Manchester United PLC (MANU) 2014 Q4 法說會逐字稿

Welcome to the Manchester United fourth-quarter and FY14 earnings conference call.

(Operator Instructions)

We would like to remind everyone that this conference is being recorded today. 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 notes 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 would now turn the call conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead, sir.

Thank you very much, operator. Thank you, everyone, for joining us today. With me on the call are Hemen Tseayo, Head of Corporate Finance; and Samanta Stewart, Head of Investor Relations.

2013/2014 was a very challenging and disappointing season. However, I'm confident that with Louis van Gaal as our manager, with a clear philosophy and a strengthened and reenergize squad, we'll get back to challenging for the title and trophies.

We have one of the best -- the world's best managers in Louis van Gaal. He's already begun to reinvigorate the Club with new faces and methods, while embracing the heritage and traditions of Manchester United.

He joined us immediately after the World Cup in Brazil, where he led the Dutch team to an impressive third-place finish. His track record of delivering top-performing teams at both the domestic and European levels speaks for itself. We're excited to have him leading our First-Team squad.

There's a real feeling at the Aon Training Center, not amongst just the coaching staff and players but general staff also, that we are starting something special. We've had an excellent start, having signed several top class players in Blind, Di Maria, Herrera, Rojo, Shaw and Falcao, who is on a one-year loan with an option to purchase. We also promoted several youngsters from our Academy to the First-Team squad including Blackett, James and Wilson.

We also won the International Champions Cup as part of our pre-season preparations, setting an US attendance record for a football match, with over 109,000 enthusiastic fans at -The Big House - in Michigan. We also continue to see incredibly strong support from our fans with season tickets selling out faster than at any time since we increased the capacity at Old Trafford to 76,000.

Commercially, we continue to go from strength to strength. As the recent world record deal with Adidas shows, United is the Club companies choose to associate with. In doing such deals, we've underpinned our ability to compete to the highest level for the next decade.

Looking at our 2014 results, we once again broke records by generating higher revenues and EBITDA than ever before, as our broadcasting revenues grew 34% from the primarily domestic and international rights agreements. Our commercial business delivered impressive 24% growth, driven largely by sponsorship revenues, which were up nearly 50%. Since the end of FY14, we've also announced our partnership with Nissin, an industry-leading Japanese food band well-known for their instant noodles, as our newest global partner.

In July, we announced our 10-year agreement with Adidas, as our new global technical sponsor, with dual-branded licensing rights beginning on August 1, 2015. We are very excited to have Adidas, as our partner. We believe their distribution capabilities will make a further reach of our merchandise and enable our fans to more easily engage with their Club. The GBP750 million Adidas deal is a record setting kit and sponsorship deal not just in football but for all sports.

This was a culmination of four years of hard work from over 70 members of our staff, including 13 of our sales team, to analyze and size the depth of this opportunity. We reached out to over 450 companies around the world and had offers from more than 20. Adidas was the clear choice, as they impressed us greatly with their overriding passion for football and a vision and plan to grow and develop our business for the next 10 years, with a broad product range tailored to meet the needs of our fans globally and a very impressive distribution footprint.

As part of the Adidas agreement, we made sure that some key rights would revert to Manchester United including retail, e-commerce, mono-branded product licensing and soccer schools. Under the current arrangement, all of those businesses are managed by Nike.

We believe there is significant potential in those businesses once we have full control of where retail outlets may be allocated and how we sell our products online. Moreover, meaningful growth opportunities and sponsorship remain both in terms of categories and countries.

Before I turn the call over to Hemen to discuss our financial performance, let's talk a little bit about the exciting emerging markets of football that is the US. We seem to be in the midst of a step-change at the moment with football or soccer breaking into the mainstream sporting consciousness in the US. Clearly, that's been aided by the recent World Cup in Brazil, the strong performance of the National Team there and the popularity of football themed video games.

We played our five tour matches across the US to a cumulative stadium audience of more than 360,000 people. The US attendance record, I've already mentioned, of 109,000, which we set in Michigan, is higher than any Super Bowl or World Series game in history, breaking a record that stood for 30 years set at the 1984 Olympics when Brazil lost to France in the final.

Here are some interesting statistics, showing the growing potential of the US as a market for football. American supporters bought 197,000 tickets for the 2014 FIFA World Cup, trailing only local fans from Brazil. The World Cup is the most -- the 2014 World Cup is the most widely streamed live sporting event ever in US history with over 30 million live viewing hours, which is more than double the streaming of the 2012 Summer Olympics.

The success of the US at the World Cup had a strong impact not only on TV ratings but also on Team USA merchandise sales. According to a CNBC article in July, fanatics.com sold 10 times more Team USA merchandise in the first two weeks of this year's event than they did during the same period of the 2010 World Cup.

Fanatics also reported that they saw huge traffic on mobile devices, as fans turned to their smartphones to place spur-of-the-moment orders. Mobile purchases of merchandise increased 70% or more on game days.

As a reminder, a record 31.5 million Americans tuned-in to NBC's 13/14 Premier League coverage, which is more than double the figure from the prior season on ESPN, ESPN2 and FOX Soccer. Additionally, Manchester United was the most-watched Club on NBC last year, despite their challenging season. We have a very strong brand in the US. It, again, continues to grow in popularity, we are well-positioned to benefit.

Hemen, over to you.

Thank you, Ed. (technical difficulty) FY14. I'll touch on a couple of financial transactions we recently completed post the year-end.

On August 5, we priced a secondary offering of 12 million shares upsized from 8 million shares, which resulted in an increase in our float to 28.7 million shares. Later in August, we restructured our term loan facility with BAML, extending the maturity by a year to August 2019, removing the requirement for a scheduled repayments and resetting the principal amount to the original $315.7 million, whilst keeping the interest rate and other terms unchanged.

Turning to our financial performance, I will focus my remarks on the full-year numbers, as the seasonal nature of our business doesn't easily lend itself to a single quarter analysis without significant explanation and understanding. Furthermore, unless I mention otherwise, as usual, all figures are in UK pounds sterling.

Total revenue, then, for the year was up 19.3% to GBP433.2 million. Adjusted EBITDA increased 19.8% to GBP130.1 million, reflecting strong performances from our commercial and broadcasting businesses.

Consistent with previous announcements, we've included both adjusted net income and adjusted diluted earnings per share, as we believe that in assessing the true comparative financial performance of the business, it is useful to strip out the distorting effects of material debits and credits unrelated to the underlying business and then to apply a normalized tax rate of 35% for both the current and the prior periods. We provide a reconciliation of this in the earnings release.

Adjusted net income, then, grew very strongly, up 51.1% to GBP28.7 million. Adjusted diluted earnings per share increased 50.3% to GBP17.51 per share, highlighting the significantly improved underlying performance of the business.

I won't address every line item here, but will highlight the items that we believe are most important. Sponsorship revenue increased 49.4% to GBP135.8 million due to the activation of several new global and regional partners, high sponsorship renewals and a significant increase from our pre-season tour in July 2013. Merchandising, apparel and product licensing revenue was GBP37.5 million, a decrease of GBP1.1 million or 2.8%, as football fans primarily focused on National team products in the run-up to the World Cup.

Mobile and content revenue decreased GBP7 million due to the expiration of a few of our partnerships in territories that we have decided to keep clean as part of our broader digital media strategy. We believe that the recent launch in limited territories of the smartphone app which we mentioned in the previous earnings call will strengthen our relationships with our telecom partners as customers increase their engagement with our mobile content and provide us with valuable live learnings for our digital media offering.

In fact, at this point, I'd like to highlight that we've changed the nomenclature of this income stream to clarify that this line item does not currently contain any revenues from our forthcoming digital media offering. The overall results then is a strong increase in commercial revenues which now contribute 43.7% of total revenue, up from 42% in FY13, which is all the more impressive when one takes into consideration the substantial step-up in broadcasting revenues.

Which is a nice segue to our second sector, broadcasting revenues, which were up 33.7% as a result of the new, primarily domestic and international rights agreements, as well as the increase in revenue from the UEFA Champions League. As we received a larger share of the UK market pool by virtue of finishing First in the Premier league in the 2012/2013 season compared to Second in the 2011/2012 season and reached the quarter-final stage in FY14 compared to the round of 16 stage in the prior year.

Match day revenues declined very modestly as FY13 revenues were positively impacted by a number of London Olympic Games matches being hosted at Old Trafford. Total operating expenses increased 20% due primarily to player acquisitions and renegotiated player contracts, increases in professional fees and increased pre-season tour costs.

Overall, we generated an operating profit of GBP67.9 million in the year, an increase of 9.5% over the prior period. Below the line, the key item I'd like to highlight is net finance costs, which decreased GBP43.4 million to GBP27.4 million for the year, primarily due to interest savings of GBP12.9 million as a result of our refinancing and the costs associated with the repurchase of senior secured notes in the prior year.

Turning to the outlook then for FY15, we expect total revenues to be in the range of GBP385 million to GBP395 million and adjusted EBITDA to be in the range of GBP90 million to GBP95 million. I would also like to provide some color on a few other items you might find instructive when modeling our business.

We expect total wages to be down slightly, low single-digit percentage points, due to the sale, release and retirement of players coupled with no uplifts for participation in the Champions League this season. Amortization to be approximately GBP100 million. As you know, this figure can change if we buy or sell a player or extend player's contracts.

Interest expense to be approximately GBP25 million. Our effective tax rates to be approximately 35%. This will, of course, vary subject to the relative magnitude of permanent differences.

Finally, regarding net player CapEx, we incurred GBP79 million in FY14. For FY15 -- committed net player CapEx after the summer transfer window, stands at GBP90 million. As we've mentioned in the past, net player CapEx expenditure has and will continue to vary significantly from period to period.

I'll now hand the call back to Ed for closing remarks.

Thank you, Hemen. We remain excited about our business and its great potential. As we've mentioned before, the live -- the value of live sports continues to increase, which should lead to further growth in our broadcasting revenues with a new cycle of deals and our commercial businesses continue to thrive.

Regarding our retail business, we've started working on the strategy for the various rights that will revert to us in August 2015. The Adidas deal was enacted less than three months ago. We continue to refine and develop our strategies for the various business opportunities. I look forward to sharing our plans with you in due course.

We continue to also make progress on digital media. On July 14, we launched MUTV in HD ahead of our US tour. Our archive is now fully digitized.

As part of the HD launch, the channel went through a full brand refresh including all new on-air graphics. The Club also invested significantly in new production facilities, with brand new studios at Old Trafford and the Aon Training Complex, as well as new control rooms and editing suites.

On August 21, we launched an official Manchester United branded social messaging account in three languages: English, Japanese and Thai, with Line, one of Asia's biggest social messaging platforms, which could see the Club engage with over 400 million users across the globe and allow users to access Manchester United news, videos and imagery directly from their mobile phones to share with friends and contacts.

As we look to the short to medium term, we are well-positioned to take advantage of our burgeoning social media presence, which now includes 56 million Facebook followers, 21 million on Twitter, Google +, Sina Weibo and all other social media platforms on over 37 million CRM database records. This, combined with the ability to fully integrate our e-commerce and content platforms, makes now the right time to turn our focus to the digital media opportunity.

Over the summer, we had a major refresh of the squads, with 13 players coming in, including 6 from the Academy and 17 players departing, including Ryan Giggs, who joined our coaching staff. So, in summary, we're excited about the year ahead, both on and off the pitch. We look forward to sharing our compliments with you through 2015.

With that, I'll hand it back to the operator. We're now ready to take your questions. Thank you.

(Operator Instructions)

Bryan Goldberg, Bank of America.

Just got a few questions on your new deal with Adidas. Aside from the financial terms that we've read about in the press and the fact that you were able to claw back the non-jersey rights from Nike, I was really just looking at the jersey part of your business going forward. Could you give us some more color about what some of the merits are, with respect to Adidas as being your supplier versus Nike previously?

What some of the operational and strategic benefits could be over the next two to three years? Are there certain parts of the world where they would be stronger from a distribution standpoint? Any color you could provide would be helpful.

Sure. Good question there, Bryan. I think the core of the deal is what you're describing here. Obviously, this was a very competitive part of the process, with a number of sportswear companies stepping up to buy this piece.

Adidas, as I mentioned already, puts football at its core. When you look at that together with their geographic distribution footprint, that's really what got us excited.

They got a huge number of retailers and partners -- wholesale partners across a wider geographic spread. I think, for example, in China, they have a multiple of what most in the industry have in terms of both -- reach from a distribution perspective. So I think the key to answer that question is distribution.

Okay, thanks. Then I've got two more on this. Financially or just mechanically, with respect to this deal, the Nike deal has a fixed fee element and a profit-sharing element. With respect to the Adidas deal, is there a similar type of structure? Is there a profit-sharing element or a performance driven element?

Then, how would you be recognizing the payments from Adidas on your P&L? Are these going to be sort of flat-line fees over the life of the deal? Will they be escalating? Any color you could give us there from a modeling perspective would be helpful also.

Sure. Hemen, why don't you take that question.

Sure. Thank you. I'll do them in reverse actually. In terms of the recognition, we're still working through that with our auditors. So when we've got something to announce, we will let you know. There are a number of different ways that it can be done. But we'll hold off on confirming that until we can be absolutely certain.

In terms of the mechanics, there is and there is so much we can say, but we can tell you that there's the fixed fee element and then there is a performance element above a certain threshold. But we can't let you know what that threshold is, so there is upside that will be driven off incremental sales.

Okay. Then finally, I know -- it sounds like you're still working through your strategy. But with respect to taking control over the retailing and the e-commerce opportunities, for example -- I know you don't have official plans to disclose today, but just broadly speaking, how are you sizing these two market opportunities? How should we -- if you can give us any kind of boundaries to think about the potential here for those two buckets of the business, that would be great.

Sorry, did you say retail and --

Yes, the e-commerce or the even licensing more broadly.

Okay. Yes, I mean they are three different businesses there. We know today how much those three businesses make in the existing structure and existing deal. Clearly, there has been to date a sharing of the retail margin due to the nature of the deal with Nike.

So there is fantastic visibility on that full margin with regard to the megastore because we have a highly visible footfall coming for through and that translates very accurately into a set of numbers. We will now capture the full retail margin there.

How that then gets replicated across further retail outlets, whether owned or through joint venture, expanding into the UK, expanding around the world into various countries, into airports, how ever we do it, is something that is a work in progress. Sizing that market is something I would rather talk to you about in the coming calls.

E-commerce, I think, we've been pretty open on e-commerce and said that the low single-digits percentage that -- of our -- from a revenue perspective that we are selling through e-commerce, we believe is very low compared to what we should be doing. As an apparel, it's an easy -- as a form of apparel, jersey is an easy one to -- for fans to buy -- or should be an easy one for fans to buy online. It's not something you try on and look in the mirror and make a purchase decision based on how it looks, necessarily.

So I think the sizing of e-commerce will become trending to a level that we see from other retailers in terms of overall e-commerce ratio. We are a long way off that. So we think there's a big opportunity there. Of course, we will capture a chunk there of the retail margin.

And then Licensings. Licensing has been sold to date. It's been done through lots and lots of different deals with companies around the world. When I talked about 450 companies that we went to, a large number of those were companies that had potential interest in licensing.

So we have sized the market fairly accurately. We have a very clear view as to what we think we should be doing on that. But again, it's too early for me to be guiding you as to the sizing of that opportunity. I look forward to doing that in the next 12 months.

Fair enough. That was very helpful. Thank you

(Operator Instructions)

Matthew Walker, Nomura.

Just a few questions please. The first is, you've given CapEx numbers. Could you say how much of the summer spend fell in 2014 versus what's going to fall in 2015?

Could you also maybe give us a bit of an outlook for the mobile piece? I guess we're not asking for guidance on the new media specifically, but on the mobile side that would be helpful.

Can you also say, just to confirm, my guess is it's true. The guidance you've given for revenue so far for 2015, if you could just confirm that includes a top three finish as it usually does?

Sure. Hemen, why don't you start with the first question on CapEx?

Sure. Absolutely. Hi, Matthew. Yes, with respect to the CapEx, we've got about GBP29 million, GBP30 million of the summer spend of the flow that we brought in was taking in FY14. So, into the GBP79 million figure that we've got there.

Perfect.

I'll quickly answer the third question, then hand you back to Hemen in terms of the mobile question -- the outlook on the mobile. But you are correct. We assume Third in our budgets and we can get all the way there, because that's our guidance.

Yes, with respect to mobile, you're right, we haven't specifically guided on that line item in the past. I think you probably have a decent idea with respect to where we are based on the FY14 numbers with that coming down. So, a very low teens in terms of FY14 in terms of that line item.

Then for 2015, it's something that we haven't guided on, but I think you can infer from the fact that our digital media pieces to come going forward. That will ultimately be the driver of that line in a bigger way. We probably see that line as being crudely flat, I guess for FY15, to be helpful, it's probably the best way to look at it.

That is helpful. Just one quick follow-up, which is, do you intend -- I mean is difficult to say obviously, but do you intend to significantly increase CapEx in the January window?

No. We don't intend to significantly increase CapEx in January. We will continue to monitor together with Louis, his view of the squad and continue to make assessments as to which areas of the squad that we would look to strengthen. Then by definition, which areas we would look to sell.

We feel like we've got to level now where we've got a stable number back in the squad. I think we guided previously that the usual three in, three out is sort of par for the course in terms of the numbers of ins and outs every year. Those typically are in the summer.

So I wouldn't necessarily sit here and have expectations around January, but I think as we've demonstrated, if there is a willingness from the manager to do something, we will engage with him and look to see if it's something we can deliver. Yes, if January is the opportunity, then you have to take the opportunity when it comes like we did last year with Juan Mata.

Okay. That's helpful. Thank you very much.

Thank you. There are no further questions. As we have run out of allotted time, please continue.

Thank you very much for everybody's time on the call. We look forward to updating you on Q1 in a few months. Thank you.