Manchester United Ltd. (NYSE:MANU) Q2 2019 Earnings Conference Call February 14, 2019 8:00 AM ET

Company Participants

Edward Woodward - Executive Vice Chairman
Richard Arnold - Group Managing Director
Cliff Baty - Chief Financial Officer

Conference Call Participants

Randal Konik - Jefferies & Company
Clayton Griffin - Deutsche Bank

Operator

Good day, ladies and gentlemen. 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. [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 factors 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.

Edward Woodward

Thank you, operator, and thank you, everyone, for joining us today. With me on the call as usual are Rich Arnold, our Group Managing Director; Cliff Baty, our CFO; and Hemen Tseayo, our Head of Corporate Finance. Certainly been an eventful few months since our Q1 update back in November. In December, we parted company with Jose Mourinho and appointed Ole Gunnar Solskjaer as caretaker manager through to the end of the season.

Ole is been joined by Mike Phelan, who previously spent 14 years with us as a coach, including 5 as Mr. Alex Ferguson's assistant manager. In addition, Michael Carrick, Kieran McKenna, and Emilio Alvarez have remained as key members of Ole's 13 coaching staff. And they've had a fantastic start, reviving the performances of the team and in the process setting a new Manchester United first team record of winning their first 8th consecutive matches.

I congratulate Ole once again for winning the Premier League's Manager of the Month for January and Marcus Rashford for being named the Premier League's Player of the Month.

The team has cumulated 25 out of the possible 27 points in the League, with some fantastic performances. We progressed to the last 16 of the FA Cup, attracting the largest UK audience for our fourth round cup match against Arsenal, which drew 1 million more viewers in the second most popular match so far this season.

In the Champions League, [Tuesday night] [ph] wasn't the result we wanted. But as Ole reflected after the game, we want to be competing at the top level and the team will be giving their all Paris.

In terms of player contractual activity, we're delighted to have secured agreements to extend the contacts of a number of our players, including Anthony Martial, Scott McTominay, Ashley Young, Phil Jones and Chris Smalling. We've also agreed the transfer of Marouane Fellaini to Shandong, our first ever sale to a Chinese Super League team.

Off the pitch, we continue to perform very well. And this quarter has seen the club achieve record quarterly revenues of over £200 million, and a record quarterly EBITDA of over £100 million. Our continued financial strength underpins our long-term success on the field, which is the focus of everybody in the club.

I attended the Premier League shareholders' meeting last week, where the UK live match audience figures were presented for the season to date. And it was encouraging to know that viewership figures are up significantly on last season, which was in turn up on the previous season before it.

Finally, feels like there have been many sad announcements in football recently, but for us, the Manchester United, the passing yesterday of our former youth coach, Eric Harrison, is especially poignant. Eric was a fantastic coach. He played a key role in bringing through many players. He went on to become a legend for the club. He was the embodiment of the club's commitment to youth. And his legacy lives on with every player who comes to our academy today.

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

Richard Arnold

Thank you, Ed. Turning to our businesses. In sponsorship, we announced our partnership with leading Chinese property developer, Harves, who work in a series of Manchester United entertainment and experience centers throughout China. Each venue will feature interactive and immersive experiences, using state-of-the-art technology to bring Manchester United to live for our 100 million plus fans and followers in China.

Visitors will be able to experience the thrill of the matchday at Old Trafford as well learn more about the history and heritage of English football's biggest and most storied club. The centers will provide fans with a place to celebrate the club they so passionately support and further deepen the special relationship the club has with China.

First of these centers are scheduled to open in Beijing, Shanghai, and Shenyang by the end of 2020, with each venue offering visitors a different experience and will include restaurants and a club retail store. Popularity of football is growing very quickly in China. The almost 12 times increase in broadcasting rights, meaning China will leapfrog a number of other countries to become the Premier League's most valuable international broadcast market and that's testament to that.

Manchester United is the most well sported team in the country. Alongside our digital reach, with our own platforms and presence on social platforms like Sina Weibo, our partnership with Harves will enable us to build on our close relationship with fans in China, and provide a further foothold to build a bigger platform in this important region.

As I've mentioned on the Q1 call in November, we remain pleased with our pipeline and continue to expect a strong contribution from sponsorship. Last week, we announced a global partnership with Remington as our Electrical Styling Partner, encompassing both the men's and women's teams.

I anticipate announcing further partnerships very soon. I'll also take the opportunity to provide an insight to an example of how we deliver value to our commercial partners, beyond the media exposure we provide. The long running I Love United series of international fan events has been transformed this season.

The match viewing parties for thousands of fans are now linked to a handful of simultaneous satellite events across the world, enabling supported clubs from different countries to interact with each other. In December, we took the show to Chennai in India. Ticket to the 5,000 capacity event attended by former Man United players, Dwight Yorke and Wes Brown, were over 2 times oversubscribed. And the social media campaign delivered 19 million marketing impressions.

In just 3 days we conducted 80 partner activations with 14 partners. The headline results, including considerable increases in awareness of our partner brands, even though it's in their home markets like ICICI Bank, an improvement in the opinion of their brands among our fans.

As an interesting specific example, DHL's designated hashtag #DHLUnitedDelivered trended number one across India. The next I Love United event will be hosted in Guangzhou, China on March 2.

Turning to the media business, we continue to focus on driving deeper, meaningful engagement through our owned and operated products. Over the roughly 6 months since the launch of our mobile app, according to third party analytic firms, our app is being the number one downloaded football club app globally, and continues to be the number one ranked football club app in the main app stores.

We are pleased with the app adoption and usage by our fans, and are seeing month-on-month growth in all user metrics: downloads, monthly active users, number of visits, visit per user and time spent, and user retention. All of these are well above industry benchmarks.

The app is providing us with the ability to have a closer relationship with our fans and provide them with a one-stop-shop for all things Manchester United, including breaking news, statistics, highlights and other exclusive content.

In addition, there are material business benefits including the cross promotion of other clubs of our other club products and services. And the growing user base also presents increasingly attractive opportunities for our commercial partners through brand integration initiatives.

I'm excited about the roadmap with the app and the enhancements to the user experience which will be coming soon. And I look forward to talking about them in May.

Those based outside the UK may not be aware that the Premier League is trialing a FIFA eSports tournament this season. Our competitors have been restricted to UK residents. All 20 Premier League clubs are participating in the three phase tournament, the purpose of which is primarily to assess the benefits of such eSports tournaments as an engagement medium, particularly the younger demographics and to potentially attract new audiences to the Premier League.

It's the first time we have participated in eSports, but the interest from our fans has been strong. We finished as the club with the largest number of registrations for fans to represent their club, accounting for around 20% of total tournament entries.

We've engaged with ChuBoi, a popular live streamer on Twitch as our ePremier League host and our related video content has generated several million views already.

In merchandising, the Adidas business continues to trade in line with expectations, with growth predominantly being driven by new leisurewear products specifically tailored for our fans in China. Such as a collection to celebrate Chinese New Year with a range of contemporary street style designs, which feature graphics representing good fortune.

Quarter also saw a number of Adidas limited edition products sell out in record time, for instance, the innovative digital kit, which was designed for and featured in EA Sports game FIFA 19, and then also retailed as a physical product. We sold out online within hours, whilst the adidas Originals, Newton Heath shoe sold out within minutes.

Our other dual branded partnerships continue to trade well, with the introduction of debut MU collections from Paul Smith and True Religion ahead of Christmas trading which proved very successful.

Megastore trading in the quarter was slightly down, due primarily to the home game scheduling being less favorable than the prior year, which reduced the footfall to the store. On the venue side, we are on course to sell out all remaining matches exclusively to official members. The focus now turns to the launch of the 2019/2020 renewals campaigns to season tickets and executive club hospitality, for which we are experiencing high demand as usual.

We have a significant and strong pipeline of fans on the waiting list of both products. Finally, we've announced two fixtures on our summer 2019 tour, which will start in Western Australia, where we will play Perth Glory and then Leeds United at the new Optus Stadium in Perth on the 13th and 17th of July.

After the matches in Perth, we will take part in the International Champions Cup 2019, organized by Relevent Sports. And we will soon be announcing details of the three matches that we will play as part of this year's tournament. Further details of additional preseason fixtures will be announced soon.

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

Cliff Baty

Thank you, Richard. I'm going to talk through our results for the second quarter of fiscal 2019. As a reminder, for fiscal year 2019, year-on-year comparisons will be impacted by two main themes. Firstly, the new Champions League broadcasting deal, and secondly, the cadence of matches on the quarterly basis.

In terms of the headline figures, total revenues for the period were a record £206.8 million, up 17.6% with a record adjusted EBITDA of £104.3 million, giving an EBITDA margin of 50%. This strong margin is due to the recognition in the quarter of a large part of the new Champions' League group stage broadcasting revenues, as we've played 5 of the 6 group stage fixtures in the quarter.

Turning to the key items in the reported financial statements, total commercial revenues were up £0.6 million to £65.9 million. Sponsorship revenues were up £1 million, which was partially offset by £0.4 million drop in retail, merchandising, apparel and product licensing revenues.

Broadcasting revenues were up £28.5 million, driven by the increased Champions League revenues and were partially offset by playing one fewer Premier League game.

Matchday revenues were up by £2.1 million, again, due to the additional Champions League game compared to the prior year period. During the period, total operating expenses, excluding depreciation, amortization and exceptional items were up 8.4%. This includes wages, which were up 11.8%, primarily due to an increase in the first team salaries following additions made to the squad, as well as the impact of renewed contracts.

Other operating expenses decreased 0.4%, despite playing one additional [homes league] [ph] game. Amortization costs were £33.4 million, a decrease of 10.5% over prior quarter. Also in this quarter, we recorded an exceptional cost of £19.6 million in relation to the change of first team's management team in December.

Net finance cost for the quarter was £6.3 million, an increase of £1.9 million, due to unrealized exchange rate movements on our unhedged U.S. dollar debt. As mentioned in previous quarters, our cash interest costs in U.S. dollars remain consistent year-on-year.

Looking at the balance sheet, the cash balance of the period end was £190.4 million, up £35.1 million against the prior year. Net debt of the period end was £317.7 million, down £10.9 million compared to the prior year, due to the increased cash balances, partially offset by the impact of foreign exchange movements.

We continue to expect full year results of fiscal 2019 to be revenues between £615 million to £630 million and EBITDA between £175 million to £190 million. We previously guided that amortization for fiscal 2019 would be £140 million. However, as a result of recent contract extensions, we now expect amortization to be below £130 million.

Finally, please note that a semi-annual cash dividend of $0.09 per share will be paid on the June 5, 2019 to shareholders on record on the April 26, 2019. With that, I will hand back to the operator and are ready to take your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Baty. We will begin the question-and-answer session at this time. [Operator Instructions] And the first question will be from Randy Konik of Jefferies. Please go ahead.

Randal Konik

Thanks. And it's glad to be back for me covering you guys. So I guess, a question for Richard, you had this interesting kind of dialogue around the entertainment venues in China and you talked about the pipeline of commercial opportunities ahead. How are you thinking about - with this - the China announcement, the entertainment venues, how are you thinking about just other unique ways of monetizing the power of the brand from a commercialization sponsorship perspective going forward, other unique ways, because I think this China opportunity is pretty interesting and different, and just shows the market that the power of the brand is global obviously, but also there is many more things than traditional types of sponsorships that can be done here and partnerships? So just wanted - curious on your thoughts.

Richard Arnold

So, thanks for the question. I think that you've alluded to a couple of things that underpinned all of the partnerships we do, which is that we got a fantastic family of fans around the world. And the huge opportunity to engage with those fans in new and exciting ways and we refer to the entertainment centers as well as eSports today.

I think that over a number of years, one of the points that we have made is that we're only just taking baby steps in terms of what's possible for Manchester United in terms of the opportunity that working with our fans around the world represents. And without getting into a very detailed discussion on this call about some of the avenues that that opened up, being one of the most engaged digital properties in the world, means that the world really is our oyster and that there is a myriad of opportunities. And we continue to be very, very excited about those for the future.

The other point worth making is that that phenomenal engagement and the phenomenal digital reach also means that the value of our, what some would refer to as traditional inventory, also remains very, very sought after, because it's such a powerful connecting tool with our fans and that represents an increasingly valuable commodity in an increasingly valuable, like in increasingly fragmented media landscape.

So I think we got many, many opportunities in that area and what you've seen here are just a couple of examples of the innovation, coupled with execution that allows us to take those opportunities forward.

Randal Konik

Okay. And I'm one of those app users and I am on the app probably twice a day. Just curious on how you're thinking about - some of those metrics you kind of alluded to with the app and the digital engagements, what is that telling you about other opportunities or are there any other deeper metrics you can give us to just kind of further flush out how powerful that app has become and that digital engagement that you're talking to which is a huge new vehicle opportunity long-term for you guys, it feels like? Thanks.

Richard Arnold

So at this stage, I don't think we're publishing the actual metrics themselves. And as I said on the last call, the reason for that is, we need a period of time to really understand the detailed trends in what will continue. When you look back, the call we had in November, when the app was brand new, the kind of record breaking engagement statistics we were seeing in terms of dwell time, video time, frequency of visits, we felt were reflective that the first so many million fans to come on to the app would be the most fervent.

And even in our upper most expectation, the continuation of that trend as we've added more and more fans has surprised us. And consequently underlying the need for us to, A, analyze deeply and, B, be patient in determining at what point we're settling to what the kind of long-term trend will be in terms of those underlying metrics, because it's easy in the first few weeks to be in danger of getting carried away, but what we're finding is that it has been sustained.

You asked the second question in terms of what that means for the future. What I would describe there is there a lot of time and attention went into both measurements and analysis, and testing of what works with apps and we did that as a number of you will be aware around the world with different kinds of apps in different kinds of environment. So the product that we launched certainly wasn't the first in the world, but we aim to make it the best. And that's been borne out and we believe that that's very important in the sustainability of the engagement level we're seeing with fans.

Correspondingly, as we look to the future, with what we will introduce into that environment, I think you will continue to see that trend of quality and excellence being really important ensuring that you never negatively affect the user experience. And I think that will be at the heart of how we look to drive the trend of this phenomenal engagement with fans we're seeing through the app.

Randal Konik

It's very thoughtful and very helpful. Thank you.

Operator

[Operator Instructions] The next question will be from Clay Griffin of Deutsche Bank. Please go ahead.

Clayton Griffin

Hi, good morning. It looks like you had several significant player contract renewals this year. I'm wondering if you could help us just quantify, without getting into specifics, what percent of the first team or what percent of the wage bill, I guess, is yet to be renewed either this year or maybe next.

Edward Woodward

Hi. Clay, hi, it's Ed here. We don't provide that kind of data or information. That starts to give people more information with regard to player by player, because it's pretty accurately well known, the end dates of the player's contract. So we're a long through the ones that we had planned to do in this season, but obviously, want to finish off the final few as rapidly as we possibly can.

But possibly by the end we get to summer, we'll be in much stronger position with regard to the average tenure of each contract with our key players.

Clayton Griffin

I see, okay. And I guess, maybe just, Ed, at a higher level, I'm wondering if you could maybe speak to some of the organizational changes that you are either implementing or considering around things like Director of Football. And also, just kind of the process by which, you and the Board are considering the appointment of full-time manager. Thanks.

Edward Woodward

So, first question with regards to Director of Football, I mean, look, lots obviously written about this. I would say that this - looking at our structures and looking at how we should strengthen all areas of the club, it is something that we're doing on a continual basis. And clearly, we've done a lot of changes within the football side in the last four or five years, in particular around the academy where we materially increased investment and we're seeing the pull through of that quality now coming out.

We've invested very materially around the recruitment side, the player care side, continued investment with regard to facilities, medial and sports science. So the evolution of the football side is continuing. It's not necessarily that visible to the outside and in some respects it's a - you get a multi-year return later rather than immediate impact. But with regard to the overall structure, we are looking at that and looking at ways that we can make it stronger and that is something we do on a continual basis.

The second question with regard to the process on the manager, I'm not going to get into. They are clearly - we communicated around December time about what we were doing, putting Ole in place as a caretaker. And the next communication with regard to this will be when we have something to announce regarding the manager. We're not going to give updates part way through.

Clayton Griffin

Understood. And then, maybe just one for, Richard, I think, Richard, you had mentioned on the last call about a couple of projects that you had in plan for this summer, I guess, the Old Trafford. Just wondering if you could just elaborate on that, just circle back on that and help us think about what's going on at the stadium.

Richard Arnold

Yeah, so - yeah, the last time we spoke, we've spoken about a couple of aspects that had been developing quite rapidly. So one was updating the contactless activities we did in kiosks and indeed implementing technology make the fan service flow much quicker, particularly at peak moments, so the last 15 minutes before kickoffs, 15 minutes of half-time and the 15 minutes afterwards. Those have made a massive difference in terms of the trading through those kiosks, which is great if you are fan. Obviously, that's not the largest income stream for us, but has generated good results.

The other area that we're looking at in quite some detail is around the refit of lounges and we saw last summer some fairly heavy duty activity on the commercial front in both relocating, refurbing and expanding a number of the lounges. And that's underpinned what's already a fantastic product. But we've seen that that continues to have phenomenal demand, very low churn rates and is one that we're very happy with.

Clayton Griffin

Okay. Thanks very much.

Operator

And, ladies and gentlemen, this will conclude our question-and-answer session and will also conclude our conference call for today. We thank you for attending today's presentation. And at this time, you may disconnect your lines.