Hemisphere Media Group Inc (HMTV) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcomes to the Hemisphere Media Group incorporated first quarter 2016 financial results conference call. My name is Kaley and I'll be your operator today. (Operator Instructions). A replay of this call will be available beginning approximately 12 PM Eastern time, May 6th, 2016 by dialing 855-859-2056 or from outside the United States by dialing 404-537-3406. The conference I.D. for the play is 132-0231. A recording of this call may be accessed at the Company's web site, www.hemisphereTV.com under the Investor Relations tab. To ask a question following today's prepared remarks, please press the star key and the number one on your touch-tone telephone. To withdraw your question, please press the pound key. I would now like to curb the call over to Mr. Josh Hochberg.

Good morning, everyone. I would like to welcome everybody to today's conference call. I'm Josh Hochberg I am with Sloan & Company, Hemisphere's outside Investor Relations firm. Joining me on the call today is Alan Sokol, Hemisphere's Chief Executive Officer and Craig Fischer, Hemisphere's Chief Financial Officer. Today's announcement and our comments may contain certain statements about Hemisphere, that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of Hemisphere 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 most recent annual report on Form 10-K and our other public filings. For a more complete discussion of forward-looking statements and the risk factors applicable to our Company. Forward-looking statements, included herein, are made as of the date hereof and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

During today's call, in addition to discussing results that a calculated in accordance with Generally Accepted Accounting Principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure, 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'll now turn the call over to Alan.

Thank you, Josh. Good morning and thank you all for joining us today. Our results in the first quarter represent a strong start to the year. But the first quarter net revenues were up by over 5% and adjusted EBITDA was up 4.4%. We achieved our first quarter financial goals and are affirming our full-year adjusted EBITDA guidance of low double digit growth. During the quarter, we continued to show the attractiveness and uniqueness of our business model. We drove significant retransmission of subscriber fee growth, our subscribers continue to grow organically in an environment of over contraction. We are seeing early results from last year's conversion of Cinelatino, to an add supported model and we continue to invest in our channels. Both in a compelling slate of programming, as well as in upgrading our networks on-air look to enhance our brands and ensure consistently strong viewership. Our overall US Hispanic tier subscriber base grew by more than 5% year-over-year first quarter. Proving yet again that we are uniquely positioned to connect to and grow with an under-served and under-penetrated audience. We have a long runway in front of us. Growth of Hispanic television households and expanded levels of pay-TV penetration create a significant continued opportunity for us.

In addition, we are optimistic that we will augment our organic subscriber growth with meaningful new launches over the course of the year. Let's now turn to our individual networks beginning with WAPA and what we're seeing in Puerto Rico. From a macro standpoint, the Puerto Rican TV ad market declined in the high single digits in the first quarter. We are encouraged that some form of acts from Congress should take place shortly, though like others in Puerto Rico, we would like Congress to act much more swiftly. Until we receive some clarity from Washington, uncertainty and anxiety will continue to affect the ad market. In the meantime, the economy is stagnant as many businesses remain in a wait and see mode and are delaying investment decisions until there's further visibility on policy.

We have seen the impact of this in up-front commitments being delayed or converted to scatter buying, but it's important to note that the economy, while soft, is hardly falling off a cliff. And once a clear plan of congressional action is approved, we're optimistic that confidence and accordingly spending will improve. There's been virtually no political spending to date, which is consistent with expectations. We still do not know the status of the availability of government matching funds. While WAPA's ad revenues declined in Q1, WAPA once again outperformed the overall market with its massive audience deliveries providing a major buffer against overall market conditions. WAPA again grew its share of the TV ad market, tying its all-time high set last quarter. Ratings at WAPA were nothing short of outstanding as we posted our highest rated quarter since the inception of Nielsen ratings on the island. Demonstrating our unrivaled position, WAPA's ratings in the key adult 18 to 49 demographic were higher than those of Univision and Telemundo combined in prime both prime time and total day. Fatmagul, our Turkish telenovela was recently concluded was a broadcast phenomenon.

It was the highest rated series in the history of Puerto Rican TV. And we are excited to build on that success later this year with Sila, another blockbuster Turkish drama series that has performed tremendously throughout Latin America. WAPA continues to benefit from robust retransmission fee growth and we do not see any reason for this growth to abate. With ratings that are higher than ABC, NBC, CBS and Fox, combined in the US, we are in a position of tremendous leverage with our distributors, and are the crown jewel in their channel's offering. Finally, we are very proud that WAPA's website wapa. TV, is now the number one most visited local website and number seven most visited website overall in Puerto Rico. Our cable networks continue to perform well in the first quarter. Cinelatino Latino had the highest coverage ratings for six of the top ten non-sports Spanish-language Cable programs in Q1, including the premiere of Pulling Strings, the number one rated program.

Advertising sales in Cinelatino Latino are moving ahead and we're looking forward to participating in our first up-front selling season. WAPA America is continuing to see growth in subscribers and revenues and delivering strong Nielsen ratings. In Q1, WAPA America was the highest-rated Hispanic cable network in the key part of weekdays, 5 PM until 7 PM. Pasiones is performing very nicely as well. Pasiones is benefiting from our investment of programming and marketing. According to Rentrak, the channel grew its total day audience by 32% year-over-year and the first quarter was the highest rated quarter since Rentrak began its measurement of the channel in 2012. We have just launched our first Turkish drama series on Pasiones and are confident new audiences will continue to discover our unique content offering.

Centroamerica TV also continues to perform well, growing its total-day audience 18% year-over-year. We launched our first co-production on CentroamericaTV in Q1, a daily reality series entitled Calle 7 and we are very excited about this opportunity. Finally, we continue to invest in programming Television Dominicana, launched several new series in Q1 and developing our on-air look. Centroamerica is our smallest network and it's not yet rated, but we are confident in our ability to continue to grow its audience, distribution, and ad sales. Latin America also continues to experience strong subscriber growth. In the first quarter, Pasiones grew subscribers by more than 19% year-over-year and Cinelatino's subscriber base increased by 14%. We continue to actively explore options to make our content available to consumers through over-the-top and other emerging digital platforms, and given the appeal of our content and the 35 million plus Hispanics who do not receive our channels today, we believe that this represents an important secular growth opportunity.

On the acquisition front, we continue to be very active in the market as we explore a variety of opportunities. We are disappointed that we have not consummated any acquisitions recently, but we are excited by the pipeline of opportunities we are exploring and we are optimistic that we will consummate one or more transactions in the near term. In conclusion, our businesses performed well in the first quarter and we are reaffirming our full-year guidance. More importantly, we are executing our plans to invest in and grow our businesses with strong results to date and a great foundation for future organic and strategic growth.

With that, I'll turn the call over to Craig. Thank you.

Thank you, Alan. And good morning, everyone. Net revenues for the quarter were $31 million an increase of 5.1% the increase was primarily driven by continued robust growth in subscriber and retransmission fees due to subscriber growth and rate increases. In addition, we experienced growth in advertising revenue at our US cable networks. Net revenue growth was impacted by decline in advertising revenue at WAPA, due to the contraction of Puerto Rico advertising market. The comparison of the ad markets in the prior-year period was also negatively impacted by the Easter holiday falling in March this year, as compared with April in 2015. The impact of the decline in the ad market was mitigated in part by growth in WAPA's share of the market, which was driven by record ratings.

While the vast majority of our revenue is sourced from the US, we do have some distribution deals priced in foreign currency, which were affected by the appreciation of the US dollar, excluding foreign currency affects, our revenue growth was 5.4% in the quarter. Subscriber and retransmission fees represented approximately 58% of our revenue in the quarter, up from 55% last year in Q1. We expect a full year to be closer to a 50/50 mix, as our advertising and total revenues historically have been seasonally lowest in the first quarter and highest in the fourth quarter and our expected to be even more so this year. Operating expenses were $23.8 million in the quarter, an increase of 6.2%. The increase was driven primarily by increased investment in programming and higher sales and marketing costs, consistent with our efforts to drive advertising sales across our networks including the launch of advertising on Cinelatino. Adjusted EBITDA was $13.3 million, an increase of 4.4%.

Excluding foreign currency effects, our adjusted EBITDA growth was 5.1% in the quarter. Turning to the balance sheet, during the quarter we made an $8.3 million mandatory principle payment on our term loan, as a result of the excess cash flow generated in the prior calendar year. The principle payment will be allocated in direct order of maturity, and as a result, we will not be required to make scheduled loan amortization payments for the next several quarters. As of March 31, 2016 we had approximately $212 million in debt and $170 million of cash on hand. Our leverage ratio is approximately 3.6 times and net leverage ratio was approximately 0.7 times. During the quarter, we were able to clean up our capital structure, repurchasing 975,000 warrants for a total cost of $1 million. There are now 12.3 million warrants outstanding convertible into 6.1 million common shares.

Additionally, we repurchased 100,000 common shares for a total cost of $1.3 million in the quarter. Our capital allocation priorities remain investing in organic growth and to grow through acquisitions both in the US and Latin America. This was a solid quarter delivering on our expectations, and as Alan noted, we affirm our full year guidance of low double digit EBITDA growth. With that, let's open the call to your questions.

Thank you. Our first question comes from the line of Ben Mogil with Stifel Nicolaus. Your line is open.

Hi, good morning. And thanks for letting me on. In terms of questions, so I just want to make sure I got everything right. For WAPA and Puerto Rico, the ad market was obviously down high single digits. Your ad revenue was actually down as well, is that correct?

Yes. We were down, but down less than the market was down. We outperformed the market by virtue of continuing to grow our share of the market.

When you take ad revenue at WAPA and add in affiliate, was your actual combined revenue, do you think year-over-year up, down or flat?

Well, when we look at WAPA, we also have WAPA America in there as well. But, yes. And with growth in retrans fees the answer is yes, revenue is up.

Okay. And even if you were to strip out WAPA America and sort of allocate the retrans fee portion just to the Puerto Rican one, were you probably still up or flattish?

Yes.

Okay. That's great. Okay. And a broader question. We've seen obviously a lot of a number of (inaudible) consolidations, one approved, actually both have been approved. Some of your peers have really noted they've either seen disruption in terms of subs not moving over and that's been more of an AT&T, DirectTV issue or they've just seen more disruption in terms of any kind of marketing momentum with a merger, this gets put aside on that front. Are you guys seeing either of these things in general and maybe talk about, you know, when you look at the acquirers versus the targets, is there a big disparity in terms of penetration and sort of working with you or -- not working with you, sort of your thoughts around M&A from the MBPD side?

I think there's two parts to the question. You have to look at each transaction kind of on its own. On -- in terms of the charter, Time Warner transaction, we're actually very optimistic about the effect of that deal, the affect that deal will have on us. Time Warner essentially has had, you know, an out-of-business sign for the last three years, while they've been in merger -- the merger discussions or merger process with Comcast and then Charter. So we think once the Charter deal is done and they're back in business, it will be good for us. And we think Charter will be much more aggressive in their approach to the Hispanic subscriber and Hispanic customer, based on discussions that we've had with them historically. Given the fact that Time Warner has the two best Hispanic markets in the US, we view that as an opportunity. In terms of the AT&T, DirectTV merger it has not had any kind of significant impact on us. I think as you, you know, heard from other programmers, it appears that, you know, the emphasis on television is shifting from AT&T to DirectTV and there may be some temporary displacement as subscribers move from AT&T to DirectTV. But it has not been anything material for us.

And on Charter, right now does Charter have a better penetration rate with you than say Time Warner does, given the fact that, you know, Time Warner obviously has a much bigger market opportunity. When you look at sort of relatively speaking number of Hispanic households in each of their various footprints do you find that Charter has a much bigger reach?

It's really apples and oranges. Because charter's footprint has very low Hispanic penetration, very few heavy Hispanic markets, other than the portion of Southern California that they have. So they have really not been a Hispanic-focused company to date, because their markets really don't align with the Hispanic customer base. But, you know, we've had a number of conversations with them in the past and recently about their strategy toward Hispanics. And our belief is they view Hispanic as a big upside opportunity for them, given Time Warner's relatively low penetration of Hispanics into key markets. They have got New York and L.A. and Dallas. You know, three -- the number one, two and another top ten market. And very low and stagnant penetration in those markets.

Okay. That's great. Thank you. And then lastly, I think you sort of touched on there was obviously no M&A consummated in the quarter. Are you seeing -- I mean, obviously there's lots of facets to M&A. Is price the issue that you're seeing? Is it seller -- is there not a lot of supply in the market, curious of what you're seeing on that front?

I mean, we're -- I think our disappointment is that it's not a function of any of those things. Because if there is a good amount of deal flow and a good pipeline in the market, it's just that more than anything else, it's just the processes have been more painstaking than we anticipated. And largely because we're dealing in many cases with sellers that are not advised by institutional banks and, as a result, the process and the effort is just more protracted and slower and more painstaking than it otherwise might be. But we think there's -- our optimism and our view of the opportunities hasn't changed and we think especially now with a strong dollar, relative to some of the Latin America currencies, opportunities may even be better than they've been in the past.

That's great. Alan, thanks. Thanks again.

Thank you. (Operator Instructions.) Our next question comes from the line of Steven Cahall with Royal Bank of Canada. Your line is open.

Thank you. Good morning. Maybe first question on the Puerto Rico advertising market. How would you put the current state of affairs in terms of --in line with your expectations or better or worse and as we think of the balance through the year and any sort of risk and opportunities, let's say vis-a-vis your adjusted EBITDA guidance, is this pretty much bad but still according to plan or is there any incremental weakness?

I think it's more or less according to plan. I mean, if you recall last year's first quarter was not a good quarter either. And the end of the year wound up coming in generally in line with where we projected to, which was low to mid-single digit decline and we're projecting the same this year. Too early at this point to have any definitive view. Because the third and fourth quarter are larger relatively speaking in terms of the impact than the first quarter. So the first quarter was obviously not a particularly strong quarter in the market. You know, is soft. But it's generally in line where we believed it would be, not materially worse.

And then maybe secondly, you mentioned OTT and exploring an option in the 35 million households, that's sort of your addressable market. So how should we think about how aggressive you want to be on timing with a potential OTT product and is that product, at the very least something that gives you incremental leverage when you negotiate with NVPD.

We're looking at a number of opportunities. It's a little premature for us to tell you timing or give you any further descriptions. Possibly by our next quarterly call we might have some more information for you that we'd feel comfortable dishing out. But I think we feel good that there are opportunities out there for us to take advantage of the Hispanic consumer that has never subscribed to any pay-TV service before. We're not talking about cannibalizing existing customers, we're talking about reaching customers that don't have pay-TV, that never have and never will have pay-TV. So we think it's, you know, relative to our general market counterparts, potentially more incremental opportunity as opposed to just a salvage opportunity. And we're looking at some things that we find very interesting for us. And, you know, and exciting in terms of reaching the new audience.

And then maybe just a couple for Craig. First, it looked like maybe free cash flow was a little weaker year-on-year. Can you give us any idea if there was a working capital swing and how we think about free cash flow for the balance of the year? And also can you give us any indication as to what your pricing has been on retransmission fees or specifically what sort of maybe pricing growth you're seeing on retrains? Thank you.

Sure. On the working capital, historically the first quarter is our weakest cash-generating quarter. This is due primarily to the fact that we pay out agency commission bonuses in Puerto Rico on March 31st of every year. So we typically see a working capital hit from that in the first quarter. Now, of course, we had that last year as well but since we had grown advertising revenue in Puerto Rico last year, those payout were higher this year than they were last year. In addition to that, we made the $8.3 million principle payment that I had noted earlier, as a result of the excess cash flow that were generated. This was the first year that we had that payment. We didn't have it last year. Last year we had only made our quarterly loan amortization, that was about $600,000 as compared to $8.3 million we made this quarter.

Additionally, as I noted, we bought back warrants and common stock in the quarter to the tune of about $2.3 million and then CapEx was about $1 million higher this quarter than it was prior years' quarter and that's just timing. We still expect CapEx to come in around the same level as where we finished up the full year last year. And then just the outlook for the year, you know, look we generate cash flow every single quarter. We expect that trend to continue going forward. On the retransmission question, as we discussed in the past, we have double digit increases in our contracts, annual escalators in our contracts. We have seen historically upon renewal of retransmission agreements that the step-up was significantly higher than what we have contractually earned on our annual escalators. I think that's been reflected in our numbers for the quarter.

And do you have much coming up in terms of renewal?

We don't really comment on the timing of our renewals. They're all staggered. We typically keep our retrans deals short-term in nature, given the historic success we've had upon renewals. So, you know, from that you can take away that regularly we're coming up for renewals in Puerto Rico for the retrans deals.

Great. Thank you very much.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.