Manchester United plc Q2 FY2020 Earnings Call

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. We would like to remind everyone that this conference call is being recorded. I will now turn the call over to Corinna Freedman, Head of Investor Relations for Manchester United. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Manchester United’s second quarter 2020 earnings call. A corresponding press release containing our financial results was issued earlier this morning and can be accessed on our IR website. Today’s call is being recorded and webcast, and a replay will also be available on our site for 30 days thereafter. Before we begin and as a matter of formality, we would like to remind everyone that this conference call will include estimates and forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such estimates or forward-looking statements should be considered along with the cautionary note included with our earnings release as well as additional risk factors discussions in our prior filings with the SEC. With us on the call today are Ed Woodward, our Executive Vice Chairman; Richard Arnold, our Group Managing Director; Cliff Baty, our Chief Financial Officer; and Hemen Tseayo, our Head of Corporate Finance. I will now turn the conference call over to Executive Vice Chairman, Ed Woodward, for his opening remarks. Ed?

Thank you. Thank you, everyone, for joining us today. Before we proceed with our usual earnings call, I would like to pay tribute briefly to Harry Gregg, who died earlier this month at age 87. Harry was one of the heroes of the Munich air disaster and a key member of Matt Busby's team of talented young players, known as the Busby Babes, making 247 appearances for the club. To borrow Sir Alex Ferguson’s words, Harry was a man of great character and a true legend to our club. Our thoughts and prayers are with him, with his family and friends. I’d like to provide an overview of progress towards our number one priority, winning trophies with the team playing entertaining and attacking football. Since our last call in November, we progressed to the knockout stages of the Europa League. We are through to the fifth round of the FA Cup and we remain in the mix to qualify for the Champions League. This season is one of rebuild with many changes for this quarter. In terms of players who’ve left or gone out on loan, new players who we brought into the club, and Academy graduates that we brought through to the first team. This process will continue as we implement our plan and our footballing vision under Ole and his coaching staff. Despite being linked to 111 players in January, our acquisition of just one of them, Bruno Fernandes is an important step in that direction, demonstrating our commitment to adding experienced world-class recruits to the exciting crop of Academy graduates that are at the heart of this developing team. We’ll take the same planned disciplined approach this coming summer. In addition to the first team signings, somewhere under the radar, we’ve also made a number of exciting acquisitions in the past year, reflecting our commitment to bringing the best talent into our Academy. So far this year, our Academy graduates have contributed over a third of first team playing minutes this season and over half our goals, emphasizing our Academy status as one of the most productive and elite-level football academies in Europe. It’s an important competitive advantage for us and represents an excellent return on the fourfold increase in investment that we’ve made in the Academy over recent years. On wider industry matters, we know the continued strength of the Premier League with a 19% audience uplift for Sky in the season state versus the same period last season. Sitting on the broadcast advisory committee of the Premier League, I see the great work being done behind the scenes, and we’re very pleased with the recent announcement of the Premier League’s groundbreaking six-year pan-Nordic deal, which will be effective from summer 2022. Our own long-term plan is underpinned by the enduring strength of our business, which provides us with the funds and the confidence to keep investing in our team and in our facilities. We are proud to be chosen to host the opening match of the 2021 Women’s European Championship next season, underscoring the continued status that Old Trafford is one of Europe’s most iconic football venues. The choice also reflects our growing role within the women’s game, following the successful launch of our women’s team last season, and their immediate promotion to the Super League under the leadership of our manager, Casey Stoney. In summary, while we still have much to do, we’re progressing with confidence in the right direction. I’ll now hand you over to our Group Managing Director, Richard Arnold, who will update you on the key business activities. Thank you.

Thanks, Ed. Before I provide an update on our business activities, I’d like to say that the thoughts of everyone at Manchester United are with those currently impacted by the coronavirus outbreak. In respect of the virus’ impact, it’s too early to understand the global implications, but we are actively monitoring the situation. Turning first to our media and digital operations. Earlier in the quarter, we announced a new strategic partnership with Alibaba, which provides exclusive Manchester United Club content in China across Alibaba’s multi-platform ecosystem. We launched with the first of its kind dedicated Manchester United channel on Alibaba’s content platform, Youku. This makes our own highly engaging content available to over 700 million consumers in China. Whilst we have only recently launched our Youku channel, we are positive on the long-term potential opportunity to satisfy strong demand for our content among our significant fan base in China, the most digitally connected country in the world. Moving to our global mobile app. We continue to improve our app functionality to deepen fan engagement by enhancing personalization, gamification of content, and an even more dynamic second screen experience for Matchday. A bigger focus for the first half of our fiscal year has been evolving our cross-platform digital content offerings, in particular, more branded content offerings via the mobile app, including highly successful collaborations with Adidas, Gulf, Swissquote, and HCL during the quarter. We are also pleased to announce the recent launch of our new podcast platform and the launch of our first official podcast, which has been extremely well received and offers a new opportunity to deliver high-quality, unique fan-focused stories and content to our fans and followers around the world. Turning to non-owned and operated platforms. Our social media engagement remains robust, with particularly strong engagement surrounding our recent new first team signings. In fact, in the last week of January, our social channels generated over 38 million interactions for our second highest weekly engagement ever. There were over 300,000 mentions of the Bruno Fernandes signing on Twitter. Both of our new signings saw immediate growth in their own social platforms following signing for the club. To put that in context, shortly after we concluded the loan signing of Odion Ighalo, he was the top trending item worldwide on Twitter, ahead of both Brexit day and the outcome of the impeachment trial of the U.S. President. In summary, global interest in Manchester United remains very strong, and our engagement with fans around the world is continuing to deepen through our own platforms and via social channels. In respect of our commercial business, it performed well in the second quarter. We launched several very successful partner activations during the quarter, including co-branded products with Chivas and New Era. During the quarter, our very popular ILOVEUNITED fan experience and being party traveled to Dallas, Texas, and more recently to Shenzhen in China. We also recently announced a new global partnership with Mondelez International, the multinational behind brands such as Cadbury, Oreo, and belVita. In respect of our merchandising activities, Adidas wholesale business continues to benefit from our localized product strategy with our Chinese New Year product line performing well. For our e-commerce business, the Fanatics, our gross sales are tracking up on a year-to-date basis, driven by an improved and diversified product mix. In our Megastore, we have experienced strong increases in average basket size. And from a product standpoint, we have seen a very strong customer response to several new products launched during this quarter, including an expansion of the branded Adidas leisurewear in the women’s and kid’s categories and the introduction of Adidas Originals lifestyle footwear. Turning to our venue operations. Our Matchday revenues have remained constant for the first six months of the fiscal year despite the absence of Champions League fixtures. We’re experiencing very strong demand in our official membership program and have a substantial waiting list for our 2021 season ticket sales and renewal campaigns. In respect of our capital projects, they remain on track, particularly our new state-of-the-art £11 million accessibility facilities, which will dramatically increase capacity and transform the match experience for our disabled supporters at the start of next season. We’re also driving forward plans for our summer 2020 improvement initiatives. As Old Trafford celebrates its 110th anniversary this year, these investments demonstrate our commitment to maintaining its status as one of the iconic football stadiums in Europe while preserving the unique heritage and character, which sets it apart from more recently built venues. We work with fan groups on measures to further enhance the Matchday experience in general admission areas, including the successful trial of an atmosphere section in the Stretford End and an application with relevant safety authorities to trial rail seating. These steps, together with the freeze in season ticket prices for the past eight consecutive seasons and the cap on away ticket prices in the Premier League, reflect our commitment to engaging with our loyal match-going supporters to keep Old Trafford safe, full, and atmospheric. I’ll now turn the call over to our CFO, Cliff Baty, to review our financial results in more detail.

Thanks, Richard. As a reminder, year-on-year comparisons relative to fiscal 2019 have been impacted by the absence of Champions League broadcasting revenues and the cadence of matches on a quarterly basis. In terms of headline figures, total revenues for the second quarter were £168.4 million, down £40.2 million versus the prior year, with adjusted EBITDA of £72.1 million down £32.2 million versus the prior year. For the full year, we continue to expect revenues and EBITDA for fiscal 2020 to track in line with our previous annual guidance. Turning to the key items in the results. Total commercial revenues were £70.6 million, an increase of £4.7 million versus the prior year, with sponsorship revenues of £45.1 million, an increase of £4.8 million over the prior year. Retail merchandising and licensing revenues for the quarter were in line at £25.5 million. Broadcasting revenues decreased by £39 million due to our participation in the Europa League compared to the Champions League in the prior year. As previously highlighted, the second quarter is where we see the biggest year-on-year impact from the reduction in UEFA broadcast revenues due to the five of the six group games taking place in the quarter. Matchday revenues decreased by £5.9 million to £33.1 million, given the impact of one less Premier League home match and one less home European match in the quarter, which is only partially offset by an additional midweek Domestic Cup home match relative to last year. Moving down the income statement. Operating expenses, excluding depreciation and amortization, were down £8 million versus the prior year. This includes wages, which were down £7 million, primarily due to a reduction in player salaries as a result of non-participation in the Champions League as well as one less home match played versus the prior year. Amortization costs were £31.2 million for the quarter, a decrease of £2.2 million versus the prior year. Net finance income for the quarter was £15.3 million compared to a cost of £6.3 million in the prior year. This movement was due to foreign exchange movements on the unhedged portion of our U.S. debt as sterling strengthened. Our cash interest costs in U.S. dollars remained consistent year-on-year. Turning to the balance sheet. At the end of December, cash balances were £100.9 million, down £89.6 million primarily due to higher player capital expenditures. As mentioned in the first quarter, this higher player CapEx reflects the accelerated payment and deferred proceeds profiles of our summer activity. Net debt at the period-end was £391.3 million, an increase of £73.6 million compared to the prior year due to the lower cash balances, offset by the impact of foreign exchange movements on our U.S. dollar-denominated debt. Our gross debt in U.S. dollar terms remains unchanged. Following recent transfer activity, we are now projecting committed player CapEx cash outflows for the full year of approximately £190 million and amortization of £130 million. We also continue to expect full year fiscal 2020 revenues between £560 million to £580 million and our adjusted EBITDA between £155 million to £165 million. With that, I will hand the call back to the operator, and we’re now ready to take your questions.

Thank you. We will now begin the question-and-answer session. And our first question will come from Randy Konik of Jefferies. Please go ahead.

Hey, thanks a lot. I guess, my first question for Ed. I know it’s a little bit of a fluid situation, but we saw the news earlier in the last couple of months regarding the Manchester City situation. Maybe just give us some perspective on what you’ve been seeing from your side, as it relates to financial fair play and the regulations and the impact that it has on the teams in the Premier League? Thanks.

Yes, I mean, as you predicted, Randy, I’m not going to comment on City or any other clubs relating to those events. But what I will say is there is a strong commitment from UEFA to ensure that financial fair play continues to deliver the benefits that it clearly has in the industry. And if you look at the last five years, the overall operating profits across the top leagues in the 50 or 55 countries in Europe have gone from pretty large losses all the way up to breakeven and small operating profits. So I think it’s been beneficial overall. And clearly, it’s up to the regulators to manage that.

Got you. And I guess Richard maybe can you give some perspective and expand upon the deal with Alibaba? Has the channel on Youku helped lead to further or acceleration of MANU app downloads or any measurement around increased engagement of the MANU app as a result of the recent partnership with Alibaba?

So, obviously the partnership is very new, and it’d be a little bit premature to extrapolate from the few weeks of data we’ve got today. That having been said yes, we have seen a massive increase in the engagement levels, we’re able to achieve off the back of having Alibaba alongside as promoting our content. In respect of app engagement, our analysis today is that China is a heavily portal-led market. The consumers actually use a relatively small number of tools to access content. Accordingly, our expectation is that the Youku channel and our engagement through Alibaba’s platform will be very important in continuing to drive that engagement with them and indeed for them while continuing to engage their consumers using our content.

Very helpful. And then I guess lastly, one thing that’s kind of noticeable is the breadth, scale, and global nature of the MANU brand. It shows that power with the signing of Mondelez, your 26th global partner. It seems like there’s been a re-acceleration in partnerships again. Are there other things you are thinking about to bring even more added value to these partners versus the traditional ways of bringing value to those brands and partnering with you in recent years?

Yes, that’s a good question. I mean, obviously, the world has changed fairly rapidly. Two aspects, I think, are very powerful in driving perhaps renewals more than new partnerships. The first thing is that our renewal rate is industry-leading, we believe. That’s a function of the satisfaction that partners have in us delivering on their objectives, which is a function of two things. Firstly, the work that’s gone into digital activities in ensuring fan engagement leads activity and being, again, we believe, the best in the world at engaging fans digitally with our content, and that translates into the results. Correspondingly, being able to manage sponsors to achieve phenomenal success in their digital engagement through our IP and content without it being intrusive to fans in terms of being perceived as advertising or otherwise. So yes, we are well positioned to acquire and retain the partners we’ve got as a result of the analytics and AI woven into our work. Overall, we believe we continue to be in a prime position.

Very helpful. Thanks, guys.

Thank you.

Our next question comes from Laurie Davison of Deutsche Bank. Please go ahead.

Hi guys, it’s Laurie here from Deutsche. First question just on the shirt sponsorship deal, so we’ve had press reports of a £17 million deal with Haier versus the £64 million, I believe, you’re getting from Chevrolet previously on a per annum basis. Can you comment on the veracity of those deals? Secondly, just in terms of what you mentioned about rebuilding the squad. When we’re thinking about player CapEx beyond the current fiscal year £190 million guidance, what should we be thinking about in terms of higher or lower versus that level for the following years? Thanks.

So in respect to the first question, we’ve communicated previously that the shirt process is underway and ongoing. We’ve communicated that at the point at which a deal is concluded, as you would expect, given its materiality, we will announce that in the usual way. That hasn’t happened. Concurrently, we’ve also indicated that we won’t be providing running commentary on how that process and the associated negotiations are proceeding. So beyond speculation, there isn’t – from the press, there is nothing further I can add in respect of that ongoing process.

Laurie, it’s Cliff here. In answer to your second question, in terms of future player CapEx, as you can imagine, we don’t guide on what that will be for sort of obvious reasons. What I will say, and reiterate what I said last quarter, is that the level of CapEx spend that we’ve got this year does reflect the accelerated payment and deferred receipt profile of last summer’s activity. Thus, if you track that through, it means that we’ve got less liabilities looking forward, which would impact what our CapEx will be.

Thanks. Just to follow-up on that, though, would it be fair to say that we should consider that you would likely reinvest that headroom as those liabilities roll off?

I say, we don’t give direct guidance. So if you look at history, you can perceive where the squad is and what comments Ed has just made regarding what we’re trying to do with the squad. But we wouldn’t provide direct guidance on what that number will be. We will inform you in September once the transfer window is done.

Okay, thanks guys. Thank you.

And our next question comes from Bryan Goldberg of Bank of America Merrill Lynch. Please go ahead.

Thank you very much. I had a follow-up on sponsorship. I was wondering if you could update us on sort of what key verticals are out there that might be unsold or renewing this year or next year? How could we think about opportunity there? And then not specifically about your jersey deal, but could you help us think about how the sponsorship market plays for that type of inventory? How has the market changed today versus when you initiated that deal just before you went public? So that’s my sponsorship question. And then I actually have a second one, and forgive me if this was asked earlier. Could you help us think about how your revenue contracts work? Are any of them tied to the actual delivery of live sports content? We’re just trying to get our heads around potential exposures to possibly changes in the situation. Thanks.

In respect of the first two questions, I’ll answer those. So the question was, if I understand it correctly, how should we view open or renewing categories in respect to the overall sponsorship business? I think there’s two or three points to emphasize. First, we continue to be successful in segmenting and defining new previously unexplored categories through our work. Take, for example, Maui Jim and the work that’s happened there. The affinity programs with Marriott, the collaboration ongoing with Kohler, a bathroom and kitchen organization, as well as generators, show the appeal of what we offer in categories that perhaps others haven’t explored. The second aspect is, when you look at our category build rate compared to the most popular ones in the industry overall, we have many open categories that we expect to show future growth. Soft drinks, consumer electronics, and several technology and software verticals represent significant opportunities. Finally, our renewal rate is industry-leading. There’s considerable investment and skilled individuals who work to service our clients, and that results in strong renewals, which enables continued growth as they recognize the benefits of the rights offered alongside category improvements in pricing achieved not just through renewals but also through category replacement. It’s an exciting time in sponsorship. The combination of the scale we offer globally, the ability to be a singular solution across both live media on nearly every TV and our engaged digital footprint positions us uniquely. That, alongside the investments made to compete effectively with the largest platforms worldwide, ensures we understand how to target and segment effectively and ultimately fulfill partner needs. Overall, we remain quite bullish about current and future sponsorship business prospects.

Thank you, Rich. The third question Bryan posed regards the coronavirus situation. First and foremost, I'd like to reiterate what Richard said earlier; our thoughts are with everyone affected in China and other countries. We have many supporters in China and the rest of Asia and staff in Hong Kong. Our first concern is for people’s welfare. It’s a fluid situation, and we’re monitoring it closely. We’re aware of the effects on sporting events in Asia and what’s happening in Italy over the last couple of days. However, to date, we haven’t seen any disruption to sporting events in the UK, and we are continuing to monitor the situation and will follow any and all guidance from the relevant authorities, including the Premier League and UEFA.

That’s it. Thank you very much.

Thank you.

This concludes the question-and-answer session. The conference has now also concluded. Thank you for attending today’s presentation; you may now disconnect.