Manchester United plc (MANU) Q2 2021 Earnings Call Transcript

Manchester United plc (NYSE: MANU) Q2 2021 earnings call dated Mar. 04, 2021

Corporate Participants:

Corinna Freedman — Head of Investor Relations

Edward Woodward — Executive Vice Chairman and Director

Richard Arnold — Group Managing Director and Director

Cliff Baty — Chief Financial Officer

Analysts:

Xian — Exane BNP Paribas — Analyst

Randy Konik — Jefferies — Analyst

Presentation:

Operator

Good afternoon 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. [Operator Instructions] 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.

Corinna Freedman — Head of Investor Relations

Thank you, Grant. Hello, everyone and welcome to Manchester United’s second quarter 2021 earnings call. Our call is being recorded and webcast and a replay of this call will be available on our site for 30 days. 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 factor discussions in our filings with the SEC.

With us today on our call this evening, Ed Woodward, our Executive Vice Chairman; Richard Arnold, our Group Managing Director; Cliff Baty, our Chief Financial Officer; and Hemen Tseayo, our Director of Corporate Development. I will now turn the conference call over to our Executive Vice Chairman for opening remarks. Ed?

Edward Woodward — Executive Vice Chairman and Director

Thank you, Corinna and thank you everyone for joining us. While our focus today is on the second fiscal quarter, it’s also an opportunity to reflect on what’s been an extraordinarily challenging year for Manchester United, for football, and of course for society as a whole. It is almost 12 months since the pandemic began to tighten its grip on the U.K. and we were required to close Old Trafford to supporters. As I’ve said before, their absence has only highlighted the importance of fans to the fabric of football. We can’t wait to welcome them back.

However, while match days have not been the same, we are proud to play that part in keeping football going to maintain a precious source of entertainment and community for fans around the world. I want to pay tribute in particular to our coaching, medical, and support staff who enabled this hectic schedule of matches to continue in very difficult circumstances. The past year has tested our club’s resilience and values and I’m pleased with how we performed in both respects.

Since the start of the pandemic, the club and our foundation have together provided over GBP5 million of charitable support to good causes in our local community and beyond. This reflects our commitment to being a positive force in society and a source of pride for our fans. It also reflects the dedication of all of our employees and robustness of our finances fueled by a commercial business in responding to this once a century level crisis.

In Europe, we continue to play an active role through the ECA in discussions on the future of UEFA’s European club competition after the current competition cycle ends in 2024. While many details are yet to be resolved, we look forward to seeing the full final proposal from UEFA that we anticipate will include a greater involvement of clubs in the governance and control of the competition and of course, a new format with greater appeal to fans and which crucially, we will continue to go hand-in-hand with thriving domestic leagues.

Demand for live football remains strong and we feel very confident about the long-term prospects for our sport. In the near-term, our focus remains on preparing for the return of fans to Old Trafford. We’re seeing some positive examples around the world of live events with reduced capacity crowds delivered safely with social distancing. The successful rapid roll out of vaccines and falling rates of infections in the U.K. makes us optimistic about the government’s road map out of the lockdown including plans for the gradual reopening of sport stadiums to spectators beginning this spring. Initially, this will be with limits on capacity. We are hopeful of crowds ramping back up to full capacity next season.

As we look beyond the pandemic, we feel more confident than ever about the power of sports to unite and inspire across generations, cultures, and ideologies. Football in particular is playing an active role in the campaign against racism, another form of discrimination, but still sadly pose a challenge for our game and our society today. We as a club will continue to be at the forefront of those efforts.

In summary, I’d like to reiterate this club’s strong underlying fundamentals. The return of our fans to Old Trafford enabled by strong vaccine deployment in the U.K. and the easing of lockdown restrictions is no doubt a light at the end of the tunnel in the near-term. And while we’re pleased about this season’s on-pitch progress and the strength of our current squad, we are as equally bullish on our long-term prospects. Our best-in-class digital operations, increased fan engagement, enduring sponsor partnerships that facilitate investment in the playing squad, the strength of our academy and most importantly, our self-sustaining operating model will all enable this club to emerge from this crisis in a stronger relative position.

In a moment, I’ll hand over to our Group Managing Director, Richard Arnold, to update you on our key business activities and provide an operational overview, but a final comment, I would like to extend my thanks to all our teams both on and off the pitch for their hard work and sacrifice through this quarter and through the whole of 2020. Thank you.

Richard Arnold — Group Managing Director and Director

Thank you, Ed and thank you to everyone for joining us today. As we reflect on the past year, few understood at the outset of the pandemic the full ramifications of the exponential spread of this virus or the huge social and economic impact that global lockdown measures would impose. To echo Ed’s sentiment, this past year has tested all of our resilience and we are eager for the continued widespread vaccination roll out which will help save lives and steadily but surely put us all back on a path towards normality.

At the same time, we recognize that not everything will revert to the way things were before and that the pandemic has created an opportunity for us to rebuild better. It’s been said many times that the pandemic and global chords [Phonetic] have accelerated trends that were already in motion and this is no doubt true of the impact that this has had on our operations as a club whether it be providing a more flexible and modern workplace or by deepening our digital connections with our fans and followers.

Despite the uncertain backdrop and the profound absence of our supporters at Old Trafford this season, we are proud of the way we responded to the crisis with resilience and adaptability. While the ongoing global pandemic remains a significant headwind, we’ve quickly pivoted and transformed many aspects of our business, the results of which we expect will generate benefits for many years to come.

As Ed briefly touched on, we’re humbly proud of the positive difference we were able to make in our communities in 2020. As Chairman of our Foundation, I’m really proud of the work that has been accomplished. We supported our community with approximately GBP5 million in contributions including direct donations, fundraising efforts, and payments to our casual staff. We believe that nearly 93,000 unique people benefited from our efforts across the NHS, local schools, and food banks in 2020. We’ve also recently opened Old Trafford for use by the NHS as a training center for hundreds of volunteers that are taking part in the National Vaccination Program and we will continue initiatives of this kind to help our communities for as long as the pandemic continues.

We will also remain committed to advancing diversity and equality in our club and in our sport. The club was one of the founding signatories of The FA’s Football Leadership Diversity Code. Our commitment to diversity spans all areas of our club and our aim is to achieve appropriate representation of all underrepresented groups in society including the LGBT+ community and those with disability. To that end, we’re pleased to announce that the final construction of our GBP11 million upgrade of our accessible facilities was completed at the end of 2020 and Old Trafford will be better equipped than ever to welcome back all of our fans.

As you all may be aware, last week, the government released its four-step road map for the easing of the national lockdown. If plans proceed according to the current schedule, crowds of up to 10,000 people will be allowed to return to football stadiums in the U.K. after May 17th with all restrictions ending from the 21st of June. It is our understanding that this would mean a return to normal operations at Old Trafford. Obviously, this will continue to be subject of circumstances in the U.K.

In parallel, we are establishing protocols to deal with testing, passports, and ongoing distancing. We know that our season ticket holders, members, and other fans are very eager to return and we expect our supporters will treasure these shared experiences now more than ever before. We look forward to sharing more details on our plans on our next earnings call including our plan for next season when we hope to return to full capacity.

Moving now to our business update. Turning first to our digital and media operations, given the absence of match day supporters, we continue to prioritize digital initiatives to drive engagement as part of our ongoing club-wide digital transformation. The rate of that acceleration has increased and we’ve continued to invest not just in platforms and technologies, but we have also further strengthened our leadership team in digital marketing and CRM.

In social media, we continued to broaden our geographic and demographic reach as we launched a club presence on several new and growing social media platforms this quarter. Our women’s team, launched in July 2018, has recently surpassed 1 million followers on Instagram, amassing a bigger following than nine Premier League men’s clubs. On our own platforms, we have developed and launched several new mobile app enhancements and features. Specifically, our gamify [Phonetic] predictions and streaks functionality, which has significantly increased our mobile app usage this quarter [Technical Issues] and more users are now logged into our mobile app than ever before.

More compelling and personalized data-led engagement has benefited in a superior end-to-end fan experience as strong engagement in turn drove strong traffic to our e-commerce channels. I think it’s useful to note that e-commerce merchandise sales for the six month period have already surpassed the entire prior season. In fact, all three of this season’s men’s kits achieved record launch day sales and we are also enjoying record sales of our women’s kits. And this momentum is continuing into the current quarter as we achieved record e-commerce sales in January.

While these stats are impressive, we believe we are only just getting started and we see significant open runway to continue to drive traffic and conversion as well as diversify our geographic reach and product mix. On a gross basis, we are seeing that these sales have helped to offset the revenue loss of the Megastore, which was closed on December 31st, part of the latest lockdown. We expect the store to reopen to fans on April 12th in accordance with the timeline communicated by the government.

Turning to our sponsorship operations. We believe the market continues to stabilize and we’re seeing a flight to quality across the industry. Since the first quarter, we’ve signed renewal deals with two of our global partners and continue to support all of our partners with new and exclusive interactive digital events. In mid-December, we took our I love United supporter and partner programming to India virtually via a multi-platform broadcast featuring local hosts and influencers. This event generated 24 million [Technical Issues] impressions — channel impressions and 223,000 supporters streamed the event live.

We also recently held an I love United USA fan event last weekend with 23 of our partners activating across the event hosted by high-profile United supporters and featuring Ole and our recent U.S. signing Tobin Heath. This event was viewed by nearly 6 times the amount of viewers of our India event with 1.4 million live streaming via Facebook, YouTube, the web, and our app.

Turning to China, United was the most engaging football club on China’s native Weibo and WeChat platforms for the 2021 season this quarter. On Weibo, Manchester United is currently the most followed football club on the platform. We also launched on the Douyin platform simultaneously with our global TikTok launch in November and we’ve earned nearly 2 million followers and over 17 million likes in the brief three months since launch becoming the fastest growing football club on the app.

Offline, we remain on track for a late March, early April opening of our first experience center in Beijing, the Theatre of Dreams experience center with our partner Harves. Finally, though we continue to expect near-term challenges, there remains much to be optimistic about. We will continue to relentlessly pursue the many growth opportunities that remain for our club and we are excited about the potential to deepen our community engagement via our own platforms as well as launch on new and emerging platforms, which we expect will drive engagement for the next generation of supporters.

Ultimately, the strong commercial engine of this club inspired by our commitment to deliver the engagement that our fans demand drives a virtuous cycle and fuels our ability to continuously and sustainably reinvest in the team, fortifying our club’s future not just over seasons, but over decades. With that, I will now turn the call over to our CFO, Cliff Baty, to review the results — the details of our results and discuss our financial outlook. Cliff?

Cliff Baty — Chief Financial Officer

Thank you, Richard. I’ll first talk to our fiscal year results, which continue to be impacted by the COVID-19 pandemic and related lockdown. Given this uncertainty, we will not be providing any forward revenue or adjusted EBITDA guidance today. As a reminder, year-on-year comparisons relative to fiscal 2020 have been impacted by our return to the Champions League and the number of games played in the year.

Total revenues for the quarter were GBP172.8 million, up GBP4.4 million versus the prior year due to the impact of the Champions League revenues relative to the Europa League. Adjusted EBITDA was GBP70.3 million, down just GBP1.8 million from the prior year quarter. Turning to the key items in the results, total commercial revenues of GBP62.6 million, sponsorship revenues of GBP37.8 million, GBP7.3 million lower than the prior year quarter due primarily to a one-off credit in the prior year together with lower revenues from [Phonetic] our shirt sponsor extension.

Merchandising and licensing revenues were GBP24.8 million, 2.7% below the prior year figure, which reflects a significant reduction in our Megastore trade due to COVID impacts offset by increased e-commerce royalties and wholesale revenue. Broadcasting revenues increased by GBP44 million to GBP108.7 million due to the Champions League revenues compared to the prior year Europa revenues. In addition, all six group stage games were played in the second quarter of this season [Phonetic]. Matchday revenues for the quarter were GBP1.5 million being membership fees and property income. 10 home matches were played at Old Trafford with no fans in attendance including three Champions League matches.

Moving down the income statement, operating expenses excluding depreciation and amortization increased by 5.6% versus prior quarter. This includes total wages, which were up 15.2% primarily due to higher player wages for participation in the Champions League. Other operating expenses for the quarter decreased by GBP4.6 million reflecting the impact of playing matches behind closed doors.

Depreciation and amortization costs were GBP36.1 million, an increase of GBP1.2 million versus the prior year. Net finance income for the period was GBP19.7 million, an increase of GBP4.4 million due to foreign exchange gains on the unhedged portion of our U.S. debt. As we’ve mentioned in previous quarters, our cash interest cost in U.S. dollars remain broadly consistent year-on-year.

Turning now to our balance sheet, at the end of December, net debt was GBP455.5 million, an increase of GBP64.3 million over the prior year, reflecting the impact of COVID through loss of Matchday revenues resulting in a drawing down of GBP60 million of our available GBP200 million credit lines during the quarter. At the 31st of December, we had just over GBP80 million of cash on the balance sheet. Finally, we expect player cash capex in fiscal year ’21 to be approximately GBP110 million with amortization of GBP127 million.

Looking forward to the current quarter, it’s worth noting that we’ll be lapping the early stages of the pandemic and the initial cancellation of matches, which occurred beginning March 12th last year. We would therefore expect to play an additional five Premier League matches in the current quarter versus the prior year. In closing, I’ll reiterate the sentiment of Ed and Richard, we are well positioned to weather the current uncertainty and optimistic for the future. And with that, we are now ready to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question today will come from Laurent Vasilescu with Exane BNP Paribas. Please go ahead.

Xian — Exane BNP Paribas — Analyst

Hey guys, this is Xian [Phonetic] on for Laurent, a couple for me. First on the retail side, down only 3% as you mentioned, I thought that was pretty impressive considering the retail Megastore was closed. You mentioned e-commerce was strong. Can you help dimensionalize a bit how big e-commerce is for you guys and how big was the decline in the Megastore?

Edward Woodward — Executive Vice Chairman and Director

Richard, you want to take that?

Richard Arnold — Group Managing Director and Director

Yeah, so I think the first thing to understand is that there is a difference in the gross versus net reporting between what goes through the Megastore where we report the gross retail passing through to consumers whereas for the e-commerce we report the licensed share of net profit as revenue. So a difference in mechanism. In terms of the drop, that’s been offset by both the explosion in the scale of the licensed profit as well as wholesale, that’s the sale by us to our e-commerce license partner, a product that’s offset the reduction. So whilst the gross numbers are broadly the same year-on-year, in total, that translates to a smaller reduction than you would expect purely from the closing of the Megastore.

Xian — Exane BNP Paribas — Analyst

Okay, got it, thanks and then second on broadcasting rights. As you think about it longer-term, I think there was an article recently about the NFL potentially getting double the fees. I was wondering how you are thinking about the growth profile for the broadcasting revenue and maybe if you can break it out between maybe domestic broadcasting rights versus international, how you are kind of thinking about potential growth rates over time?

Edward Woodward — Executive Vice Chairman and Director

Let me start with that and then maybe Cliff, if you jump in. I mean, yeah, the NFL is the best example I think to point to in terms of premium sports league and I think the way we think about the growth that we expect to come I think it’s likely to be less — lower rate of growth than we’ve experienced the last two cycles in the U.K. right sales but set off that reduction of growth is covered by still big growth that we’re seeing on the international side. So the cycle ’21-’24 [Phonetic] that the Premier League has been selling during COVID as well as couple of deals just at the start has seen some good growth rates.

So I can’t really — I don’t really want to put a number on year-on-year growth, but there is positivity that we are hearing with regard to the deals as they come through even during COVID and I think that’s the same as the NFL at least in terms of positivity despite the environment that obviously they are selling the rights in. Cliff, I don’t know if there is anything to add on that.

Cliff Baty — Chief Financial Officer

No, I think you’ve mentioned, I mean, we had the med deal you mentioned it, which happened just before sort of COVID which again sort of showed the appeal of the Premier League in [Phonetic] International.

Xian — Exane BNP Paribas — Analyst

Okay, very helpful. Thank you, guys.

Operator

Our next question will come from Randy Konik with Jefferies. Please go ahead.

Randy Konik — Jefferies — Analyst

Yeah, thanks a lot. You touched on China a little bit in the remarks. Can you just give us some perspective — added perspective on how you are thinking about monetizing the region in a deeper way. Obviously, you talked — you gave us those great statistics on the engagement of your theme of club versus everyone else. So I was just curious on — update us on the partnership you have over there, what’s going on and what’s the latest there and just any other areas of monetization you are thinking about to really kind of capitalize on the strength you have for the brand and the team in China?

Edward Woodward — Executive Vice Chairman and Director

[Speech Overlap] Yeah, so three main monetization routes that we are actively both pursuing and participating in. The first, obviously with such an important part of our family of fans in China is the benefit that comes in the attractiveness of our right to sponsors. So that engagement translates into an ability to engage with those fans and higher sponsorship revenues.

Secondly, the integrated partnership we have with the Alibaba Group with the content distributed on Youku as well as the work that we’re doing to pass that traffic into Tmall on an integrated ecosystem basis drives e-commerce revenues and then finally, the in-market experiential work that we’re doing particularly with Harves obviously will drive and that’s — we’re opening the first of those this spring and with a further four sites identified and 14 sites contracted. So a big expansion of that in terms of its reach across the country and very excited about what that can bring for us in terms of fan engagement and sponsor driving.

Randy Konik — Jefferies — Analyst

Super helpful. The one thing that we’re seeing at least in the U.S. market. I’m sure it’s around the world that is the traditional media companies or Fox or what have you, they’re trying to do more I guess selling more like Netflix-like content, which means less commercials or what have you. So are you seeing disproportionate more interest in, you know, different kind of sponsor size, different brands out there that want to get more exposure to your brand and the live exposure you get across the world. Just give us some more thoughts there and any type of out of the ordinary demand that you are seeing within the sponsorship commercial segment?

Edward Woodward — Executive Vice Chairman and Director

Yeah, that’s a good question. So I mean I think there are a couple of items that set us apart in what I would say is a unique way globally. The first is the scale of the fan base and the passion of the engagement and that translates into a partner who is looking to activate with us particularly in a digital setting a very deep engagement level with our fans and that translates to deep engagement to sponsors and successful commercial engagement and you know, that is a huge multiple of the typical advertising you see in a digital setting. So that itself is very powerful.

And then further to your previous question, we’re able to offer that engagement and commercial success not only in a western digital ecosystem, but as strongly — equally as strongly, if not more so in the Chinese digital ecosystem and those are obviously a distinct subset. So that is unique in terms of being able to offer that strength on a genuinely global basis and that attracts partners that are seeking to be successful in that way and in that market and that tends to be the large and powerful fast growing global companies.

Randy Konik — Jefferies — Analyst

Super helpful. Thanks guys.

Edward Woodward — Executive Vice Chairman and Director

Thanks, Randy.

Operator

[Operator Closing Remarks]