Manchester United Ltd. (NYSE:MANU) Q3 2019 Earnings Conference Call May 16, 2019 8:00 AM ET

Company Participants

Edward Woodward - Executive Vice Chairman
Richard Arnold - Group MD
Cliff Baty - CFO

Conference Call Participants

Corey Tarlowe - Jefferies
Clay Griffin - Deutsche Bank

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 a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [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 would now like to turn the conference over to Ed Woodward, Executive Vice Chairman of Manchester United. Mr. Woodward, please go ahead.

Edward Woodward

Thank you, operator and thank you everyone for joining us today. With me on the call are Richard Arnold, our Group Managing Director; Cliff Baty, our CFO; Hemen Tseayo, our Head of Corporate Finance; and our recently appointed Head of Investor Relations, Kareena Friedman [ph].

Before Richard and Cliff talk in detail about our commercial and financial performance over the last quarter, I'd like to briefly comment on the season that has just ended. It clearly didn't end the way we hoped, finishing sixth place and with a disruptive managerial change partway through. However, Ole and the squad battled back from mid-December to put it in contention to qualify for the Champions League next season, but ultimately we came up short. While the last few weeks were disappointing, we're delighted to confirm the appointment of Ole as our manager on a three-year contract, and to recently confirm the key members of the coaching team, Mike Phelan, Michael Carrick, Kieran McKenna and Mark Dempsey will be remaining at the club. Everyone at the club, the Board, the Manager, the squads, and all the staff; our resolution, our desire to get United back to the top of English football. We continually look to improve staff on and off the pitch to achieve this. The strength of our business means the other financial resources to continue to provide the solid foundation for backing the manager and creating success on the pitch, this as ever remains our number one goal.

Turning to industry-related news; you may have seen there a quite a number of material plans and proposals that could impact football landscape over the medium-term. These includes the FIFA proposed 2014 Summer Club World Cup which is a pilot which is going to be launched in June 2021, which we believe would be an improvement on the current Club World Cup format. Secondly, changes to the UEFA Club competitions in the 2021 to 2024 cycle, reducing the UEFA League from 48 to 32 teams and introducing a new third tier of 32 teams. And finally, initial proposals regarding the post-2024 format for UEFA Club competitions. We're deeply involved in these discussions across various forums including the Premier League, ECA and various UEFA committees.

Finally, one important achievement during the quarter I'd like to highlight is the excellent performance by our women's team in their [indiscernible] season. Scoring an average of almost five goals a game and winning 18 of their 20 league matches, they've won the second division title and secured a promotion at the Women's Super League. I'd like to take this opportunity to congratulate the squad, the manager, Casey Stoney, and everyone involved in the women's team.

I'll now hand you over to our Group Managing Director, Richard Arnold, who will update you on our key business activities.

Richard Arnold

Thank you, Ed. Starting in sponsorship, we announced and launched two new global partnerships; with Marriott International, our new hotel partner, and leading in sunglasses and eyewear brand, Maui Jim. In our key two updates, we announced our partnership with Hobbs to open a series of Manchester United interactive and immersive experience centers in China. These plans are developing well and while we're looking to start opening the main centers in late-2020, we plan to open a preview center at the Beijing site in Tiananmen Square later this summer.

Turning to our media operations; the app continues to perform ahead of expectations, we grown across all metrics. In the last quarter, we launched a new feature in the app called Match Center which provides our fans with a unique and immersive way to visualize live match statistics in real-time. We've also incorporated live streaming functionality within the app enabling live events to now be viewed for free via our app. In respect of MUTV, two points of note: first, our collaboration with U.S. broadcaster NBC on a co-production of a documentary to celebrate the 20th Anniversary of the 1999 Treble winning team entitled 'The Impossible Dream'. The documentary is available on-demand on the MUTV app and will next air on NBCSN on the anniversary of the Treble on May 26 with it's final showing on NBC on August 10. The MUTV app will also be the only place to watch all of our pre-season tour games live in the preparation for the 2019-2020 season.

In merchandize; the Adidas business continues to perform in line with expectations with strong growth generated out of the Asia Pacific region, especially China. We expect to see a stronger start to next season driven by the planned earlier launch of the Home, Away and Third kits providing more time for sell-through, and an increased focus on club football by retailers in the absence of the major international tournament.

Terms of venue; notable highlights include a new high for official membership, following several years of growth which is now approximately 255,000, which is 30,000 higher than the previous high set last season. This membership supports the demand for match tickets which for the vast majority of games are only available to official members. In respect of 2019-2020, we sold out season tickets on Saturday, May 4, and seasonal hospitality for our Executive Club on May 14.

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

Cliff Baty

Thank you, Richard. I'm now going to talk the results of the third quarter of fiscal 2019. And as a reminder, year-on-year comparisons will continue to be impacted by two main themes: firstly, the new Champions League broadcasting deal; and secondly, the quarterly cadence of matches which has resulted in one additional Premier League match versus the third quarter of 2018. In terms of the headline figures, total revenues for the period were £152.1 million, up 3.4% versus last year with an adjusted EBITDA of £41.2 million.

Turning to the key items and the results; total commercial revenues were flat at £66.6 million as both sponsorship revenues and merchandizing and licensing revenues were in-line with the prior year at £41.6 million and £25 million respectively. Broadcasting revenues increased 8.9% or £4.4 million driven by the increased Champions League revenues, and one additional Premier League game. Matchday revenues increased by £0.6 million or 1.9% despite one less home match compared to the prior year. For the third quarter, total operating expenses excluding depreciation, amortization and exceptional items were up 9.4% versus the prior year. This includes wages which were up 12.9%, primarily due to ongoing investments in first team salaries. This was offset by 0.8% reduction of other operating expenses. Amortization cost was £30.5 million, a decrease of 5.9% versus the prior quarter.

Additionally, during the quarter we recorded a profit on player sales with £6.3 million, due primarily to the transfer of Marouane Fellaini. Net finance costs for the quarter were £3.1 million, an increase of £4.1 million due to the unrealized exchange rates movements on our unhedged U.S. dollar debt. As mentioned in previous quarters, our cash interest costs and U.S. dollar terms remain consistent year-on-year. Turning to the balance sheet; the cash balance to the period end of the £193.9 million, up £32.1 million against the prior year. Net debt of the period end was £301.7 million, a modest increase of £0.4 million compared to the prior year as the higher cash balances were offset by the impact of favorable foreign exchange rate movements.

Now turning to our guidance; for the balance of the year we continue to expect full year fiscal 2019 revenues between £615 million to £630 million, and an adjusted EBITDA between £175 million to £190 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Randy Konik with Jefferies. Please go ahead.

Corey Tarlowe

Hi. This is Corey Tarlowe, on for Randy Konik. It sounds like you're doing a lot of great things on the app side with expectations -- performance ahead of expectations, growth up across all metrics and new features. And I guess one year under your belt with the launch of MUTV on major devices, you have a lot of these learnings that you come across -- how do you think about your ability to leverage that platform, continue to grow the brand, increase engagement and grow subscribers? And I guess, what are these learnings over the last year that you've had? And really, how do you plan to apply those to inform your decisions going forward? Thank you.

Richard Arnold

As you described that we're actually slightly less on the year-end in terms of having started in August with the app, and while we're very happy with the rate with which we acquired not just downloads, but also monthly active users, less than a season and the scale of the operation at the moment is still small, relative to the -- for example, social media footprint we have. So we have been really pleased but quite cautious about extrapolating the numbers that we're seeing on the early stages over a larger population as you can imagine. And that having been said, we continue to be excited by exactly that prospect in terms of growing the scale of the app.

Corey Tarlowe

Great, thank you very much.

Richard Arnold

In terms of it's use, the primary use is as an engagement tool and ensuring that we can communicate directly with fans in a managed and controlled way and then that will open the door to opportunities in the future with regard to how that contributes to our overall business. But at this stage, the focus is very much on engagement and growing the active use of those.

Corey Tarlowe

Perfect. Thank you.

Operator

[Operator Instructions] The next question comes from Clay Griffin with Deutsche Bank. Please go ahead.

Clay Griffin

Just a couple for me. Ed, just wondering if you could just comment maybe a little bit more on the proposed changes to the Champions League format? I guess what's at the heart of the issue? I guess what's being proposed? What would you like to see? And then, I guess maybe just -- general kind of time line or expectations around seeing how those proposed change has evolve or adopted? Thanks.

Edward Woodward

Few questions in that. First of all, and I think this is partly driven by domestic leagues across Europe, not necessarily thriving and there being a desire from the clubs that are towards the top of those leagues to play more European Games which perhaps are more competitive. I think there is a drive from UEFA which is laudable, which is to try to give greater access to more teams, so if you look at the year just finished or the year about to finish, 80 teams competed in the two competitions and the proposal for 2024 is 128 teams; so a greater than 50% increase in the number of teams playing in Europe, there are of course other factors as well. Although, I think from our perspective we are viewing these puzzles interesting but I think there is a lot of work to do with stakeholders to assess it. We're doing that ourselves together with our colleagues in the Premier League and frankly, also the ECA. From a timeline perspective, I think we can expect to hear more and more feedback on progress around this through 2019, and -- so therefore maybe clarity in somewhere around sort of 6 to 9 months from now.

Clay Griffin

Okay, great.

Operator

Thank you. This concludes our question-and-answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.

Edward Woodward

Thank you.