Thunderbird Entertainment Group Inc

XTSX:TBRD

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for joining us. We are here to provide a corporate update and report on Thunderbird Entertainment Group's First Quarter Fiscal 2022 results, which ended September 30, 2021. Speaking on today's call are Ms. Jennifer Twiner McCarron, Thunderbird's President and CEO; Ms. Barb Harwood, Thunderbird's CFO. Ms. Twiner McCarron will provide a strategic overview of Thunderbird Entertainment Group, and Ms. Harwood will review the company's first quarter 2022 financials. Following the corporate update and financial review, the call will open for a question-and-answer session. [Operator Instructions] Alternatively, if you have any questions, you can call 1 [phone] or e-mail [e-mail], and the company will follow-up directly after the call. [Operator Instructions] I'd like to remind everyone that certain statements made on today's call will be forward-looking and constitute forward-looking statements or forward-looking information under applicable securities laws. Forward-looking statements and information discussed on this conference call include, but are not limited to, statements with respect to the company's objectives, goals or future plans and the business and operations of the company. Forward-looking statements are necessarily based on a number of estimates and assumptions that were considered reasonable, are subject to known and unknown risks, uncertainties and other factors, which may cause actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, general business, economic and social uncertainties, litigation, legislative, environmental and other judicial regulatory, political and competitive developments. Those additional risks set out in the company's filing statements and other public documents filed on SEDAR at www.sedar.com and other matters discussed in the company's year-end news release. Although the company believes that the assumptions and factors used in preparing these forward-looking statements are reasonable, undue reliance should not be placed on these statements, which only apply as of the date of this presentation, and no assurance can begin that such events will occur in the disclosed time frames or at all. Except where required by law, the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For your convenience, the press release, the MD&A and unaudited financial statements for the first quarter 2022 of Thunderbird Entertainment Group, which ended September 30, 2021, are filed on SEDAR and are available online under the Investors section of our website. We do not expect to update forward-looking statements continually as conditions change. This conference call is being webcast live, and the archive will be available on the company's website at www.thunderbird.tv following today's call. Please note that Thunderbird reports in Canadian dollars unless otherwise stated. Ms. Twiner McCarron will now provide the corporate update.

[Jennifer Twiner McCarron, President, CEO & Director]

Thank you so much. On behalf of everyone at Thunderbird, I'd like to welcome you to this morning's call to discuss our Q1 '22 results, which ended September 30, 2021. My name is Jennifer Twiner McCarron, and I'm the President and CEO of Thunderbird Entertainment Group. I'm here today with our CFO, Barb Harwood, and as always, we're both very thankful to have you join us. We hope all of our American friends had a wonderful Thanksgiving hence the spacing between our PR and this call. We wanted to make sure we were not interrupting any of your special -- our special holidays, which of course, are different between the Canada and U.S. Once Barb and I finish our updates, we'll be very happy to answer any questions that you have. Regular followers of the company are aware of our ambitious goal to become the next major global studio as Thunderbird would not content with the status quo, and our teams are committed to pushing ourselves creatively to stand out and differentiate our work from other content producers in the market with quality as our North Star, we want to create, own and distribute award-winning factual, animated and scripted content worldwide, and we are laying the framework to achieve this. We are focused on producing and distributing premium content that attempts to make people happy and feel empowered while providing a connection and a much needed escape. Our goal is to create content where we can all see ourselves reflected in a positive light no matter a race, gender or cultural background. During last month's year-end 2021 conference call, we shared how Thunderbird's current success is the result of initiatives put into place years in advance. This includes investing in top talent, owned IP, opening additional studios in Ottawa and Los Angeles, launching a consumer products and global distribution division and building trust and relationships with companies like HBO Max, Nickelodeon, Discovery Channel, Netflix, Apple TV, Disney+, NBCUniversal, CBC, among others. Essentially, the top-tier streaming and traditional broadcasting companies that are hungry for quality content to attract and retain subscribers and audiences. We also shared how we are continuing to build on this by creating a strong foundation to support exponential growth. While challenging, the pandemic forced us to look at our current way of doing things and emerge stronger and nimbler with the added ability to attract talent from across the globe within a remote working structure as we're no longer confined to our studio walls. Since the pandemic was declared, Thunderbird had added 430 new full-time members to our crew, and the company now employs more than 1,400 people. We also have 27 productions on our production slate. Fiscal 2022 is a key year to a continued success as we see it as incredibly important build year, a year where we will be laser-focused on the initiatives and business structures that we need to facilitate our strong long-term growth. Naturally, this involves strategic and thoughtfulness around the content we choose to produce and more targeted efforts around acquiring incremental IP. IP is so important to our growth strategy because it provides ancillary revenue opportunities in toys, merchandise, music, gaming, all across media exploitation, you name it. To this end, Atomic Cartoons, our Kids and Family Division, pitched more new series to platforms worldwide this calendar year than in any other year in our history. And we will start to see the results of this in fiscal year '23 and into '24 and beyond when Atomic begins working on some of these new productions. We can't wait to share with you the types of productions that our teams will be bringing to the screen. The progress at Great Pacific Media, which we know is GPM and Thunderbird's Factual Division is equally exciting, as you added more IP series to our production sites. We have previously shared our delight around in renewals for discovery of our legacy IP properties, Highway Thru Hell, Heavy Rescue: 401 and Mud Mountain Haulers, and we commenced work on 3 new IP productions that were ordered to Series by Corus Entertainment, Styled, working title, soon to be announced; Gut Job; and Deadman's Curse, which is also the working title, all of which we're really proud to say and excited have [indiscernible]. Adding more scripted series to our production slate is also incredibly exciting for us, with productions like strays airing on CBC and a fully owned U.S.-facing scripted series titled Reginald the Vampire for SYFY which is now in the works and being shot right now. As you can see, our portfolio is expanding, and we're so proud of the production we are putting our name behind. And on that note, we also can be more thrilled to work a long time Wapanatahk Media, Tania Koenig-Gauchier and Shirley McLean on productions that support indigenous creative in the entertainment industry and showcase authentic stories that increased indigenous representation in media. We have come so far in terms of representation for women entertainment, but we still have so much further to go when it comes to representation of all women in media. The most recent women in view on screen report shows, for example, that in 2019, of the 43% of women in key creative roles in TV and film, only 6.44% were black women and women of color or less than 1%, 0.94% were indigenous women. This same disparity exists across every measured category in film and TV which is why authentic and equal representation of BIPOC women is a key focus for our team. We see equity, diversity and inclusion as not only the right thing to do, but something that positively impacts our bottom line. McKinsey & Company study shows that companies in the top quartile for gender diversity on executive team were 25% more likely to have above average profitability, and this also rings true for ethnic diversity. The foundational work we are focused on also involves expanding and growing our global distribution and Consumer Products division to better enable us to exploit our IP and create additional revenue streams. Our distribution and Consumer Products division will diversify Thunderbird IP, and it will also invest in extraordinary productions from other companies that we can distribute. The demand for content is international and the opportunities are truly endless, as the growth outside of North America is increasingly strong and holds immense opportunities. This is evidenced by the ongoing expansion seen by the biggest players in the industry such as the recent Disney+ Day on November 12, which highlighted Disney+ bold content expansion into new markets in the Asia Pacific region. This is why our senior management team is heavily focused on opportunities to expand our content portfolio and are looking beyond the North American market for strategic international expansion opportunities. We are looking to explore acquisitions that not only support expanding our company's IP but also increase our capacity and talent roster as we look to grow our own production output. Content remains king. Currently, there is no ceiling on the opportunity for content in the entertainment industry and budgets for premium television series continue to get more robust. Netflix, for example, spent over $17 billion on content in fiscal year '21, while Disney is estimated to have spent over $30 billion on new content across its platform. As this that the consumer spending has increased by 21% to $12.2 billion in the first 6 months of '21, and this is according to the Digital Entertainment Group. 2020 and 2021 were transformative years for the film and television industry. And in the upcoming years, audiences demand for content will continue to grow. The future holds more streaming services entering the market and at a faster pace. And with more streamers entering the market, overall spending will reach new heights in the U.S. and Canada alone, content spending from streamers hit almost $144 billion in 2021, an increase of 16.1% year-over-year and global SVOD subscriptions are expected to reach $1.6 billion by 2025. In order to stay competitive, platforms will lean on trusted production studios like Thunderbird to deliver premium quality content as they constantly have to refresh their streaming site. Given all of this, the opportunity for growth in this industry is incredible. However, how we grow also matters. Ultimately, a focus on culture and people -- what has been -- has led to excellence in terms of the content we create, talent we've attracted and relationships that we've built. This is why our working environments and structures are designed for creativity and for culture to flourish with retention strategy centered on inclusivity, safe workspaces, innovation and communication. Our greatest asset will always be our people and growing from within is incredibly important to us. I'm thrilled to see people start and progress within our company. team members moving from production to production is key as people can learn new skills and become more confident to innovate. This results in an incredible content which further contributes to our strong trust and relationships with our partners and buyers, ultimately leading to increases in our EBITDA and revenue, which we are seeing. I have the privilege of working with outstanding individuals each and every day, true leaders in the industry on every level. Collectively, we are committed to Thunderbird's growth into being smart, selective, fiscally conservative, but taking calculated swings and good stewards of the content we produce. We're building on Thunderbird's already solid foundation and are on track to deliver not only incredible content with our diversified portfolio of animated factual and scripted programming year-over-year, but also shareholder value for those who have put their trust and invested with us for which we are incredibly grateful. With this, I will turn it over to Barb to go over the highlights of this call, which is the numbers, and then I can provide a more high-level corporate update. Over to you, Barb.

[Barb Harwood, Chief Financial Officer]

Thanks, Jim, and thanks, everybody, for joining us today. Here are the highlights of our Q1 2022 results. Consolidated revenue was $35.1 million for the 3 months ended September 30, 2021 compared to $19.8 million for the comparative period of fiscal 2021, an increase of 77% or $15.3 million. $10.4 million of this increase or $25.1 million is related to growth in production service projects. The remainder of this increase is mainly due to delivery of Season 1 of the scripted comedy series Strays for CBC, which is a spinoff of our popular series Kim's Convenience. There was no comparative series recognized in Q1 of 2021. Gross margin, as defined by revenue less direct costs increased from $8.1 million to $10.2 million in the quarter, an increase of $1.9 million over Q1 of 2021. Gross margin percentage decreased 41% to 29.2% due to the increase in production service revenue as a percentage of total revenue. Production Service gross margin is typically less than gross margin from our own IP, but remains constant over different projects. whereas our distribution and licensing gross margin is typically higher than the service projects, but fluctuates depending on the mix and type of content we are producing. The higher gross margin for the owned IP is reflective of the fact that we keep that content in our library and are able to exploit it over time. Consolidated net income was $1.9 million for the 3 months ended September 30, 2021, compared to $1.4 million for the compared period of fiscal 2021, an increase of $0.5 million or 36%. Adjusted EBITDA was $6.3 million compared to $4.8 million for the comparative period of fiscal 2021, an increase of $1.5 million or 31%. This increase was primarily due to the growth in production services and the delivery of Strays that I mentioned before. And finally, free cash flow was $3.4 million for Q1 2022 as compared to $1.2 million for the comparative period, an increase of $2.2 million. This fluctuation is mainly due to changes in working capital and net production loan advances. Once again, thank you for joining us, and back to you, Jen.

[Jennifer Twiner McCarron, President, CEO & Director]

Thank you so much, Barb. I will now provide the corporate and divisional updates. At September 30, 2021, the company had 27 programs in various stages of production. 12 of these productions are company IP or partner managed service production where the company receives a percentage of certain revenue streams. At the end of Q1, our Kids and Family Division, Atomic Cartoons, was in various stages of production on 16 animated series and 2 feature-linked animated projects, 18 productions in total. These programs reflect a blend of both proprietary and service-based work and include LEGO Marvel Avengers for Disney, Molly of Denali, Season 2 for GBH and PBS Kids, CoComelon Lane for Moonbug and Netflix, My Little Pony for eOne and Hasbro, A Curious George production for Peacock, Young Love with Sony Pictures Animation for HBO Max and Ogden Space for Netflix, among others. Add to this, work already produced by atomic including Mighty Express, which debuted season 4 exclusively on Netflix; the LEGO Star Wars Terrifying Tales, special streaming on Disney+; Season 4 of Trolls: TrollsTopia, streaming on Peacock and Hulu; Marvel's Spider-man and his amazing friends, which is the first full-length Marvel series for preschoolers premiering on Disney Channel and Disney Jr.; and Curious George: Cape Ahoy also debuting on Peacock. Also in Q1, season 2 of Marvel's Spider-man and his amazing friends was greenlit after an impressive debut on Disney. Shifting focus, our factual dividend Great Pacific Media, was in production on 8 series and/or documentaries, Highway Thru Hell, season 11; Heavy Rescue: 401, Season 7; Mud Mountain Haulers, Season 2; Deadman's Curse, which is the working title Season 1; Gut Job, Season 1; Styled, Season 1; The Teenager and The Last Mine City and other working title; and Dr. Savannah: Wild Rose Vet, Season 1 in conjunction with Wapanatahk Media. We're also proud to share that a second season for Dr. Savannah: Wild Rose Vet has already been renewed before the first episode has even come to air, congrats to the whole team. GPM also began broadening its content horizon to serve key audience demographics globally, from kids on up because factual and Kids and Family programming remains the cornerstone of every broadcaster strategy to maintain and glue subscribers. As such, in development at GPM is a diverse group of productions and development that range from how to -- to pop culture designs to high action and drama for viewers of all ages. A great example of this is its new series in developed If: Imagine the Impossible, which is based on Underknow's Webby Award-winning social media sensation What-If. GPM also recently announced that it has signed with the extremely talented director, writer and producer, Brad Patent and visionary physicist Michio Kaku to work on this series. In Q1, Thunderbird also announced Reginald the Vampire, our new fully owned U.S.-facing scripted series starring Spider Man's Jacob Batalon. Reginald the Vampire was picked up in a straight to series 10 episode order by SYFY and is being produced with modern story company December Films. We fully own this IP, and it's a strategic move to U.S.-facing scripted. And last but not least, in Q1, Strays, the spin-off from series from Kim's Convenience premiered on CBC to rave reviews. This concludes the corporate update for today. As I wrap up my remarks, I'd like to thank you again for joining us to discuss our Q1 '22 results. The opportunities ahead are filled with incredible potential and on behalf of the amazing and talented teams at Thunderbird. Thank you again so much for joining us on this exciting ride. Now Barb and I are pleased to take any questions that you may have.

[Operator]

[Operator Instructions] Your first question comes from the line of Aravinda Galappatthige with Canaccord.

[Aravinda Suranimala Galappatthige, Managing Director]

Congrats on the great quarter in Q1, fantastic results. I wanted to kind of start off with the -- look at the '22 expectations. I know that as we've talked about many times, there is a lot of lumpiness in quarterly results. How should we kind of think about the full year on the back of these numbers? I know there were a lot of deliveries that strengthen Q1. I wanted to get your thoughts both on top line and bottom line, including, I know some investments you're planning on applying to the '22 period?

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. It's another growth year. Certainly, you can see evidence by our quarter are more exponential growth organically, what we see booked starts to pop again in '23 and '24, but this is still a great year as we continue to build a major global studio. As our baseline numbers go up, those huge double-digit growth are always the same, but we start to see that again in '23 and beyond. But again, this is a strong growth year, '22 is a build year as we put in more foundations in place to see those huge pops again that we're expecting in '23 and beyond. But as evidenced by the quarter, we're off to a great start.

[Aravinda Suranimala Galappatthige, Managing Director]

Absolutely. And maybe just to kind of to build on that, maybe, Barb, are you able to kind of give you a sense of the cadence this year? I know it's tough to call, but anything out of the ordinary we should be thinking about in terms of seasonality?

[Barb Harwood, Chief Financial Officer]

Yes. Well, as our production services, we've seen in 2021, our production services expanded quite exponentially. And so as you get more production services as a proportion of revenue, you're going to smooth out your quarters a little bit, you're not going to rely as heavily on deliverables and things like that of the IP. So as we grow, I can say that we can see a lot more smoothing of the quarters. Having said that, as Jen mentioned, we are producing a series called Reginald the Vampire, that's quite a large series. And so when that hits, which will be in -- which we anticipate will be in 2022, our revenue will go up more than it has before from scripted series.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. I was going to ask you about that show. Could you give us a sense of how big that budget is? Or is it more of an end of year expectation?

[Barb Harwood, Chief Financial Officer]

Yes, I can't really say how big the budget is, but it is a 10-episode, 1-hour scripted series. So it's bigger than our -- on the shows that we do for CBC like the kids and the stories and that kind of thing, more like a show we did for ABC back in 2019, I think, called somewhere between. And yes, it's shooting right now, so the anticipated delivery would be end of '22, beginning of '23.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. Okay. That's helpful. And then maybe just going back to Jen. With respect to the service business, I know we've talked about potential hybrid models. You have that with Helo and Intra. Any others that are in the horizon or that maybe you can mention have already occurred, just to kind of give a sense of how that model is building?

[Jennifer Twiner McCarron, President, CEO & Director]

The partner managed one?

[Aravinda Suranimala Galappatthige, Managing Director]

Yes. Yes.

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. That's kind of a hybrid of service and ownership, where we don't keep the copyright, but we do participate in all of the back-end toys and whatnot. So I think I'm just trying to be careful here. I don't say something that hasn't been announced because there's a lot of them. I'll be honest. I know one that has been announced and that just is airing to good reviews is Dogs in Space. That's another one set up in that model. And I think I'll be able to speak of more in Q2.

[Aravinda Suranimala Galappatthige, Managing Director]

Great. Last question, and I think I asked you this recently as well. But if there's anything more to add about the sort of the M&A landscape there seems to be a bit of a pickup in deals that we're starting to see in the landscape, which I guess is a good thing. But anything else you noticed that you care to add?

[Jennifer Twiner McCarron, President, CEO & Director]

I think it's just sort of underscoring that people recognize the demand for content, the huge industry theme, that content is king and that all of these current streamers and more coming online what we do is incredibly valuable, and it is hot in the space, people looking to acquire, retain own content. So it's a really luxury at time to be doing what we're doing. We're incredibly grateful to be in this time in this industry because it is hot.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay, and look forward to the upcoming results as well.

[Operator]

Your next question comes from the line of Adam Wilk Graystone Capital Markets.

[Adam Wilk]

Congrats on a great quarter, really blown away by the revenue increases and the production services work, that's just phenomenal. My question was actually asked already. So that's great. But I guess I could ask sort of a follow-up on the M&A stuff. And maybe if we can get an update on sort of your internal M&A efforts and kind of where you guys stand with that in terms of if you're still interested in doing something and maybe how you're kind of thinking about financing it? Any update there would be great.

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. Thanks for that question, Adam. Essentially, we are heavily focused on it. We're -- again, we're not looking for a roll-up strategy. We're looking for a strategic growth engine for our company. we've got great organic growth. So I'm confident just what I see what we're doing. But we want to go where the -- we can see the streamers on Disney and Netflix that we work heavily with just, for example, publicly announced, they need to get into Southeast Asia and Europe to increase their subscription, which is how they're valued. That's the merit by which they're judged by increasing subscriptions, and they won't be able to just get into all these regions where they need to stream and through North American content. They have to stream content that's native to the regions where they're streaming. And so by us having ownership in these areas, we can help turn on content with our LA base, help sell it, IP that's native to those regions and then run that content through a burgeoning consumer products and distribution division. So that strategy of ours remains laser focused. And we're in conversations with about 30 companies well into due diligence with, I'd say, 6 or 7. And we're really looking for that right cultural, strategic and financial fit that will help take us to next level. And what we're looking at is Thunderbird is the overarching entity and think Disney with ILM, Pixar. We have Thunderbird. We've got Atomic with GPM. These 2 divisions are off to the races in terms of success and profitability. We're looking to add on other labels, international labels that are successful in and of their own right that can give us that international footprint and help take us closer to being a major global studio, which in today's image, in this world, you do need to have an international footprint. So that remains laser-focused and we are heavily spending time on it. In terms of the second part of your question, how we look to pay for that, it would be a mix of cash and shares and then earn-outs based on performance.

[Adam Wilk]

Okay. Great. And then maybe just one more for me. In line with your comments for the full year '22 in terms of being a build year, obviously, I guess for anybody who's kind of followed your business, it doesn't really make sense to evaluate Thunderbird on a quarterly basis, especially because you're in growth mode and making a lot of investments, and I think that's probably going to continue into the foreseeable future and -- but doing so profitably, which is great. But does that build your stuff relate mostly to your own IP work? And I guess with the growth in Production Services, how are you guys now kind of thinking about the continued shift towards more higher-margin owned IP? And I know Barb touched on this a bit, but I'd be curious if you have any follow-up comments.

[Jennifer Twiner McCarron, President, CEO & Director]

Absolutely. I think when I referred to build year, a lot of the IP that we're turning on, you get paid upon delivery. So that type of work once you deliver it that's when you get paid, of course, we're seeing tremendous opportunity in production services where we're servicing really high-end brands like Spider-Man and Cocomelon Moonbug just sold who owns Cocomelon to Blackstone for $3 billion because of that property. So strategically, when we service shows like that, then we can go around and easily sell our own toddler show. But -- so we continue to build on the momentum that we put in place. We just opened our Consumer Products and Distribution division this year in January. So these things take a little bit of time to come to fruition. Barb, did you want to add to that?

[Barb Harwood, Chief Financial Officer]

Yes. It's -- Adam, it's mainly just timing. I mean, like once we -- our new division is really working hard at getting these properties green lit. Once they're green lit, obviously, they go into production. If it's an animated show, it's like a 2-year pipeline or things like that. And then we recognize that the very end. So all these things that we're kind of firing on all cylinders right now, we'll start to see the results of that a little bit later than '22.

[Operator]

[Operator Instructions] Your next question comes from the line of David McFadgen with Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions. So in the past, I think, for the most part, the business has been I think about 50% proprietary, 50% service work. And I was just wondering if you can give us an update on that ratio looking into 2022 and 2023.

[Jennifer Twiner McCarron, President, CEO & Director]

Yes. David, that's a great question. I think we're holding steady and looking -- the goal is to have the IP increase in ratio. But we never -- we really value the mix of service work. It's great for cash flow. It takes out a lot of the lumpiness of quarters, which is reflected, which is necessary in the public market. So Barb, I don't know if you want to weigh on any exact percentages right now, but essentially that 50-50 mix, we're looking to see it increase towards IP over the coming years.

[Barb Harwood, Chief Financial Officer]

Yes, definitely, we're looking to increase. I mean, when we opened up the studio in Ottawa and L.A., that's why our Production Services has now going full steam ahead kind of starting last year and continuing into this year. And so it's sort of overtaken the IP just by the fact that you can recognize it right away rather than waiting and recognizing it. So it's definitely our desire and our plan to start bringing the IP up in terms of ratio of projects, but it takes time.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then maybe a follow-up question on Strays. As I know this is a sequel to Kim's Convenience. I thought Kim's convenience was an IP show. I think it is, and I was an IP show. And I would have thought Strays is the IP as well. But I think in your MD&A inside of a service, so I was just wondering if you can give us an update there.

[Jennifer Twiner McCarron, President, CEO & Director]

No. It is definitely IP. It might have been mixed in with like the increases in the revenue are due to both the production services increase and the delivery of Strays. If you take a look at our MD&A at the revenue split out, that increase in the revenue split out as compared to Q1 2021 is Strays under the distribution and licensing revenue line.

[David John McFadgen, Director of Institutional Equity Research]

Okay. All right. I guess that wasn't clear to me. And then just lastly, just on investment in film. I was wondering can you give us any idea of what the magnitude of your net investment in film might be for '22?

[Jennifer Twiner McCarron, President, CEO & Director]

I can't say for sure. It really depends on a lot of different factors, of course, because as soon as we recognize something, as you know, it releases that amortization from that line. It will probably be very -- it will probably be similar to '21.

[Operator]

This concludes our call today. If you have any questions, please call 1 [phone] or e-mail [e-mail]. Thank you.