Manchester United PLC

NYSE:MANU

Earnings Call Transcript 2018-Q3

[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 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.

[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.

The league season ended on Sunday and we finished in second place with 81 points, a significant improvement on recent seasons, achieving our highest league finish and highest total points tally since 2012-13.

Furthermore, we’re looking forward to contesting our fourth final in three years when we faced Chelsea in the FA Cup final this Saturday, a record equaling 20th FA Cup final for the club. You may have seen in news that in March we applied to the Football Association to establish our first professional women’s team. We expect to hear whether our application has been successful at the end of this month. And if so, we’ll be entering a team into the league next season and look forward to creating development pathway for our successful Girls’ Regional Talent Club.

Turning to our commercial business. In sponsorship, we’ve announced a new financial services partnership with PingAn, our retail banking partner in Mainland China, which will offer a 100 million plus fans in China a range of Manchester United branded financial services products, starting with the Manchester United credit card; a new regional partnership with Science in Sport, our sports nutrition partner across the UK and Europe; the renewal of our partnership with Cho-A-Pharm, our pharmaceutical partner in Korea and Vietnam. And early this week, we announced extension of our partnership with Mlily, our mattress and pillow partner, which has experienced significant growth since that partnership began two years ago.

Turning to our media business. We continue to see subscriber growth in our MUTV direct-to-consumer products in priority territories such as the U.S., China, India, Vietnam, and Thailand. We have active subscribers in a 115 markets globally and our iOS app has reached number one in the app store’s sports category for downloads in 36 countries. Ahead of our pre-season tour, we’ve enhanced our MUTV direct-to-consumer product by launching on connected TV platforms. This allows our fans to watch all of our live tour games on more devices, not just on mobile devices obviously but from the comfort of their living room.

A good example of how we look to augment our content offering with the acquisition of the UK digital and linear live rights for the France’s friendly with Russia in March. This game featured obviously Pogba and Anthony Martial and was well received by our fans. At the start of this month, we launched our new website in beta. Through a controlled rollout we’ve built scale to test resilience and we look forward to launching a full version of the website later this summer. So far, user feedback, both directly and through social media has been very positive. We believe the new website provides a cleaner design, which will revolutionize the way our fans consume content by creating an immersive video first experience. In addition, the new website will also provide strong benefits for our e-commerce business and commercial partners. In terms of social media, this quarter we launched the club’s first YouTube channel. And in terms of subscribers, within the first hour, we overtook the Dallas Cowboys and an hour later we overtook the Yankees. The channel quickly became bigger than all U.S. sports teams and at currently over 800,000 subscribers with the fastest growing sports club channel, that’s ever launched on YouTube.

Retail continued to perform strongly through the third quarter, the Megastore beat its third quarter record despite of playing one less game and e-commerce also had a record Q3, 16% up compared to the previous record. Both the Megastore and e-commerce performance were boosted by the signing of Sanchez in January and a broader mono-branded apparel collection.

On the venue side, 2017-2018 has seen another record breaking season for number of our products. Some notable highlights include official memberships sales are currently at 224,000, which is about 25% higher than the previous record achieved last season of around about 180,000. Match-by-match hospitality product has achieved another record breaking year in terms of revenue and EBITDA, and this is despite playing five fewer home games than last season.

Looking ahead to next season, I am delighted to announce that both season tickets and our seasonal hospitality product called Executive Club have fully sold out. Both achieved by the earliest ever sellout date. Demand for season tickets was exceptionally high with churn being at its lowest rate by over a decade. We also announced our 2018 summer tour where we will return to United States play five games in five cities this July, as part of our preparations of the 2018, 2019 campaign. The two-week tour will kick off with a game against Mexican side Club America in the Phoenix University Stadium on the 19th of July. We have matches against San Jose Earthquakes at the Levi's Stadium in Santa Clara; AC Milan in the Rose Bowl, Pasadena; Liverpool in the Big House in Ann Arbor; and Real Madrid in the Hard Rock Cafe Stadium in Miami on the 31st of July.

Before handing over to Cliff, I’d like to comment on a piece of recent industry news. Many of you will have seen reports of a 25 billion offer to FIFA, 12 billion of which is for four cycles of a revamped Club World Cup tournament between 2021 and 2033. Merits and details are being currently considered by FIFA and other stakeholders. And I don’t intend to go into them here. However, it highlights a few relevant points. It supports the view that OTT platforms will be the future of content consumption; live compelling content will be a key battleground that influences which are successful; and whichever way the rapidly evolving media landscape unfolds, content generators are uniquely placed to be the beneficiaries. As such, we continue to believe live sports content will become increasingly more valuable in the future.

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

[Cliff Baty, CFO]

Thanks, Ed, and hello, everyone. I am going to talk about the results for the third quarter of fiscal 2018. As a reminder, fiscal year 2018 year-on-year comparisons will be impacted by two main themes, the impact of qualification to the Champions League in 2018 and the cadence of matches on a quarterly basis.

In terms of headline figures, total revenues for the period were up 8.1% to a £137.5 million with adjusted EBITDA up £6 million to £36.1 million given EBITDA margin of 26%.

Turning to the key items in the financial statements. Commercial revenues were £66.7 million, an increase of £0.2 million, with sponsorship broadly flat and a slight increase in retail, reflecting the solid trading from our Megastore and e-commerce, as Ed outlined. Broadcasting revenues were up £8.3 million or 26.4%, primarily due to playing one additional Premier League home game and two additional Premier League games being broadcast live. Matchday revenues were £31.1 million, an increase of 6.1% on prior year quarter, primarily due to playing the additional Premier League home game, partially offset by playing fewer domestic cup games.

During the period, total operating expenses excluding depreciation and amortization were £101.4 million with total wages up 12.9% due to salary uplifts due to participation in the UEFA Champions League. Other operating expenses decreased by £4.4 million, reflecting lower domestic cup competition costs and a reduction of foreign exchange losses.

Net finance income for the quarter was £1 million compared to net finance cost of £3.3 million in the prior year quarter. This volatility is due to unrealized foreign exchange gains on unhedged U.S. dollar borrowings following the movements in the sterling-dollar rate. Cash interest costs are unchanged. Looking at the balance sheet, the cash balance of a £161.7 million was £9.1 million above the prior year figure with net debt of £301.3 million, £65 million lower than prior year.

With regard to the full year results of fiscal 2018, we’re maintaining guidance at revenues of between £575 million to £585 million and EBITDA between £175 million to £185 million, although we expect to be towards the lower end of the EBITDA range.

Finally, please note that the semi annual cash dividend of $0.09 per share will be paid on the 5th of June 2018 for those shareholders who are on record on the 27th of April 2018.

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

[Operator]

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

[John Janedis, Jefferies]

Hi. Thank you. With the team qualifying for the Champions League, I understand there have been some changes to the prize money distribution mechanism. Can you help us understand what they are? And then, I guess, sticking with the Champions League, do you see any potential for income under sponsorship opportunities given team performance?

[Cliff Baty, CFO]

John, I’ll take the first piece which is the technical piece. Firstly, just in terms of next year’s Champions League, it’s obviously great finish, second and qualified. And in terms of the prize money for that next cycle, it’s not been announced by UEFA yet but it is expected to increase somewhere roundabout 25 to 30%, example in the UK BT Sport announced a while ago the sort of increase from 900 to 1.2 billion, 33%, increase for that three-year coverage of that cycle.

The main change going into distribution that you might have heard about is really the change to the mechanism. So, previously, the money was split 60-40 into something called the fixed pool, which is distributed based on participation in the competition and performance in it and 40% based on the market pool, which is shared relative to the contribution the each country’s broadcasters make towards the total part.

For the next season, for the new cycle, the main change of the distribution mechanism is the reduction in the market pool share. So that was 40% as I have said, and that’s going down to 15%. And that is to create a new coefficient-based prize pool, which allocates therefore a larger share of prize money towards historic performance rather than just the geographical broadcasting contribution. The coefficient pool is calculated on each individual club’s performance in the Champions League in Europa League over preceding 10-year period, with also further recognition for historic European trophy wins. So, this pool will represent 30% of the total prize money and is shared amongst the 32 competing clubs based on their coefficient ranking order. So, the club with the highest coefficient will receive 32 times more than the club at the bottom of the coefficient.

Each players will be worth fixed amounts. And so thinking about this, I think of it similarly to the way that Premier League in the UK distributes its merits payments, in terms of finishing positions. Currently what does that mean for us, we sit fifth in the coefficient table, and we are the leading English club at the moment. But in terms of overall how this shakes down what we’ll do is we need to wait until UEFA announces what the prize fund will be for the next cycle and we’ll provide more detail of the actual impact for us when we -- either when we next speak or when UEFA announce those numbers.

[Ed Woodward, Executive Vice Chairman]

Thank you, Cliff. The other question, if I understood it correctly, John, was around, does the impact of a successful season have an impact in terms of commercial side of the business? If I answer that just very simply and candidly, playing performance doesn’t really have a meaningful impact on what we can do on the commercial side of the business. So, I hope that answers your question.

[John Janedis, Jefferies]

Yes.

[Operator]

The next question comes from Clay Griffin with Deutsche Bank. Please go ahead.

[Clay Griffin, Deutsche Bank]

Hi. Good morning. I just want to follow-up on the Champions League. So, is the change in the mechanism, is that going to be renegotiated with the next renewal or is that kind of a separate issue versus kind of the right size of the rights pool?

[Ed Woodward, Executive Vice Chairman]

That is an agreed position for the next three seasons from next year, and will be debated again in the coming 12 months.

[Clay Griffin, Deutsche Bank]

I see. And then, just, I think there are new financial fair play rules being contemplated by UEFA. Just, what are the main highlights there and what’s your expectation for when might those be implemented?

[Ed Woodward, Executive Vice Chairman]

They are due to be implemented later this year. They are more marginal changes to financial fair play rules and less I would say impactful of the actual calculation, which remains broadly the same. It’s more things like harmonization of accounting and transparency of information. There are a couple of triggers where those are tested, so more information is provided to UEFA, so they can start looking on an earlier basis at information. But from our perspective, it’s very negligible changes, I’d say.

[Clay Griffin, Deutsche Bank]

Okay. And then, just lastly, just any update on the remaining domestic TV rights package?

[Ed Woodward, Executive Vice Chairman]

Good question. So, we have had obviously five of the seven sold so far to Sky and BT with a reduction relative to the last sale. And the final two packages, F&G together with the island rights and near live are being sold at the moment by the Premier League. We expect to get an update on that process when we go to the AGM in the second week of June. And overall, we expect a small reduction, once everything is added up compared to last time, but only a small reduction. But there is no current update on it.

[Operator]

At this time, this will conclude our question-and-answer session today as well as the conference. We want to thank you for attending today’s presentation and you may now disconnect your lines.