantages are still very strong and the T1s [ph] I’d call out are an unmatched track record of player development compared to any other team in particular, in England. And secondly the runway we deliver those first team opportunities to those players coming through, again very different to some of our competitors.

Matthew Walker

Okay, much appreciate it. Thank you.

Edward Woodward

Thank you.

Operator

And our next question comes from Omar Sheikh of Credit Suisse. Please go ahead.

Omar Sheikh

Good morning, everyone. Three from me, if I could. First of all for Hemen, perhaps; I just want to get a sense of how the employee benefit expenses might change next season if you don't qualify for the Champions League. I know it’s a long way to go yet, but it’ll be interesting to your thoughts, maybe if you could just let us know what proportion of those expenses are variable that might be sort of a helpful starting point. Second question is maybe for Ed. You just hired Head of Retail, I just wondered whether you could update us in that context about your thinking on the store expansion or the store rollout. Maybe talk about which geographies you’re thinking about first and pacing? And then finally, could you perhaps update us on the performance of the Old Trafford store. Last quarter you gave us some base points on or some commentary about the start after you’ve taken over the running of it. If wondered if you could just perhaps give us some color on how that's doing this quarter? Thanks.

Edward Woodward

Thanks, Omar. Hemen, [indiscernible]?

Hemen Tseayo

Yes, sure. Thanks, Omar. With respect to the employee benefit expenses and the proportion that’s variable, I mean first of all that’s not something we guide on. So I’m not going to be able to transparent with you besides, I mean you know that those are components of our players sadly that it is linked to the club participating in the group stages of the Champions League and to the extent that we’re not in the group stage of the Champions League, and that component will come off and its sufficiently meaningful. With respect to, I’ll take your third question and then I’ll pass over to Ed for to give a wider feel around retail. In terms of the performance of the Old Trafford megastore, in terms of year-on-year it continues to perform strongly and we’re pleased with the way it’s doing so. So, outstripping its performance last year. Obviously with respect to Q1 and there often is a dip obviously from the start of the season where there is a lot of interest, and there is -- the new kits are released. But in terms of the performance you’re seeing in this quarter and to the rest of this fiscal year, it will be in line with what we expect this quarter into Q3 and then Q4 and we’re pleased that it’s up year-on-year. Ed, do you want [multiple speakers].

Edward Woodward

Yes, sure. So your second question was, now we’ve brought in this, this Head of Retail, and what is the plan? So, high level I can say there’s obviously a review process first. There’s a lot of work to be done around looking into locations, format size, and what kind of product range might go in, and it’s really too early to be guiding you around what that may result in. So, hopefully I’ll be able to tell you a bit more on the next quarter call.

Omar Sheikh

Okay. Ed, just -- could you clarify when the Head of Retail starts then?

Edward Woodward

Last week.

Omar Sheikh

All right. Thank you.

Edward Woodward

Thanks, Omar.

Operator

And this concludes your question-and-answer session. I would like to turn the conference back over to Mr. Woodward, for any final remarks.

Edward Woodward

Thanks for your time everybody and we’ll speak to you again in a few months. Thank you.

Operator

Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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