Manchester United PLC (MANU) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Manchester United 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 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 call 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 usual, are Cliff Baty, our CFO; and Hemen Tseayo, Head of Corporate Finance.

As we look back at the fourth quarter and, indeed, the 4 months since our last earnings call, we're pleased that the club has made excellent progress on a number of fronts. In May, we won the UEFA Europa League, our third trophy for the season having earlier won the Community Shield and the League Cup. And of course, as Europa League champions, we qualify for Champions League this season.

We're also pleased with our transfer business done during the summer, bringing in 3 top players: Lindelof, Lukaku and Matic. Moreover, we also agreed new contracts with several players, including Carrick, Zlatan Ibrahimovic, Romero and Valencia, together with extending 2 of our young stars, Joel and Andreas Pereira. We believe we have improved the balance and depth of our squad and are well placed to challenge for trophies. We had a fantastic tour to the U.S. this summer, which aided our preseason preparations. The squad is gelling well, and we are pleased with the progress Jose has made for the squad, as shown in the early games this season, including last night.

Looking at 2017 full year results, I'm pleased to state that we once again set new records by generating higher revenues, EBITDA and operating profit than we've ever done before as all of our businesses showed year-over-year growth. We announced 12 sponsorship deals, including 9 global partnerships, 1 regional, 1 financial service and 1 MUTV international deal. As we reached a more mature profile for our sponsorship business, we see higher levels of revenues each year being subject to renewal considerations by our partners. Whilst we have industry-leading renewal rates, this is likely to lead to lower growth rates compared to those achieved a few years ago.

In respect of both renewals and new business, we are taking steps to ensure that we continue to innovate, maintain our advantage in an increasingly competitive market and harness the advantages of digital and social marketing. As part of these steps, we've hired Sean Jefferson from the WPP Group as our Director of Partnerships to lead this. In the near term, global sponsorship spending is forecast to see continued growth this year. Our pipeline remains promising, and so we continue to expect good contribution from sponsorship.

Turning to media. We continue to test and learn from our MUTV direct-to-consumer proposition. And building on the launch of the MUTV app in February, we launched mutd.com -- mutv.com in July, which for the first time enabled fans in the U.K. to receive MUTV without having a satellite or a cable subscription. We live streamed all 7 of our summer tour games, both linear and digital, produced over 32 live shows during the tour, and we learned from all aspects of the process, from the effectiveness of the different marketing methods to drive awareness, downloads and subscriptions to geographic consumption habits and operational learnings.

A couple of positive developments from the launch of the MUTV direct to consumer. Firstly, we've diversified our audience demographic, significantly reducing the average age of our subscribers from 54 years old on MUTV linear to 32 years old on MUTV digital. And secondly, the U.S. now accounts for over 20% of our global subscribers.

Turning to our new website and our official club app. We remain on target to launch both of these in the coming months. These new products will highlight our video, editorial and production capabilities, focus on providing a best-of-breed matchday media experience for fans, aligning storytelling with affinity and bringing fans closer to the club and other fans. It will be a much broader offering than our current product, with a far wider range of functionality including news, data, player and team statistics and improved personalization.

And now on our social footprint, we continue to focus on growing our reach and increasing fan engagement, with our social profiles now having over 150 million global followers. Twitter recently confirmed that #MUFC is the most tweeted team hashtag in global sports. And Mailman Consultancy announced when they released their sixth annual red carpet (sic) [Red Card] report earlier this year that Manchester United is the most influential sports team in China.

The Retail, Merchandising and Product Licensing division had an excellent year, breaking a number of records in the process. The partnership with adidas has continued to thrive, posting growth in the second year on our wholesale business. As noted in Q3, this goes against the industry norm, where we traditionally see a drop in year 2 sales after a kit manufacture change. The growth from adidas has been achieved by a more diversified range, better distribution as well as industry-leading integrated marketing activity between the club and adidas, for example, the arrival launch of Paul Pogba.

Stadium retailer the Megastore finished the year with a record turnover, trading up 33% on the previous year. The store also experienced strong margin growth with material increases in EBITDA, driven from the success of the dual-branded partnerships, such as TAG Heuer, Columbia and New Era; sales of mono-branded apparel; and a record number of in-store shirt sales.

E-commerce also finished the year with a record turnover, growing 13% against the prior year, which was the previous record. This growth was supported by strong grown in the United States following the decision for Fanatics to operate this market independently from the core United direct site.

On the venue side, our seasonal products are sold out in record time nearly 3 months before the start of the season. The team achieved the earliest ever sellout dates for both season tickets and the executive club, beating the previous records by 3 weeks. We also had a record-breaking year for official membership with over 180,000 memberships being sold for the 2016-'17 season, beating the previous record of 155,000 memberships, which was set 14 years ago. In summary, these are very exciting times for Manchester United, and we are optimistic for the season ahead and for our longer-term future.

I'll now hand you over to our CFO, Cliff Baty.

Thanks, Ed, and hello, everyone. I'm going to talk to our results for the fiscal year ended 30 June 2017. For fiscal 2017, year-on-year comparisons have been driven by the following key themes: the impact of non-qualification to the Champions League; secondly, the new domestic and international Premier League deals.

In terms of the headlines figures, total revenues for the year were up 12.8% to GBP 581.2 million, with adjusted EBITDA up 4.1% to GBP 199.8 million, giving an EBITDA margin of 34.4%. Profit for the period was GBP 39.2 million compared to GBP 36.4 million in the prior year.

Turning to the key items in the financial statements. Commercial revenues are up GBP 7.2 million to GBP 275.5 million, driven by the increase in Retail, Merchandising, Apparel and Product Licensing revenues. As Ed had mentioned, this is primarily due to growth in the Megastore revenues as well as a full year contribution from the adidas agreement, which commenced on the 1st of August 2015.

Broadcasting revenues are up GBP 53.7 million due to the new Premier League broadcasting rights agreement together with our success in the UEFA Europa League. Matchday revenues are up GBP 5 million due to playing 2 more home games in the year as well as record sales of match-by-match executive seats.

During the year, total operating expenses excluding depreciation and amortization were up 17.9% (sic) [17.1%], including wages up 13.5%, primarily due to increase in first team salaries following investment in the playing squad. It is worth noting that '16-'17 player wages did not include any salary uplifts in connection with Champions League qualification. Other operating expenses increased 29.3% due primarily to the impact of playing more games in the year as a result of progression in domestic and European Cup competitions as well as adverse foreign exchange movements. Excluding these foreign exchange movements, operating expenses increased to 21.8%.

Amortization costs were GBP 124.4 million, an increase of GBP 36.4 million over prior year, again due to the investment in the playing squad in recent years. Net finance costs for the year were up GBP 4.3 million due to noncash items, being the fair value movement on derivatives and unrealized foreign exchange gains.

Looking at the balance sheet. Cash generated from operating activities in the year was GBP 227.7 million with overall cash balances increasing by GBP 61.1 million. Net debt at year-end was GBP 213.1 million, a decrease of GBP 47.8 million over the year, giving net leverage of just over 1x EBITDA.

Turning to expectations for this current fiscal year ending 30 June 2018, there are 2 items to highlight. Firstly, due to our return to the Champions League, player wages will step up due to contractual uplifts, meaning total staff costs are expected to be up low teens in percentage terms. Secondly, broadcasting revenues from the Champions League will be impacted by our qualification route through the Europa League win, which means we are not entitled to share in 50% of the English club's market pool. As such, we expect revenues between GBP 575 million to GBP 585 million, with EBITDA between GBP 175 million to GBP 185 million.

Finally, I would also like to provide some color on a few other key items you may find instructive when modeling our business. We expect amortization to be in the mid-GBP 140 millions. As you know, this can change if we buy or sell a player or extend a player's contract; net finance costs of around GBP 22 million, although that is subject to foreign exchange movements; and our effective tax rate to be approximately 35%.

Regarding net player CapEx, we incurred around GBP 142 million in fiscal 2017. And for fiscal 2018, committed net player CapEx currently stands at approximately GBP 95 million, reflecting our recent transfer activity. As we've mentioned in the past, net player CapEx is lumpy by nature and may continue to vary significantly from period to period.

With that, I'll hand back to the operator, and we are ready to take your questions.

(Operator Instructions) And your first question will come from John Janedis of Jefferies.

This is actually Brian Paturzo on for John. Maybe the first question for Ed. So as we think about ESPN and CBS both deciding to launch direct-to-consumer live sports applications, we think this furthers the narrative that the stream rights for live sports will become increasingly more valuable. So as you think longer term, do you have an updated view on how the UEFA and the EPL could look to better monetize streaming rights in the next round of renewals? And do you think that new non-traditional players like Facebook and Amazon could potentially enter the mix?

Yes. Absolutely, I think they'll enter the mix. I think, anecdotally, there was strong interest in the last cycle. We're hearing that around the Premier League table. But also, as -- you asked a question about UEFA. We're also hearing that from a European perspective as well in terms of interest in the Champions League and Europa rights. But I think the wider picture, you have to look at what's happening elsewhere at the moment because, obviously, there aren't any clear European sale to these kind of partners at the moment. But you look at the interest that Facebook and Amazon had on the bid for the IPL rights, anecdotally, sounds like very big numbers for the Indian cricket. Secondly, Amazon has taken over the Thursday night streaming from Twitter for NFL. And then, thirdly, the MLS deal with Facebook, I think is very interesting, to broadcast 22 games of the regular season. So I do think we're going to see an increasing engagement from these, and we would welcome the interest. I think it's going to be increasingly important to digitally engage with fans, and we think we can be complementary to partners like this coming in.

And then our second question, maybe for Cliff. I know you touched on this in your remarks, but can you provide a little bit more color around how Man U's path to the Champions League qualification will impact its market pool distribution? And any clarity on what impact that might have in terms of the quantity of the distribution?

Thanks, Brian. Yes, as I mentioned, because we qualified through winning the Europa League, we do not share in the half of the market pool. So just to explain how that works. The market pool was split in 2. Half of that pool is distributed to the 4 teams from England, if you qualify, in accordance to the league position. So if you win the league, you get 40%. If you come fourth, you get 10%. So the example, if you finish third the previous season, qualified for the Champions League, you get 20% of that market pool finishing third. And roughly, that would work out at about GBP 10 million that way. So in terms of looking at what we will make from the Champions League this year, clearly, it's performance dependent, but we've always sort of said it's between GBP 40 million and GBP 50 million. It's roughly there, and we'll be GBP 10 million less than that because we missed out on that pool.

Your next question will be from Omar Sheikh of Crédit Suisse.

Just a couple for me. First, maybe Ed, you mentioned on sponsorship that we should expect lower growth rates going forward than you've seen in the past. Just wondered whether you could talk a little bit more about how you see the sponsorship market generally right now in terms of what we should be expecting on renewal rates and how you're positioned in that market. That would be helpful. And then also, maybe on e-commerce. You mentioned that you'd seen strong growth, driven in the U.S. by -- I think you changed the supplier for operating your website. I just wondered whether there's any sort of wider sort of implications for other markets where you could do perhaps the same thing.

Okay. So the first question, view of the market from a sponsorship perspective. As I said in the call earlier -- the script, the overall market continues to go up in terms of an industry for sports sponsorship. So the backdrop is -- from a macro perspective is good. But what I'm trying to communicate is as the business gets bigger and the number of deals that are up for renewal increase over time, that there's a larger number of deals that have to be done just to stand still, whether they're renewals or new deals. So yes, we still believe there's growth, and that's partly underpinned by our renewal rates. I said in the script that we have industry-leading renewal rates, and we've done a lot of analysis around that, and that is the case. But we still are looking closely at our product, understanding the digital and social needs, the trend towards that from our partners, and so we're tuning and looking at the way we can activate with them. And in terms of how we're positioned, we continue to strongly believe that we are about as well positioned as anybody in this industry. So again, we're not saying the business is going to shrink. We're saying that the big growth rates we've had in the past may be a bit more measured just because of the size of the business. Second question, e-commerce. Yes, it's a really interesting question. I mean -- so we carved out the U.S. with Fanatics, and I think there is a lesson here and it -- even something as simple as do you call a shirt a jersey or a shirt and how you communicate, how you're focused on the local market and tuning it for that audience in a way that gives the best chance for sale. And I think we are looking at how that can be replicated in other key markets that we have. So the growth that we've experienced was fantastic in the U.S., and we think it's largely because of that local approach.

And sorry, Ed, on that point, when did the Fanatics -- relationship with Fanatics start? Was it in the quarter or is it earlier in the year?

It was earlier in the year, yes.

The next question will come from Alex Mees of JPMorgan.

Congratulations on a good year and also good start to the season. Just 3 questions for me, please. Firstly, on the comments you made, Ed, about sponsorship renewals, I wonder if you can give us any indication of what that rate of renewal is. I suspect you won't, but worth asking a question. And also, just on renewal pricing, whether you expect to see increases in the value of sponsorship agreements when you renew them. Secondly, with regards to the guidance, I wonder if you can just help me understand the key assumptions with regard to your on-field performance. I would assume that you are assuming that you finished third in the Premier League, as I think that is your customary approach, but I just wonder what your base assumptions are with regard to the Champions League. And then finally, Cliff, I wonder if you can just give us some outlook for net debt given that it did decline fairly significantly during the year?

Okay. First one, you predicted accurately, Alex. I'm not going to answer the first question around the rate of renewals, but as I sort of echo, we are up there as the industry leader on this. The second question, it is a price times volume game, and the prices are going up, like everything in football, to be honest. It's -- so we continue to benefit from price increases. But as I said, it's more a renewal question and just simplifies the business. With regards to the guidance question on playing performance, the range that we set out there encapsulates the various finishing positions within the Premier League. And from a Champions League perspective, it's the same across all the cups, which is a cost of final assumption. Cliff, do you want to comment on...

Yes. Just in terms of net debt, look, the main drivers of net debt, and we've said -- obviously, you see the EBITDA, but the main driver of net debt can be our CapEx. You'll see we've mentioned at the end of this transfer window, we are currently sitting at GBP 95 million. I'm not going to forecast what that number is going to be for the reasons I've said. But with the EBITDA guidance that we've given and then with GBP 95 million of the major expenditure in terms of CapEx, you can see that we're likely to generate some cash this year.

And the next question will be from Bryan Kraft of Deutsche Bank.

This is actually Clay Griffin on for Brian this morning. Given the elevated cost of transfer market in Europe this summer and Ed's position now on the UEFA board, just how would you characterize the willingness of clubs to maybe revisit or revise the financial fair play rules?

Good question. I think there's been a lot of press about this already. And it's -- the rhetoric isn't just coming from clubs. The rhetoric is coming from UEFA and also from the European Club Association. So I think the willingness is there to look at it closely to make sure that the rules are being abided by and, obviously, penalties are looked at. So there's nothing concrete that's going on at the moment, but I do think there is a noise level that has increased since August.

I guess, just as a follow-up, are there any kind of structural reforms that you all would be advocating for, I guess, not just in the EPL but just kind of across Europe when it comes to the transfer market?

Structural reform, no, not really. I mean, it broadly works within the sort of structure that we have around us from an EU perspective, if that makes sense. So it's -- as an industry and as a market, we don't think it has major, major issues. Any other questions?

No, that's it.

And ladies and gentlemen, this will conclude our question-and-answer session, and we will also conclude the Manchester United earnings conference call at this time. We thank you for joining today's presentation. At this time, you may disconnect your lines.