Manchester United PLC (MANU) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Manchester United third-quarter 2015 earnings conference call.

(Operator Instructions)

We would like to remind everyone that this conference call is being recorded. Before we begin, we would like to inform everyone that this call will include estimates and forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially, and which should be considered together with the cautionary note in our earnings release regarding forward-looking statements and the risk factors in our filings with the SEC.

Manchester United PLC assumes no obligation to update these 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, operator, and thank you, everyone, for joining us today. With me on the call are Hemen Tseayo, Head of Corporate Finance; and Samantha Stewart, Head of Investor Relations. Hemen will take you through the detailed financial results shortly, but I will start with some comments on recent news and then discuss the quarter.

Let me start with on-pitch performance. We are delighted with the progress made so far under Louis in his first season of manager, and with only two games remaining, we're well positioned to achieve a top four finish in the Premier League and therefore return to European football next season.

Regarding this summer's transfer activity, we already starting implementing our plans, and last week announced that Memphis Depay, who is one of the most exciting young players in Europe, will be joining our first team. We expect to be active again during the window, but it's too early to give guidance on transfers or wages at this point.

As we mentioned before, the value of content continues to rise and football is the world's number one sport. As we discussed in our last quarter in February, Sky and BT have won the UK television rights for seasons 17 through 19. And that bid reflects an increase of more than 70% over the current three-year cycle. The Premier League will bring the international rights to market in the second half of calendar year 2015.

In March UEFA provided preliminary information on the amounts to be shared with clubs for participation in Champions League and Europa League competitions for the new three-year cycle commencing next season. For the first time, UEFA's centralizing into one single part and the total club remuneration announced represents an increase of more than 25% on the current deal.

The total economics to English clubs and the impact on our numbers will depend on what proportion the UK broadcasting rights represent of the total broadcasting pull for all countries participating in the competition. As a reminder, in November 2013, BT acquired the rights to broadcast the UEFA Champions League and Europa League competitions in the UK in a deal worth more than double the current arrangement.

Off the pitch, our commercial business continues to grow. Sponsorship was up 22.1% in the third quarter and we announced three new deals. KamaGames is our first official global social games partner.

Swissquote is our first official global ForEx and online financial trading partner. And Emtel is our first partner in Mauritius as a triple-play media partner. We recently announced that we will be returning to the US for our preseason tour and will play four matches against Club America, San Jose Earthquakes, Barcelona and PSG.

I'll turn our focus now to the bottom line. We believe that Financial Fair Play in the Premier League's financial regulations are starting to show their effectiveness in controlling the industry's key costs, player wages and CapEx. According to an article published at the end of April in the Guardian following the introduction of Financial Fair Play rules in 2013, Premier League clubs made an overall profit for the first time in 16 years.

The collective GBP198 million of profit followed a loss of GBP291 million the previous year. And player wages up around 5.5%, much less than the total income which grew 22%.

Turning to retail, following the conclusion of the agreement of our new 10-year partnership with Adidas, we've been preparing for the transition of the retail and merchandising business back to the club. The business segments that will be operated by the club from the first of August are: retail, including the Old Trafford Megastore; e-commerce; licensing; and soccer schools. I can confirm that the Old Trafford Megastore will be taken in-house and operated by us from the first of August and therefore we'll be retaining the retail margins.

Manchester United currently has over 20 stores and twice as many shop and shop concessions operating across India and Southeast Asia, all managed through franchise agreements established by Nike. We're in the process of evaluating these partners, and where appropriate, extending our relationship with them. We believe that there are other global [carrot trees] which could support Manchester United stores and we're in the process of assessing and prioritizing these markets.

On e-commerce, the focus remains on establishing mechanics to convert the online traffic into purchases. We'll be extending the relationship with Kitbag and assessing the opportunity as we focus on developing and implementing a full strategy for this business from 2016, 2017, onwards.

On licensing, all the current licensing deals will terminate at the end of this July and we are taking this opportunity to make sure robust foundations are put in place for future growth. We will selectively extend deals with some licensees and this transition will allow us to investigate further sponsorship opportunities and take control of the products and retail experience for our fans.

Also I wanted to mention that David Sternberg, Head of Digital Media, will be leaving Manchester United at the end of the current season to return with his family to the United States. I would like to thank David for his contributions at this time, to the club, helping to grow all of our expanding media business. In his two years at Manchester United, David has helped develop the strategic plan and hired a talented team that will continue working on the digital media roll-out plan, as we in parallel, look to hire a new Head of Media.

Our strategy is to redefine the club's digital media infrastructure and leverage the opportunity to connect with the fans, the 659 million fans that follow us globally. Our primary objective is development of a mobile first approach that will be associated a social footprint, which is now over 100 million social media connections across 10 platforms delivering content in over 27 languages, the most recent being the club's Chinese launch on the mobile messaging platform, WeChat.

We've developed an embryonic mobile application that is being released initially with partners in key strategic regions through 2014. The app is a content-rich environment for fans with exclusive content, video and audio, along with a rapidly developing range of engaging in interactive features.

We continue testing the app and making changes to incorporate learnings based on usage patterns. We'll provide further updates on our additional media progress in the next earnings call. With that, I'll turn it over to Hemen for a more detailed look for into this quarter's financials and guidance.

Thank you, Ed, and hello, everyone. I'm going to review our results for the third quarter ended March 31, 2015. As usual, unless I mention otherwise, all figures are in UK pounds sterling.

In terms of the headline figures, our third-quarter 2015 revenue was down GBP25.5 million to GBP95 million and adjusted EBITDA was down GBP14.6 million to GBP25.4 million. EBITDA is higher than consensus due primarily to lower wages in the quarter and variable costs than expected by the Street.

Consistent with previous announcements, we have 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 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, and we provide a reconciliation of this in the earnings release.

Adjusted net loss was GBP7.1 million then compared with GBP13 million of profit in the third quarter of the prior year, due primarily to lower broadcasting and match day revenues as a result of our absence from European competition this season, and higher amortization which is partially offset by lower wages and decreases to other operating costs.

Turning to the key items of note in the financial statements then, match day revenues decreased GBP11.6 million primarily due to playing two fewer Premier League home games, the discount provided to executive season ticket holders this year due to the absence of European football and the loss of one Champions League home game in the third quarter compared to the same quarter last year.

Broadcasting revenues decreased GBP13.9 million due to, again, the two fewer Premier League home games in the quarter. And this is because we recognize the domestic rights equal share amount together with the international rights revenues equally over the number of Premier League home games in the season.

There's also the loss of the one Champions League home game. And finally, with respect to broadcasting, in this quarter we had five fewer games selected to be broadcast live compared to the same quarter last year.

Now, this is merely a phasing issue as the total number of games to be selected live for this season in the UK is expected to be at least 26 this fiscal year. The final game for the season is yet to be decided whether it will be selected or not, that which is difficult from the broadcasters. And this compares with 25 games last year.

Commercial revenues then increased GBP5 million primarily as a result of sponsorship revenue increasing GBP6.8 million due to the increase in the shared sponsorship with Chevrolet and other new sponsorship agreements. Merchandising, apparel and licensing revenues declined GBP0.8 million due to the reduction in the minimum guarantee from Nike as a result of non-participation in European competitions in the current season. And the extended final period of the partnership which ends on July 31 this year, resulting in the profit share element being recognized over 13 months, with 12 of the 13 months recognized in FY15 and the final month recognized in the first quarter of FY16.

Mobile and content revenue then decreased GBP1 million, due as previously explained, to the expiration of a few of our partnerships in territories that we decided to keep clean as part of our broader digital media strategy.

During the quarter total operating expenses, excluding depreciation, amortization and exceptional items, were down 7.8%, with wages down 6% primarily due to the absence of the Champions League participation uplift in football staff wages. And other operating expenses decreasing a little over 12% due primarily to reductions in match day variable costs, resulting from playing three fewer games at Old Trafford in this quarter compared to the prior-year quarter, coupled with savings on fixed costs such as travel and entertainment and legal and consulting costs.

Based on our year-to-date results and the current visibility, we leave revenue guidance unchanged for FY15 at between GBP385 million to GBP395 million, and raise EBITDA guidance from the previous range of GBP90 to GBP95 million to a new range of GBP103 to GBP110 million. The EBITDA guidance increase is primarily driven by, on the revenue side, the expectation that full-year revenues will be toward the top end of our guidance range, notwithstanding the team's early exit from the Capital One cup.

This is due to larger-than-expected Champions League and overseas wash-up payments which related to FY14 and strong performance in the match day ticketing sales. This is coupled with, on the cost side, lower operating costs due to fewer domestic home cup games, resulting in savings in the direct costs of putting on those games and also the gate check cost associated with those. Also lower legal and consulting costs than we'd anticipated, and efficiency drive savings as well.

On top of this, we have material one-off items such as FX translation gains on cash and receivables and payables. And also on nonrecurring items such as a business rates rebate, which relates to a claim dating back to 2010 and also lower tour and friendly costs.

It is also worth noting that we're in negotiation with a few players regarding contract extensions. Any deals concluded could have a wage catch-up effect in the fourth quarter.

Finally, we've been working on the appropriate revenue recognition methodology for the Adidas partnership, and have agreed with our external auditors, PWC, that we will recognize the revenue from the GBP750 million minimum guarantee on a straight-line basis. The contract covers a period of 118 months from August 1, 2015 to May 31, 2025. So in the first and the last fiscal years of the contract, Adidas will contribute in only 11 of the 12 months in those years.

As such, the amount to be recognized with respect to the Adidas minimum guarantee in FY16 will be GBP69.9 million. That's the GBP750 million divided by the 118 months, times 11 months. With that, I'll hand you back to the operator and we're ready to take your questions. Thank you.

Thank you.

(Operator Instructions)

Our first question will come from Alexander Mees of JPMorgan. Please go ahead.

Good morning, everyone. Thanks for taking my call. Just a couple of questions. The first one with regard to the very strong Q3, and congratulations for that, it seems that the 6% reduction in staff costs was one of the reasons for it. I wonder if you could give us a little bit more color as to why staff costs went down 6% the way that they did.

And my second question is with regard to the squad for next year, two prongs for the question. Firstly, I wonder what proportion of players are up for contract review this year, and whether we ought to be concerned about wage inflation next year.

And the second prong is, do you believe the squad is deep enough to challenge for European honors next year? And if not, will you be looking to strengthen?

Thank you, Alex. I'll definitely take the first portion of that, the reason for the 6% wage reduction in staff costs. The bulk of that is driven simply due to the absence of the Champions League uplift on this quarter versus last year, when we were in the Champions League.

I did mention, and I know that a number of analysts obviously have an expectation of some costs coming in the second half of the year, some of those coming into Q3, some of those could still happen in Q4 from the player wage re-negotiations that are under way. With respect to the portion of the squad, do you want to take that, Ed?

Yes, sure. There are several players out of, if you like, out of 13 players, maybe around about 8 or 9 who has a contract at the end of next season. There are only a couple this season who are on the periphery. So it's not going to have a major impact from an inflationary perspective because that's a fairly normal ratio, to be honest.

Obviously a number of those that have one year left will be offered new contracts. I think Hemen alluded to that earlier when he made his comment about the negotiations that are under way.

The second part of your question in terms is the squad deep enough to challenge. The squads will be absolutely deep enough and ready to challenge on all fronts, all competitions next year. That, as ever, does involve some ins and outs in the summer, which we're not going to guide on in terms of number.

Okay. Thank you very much.

(Operator Instructions)

The next question will come from Matthew Walker of Nomura. Please go ahead.

Thanks very much. Good afternoon, good morning. The first question is, the beat on EBITDA and the upgrade that you've put through, does that flow through into EBITDA for next year? And if not, why not?

The other question really is on the e-commerce side and retail. Why have you chosen to extend with Kitbag and where are the other stores going to go?

You mentioned 20 stores in India and Southeast Asia, what markets are promising for further stores? And will you be doing those by yourself or with somebody else?

And the last question is really on player CapEx. You said you couldn't really give guidance for next year, but for this year I think you were talking about around GBP90 million of net player CapEx.

Does Depay go into that CapEx number? Are you still comfortable with that number? And how much is Depay coming in for, please?

Hi, Matthew, and thank you. I'll take your first and your third question, and then I'll pass on to Ed for the retail and merchandise.

Firstly on the EBITDA up-list and whether it would flow through into next year, the vast majority of it does not flow through. I'll walk through the items that are largely contributing to go that. We can see that, I think, relatively clearly.

First of all, and with respect to the top line on the revenue side, we're at the high end of guidance. On a like-for-like basis, the revenue would have come down with respect to the early exit on the Capital One Cup, where we went out on the first round as you might recall, the MK Dons game.

And so we lost a portion of revenue but we've made that up in other ways, in particular due to the payments on broadcasting, the wash-up payments from broadcasting on the Champions League, which were higher than we'd forecast. And also for the overseas payments.

Those are one-offs, and although they happened -- I said one-offs -- the amounts are not forecastable, the amount we received. Although we had a provision in there for what we expect to receive, it was significantly higher than what we expected. So that would not repeat. And that's together circa about GBP2 million in terms of the incremental uplift.

There's also, then, the strong performance on match day ticket sales is something that theoretically could repeat. It's relatively small, around circa GBP0.5 million. That obviously varies from year to year, but that's an amount that's theoretically repeatable.

With respect to the cost side, the fewer domestic cup games, clearly that had an effect on the revenue side and also on the cost side, but we've made it back up on the revenue side. So in terms of the cost side, the circa GBP2.5 million of savings from not putting on the games that we expected to put on in terms of the domestic cup side, together then with the gate share that we'd forecast to have in there. So that's another GBP2.5 million that wouldn't repeat necessarily next year and not one that would you flow through.

On top of that, we've got the FX translation gains, which at the moment sit at circa GBP2 million. It's possible that we might have some of the reverse of that with the remaining months to come, so that's a number that could come down again. There's an element of a swing, but it's unlikely that swing will turn into a negative, so that GBP2 million might end up being slightly smaller.

On top of that, the two other key nonrecurring items, one is the business rates rebate. Again, that's over GBP1 million that we had. And I mentioned that's from a claim with the council dating back before 2010.

And then finally, we were forecasting to have a certain amount of cost relating to the tour together with either mid-season or end-of-season friendlies, which we've decided not to have. The only friendlies we had at Old Trafford were the international game that was played between Argentina and Portugal.

As such, the costs relating to those that we had provisioned for, circa GBP2 million, will also not happen and those GBP2 million will not flow through. So hopefully that answers the EBITDA beat point and the forecast point and why it doesn't flow through with respect to the guidance.

With respect to player CapEx, you're right, previously we were at circa GBP90 million for player CapEx for this year. We expect the number this year post the Depay transaction, and a few other small movements that happen to basically be GBP101 million for this year contracted. And then the contracted figures which we've given you for next year as well, which we provided, I think, the last time we spoke, it was at circa GBP45 million. That number is now GBP53 million for FY16.

Thank you.

I'll hand you now to Ed for the retail piece.

Yes, okay. So why did we extend Kitbag? Essentially prudence. We've done a very short extension while we finish off our additional media plans. We didn't want to lock ourselves into something and then regret it.

We are going to basically be making strategic decisions during the next 12 months relating to that. So that's why we've done it. It's just to cover that and off and continue to deliver a product via e-commerce with a partner that we know.

The stores, that is very much a work in progress in terms of where they may be. We think there is a big opportunity here globally that hasn't fully been developed. I think there are several strategic markets, I would call them, that we believe represent a material opportunity. One, as an example, would be the US.

And whether it's ourselves directly or partnering, again, that's to be determined. But obviously recognizing that our retail expertise largely resides within the team of people who run the Megastore, that group of people, staff members, are coming back to us obviously. So we are open-eyed about whether we need to partner from an expertise and understanding perspective, in particular as you look to local markets where local knowledge is extremely important.

Last quick question, which is it was reported, I think, that the club had decided not to take up naming rights for the stadium, which could have brought in maybe GBP20 million, GBP25 million. Could you comment on that? Is that right?

I think the comment was that we had no intention of doing a process to sell naming rights related to Old Trafford. I have no idea where that GBP20 million came from. We're not sitting here with an offer we're ignoring, no.

Okay, thanks very much.

At this time we show no further questions. We will conclude the question-and-answer session.

Ladies and gentlemen, the Manchester United third-quarter 2015 earnings conference call has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.