Manchester United's (MANU) Management on Fiscal Q3 2016 Results - Earnings Call Transcript

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Manchester United plc (NYSE:MANU) Fiscal Q3 2016 Results Earnings Conference Call May 13, 2016 8:00 AM ET


Edward Woodward – Executive Vice Chairman and Director

Hemen Tseayo - Head of Corporate Finance

Cliff Baty - Chief Financial Officer


John Janedis - Jefferies & Company

Bryan Goldberg - Bank of America

Omar Sheikh - Credit Suisse

Alex Mees - J.P. Morgan


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Manchester United third 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 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 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 will 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, I have Hemen Tseayo, Head of Corporate Finance; Samanta Stewart, Head of Investor Relations, and I’m delighted to say, Cliff Baty, our new CFO, who joined us at the end of March.

So we’re approaching the end of the season with only one Premier League game left to play, plus, of course, the final of the FA Cup a week tomorrow. If we won that, it would be a record-equaling 12th win for the club.

This Premier League season has demonstrated once again why this league is the most compelling competition to sports fans all over the world. As we look back on our season, I'm delighted by the emergence of our young players. In the last two seasons alone, some 15 players from our under-21 squad have appeared 130 times in our first team.

Marcus Rashford made an immediate impact, scoring goals in his debut in Europe and then two more on his Premier League debut against Arsenal. Three of our regular first team players – Rashford, Lingard and Borthwick-Jackson – are locally-born academy players who’ve been with the club since they were eight years old.

Over the past six seasons, we’re the highest Premier League producer of academy players who are now playing in one of the top four leagues in Europe. Also, we’ve won three out of the last four under-21 Premier League titles, including this year’s, particularly impressive achievement given how many of our under-21 players have also been called into our first team, making them unavailable for that side.

We are continuing a long Manchester United tradition of bringing through our own talent. And as you may have seen, following a fundamental review of the academy, we announced the appointment of Nicky Butt to the role of Head of Academy. As a graduate of the academy’s famous class of ‘92, he made 387 competitive appearances for United between 1992 and 2004. Nicky will uphold the traditions and the heritage of this club as they are in his blood. He retains the values and the focus that our academy has always had.

We also recently appointed John Murtough as Head of Football Development. John was the Premier League Head of Elite Development and was deeply involved in the development and implementation of the new wave of academy strategies rolled out across the Premier League until he joined us in December 2013. The new structure signals significant enhanced investment in the vital areas of our academy and support teams.

Turning to our commercial business, the third quarter was a successful period. We made good progress on new sales, renewals, and activations. Highlights from the quarter include the following: Sina became the club’s first media partner in China bringing MUTV to our Chinese fans for the first time; Gulf Oil International was unveiled as the club’s first lubricant, oil and fuel retail partner; and since the end of the quarter, we’ve also announced the renewal of our partnership with Swissquote.

On the licensing front, Columbia Sportswear signed as official outdoor apparel partner, extending the range of product available for our fans. And since the beginning of this year, we’ve hosted international fan events called I Love United all around the world including in Mumbai, Bahrain, Rio, and New York. And we’ll host the last event of the season in Hanoi on Sunday.

We also announced Tour 2016 presented by Aon and participation in the ICC tournament with two games to be played in China in July. These achievements involve close collaboration between our teams in Manchester, London and Hong Kong, the key points of differentiation we have of the strength and reach of our band, the quality of our execution, and the international impact we deliver.

On digital media, since our last call, we are tracking as planned with our team working closely with HCL on the development of the app and the Web site that will enhance the experience of having engaged with our fans around the world. I expect to update you further on digital media and on our retail strategy on the next call in September.

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

Hemen Tseayo

Thank you, Ed. And hello, everyone. I’m going to review our results for the third quarter ended 31 March, 2016. As usual, unless I mention otherwise, all figures are in UK pound Sterling.

As previously stated, year-over-year comparisons throughout fiscal 2016 will be driven by three key themes. First, contribution from UEFA competitions; second, the commencement of the adidas partnership; and third, bringing in-house our retail, merchandising, apparel and product licensing businesses, which were previously operated by Nike.

In terms of the headline figures, our third quarter 2016 total revenue was up 29.9% to £123.4 million and adjusted EBITDA was also up 76.8% to £44.9 million, both records for Q3, delivering an EBITDA margin of 36.4% in the quarter compared to 26.8% in the prior-year quarter.

As with previous announcements, we have 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 then was £11.7 million compared to a loss of £7.1 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 £18 million to £65.8 million primarily as a result of the increase in retail, merchandise, 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 and licensing.

Broadcasting revenues were up £6.1 million, primarily due to the participation in UEFA competitions and one additional Premier League live broadcast in the current quarter.

As highlighted in our earnings release, the international broadcasting agreements for the 2017 to 2019 cycle have been finalized and we expect the total value of the three-year deal represents an increase of approximately 40% over the current cycle.

Matchday revenues were up primarily due to playing the two UEFA, Europa League home games in the current quarter, resulting in £4.3 million increase over the prior-year quarter.

And during the quarter, total operating expenses, excluding depreciation and amortization, were up 12.8%, with total wages up 12%, due primarily to contract renewals of existing players and uplifts of annual player salaries associated with the participation in the Champions League. Other operating expenses increased 14.9% due primarily to retail, merchandise, apparel and licensing costs now being recognized on our income statement, coupled with higher variable costs from playing the two Europa League games in the quarter compared with none in the prior quarter.

Net finance costs for the quarter were down £2.3 million, primarily due to a reduction in interest payable on our senior secured notes and secured term loan facility following the refinancing in June 2015.

And so, based on our nine-month results, we expect to exceed £0.5 billion in revenues this year and are reiterating revenue guidance between £500 million to £510 million and EBITDA guidance between £178 million to £188 million.

Finally, we announced our final quarterly dividend this fiscal year of $0.045 per share, which will be payable on 10 June, 2016 to shareholders on record on 26 May, 2016. And going forward, the Board of Directors has recently approved replacing the previous quarterly cash dividend with a regular semi-annual cash dividend of $0.09 per share, which for fiscal 2017 will be paid in January and June.

The specific record ex-dividend and payment dates with respect to each semiannual cash dividend will be announced in future releases. This change will give us better visibility on the US tax reporting profile of the dividends.

With that, I’ll hand the call back to the operator and we’re ready to take your questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question will come from John Janedis of Jefferies.

John Janedis

Thank you. A couple of quick questions. First, just in the event you qualify for Europa League instead of the Champions League, can you quantify the impact on Matchday and broadcast revenue?

Hemen Tseayo

Sure. I’ll take that, John. Hi. In terms of Matchday, if we were to in the Europa League, it should be mid-single-digits in terms of the impact to Matchday. And then, in terms of broadcasting, I believe you said, it’s a little over £30 million in terms of revenue. However, most importantly, in terms of the EBITDA impact of being in the Europa League versus being in the Champions League, getting to the quarterfinals of both, the impact to us and the business will be high-single-digits.

John Janedis

Thanks. And then maybe just one for Cliff, I know it’s, obviously, not been too long since you joined the company, but I’d love to get your perspective, what stands out to you about your experience in ManU so far? And more specifically, what are the key growth areas of the company that you’re most excited about and how do you think about usage of capital and investment compared to the view from when you joined? Thanks.

Cliff Baty

Thanks, John. I look forward to meeting you all in the near future on the call. Just, first of all, yes, I’m delighted to have joined and start working with Ed, Richard, Hemen and the team. It’s early days, as you say, for me and I’ve been spending the first three weeks meeting people across the organization. And I think one thing that stands out to me is the commitment to excellence across the whole club. And there’s a pride in working for Manchester United that can be seen from talking to everybody around the place, is to be the best and that drives a very strong and a can-do culture. So that’s very exciting for me to join this organization.

More broadly, I think it’s a significant organization with a wide span of operations, revenue streams and cost bases in a fast-moving industry. So there’s lots to do, but lots of opportunity.

You asked about growth, there are many opportunities for initiatives and growth across all the operations I just mentioned. And it’s that really which excites me overall. I do have experience from my previous role in the online world. So how we progress the digital media strategy that Ed mentioned before is something that I’m keen to support where I can as we go forward.

And finally, you talked about capital investments. Well, I’m not going to comment on capital investments at this stage other than really to say the club’s financial position and commercial performance does give it the flexibility to invest, if we choose. But more to say on those things as we move through.

John Janedis

Thanks very much.


And the next question comes from Bryan Goldberg of Bank of America Merrill Lynch.

Bryan Goldberg

All right, thanks. I’ve got a quick question. I guess, in the event you’re not in the Champions League next season, could you just refresh us on the mechanics of your adidas contract and I guess the range of possible economic adjustments we should be thinking about in the next year or two? And then I want a quick follow-up.

Hemen Tseayo

Sure, absolutely. Hemen here, I’ll take that. The short answer is that there is not an impact on adidas. To remind everyone how it works, there is a clause that states that to the extent we are not – we do not participate in the group stages of the Champions League in two consecutive seasons, very importantly, then there would be a 30% reduction on the amount that we would’ve calculated, on the amount that we would’ve received in that year and the cash impact of that, along with the accounting impact frankly, is spread over the remaining life of the deal.

So, the first year, that could bite us in terms of the cash received. It would not be next season, 2016/2017; it would be the 2017/2018 season that it would be calculated on, should that happen. And then, as I said, and I do just want to reiterate, to the extent the 30%, just using the average figures, assuming it was a 75% amount that we would’ve received, just to take the average cash amount, 30% of that, but then that amount is spread over the remaining life of the deal. Okay?

Bryan Goldberg

Yeah, thank you. And then, I guess, a little more broadly speaking, are there any – in terms of other commercial contracts that you guys have, are there any other sensitivities economically we should be thinking about, again, if there is a possible absence from the Champions League?

Hemen Tseayo

No, again, is the short answer. We only have one other contract that has a penalty clause in it, if you like, for participation, which I think we’ve talked about in the past quite some time ago, and that’s the Chevy contract. However, that only bites if we’re relegated from the Premier League, and that’s not something that keeps us awake at night.

Bryan Goldberg

Okay, great. Thank you very much.


And the next question comes from Omar Sheikh of Credit Suisse.

Omar Sheikh

Good morning, everyone. I’ve got three actually. First one is on the Old Trafford store. I think, Ed, last time you gave us some sort of commentary on how that was doing under your management. I wonder whether maybe you could update on us how sales are currently tracking.

Second one is on the Chinese tour. I’m just trying to get a sense of whether we should expect the tour revenues to be higher or lower than the US tour last year. So I don’t know whether you can give us some color on, I don’t know, number of matches or how sponsorship revenues will work this year. That would be very helpful.

And then the final question is, perhaps for Ed, on player CapEx, sort of long-term, obviously, where your currently net player CapEx is at an elevated level, if you look at it, versus three, four, five years ago. I just wonder whether you thought that player CapEx is now at a permanently elevated level or do you think it’s going to come down over time. Thanks.

Hemen Tseayo

Hi, Omar. I’ll take your first question, possibly the second as well. But with respect to the Old Trafford store, we haven’t, as you know, in the past, nor do we intend to going forward in any way disclose the sales details about the megastore. However, obviously, with a view of trying to be helpful, you’ll be aware that the profit share in fiscal 2015 was about £11.5 million. No, that wasn’t just the store, but, obviously, the store is the main part of that – that’s retail, e-commerce, licensing. We’ve mentioned, again, on previous calls that given we’ve taken that business, the businesses in-house, and you can assume a high level, 50%, gross profit on that. If you gross that up by two times, you get to a figure and you can see from the run rate that we are trending on that we’re slightly ahead of that this year than last year. So we’re pleased with how that’s performing, but I can’t give you any color specifically on the Old Trafford store itself.

Your second question, I believe, was with respect to…

Edward Woodward

On the China tour, I would expect lower revenues relative to last year, not least because we’re only having two games this summer. And generally speaking, I would say, if you like, the ticket revenue tends to be higher in the US and perhaps the sponsorship revenue may be as higher in Asia, but, net-net, I would just try and just take a blend across that and make an assumption that this is ratable across the number of games.

And then your last question was player CapEx, I accept your observation about where we are. And I think there have been two effects in recent years. There’s been continued inflation in player transfers, given the increase in money flowing around the industry, but also the second, perhaps greater, effect is the retooling that we’ve been undertaking in terms of the squad. And I do think that things will stabilize lower in the coming few years, but probably continue to be lumpy thereafter. So I can’t guide on what that is. You know, as a club, we will always invest in the squad to the extent we feel we need to, so that we are challenging for titles. But I think this sustained level is probably relatively high compared to what is needed.

Omar Sheikh

That’s helpful. Thank you. Actually, I have one follow-up. Maybe, Hemen, you can help me on this. You mentioned on the international Premier League licensing revenues that they are going to be up 40% over the whole cycle, so I presume that’s an average versus the average of the last cycle. What is it going to be the year-on-year, do you think? I’m sorry to be slightly lazy not trying to [indiscernible] can you just give us a sense of what it will be 2017 versus 2016?

Hemen Tseayo

I can help you with that. And I’ll give you the principle, actually, which is probably easier. There’s a built-in 5% step up in it. So between years one, two, and three, so actually the 40% step up is, actually, when you’re looking at a comparison year-over-year, would be based on the FY 2014 numbers. And so, if you added 40% to the FY 2014 numbers, you get to where we’d expect to be for 2017, if that makes sense, because the cycle is at your one, two, and three and it’s kind of 19 over 60, 20 over 60, 21 over 60 which gets you to basically a 5% embedded increase in each year. So I won’t give you the exact number stepping up from this year into next, but if you’ve got FY 2014’s numbers and you times that by 40%, you should get to the numbers for 2017.

Omar Sheikh

That’s perfect. Thanks, Hemen. That’s very clear. Thank you.


And our next question will come from Alex Mees of J.P. Morgan.

Alex Mees

Thanks so much. And congratulations, guys, on the record numbers. It's great to see. A couple of questions from me. Just, firstly, on staff costs, you did beat my estimates a little bit in EBITDA. And it comes from lower staff costs, which, although they grew in the quarter year-on-year, it was less than the growth we saw in Q1 and Q2. I wonder if that's because of the early exit from the Champions League or there's something else we should be thinking about?

And then just secondly, echoing your comments earlier, Ed, on the academy, I just wonder if you see it as much of a competitive advantage in the current environment, given how much broadcasting money is available to other clubs as it has been in the past?

Hemen Tseayo

Hi, Alex. It’s Hemen here. I’ll take your first question on staff costs and then I think Ed is best placed to speak about your second.

With respect to the first, there isn’t anything different happening there because of the performance – that means, there’s been any change to any bonuses or uplifts or anything like that. We typically will have a higher staff cost in Q4 than we do in Q3 because of bonuses across the organization together with the fact that when we are doing contract renegotiations in the year, there’s often an impact that comes in in Q4 as well as that happens throughout the year. So we might be out compared to your numbers by a few million pounds, but there’s nothing unusual and it’s likely to catch up in Q4.

Edward Woodward

And then your second question, I’ll probably answer in two different ways. We comment on the academy because it’s the heart of the club, it’s an extremely important part of the club, it’s in our DNA and has been for over 60 years. But as that continues to deliver players into the first team, obviously, that is helping us in terms of net transfer spend referencing the previous call or two questions ago. But in terms of the competitive environment, yeah, I have to say it has become more competitive. It became more competitive when Chelsea had a change of ownership 12 years ago, whenever it was, 13 years ago. It, obviously, got more competitive when City changed ownership about five years ago [indiscernible] the last round increase was 70% domestically. Obviously, we are in the last year of that cycle. And visibility into the next year’s cycle from domestic, money going up similar percentage, obviously, makes all the other clubs competitive –more competitive in the Premier League. But I think the way we view it is, we know where we have strengths and we have to focus on giving ourselves the best chance in every single area of the club that we can. Yes, that’s the academy, but it also means in recruitment, it means the coaching staff, it means having the best medical departments, sports science facilities, etc., etc. It’s trying to get the extra 1% from all of those areas that influence and impact the first team.

Alex Mees

That’s very clear. Thank you.


And this will conclude our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Edward Woodward

Thanks very much.

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