Manchester United Ltd. (MANU) Q4 2018 Earnings Conference Call Transcript

Manchester United Ltd. (NYSE: MANU)Q4 2018 Earnings Conference CallSept. 25, 2018, 8:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Manchester United Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. To queue for questions, please press *1. If anyone has difficulty hearing the call, please press *0 for operator assistance at any time.

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 conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Please go ahead, sir.

Ed Woodward -- Executive Vice Chairman

Thank you, Operator, and thank you, everyone, for joining us today. With me on the call are Cliff Baty, our CFO; Hemen Tseayo, Head of Corporate Finance; and we're also joined today by our great Managing Director Richard Arnold. I've invited Richard to join the call today because we've been extremely busy on the operational front and felt the investors would benefit from hearing from the person who's directly responsible for those activities.

Before he does that, as it's easy to get caught up in the game by game fluctuations of our season, or even the relatively minor pieces of business and industry news, I would like to take this opportunity to take a step back and look at the bigger picture. We're the biggest sports team in the world as measured by number of fans. We know that position is one that requires continued effort and investment to maintain. Our board, our investors, and everyone at the club are aligned with the fans on what we need to do on the pitch, and that is to win trophies. That's one of the reasons why we hired Jose Mourinho, and we've already won three with him.

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Off the pitch, it's clearly important that we continue to drive the business forward, giving us the financial muscle to compete in the highly competitive transfer market. This allows us to continue to blend world-class purchase talents with our continued development of top academy graduates. Our academy continues to be a huge source of pride in delivering talent to the first team, and we've materially increased investment in recent years.

A few comments briefly on why we remain highly confident on growing our revenue. As the most popular sports team in the world, we have a huge opportunity to ride the wave of global media, technology, and certain economic trends. As a content generator, we're well-placed to benefit from changes in the global media landscape, with the OTT revolution that is under way. Our recent material investment in digital media, together with our huge social media footprint, means we are well-placed to drive all areas of the business through the closer connections that we have to our fans. Clearly, in an OTT environment, where we know who is actually watching our games, the opportunity will be even greater.

Also, potential changes in the European or worldwide football landscapes are likely to benefit us. For example, UEAF has plans for the evolution of European competition, and some are club competition opportunities.

On that, I'll hand it over to our Managing Director, Richard Arnold He'll take you through the key business activities.

Richard Arnold -- Managing Director

Thank you, Ed. Turning to our businesses, in sponsorship, we've announced seven sponsorship deals, five of which are global partnerships, including our first and inaugural sleeve sponsor, Cola; one regional partnership, and one financial service partnership. We're very proud of our partnership with Cola. We took longer than most of our peers in seeking and selecting the right partner. We had multiple other offering parties, including a number at the same or higher values, but we are happy that the partner we chose is a strong business with a brand we are proud to partner with and brand values consistent with our own.

The value achieved also underpinned our ongoing confidence in the competitive advantages the club has relative to our peers, particularly in respect to the scale and passionate engagement of our fan base, with a multiple of the next highest club being achieved. The overall mix of those announced deals underpinned our increased focus on larger partnerships with stronger, globally focused brands. The announcement of replacement brands in spirits and gambling categories also points to the continued strength in our sectoral approach and competition for our exclusive rights. We have seen the highest value in a number of partnerships to date come to the point of renewal, reflective of our cumulative historic success in this field over the last decade.

Whilst we continue to be proud of the renewal rate, which we believe to be market leading, the scale of the operation means that significant effort now needs to be expended to replace the minority that don't renew, in addition to those required to grow. We're pleased with our pipeline and confident in the underlying attractive of our rights. We continue to expect a strong contribution from sponsorship.

Turning to the media business, we continue to see an increase in both reach and engagement across our off network channels, social, as well as our owned and operated products, O&O. We have seen the successful culmination of our recent investment work in our new digital media platforms, replacing our production, storage, and distribution platforms with new, state-of-the-art capabilities, as well as moving to a next generation CRM platform. This builds on the prior work in respect to the digitization of our archives, processes, and staff capabilities. We anticipate now being able to generate better-targeted content quicker, cheaper, and distributed more rapidly and consistently across the 16 distribution channels we have in ten languages, both on and off 'Net.

In respect of our O&O, we're pleased to announce that over the summer, we successfully launched the club's first free global mobile app, as well as our new website. The mobile app reached the number one sports download ranking in over 70 territories, and has monthly active users in over 210 markets. Both products provide fans with a cleaner design, enhancing the way they can interact with the club, and are a one-stop shop for all things Manchester United, including exclusive content, real time matchup dates, live blogging, fan polls, trivia statistics, and social integration. The learnings we took from the 18 trial markets around the world ahead of the launch meant that we were able to significantly enhance fan engagement across almost all measures for the products. We also were able to launch without any technical glitches, and have seen the app rated strongly in the app stores, with a 4.95 rating in Apple's App Store.

Both products also provided increased promotional and sales opportunities for our other businesses and commercial partners. MUTV direct consumer products continue to grow, and we now have downloads in over 168 markets. We have also extended our reach of MUTV to target core customers and core members by launching on Roku, Apple TV, Xbox, and Amazon Fire, and allowing fans to interact and engage with the club through their TVs without a cable or satellite subscription. Investment in our content evolution capabilities continues, and we have sought to improve the user value proposition by introducing a discounted annual pass and launching a free front porch on the MUTV app, so the nonsubscribers are able to view video content.

In respect of our off-'Net social network, we finished the year with around 155 million total followers, a 9% year-over-year growth, and expect significant growth -- sorry, experienced significant growth on both Instagram and Twitter. We continue to have a very popular brand page on Facebook, with more followers than the NBA, NFL, NHL, and MLB combined. We also continue to be the most engaged Premier League club on Facebook. Moreover, we were the fastest-growing Premier League club on Instagram. @manunited, the club's official Twitter handled, was the most engaged sports club Twitter handle globally. We continue to be the most followed club in China and were again named the most influential sports club online in China in the 2018 mail-in group Red Car report.

Lastly, our recently launched YouTube channel passed one million subscribers within five months of launch, making it the fastest sports channel to reach this milestone in YouTube's history.

With respect to our retail business, e-commerce had a fourth consecutive year of growth, finishing the year with a record turnover. The growth was generated by improved conversion, aided by a broader product collection. Looking forward to next year, and indeed, the future, we are anticipating further growth as the new digital platforms start to deliver additional traffic and increased conversion to the store. The stadium Megastore traded exceptionally well during the year, with a number of record trading months. Underlying growth in our non-match-day revenue enabled us to partly offset the reduced number of home games, which was five fewer than the previous year.

We've continued to work closely with Adidas to innovate and break new ground in the distribution of our dual-branded kit. This is extended to design of our kits, marketing campaigns, as well as a digital-first approach to kit launches. Adidas have also had a strong hand in the design of the most recent kit app of our stadium Megastore.

On the venue side, 2017-2018 was a record-breaking season in a number of areas, including match-by-match hospitality products, or the match-day VIP Experience, which generated record levels of revenue and EBITDA, despite playing five fewer home games than the previous season; and our official membership product, which achieved 224,000 sales, almost 25% higher than the previous record set in 2016-2017. Our season products for 2018-2019 were sold out in record time, around three months before the start of the season, as we continue to benefit from the phenomenal support of our fans, which has translated into exceptionally high demand for both season tickets and executive club hospitality. We've made a strong start to the 2018-2018 season in terms of match-by-match sales, with Premier League matches on track to once again sell out exclusively to official members and Match DAY VIP Experience sales tracking ahead of the prior year.

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

Cliff Baty -- Chief Financial Officer

Thank you, Richard. I'm going to talk of our results of the fiscal year and for 2018-2019. As a reminder, for fiscal year 2018, year-on-year comparisons have been driven by two main themes. Firstly, the impact of qualification to the Champions League; and secondly, the number of matches played. In terms of the headline figures, total revenues for the full year were up 1.5%, up to ₤590 million, with adjusted EBITDA of ₤177.1 million, giving EBITDA margin of 30%.

Turning to the key items in the financial statements, commercial revenues were up ₤0.6 million, with an increase in sponsorship revenues offsetting the slight decline in retail, merchandising, apparel, and product licensing. Broadcasting revenues were up ₤10 million, primarily due to the increased Premier League merit payments following our second place finish, compared to six in the prior year.

Match-day revenues were down 1.6%, due to our prior -year Europa and Carabao Cup wins, resulting in five additional home games in 2016-2017. During the year, operating expenses, excluding depreciation and amortization, were ₤412.9 million, compared to ₤381.4 million in 2016-2017. Wages increased by 12.3% to ₤295.9 million, primarily due to player salary uplifts related to participation in the Champions League. Other operating expenses decreased by ₤0.9 million, due to the reduction in match-day variable cost associated with playing the fewer home games. Amortization costs were ₤138.4 million, an increase of ₤40 million over the prior year, reflecting the investment in the playing squad.

Net finance costs for the year were down ₤6.2 million to $18 million, due to unrealized foreign exchange gains on our unhedged U.S dollar borrowings. In addition, there is a 1.9 exceptional cost in fiscal 2018, being our share of the pension costs relating to the Football League pension scheme deficit, as per diluted valuation report.

As outlined in 2Q, the tax charge for this year was impacted by a non-cash accounting charge of ₤48.8 million, due to the change in the federal income tax rate from 35% to 21%. It is important to reiterate that this is a non-cash accounting charge only, which has no impact on our financial competitiveness nor on our ability to satisfy Financial Fair Play Regulations. This tax charge has generated a statutory loss. So, to better reflect the underlying performance of the business, we have also shown the adjusted profit and adjusted earnings per share, which strips out the resulting impact of this one-off non-cash tax charge.

Looking at the balance sheet, cash generated from operating activities in the year was ₤95.3 million, a decrease from the prior year due to the timing of annual cash receipts and commercial agreements, which were received after the year-end cut off. This impacted our year-end cash balance of ₤242 million, which was ₤48 million below the prior year. Consequently, net debt at the year-end increased by ₤40.6 million to ₤253.7 million, with gross debt remaining unchanged in U.S dollar terms. Had the expected annual receipts been received in June, as in the prior year, our cash balance would have been ₤307 million, and our net debt would have been ₤188 million, a reduction of ₤25 million from 2017.

Before I outline our current year guidance, I would just like to highlight that accounting standard IFRS 15 is required to be adopted in this fiscal year and will have an impact on the quarterly timing of revenue recognition of EPL Broadcasting income. There's no change to the overall broadcasting revenue we will recognize over the financial year, but there will be a significant change in the quarterly recognition profile. We are now required to recognize the merit payments revenue in each quarter based on a forecasted finishing position rather than all in fourth quarter, following completion of the season. We would also recognize EPL domestic and international equal share broadcasting revenues pro rata on all EPL matches, rather than the 19 home fixtures, which was the case previously. Prior-year comparatives will be restated to reflect these changes, and Notified in the earnings release illustrates these impacts.

Turning to our expectations for this current fiscal year, it is relevant to highlight that this is the first year of the new 2018, 2021 UEFA cycle. As described on the 3Q call, the new cycle has a change to the Champions League distribution mechanism with the introduction of a new coefficient element, as well as a significant increase in UEFA's gross revenues to ₤3.2 billion, up 33% from ₤2.4 billion. This will drive an increase in broadcasting revenues. With the increased Champions League prize money comes a greater range of outcomes depending on the team's progress, which is being reflected in our increased FY 2019 guidance range. As such, we expect revenues between ₤615 to ₤630 million and EBITDA between ₤175 to ₤190 million.

Finally, I would like to add some -- I would like to provide some color on a few other key items you may find instructive. We expect amortization to be around ₤140 million, although this could change if we buy or sell a player, or extend the contract; net finance costs of around ₤22 million, although this is subject to FX; and the effective tax rate will likely trend toward the U.S Federal rate of 21%.

Regarding net player capex, we incurred ₤106 million in fiscal 2018, and for fiscal 2019, committed net player capex currently stands at approximately ₤124 million. As we have mentioned in the past, net player capex is lumpy by nature, depending upon different payment profiles, 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. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press *, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *, then 2.

Our first question comes from John Janedis of Jefferies. Please go ahead.

Ed Woodward -- Executive Vice Chairman

Hi, John.

Operator

John, your line is now open. Our next question comes from Clay Griffin of Deutsche Bank. Please go ahead.

Clay Griffin -- Deutsche Bank -- Analyst

Hi. Thanks for taking the question. Congrats on the Kohler deal. Just curious, any sense of how this deal might impact pricing on the main shirt sponsor renewal in a couple years?

Ed Woodward -- Executive Vice Chairman

So, I think, as I said in the script, what we saw was that the demand for these rights was good. It had competitive interest during the process. We did take our time relative to other clubs. Obviously, you saw all clubs came to rights at the same time. But we are in a strong position, and Manchester United is in demand.

Clay Griffin -- Deutsche Bank -- Analyst

Great. And then just as follow-up to that, are there other opportunities to monetize? And I'm thinking about the training kit, or elsewhere on the jersey, how are you thinking about kind of incremental from here?

Ed Woodward -- Executive Vice Chairman

I mean, the first thing I would say would be that we are somewhat restricted, obviously, by Premier League rules, FA rules in some competitions, and obviously, UEFA, with regard to when we play in European competitions. So, we can't unilaterally just decide to put another brand on our shirt. So, there are wider opportunities that we can look at off the shirt, and we continue to do that.

The other point worth noting in respect to the query you asked is that the underlying effectiveness of the rights associated both with the shirt, training kit, and sleeve continues to grow in power with the viral effect on social media at that kind of imagery, which is a very powerful reason in respect to the demand for our shirtsleeve during the current period.

Clay Griffin -- Deutsche Bank -- Analyst

Thank you. And just, last one for me. Just, it seems like the dust is somewhat settled on the EPL rights renewal for next year. Can you update us on your expectations for growth in the total pool of broadcast rights coming from the EPL?

Ed Woodward -- Executive Vice Chairman

Well, things haven't quite finished yet. There are still some international deals to be finished. And while domestic is down a little bit single-digit, we expect international to allow the whole pot, well, to go up by an amount that would at least result in an increase in the revenue. But we don't -- we can't really guide on how much that would be, but we are hearing about continued strong interest around the world in our international rights.

Clay Griffin -- Deutsche Bank -- Analyst

Okay. Thank you.

Ed Woodward -- Executive Vice Chairman

Thank you.

Operator

Once again, if you have a question, please press *, then 1. We will pause momentarily to assemble our roster. Again, that's *, then 1 to ask a question. As we have no further questions at this time, this concludes our question and answer session. I'd like to turn the conference back over to Ed Woodward for any closing remarks.

Ed Woodward

I'd just say thank you for joining us on the call, and we look forward to talking to you after Q1 in November. Thanks, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 24 minutes

Call participants:

Ed Woodward -- Executive Vice Chairman

Richard Arnold -- Managing Director

Cliff Baty -- Chief Financial Officer

Clay Griffin -- Deutsche Bank -- Analyst

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