Wanda Sports Group Co. Ltd. (WSG) Q2 2020 Earnings Call Transcript

Wanda Sports Group Co. Ltd.  (NASDAQ: WSG) Q2 2020 earnings call dated Sep. 01, 2020

Corporate Participants:

Edith Kwan — Head of Investor Relations

Hengming Yang — President and Chief Executive Officer

Honghui Liao — Chief Financial Officer

Analysts:

Bryan Kraft — Deutsche Bank — Analyst

Alan Gould — Loop Capital Markets LLC — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and for joining Wanda Sports’ Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Today’s conference call is being recorded. If you have any objections, you many disconnect at this time.

I would now like to turn the conference over to your host for today’s call. Ms. Edith Kwan, Head of Investor Relations at Wanda Sports Group. Please go ahead.

Edith Kwan — Head of Investor Relations

Thank you, Amber. Hello, everyone. Thanks for joining the second quarter 2020 earnings call. With us today are Hengming Yang, Chief Executive Officer of Wanda Sports; and Brian Liao, our Chief Financial Officer. A replay of the call will be available on our IR website later today. We have also posted a slide presentation on our website, which Brian will reveal during his remarks.

Now, let me quickly cover the safe harbor. Today’s discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements and consequently, could be affected by the uncertain and unprecedented impact on COVID-19 on our business and operations, and a related impact on our liquidity needs.

For a detailed discussion of these risks and uncertainties, please refer to our earnings release, our annual report on the Form 20-F for the year ended December 31, 2019 filed with SEC annual report and available on the SEC’s website at www.sec.gov, as well as such as filings that we may from time to time with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update these statements except as required under applicable law.

Please note that certain financial measures that we use on this call, such as adjusted EBITDA are expressed on a non-IFRS basis. Our IFRS results and reconciliation of IFRS to non-IFRS measures can be found on our earnings release.

With that, I will now turn the call over to our CEO; Hengming Yang. Hengming, please proceed.

Hengming Yang — President and Chief Executive Officer

Okay. Thank you, Edith. And thanks to everyone for joining us today. First, I hope you and your families are healthy and safe during the pandemic. I’d also like to recognize and sincerely thank our people at Wanda Sports Group for their dedication and highly effective work as we respond to the profound challenges that have severely impacted the global community.

Turning to today’s calls, I’ll first review our second quarter performance. Then I have some updates on our focused and disciplined actions in addressing the COVID-19 pandemic. Let me start with the second quart results. I’d like to remind you that given the sale of The IRONMAN Group closed in July, we still treated The IRONMAN Group in the second quarter as an asset held for sale and its historical results are reflected as discontinued operations.

As expected, second quarter 2020 was probably the most challenging operating environment in the history of our company as we were affected for the entire quarter by the pandemic and its impact on the global economy. Nevertheless, we still delivered total revenue of EUR51.8 million and adjusted EBITDA of EUR17.9 million.

Despite the postponement of all cancellation of most every sport event worldwide in the second quarter, I am proud to report a number of achievement and business wins and maintaining our diversified portfolio and expanding our priorities in serving clients while undertaking structural cost reductions.

As for the highlights for our Spectator Sports business, several delayed football events were successfully completely after a relatively lump period of lockdown. Including the return of German Bundesliga, the semi-final and a final of DFB-Pokal, which is German Cup as well as Lega Serie A matches with the Coppa Italia Coca Cola final. Although, these games were primarily played behind close doors with no spectators, we served as media and marketing partner in the broadening environment with the clients. The Coppa Italia Coca Cola final, celebrated a broadcast reach of over 10 million viewers with the match distributed to almost 220 territories globally.

In respect of major commercial contracts and extension of long-term partnerships, we extended for another three-year our agreement with the German Ice Hockey Federation for exclusive media and marketing rights. We also extended exclusive international media rights partnerships with Czech Republic and Norway Ski Federation for five years. Furthermore, Finland Biathlon extended its long-running agreement with us for exclusive marketing rights until the 2029, 2030 season. For facilitating sponsorships, we successfully brokered several commercial agreements with recognized brands including Nike and the Top 14 rugby club named Stade Toulousain, LGT and the World Curling Federation, Hormann and International Biathlon Union.

In terms of new business wins, we remain positive about our pipeline opportunities as we became the exclusive media rights partner with Broadcaster Pragosport covering 15 media properties for period up to 2028. We also completed an exclusive marketing and sales agreement with Besiktas Sports Club, one of the Turkey’s top football, basketball, volleyball, and handful and esports clubs for 2021 to 2024.

In addition, we signed media agreements with Scottish Premier Football League in over 30 countries for three years. We see these accomplishments in the second quarter as a strong testament to our operational excellence and our differentiated capabilities to stay ahead of the curve for our clients and partners.

So next our DPSS business continued to adopt leading technology which plays an ever increasing part of the daily operations of ours and our clients. In the second quarter, we delivered a number of virtual events including the International Ice Hockey Federation’s e-sports Digital Championship Tournament, online e-sports matches for Italian football league’s eSerie A TIM clubs and virtual overlays for the Coppa Italia Coca Cola football final.

Following our recent success in partnering with Verizon to launch a new 5G base in stadium experience which allows fans equipped with a 5G device to enjoy multi-camera live and on-demand streams of the game, we have further reached the agreement with the Verizon on four separate deals to continue to bring more thrills and excitement to the outside experience for the games including NBA, the NASCAR and so forth.

Furthermore, we are experiencing heightened demand for marketing technology, and content data management as evidenced by the various projects mandated by the Professional Golf Tour, English Premier League, Club Chelsea Football Club, Badminton World Federation and Activision Blizzard. In addition, we renewed the contract with France Ligue Football Professional for the next four seasons.

We were also awarded the outstanding production achievement event for its production of the Rugby World Cup Japan 2019 by the Sports Video Group Europe TVA, one of the most prestigious bodies for the sport broadcasting and production across Europe. For this award, we set new standards in rugby broadcast production with the first 8K production, the use of augmented reality graphics and Hawk-Eye Smart Replay technology.

Now returning to our Mass Participation business. Not surprisingly as the pandemic spread across the globe, all mass participation sport events were cancelled or postponed in the second quarter. But we successfully launched a few virtual events including the online HYROX fitness competition which attracted 5,000 participants from 51 countries, and a virtual long distance hiking challenge. Our advanced digital technology enabled us to continue to engage and connect with diverse athletes and spectators from multiple markets globally regardless of the COVID-19 crisis. As this experience demonstrates the COVID-19 situation actually inspired new innovative formats that could become a complementary, commercial viable mass participation event going forward.

For our China business, unfortunately almost all sport events in China also were cancelled and postponed in the second quarter as a result of the pandemic disruptions. However, we remain confident of these significant opportunities in the China market and will continue to prepare our team to expand premium sport events in the future.

Now let me provide some updates on how we see the impact on us of the current environment. In addressing the COVID-19 disruptions, we were fortunate that due to the immediate implementation of remote working protocols, all of our employees were safe. But as part of our cost reduction efforts in aligning staff level with the client demand, we made a difficult decision to decrease headcount by about 13% compared to the beginning of 2020.

Our other priority of planning with our partners and clients for the safe resumption of sport event led us to join us one of the founding members the 4Sport4Recovery initiative, which launched an international campaign to encourage policy makers to safely reopen organized events. In addition to communicating with policy makers, this campaign aims to collaborate with scientific community for necessary measures such as testing, social distancing, defined hygiene measures as well as monitoring and tracking protocols sanctioned by government authorities.

In our Spectator Sports segment, due to this slow and cautious reopening of football, our 2019-2020 season was delayed into the third quarter with the DFB Cup final taking place early July behind closed doors. The Italy eSerie A was completed in August with all games played. We are looking forward to other leagues and clubs gradually resuming with the 2020 2021 season scheduled to start in September.

Regarding summer sport events, some postponed events are gradually being rescheduled. For example, the SIM MXGP Motocross Championship resumed in August through with fewer races, the Badminton World Federation World Tour Finals and Women’s European Handball Federation, Euro Championship 2020 are also tentatively expected to take place in December of this year.

In addition, we remain hopeful for our upcoming winter sports season including the Fifth World Cup and IBU World Cup. But the visibility is still relatively limited. Our current plan is continue to prepare our team for the season and we will provide an update at an appropriate time as the year progresses.

Our DPSS business has been impacted by lack of events during the pandemic, as well as intra-year cyclicality from the FIFA Women’s World Cup which was held in 2019 but not this year. Once sports events resume such as the delayed French Open and Roland-Garros, we believe we are very well positioned to serve our clients in digital transformation services and data-driven solutions.

While we continue to focus on our long-term strategy in building a leading global sport event, media and marketing platform, I would like to provide some updates since our last call on our near to mid-term initiatives related to facing the pandemic crisis. This initiative we hope will be a key driver in enabling us to emerge from the pandemic even stronger.

First, we have made great progress in resolving contractual issues with our partners in a fair and straightforward manner as evidenced by the prolongation and new commercial contract signed in the second quarter. We appreciate the value of our long-term partners and will continue to collaborate effectively in achieving long-term objectives for all parties.

Secondly, we continue to be at the forefront of the industry as we accelerate the pursuit of innovative content and the digital initiatives. Some examples include the International Ice Hockey Federation Virtual World Championship and the newly developed digital ecosystem for European Handball Federation in the second quarter. These were outstanding team efforts and demonstrated our ability in this new virtual world to bring together the best marketing intelligence, media strategy, creativity and advanced technology for our clients.

Finally, our cost containment and liquidity protection efforts continue as we attempt to manage our operating expense by addressing the reality of current macroeconomic situation, while maintaining well positioned for every — for revenue growth when we markets rebound.

In summary, while the macroeconomic environment is challenging, we are confident in our solid business fundamentals namely our core global resources and capabilities. Our performance so far in the first half of 2020 demonstrated the trust of our long-term commercial clients, as well as the confidence of our new business partners especially as overall spending in our market tightens. We will continue to deepen our engagement with clients and partners as we support each other in navigating the unprecedented disruptions.

Now I would like to invite our CFO, Brian Liao to shed more light, some highlights on the quarter two financials. Brian, please?

Honghui Liao — Chief Financial Officer

Thank you, Hengming. Hello, everyone. I would like to also take a moment to wish that all of you and your family stay safe and healthy. Before I start the second quarter discussion, I would like to make a few comments. First, as Hengming just mentioned we are intensely focused on aligning our business model to the reality of the current economic environment, while preparing with the full support of our clients for the recovery of the industry. We have ongoing reviews to streamline our business operation to create a leaner organization with a greater flexibility that will continue to be highly focused on delivering value for all stakeholders. For the short term, these reviews resulted in tremendous cost savings which in large part are aimed at offsetting the decline in revenue in order to protect our profitability.

For the mid to longer term, we are focused on realizing our full potential to achieve a sustainable and healthy base for future opportunities. Next as the closing of IRONMAN sales was completed in July, for the second quarter, in accordance with accounting rules, we have adjusted our reporting to exclude IRONMAN business and treated as asset held for sale under its continued operations. IRONMAN results and operating data also have been excluded from the comparative second quarter 2019 results and operation data as well. Unless otherwise indicated, the financial statement line items are on a non-IFRS financial measures are reported on a continuing operation basis.

Now for the second quarter financial reviews, you may follow my remarks in the earning conference call presentation on our website. If you turn to slide 6 for the second quarter of 2020, our total revenue was EUR51.8 million, the decline of 75% year-over-year was mainly due to postponement or cancellations of almost all events due to the pandemic during the quarter.

Gross profit was EUR34.5 million representing a smaller decrease of 55% year-over-year elative to revenue. Effectively, this resulted in overall gross margin improvement of 67% for the second quarter compared to 36% in the same period in 2019. The primary reason for the margin enhancement is the increased revenue contribution from the commission based model for our football business.

Now let’s go to slide 7. The net profit for Q2, 2020 was EUR5.5 million with margin enhancement and the rigorous operating cost reduction, partially offset in the significant revenue decline. Our adjusted EBITDA was EUR20.9 million.

Next, I will provide a detailed review of our three segments starting with the Spectator Sports on slide 10. Revenue was EUR38.4 million, a decrease of 72% year-over-year mainly due to multiple key events cancellations or postponement such as IIHF and the Italian Football. Thanks to the gradual restart of 2019-2020 football seasons in May and June, Italian and the German football were the main drivers of the revenue for Spectator Sports in the second quarter.

Compared to the revenue, our Spectator Sports gross profit decreased 48% year-over-year representing an improved gross margin of 76% compared to 40% of last year. The high gross margin was attributable to the commission-based revenue model driven by football.

Looking at our DPSS segment on slide 12. DPSS revenue was EUR13.1 million, a decrease of 76% year-over-year. DPSS revenue excluding reimbursement revenues was EUR12.7 million, representing a decline of 53% annually. This DPSS revenue decline is primarily driven by psychology effect as the women’s FIFA World Cup took place in 2019. Also even events cancellations and the performance in the second quarter also dampened the production revenue for the quarter. Gross profit for this segment was EUR6 million, a decrease of 54% year-over-year, but representing an increased gross margin of 46% compared to 24% for the same period of 2019. This again reflects the continued market attractiveness of our innovative DPSS solutions.

Lastly for our Mass Participation segment on slide 14. In second quarter 2020, our Mass Participation revenue is close to nil, mainly attributable to the full shutdown of all events during the quarter.

Now let’s move to slide 16 on liquidity and CapEx. As of June 30, 2020, we had a strong liquidity position with the cash and cash equivalents of EUR167.5 million from continuing operations. As of July 31st, 2020, post the completion of The IRONMAN Group sale, the company had a total cash and cash equivalents of EUR208.7 million. This extra liquidity further optimizes our capital structure and strengthens our balance sheet with a greater financial flexibility to navigate the maze and to emerge stronger from COVID-19 disruptions.

As for the balance of the cash and IRONMAN sales proceeds, in light of the many and the significant uncertainties we and the broader sports ecosystem face due to the COVID-19 disruptions, we continue to evaluate whether we should apply the proceeds for general cooperation purpose or subject to shareholders approval return capital to our shareholders. Our second quarter CapEx for continuing operations was EUR0.6 million much less than the corresponding quarter in 2019.

In the following slide 17 on general expenditure. In addition to CapEx for the second quarter, each of our principal expenses categories decreased a lot including personnel expenses, which declined by 17% year-over-year. Selling, office and administrative expenses which decreased by 51.3% year-over-year as well as finance cost which declined by 15.5% year-over-year. These are strong testaments to the successful execution of our cost-saving plans. We believe this provides us with a solid cash position and sustainable operations in the current environment. I would also note that as always we are committed to being very disciplined and prudent in capital management in order to preserve our financial position and minimize the overall pandemic impact of our business.

Let me conclude on slide 18 and 19. Given the continued uncertainty related to the COVID-19 crisis, we are not able to provide 2020 guidance. We will reconsider providing guidance once the environment stabilized.

Having said that, I would like to share with you on slide 18 that we use the part of the proceeds from the sale of IRONMAN Group to repay WSG’s debt. As a result, as of July 31st, our total indebtedness declined to approximately EUR473 million from EUR685 million. And our total net increase expenses are EUR6.7 million for the second quarter of 2020 which is EUR8 million lower than the same period in 2019. We expect the net increase expenses remain lower for the rest of the year.

Finally before I conclude I would like to mention that typically we do experience some seasonality in our Spectator Sports segment because the revenue tends to be lower in the third quarter as our winter sports event have not yet commenced and there is less activities in European Football compared with other quarters, especially now during the pandemic. Our 2020 and 2021 European Football season is going to experience a delayed start in the upcoming third quarter to September.

So in conclusion, our diversified portfolio and the long-term client relations have enabled us to achieve a solid financial basis in the first half of 2020 despite the postponement and cancellations of most events as evidenced by our prolongation and the new business wins. Looking ahead while visibility is still limited, we are seizing opportunities to improve the economics of our business model by adjusting our operations quickly and optimally for enhanced competitive advantage, continuing to deliver outstanding services to clients, focusing on some investment in talent, technology and the differentiated capabilities that will better position us for growth in the longer term.

This concludes our prepared remarks. Operator, we would like now to open the call for questions. Thanks.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Bryan Kraft from Deutsche Bank.

Bryan Kraft — Deutsche Bank — Analyst

Hi. Good morning. I want to ask you a couple of questions. I guess first can you just help us to understand the impact to net debt and cash from The Ironman sale a little bit better? I thought the purchase price was around EUR700 million, but I think net debt only changed by about EUR260 million. So just trying to understand that gap there. And then I know the visibility is limited, and you’re not providing guidance as a result. But can you just talk qualitatively about the relative size of the impacts you expect in Spectator Sports and DPSS at least at this point in time from the lift in 3Q from timing shifts of events from 2Q into 3Q and then the negative impact from the cancellations and other losses of revenue from things that are maybe more related to people actually attending the events. It seems like there are some positive impacts and negative impacts in the third quarter and just wanted to take your temperature on, at this point, what you think the size of those negative and positives are going to be in aggregate? Thanks.

Hengming Yang — President and Chief Executive Officer

Maybe Brian wants to take up the cash question.

Honghui Liao — Chief Financial Officer

Yes. For The IRONMAN sale the price was EUR730 million but we do have the net debt. I think it was around for IRONMAN Group is around EUR290 million, and with some networking capital adjustments, so the gaps majorly come from different net debt and networking capital adjustments.

Bryan Kraft — Deutsche Bank — Analyst

Okay. Can you help us to understand how big that net working capital adjustment was?

Honghui Liao — Chief Financial Officer

Sorry can you say that again, Bryan?

Bryan Kraft — Deutsche Bank — Analyst

So there was a pretty large working capital adjustment you’re saying and that’s what drives the difference.

Honghui Liao — Chief Financial Officer

I don’t think that there is too big net working capital adjustment. I think the net proceeds are around EUR390 million to EUR430 million. So the major adjustment really comes from net debt and the net working capital adjustment mainly about the timing from we signed the SPA in March and we close in July. So the delta of the working capital change, that won’t be huge.

Bryan Kraft — Deutsche Bank — Analyst

Okay. Thanks.

Hengming Yang — President and Chief Executive Officer

So, Bryan, regarding your second question from qualitative impact on the third quarter and remaining year, I think it’s, as you know we said it’s a lot of things we still be dependent upon the when and how those events will be resumed. So that’s why we’re difficult to actually give a straight forward view on what the year looked like. A third quarter traditionally is a loose season because of the clubs are the leagues are actually at holiday, it’s low season traditionally, so we will expect third quarter will be a low season coupling with this impact of pandemic. If the events we foresee by the coming back after the second season which is actually the season for 2020, 2021 and summer sports if we anticipated the schedule they’re coming back in the first quarter. I think fourth quarter will be better than third quarter, but that’s all dependent on the events we anticipate will coming back.

Operator

Our next question comes from the line of Alan Gould from Loop Capital.

Alan Gould — Loop Capital Markets LLC — Analyst

Hi, there. Thank you. Let me just follow up on Bryan’s question a little bit on the flow of the net debt. So net debt at June 30th was EUR518 million and July 31st pro forma is EUR264 million, so it’s a EUR254 million improvement and I was thinking that the net proceeds was about EUR350 million. So I’m just trying to figure out what the difference is there?

Honghui Liao — Chief Financial Officer

So by end of July 31st right?

Alan Gould — Loop Capital Markets LLC — Analyst

Yes.

Honghui Liao — Chief Financial Officer

So what’s your calculation was — can you say that again, Alan? The — not so clear for you.

Alan Gould — Loop Capital Markets LLC — Analyst

Sure, Brian. Yes, so the net debt was EUR518 million at June 30th and EUR364 at July 31st based on the slides. So that’s an improvement of EUR254 million and the big difference between June 30th and July 31st of course is the sale of IRONMAN and I thought that was about a EUR360 million proceeds.

Honghui Liao — Chief Financial Officer

I think two reasons probably; one is we repaid the CS loan and the interest. I do believe you count this, right? This is about EUR200 million and also we pay all for the shareholder loan EUR54 million.

Alan Gould — Loop Capital Markets LLC — Analyst

Shareholder loan, was that — was the shareholder loan previously something you consider part of interest-bearing indebtedness?

Honghui Liao — Chief Financial Officer

No. I don’t think so. That’s a promissory note.

Alan Gould — Loop Capital Markets LLC — Analyst

Okay. That’s probably the biggest difference there. Okay and then the second and the related question are the EUR473 million of Infront debt it looks like it’s classified as short-term debt. Can you tell us when that matures? Your Infront debt, it’s classified as short-term debt, so I assume it matures in less than 12-months.

Honghui Liao — Chief Financial Officer

Yes, yes, yes. The facility, it is a term loan, but the due date is June 2021 so less than 12-months. So from accounting perspective it was reclassified to a short-term loan, but we are planning to have a refined starting later this year.

Alan Gould — Loop Capital Markets LLC — Analyst

Okay. And I know you’re talking about using some of the net proceeds from The IRONMAN deal as a return of capital to shareholders. Have you given any — what is your thoughts on what the proper leverage ratio going forward on the company should be? What sort of debt to EBITDA?

Honghui Liao — Chief Financial Officer

We have not really decided yet given the uncertainty. We are still reviewing and researching what’s the best way. Whether we keep this as proceeds, net proceeds for general, corporate property business purpose or return to the shareholder. So it is not decided yet given the uncertainty of the pandemic environment.

Alan Gould — Loop Capital Markets LLC — Analyst

Okay. And then my last question. You’ve had a number of contract wins, some contract extensions. I’m sure there’s also a few contract losses that come up. Do you have any sort of a backlog number or a way that we can just look at one number to see how the trend is going?

Honghui Liao — Chief Financial Officer

Sorry, can you repeat your question? Would you look at your…

Alan Gould — Loop Capital Markets LLC — Analyst

Sure, hang on. So you’ve had a number of contract wins and contract extensions. I was wondering if you have some sort of a backlog number. What your total — where your total contract future revenue stands for backlog?

Hengming Yang — President and Chief Executive Officer

It’s not by handy, but I think we may get off get back to you offline.

Alan Gould — Loop Capital Markets LLC — Analyst

Okay. Thank you.

Hengming Yang — President and Chief Executive Officer

But I think as you said we have contract wings, there will be certain contracts starting coming up, we are still working on for the renewable and that’s like major one like league’s eSerie which is coming up, FIFA, also the media rights FIFA media productions coming up. Yes. So let’s get offline and we’ll get back to you.

Operator

There no further questions. I’d like to invite Mr. Yang for his closing remarks.

Hengming Yang — President and Chief Executive Officer

Okay. Well, thank you everybody for joining us today on the call. And we appreciate your interest in Wanda Sports Group. And your insightful questions and we look forward to continuing our conversation with you or investor community. So thank you again.

Operator

[Operator Closing Remarks]