Hemisphere Media Group Inc (HMTV) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc., Third Quarter 2013 Financial Results Conference Call. My name is Julianne and I'll be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now I'd like to hand the call over to Mr. Craig Fischer, Chief Financial Officer. Please proceed, sir.

Thank you, Julianne, and good morning to everyone. I would like to welcome everybody to today's conference call. Joining me is Alan Sokol, Chief Executive Officer of Hemisphere Media Group.

A replay of the call will be available beginning at approximately noon Eastern time November 13, by dialing 888-286-8010 or, from outside the United States by dialing 617-801-6888. The conference ID for the replay is 61398608, and a recording of this call may be accessed through our website, www.hemispheretv.com.

Before we begin our discussion, I would like to say a few words about forward looking statements. Today's announcement and our comments may contain certain statements about Hemisphere that are forward looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995.

These statements are based on the current expectations of the management of the company and are subject to uncertainty and changes in circumstance which may cause actual results to differ materially from those expressed or implied in such forward looking statements.

In addition, these statements are based on a number of assumptions that are subject to change. Please refer to our company's registration statement on form S-4 as subsequently amended and our other public filings for a more complete discussion of forward looking statements and the risk factors applicable to our company.

If one or more of these factors materialize or if any underlying assumptions prove incorrect, the company's actual results, performance, or achievements may vary materially from any future results, performance, or achievements expressed or implied by these forward looking statements.

Forward looking statements included herein are made as of the date hereof and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

During today's call, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we will refer to EBITDA and adjusted EBITDA which are non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier today. Management believes that this non-GAAP information is important to investors' understanding of our business.

I will now turn the call over to Alan Sokol.

Thank you, Craig. Good morning, everyone, and thank you for joining us. For those of you who may be unfamiliar with our company, Hemisphere was formed on April 4th, 2013, with the closing of a series of mergers pursuant to which WAPA, Cinelatino, and Azteca Acquisition Corporation, a special purpose acquisition company, each became indirect wholly-owned subsidiaries of Hemisphere.

As we mentioned last quarter, we have refinanced our debt and now have approximately $173 million to fund our acquisition strategy. We are actively pursuing transactions that meet our growth objectives and are a strategic fit with our current operations. We are confident that we will identify compelling acquisition opportunities in the near term.

We are very pleased with our third quarter performance. Regarding our individual businesses, Cinelatino continues its market leading performance. In fact, during the third quarter Cinelatino grew from number two to become the top Nielsen Ratings Hispanic cable channel in the US, in both household viewing and viewing among adults 18 to 49.

Cinelatino has begun to air the first batch of its original movies that have resulted from several low cost co-production arrangements entered into this year. These movies have all performed extremely well and provide Cinelatino with a pipeline of exclusive original high quality content.

WAPA America continues to grow its subscriber base and subscriber fee revenues, taking advantage of its strong position as the news and entertainment destination for Puerto Ricans and other Caribbean Hispanics living in the US

We were excited to announced this quarter that we have hired Nick Valls as Executive Vice President of Advertising Sales. Nick comes to us from Univision and brings 26 years of broadcast and multi-platform sales experience. With Nick, we have a world-class ad sales executive who we are confident will drive sales at all of our networks and who has the qualities and experience to lead us as we expand our portfolio.

WAPA TV delivered strong ratings during the third quarter, in fact, growing its ratings from Q2 and expanding its already sizable ratings lead over both Univision and Telemundo. WAPA's rating success has helped drive strong retransmission fee growth, and we expect continued robust growth as we renew our retransmission agreement.

Among the highlights for Q3 is the continued emergence of our new 6.00 p.m. daily series, Lo Se Todo, as a major hit. In the most recent monthly Nielsen ratings ranker, after only nine months on the air Lo Se Todo ranked as the top-rated daily show in Puerto Rico.

As you probably recall, Lo Se Todo replaced a popular long-running series SuperXclusivo. While our revenue in 2013 has been affected by the loss of SuperXclusivo, with the strongest ratings performance of Lo Se Todo we are confident that we will see significant revenue growth going forward while also benefiting from much lower production costs.

Puerto Rico's debt burdens and economic challenges have a received a great deal of press recently. We believe that the Puerto Rico government is making difficult decisions and taking steps necessary to save a lot of the economy. In spite of these challenges, for the first nine months of the year, television ad spending in Puerto Rico grew versus prior year. For the full year, given the uncertainty around Puerto Rico's economy, we are forecasting that the Puerto Rico television advertising market will finish flat with last year.

WAPA's rating success, as well as its growth in retransmission and subscriber fees among all of our networks, largely temper the impact of a less robust advertising market in Puerto Rico. However, given the outsize importance of fourth quarter for television advertising, we believe that a flat ad market in Puerto Rico could impact Hemisphere's full year of forecasted EBITDA by approximately five to seven%.

It's important to note that for the full year, we expect that EBITDA will finish solidly ahead of 2012, excluding political, and notwithstanding the incremental public company costs we incurred this year, and the choppy Puerto Rico business environment. This bodes well for our future, as all of our businesses are performing at extremely high levels, and are poised to achieve our planned growth.

Our aggressive strategy with WAPA has been very successful for us. None of the current challenges affecting Puerto Rico changed our strategy or long term plans for WAPA. We have made WAPA a market leader and have been able to dramatically grow revenue and EBITDA over the year by investing in programming, production, and digital media. We view the current economic situation as an opportunity to expand our leadership position and leverage our assets to develop new high-growth business lines and better the opportunities.

With that, I will now turn the call back over to Craig to discuss our financials.

Thank you, Alan. As we mentioned in the release, WAPA is the accounting acquirer and predecessor for the transaction that formed Hemisphere. And therefore, WAPA's historical results have become the historical results of Hemisphere as of the date of the transaction. The operating results presented reflect the operating results of all the businesses acquired in the transaction since the merger date.

Net revenue for the three months ended September 30th, 2013, was $23.7 million, an increase of 35% compared to net revenue of $17.5 million for the same period in 2012. Net revenue for the nine months ended September 30th, 2013, was $60.1 million, an increase of 35% compared to net revenue of $48.3 million for the same period in 2012. This increase in revenue is primarily a result of the inclusion of a net revenue Cinelatino since the date of the merger.

Excluding the acquisition in the 2013 period, and political advertising revenue in the 2012 period, for the three and nine months ended September 30th, 2013, net revenues increased by $0.5 million or three%, and $0.3 million or one%, respectively.

The increase in revenue for the current quarter was due to a 15% increase in retransmission and subscriber fees, and a one% increase in advertising revenue despite the cancellation earlier this year of one of Puerto Rico's top rated television programs, SuperXclusivo. The increase in revenue for the nine-month period was due to a 15% increase retransmission and subscriber fees, offset in part by a three% decline in advertising revenue as a result of the cancellation of SuperXclusivo.

Operating expenses were $19.6 million for the three months ended September 30th, 2013, an increase of 41% from operating expenses of $13.9 million in the year-ago quarter. Operating expenses were $56.5 million for the nine months ended September 30th, 2013, an increase of 55% from operating expenses of $36.4 million in the year-ago period.

The increase in operating expenses was due to the inclusion in the current quarter of Cinelatino in the operating results since the consummation of the transaction, offset in part by lower programming costs at WAPA due primarily to the cancellation of SuperXclusivo.

Net loss from continuing operations was $4 million for the three months ended September 30th, 2013, a decrease of $4.9 million compared to net income of $0.9 million for the same period of 2012. And net loss was $6.4 million for the nine months ended September 30th, 2013, a decrease of $10.9 million compared to net income of $4.5 million for the same period in 2012.

Adjusted EBITDA was $8.8 million for the three months ended September 30th, 2013, an increase of $4 million, or 85%, as compared to the year-ago quarter. Adjusted EBITDA was $23.5 million for the nine months ended September 30th, 2013, an increase of $7.9 million, or 51%, as compared to the same period in 2012.

As we have disclosed in our quarterly report, 2012 periods and the first quarter of 2013 reflect the operating results of WAPA only, whereas the second and third quarters of 2013 reflect the operating results of the consolidated businesses.

We have previously disclosed adjusted EBITDA for each of WAPA and Cinelatino for the nine months ended September 30th, 2012, which, when aggregated, total $25.5 million. Assuming Cinelatino was acquired on January 1, 2013, adjusted EBITDA for the nine months ended September 30th, 2013, was $27.8 million, an increase of $2.3 million, or 9.1%, as compared to the same period in 2012.

This increase is inclusive of political revenue in 2012's EBITDA, and is inclusive of public company costs and corporate overhead since the merger dates in 2013 EBITDA. While we experienced growth in advertising revenue in the third quarter as compared to the corresponding 2012 quarter, as Alan mentioned previously, we are being cautious about our full year guidance given the uncertain economic climate in Puerto Rico.

Advertising revenue is seasonally high in the fourth quarter due to the holiday season and has historically generated nearly one-third of our advertising revenue each year. Our previously provided guidance of adjusted EBITDA of $41 million for the full year 2013 could be impacted by approximately five to seven%.

During the quarter, we closed a $175 million term loan which, after paying off all existing indebtedness, fees, and expenses, yielded net proceeds of approximately $85 million. As of September 30th, 2013, we have approximately $173 million to pursue strategic acquisitions. We continue to pursue acquisitions which will further expand our revenue and earnings base.

This concludes our prepared remarks. Operator, will you please instruct our guests how to ask questions? Thank you.

Thank you, ladies and gentlemen. (Operator Instructions). Your first question comes from the line of John Tinker, Maxim. Please proceed.

Hi. Thank you. I'm -- the -- could you just talk a little more about the guidance for this year, given that we are nearly half-way through the fourth quarter? And where you see the, sort of, sensitivities? Is it one particular group on the advertising side, or is it just -- or is it a general cutback?

I think -- good morning, John. How are you? It's Alan.

Hi, Alan.

You know, I think generally there is caution among marketers in Puerto Rico because of the economic uncertainties. And they're still spending, just not at the level that we had projected. So that's the genesis of our caution regarding our fourth quarter performance and our fourth quarter EBITDA number. It's just that we're still, you know, seeing uncertainty and a little choppiness in the market, frankly, even on a week-to-week basis.

And, you know, the rest of December and November, going through the holiday season, is a, you know, a big part of the fourth quarter spend. So we don't have total visibility on the early end of the year.

Okay. You mentioned that -- that the ratings are up on Cinelatino. That was their number one rated. Can you give some sense as to how you're thinking about the timing of adding advertising to that service?

Yes, I think we're still thinking the same timing that we have had in past quarters which is two -- it will be a 2014 event, that we will start advertising on Cinelatino. We may not get into being able to take advantage of the full year and the upfront until 2015, but we plan to start advertising next year.

Okay. And how -- have you started [trolling] with the cable operators yet about the switch of plans?

Yes, we've made good progress on that front. And we feel good about being able to get that done.

Okay. And finally, you touched the -- sort of, the 170 plus of cash you have in deals. How -- obviously you can't go into any details, but could -- how would you describe the deal market at the moment?

We are, you know, actively pursuing deals. And we feel confident that we'll get, you know, one or more deals done in the near term. You know, it's hard to predict with exactitude whether it's this month or next month, but it will be -- we believe we'll get a deal done, you know, relatively soon.

Thanks.

Thanks, John.

Thank you, sir. You have no questions at this time. (Operator Instructions). Your next question comes from the line of Aaron Watts, Deutsche Bank. Please proceed.

Good morning, guys.

Good morning.

A couple of housekeeping questions from me. Craig, could you remind me what the political revenue was last year that you were backing out to get to that three% number?

Yes, well, we -- what we've always disclosed historically was the full amount of EBITDA impact from political revenue of approximately $5 million. And that's net after commissions. So if you apply commission rates to that, you'll get something in the order of $6 million of revenue for the full year, which was predominantly placed between Q3 and Q4.

Okay. Okay. So $6 million's a full year number.

Yes.

Okay. Got it. And as you think about -- you gave us kind of a same story, apples to apples comparison on those revenues, and I'm sorry if I missed this but, what was, kind of the right number to use to compare to the $8.8 million of EBITDA you generated in the third quarter this year? What was, I guess, the third quarter last year?

We -- (inaudible) the $8.8 of -- you're talking about for the three months. We --

Yes.

-- we've -- well, the reason why we were able to give you some guidance on the nine months on an apples to apples basis, because that's what was actually publicly disclosed on our S-4 in January. But it was only three months -- I'm sorry, nine month disclosures, not three months.

Okay. All right. Got it. And I guess --

(Inaudible)

-- bigger picture, Alan, I mean, you saw what kind of happened in the US a few years back when the economy slowed down and how that impacted advertising and notably in the TV world. What kind of gives you confidence that in Puerto Rico things are coming to a somewhat stable point, and maybe you can see a turnaround, or what makes you think it's going to be a little bit different than what we saw in the US a few years ago?

Well, I think, you know, Puerto Rico has -- you know, saw the same things as the US did a few years ago. It was -- you know, the Puerto Rico experience, frankly, was probably more adverse than the US experience, you know, since the year 2007.

And we lived through that and we know the market very well, know where the pressure points are and understand how to deal with -- how to deal in that market. So, you know, Puerto Rico's had bumps in the road along the way. This is a bump in the road that we're dealing with. I think that there is, you know, anxiety and uncertainty among marketers waiting to see where things shake out.

You know, so ball -- you know, I think once marketers have some clarity that the crisis is past, I think that they will come back in to the market in a normalized way. And that's what we're believing will be the case.

Okay. Got it. And last question from me. The growth in your subscriber fees and retransmission fees, is that something that you expect which is a trend that we can kind of count on for the next few quarters? Or is it going to be more lumpy? How should we think about that?

The answer's a little bit of both. It gets lumpy as we end up renewing deals as they expire, particularly on our retransmission side where we've had historically higher resets than the annual escalators in our contracts. So I think it will continue to be lumpy in the future.

(Inaudible.) And can you just (inaudible) any big deals coming up that would move the needle materially on that?

Not for the next handful of quarters.

Okay. All right. Thank you.

I think within the next few quarters you should see pretty, you know, consistent growth. Towards the end of next year it -- you know, we hopefully will have, you know, some spice.

Okay. Great. Thanks for taking the question.

Thank you. Our next question comes from the line of Jonathan Brolin, Edenbrook Capital. Please proceed.

Hi. Good morning. Could you please give us an update on your expectations for increasing Cinelatino's presence in Latin America, and with operators down there?

Uh, yes. We are aggressively going after operators down there. We are having discussions -- in discussions with several major operators. We're actually on a test basis in -- on several significant systems in Latin America and hopefully that will -- those will turn into real deals.

I mean, it's very tradition -- typical in Latin America. They will test your signal, and see the response to it before they actually commit. And so -- but, you know, it's a hurdle just getting them to test you. And we've -- we're on a test basis on several systems down there, and in negotiations on other.

And so if you look at the opportunities there, how much of it is -- would you characterize as expansion into new systems as opposed to getting additional space with either operators or owners, system owners, with whom you already have relationships, as opposed to brand new relationships?

This is primarily new relationships.

Okay. Great. Thanks.

Thank you. Sir, you have no questions at this time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.