Wanda Sports Group Company Limited (NASDAQ:WSG) Q4 2019 Results Conference Call April 30, 2020 8:30 AM ET
Edith Kwan - Head, IR
Hengming Yang - CEO
Dalian Zhang - Chief Accounting Officer
Conference Call Participants
Walden Sing - Haitong International
Theodore Cronin - Citigroup
Lindsey Huber - Deutsche Bank
Ladies and gentlemen, thank you for standing by, and joining Wanda Sports Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] After the management’s prepared remarks there will be a Q&A session. [Operator Instructions]
I would now like to turn the conference over to your host for today’s conference call, Ms. Edith Kwan, Head of Investor Relations at Wanda Sports. Please go ahead.
Thank you, Rachel. Hello, everyone. Thanks for joining the fourth quarter and full Year 2019 earnings call. With us today are Hengming Yang, CEO of Wanda Sports; and Dalian Zhang, our Chief Accounting Officer. Unfortunately, our CFO, Brian Liao, has to deal with a family matter and he is unable to join us today.
A replay of the call will be available on our IR website later today. We have also posted a slide presentation on our website, which Dalian will review during her remarks.
Now let me quickly cover the safe harbor. Today’s discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements and consequently, could be affected by the uncertain and unprecedented impact of COVID-19 on our business and operations, and the related impact on our liquidity needs.
For a detailed discussion of these risks and uncertainties, please refer to our earnings release, Form F-1 registration statement filed with the US SEC as well as other filings that we make from time to time with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements except as required under applicable law.
Please note that the certain financial measures that we use on this call, such as adjusted EBITDA, are expressed on a non-IFRS basis. Our IFRS results and reconciliation of IFRS to non-IFRS measures can be found in our earnings release.
With that, I will now turn the call over to our CEO, Hengming Yang. Hengming, please proceed.
Well, thank you, Edith. And thanks to everyone joining today’s call. And I hope you and your family are staying safe in this very difficult time. So today, I will discuss our 2019 performance, the impact of COVID-19 having on our business and how we are responding to the pandemic, and how we are positioning Wanda Sports for long-term growth.
As you will have seen from our press release, 2019 was a noteworthy year, marked by a number of important achievements that we believe position us well for the future. For fiscal 2019, the total revenue was €1.03 billion. And the total revenue, excluding the impact of reimbursement revenues was €996.6 million, which increased 10% year-on-year.
We delivered encouraging revenue growth in fiscal 2019 on a like-for-like basis. And our adjusted EBITDA was €167.4 million. Overall, these results were backed by our solid business operations. Despite the inter-year event cyclicality impact, particularly regarding the FIFA World Cup, where 2019 was the first year of a new cycle is traditionally below the previous world cup year.
So, now let me discuss each of our business through the lens of how we are positioning them for the future. First, our Mass Participation business. We delivered significant growth in 2019. As expected, we saw organic growth from our Triathlon business, especially the IRONMAN and IRONMAN 70.3 events. We are also pleased that the Chinese market was the other main growth driver in 2019. This was largely and organically driven by the growth from our running business.
For example, we are proud that our Chengdu Marathon was recognized as a candidate race for the Abbott World Marathon Majors. This is the first and only candidate race in China for the world’s largest and most renowned marathon series. The Chengdu Marathon 2019 was a huge success with a number of registrations close to 100,000, almost double compared to the previous year. We are confident that the excellent athlete and fan experience from our operations will further boost the commercial value and will eventually be beneficial to us. We strongly believe the huge population base in China creates a perfect synergy to our Mass Participation business segment.
Internationally, during 2019, we diversified our Mass Participation business with several strategic acquisitions of sports event through Infront. For example, we added London-based Threshold Sports, which hosts popular events like Ride Across Britain, and Megamarsch, a German company that owns and operates a series of long distance hiking events across the country. We have added HYROX to our portfolio. It’s a German-based winter indoor fitness competition for amateur and professional athletes. And we also made an investment into the District Race APP, which enables races through virtual checkpoints and challenges in the designated cities. Overall, we expect to continue benefiting from our diversified IP portfolio and the targeted acquisitions that we made to add attractive events in desirable markets.
We announced last month that we have entered into an agreement to sell the IRONMAN Group to Advance in an all-cash transaction with an enterprise value of $730 million. This transaction is expected to unlock significant shareholder value and strengthen our balance sheet while allowing us to continue carrying out our growth strategy. We expect the transaction to close in the second half -- second quarter of 2020.
After IRONMAN Group sale, our Mass Participation segment will consist of the mass participate events, owned, operated or licensed by Infront and Wanda Sports China. Internationally, Infront will continue to focus on markets with high potential and a strategic value for further expansion, such as existing B2Run corporate running series, The Xletix Challenge and Muddy Angel Run obstacle courses, which are events with our own IP and a proven success.
In China, we have an existing portfolio of city marathons, such as Chengdu Marathon, Shenyang International Marathon and our Shuangyi Marathon Series. We will combine that with our multiple year exclusive license agreement with the IRONMAN Group, which will allow us to continue hosting and putting on their popular races across the country, such as the IRONMAN event series, Rock ‘n’ Roll running series and Cape Epic mountain biking events series. So combined, we will continue to organize, manage and license a broad portfolio of events, which includes running, hiking, roof cycling, fitness competition, hill running and obstacle course racing, and so forth.
Our Spectator Sports business will continue to demonstrate its caliber as a leading sports marketing platform. Last year, we delivered approximately 3,700 event days, including some of the largest sporting events in the world. Our ability to connect fans and consumers to the greatest sport events by delivering unmatched event experience, creating easy access to engaging content and building inclusive communities is a key differentiator. We believe this inherent strength will continue to make us the partner of choice for rights holders, sponsors and media organizations around the world. The best example of this is the number of agreements that we have extended with long-term rights owners and the new contracts that we have won.
For example, we signed the landmark deal with World Athletics, previously known as the International Association of Athletics Federations. This is the world federation for track and field sports, and granting us the right to organize an additional, annual Diamond League meeting in China, and to bring new top-class track and field events to China with the world’s best athletes. We also won the international media rights for the Diamond League for five years and New World Athletics Continental Tour events for 10 years. It is an important addition to the group’s top-class track and field event portfolio, about which we are very excited.
In winter sports, we signed a 10-year media marketing, digital and merchandising rights for an engagement agreement with International Ice Hockey Federation and a media rights agreement with International Skiing Union through the 2020 and 2023 season, making us the commercial partner for all seven Olympic Winter Sports Federations.
A number of our summer sports also highlights include: first, a new partnership with NBA to cover the sale of the league’s sponsorship rights in Italy and France; a 12-year elongation and expansion agreement with European Volleyball content confederation for media rights to Europe’s top volleyball events; and a six year media rights with The International Olympic Committee in Sub-Saharan Africa for all Olympic events, including Olympic Games Tokyo, up until 2024. The prolongation and acquisition of major rights in business we achieved in 2019 has solidified our position as a leading global sports events media and marketing platform.
Now I come to our DPSS business. We significantly strengthened its digital capability through the launch of iX.co, our dedicated digital brand. Since its launch in May 2019, iX.co has quickly become a preferred partner across many sports, with clients such as French Rugby League, Chelsea Football Club, Nascar, and FIBA, just to name a few. Its clients also include leading video game developer, Activision Blizzard.
The company manages and interacts with our core business pillars, Infront Lab, a new group company based in Tel-Aviv, will identify start-ups that can further enhance our 360-degree approach of connecting fans with rights holders through innovation. All in all, iX.co, the Infront Lab, as well as the several virtual sport initiatives that started in 2019 are set to continue our transformation into a digital player.
Turning to our China business, which had a very successful year. Besides Mass Participation, the business achievements we mentioned earlier in 2019 brought a number of top-class world championship events into China. This includes the 2019 Gree-Tour of Guangxi, the HSBC Badminton World Federation World Tour Finals and the 2019 FIBA Basketball World Cup.
Now I’m going to shed some light on COVID-19 impact and our operational update. So, while COVID-19 has temporarily disrupted daily life around the world, we remain confident in an Wanda Sports’ long-term outlook once all events resume. We recognize that significant adjustments will be made in the coming months, in the way people gather, travel, and generally engage, but do also believe we have a resilient and adaptable strategy that should enable us to emerge from the pandemic as a stronger competitor.
Our 2020 outlook changed in early January as governments began to taking -- began taking aggressive steps to curtail the spread of COVID-19. To protect our employees and their families, we took immediate steps such as implementing a remote working policy and helping our offices and employees around the world to obtain relevant benefits depending on the country and the region they are in.
Our China business was the first to be impacted with the cancellation or postponement of sport events and races scheduled in January and February. During the same period, races and sport events in Europe, North America were impacted. However, as the pandemic continued to spread around the world, sports federations and organizers postponed or canceled more events and entire seasons.
We are working closely with our partners, rights holders, sponsors and event organizers to assess the impact of COVID-19, on the timing and the protocols for the future events, and to manage the financial impact across our value chain. We are partnering with sports organizations to deliver innovative virtual training, racing and event experiences to keep our athletes’ community active and engaged. We are also working closely with our partners to help them reschedule events and determine how to host events under the likely continuation of social distancing requirements.
In the near term, this will likely mean events without spectators. That is why we are developing additional digital and broadcast solutions in anticipation of the expected demand for new forms of live sports consumption and delivery of more content across our apps and mobile platforms. For instance, we recently hosted several virtual IRONMAN challenges and organized the Chengdu Shuangyi Online Marathon, Nanning Online Marathon. And we’re also working to virtualize part of the racing trails for UCI World Tour of Guangxi.
We are also in active discussion to prolong current portage agreements and renew contracts as rights holders move forward with long-term planning for their sports and events. Furthermore, we are benefiting from more strategic investment in esports, which is seeing an increased interest from our clients. Our trusted relationships with rights holders have enabled us to support their expansion into the fast growing industry.
For example, we are currently providing post-production service for La Liga’s EA FIFA tournament, supporting Serie A’s eSports tournaments, and organizing and promoting International Ice Hockey Federation’s virtual world championship for its fans. Despite the uncertainty under COVID-19, the company still managed to compete -- complete refinancing with a new $240 million senior term loan facility agreement with Credit Suisse. Just last month, this enabled us with lower interest rates and savings in our financing costs.
So overall, we are pleased to be able to maintain our dialogue with banks, government federations, partners and other stakeholders during the past few months, which helped us to carry out initiatives that were crucial to the company. We are thankful to that. Notwithstanding COVID-19, our strategy to build a leading global sports events media and marketing platform is working. Our operational foundation is very sturdy, and our long-term fundamentals for each of our businesses are strong.
So with that, I’m going to turn over the call to Dalian. Dalian, please?
Thank you, Hengming. Hello, everyone. You may refer to my remarks in the earnings conference call presentation in our website. As we previously mentioned, the nature of our business has some cyclicality, depending on the timing of our race events, including inter-year cyclicality. This means there may be some volatility in our financial results, which we experienced in the fourth quarter and fiscal 2019.
If you turn to slide five, of the presentation, I will walk you through the financial results for the fourth quarter and fiscal 2019. We’ve also highlighted some of the major achievements of our three business segments. For the fourth quarter of 2019, total revenue was €255.5 million. Excluding the impact of reimbursement revenue, total revenue was €252.2 million. Gross profit was €94.4 million, and our gross margin was 37%. Adjusted EBITDA was €44.8 million.
On Slide 6, total revenue for fiscal 2019 was €1,030.1 million. Excluding the impact of reimbursement revenue, total revenue was €996.6 million, an increase of 10% year-over-year. Gross profit was €343.7 million, and our gross margin was 33%. Adjusted EBITDA was €167.4 million. The decrease compared to the full year 2018 reflects the event cyclicality between 2018 and 2019, in particular, in connection with the 2018 FIFA World Cup Russia, and also the increase in selling office and administrative expenses to support business expansion initiative.
The loss for the fourth quarter of 2019 and full year 2019 was $258.6 million and $273.8 million, respectively, mainly attributable to a noncash impairment loss of $254.3 million related to the goodwill in IRONMAN Group, resulting from impairment test at end of 2019. Excluding the noncash impairment loss, the share-based compensation there would have been a profit of $6 million for 2019.
Overall, our fundamental operations delivered solid Q4 and full year 2019 financial results. Both the revenue and adjusted EBITDA were within our guidance range. I’m going to review the results of our three segments, starting with Mass Participation on slide nine. In the fourth quarter of 2019, our Mass Participation segment benefited from the increase in the number of gross-paid athletes, mainly attributable to the successful expansion of our event platforms in China and the continued popularity of our existing IRONMAN and IRONMAN 70.3 races. We have seen very encouraging revenue growth of 16% year-over-year. Gross margin also grew 13%, with a gross margin of 34%.
On Slide 10, you can see that for fiscal 2019, Mass Participation revenue was €326.9 million, a 15% increase year-on-year. Gross profit also grew 16% with gross margin, improved to 36%.
Slide 11 shows the number of gross-paid athletes and the events. For 2019, our number of gross-paid athletes and the number of events increased 15% and 5%, respectively, which contributed to a robust revenue growth in 2019. The growth was underpinned by the successful expansion of running events in the China market, and the acquisitions of a number of new international events, and the continued momentum of existing events.
Moving to our Spectator Sports segment on Slide 13. In the fourth quarter, revenue was €129.3 million, a decrease of 13% year-on-year, mainly due to the event cyclicality driven by the absence of the EHF European Championships in 2019, the reduced contribution from the FIFA-related projects in 2019 as well as the discontinuation of DFB national team business, which was partially offset by contributions from FIBA related events, subsequent to the FIBA Basketball World Cup held in the third quarter of 2019. Despite this, gross profit increased 3% year-over-year. This increase primarily reflects higher profit contribution from FIBA-related events and organic growth of our football business, which partially offset the cyclicality effect. Our gross margin was 41%.
On Slide 14, we you can see that for fiscal 2019, Spectator Sports revenue was €567.3 million, an 8% increase from 2018. The increase principally reflected inter year event cyclicality relating to this FIS World Championships 2019, which only occur in odd years as well as expansion of our summer sports portfolio, such as the FIBA Basketball World Cup 2019, FIM MXGP Motocross World Championships and the CEV European Volleyball Championships 2019, despite the absence of the 2018 FIFA World Cup Russia.
Spectator Sports gross profit was €184.8 million in 2019, an 11% decrease from 2018. The main profit contribution was from the expansion of our summer sports portfolio and the FIS World Championship 2019, but was offset by the inter-year cyclicality impact. Overall, our gross margin was 33%.
Looking at our DPSS segment on slide 16. While the segment benefited from the expansion of our digital business and the contributions from the Rugby World Cup 2019, our results were largely impacted by the cyclicality effect of 2018 FIFA World Cup Russia. For the fourth quarter, revenue was €33.6 million, significantly similar to same period previous year. DPSS revenue, excluding reimbursement revenue, was €30.3 million. Gross profit was €10.3 million. This, again, reflects the absence of the media production business related to 2018 FIFA World Cup, relating to Russia. As a result of the different event portfolio between 2018 and the 2019, gross margin was 31%.
Let’s move to slide 17. In fiscal 2019, DPSS revenue was €135.9 million. DPSS revenue, excluding reimbursement revenue, was €102.4 million. Due to the cyclical nature of our business, especially concerning 2018 FIFA World Cup Russia, the first year of a new cycle is traditionally below the previous World Cup year. Gross profit was €41.5 million. This, again, primarily reflect event cyclicality compared to 2018. And our gross margin was 31%.
Turning now to our capital structure on slide 19. At the end of 2019, we had cash and cash equivalents of €163.2 million. We believe this provides us with a solid cash position in this current environment. I would also note that we have implemented cost reduction and management measures across our organization. This includes global hiring freeze, eliminating nonessential spending and taking other initiatives to preserve cash. In 2019, our CapEx was €14.9 million, 1.5% to total revenue, which reflects our asset light structure.
Let’s turn to Slide 20. We are pleased to achieve our goal to reduce our leverage. We ended the year with a net leverage ratio of 4.1 times, which is down considerably from 4.8 times after our IPO in July. As Hengming mentioned earlier, we reached an agreement to sell the IRONMAN Group to Advance in March. In addition to unlocking shareholder value, the transaction will further optimize our capital structure, strengthen our balance sheet and provide us greater financial flexibility to navigate the COVID-19 and execute our long-term growth plan.
Let me conclude on slide 22 -- 21. We would like to make a few comments about guidance. Given the unpredictability of the COVID-19 pandemic and the aggressive actions taken by governments and public health agencies around the world to stop the spread of the virus, we cannot estimate at this time how long this situation will last and what financial impact it will have on our operations in 2020. We will continue to closely monitor the situation, and we will look to provide guidance once the situation stabilizes and we have more visibility on the actual financial impact on our business.
This concludes our prepared remarks. Operator, we would like now to open the call for questions.
Ladies and gentlemen, we’ll now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Walden Sing of Haitong International. Please ask your question.
Hi, management. Thanks for taking my questions. I would like to ask a question regarding the NBA -- the deal with NBA on selling sponsorship in France and Italy. I think typically, NBA tried to get sponsorship by themselves. So, why they -- why you can secure this contract? What NBA believe they can do better than them? Can you share with us? Thank you.
Hey, Walden. I hope you stay safe and it’s good to hear from you for a time -- for quite some time. Yes. So I think that’s a very good question. So I mean, this is actually -- really demonstrates another -- just a good example, demonstrating that we are the partner of choice. Where -- we have unique strengths in terms of international media and the sport events and also in the sponsorship business. And our trace in the territory in Europe, and also the strong relationship in the European market, our marketing team. And this is basically -- it’s just evidence in that, when a big partner sports events organizer, they want to expand their business or grow their business. And we are part -- we basically are the partner of choice and just demonstrating our core capability.
Can I ask a follow-up question? Regarding the Diamond League, given what’s happening around the world regarding the coronavirus outbreak, are you going to have your Diamond League competition in China this year? And how big do you think this can be when things resume normal? Thank you.
So current plan is we have rescheduled from May -- it was originally scheduled in May, to September. And so current plan, with discussion with the Diamond League and also the World Athletics association, we’re still holding this event on the calendar. However, there’s still uncertainty as overall, the global calendar is still changing. And because of the uncertainty of when, how soon that each market will open up the sports events. So there is uncertainty. But the planning currently, we’re still holding to happen toward actually, probably in the second half of September.
Your next question comes from the line of Theodore Cronin of Citigroup. Please ask your question.
Hi, guys. Thank you for your time. As it relates to the sale of IRONMAN and what you plan to do with the proceeds, I think the earnings release suggested that you used the proceeds to strengthen the balance sheet. And if I remember right, when you announced the deal, last month, you suggested that you might use a portion of the proceeds for either dividends or share buybacks. So I’m just wondering if you could clarify if there’s been any change in thinking there?
So -- no, the current plans remain still as we have communicated earlier in the press release. So we will use the proceeds first to pay down the debt, which is €230 million -- this should be the term loan. And also there’s a €50 million intercompany payable to the majority shareholder. And the remaining proceeds, we intend to dividend back, most of them or share buyback, pay back to the shareholder. So that plan has not changed. But by saying that, we will constantly evaluate the situation, the business needs, so there might be adjustment to that by the time when we close.
[Operator Instructions] Next question comes from the line of Lindsey Huber of Deutsche Bank. Please ask your question.
Hi. How are you? This is Lindsey Huber on for Bryan Kraft. Thanks for taking the question. I have a question regarding the sale of the IRONMAN Group. How much of the Mass Participation revenue and gross profit will remain after the sale? And I have a follow-up once you finish with that.
Yes. So IRONMAN accounts about 20% -- I think it’s around 20% of total revenue. So after -- that’s pretty much in line with revenue and also EBITDA. So after sale of IRONMAN, our new portfolio of the mix of the total business will be around -- probably around 10% of Mass Participation, 70% the Spectator and 20% of the digital media protection for the remaining business.
Okay. Thank you. And my second question is how much of the shared cost below EBITDA, like, personnel and SG&A, will remain after the sale of the IRONMAN Group?
I don’t think we have that information, disclosed the information to the -- you won’t disclose it, right? So your question is how much remaining shared cost? What do you mean shared cost?
So, shared cost, the cost below EBITDA, like personnel and SG&A?
So, you’re -- basically you’re saying what’s the remaining -- the G&A or the cost for the remaining business, right?
Yes, that’s correct.
Okay. I think we probably need to get back to you separately off-line because we need to really go back to check the -- I want to make sure we give you the right number. So again, I will take it up and we can get back to you separate.
There are no further question at this time. I would now like to hand the conference back to today’s presenters for closing remarks.
Okay. So, thank you, everybody. As I said earlier, we delivered a solid performance in 2019. We have laid a pretty strong solid foundation. And we also achieved quite a multiple strategic milestones that enable us for future growth, position ourselves for future further growth. We also have a very strong cash position. And the measures we are taking right now help -- will enable us to navigate through this COVID-19 and difficult time. And we believe we will come out strong and vibrant again as the situation improves.
So with that, I would like to conclude the call today. And I wish everybody and your family stay safe and stay well. And we’ll talk to you soon next time. Thank you very much.
Thank you, everyone.
Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now all disconnect.