Manchester United's (MANU) Q2 2017 Results - Earnings Call Transcript

| About: Manchester United (MANU)

Manchester United Ltd. (MANU) Q2 2017 Earnings Conference Call February 9, 2017 8:00 AM ET

Executives

Edward Woodward - Executive Vice Chairman

Cliff Baty - CFO

Hemen Tseayo - Head of Corporate Finance

Analysts

John Janedis - Jefferies

Bryan Kraft - Deutsche Bank

Alex Mees - JPMorgan

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Manchester United 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'd 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 Cliff Baty, our CFO; and Hemen Tseayo, our Head of Corporate Finance.

As you can see from the strong numbers that we released this morning, we remain on track to achieve our annual guidance, which includes record revenues of 2017. These revenue numbers are particularly pleasing given the negative impact non-participation in the Champions League. Cliff will go through the numbers in detail shortly.

On the pitch, we remain involved in all competitions and have qualified the EFL Cup where we face Southampton on 26th of February at Wembley, our third visit in 12 months. Borussia [ph] progressed the fifth [ph] time in the FA Cup where we face Blackburn and the Round 32 of the Europa League where we face St-Étienne. Finally, with 14 more league games left in the Premier League or to say over the third of the season left to play, we are approaching the business end of the season and look forward to a strong finish.

I’d like to take this opportunity to congratulate Wayne Rooney on becoming Manchester United's all-time record goal scorer, achieving a remarkable feat of scoring 250 goals over the last 13 seasons, surpassing Bobby Charlton's record which stood for 44 years.

Our key to EBITDA of £69 million is a record quarter profit for the Club and a testament to the resilience of our business model, which allows us to overcome the performance volatility inheritance sport, while simultaneously investing in that business for growth.

During the quarter, we signed global sponsorship deals with Mlily, the Club's first official mattress and pillow partner and Deezer our first partnership in digital music streaming. We also renewed our partnership with Concha y Toro, our wine partner.

Since the quarter end, we’ve also announced a global partnership with Uber, the first partnership of its kind which will involve global campaigns, creating exclusive experiences to Uber riders and drivers around the world, and the creation of a dedicated Uber zone at Old Trafford.

Turning to digital media, we’re planning to launch MUTV app globally in territories where the competition and partner rights allow us to do so. The app will be a premium paid content product with pricing ranging from about ₤1.49 to ₤4.99 per month. It will be available by the Apple and Google app stores and will include access to a continuous live-stream with Manchester United's 24-hour television channel, access to a continually updated on-demand library of topics, documentary box set, studio shows, recent matches, highlights, and classic matches. And also allow Chromecast programs to be showing on a TV with a Google Chrome device.

As we progress on our digital transformation journey, this product will enable us to do a number of things. Building global use of basic customers, tracking user behavior within the app, test and optimize acquisition marketing, and of course build a deep insight at scale on the consumption of our premium content and the DCC distribution market. We will track this closely and it’s something we expect to grow steadily over time.

The January transfer window was relatively quiet for us, aside from the sale of two first team players, Schneiderlin to Everton, and Memphis Depay to Lyon. It was also generally quiet window for our Premier League pace. In fact it was the first window where Premiere League clubs report -- reportedly recorded an aggregate transfer window profit.

The window is notable for one development, which was Twitter's deal with Sky to live-stream Deadline Day, the final day for clubs in the U.K to acquire new players which was Twitter's first live streaming deal in Europe. The series of broadcast follows similar tie ups to stream NFL and PGA Golf Tours in the U.S., and again reflects increasing competition in live video for such platforms.

A quick comment on TV audience. In our away game at Liverpool Sky recorded the largest U.K audience for three years and the Return Fixture Old Trafford last month was the most watched game of the season in the U.S and one of NBC's top three most watched games since they started broadcasting the Premier League several years ago.

Finally, the international popularity of the Premier League was again recently demonstrated by the Chinese broadcast rights deal for the next cycle. We saw an approximate 12x increase for the next cycle.

And with that, I will hand over the call to Cliff.

Cliff Baty

Thank you, Ed. Hello, everyone. I’m going to review our results for the second quarter of fiscal 2017. As usual, unless I mention otherwise, all figures are in U.K pound sterling.

As mentioned in the last quarter, year-over-year comparisons throughout fiscal 2017 will be materially impacted by three themes. Firstly, the impact of non-competition to the Champions League competition on broadcasting figures. Second, the new domestic and international Premier League deals, and thirdly, the cadence of matches on a quarterly basis.

During the quarter, we played three additional home games compared to the prior year, two Premier League and one domestic cup. This together with the new broadcasting deals, contributed to the 18% growth in total revenues for the period to a ₤157.9 million. Adjusted EBITDA for the period was ₤69 million, 23% above last year's second quarter driven by the increased revenues, partially offset by higher wage costs and increased operating expenses.

As with previous announcements, we’ve included both adjusted profit 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 distorting impact of items that are unrelated to underlying business, and then 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 ₤17.4 million compared to ₤17.7 million, as the EBITDA growth was offset by increased player amortization following the investments in playing staff over the summer.

Turning to the key items of note in the financial statements. Commercial revenues were up ₤0.7 million with growth in both sponsorship and retail, merchandising, apparel, and product licensing revenues been partially offset by decline in mobile and content revenues.

As Ed mentioned, we’ve signed a number of new global sponsorship deals and remain confident in the long-term performance of the commercial business. Broadcasting revenues increased ₤15.2 million, primarily due to the new Premier League domestic and international broadcasting rights agreements together with two additional Premier League home games and one additional live broadcast compared to the prior year. Matchday revenues were up ₤8.2 million due to playing three more home games across all competitions.

During the quarter, total operating expenses excluding depreciation and amortization were up 14.4% with total wages up 14.2% due primarily to new player acquisitions. Other operating expenses increased due primarily to playing the three more home matches.

Net finance costs for the quarter were up ₤7.3 million due to adverse exchange rate movements on the un-hedged portion of our U.S dollar debt, following the significant decline in sterling against the dollar. These foreign exchange losses are non-cash and we exclude them in our calculation of adjusted profit for the period. The quantum of our cash interest costs in U.S dollars remains unaffected.

However, due to these exchange rate movements, it is likely the reported net financial costs for the year will now be in the ₤27 million to ₤29 million range. Looking at the balance sheet, the cash balance of ₤122.7 million was ₤1.1 million up over the prior year and the increase in our net debt of ₤87.2 million, ₤409.3 million was entirely driven by the impact of foreign exchange rate movements on our U.S denominated debt. Our long-term debt remains unchanged in U.S dollar terms.

Turning to the full-year outlook. Following the closure of the transfer window and the sale of two first team players, we'd expect full-year results to be at the upper end of our previously stated guidance of fiscal 2017 of revenue between ₤530 and ₤540 million, and adjusted EBITDA of ₤170 million to ₤180 million. This guidance reflects the range of the likely possible on pitch performance outcomes for the year.

In addition, we now forecast amortization costs for the full-year to be ₤126 million, with net player CapEx of ₤133 million. Finally, on the dividend, a semi-annual cash dividend of $0.09 per share was paid on 5 January 2017. Further semi-annual cash dividend of $0.09 per share will be paid on 8 June 2017 to shareholders of record on the 28 April 2017 and the stock will begin to trade ex dividend on the 26 April 2017.

With that, I will hand back to the operator, and we’re ready to take your questions. Thank you.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from John Janedis of Jefferies. Please go ahead.

John Janedis

Thank you. Cam you provide more detail on the thinking behind the ticket price freeze for next year. How should we think about Matchday revenue growth I guess for the year assuming backing of champions' League and should it be comparable to fiscal '16 or closer to fiscal 17 levels.

Edward Woodward

Hi, John. On the first point, the ticket price freeze that we’ve announced, that’s a sixth year in a row that we’ve done that and that is our policy with regards to the core fans in the stadium. I think the number one, most important thing is a full stadium, the second most important thing is a noisy stadium and we can mix to keep in that. So that’s on the ticket freeze and I -- we wouldn’t be guiding anything beyond that in terms of expectation for future as well. But in terms of the Matchday growth, Cliff do you want to mention …

Cliff Baty

Yes, thanks Ed. I think John to answer your question, I think 2016 is a better comparator. I mean, Champions League games do attract greater revenues, bigger attendances and we do also give discounts for the Europa League. So if you’re looking sort of an like-to-like basis. I would use 2016 when we were left in the Champions League as a guide.

John Janedis

Thanks, Cliff. Maybe on sponsorship, over the past several quarters, the sponsorship revenue growth has slowed from what we saw in years prior and obviously makes some comments around recent deals. But how do you think about the long-term rate of that business now that has reached somewhat of a more mature state?

Edward Woodward

Yes, I mean, it’s a good question. The double-digit growth rates are harder as the lower size impacts in the analysis. And so as the business has got bigger, I wouldn’t say it’s a mature business, I still view it as a great business, but it's harder to drive those big double-digit annual increases that we’ve seen in the past. So that’s a fair question. I think we still feel that the long-term prospects of the sponsorship part of the business are extremely good. We feel that there is a very good pipeline and that’s evidenced, I guess, by the recent announcements of Deezer and Uber, plus the big buzz around the treatment [ph] of popularity of football, which continues to show big pull from corporate channel.

John Janedis

Thank you very much.

Edward Woodward

Thank you.

Operator

Our next question comes from Bryan Kraft of Deutsche Bank. Please go ahead.

Bryan Kraft

Hi. Thank you for taking the question. I wanted to ask you two things. I guess, one, just on the roster, are you guys happy with the roster at this point? Just how you’re thinking at this point about player spend as the next transfer window opens up. And on the new streaming service, how broad will that be made available geographically, and should we expect mobile and content to start becoming a growth driver again as a result of their product launch, Thanks.

Edward Woodward

Okay. So the first question, are we happy with the roster at this point? Yes. I think there's a happiness from the manager at this point as you can tell in all his recent interviews, in terms of where we are as a squad. I think there is always going to be continual improvement, I think even if you win everything you still want to improve the squad, that’s the nature of the dynamic industry that we're in. So -- but I think we are necessarily in a position where we have to churn a large number of players, as guided before we want to get remove steady state and re-buying and potentially selling a lower number of players each year, and I think we're in that kind of environment now compared to where we were two, three years ago when perhaps there is a little bit more churn required from the playing squad perspective. And in terms of like guidance, obviously we don’t guide around player spent. It's a number that you can track always on a deal-by-deal basis, because it's -- things are very widely published when the happened, but it isn't something that we will guide on. Your second question was around the apps that we’re streaming. It is MUTV. So this is MUTV channel, the linear channel which we’re putting live available on an app and indeed with on-demand content alongside that. But how -- I think your main question was geographically how wide this can go? It cannot go into the U.K., because of the deed of license restrictions with the Premier League. So it's not in the U.K and it is not in many countries worldwide where we have sponsorship deals in existence with partners who can utilize an exclusive content within those territories. But it is still going to 160 plus countries round the world, right. I think the way to look at this is, of course we believe that the mobile and the content side of this business will grow over the years to come. The main app, the main platform will be launched at some point later in 2017, and we’ve measured about expectations around this and we won't be giving guidance, but I think this is a case of -- let's report in the coming quarters and over the years rather than the next quarter, if you like, you will see growth in this area.

Bryan Kraft

Great. Thank you very much. Very helpful.

Operator

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

Omar Sheikh

Thanks. Good morning everyone. I just got a couple of questions. Just following on -- from your comments is now on the MUTV app. I don’t know whether there is anything in addition to that, that you’re planning on the digital side. I know you talked before about improving e-commerce experience in the [indiscernible], demand for merchandise and so on more widely. I wonder whether you can guide us on whether there is any progress on that front? And then second question, just on the tour for this year, I think I don’t know you’ve concerned where the tour is going to be in 2017, but [indiscernible] first of all, you’re going to come to the U.S., in the summer. I wonder you could just sort of give us a bit of an insight into that, and whether it will be the same sort of size with a number of matches that we saw in 2015? Thanks.

Edward Woodward

Yes, hi, Omar. Your first question and then in terms of the -- in addition to the MUTV app. As I said at the end of the last question, that’s -- that is just the MUTV live experience. So, if you have BT Sport on your phone or Sky on your phone, it’s just equivalent to that plus on-demand content. The broader products, which we’ve obviously been working on for some time is with much greater functionality, it's still being worked on and as I just guided earlier, 2017 will be our expectation of when that comes to market. So that is the broader platform and that is the one that obviously we will be telling you all about once we get to the point of launch. The second question on Tour, we haven't announced where we’re going at, so I can't confirm or deny whether it's the U.S, but I can say it will be a larger Tour than last year. I mean, obviously last year was a smaller tour in planning and be smaller in terms of the games, because obviously what happened in Beijing. So it will be a broader Tour in terms of number of games than we experienced last summer.

Bryan Kraft

Okay, great. That’s very clear. Thanks a lot.

Operator

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

Alex Mees

Hi, gentlemen. Thanks for taking my questions. So, a couple please. Firstly, just on replica shirt sales. I believe you sold more of these shirts last year than any other club. I wonder if you could just give a sense of how you see that progressing into the future, particularly as you got some very high-profile names on a global basis now in the squad. Does that help and given the [indiscernible] historically been focused in the U.K whether there is an opportunity, you think to increase at retail more widely across the world? And then secondly, I just wanted to confirm why the mobile and content revenue fell by a third in the quarter. Is it just in the run-up to the release of the app or is it something else?

Edward Woodward

Okay. I will take the first one there, Alex. So the Replica shirts being number one in the world, that’s -- so how do we see that progressing? I mean, we see that continuing. It's a cool [indiscernible] but the reality is we did lot of analysis when Cristiano left the club in 2009 and it doesn't have a material impact when a star leaves because people go stand by Manchester United shirt and then when they are in the shop or they’re online deciding which name to put on the back, that’s when they made that decision. But the decision of making the purchase is a different one to the name on the back. So we see that continuing. I think the second part of your question was how do we see the opportunity from an ex-U.K global basis? We see that is definitely an area of growth, because as our partner [indiscernible] develops the footprint from a wholesale perspective or the retail perspective from their -- through their lens, then obviously there is a greater opportunity for our fans to go and buy those products. And you know all I can really say at this point is, it's heading in a very good direction. And then the second question, Cliff do you want to …?

Cliff Baty

Yes, sure. Alex, one thing on the mobile and content, it’s a big percentage, but it is also sort of a lower -- of small numbers through there. So we are down year-on-year and that is purely due to the loss of two deals in two particular countries. One of them is related specifically just to payments, restrictions and issues in that country. So nothing really under the underlying strength of that business is just to particular -- particularly a contract that are not in this year that weren't last year.

Operator

This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect the line.

Edward Woodward

Thank you.

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