Manchester United PLC (MANU) 2013 Q3 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Manchester United plc third-quarter fiscal 2013 earnings conference call. (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-looking statements, which are 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 everybody for joining us this morning. With me on the call today, as usual, are Michael Bolingbroke, Chief Operating Officer, and Hemen Tseayo, Head of Corporate Finance.

The third quarter was highlighted by strong revenue gains in each of our three key business areas, Commercial, Broadcasting and Matchday, which in total grew by more than 29% over the prior-year quarter to a record GBP91m for the quarter. This strong top-line performance translated into a 23% improvement in adjusted EBITDA, GBP25m, also a record for the third quarter. Like the first half of the fiscal year, our growth was fueled by the sponsorship business. Overall commercial revenues were up 32% in the quarter and 28% year to date, while sponsorship itself rose 52% in the quarter and 43% year to date.

Since our last earnings call, we've signed three new regional sponsorship deals, gloops, which is our first social gaming agreement, and two financial service agreements, one with Ekspres Bank and the other with BIDV in Vietnam.

We also announced that Aon has agreed to sponsor our training kit for the next eight years, to replace DHL from July. We are delighted they will be continuing in partnership with us for this duration and in much greater capacity than just a training kit. It will also include renaming Carrington as the Aon Training Complex. They will also serve as the lead sponsor for our summer tours over the life of the contract. This further evidences the innovative strategy of segmenting our rights in a way that generates value to both our partners and to our business.

On the field it was also a strong quarter. The first team went on an exceptional run, culminating in winning the Premier League with four games left to play, so warm congratulations to Sir Alex Ferguson, his staff and all the players on another successful campaign and a record 20th English league title.

I would also like to take this moment to congratulate David Gill, who as we previously announced will be stepping down from his duties as CEO of Manchester United at the end of the season, after more than 16 years of excellent service to the club. David will continue his long association with the club by joining the Football Club Board, which includes, amongst others, Sir Alex Ferguson and Sir Bobby Charlton. From this position, David will continue to provide his insight to the management and the Board, in particular, regarding football matters.

As we also announced, I will be taking over the Football Club responsibilities, and Richard Arnold, our Commercial Director, will take on the role of Group Managing Director with consolidated responsibilities for all business operations, including venue. Michael Bolingbroke will join the main Board and become Chairman of the Foundation.

I'll now hand over to Michael.

Thanks Ed and good morning everyone. I'm going to review our third-quarter 2013 financial results and I'll also provide the relevant comparisons with the same period 12 months ago, and I'll give you explanations, as well as to any material movements. I'm then going to hand back to Ed. He'll review our guidance for fiscal '13, and then we'll open up the call for questions, as he mentioned.

Now just as a reminder, and I'm sure you're all aware of this, we account from July 1 each year through to June 30 of the following year. This follows the pattern of our playing season. So when I refer to fiscal '13, for example, I'm referring to the year end June 30, 2013. This report, then, I'm about to give you, therefore covers the period January 1, 2013, to March 31, 2013. Please also 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 of our games. And of course, unless I mention otherwise, all figures I'm about to give you are in UK pounds sterling.

So from a very high level, I would just first of all like to reinforce what Ed has said. This third quarter was another quarter of strong results from the Club, and the key metrics that underscore that are as follows. First of all, total revenue was at GBP91.7m, a significant increase on the GBP70.8m in the equivalent quarter last year. That is an increase of a shade under 30%, an increase of 29.5%.

Our operating profit for the quarter finished at GBP15.2m, and that compares to GBP6.3m in fiscal '12. That is an increase of 141%. And our net income was GBP3.6m, which compares to net income of GBP1.1m in the third quarter fiscal '12. And this net income figure is net of a GBP6.8m tax credit, which is offset by a significantly higher finance cost charge of GBP18.3m. Now both of these are predominantly non-cash movements, but I will take a moment to explain them to you later.

So let's first of all look at our revenue of GBP91.7m and this is most easily done by looking at each of the three sectors, Commercial, Broadcast and Matchday. So looking first at Commercial revenue, that for the quarter increased by 31.9% to GBP36m and all three components of Commercial revenue showed increases.

Firstly, sponsorship revenue increased by 52.2% to GBP21m, and that was due to the addition of new global and regional partnerships and to the step ups in some of our existing deals. These figures also of course include recognition of the pre-sponsorship payments under our new shirt deal with General Motors. Secondly, we have retail, merchandising, apparel and product-licensing revenue, and this increased 10% to GBP9.2m. This increase is as a result of an uplift in the recognized amount of surplus profit that's currently being generated through our joint venture with Nike. And finally we have our new media and mobile revenue, and that increased 13.7% to GBP5.8m, and that is as a result of the negotiation of new mobile partnerships and also step ups in existing deals.

So let's take a moment now to move to Broadcast revenues. For the third quarter Broadcast revenues increased 28.4% to GBP21.7m and that's due to progress in the Champions League round of 16, which compares to the same period last year when, following elimination from the Champions League at the group stages, we participated for two rounds in the less-lucrative Europa League. We also benefited from a higher payout from the performance element of the market pool, which was triggered by a better performance relative to the other English clubs. That applies to the Champions League.

Finally, I just want to touch on Matchday revenues. For the quarter these increased 27.8% to GBP34m and that's mainly due to progress in the FA Cup, with four home games in the quarter compared to two away games in the prior-year quarter. Now although gate revenue for the FA Cup matches is shared, the size of our stadium and the fact that we progressed to the quarter finals with two replays resulted in a material revenue uplift for us.

So moving down to operating expenses, these totaled GBP79m for the quarter, an increase of 18.8% on a cost of GBP66.5m in the previous year. There are three key elements here that need to be highlighted. Firstly, player and staff compensation totaled GBP44.9m, and that's an increase of 25% over the prior-year period, and this is primarily due to new player signings, contractual player wage increases and also the growth in our Commercial headcount.

The second area that's worth noting is that other operating expenses increased by 50% to GBP21.8m, and that's primarily due to an increase in gate share costs, catering costs and police and security costs. Now these are variable costs associated with the four FA Cup home games that we played in the quarter that I mentioned earlier, so they're related to that increase in revenue for Matchday revenues. And of course we played no home games in the same period last year in the FA Cup.

And the third and final issue that's worth noting is that amortization of players' registrations for the quarter increased 7.2% year on year to GBP10.4m. The unamortized balance of existing players' registrations at the end of the quarter was GBP126.5m.

So after taking account of the above and also GBP2.5m for the aggregate of profit on disposals of players' registrations and also conditional payments received on behalf of players sold in prior periods, we generated an operating profit in the third quarter of GBP15.2m which, as I mentioned earlier, compares to GBP6.3m in the same period a year ago and that's an increase of 141%.

Now, as I mentioned earlier, net finance costs for the quarter totaled GBP18.3m. That is an increase of GBP14.8m on the prior-year period due primarily to a net unfavorable, unrealized FX swing of GBP15.8m on the translation of the Group's US dollar-denominated senior secured notes and also our US dollar cash balances at the quarter end compared to 12 months ago. Now, as detailed on prior earnings calls, these foreign exchange gains or losses are not a cash benefit or a cash charge and could reverse depending on dollar/sterling exchange rate movements. And 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 this was partially offset by a reduction in interest payable of GBP1m, following the repurchase and retirement earlier in the fiscal year of $101.7m dollar-denominated notes.

Now with regards to the tax line, the Group recorded a non-cash tax credit for the third quarter of GBP6.7m. The credit reflects management's revised and best estimate of the effective tax rate for the year, which we now feel is at 38%, lower than the rate we estimated on the 31st December 2012. The effective tax rate for the year is higher than the US tax rate at 35% primarily due to a current mismatch in the recognition of UK and US deferred tax assets and liabilities. Now the most important thing here is that it should be noted that these are all non-cash tax charges. Non-cash. In the prior-year third quarter the Group recorded a tax charge of GBP1.7m.

So to summarize the overall position, total revenue GBP91.7m, operating profit GBP15.2m, net income at GBP3.6m. Finally, and crucially for our business, adjusted EBITDA, which is the measure we use to monitor ongoing operations, finished at GBP25m, and that compares to GBP20.4m in the prior year so an increase of 22.5%. Basic earnings per share for the quarter were 2p based on an average weighted diluted share count of 163.8m, and that compares with an EPS of 1p based on an average weighted diluted share count of 155.4m in the prior-year quarter.

So turning briefly to cash flow and balance sheet movements, at the end of the third quarter, our cash balance stood at GBP36.2m and we had no outstanding borrowings on our GBP75m revolving credit facility. Cash used in operating activities was GBP23.6m over the three-month period and that was a minor decrease of GBP0.7m compared to the prior year.

Net capital expenditures on property, plant and equipment for the quarter were GBP1.3m, consisting mainly of ongoing investments in the team's training facilities at Carrington due to be redesignated as the Aon Training Complex. This represents a decrease of GBP0.3m from the same period a year ago. The facility improvements were completed in the second quarter and final payment should be made in the fourth quarter.

Net player capital expenditure for the third quarter was GBP1.4m, and that's an increase of GBP2.3m compared to the GBP0.9m net inflow in the prior-year quarter. This consists of outflows relating to existing players and inflows from players disposed in this and prior years.

In the third quarter the Group acquired the remaining third of the issued share capital of MUTV Limited for a purchase consideration, including transaction costs of GBP2.7m. The Group now holds 100% of the issued share capital of MUTV Limited.

Net cash used for financing activities for the quarter was GBP7.2m. That's an increase of GBP7.1m from the GBP100,000 cash used in the prior quarter. The current-year quarter includes GBP4.4m of repayment of loan stock issued to the former minority shareholder of MUTV Limited.

And lastly, as of March 31, 2013, our total borrowings were GBP367.6m and that compares with GBP423.3m at March 31, 2012. That's a decrease of 13.2% and that follows the September 2012 repurchase and retirement of GBP62.6m of our senior secured notes with the proceeds from our IPO.

I'll now turn the call back to Ed -- Ed -- for closing comments.

Thank you Michael. So we're once again delighted with our results. The performance of the team, the growing strength of our brand and the excitement generated by the Premier League on a global basis continues to deliver new opportunities across our business. Even taking into account the negative impact of exit from the Champions League one round earlier than we assumed and winning the Premier League, we are continuing with the same guidance level. That's revenue of GBP350m to GBP360m, and EBITDA of GBP107m to GBP110m.

As we head towards the start of fiscal '14, our top priority is strengthening the squad to assure we're best positioned for successful runs in all the major competitions next season. At the same time we're focused on accelerating the pace of our commercial expansion.

Obviously the retail, merchandising and apparel portion is dependent on the timing of a potential new deal with Nike, but we're putting more resources in place to pursue the myriad of sponsorship opportunities that we believe exist globally and better support the upcoming launch of our new digital media offering. This includes additional sales and support staff as well as a new Director of Media who will start with us this month and comes with a vast depth of experience in sports media from Universal Sports and 11 years at FOX. We've also hired Samanth Stewart from Wynn Resorts as our Head of IR, to complement the current team, which is being led today by Hemen Tseayo, supported by ICR.

Operator, we're now ready to take questions, but I'd like to again remind everyone, as we enter the transfer window, where there will inevitably be huge speculation, I won't be commenting on football contracts. Thank you.

Thank you. (Operator Instructions). And the first question comes from the line of Randy Konik of Jefferies. Please proceed.

Hi. This is Amanda Seguin on for Randy. First, just wanted to get any update on the Nike deal now that we are a few months into the exclusive negotiating window. Just wanted to see if it seems like it's still reasonable to think that a new deal could start in the 2013/'14 season?

And then just second wanted to ask on the financial services segment. Seems to have really good momentum with new deals there. I was wondering if you could elaborate a little bit on where the business is today -- I think it's in 12 countries -- and kind of where you think it could ultimately be. And also just how are the margins of those financial services deals? How do they compare to the Commercial segment overall? Thanks.

Okay. There really isn't an update on the first point with regard to our retail and merchandising apparel business. There are a number of outcomes here which could impact numbers in fiscal '14, fiscal '15 or even as far out as fiscal '16. So we can't update and we won't update at this stage, until we get to the point where there is some news. So I'm not going to, Amanda, as I explained before, I'm not going to be giving piecemeal feedback on the process.

And on the second question, financial services, you're absolutely right. We've got excellent momentum in this category. We're currently going to a number of countries in the Middle East and other areas in the world other than obviously the Eastern Asian countries that we've started in.

The size of these deals is smaller, as I've guided before, from a minimum guarantee perspective typically compared to a normal regional deal. But we do get revenue share. We get share of interest payments and retail spend, and we also get the CRM data. So there is an element of sowing seeds in this part of the business for growth in the future. And as a result, the margins, whilst they're high, are off relatively low numbers. I think you should watch this quarter by quarter, year by year, and in the coming two/three years we'll see some meaningful feedback coming out of that from a financial perspective.

Great. And just follow up on the CRM database. Do you know roughly the size of how big that is from the financial services deals now? Thanks.

The CRM database overall is over 30m now so it's growing at a phenomenal rate. I think we mentioned, if I recall correctly, 25m on the last call. So it's going extremely well.

Thank you.

Thank you for your question. The next question comes from the line of Michael Senno from Credit Suisse. Please proceed.

Good morning. Just two quick questions. One, just to provide some context on the global and regional sponsorships, can you remind us in the process where you are on how many categories overall you think there's an opportunity in, and if there's an update on how many you envision pursuing on a global basis and how many on a regional basis?

And then one more housekeeping-type question. In the other OpEx line, would you be able to remind us of roughly the percentage that is variable versus fixed overhead in that line?

Sure. So first question I will answer firstly. The global and regional mix, I think we've tried to come at this question in different ways in the past. The reality is, the number of categories we believe can go up to a comfortable sort of 94 in terms of categories that we can delineate and go after to do deals.

I don't believe we'll ever get to that level partly because of the regional opportunity. So a number of the categories get dropped into regional and therefore are pursued on that basis. And then you have seen -- we've announced deals in a number of categories. We started in mobile, we've moved into financial services. We've moved into soft drinks, tires. There are other ones coming that we're going to be announcing. You can see we've done a social media deal in one country, as well.

So there are an increasing number of regional deals, but we're still going after a huge number of global categories because there are a large number of them, and we only have 13, 14 of those in place as we sit here today. So the opportunity remains huge. At some point the rate of growth of global will slow down and be replaced by even more accelerated growth in regional. That's our expectation, but that's a long way out.

It's Michael Bolingbroke. Your second question was about the variable/fixed cost split.

Yes.

As stated in the earnings release, the total OpEx in costs, GBP21.8m, and the split between fixed and variable is basically 50-50 in that. And the increase that I talked about from the quarter in the prior year to this quarter is nearly all on the variable-cost line and that relates directly to the increase in Matchday revenue. So, in other words, the variable-cost increase is because we hosted more FA Cup games. So you'll see we take the extra revenue. It's about GBP8m in revenue and then there's about GBP6m in costs.

Okay. Thank you very much.

Thank you Michael.

Thank you for your question. Your next question comes from the line of Brian Russo from Deutsche Bank. Please proceed.

Hi. Thank you. The team's performance in the Premier League was obviously top notch, but the Champions League results were a little bit disappointing. As you look into next year, do you feel that there's a need to further invest in the team in order to advance further in the Champions League? Or was it more just a question of luck and the same team could just as easily go further next year without any meaningful changes? Thanks.

Yes. I don't believe there is a need for meaningful investment in the squads. There is incredible depth. I think we could put two first teams out with 11 internationals in each. As we've said, we're a long way ahead in the Premier League. It's been a phenomenal season. We obviously were knocked out of the Champions League. I wouldn't necessarily describe it as luck, but clearly things could have gone our way differently in that game and we could have gone through to the next rounds and possibly beyond.

So I wouldn't expect there to be a need for major retooling of the squad. We've got a fantastic depth in terms of experience and age. And I think that's key. We've got a young squad and each of those are a year older when you compare ourselves to last summer so we're very comfortable with the make-up of the team and the squad.

Terrific. Thanks.

Thank you for your question. (Operator Instructions). And your next question comes from the line of Michael Nathanson from Nomura. Please proceed.

Thanks. I have two housekeeping and then one philosophical question. On housekeeping on the Aon deal, it's an eight-year deal has been reported. The range in the press is somewhere between GBP120m to GBP180m. I wonder if you can somehow tighten the range on the underlying value of that deal.

And then how do you think about of the inflation of that deal in terms of is it front-end loaded, is it natural over the life of the contract? So any more help on that deal would be great.

We won't be commenting on the size of that deal, as we've flagged before. We're respectful of our partners and we haven't set precedent in the past with regard to saying the size of individual deals. We will talk to the accumulated numbers in our results, but I can say that there is an element of inflation within it. Each year as you go forward is higher than the previous. And it's slightly lower in the first year. You've got to remember in the first year they are also on the shirt. So for the next season, '13/'14, Aon remains on our shirt so there is an overlap of rights for that year. So you'll see a greater step up, if you like, from year one to year two, but I'm not going to give you any further detail on that, I'm afraid, Michael.

Okay, then let me ask you this one. We're waiting to hear about the international portion of the Premiership TV contracts. We thought it would be out by now. Is there any more comments you can share about the growth rates on the international side of that TV contract?

Yes, I'm afraid we're still at the point where the last few contracts are still being done and so we're bound to not be able to say anything in that regard, I'm afraid.

Okay. And then let me see if you can say something on the last question. I guess philosophically on the Champions League, in the States we have teams like the Yankees and the Patriots who get to the finals very often and don't win. And I wondered within your mind is there greater chance -- do you think it's better for franchise values to get further in Champions League than what you've done recently? Is that something that you think it's a priority for maybe even driving further Commercial revenues for the enterprise, going further in that competition? So how do you think about that as a franchise value?

Yes, look, I think there is obviously a benefit of going all the way to the final and winning it. It creates a lot of excitement, a lot of focus. A lot of people watch that final. I think when we played Barcelona a few years ago it was about 300m people, more than double a Super Bowl.

But we don't believe and we don't pick this up from the business, all the different strands of business, we don't believe there is an impact, a tangible impact, if we get knocked out early. Last year we got knocked out, as you're aware, in the group stage. We didn't even get to the knockout phase after Christmas, but our business continued to grow strongly. We still had huge demand for our merchandise, for our sponsorship and for our media products. We don't -- perhaps getting to the final, when you can do a special shirt, there might be a little increase there, but we don't think there's a meaningful difference between being knocked out in the semi-finals versus being knocked out in the last 16. We've not experienced that.

Okay. Thanks.

Thank you.

Thank you. Your next question comes from the line of Ian Rennardson from Jefferies. Please proceed.

Thank you. Good morning. You maintained EBITDA guidance despite being knocked out of the Champions League probably around earlier than you thought you might have been. What was the EBITDA impact of that against your expectation please?

Okay. Sorry, of being knocked out of the Champions League?

Yes.

About GBP4m.

Thank you.

Thanks Ian.

Thank you very much indeed. Your next question comes from the line of Bryan Goldberg from Bank of America - Merrill Lynch. Please proceed.

Hi. Thanks. Just a couple quick ones. On MUTV, I recognize it's fairly small right now, but it seems media's, new media's a relatively underexploited part of your opportunity. So now that you have full ownership of the asset, could you just remind us what more could you do with it now or what we could expect with MUTV in fiscal '14?

Yes. We can do a huge amount more with it. That's why we've purchased the portion from Sky. We believe there are two clear opportunities ahead for us.

One is to continue to sell MUTV as a linear product. There's a huge portion of the world that still devours a lot of television in a linear manner. And then secondly is the digital media piece of it, and we've talked at length, including through the IPO road show, about the opportunities that we see out there from a digital media perspective where we can use our content, our bespoke content, our unique content, in a way that not many people can. The new age of digital media has shortened the gap between us, the content generator, and our fan base, the consumer, and that really is something that we'll be very focused on in the future.

Both of those we believe will add growth to the bottom line, starting probably in calendar '14. We brought in a new -- the new head of media, rather, sorry, Director of Media, who started this month and will pick up the plans and continue to work with them and the team that's in place today. And I think in the next couple of calls we'll be able to give you a bit more color as to the actual -- more detail around the product, more detail around the go-to-market plan and indeed some guidance around when we might see revenues and profits coming through in that regard.

Okay. Thanks. And then just a follow up on the Aon deal -- as far as all the exposure elements of the deal, you had talked about the timing of the shirt exposure overlap, but all the other stuff like the training ground exposure and the touring exposure, does all that begin in fiscal '14 for Aon?

It does. It does all start --- so the contract from a rights package perspective starts on the 1st of July. There is just an overlap for the first year because of what exists in the existing share deal. All of the rights within that eight-year deal they will start enjoying the benefit of from the 1st of July.

Okay. Thanks. And then finally just on, I guess more housekeeping on the fiscal fourth quarter. I know it's seasonally light in the Matchday segment, and Broadcasting and the Commercial elements appear largely contractual at this point, so are there any other kind of one-time events that might -- or true-up payments perhaps from the Broadcasting fees that might be flowing through in your fiscal fourth quarter?

No. We don't expect there to be anything major coming through there, no surprises. But you're right, there are always true-ups coming through so we'll be reporting on those in September.

Okay. Thank you very much.

Thanks for your questions ladies and gentlemen. I would now like to turn the call over to Edward Wood for the closing remarks.

Thank you very much for your time and we'll look forward to speaking to you about the full year and the Q4 in September. Thank you.

Thank you very much for joining today's call ladies and gentlemen. That concludes your presentation. You may now disconnect. Have a good day.