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Manchester United plc (MANU) Q2 2019 Earnings Conference Call Transcript

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Manchester United plc  (NYSE: MANU)
Q2 2019 Earnings Conference Call
Feb. 14, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 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.

Edward Woodward -- Executive Vice Chairman

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

Ole has been joined by Mike Phelan, who had previously spent 14 years with us as a coach including five with Sir Alex Ferguson his assistant manager. In addition, Michael Carrick, Kieran McKenna and Emilio Alvarez had remained as key members of Ole's first team coaching staff. And I've had a fantastic start revising the performances of the team and in the process of setting a new Manchester United first team record of winning their first eight 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 accumulated 25 out of the possible 27 points in the league with some fantastic performances. We progressed to last 16 of the UEFA Cup attracting the largest UK audience for our fourth round cup match against Arsenal. We had million more viewers in the second match popular match so far this season.

In the Champions League (inaudible) and I wasn't the result we wanted, but as Ole reflected after the game. We wanted to be competing at the top level and the team will be giving their all empowers. In terms of player contractual activity, we're delighted to have secured agreements to extend the contracts for 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 Fellini to Shandong our first ever sales for Chinese Super League Team. Of the pitch, we continue to perform very well. And this quarter seeing the club achieved record quarterly revenues of over GBP200 million and a record quarterly EBITDA of over GBP100 million.

Our continued financial strength underpins our long-term success on the field, which is the focus of everybody at the club. I attended the Premier League's shareholders meeting last week where the UK live match audience figures represented for the season to date, and it was encouraging to note the viewership figures are up significantly on last season, which wasn't turn up on the previous season and before.

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 legends of the club. He was the embodiment of the club's commitment to youth and his legacy lives on with every player who comes through our academy today.

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

Richard Arnold -- Group Managing Director

Thank you, Ed. Turning to our businesses. In sponsorship, we announced our partnership with leading Chinese property developer, Harves like 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 life for our 100 million plus fans and followers in China.

Visitors will be able to experience the thrill of the match at Old Trafford as well as learn more about the history and heritage of English Football's biggest and most storied club. The centers will provide fans with the 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. It almost 12 times increased in broadcasting rights meaning China will leapfrog a number of other countries to become the Premier League's most valuable international broadcast market and testament of that.

Manchester United is the most well supported team in the country. Alongside our digital reach through our own platforms and presence on social platforms like seeing the way you do. Our partnership with Harves will enable us to build on our close relationship we found in China and provide a further foothold to build a bigger platform in this important region.

As I 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 on women's teams. I anticipate announcing further partnerships very soon. I'll also take the opportunity to provide an insight into an example of how we deliver value to our commercial partners beyond the major exposure we provide.

The long running, I love United, series of international fan events has being 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 two times oversubscribed and the social media campaigns delivered 19 million marketing impressions. In just three days, we conducted 80 partner activations with 14 partners.

The headline results included considerable increases in awareness of our partner brands. Even those in our home markets like ICICI Bank and improvement in the opinion of their brands among our fans. As an interesting specific example DHL's designated #DHL United delivered trended number one across India. The next I Love United event will be hosted in Guangzhou, China on the 2nd of March.

Turning to the media business. We continue to focus on driving deep and meaningful engagement through our owned and operated products. Over the roughly six months since the launch of our mobile app according to third-party analytics firms, our app has been 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 the user and time spent and user retention. All of these are well above the 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 giving breaking news, statistics, highlights and other exclusive content.

In addition, there are material business benefits including the cross promotion of 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 of 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 decision. As competitors are being restricted to UK resident. 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 tournament as an engagement medium particularly for 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 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 stream around 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 addition product sellout in record time. For instance, the innovative digital kit which was designed for and featured in the EA Sports game FIFA 19. And then also retailed as a physical product. We sold out online within hours. While the Adidas Originals Newton Heath shoe sold out within minutes.

Our other geo-branded partnership continued to trade well with the introduction of debut MU collections from Paul Smith True Religion ahead, sorry, 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 Football 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-'20 renewals campaigns to season tickets and executive club hospitality, which we are experiencing high demand as usual.

We have a significant and strong pipeline of fans on the waiting list for 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.

John Clifford Baty -- Chief Financial Officer

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 GBP206.8 million up 17.6% with a record adjusted EBITDA of GBP104.3 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 have played five of the six group stage fixtures in the quarter.

Turning to the key items in reported financial statements. Total commercial revenues were up GBP0.6 million to GBP65.9 million. Sponsorship revenues were up GBP1 million, which was partially offset by GBP0.4 million drop in retail, merchandising, apparel and product licensing revenues. Broadcasting revenues were up GBP28.5 million, driven by the increased Champions League revenues and were partially offset by playing one UEFA Premier League game.

Matchday revenues were up by GBP2.1 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 we were up 8.4%. This includes wages, which were up 11.8% primarily due to an increase in first team salaries following additions made to the squad as well as the impact of the new contracts. Although operating expenses decreased 0.4% despite playing one additional home league game.

Amortization costs was GBP33.4 million, a decrease of 10.5% over prior quarter. Also in this quarter, we recorded an exceptional cost of GBP19.6 million in relation to the change of first team's management team in December.

Net finance costs for the quarter was GBP6.3 million, an increase of GBP1.9 million due to unrealized exchange rate movements on unhedged US dollar debt. As mentioned in previous quarters, our cash interest costs in US dollars remain consistent year-on-year. Looking at the balance sheet, the cash balance at the period end was GBP190.4 million, up GBP35.1 million against prior year.

Net debt at the period end was GBP317.7 million, down GBP10.9 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 GBP615 million to GBP630 million and EBITDA between GBP175 million to GBP190 million.

We previously guided the amortization for fiscal 2019 would be GBP140 million. However, as a result of recent contract extensions, we now expect amortization to be below GBP130 million.

Finally, please note that a semi-annual cash dividend of GBP0.09 per share will be paid on the 5th of June, 2019 to shareholders on record on the 26th of April 2019.

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

Questions and Answers:

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 -- Jefferies -- Analyst

Thanks. And it's glad to be back for me covering you guys. So, I guess question for Richard. You had this interesting kind of dialog 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 announced with the entertainment venues? 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? So 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 then you know there's many more things in traditional types of sponsorships that can be done here and partnerships. So, just wanted curious on your thoughts?

Richard Arnold -- Group Managing Director

So, thanks for the question. I think that you've alluded to a couple of things that underpin all of the partnerships we do, which is that we've 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 that 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 opened up. Being one of the most engaged digital properties in the world means that the world really is our oyster, the 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 is such a powerful connecting tool with our fans and that represents an increasingly valuable commodity in an increasingly valuable -- increasingly fragmented media landscape. So, I think, we've 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 -- Jefferies -- Analyst

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

Richard Arnold -- Group Managing Director

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, yeah, we need a period of time to really understand the detail trends and what will continue. When you look back with the goal 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 reflected the first so many million fans to come onto the app would be the most fervent. And even in our uppermost expectation the continuation of that trend as we've added more and more fans has surprises 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 is 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 a lot of time and attention went into both measurement and analysis and testing of what works with that. And we did that as a number of you will be aware around the world with different kinds of actions and different kinds of environments. 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'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.

Randal Konik -- Jefferies -- Analyst

That'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 -- Deutsche Bank -- Analyst

Hi, good morning. It looks like you had several significant player contract renewals this year. 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 -- Executive Vice Chairman

Hi, Clay. It's Ed here. We don't provide that kind of data or information that starts to give people a more information with regard to player-by-player because it's pretty accurately well known. The end dates of the player's contracts. So, we're a long way through the ones that we had planned to do in this season, but obviously we want to finish off the final few as rapidly as we possibly can, but possibly by the time we get to the summer will be in much stronger position with regard to the average tenure of each contract with our key players.

Clayton Griffin -- Deutsche Bank -- Analyst

I see, OK. And I guess maybe just, Ed, at a higher level 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 -- Executive Vice Chairman

So, first question with regards to Director of Football, I mean, look a lots obviously been 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's 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've materially increased the investment and we're seeing the pull-through of that quality now coming out. We've invested very materially around recruitment side, the player cast side, continued investment with regards to facilities, medical and sports sides. So, the evolution of the football side is continuing. It's not necessary that visible to the outside and in some respects it's a -- you got 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 regards 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 -- Deutsche Bank -- Analyst

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 Old Trafford just wondering if you could just elaborate on that or circle back on that and help us think about what's going on at that stadium?

Richard Arnold -- Group Managing Director

Yes, so the last time we spoke, we have spoken about a couple of aspects that have been developing quite rapidly. So, one was updating the contactless activities we did in kiosks and indeed implementing technology to make the fan service flow much quicker particularly at peak moments. So, the last 15 minutes before kickoff, 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 a 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, refurbishing and expanding a number of the lounges and that, yeah, that's underpinned was already a fantastic product, but we've seen that continues to have phenomenal demand, very low churn rates, and is one that we're very happy with.

Clayton Griffin -- Deutsche Bank -- Analyst

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.

Duration: 28 minutes

Call participants:

Edward Woodward -- Executive Vice Chairman

Richard Arnold -- Group Managing Director

John Clifford Baty -- Chief Financial Officer

Randal Konik -- Jefferies -- Analyst

Clayton Griffin -- Deutsche Bank -- Analyst

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