Manchester United PLC

NYSE:MANU

Earnings Call Transcript 2018-Q2

[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 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 statements 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.

[Ed Woodward, Executive Vice Chairman]

Thank you, operator, and thank you, everyone, for joining us today. With me on the call as usual are Cliff Baty, our CFO; and Hemen Tseayo, Head of Corporate Finance.

Returning straight away to our second quarter results, we had a really strong set of numbers including record second quarter revenues and Cliff will go through them in detail shortly. On the pitch, we remain second in the league and our progress sits around the FA Cup where we face Huddersfield. We've also progressed the knockout phase, the Champions League and will face Sevilla in the round of 16.

[indiscernible] further invested in the future of the club by extending Jose Mourinho's contract and entering to an exchange agreement with Arsenal swapping Mkhitaryan for Sanchez, strengthening Jose's attacking options.

This trade generated some interesting social media stats. It was the biggest United post on Instagram with two million likes and comments, the most shared United Facebook post ever, the most re-tweeted United post ever and #Alexisseven was the number one trending topic on Twitter worldwide.

To put a lot into context the announcement post generated 75% more interactions than the announcement of the side of the world's most expensive player last summer when Neymar moved from Barcelona to PSG.

[Indiscernible] broadcasting reports of the effect of live sport are greatly exaggerated. I just came from a Premier League meeting where research shows that the league's global cumulative audience has increased 9% year-on-year, the particular show increases in Asia and North America.

It's been a good quarter for the retail business, this method still had a record December breaking the previous record set last year and the underlying still performance continues to strengthen with convention up and margin strengthening due to the increased mix and mono-branded apparel, all achieved despite the global supply chain cost pressures of the weaker pound.

With regard to eCommerce, we've had a record second quarter, trading substantially up on the prior year. This was driven by an integrated club approach to the Black Friday period, has generated a large global pickup resulting in a material sales increase over the period, notwithstanding the strong prior year comparison due to the spike from the signings of Pogba and Zlatan, anticipate beating last year's record performance.

Finally, on merchandize, Alexis Sanchez has also set a new January signing record in terms of shirt sales, three times up previous record.

On the venue side, I mentioned on the November call that we're hoping to achieve 200,000 official members this season. I am pleased to confirm that we're currently at over 210,000 official members, which is 16% higher than our previous record just over 180,000 which we achieved last season. It's worth reiterating the importance of membership.

In terms of match tickets, we'll sell our whole Premier League games exclusively to official members and the only way for nonmembers to see a Premier League match is through our match-by-match hospitality products. On match day, the experiences on course therefore for another record-breaking year.

Turning to the media business, we continue to see scriber growth in our MUTV direct-to-consumer products and products which are exclusively like the U.S., China, India and Thailand and manumax.com continues to be the most visited sports club website globally.

Last month it was announced as part of the [indiscernible] Annual Recovery Report, that we are the most influential club online in China for second consecutive year and we're excited about the ongoing opportunities to innovate and bring our brand in this -- build our brand in this key market.

In terms of the social media, we've been the fastest growing and most engaged football club on Twitter. Since start of the season, we've generated $25.5 million interactions, which is close to the same number of interactions as the next two biggest European clubs combined.

We collaborated with Jesse Lingard to stay Jesse Lingard takeover on Instagram on the 19 January, telling the story of a typical day in his life as a Manchester United footballer. Campaign was our biggest ever non-match day or non-signing story and generated over 40 million impressions and over 6 million views of Jesse's posts.

I'll now hand you over to our CFO, Cliff Baty. Cliff, over to you.

[Cliff Baty, Chief Financial Officer]

Thanks Ed and hello everyone. Next, I'll talk to our results for the second quarter of fiscal 2018. As a reminder, the fiscal year 2018 year-on-year comparisons will be impacted by two main themes. The impact of core locations for the Champions League in 2018 and the cadence of matches on a quarterly basis.

In terms of the headline figures, total revenues for the period were up 3.8% to £163.9 million with adjusted EBITDA of £67.8 million, giving an EBITDA margin of 41%. Before getting into the operating financials, I'll highlight the tax charge in the quarter has been impacted by the recent U.S. tax reforms, which impacted the end of December.

The federal income tax rate was reduced from 35% to 21%, which should be beneficial to the club in the long term; however, we are still working through the details and potential impact of the more complex aspects of the reforms with our advisors.

The reduction in tax rate has resulted in a non-cash accounting charge of £48.8 million to be recorded in the quarter. This charge relates the write-off of a portion of deferred tax assets and a similar in nature to the write-off supported by many other companies in their recent earnings statements.

It is important to reiterate this is a non-cash accounting chart only, which has no impact on our financial competitiveness nor our ability to meet financial fair play regulations.

As in previous announcements, we've included both adjusted profit and adjusted earnings per share within the release, as we believe that setting the true comparative financial performance of the business is useful to strip out the distorting items -- distorting impact of items that are unrelated to the underlying business, such as this one-off accounting charge and then to apply a normalized tax rate for both the current and prior periods and we've provided the reconciliation of this in the earnings release.

So, turning to the key items in the financial statements, commercial revenues were down -- were £65.4 million down 2.1% due primarily to a decrease in sponsorship revenues, with retail, merchandizing, apparel and product licensing being broadly flat.

Broadcasting revenues up £9.1 million or 17.3% due to participation in the UFEA Champions League and two additional Premier League games broadcast live. Match Day revenues were £36.9 million down 4.4% on prior year quarter, primarily due to playing fewer domestic cup home games.

During the period, total operating expenses excluding depreciation and amortization were up 8.1% to £96.1 million with total wages up 9.4% due to salary uplifts from the Champions League. Other operating expenses increased by £1.2 million, primarily due to the impact of a foreign exchange gain by the period year.

Net finance cost in the quarter were down £7.7 million due primarily to the foreign exchange movement on unhedged U.S. borrowings recorded in the prior year. As previously mentioned in prior quarters, the quantum of our cash interest costs in U.S. dollars remains unaffected by these exchange rate movements.

Looking at the balance sheet, the cash balance of £155.3 million was £32.6 above the prior year with net debt of £328.6 million being £80.7 million below the prior year. Notwithstanding our recent investments in the club's future, we continue to expect full year results for fiscal 2018 to be revenues of between £575 million and £585 million and EBITDA between £175 million to £185 million.

I'd also like to provide an update on a couple of other items you may find instructive contained in your models. We expect amortization for the year now to be just below £140 million following recent transfer activity and contract extensions and net finance costs to be high teens million, although that again is subject to foreign exchange movements.

Finally, please note that the semiannual cash dividend of £0.09 per share will be paid on the 05 June, 2018 to shareholders of record on 27 April 2018.

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

[Operator]

[Operator instructions] The first question comes from John Janedis of Jefferies. Please go ahead.

[John Janedis, Jefferies]

Thanks guys. Ed, maybe I thought I'd start where you started, meaning press reports indicated that bids for broadcast rights to the next cycle will be due by the end of January. Any kind of update you can provide where the EPL stands in the process?

And then separately, I think on the last call, you highlighted some of the recent success you've had with the MUTV direct-to-consumer product, both in terms of expanding your global reach and your ability to target younger demos. So, can you provide us an update on what you're seeing in terms of either the platform sub growth and monetization opportunities?

[Ed Woodward, Executive Vice Chairman]

Hi John. I'll take the first question on broadcast and I need to be careful around this. It's a very sensitive point in time because the end of January is fact the first round of domestic bids due in tomorrow and all I can really say is if you look at past history, we would expect that the entire process of selling the domestic rights will conclude in a relatively short period of time within a couple of weeks.

So, watch this space. There could be some news tomorrow, but it more likely I think in the next week or two.

[Cliff Baty, Chief Financial Officer]

John hi. It's Cliff here. I'll take the MUTV app and I think when we launched this, it was key and we played back and what we're getting from this is really good leadings about fan base, what they like, what they want to watch because we're actually going direct to them and as you say.

So, we've been continuing really in terms of the demographics, the age profile that is on there, the percentage of where in the world to now about 40% of our subscribers for the app are based in the U.S. and the popularity of club etcetera is shown through that.

But the real learnings we're getting is on the content side, what people are coming in to watch, what they stay around for, how long we're interacting with this, what sort of content is engaging to that younger demographic. Generally older demographic will watch through the liner channels, but the younger demographic and what it also popular in different markets and different places around the world.

So, we would expect within the -- within the half obviously the twirl is a great attractor for people to sign off and spike because that's when we have our live content, but we can show through them and then the sort of interim periods between that.

So, to get these learnings, we still have people signing up and really be sort of throw that into the mix and while iterating and get better and develop as we go on.

[John Janedis, Jefferies]

Thank you.

[Operator]

[Operator instructions] The next question comes from Clay Griffin of Deutsche Bank. Please go ahead.

[Clay Griffin, Deutsche Bank]

Hi thanks for taking the question. Just curious on the Champions League this year, I guess what's embedded in the guidance now in terms of further progression and how should we think about increment EBITDA if you do progress in the tournament?

And then just looking to next year's tournament, obviously there's a new right structure coming in place. Just wondering on the broad timing of when UEFA will announce the size of the structure, but also, I think there are some slight modifications to the market pull next year?

[Ed Woodward, Executive Vice Chairman]

Yeah, I'll take the second question first and then hand you over to Cliff for the current year impact round-by-round. They are nearly done now on selling the global rights for the next cycle, which as you say starts next year. There has been a lot of indication of an increase, which has been well guided really for the last year, but I would expect some sort of announcement around those numbers coming through it hopefully in the next month.

[Cliff Baty, Chief Financial Officer]

Hi Clay. This is Cliff. In terms of this year, as we mentioned because we won the [Euro] where we qualified the Champions League, we lost that effectively on what we normally budget for round about £10 million of revenues but because we're not entitled for half the market pool, which goes to those qualified through the legal routes.

That reduced our expectations down to somewhere around £40 million or so because we have to budget around getting to the quarter final. So, as we go back to the quarter final, that would impact our guidance equally. If we do worse in the quarter final, we still got to get past as I had mentioned in the round of 16, that will impact that as well.

So that's really, we're very explicit really on where we were in terms of Champions League for this year. Was there anything else through that, I didn't answer?

[Clay Griffin, Deutsche Bank]

Just how do we think about just kind of the incremental EBITDA? I know there's probably cost incentives to the players etcetera. I know there are some costs with Europa Associates logistically and things of that sort. So, any kind of sense of just margin on increment revenues should you get past quarter final?

[Cliff Baty, Chief Financial Officer]

Should we get past the quarter final, than there's not a huge amount of costs. Most of those revenues from getting through will drop down for the conversion rate is very high. Obviously, there would be further costs where we get through right through to the end and be successful and we can get to the final because that is a different -- you get to a different place, but I don't think we can talk about that now.

And if we were lucky, we'll be able to talk about -- if we do that, we'll be able to talk about that in May whether we -- before the final. So yeah, I know it would be very greatly beneficial for EBITDA as you get through the next rounds.

Broadly it's published in terms of what the flat fees are as you get through the semifinal, but as you're talking about another just getting to double-digit increase.

[Clay Griffin, Deutsche Bank]

Okay. Great. Thanks.

[Operator]

This concludes today's Manchester United earnings conference call. Thank you for attending. You may now disconnect your line at this time.

[Ed Woodward, Executive Vice Chairman]

Thank you.