Formula One Group
Q2 2020 Earnings Call Transcript

Published: 10 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Media Corporation’s 2020 Quarter Two Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, August 10th. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.

[Courtnee Chun:]

Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent form 10-K and 10-Q filed with the SEC. These forward-looking statements speak only as of the date of this call and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty Media's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA and adjusted EBITDA. The required definitions and reconciliations for Liberty Media and SiriusXM Schedules one and two can be found at the end of the earnings press release issued today, which is available on our Web site. Now, I'd like to turn the call over to Liberty President and CEO, Greg Maffei.

[Greg Maffei:]

Good morning, and thank you, Courtnee. Today speaking on the call we will also have Formula One's Chairman and CEO, Chase Carey and Liberty's Chief Accounting and Chief Principal Officer, Financial Officer, Brian Wendling. First, I hope you all are healthy and safe and have been enjoying your summer given these challenging circumstances. Second, I'd like to again thank our management teams and employees that have done such an impressive job managing through this COVID-19 crisis. So first looking at Liberty SiriusXM. We completed the previously announced rights offering, it was fully subscribed, generated proceeds of $754 million and we used that money to fully repay the intergroup loan that Liberty SiriusXM had to the Formula One Group. During that period, we paused our share repurchases as we were prohibited from being in market during the rights offering. We are certainly aware that if this panic remains and we have ample liquidity at LSXM and expect to take full advantage of the discount opportunity. Our ownership at SiriusXM now sands as of July 28th at 72.9%. SIRI also paused it's buybacks in Q2 due to market conditions and the depths of the COVID crisis, but recently extended their authorization by $2 billion. We remain very focused on getting to 80% as SIRI. Looking at Sirius itself, like our other subscription businesses, Sirius has proved resilient during the crisis. Sub pay net adds, subscriber adds were 254,000 and turn was down 1.6%. During the quarter, we generated over $0.5 billion of free cash flow. We also announced the deal to acquire Stitcher, creating a full service platform for podcast creators, publishers and advertisers and also announced a smaller deal Simplecast with podcast management and analytics platform services. SiriusXM continues to provide innovative programming and launching new apps, including the Beastie Boys, Bob Marley, Coldplay, Queen, you know how much I enjoy Freddie Mercury and the comedian Jim Gaffigan. With strength and visibility in the business, we offered new 2020 guidance at SiriusXM. Turning briefly in the Formula One Group, and you’ve hear more from Chase in a moment. We returned to racing at beginning in July and we now completed five races, and are still targeting a 15 to 18 race season and we continue to move the business forward. We have a new lower cost capital build effect in 2021, we have new broadcasting and sponsorship deals. The teams and all of our partners have been doing a tremendous job of returning to the track. Yesterday, we had an exciting race in Silverstone where Red Bull and Max Verstappen had a great strategy that they execute on very well upon to win, so it’s exciting racing. Turning to Live Nation, their top priority in the recent months has been strengthening the financial position announced an amendment to the credit agreement, which suspends their leverage covenant till the end of 2021 and provides increased flexibility. They recently reported results last week, still bullish on the future of live events even with the near-term of ticket is turbulent rather. They've already sold 19 million tickets over 4,000 concerts and festivals, which are scheduled for 2021. Management expects live events can return to scale in the summer of 2021. In a positive note, 86% of fans opted to keep their ticket for rescheduled shows even if they're offered refunds. Two-thirds of their fans keeping tickets for canceled festivals so they can go to next year's show. Virtual concerts are generating big demand with fans over 67 million fans used 18,000 virtual concerts globally in the second quarter. We had over 150 performances for a virtual Lollapalooza and we launched socially distanced shows in permitted locations, including New Zealand, France, Denmark, Spain, Germany, Finland and select cities across the U.S. Now turning to Braves. Glad to see that Braves return to field and they’re off to a strong start with 11, six records, including seven and two at home and they won all three series though its part. In series play, they are five in one, which is tied to the most such victories in the majors. And we’re very sad our number one Mike Soroka end the season early with a torn Achilles and we do wish him a speedy recovery. But the Braves still have four former first round picks and starts and starting rotation with Max Fried, Sean Newcomb, Kyle Wright] and Touki Toussaint. Early in the year, Markakis opted out of the season but he since returned and he returned with a bang with a walk off homer last week in his debut.

[Courtnee Chun:]

Greg, are you on?

[Brian Wendling:]

While we wait for Greg to return, I will continue on and then hand it over to Chase. Good morning, everyone. At the end of June, we amended the term loan and revolving credit facility at Formula One. The net leverage covenant will not apply until our first testing day for the quarter ending March 31, 2022, providing the business additional flexibility to operate during this uncertain time. Brave Holdings is expected to be out of compliance with certain debt covenants at the end of the quarter. We continue to work with the lenders to obtain waivers and covenant modifications. These discussions are going well and we're optimistic that we will have a favorable resolution by the end of the month. Liberty SiriusXM Group had attributed cash, restricted cash and liquid investments of $154 million, excluding $1.8 billion of cash and restricted cash all with SiriusXM. We have $870 million of undrawn margin on capacity at the parent level. The value of the SiriusXM common stock and Live Nation stock held at Liberty SiriusXM as of Friday’s close was $22 billion, which excludes the value of the Live Nation call spread, which is held at Formula One Group valued at $210 million at quarter end. We have $2.1 billion in principal amount of debt against these holdings. Total Liberty SiriusXM Group attributed principle amount of debt is $12.6 billion, which includes $9.4 billion of debt at Liberty SiriusXM. Formula One Group had attributed cash and liquid investments of $1.4 billion, which excludes $324 million of cash at Formula One. Total Formula One Group attributed principal amount of debt was $3.6 billion, which includes the $2.9 billion of debt held directly by Formula One, leaving $733 million at the corporate level. And lastly to the Braves, we had attributed cash, liquid investments and restricted cash of $329 million and attributed debt was $718 million. With that, I'll turn it over to Chase to talk more about Formula One.

[Chase Carey:]

Okay, thank you, Brian. And I guess I’ll keep going and wait for Greg to return at some point. We were thrilled to return to racing with the launch of our 2020 season in Austria, the first weekend in July. It was an exciting race that saw a lot of competition in the midfield with an action packed last few laps that are Lando Norris’s first podium finish. In the five races so far, we've seen Lewis Hamilton fighting for his 7th World Championship. The continued strength and ingenuity of Red Bull, the struggles of Ferrari, the emergence of McLaren and Racing Point as serious contenders. Our data through the first four races of the season have produced solid viewership growth across the race weekend, especially in key markets like China and there's tremendous growth on our digital platforms measured in video views, social media interactions and traffic across the Web sites and app. The drama in the Paddock built this summer as a number of driver changes were announced for 2021. Ferrari decided not to renew four time World Champion, Sebastian Vettel, and instead signed Carlos Sainz. His open seat at McLaren went to Danny Ricardo, which will make for a strong and entertaining pairing with Lando Norris. Renault decided to fill their vacancy with former Champion, Fernando Alonso. And Valtteri Bottas resigned with Mercedes for 2021. There's continued speculation around Sebastian Vettel, so more to come. Just prior to the start of this season, we launched our, we race as one initiative, to tackle the major issues that we as a sport and a society are facing. We used our restart to show that we stand united against racism and are doing more to address inequality and diversity in Formula One, while also taking a moment to thank people around the world for the fortitude they’ve shown against the global COVID-19 pandemic. We will be establishing a task force to listen and identify the right initiatives required to increase diversity and inclusion across Formula One, specifically focused on identifying employment and education opportunities and the required actions to affect change. We're in the process of creating a foundation that primarily finance internships and apprenticeships within Formula One for underrepresenting groups. These efforts build on ambitious sustainability, diversity and inclusion strategy set out in November 2019, which set goals of having a net zero carbon footprint by 2030 and ensuring all of our events are sustainable by 2025. Getting back to racing, there’s been no easy feat I'd like to thank the FIA, our employees, the teams and drivers, our promoter partners and local authorities. Together, we developed an extensive code of conduct and testing protocols that are being closely followed and have been working well. Our priority has always been to safely transport everyone and to enable those individuals to operate in a safe and secure manner. We've been publishing our testing results each week as we believe it's good to provide this transparency. At Silverstone, we saw firsthand how our safety procedures are robust and effective. Sadly, Sergio Perez tested positive for the virus but our trace and test procedure handled the situation safely and with efficiency with no impact on the race weekend for the wider sport. It shows how far we’ve come into Australia and it's a testament to the diligent way that we've returned to racing. We have now announced 13 races in the revised calendar and expect to get to between 15 and 18 races in 2020. The newly added three races bring exciting circuits that were not part of the original 2020 calendar. Portimao in Portugal will be a completely new circuit, while we welcome back Imola and Nurburgring that have hosted World Championships in the past. Unfortunately, due to the fluid nature of the ongoing pandemic it will not be possible for us to race the Americas this season, but we’ll look forward to being back in 2021. We expect to release the final details of the 2020 calendar in the coming weeks. While we’ve been extremely focused on 2020 season, we continue to progress the business for the long-term. We reached a long term exclusive rights agreement with Sky Deutschland beginning in 2021. Sky Deutschland will provide fans in Germany with full coverage of every Grand Prix and include Germany's first 24x7 channel dedicated to Formula One. We also announced agreements in Austria with Servus TV and ORF and in Russia with Match TV. We're in the process of finalizing the last couple of TV deals for 2021. We've also continued to strengthen and expand our commercial partnerships. We believe our planned raise calendar of 15 to 18 races will be able to satisfy the vast majority of our contracted sponsorship revenue in 2020. To name a few recent updates Liqui Molly, the globally renowned vehicle care products experts, upgraded to an official sponsor for the next three years. Adapting to the new reality, we partnered with Zoom to deliver the first ever Virtual Paddock Club experience. Beginning with the race in Hungary, guests are treated to a range of experiences and we're working to expand this offering to our global partners and F1 teams. Furthering the fan outreach, we announced a new podcast series, The Spotify. Paddock passes hosted by Will Buxton and in these exclusive episodes, he will speak to drivers, team principles and legends of the sport. On the video front and following on the strong results of the first two seasons of the Netflix show, Drive to Survive, the film crews are already at work filming the third season. We're also partnered with YouTube to live stream the Eifel Grand Prix in Nurburgring, Germany. This is the first time fans from select European countries will be able to view the entire Grand Prix weekend for free on the Formula One YouTube channel. Before I return to the track, we took the opportunity to revisit the cost cap of $175 million announced last October. The new cost cap of $145 million will be introduced in 2021 and we’ll further reduce to $140 million in 2022 and $135 million in 2023. This will advance the objective to improve the competition and action on the track and at the same time, make the sport a healthier and more attractive business for all. With our return to racing and the revised cost cap, we've moved to finalize discussions around the Concorde Agreement. We've had productive conversations with all constituents and we look forward to completing this agreement in the near future and solidifying the sport for the longer term. We've also been focused on the corporate operations of Formula One. During the second quarter, we furloughed over 50% of our workforce, but we’re pleased to bring back the majority of our employees with our return to racing. We also focused on our balance sheet and announced an amendment to our debt covenants, which provides flexibility until March 31, 2022. These actions along with diligent approach to our spending will enable us to weather this difficult time. Given all the challenges in 2020, we're proud of what we've been able to accomplish and expect to accomplish. We've been in regular contact with the majority of our commercial partners to discuss the reduced race calendar and the expectations that many of our races will not have fans. Clearly, this is going to impact our revenue in multiple areas but it’s still dependent on how the remainder of the year unfolds. We appreciate and value our long-term partners and we expect to resolve any contractual issues in a fair and straightforward manner. We're confident in our plans for 2020, and look forward to 2021 when we think we can return to our prior expectations for Formula One. Now I'll turn the call back to Greg.

[Greg Maffei:]

Thank you, Chase and thank you, Brian. Given the ongoing pandemic, we have decided that Liberty's Investor Day will be virtual and will happen over two days, because no one, as much as we love to, should have to be in the video call for that long. On Thursday, November 19th, we will cover Liberty Media and Liberty TripAdvisor and on Friday, November 20th, we'll include Qurate, GCI Liberty and Liberty Broadband. We'll run from 11.02 Eastern on both days. More details will be provided on our Web site, so please mark your calendars. As always, we appreciate your continued interest in Liberty Media and again, hope you all stay safe and healthy. And with that, operator, I'd love to open the floor for questions.

[Operator:]

[Operator Instructions] We will now take our first question from Ben Swinburne from Morgan Stanley. Please go ahead, your line is now open.

[Operator:]

Our next question will come from Bryan Kraft from Deutsche Bank. Please go ahead, your line is now open.

[Operator:]

[Operator Instructions] Our next question will come from David Karnovsky from JP Morgan. Please go ahead, your line is now open.

[Operator:]

We'll now take our next question from James Ratcliffe from Evercore. Please go ahead, your line is now open.

[Operator:]

Our next question comes from Brian Russo from Credit Suisse. Please go ahead, your line is now open.

[Operator:]

We'll take our next question from John Tinker from Gabelli and Company. Please go ahead, your line is now open.

[Operator:]

Our next question comes from Jason Bazinet from Citi. Please go ahead, your line is now open.

[Operator:]

We'll now take our next question from Zack Silver from B. Riley. Please go ahead, your line is open.

[Operator:]

Our last question today comes from Kannan Venkateshwar from Barclays. Please go ahead, your line is now open.

[Chase Carey:]

I think that's our last question for the morning. Thank you very much all for joining. Thank you for your continued interest in Liberty, and we look forward to speaking with you again. And getting a chance to have you participate in the Investor Day, if so, remotely. Thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.