Thunderbird Entertainment Group Inc

XTSX:TBRD

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and thank you for joining us. We are here to provide a corporate update and report on the second quarter results of Thunderbird Entertainment Group's 2020 fiscal year, which ended December 31, 2019.Speaking on today's call is Brian Paes-Braga, Chairman of Thunderbird's Board of Directors; Ms. Jennifer Twiner McCarron, Thunderbird's CEO; and Ms. Barb Harwood, Thunderbird's CFO. Mr.Paes-Braga and Ms.Twiner McCarron will provide a strategic overview of Thunderbird Entertainment Group. And Ms. Harwood will review the company's second quarter financials.Following the corporate update and financial review, the call will open up for a question-and-answer session. [Operator Instruction]I'd like to remind everyone that certain statements made on today's call will be forward-looking and constitute forward-looking statements and 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 company's objectives, goals or future plans and the business and operations of the company. Forward-looking statements are necessarily based on numbers of estimates and assumptions that, while 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 and 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 Q2 news release.Although the company believes that the assumptions and factors used in preparing the 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 be given 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 audited annual financial statements for the 3 months ended December 31, 2019, of Thunderbird Entertainment Group 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 dollar unless otherwise stated. Mr. Paes-Braga and Ms.Twiner McCarron will now provide the update.

[Brian Alexander Paes-Braga]

Thank you, and good morning, everyone. My name is Brian Paes-Braga, I'm the Chairman of the Board for Thunderbird Entertainment Group. I'm pleased to participate in today's call with Jen and Barb to highlight Thunderbird's progress, which is driven by continued demand for premium content, universally across premium broadcasters and streaming companies.This quarter, Thunderbird delivered excellent operational results, experiencing a year-to-date fiscal 2020 revenue growth of 21%. The company focused on producing quality content, advancing its already successful relationships and partnerships and strengthening its balance sheet to further enable profitability and reinvestment in the business at a very exciting time and inflection point in the industry. Looking forward to the second half of our fiscal year, as more of our franchises and shows get delivered, we are even more excited with both expected revenue and notably EBITDA experiencing significant growth.On previous calls, we have discussed the streaming awards and the exploding demand for content. Good demand touches every facet of our business, and if you break it down by genre, the picture becomes even more clear. For example, in the Factual space, multiple companies are making big plays, Disney+ is looking to diversify some family-centric content and nearly 1/3 of originals commissioned by streaming service or documentaries. Adding to this, Discovery and the BBC recently announced a 10-year streaming content partnership, focused on natural history and Factual programming that will launch in 2020.In the Kids and Family space, roughly 60% of Netflix global audience watches family-centric content on a monthly basis, which further validates the power of renewals and subscriptions. And after November's launch, Disney+ reached almost 30 million subscribers by February 2020, ahead of analyst expectations. In the months to come, we'll see more new engines making big plays in the Kids and Family space with HBO Max launching 50 years' worth of Sesame Street, plus 2 seasons of a beloved show of multiple spin-offs being planned. This is just a snapshot of how the demand for content continues to grow, and naturally, with that comes increased budgets. Netflix is alone looking to invest more than $17 billion in the U.S. in 2020, which is up from $15.3 billion in 2019. The demand for content opens doors of opportunity for Thunderbird and allows the company to do more what it does best, which is to produce compelling stories and content that positively impacts our world.Thunderbird is well-known for producing exceptionally high-quality and innovative programming. And this has allowed the company to grow, attract and retain extremely talented teams. In fact, in February, just 16 months after opening its Ottawa production studio, Thunderbird opened its first U.S.-based production studio in Los Angeles, expanding its presence in one of the world's largest media markets. The addition of this studio increases the capacity of Thunderbird's Kids & Family Division house up to 880 crew across all locations. And with one production already underway at the L.A. studio, we are looking forward to sharing more exciting updates around the studio in the weeks to come.The company also added best-in-class leadership to our Board with the appointment of Marni Wieshofer, who will be based in L.A. as our Lead Director. As the former CFO and EVP of Corporate Development at Lionsgate Films, Marni has joined our team at an invaluable time. We're already seeing the immense benefits of her expertise during the period of intense growth at Thunderbird and the industry as a whole.Before passing things over to Jen to provide a detailed corporate update and to Barb for the financials, I want to take a moment to recognize 2 more important aspects of our business. First, the power of IP. As a key part of our growth strategy, owned IP enables Thunderbird to build long-term shareholder value, generating revenue that funds productions and allows the company to continue growing. All of our Factual and Scripted projects are IP owned, and in 2019, 100% of our Factual series were renewed, which is absolutely phenomenal.Our IPO in animation projects such as Last Kids on Earth and Princesses Wear Pants yield incredible potential, and are on the path to becoming global franchises. With these properties, the best is yet to come. Secondly, I want to recognize the team behind the work of Thunderbird. From the company's experienced and innovative management team with deep roots in content creation to each and every production team behind each series or show, Thunderbird employs the best in talent in the business, and this is evidenced by the content it creates. Highway Thru Hell celebrated its milestone 100th episode. Hello Ninja was named one of the most pinned shows on Netflix by TVision. Molly of Denali was listed as one of the best TV episodes in 2019 by the New York Times. Variety included Atomic's Rick and Morty Pringles commercial as one of the best Super Bowl commercials in 2020. Kim's Convenience has received 8 nominations from the Canadian Screen Awards. And the popular lifestyle series, $ave My Reno was renewed for a 4th season, this occurred before the third season even premiered. Thunderbird's team works tirelessly, always focused on delivering outstanding work while also building a very special mission and values focused organization. For this, they need to be applauded. I also want to thank all of you who see the value of Thunderbird to invest with us and who joined our journey. We appreciate your support, and we'll continue executing on all areas of the business to drive future growth and deliver long-term shareholder value. Over to you, Jen.

[Jennifer Twiner McCarron, CEO & Director]

Thank you, Brian. I'm thrilled to share our quarterly company highlights. In Q2 2020, we made steady progress across all divisions, delivering strong results, which Barb will further outline shortly. We had 21 programs in various stages of production and deals with Netflix, NBCUniversal, Nickelodeon, PBS, WGBH, Discovery Canada, APTN, Corus Entertainment and the CBC to list just a few. Throughout the quarter, 32 half-hour episodes and 15 1-hour episodes were delivered collectively from the Factual, Scripted and Kids and Family divisions. In 2020, we have 13 productions scheduled for delivery, and we remain on track to meet these targets.As Brian mentioned, we also strengthened our leadership team with Marni Wieshofer joining the Board. We are so honored to welcome Marni to our team with her rich experience, including serving as Lionsgate's CFO, alongside its founder, Frank Giustra. We know she is perfectly suited to drive success in this role.Before jumping into division updates, I want to highlight Thunderbird's recent Canadian Screen Awards recognitions. We are proud to share that the company received 11 nominations. Great Pacific Media, our Factual division received a nomination in the category of best writing. Factual, for its popular series Heavy Rescue: 401. Atomic Cartoons, our Kids & Family Division, received 2 noms for its animated series Cupcake and Dino: General Services, which was nominated for best animated program or series. Mark Little was also nominated in the category of best performance for animation.As Brian mentioned, Thunderbird productions, our Scripted division received 8 nominations for Kim's Convenience, including best comedy series, best costume design and best achievement in casting. 5 individual cast members were also nominated. Each of our divisions plays an integral role in the combined success of Thunderbird, and while we all know the incredible depth of talent behind each and every one of our productions, it's always gratifying to be acknowledged by our peers in the industry. Congrats to all the nominees and the winners will be announced at the end of March.On to the division update. I will start with our Factual division, Great Pacific Media, which is a market leader, recognized globally for authentic storytelling. Great Pacific's editorial team has been working together for over 10 years and the work they produce is world-class. Factual series produced by Great Pacific Media are among the most popular in all of Canadian television, and they continue to be embraced around the world as well. During the quarter, our Factual division was in production on 5 series and 1 documentary. Highway Thru Hell season 8, Heavy Rescue: 401 season 5, $ave My Reno season 3, Queen of the Oil Patch season 2, High Arctic Haulers season 1 and Teenager and the Lost Mayan City, which is a documentary for CBC. In Q2, we began production on the 9th season of the hit series, Highway Thru Hell, which will be the series largest ever with 18 1-hour episodes. The series also celebrated its 100th episode in season 8, which aired this past November. Highway Thru Hell is a top-rated series on Discovery Canada, right alongside another Thunderbird production Heavy Rescue: 401, both of which average more than 1 million viewers per week. These series both air around the world on cable, VOD and streaming platforms. Speaking of Heavy Rescue: 401, we are also in production on the fifth season of the popular Factual series in Q2, which will feature 18 1-hour-long episodes and premiere in 2021. Demonstrating Thunderbird's capability to create premium content and develop global brands, both Highway Thru Hell and the Heavy Rescue: 401 continue to have strong international sales and are available in more than 200 territories around the world and in more than a dozen languages. These are truly global hits. And because the IP is 100% owned by Thunderbird, all production revenues flow back into the company, which enables us to further invest in the company's impressive growth.Also in Q2, another IP-owned production, High Arctic Haulers had its premiere date announced and the series officially launched on CBC in January 2020. The series instantly received positive reviews for shining a light on the incredible, almost superhuman efforts made its year to bring vital supplies to people living in Canada's far North. Thunderbird holds worldwide rights to the original IP series, and will be launching it to foreign markets with beyond distribution in March 2020 at MIPTV in Cannes. During the quarter, season 2 of the critically-acclaimed documentary series Queen of the Oil Patch, wrapped principal photography with 8 episodes being produced. The series has been hailed for helping to break down boundaries for LGBTQ2+ and indigenous people by providing an insightful look into a community that has previously been unseen on mainstream TV. We will produce Queen of the Oil Patch in collaboration with Kah-Kitowak Films and look forward to the premiere of season 2 on APTN later this year. In our scripted division, season 4 of Kim's Convenience premiered on January 7, 2020 to rave reviews. Kim's Convenience airs on CBC and CBC Gem in Canada, with previous seasons available worldwide through a mix of Netflix streaming, video-on-demand partnerships and cable TV deals, including Japan and Korea.Shifting focus to our Kids & Family Division, Atomic Cartoons, our animation group keeps on delivering creative and popular content for partners around the world for both traditional platforms like CBC and PBS, but also for deep-pocketed streaming players that include Disney and Netflix plus NBCUniversal, which will launch its Peacock streaming service later this year. During the quarter, Atomic was in various stages of production on 14 animated television programs, including a blend of service and IP work. Service productions include Hello Ninja, a partnership model for Netflix, Molly of Denali, WGBH, PBS Kids and CBC, 101 Dalmatian Street for Disney+, which just launched on February 28, 101 Dalmatian. LEGO: Jurassic World for NBCUniversal, owned IP series include The Last Kids on Earth with further announcements to come later in 2020. While our team remains focused on production this quarter, we were also greatly honored to receive recognitions from our peers and stakeholders around the world. One example is Hilda, an animated series in Netflix which was recognized with the British Academy of Film and Television Award, BAFTA in the animation category. We are also deeply honored that our critically acclaimed animated series Molly of Denali has been selected as a finalist for the highly exclusive Prix Jeunesse International 2020, which celebrates the very best in kids TV content worldwide. Additionally, the pilot episode of Molly of Denali was recognized by the New York Times as one of the -- 2019's best TV episodes. And besides recognitions for individual series, Atomic was recognized as one of the best animation studios in the world, placing fourth in the production company category in Kidscreen's 2019Hot50 Ranking. The annual Hot50 list features world's top companies in 4 categories: broadcasting, production, distribution and licensing. This is the first time Atomic made this list and we are extremely proud to arrive at #4 and -- of this accomplishment. And while these happened subsequent to the quarter, there are a few more exciting developments that recently took place in our Kids & Family Division.First, as Brian mentioned, Atomic expanded its L.A. footprint in February by opening a third animation production studio and our first base in the U.S. The new L.A. Studio provides a stellar opportunity to work more closely with our clients and partners in L.A., and of course, add an even more incredible animation talent. Showrunners, directors, writers, you name it, who are based in L.A. to our already extraordinary team. Secondly, Atomic will be providing the animation for a new Netflix and Spin Master CG animated series called Mighty Express, debuting in September, the show hails from PAW Patrol creator Keith Chapman, and Netflix has ordered 52 11-minute episodes. And thirdly, last week, we announced a new partnership between Atomic and the visionary Jim Henson Company, who doesn't love The Muppets, to develop a new animated series called Nate Create. The Jim Henson is one of the most storied players in the Hollywood today with decades-long legacy and puppetry. It's a true honor for the entire company to be co-developing and co-producing this project. Nate Create will be one of the most ambitious productions Atomic has ever undertaken.With that, I'll conclude my update. Q2 was another great quarter for Thunderbird and while we are extremely proud of what's been accomplished to our company for date, we continue to challenge ourselves to reach for new heights. There's a lot more on the horizon for Thunderbird and we look forward to sharing the progress with you. As a company, we are unrelenting in our focus on quality, creativity and innovation. We are also deeply committed to our mission of creating content that makes the world the better place. This dedication helps us select, invest and develop global brands with longevity, brands that will, in turn, create more opportunities for the company as a whole. Our success is rooted in the talents of our incredible team members and their work continues to elevate the entire company. I want to thank every team member for their dedication, creativity and hard work. They are truly inspiring. At this time, I also want to thank you for tuning in to listen to our story, for your support and investing in what we do. And for those of you attending either the LD Micro Conference in California this week or the ROTH 2020 Conference in California from March 15 to 17, I look forward -- our team looks forward to seeing you and connecting with you there. Thank you so much. Over to you, Barb.

[Barb Harwood, Chief Financial Officer]

Thanks, Jen. Good morning. This is Barb Harwood, CFO of Thunderbird. I'll just give you a quick snapshot of the financials for this quarter. Consolidated revenue for the 3 and 6 months ended December 31, 2019, was $14.3 million and $31.3 million as compared to $11.6 million and $26 million for the comparative periods of fiscal, 2019, increases of $2.7 million and $5.3 million, respectively. Majority of this revenue increase over the comparative periods in 2019 related to growth in the animation division. Consolidated net losses were $1.4 million and $0.5 million for the 3 and 6 months ended December 31, compared to net losses of $6.1 million and $4.7 million for the comparative periods of fiscal 2019. Last year, the company incurred a one-time charge during the comparative period of fiscal 2019 related to the RTO transaction of $5.3 million, which indicates the differences. Adjusted EBITDA was $0.8 million and $3.9 million for the 3 and 6 months ended December compared to $1.5 million and $5.6 million for the comparative periods of fiscal 2019, a decrease of $0.7 million and $1.7 million, respectively. The 3-month decrease was due to the timing of revenue recognition of an animation series and certain distribution contracts in Q2 of 2019 that had no comparable delivery in Q2 2020, offset partially by increases in production service work. The decrease also stemmed from increases in salaries and computer software due to significant growth in the animation and Factual divisions, offset by a decrease in rent expense, primarily due to the adoption of IFRS 16, in which lease obligations for long-term leases are no longer recorded as rent expense, but capitalized as right to use assets and amortized. As Brian mentioned, we look forward to a very strong Q3 and Q4. Traditionally, Q2 is quite a flat quarter due to the deliveries that happen in that quarter. Additionally, the company is very pleased to say that during the 6 months ended December 31, we paid down the remaining $1.4 million of a 3-year non-revolving term loan that was initially drawn in July 2018 in the amount of $6 million. That means we paid it down in 1.5 years versus the 3 year term loan. The term loan was drawn in order to repurchase common shares of certain shareholders of Thunderbird and was part of an overall credit facility negotiated with the Royal Bank Canada, that also included an increased production line of credit and an acquisition facility. Those shares were eventually canceled. And that's all I have, that's why I send it back to Jen and Brian and the operator. Thank you.

[Operator]

[Operator Instruction] And your first question will be from Aravinda Galappatthige at Canaccord.

[Aravinda Suranimala Galappatthige, Managing Director]

[indiscernible] Hello?

[Jennifer Twiner McCarron, CEO & Director]

You're breaking up and I'm not hearing you.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. Can you hear me now?

[Jennifer Twiner McCarron, CEO & Director]

Yes.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. My first question was with respect to, I think what Barb mentioned and also Brian, about the strength in Q3 and Q4 and is more relating to seasonality. We know that Q3 is the strongest quarter of the year, whereas Q4 tends to be a fair bit lighter. Is that sort of the expectation? I mean do you expect any material changes to the seasonality in fiscal '20?

[Jennifer Twiner McCarron, CEO & Director]

Yes. Q3 is going to be quite a large quarter. It'll probably be our biggest quarter. And traditionally, Q4 is kind of a flat quarter this quarter, this year, it will be more than flat. It will be lifted a little bit from the deliveries of one of our animation shows, Last Kids.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. Great. That's helpful. And then with respect to the distribution revenues, I know that Barb provided some color both on the call and the MD&A, but we've seen a couple of quarters now where distribution revenues are trending lower, and sort of leads me to believe that that might be the variance between sort of the revenue growth and the EBITDA decline that you're seeing. Obviously, distributions having higher margins. Should we still -- should we continue to believe that's still more timing, and that's something that would kind of gain traction in the second half?

[Jennifer Twiner McCarron, CEO & Director]

Yes. I think definitely, it's definitely more timing. You'll see more distribution revenues in Q3.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. Excellent. And my last question. Anything new on Last Kids on Earth? I know that based on your merch arrangement with JAKKS, there should be a bit of a release of products at some point this year. Any sense of timing or any other update that's worthwhile highlighting?

[Barb Harwood, Chief Financial Officer]

Our next episodes, I can't say the date. I'm waiting for Netflix to release it, but this spring, and you'll see a toy drop at the same time, which is pretty exciting.

[Operator]

Next question will be from Sid Dilawari of Cormark Securities.

[Siddhant Dilawari, Associate of Institutional Equity Research]

I'm calling in for David McFadgen. My first one is for Barb, can you please remind us what the approximate IFRS 16 contribution to EBITDA is for the quarter and for the year?

[Barb Harwood, Chief Financial Officer]

Yes. Sure. The -- it's about -- sorry, I'm just going to open up a -- the contribution to EBITDA is approximately $2.4 million for the 6 months ending December 31, about $1.4 million just for the quarter. And so we can see that probably trending, it will probably hit about $3.5 million for the fiscal 2020.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Okay. That's great. That's helpful. And then in the Scripted segment, so congrats on delivering the 4th season of Kim's Convenience. Are there any ongoing discussions regarding season 5 being delivered this year or sort of next year or, where are we on that?

[Barb Harwood, Chief Financial Officer]

I don't think anything has been announced on Kim 5, so -- but stay tuned. There'll be something soon, I'm sure.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Okay. And then obviously, we saw the EBITDA being impacted by the distribution revenue trending lower, and obviously, that's a timing issue. But in regards to the expenses related to ramping your animation business, can we expect this quarter to be kind of a one-off? Or do you expect ongoing spending for that segment to sort of weigh down EBITDA versus prior periods?

[Barb Harwood, Chief Financial Officer]

I think it's probably more of a one-off because we've got -- we had some -- as Jen alluded to, we opened up the LA Studio in February.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Right. Okay. That's helpful as well. And then one last one for me for Jen. Do you guys have any ongoing discussions with Disney+ on any potential titles for this year or?

[Jennifer Twiner McCarron, CEO & Director]

Yes. We're working with all the major streamers, including Disney+. So we've got 2 shows launching there now. 100 -- Donald Duck and The Three Caballeros and 101 Dalmatian Street, and there is more to come, so stay tuned.

[Operator]

[Operator Instruction] And at this time, we have another -- no other questions registered. Please proceed. We have no further questions at this time, please proceed.

[Brian Alexander Paes-Braga]

I guess we'll sign off, Jen. Thank you, everyone, for listening to the call, and as always, we're all available to answer any further questions and are very appreciative of everyone's time this morning and your continued support for this incredible company.

[Operator]

Thank you. This concludes our call today. If you have any questions, please call 1 [phone]. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.