Hemisphere Media Group Inc (HMTV) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. fourth-quarter and full-year 2016 financial results conference call. My name is Skylar, and I will be your operator today.

(Operator Instructions)

A replay of the call will be available beginning at approximately 1:00 PM Eastern Time today, by dialing 855-859-2056, or from outside the United States by dialing 404-537-3406. The conference ID for the replay is 73154660.

(Operator Instructions)

I would now like to turn the call over to Ms. Erica Bartsch.

Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Erica Bartsch and I am with Sloane & 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 US 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 Company's 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 applied 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 are 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 will now turn the call over to Alan.

Thank you, Erica. We are very pleased with the performance of our business, both in the fourth quarter and for the full year. In the fourth quarter, net revenues were up 9% and adjusted EBITDA increased by a robust 21%. For the full year, net revenues were up 7% and adjusted EBITDA was up by 11%, consistent with our full-year guidance of low double-digit growth.

Our strong fourth-quarter results were driven by continued robust retransmission fee growth, solid US organic subscriber increases, and important new MVPD launches in the US and Latin America. For the full year, our US Hispanic share subscribers increased by 5%, and our Latin American subscribers increased by an impressive 30%. This growth stands in sharp contrast to the subscriber losses experienced by general market networks, and highlights our unique growth paradigm.

Distribution wins in the fourth quarter include the launch of both Cinelatino and Pasiones on Megacable in Mexico, covering a significant portion of their 3 million subscribers. Importantly, WAPA America, Television Dominicana, and Centroamerica TV were added to Charter Cable's new national Hispanic programming package in Q4, which we expect will result in significant subscriber growth over time. These important new distribution gains come on the heels of our third-quarter launches of WAPA America and Pasiones in Cox Cable's largest markets. Collectively, these distribution successes in 2016 helped drive our growth, and will result in significant revenue going forward.

Before we discuss performance at our individual networks, I would like to provide an update on two important strategic initiatives which we announced in the fourth quarter. First, our joint venture for Canal Uno in Colombia. Canal Uno is one of only three national broadcasters in Colombia. This is a unique and exceptional opportunity to access the number two ad market in Spanish-speaking South America.

There are very few, if any, markets in the world as large as Colombia, which have only two incumbent national broadcasters. By capitalizing on our proven expertise, and the production infrastructure and capability of our partners, we are extremely well positioned to carve out a meaningful share of a large and lucrative market, and to turn this venture into an important and valuable asset. The venture will be assuming control of the network on May 1.

Second, we're rapidly progressing toward the launch of our recently announced Spanish-language subscription movie service, in partnership with Lionsgate. We are planning the official launch for the second quarter. With our collective libraries, production resources, and expertise, and our marketing and distribution alliance with Univision, we are confident that we will build the definitive streaming service for the millions of Hispanic movie lovers in the US. There is nothing like this product in the market, and we believe there is a large and passionate audience for this content.

Let's now turn to the performance of our networks, beginning with WAPA, which once again delivered a very strong quarter in the face of ongoing economic challenges. WAPA achieved an all-time high in its share of ad revenue in Q4, once again driven by WAPA's All-Star programming lineup. WAPA, in fact, was the only network in Puerto Rico to increase its total day household, and adult-18-to-49 ratings from Q3 to Q4.

The advertising environment in Q4 continued to be weak. For the full year, the ad market was down mid-single digits, excluding political, and low-single digits when including political. These results, both excluding and including political, were below our expectations. Nonetheless, WAPA once again significantly outperformed the market, in fact growing its ad revenue in Q4 year over year, when including political.

Political spending for both the fourth quarter and the full year was at historically low levels. The fall off in political spending from 2012 to 2016 represented several million dollars of lost revenue to WAPA. Notwithstanding the weak economy, our retransmission revenues provided us with strong growth in 2016, and we anticipate continued robust growth in 2017 and beyond.

Regarding the Puerto Rican economy, the new administration of Governor Rossello has begun to enact legislation to reduce spending and create efficiencies. We are encouraged by the governor's early efforts to enact legislation to improve Puerto Rico's competitive position, including much-needed labor reform. The PROMESA Board is working with the administration to deliver a five-year fiscal plan.

We believe that reductions in government spending will be difficult, but are necessary to restore the fiscal health of Puerto Rico. We are optimistic that these measures will result in restoration of economic growth over time. Given these circumstances, however, we are forecasting a decline in the Puerto Rico TV ad market of mid-single digits for 2017, excluding political. Nonetheless, WAPA's dominant market position and continued strong retransmission revenue growth should allow us to once again outperform the market.

Our cable networks continued to perform well, with solid revenue growth in the fourth quarter. In Q4, Cinelatino continued to be the number-two Nielsen-rated Spanish-language cable network in both households and adults 18 to 49. And 2017 is off to a strong start, with January primetime ratings among adults 18 to 49 hitting a three-year high.

Although we are generating meaningful advertising revenue for Cinelatino, our growth has been slower than planned. This is a result of several factors, including overall softness in the US TV ad market, the absorption of most independent Hispanic ad agencies by large general market agencies who are less familiar with Hispanic cable networks, and Cinelatino's lack of a long-term Nielsen ratings track record. These challenges have slowed our growth, but we are confident in our value proposition, and remain bullish that we will generate strong growth over the coming years.

It's also important to note that Cinelatino and its library of over 600 titles gives us tremendous flexibility to offer content on various platforms, creating new revenue streams. Our OTT venture with Lionsgate is driven by our control of digital rights to the vast majority of our titles, which we believe will facilitate creation of an asset with substantial value.

WAPA America continues to dominate viewing among Puerto Ricans living in the US, with 29 of the 30 highest-rated Spanish-language cable shows in Q4 among US Puerto Ricans. However, WAPA America's appeal is not just limited to Puerto Ricans. WAPA America had the highest coverage ratings among all Spanish-language cable networks, from 6:00 AM to 10:00 AM and 5:00 PM to 7:00 PM, Monday through Friday.

Pasiones also continues to perform well, with its mix of the most popular dramas from throughout the world. The introduction of Turkish novelas in Pasiones has been a resounding success. Our most recent Turkish novela, Sila, is our highest-rated novela ever, and helped drive Pasiones to the highest-rated quarter in its history, according to comScore.

Centroamerica TV continues to be the destination for the 6 million Central Americans living in the US to find the best news, sports, and entertainment from the region. We will be introducing a new on-air look shortly, which we believe will provide the network with a fresh, current, and relevant look and feel.

Finally, Television Dominicana is now rated by comScore, and has seen some impressive results. For example, Television Dominicana is a top-four rated Spanish-language cable network, from 12:00 PM to 4:00 PM, Monday through Friday.

In conclusion, our networks continue to perform very well, and we demonstrated solid revenue growth, notwithstanding the headwinds we are facing in Puerto Rico. We're confident that we will continue our growth as we move into 2017. We are extremely excited by the opportunities offered by our new Colombia and OTT ventures.

We love the growth opportunity which Colombia presents, and are optimistic about closing other attractive transactions in 2017. We believe that no one is better positioned to capture opportunities in US Hispanic and Latin American media than Hemisphere. I'll now turn the call over to Craig. Thank you.

Thank you, Alan, and good morning, everyone. Net revenues were $39.4 million for the quarter, an increase of $3.2 million, or 9%, as compared to $36.2 million for the same period in 2015. For the year, net revenues were $138.5 million, an increase of $8.7 million, or 7%, as compared to $129.8 million for the same period in 2015. The increases for both the 3- and 12-month periods were due to growth in subscriber and retransmission fees, and growth in advertising revenue.

As anticipated, political advertising in Q4 increased over Q3, as we neared election day, though political revenue for the full-year 2016 was significantly lower than both our expectations and the 2012 election year. Excluding political advertising revenue, net revenues in the 3- and 12-month periods increased by 4% and 5%, respectively.

Subscriber and retransmission fees represented approximately 53% of our revenues in 2016, up from 51% in the same period in 2015, due to growth in subscribers and rate increases, as well as significant fee increases in our retransmission deals. We view these developments as very positive, as these revenue streams are contractual, and not subject to the cyclical nature of the ad market.

Operating expenses were $26.8 million in the fourth quarter, an increase of 7% over the prior-year period. Operating expenses were $98.5 million for the full year, an increase of 4% over the prior year. These increases were driven primarily by higher personnel expenses and higher legal and advisory fees incurred in connection with strategic activities. Additionally, operating expenses in the fourth quarter increased due to higher stock-based compensation in connection with grants made during the quarter, offset by lower programming costs related to the timing of certain programming, including Miss Universe and Miss Puerto Rico, which were held in 2015, but not in 2016.

Adjusted EBITDA was $20.4 million in the fourth quarter, an increase of 21%, as compared to adjusted EBITDA of $16.9 million for the same period in 2015. Adjusted EBITDA was $64.3 million for the full year, an increase of 11%, as compared to adjusted EBITDA of $58.1 million in the prior year. We are pleased that we delivered on our full-year adjusted EBITDA guidance, despite the historically weak political spend in Puerto Rico.

Turning to the balance sheet, we had $213.3 million in debt and $163.1 million of cash as of December 31, 2016. Our leverage ratio was 3.3 times, and net leverage ratio was 0.8 times. Last month, we announced the successful amendment and extension of our existing term loan. We are very pleased with the terms of the amendment. Pricing on the amended term loan facility is now LIBOR plus 350 basis points, decreasing the spread to LIBOR from the previous facility by 50 basis points, and eliminating the previous LIBOR floor of 1%.

We also extended the maturity date of the term loan from July 2020 to February 2024. With regard to guidance for full-year 2017, we're guiding to a mid-to-high single-digit increase in adjusted EBITDA, which implies an acceleration of our core business. While we still have headwinds that are dampening our organic growth, including weakness in the television and advertising market in Puerto Rico, and slower-than-anticipated ramp-up in advertising sales at Cinelatino, our business is performing very well, and we expect to see continued growth in subscriber and retransmission fees, and advertising revenue.

Comparisons to 2016 exclude the impact of political revenue, and the forecast does not include our attributable interest in the operating results of both the OTT joint venture with Lionsgate, and the Canal Uno joint venture. With that, let's open the call to your questions.

(Operator Instructions)

Steven Cahall, Royal Bank of Canada.

A few for me. Maybe first, with Puerto Rico advertising and political in particular coming in weaker than you expected in 2016, but still achieving your guidance, can you talk about what maybe some of the levers that you were able to pull in order to achieve the guidance?

And as we then roll forward to thinking about 2017, where you called out some of the revenue weaknesses, what is it that you're seeing in the budget for the year? Is it retrans? Is it subscriber growth that give you confidence, because I think you do have an acceleration in adjusted EBITDA on a like-for-like basis.

Regarding 2016, I think you hit the nail on the had. I think that both the core advertising market in Puerto Rico and in particular political were down -- did not perform as well as we had originally expected, or were weaker than we had originally expected. That's also part of the reason for our conservative guidance going forward for this year, given the lack of visibility and the weakness that we've seen in the market over the past couple of years.

That said, our businesses are all humming on all cylinders. And if we had any -- forget about tailwind, if we just had no winds in Puerto Rico, we would be crushing it. But we are performing extremely well on the retransmission fee side. On the subscriber fee side in the US and Latin America, we've seen some really strong growth, and that has driven our outperformance, relative to the relatively poor advertising environment in Puerto Rico.

And we see the same trends happening in 2017. We've had some nice growth and some nice launches and pick ups in subscribers in the US and Latin America, which will represent meaningful revenue position, we'll have full-year revenue for that this year. And we also expect advertising in the US to continue to perform well. And although Cinelatino has not grown the way we originally planned, we still expect to see a nice pickup this year.

And just relatedly, in terms of overall affiliate revenue, maybe first, do you expect retrans revenue to accelerate year on year, in terms of either the incremental dollars or the growth rate in 2017 versus 2016? And then relatedly on the Charter deal, can you let us know how many subs you think that you've added by getting on the basic tier of Charter? I know that's been a long time coming with Time Warner Cable, and did we see that in the numbers in Q4, or is that really going to be more of a 2017 impact on reported sub growth?

Regarding retrans, we've never specifically addressed rates of growth in that, but I will say, just directionally, the growth will be very strong in 2017, and we anticipate that to continue going forward. We think 2018 will also have significant retransmission fee growth. And if you recall, our deals are all short-term and all staggered, so we typically are dealing with at least one renewal a year, and every time we renew, we have a -- we've been able to generate a significant step function growth in our fees.

I would say generally overall speaking, given the fact that we started so much later than US broadcasters did, in generating retransmission revenue, we have quickly caught up to where we believe US broadcasters are. I think if we're not there, we are just below their levels, and I believe in our next round of retransmission agreements, we will meet and surpass where US broadcasters are. So to the extent that gives you some helpful guidance. Regarding Charter/Time Warner, those are very recent launches, and are really not reflected in fourth quarter at all.

(Multiple speakers) though the other launches of Megacable and Cox that we disclosed --

Cox was a full quarter, Megacable was a partial quarter.

Okay. And then just the last one on the JVs, just so we understand how they are going to impact numbers, at least on the P&L for the year. Will you be recognizing these proportionally as equity items in the investee, so essentially below the adjusted EBITDA, or are you going to be consolidating these, and then we need to back them out of guidance?

The venture now is not consolidated in our financial statements. This structure may change over time, as this structure evolves. But for now, equity method pickup, and if that changes, we will update you.

Great. Thank you.

(Operator Instructions)

If there is nothing further, thank you, everybody for joining the call, and I wish everybody a very nice weekend, and we'll talk soon. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.