Thunderbird Entertainment Group Inc

XTSX:TBRD

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for joining us. We are here to provide a corporate update and report on Thunderbird Entertainment Group's 2020 fiscal year-end results, which ended June 20, 2020.Speaking on today's call are Ms. Jennifer Twiner McCarron, Thunderbird's CEO; and 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 2020 year-end financials. Following the corporate update and financial review, the call will open up for a question-and-answer session. [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, while considered reasonable, are subject to known risks -- 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 the presentation, and no assurance can be given that such events will occur in the disclosed time frames or at all. Except when required by law, the company disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.For your convenience, the press release, the MD&A and audited financial statements for the fiscal year-end of Thunderbird Entertainment Group, which ended June 30, 2020, are filed on SEDAR and are available online under the Investor 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.thunderbirdtv 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, CEO & Director]

Hello. Thank you so much for joining us today. My name is Jennifer Twiner McCarron, and I am the CEO of Thunderbird Entertainment Group. Barb and I are thrilled to review Thunderbird's progress, which is rooted in our company's commitment to authentic, inspiring stories that move hearts, connect people and positively impact our world. Our mission remains to create content that makes the world a better place, makes people happy and provides a much needed escape, especially during these unprecedented times.Fiscal 2020 has been an extraordinary year for Thunderbird on many levels. Programming created by Thunderbird airs daily in 40 different languages and 200 territories worldwide. Through Atomic Cartoons, our Kids and Family division; and Great Pacific Media, our Factual division; and our Scripted division, our company is a leader in developing and producing family-friendly entertainment that is a key cornerstone of our major media platform strategy to glue that key co-viewing audience. Essentially, families gathering together towards content, more pertinent in 2020 than ever before. We are working with HBO Max, Nickelodeon, Discovery, Apple TV, Disney+, NBCUniversal, CBC, Netflix and many other streaming VOD, broadcast and cable partners around the world. I am personally extremely grateful to be working in a pandemic-resistant business and in an industry that's thriving. I'm proud to report that through this unprecedented time, there has been no disruption to production, delivery dates or to our security protocols. In fact, COVID-19 has forged new opportunities and staffing of production is no longer constrained by location or studio space, thanks to new technology.While Barb will go through the financials more thoroughly, I am proud to share that Thunderbird has had a strong year, filled with growth and exciting opportunity. The company's revenues are $81.3 million, which is up 41% from fiscal 2019. Our year-end adjusted EBITDA also increased year-over-year by 21% to $15.5 million. And our free cash flow went from negative $5 million in fiscal 2019 to a positive $7.3 million this year. We have 0 corporate debt, which means Thunderbird is positioned for growth by leveraging relationships and intellectual property to launch more global brands and franchises.During the fourth quarter of fiscal 2020, we had 18 programs in production across all of our divisions. We delivered 29 half-hour episodes and 26 full-hour episodes. All of the full-hour episodes and 10 of the half-hour episodes are company-owned IP, further building our already substantial library of premium quality content, which includes many longstanding hits like Intelligence and Da Vinci's City Hall. And by adding new content from Great Pacific Media and Atomic Cartoons, which can also be licensed, distributed and exploited in many forms of cross-media exploitation such as mobile games, console games, microtransactional games, merchandise, age game shows, you name it, we create additional revenue for years to come.At this time, I also want to highlight that during the quarter and subsequent to the quarter, several facets of the company and our productions were recognized. We received an Emmy Award for The Last Kids on Earth, a Peabody Award for Molly of Denali, a 2020 Television Critics Association Award also for Molly of Denali, 2 2020 Canadian Screen Awards for Kim's Convenience, 9 Leo Awards across all divisions and the Queen of the Oil Patch is shortlisted for a 2020 Content Innovation Award from the Television Business International. Thunderbird was also awarded 2 Stevie International Business Awards in the categories of Medium-Sized Media and Entertainment Company of the Year and Management Team of the Year. And this morning, Thunderbird was listed on Canadian Business 2020 Growth List as one of Canada's fastest-growing companies.At Thunderbird, we are deeply proud of our teams, how talented they are and how dedicated everyone is to creating top-notch content that entertains and inspires. To have our work recognized by peer organizations is an incredible honor and a recognition of the high-quality content our amazing teams are creating.Moving on to divisional update. Atomic, our Kids and Family division, was in various stages of production on 12 animated series during the quarter for partners such as Disney+, Netflix, CBC and NBCUniversal to list a few. And a snapshot of this remarkable work has already surfaced over the past few months. For example, Hello Ninja Season 3 was on Netflix. LEGO Jurassic World Double Trouble was on Nickelodeon. Curious George: Go Wild, Go West was one of the debut properties on Peacock. Mighty Trains Express with Spin Master debuted on Netflix. And our Emmy Award-winning series, The Last Kids on Earth is set to premiere tomorrow 10 more episodes, October 16, on Netflix.And the highly anticipated LEGO Star Wars Holiday Special will launch November 17 on Disney+. This production will unite -- reunite Rey, Finn, Poe, Chewie, Rose and many favorite droids for a joyous feast on Life Day, which is the Star Wars holiday first introduced in 1978. Our LEGO Holiday Star Wars Special is the first LEGO and Star Wars special to debut on the streaming platform. We are excited.Atomic Cartoons produces high-end content across multiple pipelines and genres spanning preschool, comedy, action adventure, adult and everything in between. Our teams are firing on all cylinders and producing outstanding work, which continues to secure great partnerships with top talents, including The Jim Henson Group, Savannah Guthrie and Drew Barrymore to list a few. Fiscal year 2021 will see Atomic further build on the phenomenal work we are already producing and also expand to capitalize on gaming, merchandise and toy opportunities across all of our titles.During Q4, our Factual division, Great Pacific Media, was in production on 4 series and 1 documentary special: Highway Thru Hell Season 9, Heavy Rescue: 401 Season 5, Save My Reno Season 4, Mud Mountain Haulers Season 1 and The Teenager and the Lost Mayan City, which is a documentary for CBC.On September 4, the ninth season of Highway Thru Hell premiered on Discovery Canada. This season is comprised of 18 episodes, its largest episode order to date. Highway Thru Hell is one of the most successfully independently-owned unscripted brands in the world, with 2 spin-offs, both of which are produced by Great Pacific Media: Heavy Rescue: 401 and Mud Mountain Haulers. The success of Highway Thru Hell franchise lies within its authentic storytelling and Great Pacific's AI data-driven approach, which increases probability of ratings success while reducing production time and cost. It is also worth noting that work on Highway Thru Hell's second spin-off, Mud Mountain Haulers, started this spring. The production was a true leader in applying new COVID-19 safety protocols pioneered by the company to ensure crews stayed safe and work could continue during the pandemic. The teams at Great Pacific are specialists in the development, co-production and financing of factual, documentary, game show and reality TV. And interest in factual production is skyrocketing. In fact, Ted Sarandos of Netflix recently mentioned that factual television is a major focus area for the streaming giant because of the love that people have for this type of programming.The majority of content produced by Great Pacific is also IP, which distinctly positions Thunderbird as this content lives forever in our library and provides us with the full ability to leverage it for distribution, licensing, consumer products, games and all cross-media opportunities. The division also employs a vertically integrated studio model and owns all of its facilities and production equipment, which in turn generates multiple revenue streams.In our Scripted division, which represents the team behind the hit comedy series, Kim's Convenience, the cast and the crew returned to studio in September. The award-winning series is still on track for its Season 5 premiere in early '21. Kim's Convenience is also renewed for Season 6. And check out Season 1, it has 100% rating on Rotten Tomatoes. That is hard to do.Our company was able to nimbly adapt at a pivotal time to not only continue but also expand operations, even bringing on new crew members to keep up with demand. With the new fiscal year upon us, Thunderbird will continue to seek out strategic growth opportunities through IP; expansion within North America and potentially international; acquisitions; branching out into animated feature films and exploring additional proven unscripted brands for new spin-offs, increased season orders and other derivative projects.Before passing things off to Barb, I want to acknowledge the massive shift that our industry is undergoing right now as it collectively strives to be more inclusive, diverse and honor authentic voices. This is reinforced by a new report from the UCLA-based Center for Scholars and Storytellers where researchers found that bringing authentic diversity to films improves financial performance at the box office, while a lack of diversity can result in losses for studios. Thunderbird is well positioned to deliver on this with our dedication to authentic stories demonstrated through titles like Molly of Denali, Queen of the Oil Patch and Kim's Convenience, to list a few. I am so proud of the steps we have made as a company thus far, and we will strive to continue to be leaders in this area. Molly of Denali Season 1 had over 60 indigenous staff and numerous interns that are now working in the industry full time. On that note, in addition to creating meaningful, diverse and world-changing content that helps shift the status quo and places the spotlight on stories that might otherwise remain untold, Thunderbird is investing in internships, programs and organizations that are raising up the voices of those who have been underrepresented for far too long. Telling stories of diversity and inclusivity are what matters at Thunderbird. This is a cornerstone of our culture, and we have intentionally built a culture of people who align with this mission.In conclusion, fiscal year '21 is coming on stronger than ever. We are well on our way to being the next major global studio, and we are thankful that you, as an investor, are able to accompany us on this journey. Never has there been a better time to be in content and never has there been a better company than Thunderbird to capitalize on.Stay tuned for a short Q&A after Barb presents the numbers. Thank you so much.

[Barb Harwood, Chief Financial Officer]

Thanks, Jen, and thanks, everyone, for joining today. I am Barb Harwood, and I'm the CFO of Thunderbird. As Jen mentioned, it's been a great year for Thunderbird, so I'll dive right into a summary of the results.Revenue for the 3 months and year ended June 30, 2020, was $21.1 million and $81.3 million as compared to $12.9 million and $57.7 million for the comparative periods of fiscal 2019, increases of $8.2 million and $23.6 million, respectively. The majority of this revenue increase over the comparative period related to growth in the Kids and Family division.Consolidated net loss from continuing operations was $0.3 million for the 3 months ended June 30, 2020, and consolidated net income from continuing operations was $4.1 million for the year ended June 30, 2020. This is compared to net income from continuing operations of $0.1 million and net loss from continuing operations of $1.6 million for the comparative period of fiscal 2019. The company incurred a onetime noncash charge in fiscal 2019 related to the RTO transaction of $5.3 million.Adjusted EBITDA was $2.9 million and $15.5 million for the 3 months and year ended June 30, 2020, compared to $1 million and $12.8 million for the comparative periods of fiscal 2019, an increase of $1.9 million and $2.7 million, respectively. The 3-month increase was due to increases in production service work as well as increases in licensing and distribution revenues related to an increase in the number of company-owned IP delivered over the comparable quarter. There was also a decrease in rent expense due to the adoption of IFRS 16 in which lease obligations for long-term leases are no longer recorded as rent expense to capitalize as right-of-use assets, otherwise known as ROU assets, and amortized.In fiscal 2020, the company completed a change in accounting policy, whereby it has capitalized certain overhead costs such as salaries, rent and computer maintenance to investment in content, and has amortized these costs in the same manner as all other investment in content costs. For service production, these costs were reallocated from G&A to direct cost. The change in accounting policy provided the investment in content costs and the direct cost to be more reflective and relevant of the cost of production.Also effective July 1, 2019, as mentioned before, the company adopted and implemented IFRS 16 leases, which requires the lessee to recognize all leases on the balance sheet as a right-of-use asset and a corresponding lease liability with limited exception. Previously, leases were classified as either operating leases or financing leases and rental payments were expensed on the income statement.And finally, during the prior quarter of 2020, management decided to discontinue operation of its U.K. division. The related assets and liabilities have been presented as held for sale and the net revenues and expenses are shown as a loss from discontinued operations.Thanks, Jen -- thanks. And back to you, Jen. Actually, I think we're open for the Q&A now.

[Operator]

[Operator Instructions] Aravinda Galappatthige with Canaccord.

[Aravinda Suranimala Galappatthige, Managing Director]

Congrats on the quarter. I had a few maybe. I'll sort of get the accounting -- have the accounting questions first and get to some of the strategic ones after.On the accounting side, Barb, can you just sort of clarify that you also -- the new accounting change adjustments that you talk about, that's also being done for fiscal '19 as well. So you've restated the prior year?

[Barb Harwood, Chief Financial Officer]

Yes, that's right. It's -- we've revised the prior year, yes. So you'll see that our EBITDA in 2019 that is reported in our MD&A is different than as reported when -- last year when we reported it.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. And to get a sense of the EBITDA impact, obviously, it looks like, when I look at the 9-month EBITDA number, which was sort of $11.2 million, and sort of compare that to the restated number, it looks like it's at $1.3 million for the 9 months, so roughly $400,000 a quarter. But when I look at the prior year, it looks like it was sort of $2 million, $2.5 million for the full year. So I guess you can roughly say sort of that's kind of in that $0.5 million impact to EBITDA quarterly. Is that a fair assessment?

[Barb Harwood, Chief Financial Officer]

It actually really depends on the types of shows that we're capitalizing the overhead to and how long the production schedule is. So for example, something on Last Kids, which was in production for 2.5 years, it's capitalizing all that overhead to investment in content, and it doesn't hit the income statement in amortization of production cost until it starts delivering. So it really depends on the meld of the type of projects and the timing of their -- of how long they're held on the balance sheet versus when they're expensed.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay. But for fiscal '20, sort of first 9 months, it looks like it's sort of $1.2 million, $1.3 million. So that's -- somewhat of a gauge, but recognizing that it can change quite a bit.

[Barb Harwood, Chief Financial Officer]

Yes. Yes, correct. And that's why at your previous comment that you've e-mailed me, that's why 2019 is different than in 2020 because of the mix.

[Aravinda Suranimala Galappatthige, Managing Director]

Yes. Okay, okay. Understood. And as you indicated to us, this is sort of -- you've kind of taken a sort of a harder look at some of these cost items and realize that they are more sort of attached to the project. So it should be capitalized. So it's a combination of that and kind of looking at some of your peers, what they're doing and perhaps -- I don't know if it's public peers or private peers, but looking at some of the peer treatments as well. Is that fair?

[Barb Harwood, Chief Financial Officer]

Yes, that's absolutely correct. We basically looked at our staffing and figured out what individuals from a corporate standpoint are spending 90% on projects. And so we've either reallocated their -- the portion of their salaries and related G&A up to direct costs or we've capitalized it up to investment in content and amortized it along with the projects that they're working on.

[Aravinda Suranimala Galappatthige, Managing Director]

Okay, great. And then 2 questions for Jen. First of all, on the partnership model that you talked of. I know that, currently, it's sort of -- of the productions that you have right now, Hello Ninja kind of reflects that. Do you see that pipeline kind of opposite of where you -- where you're able to share the merch and any other related revenues, do you see that pipeline sort of increasing quite rapidly over the next couple of years? Or is that, at this point, a bit more prospective?And my second question is with respect to the mix, both in term -- like in terms of the service and distribution mix. Both are growing, obviously, but 47 of the 80 is still production services. How quickly do you see that mix sort of moving towards 50-50 or maybe even beyond that?

[Jennifer Twiner McCarron, CEO & Director]

Yes. Great question there, Aravinda. So with regard to the partnership model, it will definitely increase. When you look at companies like Disney making a statement this week that they need to focus on Disney+ and turn on as much content as possible, the reason the partnership model exists is because studios like ours that are delivering high-quality content and can handle everything from stem to stern are needed because the major streamers can't handle all of the content they need to turn on themselves. They have to constantly refresh content to keep subscribers glued. They are judged on gaining subscribers so they need full-service companies like Thunderbird to execute in that partnership level, which is a great new story for us going forward.In terms of the mix of content, we will see content continuing to grow. And it takes many forms of ownership. There is the full IP ownership where we hold the copyright, and then there is the partnership model where we own a piece of the back end. And both of these should be looked at as content. So yes to both questions. There's -- look forward to growth in each area.

[Aravinda Suranimala Galappatthige, Managing Director]

And a really quick one before I get back in the queue. The Last Kids on Earth, I know the products are out on the shelves. I know it's unusual conditions. Is there anything to take away at this point? Or you just have to maybe need another 6 months to sort of monitor how those product sales are occurring?

[Jennifer Twiner McCarron, CEO & Director]

Yes. We just have done the toy line release and, again, there aren't that many shelves open, but certainly, there's online. And we've got a huge product behind it. Ten more episodes launching on -- tomorrow, and then interactive episodes launching in the spring. And then we have our video game coming out in the spring as well. So there is a lot of cross-media exploitation coming. And I would say, to answer your question more directly, we should monitor over the next 6 to 12 months and see how things go.

[Operator]

David McFadgen with Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

So a couple of questions. Just -- I'll start off with an accounting question. So just to understand the benefit to EBITDA from the accounting policy change, I was looking on Page 20 of your financial statements. I don't know if you could pull that up in front of you, but it looks like the benefit from the accounting policy change to EBITDA is about $2.1 million. Is that correct?

[Barb Harwood, Chief Financial Officer]

Yes, that's correct. That would be the -- you're talking about the IFRS 16 accounting change?

[David John McFadgen, Director of Institutional Equity Research]

No. I'm talking about the change to capitalize some cost to production to the investment in film, build it up on the balance sheet. Isn't that what this refers to?

[Barb Harwood, Chief Financial Officer]

Oh, yes, sorry. I just got to the page. Yes, that's correct.

[David John McFadgen, Director of Institutional Equity Research]

Okay. So that's $2.1 million, okay. Can you comment at all about how The Last Kids merchandising has done so far this year? Any comments in terms of metrics?

[Jennifer Twiner McCarron, CEO & Director]

No, we're not ready to release those yet. So I would say, just sort of repeating what I said to Aravinda, check back over the next 6 to 12 months as we see and as the video game is released in the spring as well to support the initiative.

[David John McFadgen, Director of Institutional Equity Research]

Okay, okay. So as we look to fiscal 2021 and beyond, I was wondering if you could give us maybe -- I guess, more for fiscal '21. I was wondering if you can give us any idea in terms of growth. What do you expect the company might be able to achieve? Would it be -- would double-digit be a reasonable assumption there in terms of revenue and EBITDA? I know you don't provide guidance, but just kind of wondering if -- just give us any idea as to what the growth might be.

[Jennifer Twiner McCarron, CEO & Director]

Well, I think it's -- we have great visibility into '21. It's locked and ready to go. It ends in June 30, '21. And I would say, much better-than-average expected growth for micro-cap. It's looking great. We're, again, really grateful to be in a pandemic-resistant industry. And any of the influx of work we've had to our company because of the need for more content, that is currently being entertained and getting into production. So we won't even see the benefits of that until 2022.

[David John McFadgen, Director of Institutional Equity Research]

Okay. I think in the past -- in the recent past, you hosted a -- like a webinar. And I think you talked about the fact that your production capacity is I think pretty much booked up for the next 18, 24 months. So I was wondering if you can give us an update on that.

[Jennifer Twiner McCarron, CEO & Director]

It's true. We have great visibility through '22, and we are firing on all cylinders.The other interesting thing I'll note that during this time of COVID, because we were able to successfully transition everyone off-site within 3 weeks and meet Tier 1 security protocols such as those with Disney, we're no longer looking at our 4 walls. So if a show comes in that we love and it makes great business sense and there's passion to put together, we no longer think how can we fit 700 people in this building. So it certainly changes the way we think, and we'll do so going forward.

[David John McFadgen, Director of Institutional Equity Research]

Okay, okay. And then just on the balance sheet, obviously, you're in a strong position here. You have no debt. I was just wondering what your sort of thoughts are on leverage. If something really interesting came along in terms of an acquisition, how might -- you might take the leverage up to if you really found something compelling?

[Jennifer Twiner McCarron, CEO & Director]

Yes. I think we are in a great position with such a strong debt-free balance sheet to be nimble and possibly opportunistic at this time. We are looking at growth and acquisitions that tie into our core business that aren't any type of roll-up strategy. We don't want to get bigger for the sake of getting bigger. It's something that really makes sense. And we're going to keep our balance sheet tight so that when the time comes to move, we will be able to do so.

[Operator]

[Operator Instructions] [ David Adelman ] of [ Adelman ].

[Unknown Shareholder]

Jennifer, my question was about -- you're doing great from just about every standpoint except earnings per share. So I was wondering, as an investor, as an institutional investor in your stock, should I be thinking that if you operate around breakeven, that's good because it will create future value from your library? I'm more -- as an old timer, I'm more used to old-fashioned earnings per share. And I was wondering if you look at it that way also or how should I look for earnings in just the last year?

[Jennifer Twiner McCarron, CEO & Director]

Right. I think a good way to -- are you just clarifying -- and thank you for being an investor with us. Are you looking how you predict future growth and how that will translate? What are the predictors or?

[Unknown Shareholder]

Well, I'm just -- looking last year, the earnings per share was negative. In the last quarter, it was negative. And on some of the brokers' estimates are estimating just a tiny bit of profit for next year. So I was wondering, is that good or it's bad? And kind of would you expect earnings per share to start accelerating or would you think that I should focus more on EBITDA, which I'm always skeptical of since things do amortize and things do depreciate and taxes at some point need to be paid?

[Jennifer Twiner McCarron, CEO & Director]

Yes, it's a great question. I think that we're in great shape with our balance sheet going forward, and that the earnings per share should continue to progress along with the EBITDA and revenue and cash flow balance. So everything's going up.Barb, did you have anything to add to that as it relates to last year?

[Barb Harwood, Chief Financial Officer]

Yes. I think maybe the metrics that you should be focused on are the adjusted EBITDA and the free cash flow more than the income per share because now there's so many -- especially things like IFRS 16, I think, tend to skew the income per share. And so I would think that the free cash flow and adjusted EBITDA are better reflectors of our growth.

[Unknown Shareholder]

Okay. I'm more skeptical of that than other analysts, but you do the best you can.

[Jennifer Twiner McCarron, CEO & Director]

It's a great question. Well, I'm going to pay closer attention to that. So thank you for asking.

[Operator]

This concludes today's call. If you have any questions, please call [phone] or e-mail [e-mail] you. You may now disconnect.