Manchester United PLC (MANU) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Manchester United second quarter 2014 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 would now turn the conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead, sir.

Thank you, operator, and thank you, everyone for joining us today. With me on the call as normal are Michael Bolingbroke, our Chief Operating Officer; Hemen Tseayo, Head of Corporate Finance; and Samantha Stewart, Head of Investor Relations.

We once again generated record second quarter revenues of GBP123 million, up 12% and driven by continued growth in our commercial business coupled with higher broadcasting revenues from the new Premier League rights agreements. Our commercial business had another great quarter with revenues up around 19% and sponsorship revenues up over 39%.

We announced several new deals in the quarter, six in total including the following. On the regional side, we're delighted to announce a nine country deal across southeast Asia with Unilever as our personal care and laundry partner. We extended our partnership with the Hong Kong Jockey Club.

We signed some MUTV deals with MUTV Fuji, SPOTV Korea as well as Banif Bank as a financial sponsor. And we also announced a five-year extension to STC's sponsorship agreement in the Middle East, making STC now official triple play part of the club with exclusive rights in that territories to distribute MUTV via all platforms, TV, online and through mobile. More recently since the quarter end, we've announced a multi-season deal with Aperol as the club's global spirits partner.

On the pitch, we've progressed to the knockout stages of the champions league with Olympiakos as our next opponents in the last 16. As for the Premier League, we're not in a position that we want to be in and are working hard to change that, and with 13 games to go, there's still a lot to play for.

We've recently announced the signing of Juan Mata, and we're excited to bring a player of his caliber to the club, especially in the more challenging January transfer window. Juan is an established International player, a World Cup and European Championship winner with a proven pedigree in the Premier League. I'm sure he will be a great addition to the team.

Mata's announcement had some very positive impacts. 288,000 new followers on Twitter and 256,000 new Facebook likes between the 21 and the 27 of January represents a 14 fold increase on Twitter and a fourfold increase on Facebook compared to the average weekly growth.

On MUTV, we also added more than three times the historical average for the five day period in January. We've not seen any impact on the wider business from our current on-pitch performance. Feedback from our sales team is that there is as much interest from potential partners as we've experienced in recent years.

Our partners choose Manchester United because we offer them something no other team can deliver: a global brand that can magnify their exposure and reach new customers, a club with 659 million followers around the world with 325 million of those in Asia and 108 million in China. And crucially, significantly higher engagement levels. On Facebook, that is more than any other sports team around the world.

Statistics like these are not achieved in one season; rather, they are the result of history, heritage and success of the club over the last 136 years. I will now turn the call over to Michael.

Thank you, Ed, and good afternoon, everyone. I'm going to review our results for the second quarter 2014, and I'd like you please to 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. And as usual, unless I mention otherwise, all figures are in UK sterling.

So we've announced our second quarter 2014 results today with revenue up 11.6% to a second quarter record of GBP122.9 million and adjusted EBITDA up 1.6% to GBP51 million. And this quarter, we hosted one less Premier League match at Old Trafford and incurred FX losses that negatively impacted that EBITDA figure.

Once again, we have added figures for both adjusted net income and for adjusted EPS as we believe, in assessing the true comparison of financial performance of the business, it's useful to strip out the distorting effects of material charges and credits unrelated to the underlying business. We then apply a normalized tax rate of 35% for both the current and prior periods, and we provide a reconciliation of this in the Earnings Release you all have. So our adjusted net income was GBP19.8 million in compared to an adjusted net income of GBP19 million in the second quarter of 2013.

Now I won't walk you through every line item, but I just want to point out items that I believe are worth highlighting on this call. In the second quarter of 2013, our commercial business represented 34.4% of our total revenues versus 32.3% a year ago. Within the commercial business, sponsorship revenue increased by a full 39.4% to GBP29 million, and that's due to new regional MUTV and financial partnerships coupled with renewals of existing relationships.

Merchandising, apparel and product licensing revenue was down modestly due to an adjustment in the cumulative profits share forecast of our retail partners. For the year-to-date, revenue was GBP19.8 million, and that's an increase of GBP0.9 million or 4.9%. New media and mobile revenue decreased GBP1.1 million, but that's as we continue working on our broader digital media strategy.

Now broadcasting revenues were up 18.7% due to increased revenue from the Premier League domestic and International rights agreements as well as the merit share of UEFA Champions League market pool distributions as we finished first in the Premier League in season 2012/13 compared to second in the 2011/12 season. These increases were partially offset by having one fewer Premier League game during the second quarter.

Matched day revenues were down GBP1.3 million, reflecting a trade-off between one less Premier League home match versus one more home game in the Capital One Cup. On the whole, match day revenues drivers have been having a very good season. We achieved a full sellout for the entire season for executive facilities before the first ball was kicked and record revenues in the volume of seats on seasonal executive hospitality.

Operating expenses increased 19.9% due to player acquisitions and renegotiated player contracts as well as higher fixed cost due to a variety of factors, the majority of which are either one-offs or revenue offsets. Variable costs are higher due to an increase in domestic cup gate share expenses from having one more home domestic cup game in the second quarter versus none in the prior quarter. Our net finance costs are lower by GBP3.5 million versus the second quarter of last year, primarily due to reduction in interest payable on our borrowings following the refinancing we conducted in June 2013.

Based on our second quarter results and current visibility, we remain confident that we will achieve our previously stated guidance for FY14 of revenue between GBP420 million to GBP430 million and adjusted EBITDA of GBP128 million to GBP133 million. Following the January transfer window, we believe that wages will be up in the midteens percentage wise as we have previously guided as the January window is broadly net neutral to player wages with loans and sales offsetting player acquisitions. Our amortization will be around GBP54 million versus the previous guidance of GBP49 million.

I will now turn the call back to Ed for closing comments. Ed?

Thanks, Michael. Anticipating some of the questions that are frequently raised, let me touch briefly on a few of them. First of all, regarding the potential announcement of a new technical partner, we are currently in discussions with multiple parties regarding our global retail, apparel and product licensing business starting in the 2015/16 season with a view to maximizing the value and structure of that business. As advised on previous calls, we will update you only when we have something to report.

Secondly on digital media, we continue to refine our strategy and have made good progress on the development of the new platform. Some recent milestones include rolling out HD technology for the first time, further expanding our social media platforms which continues to lead PTA or people talking about standings of all properties on Facebook.

We're also testing live content on the TV platform and doing product research using the Club's 60,000 strong in-house global fan panel on pricing and product requirements. We continue to expect additional media new platform rollout to have meaningful revenue contribution likely starting in the 2015/16 season.

Lastly on players transfers and fees and salaries, I'd just like to say over the medium-term, we would expect annual net player CapEx to track higher than our historical average as we would invest in our squad as needed in order to make sure we're competing at the highest level. And this in turn will have an inflationary impact on wages.

At this point, it's worth touching on our Player Academy, an often overlooked part of the club but one that's central to our player strategy. It's developed over decades and is one of the strongest in the country.

We will continue to nurture and develop young talented players, bringing them into the first-team when ready. Januzaj, Welbeck, Cleverley, Fletcher, Evans are current all Academy graduates. We continue to believe that financial fair play will begin to curb player cost inflation, and homegrown talent is going to be a key differentiator as FFP begins to take effect.

So I just wanted to reiterate there's been another solid record quarter for us. Our commercial business goes from strength to strength, broadcasting sports right continue to appreciate, and our match day and statistics continue to be very robust. We've strengthened the playing squad and look forward to the rest of the season.

With that, I will conclude the call and pass it back to the operator and open up for questions. Thank you.

(Operator Instructions)

Doug Mitchelson, Deutsche Bank.

This is Brian Russo for Doug. Thanks for taking the question. You mentioned financial fair play, I have a question around that.

With regard to the outlook for player costs, in the industry there's been a lot of press with regard to Manchester City's recent financials as they relate to the financial fair play regulations and the likelihood of sanctions when the government governing body rules on this. Would it be reasonable to see the outcome of this ruling as a proxy for the effectiveness of financial fair play on the future of player wage growth?

I'm not going to talk about specific teams. But I would say that this year is the first point where we will see how FFP is going to bite. And indeed work and have an impact on potential inflation in football.

And there are a number of clubs that have been looked at more closely by UEFA, and I'm not going to obviously comment on specific ones, but I would agree with your perspective that how UEFA yields deals with those clubs that have breached the rules or are close to breaching the rules I think is going to be important here to see what the trajectory the overall -- how FFP going to impact the industry. So I would agree with that comment, and I think the timing of that will probably start to get a sense as to where UEFA are coming out in the coming five or six months, but the process may take somewhat longer than that.

Terrific. Timing is helpful. Thank you.

Matthew Walker, Nomura.

A few questions please. First one is, you mentioned upping the CapEx. Can you -- it's difficult because you don't know who you're going to buy, but ballpark figures, how much above the historical level are you talking about? Second question is, what do you think about the growth outlook for match day revenues and ticket pricing given current performance and pricing levels that you may or may not have put into the market?

And last question is, you mentioned that the business has not really seen any impact at all on the commercial side from the on-pitch performance. Just theoretically, if there was to be no football for a while, how long do you think the commercial business could perform according to your plans and hopes? If you didn't have champions league football, or is it the case that it really doesn't matter?

I'll take the first and third of those questions, Matthew. First of all in terms of the upping of the CapEx which I guided earlier on, I'm not going to give a number or even a range on this. Partly based on what you said, partly because it is a weather forecast.

It is subject to X players going out and Y players coming in and who those players are, you can obviously have some materially different numbers based on that. So I don't think it would be hopeful to guide around that. I certainly would guide there's going to be an increase in the medium-term as I've already said.

And the second piece is I don't want to get into giving forward-looking statements relating to the financials. We will give guidance relating to next financial year when we get to the call in September.

And with regard to your third question, in terms of potential impact on the commercial business, the first thing I would say is our starting point long-term strategy of the club is to focus on building a competitive squad that challenges for trophies. And parts of the financial strength that we have that again we presented in the results today demonstrates that we have the ability to do that.

We have the ability to buy players, to churn players, to make sure that we are competing at the top level which is what we should be doing. So the first comment there is I think there are huge mitigants in terms of our overall financial strength in terms of making sure that we are not in the situation that you've outlined.

The second thing I'd say is I think it takes a long, long time to build up a huge fan base to have if you like the equity values of what we are as a business and as a club projected out there so that people can understand from a commercial perspective why it makes sense to partner with us. And I don't think that would go away for a long time.

And some of our competitors haven't won the Premier League for a long time but still selling a huge number of shirts out there globally. Some just down the road from us. So that's not something I'm sitting here concerned about.

What I am focused on is that long-term strategy which is making sure that we're building a competitive squad that challenges for trophies, and that's something we are doing. The second question I will pass over to Mike.

Just on the match day revenues issue, you will know probably that we decided to freeze prices for the 2014/15 year. The reason for that is firstly, we're just coming out of the major, major recession, and it just seems sensible from a macroeconomic point of view to take that step.

We also conducted a great deal of analysis on supply-demand et cetera around that and did our yield work on that and felt that that was the most sensible way to go. But looking more into the medium and long term and talking about yields, there are plenty of opportunities that Old Trafford offers us from a capacity point of view and from a balance of executive hospitality to GEA point of view, to raise that yield.

And over the medium-term, we will be looking at that. So we've kept prices flat for the following year because we think that's the right thing to do, but the guidance we have in the past has always been that we will increase prices in-line with inflation, and I'm sure that's the case and potentially there will be more yield there as well in the near to medium term.

Okay. Thank you very much.

Randy Konik, Jefferies.

Back on the player CapEx, there's no type of guidance we can get at all in terms of how much of an increase? Or maybe instead of quantify, can we qualify what the game plan is? Is there a need for five or seven new players or maybe put some --qualify what needs to be done rather than quantify what needs to be done. Thanks.

That's difficult to answer, Randy. I think it's fair to say we are focused on strengthening the squad.

We are looking at some players in the squad as well as players that perhaps we would sell this summer. We wouldn't necessarily be looking to churn a huge number of players as that can have a destabilizing effect, but we aren't afraid of moving in the market in a way that perhaps we haven't seen in recent years.

And if you look at historic numbers, that gives you one guide. If you look at historic churning of players by number, that gives you another guide.

And historically we've had roughly three sales and three purchases each year, and it's possible that we would do more than that, but I can't guide as to where that may end up. It is a dynamic situation, and obviously the market itself can throw up opportunities or the opposite of that as we go through the window.

Great. That's fair. Thank you.

Bryan Goldberg, Bank of America.

Just a couple quick ones. Thanks for your comments, your update on the digital media strategy earlier.

Are you still on track for a late 2014 launch? And then is the cost base for this initiative fully built into our P&L, or is there going to be some sort of modest ramp into that launch?

And then secondly, with respect to the team's summer tour, what were the biggest factors that drove your decision to come back to the US market? And if you've got any recent data points with respect to Premier League viewership trends in the US on NBC, that would be great as well.

And then finally, with the profit share adjustment that I think you called out in your prepared remarks with respect to your Nike relationship, was that a one-time adjustment? I know it's small, but is this going to recur for the remainder of the year or was it just one time in the quarter? Thanks.

Thanks, Bryan. Digital media yes, there's no change in terms of guidance around timing. I think the major guidance though, remains having a material impact on the P&L, and that's a 2015/16 season, not a 2014/15 season. But you will see as we will product out and as we develop the plan further, that picking up in the coming year.

Cost base wise, there has been investment in this, and we are carrying a cost base relating to people working with suppliers, investment in increasing capacity and ability from a production perspective at MUTV, our production company, and HD is a good example of that. That's not cheap, but the cost base inevitably will pick up particularly on a variable cost basis as we launch products. So I would again, I think you will see that come through and be able to assess better the margins as we get closer to the revenue streams.

Your second question on the US, the US has always been an important market for us. I think we've kind of given guidance in the last five years, maybe three to five years we've seen a greater acceleration of interest in the sport and in Manchester United in that territory, and that continues to be the case. It's something we track very closely.

We've got incredible number of people on Facebook and our other social media platforms, and they're highly engaged from the US where we have now we think as many if not more fans in the US compared to in the UK. And early stats coming out of NBC showed an increase of about 78% viewership this year compared to last year on the Fox and ESPN platforms in terms of the US audience, which is obviously extremely positive. And I will pass the third question over to Mike on the profit share.

Brian, on the Nike question, so that is a one-time adjustment. Nike made an adjustment primarily driven by the effect of having the World Cup in 2014 which they haven't fully baked into the numbers.

Thanks a lot.

(Operator Instructions)

There are no further questions at this time. Please continue.

Thank you very much everybody for your time, and we look forward to speaking with you in a few months. Thank you.

Thank you, everyone for joining us today. We look forward to updating you on our progress on our third quarter call in May.