Manchester United PLC (MANU) 2013 Q2 法說會逐字稿

Welcome to the Manchester United, second quarter fiscal 2013, earnings conference call. At this time all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time, so you can queue up for questions.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded. Before we begin, we would like to inform everyone that this conference call will include estimates and forward statements, which is subject to various risks and uncertainties, that could cause actual results to differ materially from these statements. Any such estimates or forward looking statements should be considered in conjunction with the cautionary note in our earnings release, regarding forward looking statements, and risk factor discussions in our filings with the SEC. Manchester United PLC assumes no obligation to update any of the estimates or forward looking statements.

I will now turn the conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead sir.

Thank you very much. And thank you for everybody joining us this morning for the call. With me on the call today as before are Michael Bolingbroke, Chief Operating Officer, and Hemen Tseayo, Head of Corporate Finance.

PLC has delivered another quarter of strong results as we continue to successfully execute the growth strategy outlined during our IPO. Our recent performance was fueled by the addition of several global and regional sponsorship signed over the last 12 months. Together with double-digit growth in our retail merchandising and licensing business, and an increase in broadcast revenues, total revenue and adjusted EBITDA rose to GBP110 million and GBP50.2 million respectively, both record levels for the second quarter. These results demonstrate the unique position of our Company.

We've matched the broadcasting revenues forming the basis of support for our operating activities, we've been able to further develop a high margin commercial revenue stream, by monetizing the Manchester United brand in a considered and strategic manner. We are confident that the combination of our fast growing commercial operations, the increased value for sports broadcasting rights, and the year-on-your consistency of our match day business, will create significant long-term value for all of our stakeholders.

I am delighted to report that we have signed an eight year sponsorship agreement for our training kit. When we made this strategic decision to buy out the remaining two years of the DHL deal, the goal was to secure a new long term agreement reset to market value. We are delighted with the conclusion of this key sponsorship agreement, and at the request of our new training kit partner, we've agreed to withhold further details pending a formal announcement in the coming months. During the course that we executed six new sponsorship agreements, adding to our already strong portfolio, global and regional partners.

Of the six, two were global, Kansai and Singha, the last of which is a renewal of an existing deal that will extended by another three years, two of them are regional deals, Wahaha and Multistrada, and two are financial services, China Construction Bank and Denizbank. You should assume that based on the start dates of these agreements, that their combined financial contribution will not be material to our current year fiscal results. On top of the financial benefits, the additional sponsors have allowed us to capture critical consumer information. In the past year, our CRN database has nearly doubled to over 25 million names, providing us with the opportunity to connect directly with more and more of the team's fans around the world.

Another important development in our long-term strategy, was the recent purchase of BskyB's stake in MUTV. This gives us full control of our global television channel. While strategic, it was also opportunistic. As a result of the acquisition, we now have further opportunities and flexibility ahead with regard to the digital media offering. In order to strategically integrate this major acquisition into those plans, we're now expecting to launch our new digital media product in calendar year 2014, and we will update you more in the coming quarterly calls. As you will see in the Q2 interim financial reports we filed over the coming few days, the consideration paid to BskyB was GBP2.6 million for their equity stake, plus GBP7.4 million in repayment of shareholder loan, plus accrued interest.

Moving to the international rights to the Premier League, we realized the expectation was that by the time we reported Q2 results, we would know the final tally. At this point however, the league has not finished contracting with all of the licensees, and until that process is complete, the details will remain confidential. You will also see from the Premier League press release last week, that the clubs have agreed to a system of enhanced financial regulations, including SFP. The key element to those regulations include a short-term cost control protocol, which limits the amount the clubs can raise their player costs, from centrally distributed revenue.

Finally, the first team has continued to perform at a very high level, we currently sit top of the Premier League, 12 points ahead of Manchester City, we progressed to the fifth round of the FA Cup and are in the middle of our two leg match and round 16 of the Champions League, having drawn last night in Madrid. During the recent January transfer window, we acquired one of the most promising young talents in English football, Wilfred Zaha, he's been laying back to his prior club but we look forward to his future contributions when he joins the squad this summer, ahead of next season. I will now turn the call over to Michael.

Thanks Ed and good morning everyone. Now I am going to review our second-quarter, 2013 financial results, and provide the relevant comparisons with the same period 12 months ago, along with explainations as to any material movements. And then what I will do is I'll hand the call back to Ed, to review our guidance for fiscal 2013, and then well open up the call for questions. Just as a brief reminder, and those of you who have been on these calls before will be aware of this, we account from the first of July each year to June 30 of the following year. As this follows the pattern of our playing season. So when I refer to fiscal '13 for example, I am referring to the year ended June 30, 2013. This report I'm about to give covers the period October 1, 2012 to December 31, 2012.

Finally, I'd be grateful if you'd bear in mind that looking at our business on a quarterly basis and in particular comparing quarters from different years, can sometimes be misleading due to the timing differences of various games that we -- and various fixtures. And of course unless I mention otherwise, all the figures I'm giving you are UK pound Sterling. So from a high level, I would reiterate what Ed has said. This was another strong quarter.

It was a great quarter for results and in several key metrics, was a record quarter. Our total revenue increased to GBP110.1 million. And that's from GBP101.3 million in the equivalent quarter last year, that is an increase of 8.7%. Our adjusted EBITDA, which is the measure we use to monitor ongoing operations, finished at GBP50.2 million, which compares to GBP44.9 million in the prior year. That is an increase of GBP5.3 million or 11.8%, underscoring the points Ed made regarding a very strong quarter. Net income was GBP16.2 million, which compares to GBP42.1 million in the second quarter fiscal 2012. Now the difference here is due primarily to a tax credit of GBP22.9 million realized in the prior year quarter, compared to a tax charge of GBP12.2 million in this year's second quarter. And I will discuss tax in more detail in a moment. What's critical for you to know though at this juncture, is the profit before tax increased from GBP19.2 million in the prior year quarter, to GBP28.4 million in this quarter, an increase of 48%.

Now, looking at our commercial -- sorry, now looking at our revenue of GBP110.1 million in more detail, and this most easily done by looking at each of our three sectors, and that's of commercial, broadcast, and match day. Commercial revenue for the quarter increased 29% to GBP35.6 million. All three components of our commercial revenue showed increases. Firstly, sponsorship revenue increased by 48.6% to GBP20.8 million, and this was due to the addition of the new global and regional partnerships that Ed noted, and also the step ups in some existing deals. These figures also include recognition of the pre- sponsorship payments under our new shirt deal with General Motors. Secondly, retail merchandising apparel and product licensing revenue increased 13.1% to GBP9.5 million. And this increase is as a result of an uplift in the recognized amount of surplus profit, generated through our joint venture with Nike.

Finally, new media and mobile revenue increased 1.9% to GBP5.3 million, as a result of the negotiation of new mobile partnerships, and the step ups in existing deals. So now moving to broadcast revenues, for the second quarter, broadcast revenues increased 4.8% to GBP39.5 million, due to one extra Champions League game being played, and also two additional live Premier League TV appearances, compared to the same period last year. Finally and briefly, Match day revenues for the quarter decreased by 2.8% to GBP35 million, and this was mainly due to having one less domestic cup game played at home this period compared to the periods last year.

So moving down to operating expenses, these totaled GBP73.2 million for the quarter, an increase of 4.6% on a cost of GBP70 million the previous year. There were three key elements here that I think is worth highlighting. Firstly, player and staff compensation. These totaled GBP44.2 million, an increase of 14.2% over the prior year period. And that's primarily due to new player signing's, player wage increases, and the growth in commercial headcount. As noted on our first quarter call, we expected the run rate for this item to be higher in the second quarter, and over the remainder of the year, as the first-quarter wage bill only included a portion of expenses associated with the players that joined the team towards the end of the summer transfer window. And when we look at the first six months of fiscal 2013, player and staff compensation increased at a lower rate of course of 20.5% -- sorry 10.5%, which is in line with our expectations.

The second thing that's worth noting is other operating expenses decreased 11.3%, to GBP15.7 million, primarily due to a reduction in gateshare costs, as we played one less domestic cup home game compared to the same period last year. And thirdly, amortization of players registrations for the quarter, increased 8.1% year-on-year to GBP10.7 million. Increases in amortization due to player acquisitions such as Robin van Persie and Shinji Kagawa, were partly offset by reductions due to contract extensions and departed players. The unamortized balance of existing players registrations as of December 31, 2012 was GBP125.9 million. Now, after taking account of the above, and also GBP0.7 million of profit on disposals of players registrations, and that's the conditional payments received on players sold in prior periods, we generated an operating profit in the second quarter of GBP37.6 million, compared to GBP31.5 million in the period a year ago, an increase of 19.3%. A very strong result.

Next, finance costs for the quarter totaled GBP9.2 million, a decrease of 25.2% from the prior year. And there are two main factors behind that movement. The primary reason for the decrease was a favorable foreign exchange movement, of GBP2.3 million year-on-year on the translation of our US dollar denominated senior secured notes. As detailed on prior earnings calls, these foreign exchange gains or losses are not a cash benefit or charge, and could reverse depending on dollar exchange -- dollars sterling exchange rate movements. Any gain or loss on a cumulative basis will not be realized until 2017, or indeed earlier, if our senior secured notes are refinanced or redeemed prior to their stated maturity.

Now the second factor that's relative to net finance costs, is the decrease in the finance cost that was caused by the repurchase and retirement of the Sterling equivalent of GBP62.6 million of senior secured notes, comprising $101.7 million, of our US dollar denominated notes, which we did with the proceeds from our IPO. Now with regards to the tax line, the group recorded a non-cash tax charge for the second quarter of GBP12.2 million. This charge primarily reflects the movement in deferred tax for the quarter. And this resulted in an effective tax rate of 42.8%, which is higher than the US statutory rate of 35%, due to a current mismatch in the recognition of UK and US deferred tax assets and liabilities. Now, I would stress that all these are non-cash tax charges.

In the prior year, fiscal 2012 period the group recorded a one-time tax credit of GBP22.9 million, due primary to the recognition of another deferred tax asset, relating to pre-existing UK losses. So to summarize the overall position, our total revenue is at GBP110.1 million. Our adjusted EBITDA is at GBP50.2 million, and our net income is at GBP16.2 million. This equates to and earnings per share of 10p, based on an average waited diluted share count of 163.8 million shares compared with an EPS of 27p based on an average weighted diluted share count of 155.4 million in the prior year period.

Now, turning briefly to cash flow and to notable balance sheet movements, at the end of the second-quarter our cash balance stood at GBP66.6 million, and we have no outstanding borrowings on our 75 million pound revolving credit facility. We generated GBP25.4 million over the three month period, an increase of GBP31.7 million compared to the prior year, and this is primarily due to year-on-year differences in working capital movements, following a small number of upfront payments received in respective commercial agreements, and also the increase profit on ordinary activities before tax.

Net capital expenditures on property, plant, and equipment for the quarter, were GBP5.9 million, consisting mainly of ongoing investments in the team's training facilities at Carrington. This represents an increase of GBP4.3 million from the same period a year ago. The facility improvement's are now complete, and final payment should be made in the third and fourth quarters. Net player capital expenditure for the second quarter was GBP2.4 million, an increase of GBP1.6 million compared to the GBP0.8 million in the prior year quarter. This consists of outflows related to existing players, and inflows from players disposed in this and prior years.

Net cash used in financing activities for the quarter was GBP1.6 million, a decrease of GBP3.7 million from the GBP5.3 million in cash used in the prior quarter. Currently our quarter includes expenses of GBP1.5 million, directly attributable to the issue of new shares, and the prior year quarter includes GBP5.3 million relating to the repurchase of senior secured notes. Lastly, as of 31 December 2012, total borrowings were GBP366.6 million, compared with GBP439 million a year earlier. That is a decrease of 16.5%, following the September 2012 repurchase and retirement of GBP62.6 million worth of our senior secured notes, with the proceeds from our IPO. I will now turn the call back to Ed for closing comments.

Thanks, Michael. So, with half the year completed, we remain on track to achieve our original targets of fiscal 2013 of a revenue between GBP350 million to GBP360 million, and adjusted EBITDA of between GBP107 million and GBP110 million. And as a reminder, our guidance is predicated on the team reaching the quarter-finals of the Champions League, ie, the next round. The second leg of this round will be played at Old Trafford on March 5, at this stage of the competition, it is worth noting that each round is only worth approximately GBP5.5 million in revenue, and approximately GBP4 million in EBITDA.

We feel very good about the results we've delivered thus far as a public Company, and looking ahead we're very encouraged about our growth prospects. At the same time, Uefa's commitment to enforcing financial fair play, combined with the Premier League's desire to adjust similar financial regulations, leaves us optimistic about our ability to expand future EBITDA margins, as we continue to unlock the power of our unique business model. Operator, we are now ready to take questions.

(Operator Instructions)

Michael Senno, Credit Suisse.

Just a follow-up on the new wage controls that were passed by the Premier League. We reviewed the two different provisions the short-term and longer-term, and in particular, to do with the short term, how do current player contracts that are signed, get incorporated? Because presumably, there's some increases that may take place or may go on during contracts already signed. Are those going to be grandfathered in in a certain way? And the second thing I know that only the top handful of players are international star players, if you will. And I was just wondering how you feel the regulations would implicate the EPL teams from competing with teams from other countries for those top players?

Let me take that. First of all the detail is yet to come on this. It's quite clear that -- it's is being passed in the Premier League and there will be some time now where the details are actually documented and no doubt there will be some little bits that come out of that. But as things stand, there is no expectation of any grandfathering rules or anything, carve outs relating to existing players are anything like that. This is a very simple calculation with regards to the cost control. It looks at the '12, '13 player wage bill, and then it restricts it from that level going into '13, '14, based on what you've seen documented, which is essentially GDP4 million, increase plus whatever other revenues that you've managed to generate new in that year, excluding those centrally paid to the clubs by the Premier League.

So that's answering the first question, hopefully, the second one with regard to competition for players, we at Manchester United don't believe this will have a negative impact on us and our transfer policy at all. So without going into it in any more specific detail, I think that, that is definitely our view and we've done and a lot of analysis, as you can imagine, on this.

And just on the $4 million from the new TV deal, and then any 100% incremental revenue, non-distribution, is that based on the prior year's revenue?

Yes, first of all it's GDP4 million.

Pounds, I'm sorry.

That is based on the current year, and then looking into next year. So next year, this is the reference year, '13, '14, sorry '12, '13, this current fiscal year '12, '13 is the reference year and then it's plus GDP4 million, plus new revenue on top of that.

Okay, great. Thank you.

Doug Mitchelson.

Hi, this is Brian Russo for Doug. Two questions. This first is, given that you had two bonds that are callable that carry relatively high interest rates for the current environment, do you have any plans to refinance these in the near term? And second question kind of relates in some way to this, which is as we look at your business model, and the ability to generate free cash flow in the future, it seems quite a substantial opportunity. So we're wondering how you think about a capital return strategy at some point, and maybe what your ideal target leverage for the Company could be? Thanks.

Very good questions. That have been asked before, and unfortunately I not going to give you that much detailed response. But just taking them one by one, from a bonds perspective, clearly we recognize the yield on those, and we recognize the market, obviously, is receptive at the moment to refinancing. It is something that obviously we are monitoring, but there are no current plans to refinance those. We still have, obviously, core protection sitting there attached to those bonds. So no current plans on the bond refinancing.

With regards to the cash flow generation, you are absolutely right that as we look forward, this is a very cash generative business, and as we said in the IPO, we have no current dividend policy. And if that changed, that is the same today, if that changes, we will communicate that at any appropriate time, presumably the next earnings call if that happens. But we recognize that we need to come to a landing on appropriate level of leverage in this business, and in related to that then, is what we're going to use with our excess cash.

Is there an ideal target leverage that you think about in the future when you kind of have brought down the debt somewhat?

There is not a target leverage level at the moment, no.

Okay. Thank you.

Randy Konik, Jefferies.

Number one would be could you give us any perspective on update on the Nike deal given that we're now in the exclusive negotiating window? I guess my second question would be, could you give us some color around the digital media strategy, when we could expect some new product rollouts there? And then third, with Jamie's team in Hong Kong, is he targeting, how is he targeting the market? Is it more of an all over the region, or is there a specific country by country strategy with one in particular first over the other. And then lastly, with the NBC deal coming for the US market, what is the update on plans to open up a US office and start to attack sponsorship opportunities in that market? Thanks.

You're testing my memory there, Randy. Okay so, updates on Nike, you're absolutely right. We are now into the six month exclusive negotiating window with them. There is no update. I will give you an update whenever there is something to tell you. What I won't be doing is just giving you piecemeal small updates with regards to dialogue. So, I will update you as and when, but obviously we are now in that six-month window.

Secondly, with regards to additional media, I don't know if you picked it up during the call earlier, but the acquisition of MUTV has resulted in us being focused on properly bringing that in-house, and reevaluating some of the strategies that we've got in place with regards to additional media. So we're now guiding 2014. That's calendar '14, with regard to the rollout of additional media products. There are no changes regarding what that product will be, and what our expectations are around that, other than the acquisition of MUTV, has pushed that out a little bit.

Thirdly, with regard to Asia and our Hong Kong office, how we are targeting the market, so that is, as you know, being set up predominantly as a regional office, to focus on doing regional deals. So, Jamie has looked at the geographies out there, there are clearly markets that make more sense to go after first than second. And so, there's a prioritization of geographies.

But more importantly is the prioritization of categories. And so, the first step has been to focus on categories. So for example, you'll see some soft drinks deals being done, and that will then rollout around the region, and then other categories will drop in. So what you'll be seeing first of all, and you are seeing, is the high priority products in the high priority geographies, and then as those rollout, you'll see more products and more geographies added to the list.

And the final question with regard to NBC as our new broadcast partner from a Premier Leagues perspective in the US, clearly, major investment from them. We're very excited to be on their platform. They obviously reach out to a huge number of households in the states, 115 million on the NBC platform itself. And so yes, it helps us in terms of thinking with our plans as you pointed out with regard to the US opportunity, and doing regional and media related deals in the US. That is still our strategy, and there is no update at the moment with regard to the US office, but that is very much in that plan.

Great. Thanks for the help.

(Operator Instructions)

James Sullivan, JP Morgan.

Just a quick question just in terms of commercial deals moving forward. It appears based upon the announced deals there's been to some degree a tilt towards Asia, I guess partially due to the opening of the Hong Kong office. I was just wondering if you could comment on staffing levels in the Hong Kong office, and whether there's any plans to increase the staffing levels above previous plans based upon the number of Asian deals that you've already signed?

Yes. We clearly are executing as hoped out there in Asia, as evidenced by the number of deals that we're delivering. So that's been very successful, the Hong Kong office. I would say staff levels are increasing, really as expected. When we open an office and the strategy is working, we obviously will look to add to that. What we're very careful about, the people we bring in though so there's always a bit of a lead time to expand. We don't want to expand too rapidly and loose control these kind of processes and our brand. So I think we're up to 12, 15 people in the Hong Kong office already, and we're always on the lookout for talented additions.

Great. Thank you very much.

I would now like to hand the call over to Ed Woodward for closing remarks.

Thank you very much, everybody. We look forward to speaking to you again in a few months time in May for Q3. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.