Hemisphere Media Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 6 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc.'s First Quarter 2018 Financial Results Conference Call. My name is Bridget, and I will be your operator today. [Operator Instructions] A replay of the call will be available beginning at approximately 1 P.M. Eastern time on Friday, May 4, 2018 by dialing [phone] or from outside the United States by dialing [phone]. The conference ID for the replay is 8877848. [Operator Instructions] I would now turn the call over to Ms. Erica Bartsch.

[Erica Bartsch:]

Thank you, operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Erica Bartsch, and I'm with Sloane & Company, Hemisphere's outside Investor Relations firm. Joining me on the call today is Alan Sokol, Hemisphere's Chief Executive Officer; and Craig Fischer, Hemisphere's Chief Financial Officer. Today's announcement and our comments may contain certain statements about Hemisphere that are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of Hemisphere and are subject to uncertainty and changes in circumstance, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change. Please refer to our company's most recent annual report on Form 10-K and our other public filings for a more complete discussion of forward-looking statements and the risk factors applicable to our company. Forward-looking statements included herein are made as of the date hereof, and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. During today's call, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier today. Management believes that this non-GAAP information is important to investors' understanding of our business. I will now turn the call over to Alan.

[Alan Sokol:]

Thank you, Erica, and good morning, everyone. We continue to make positive strides in our recovery in Puerto Rico in the first quarter, while our U.S. and Latin American businesses performed very solidly. When we spoke last quarter, we had begun to see pockets of normalization across Puerto Rico and promising signs that rebuilding were advancing. We continue to see meaningful progress and important steps towards normalization throughout the first quarter. As things stand today, power has been restored in 98% of Puerto Rican homes, a major improvement since the beginning of the year when power was available in only 50% of homes. We were also encouraged by the increase in the flow of insurance proceeds and FEMA emergency funds on the island. This together with expected federal recovery funds should drive meaningful economic growth. We are already seeing some important indicators of economic growth. New car sales were up 12% over the first quarter of 2017. And for the first time in roughly a decade, cement sales grew in Q1. Notwithstanding these important measures of progress, numerous challenges remain. The electrical grid is still fragile and subject to frequent outages. Additionally, the Governor and the Federal Oversight Board are engaged in a dispute over the implementation of austerity measures, which if not resolved could delay or adversely impact Puerto Rico's recovery. So while progress is notable and impressive, there is still much work to be done. Reflecting these improved conditions, both the overall TV ad market and WAPA's business were markedly better than the fourth quarter. The TV ad market was down 39% in Q1 compared to a 70% decline in Q4, with sequential improvement during each month of the quarter, and we have continued to see this positive trend carry over into '18. The year-over-year decline in Q1 was a direct result of the continued disruption from Hurricane Maria. In addition, Nielsen ratings are still not being published, which has further suppressed spending by advertisers. We expect that Nielsen will begin publishing ratings before the end of the second quarter. Given these positive trends, we remain optimistic that advertising will normalize over the second half of the year. Retransmission revenue also grew significantly from the fourth quarter as pay TV subscribers continue to come back online and WAPA's retransmission fees continue to show impressive growth. Nonetheless, retransmission fees lag year-ago numbers as the overall number of subscribers was well below pre-storm levels. However, as with the case with advertising, we have seen and expect to continue subscriber levels increase and normalize over the second half of the year. Although, we still do not have the benefit of published Nielsen ratings, we feel very confident in our news and entertainment programming line-up. During the hurricanes and their aftermath, WAPA once again affirmed its stature as the undisputable news leader in the market. We had a terrific pipeline of blockbuster movies and U.S. series for the remainder of this year, and we just launched Mother, a new Turkish novella in prime time. Based on the feedback we have received and the commentary in social media, we are confident that we have a hit on our hands. Unfortunately, as of midnight, we reached impasse negotiations with DIRECTV in Puerto Rico regarding our retransmission consent agreement. As a result, WAPA is currently not being broadcast in Puerto Rico to DIRECTV customers. We have engaged in the extended negotiations with DIRECTV but do not believe that DIRECTV has properly valued WAPA and WAPA 2's extraordinary line-up of news, sports and entertainment programming. Recently, we successfully signed a new retransmission consent agreement with another large pay TV distributor in Puerto Rico, which is now paying fair market value for WAPA's programming. In just a few hours since the start of the blackout, WAPA has received a tremendous outpouring of support from viewers. Hopefully, this will encourage DIRECTV to properly value WAPA and that the blackout will be short-lived. Turning now to our U.S. cable channels. We continue to defy overall subscriber trends with our organic growth. While the overall pay TV market continues to suffer cord cutting, the quality and uniqueness of our channels continues to grow new subscribers. We also anticipate future growth from emerging over-the-top platforms. To date, Sling is the only major platform that is offering a Hispanic programming package. Over time, we expect all the major platforms to launch Hispanic packages, and we believe that we are a must-have on those packages. Only Univision's cable channel bundle comprise of 8 measured networks, accounts for a larger aggregate audience than our 4 measured channels in Hispanic cable. And our share of audience continues to grow. According to comScore, during Q1, we increased our share of total Hispanic cable channel viewing by 27% over last year. Our audience growth has driven solid increases in advertising. We have a very strong advertising quarter in the U.S., led by robust growth at Cinelatino and WAPA America. Cinelatino achieved its highest ad sales ever in Q1, with bias from a number of new large national advertisers. Cinelatino grew its ratings in Q1 by an impressive 14% in the key adult 18 to 49 demographic according to Nielsen, affirming the quality and appeal of its line-up of blockbuster movies. We have just acquired a library of 25 titles from Laguna Films, adding to our existing robust library, which will deliver great value to Cinelatino and which we can also utilize our PANTAYA and our other platforms as well as syndicated third-party networks and digital platforms. WAPA America continues to grow huge audiences for its news and entertainment programming. WAPA America is the top 5 rated Hispanic package network according to comScore and experienced solid year-over-year ratings growth. Pasiones also experienced strong ratings growth in Q1, increasing its ratings by 11% according to comScore and delivering the highest rated quarter in its history. We have successfully replicated the great results we have seen on WAPA in Puerto Rico with Turkish novellas and have been aggressive in acquiring them for Pasiones. Pasiones' ratings were fueled by the Turkish hit, Elif, the highest-rated series in the channel's history. Centroamerica TV is an indispensable resource for Central American living in the U.S. as shown by 18% ratings growth in Q1 according to comScore. This ratings growth was driven by Centroamerica TV's unparalleled, extensive live coverage of critically important national elections. At Television Dominicana, we are seeing nice progress in advertising sales and a fast rate growth, ad revenue is up over 2017. Regarding our new strategic investments, Canal Uno continues to perform well and grow its audience share. We are now at a solid 7% full day share, well ahead of plan and a hit 15% in certain key day parts. Viewers are continuing to find us, and we have several new shows in the pipeline that we believe will drive further ratings growth. PANTAYA, our OTT joint venture with Lionsgate, also continues to perform well, showing strong subscriber growth, validating the importance to consumers of premium Spanish language movies. After only 6 months, PANTAYA is already the leading Spanish-language OTT service in the U.S., and we believe there is significant growth opportunity in front of us. Finally, I am pleased to announce our acquisition of a 75% ownership interest in Snap Global. Snap is a leading independent distributor of content to broadcast pay TV and OTT platforms in Latin America. Led by Ariel Tobi, who will be joining Hemisphere, Snap has long-standing solid relationships with the largest TV network owners in the region, including Disney, Televisa and Fox, as well as with OTT platforms such as Netflix. Snap provides the world-class distribution organization to monetize our growing slate of original programming as well as sourcing and acquiring content for our networks. In addition, we are confident that our resources and expertise will accelerate Snap's growth and position it as a leading independent distributor of Hispanic content throughout the world. As part of this acquisition, we are forming a coproduction joint venture with MarVista Entertainment, an established and highly regarded independent film and TV production company, a minority owner in Snap. We expect to be coproducing movies and series with MarVista, facilitating the expansion of our original programming strategy and providing us with fresh, high-quality content that we can utilize in our networks and platforms to meet the growing content needs of existing and emerging third-party platforms. While we are excited about our Snap acquisition, we continue to pursue other attractive opportunities and are optimistic about our acquisition pipeline. I will now turn the call over to Craig.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Before I get into our financials, I want to provide some initial color on the trends we are seeing in Puerto Rico. As Alan noted, the TV ad market in Puerto Rico declined 39% as compared to the first quarter of 2017, a dramatic improvement as compared to the fourth quarter of 2017, which declined year-over-year by 70%. And while the fourth quarter is typically the highest advertising quarter, the first quarter of 2018 was actually 46% higher than the fourth quarter of 2017. Importantly, we have also seen sequential improvement month-to-month during the quarter. This closely tracks with the restoration of power on the island, and we expect that the improvement in trends will continue over the course of the year. Similarly, with the restoration of power, we are also seeing sequential improvement in the number of pay TV subscribers in Puerto Rico. While subscriber retransmission fees were down year-over-year, we anticipate that this trend will begin to reverse as more subscribers continue to return online, and we realize the benefit of the significant rate increases we have secured. Turning to our income statement. Net revenues in the quarter were $29 million as compared to net revenues of $34.2 million for the comparable period in 2017. Advertising revenue in the three-month period declined $4.7 million. The decrease was driven by the continued impact of Hurricane Maria, particularly the widespread loss of power, which was slowly restored during the period. Additionally, in 2017, the company benefited from the World Baseball Classic on WAPA, which did not occur in 2018. Subscriber and retransmission fees in the 3-month period decreased $1 million due to the interruption caused by Hurricane Maria on paid television subscriptions in Puerto Rico and the termination of carriage of Television Dominicana by AT&T in September 2017. This decline was partially offset by rate increases and growth in subscribers. Other revenues, which are primarily related to the licensing of content to third-parties, grew $500,000 in the three-month period. Operating expenses in the three-month period were $24.2 million as compared to $27.1 million for the comparable period in 2017. This decrease was due to lower programming and production costs as WAPA implemented cost savings measures following Hurricane Maria. Additionally, transaction expenses declined due to the refinancing of our term loan in February 2017. These decreases were offset in part by incremental Hurricane Maria-related expenses of approximately $500,000, including costs incurred to maintain our signal, enhance security, and protect our critical sites and diesel fuel to power our generators at our transmitter sites. I am pleased to report power has since been restored to all of our sites. Adjusted EBITDA for the three-month period was $10.6 million as compared to $14.5 million in the first quarter of 2017 and a sequential increase as compared to $6.8 million in the fourth quarter of 2017. Historically, the fourth quarter has been our strongest quarter and the first, our lightest. This should give you the sense of the trends in our business. Turning to the balance sheet. We had $209.1 million in debt and $107.4 million of cash. Our gross leverage ratio was approximately 4.4x, and our net leverage ratio was approximately 2.2x. Capital expenditures of $1.7 million in the quarter, and of that, roughly $900,000 were hurricane related. This was prefunded by the $3.3 million in cash we received in the fourth quarter from our insurance carriers. We also incurred capital expenditures totaling $250,000 related to the FCC repack. We expect to be reimbursed for this amount later this year. In terms of insurance proceeds, we have no additional updates beyond what we previously provided. During the quarter, we funded $14.8 million in investments towards our strategic ventures. While the situation in Puerto Rico has improved and the trend in our business in the first quarter was certainly positive, the Puerto Rico economy is still not still at full speed, and we lack the necessary visibility to provide 2018 guidance. With that, let's open the call to your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Steven Cahall from Royal Bank of Canada. Your line is open.

[Steven Cahall:]

Thanks, good morning. Maybe to start off on the ad market. You mentioned maybe getting back to a more normalized run rate in the back half of the year. Perhaps you have a bit of a view of what migration will look like and just what the overall at market in Puerto Rico looks like. So do you think in the second half of the year will be a sort of historical run rates? Or do you expect it to be sort of a step down from there due to migration?

[Alan Sokol:]

Good morning, Steve. I think it's a little too soon to tell. I do think we will get a new normal, starting in the second half of the year. Our best estimate of outward migration to date has been around 200,000 people migrating out of the island, which is about 6% of the population. Of that, however, we think there's a certain percentage that will eventually come back. The amount and the number, which depends on the status of the economy, the number of jobs, the overall environment in Puerto Rico and, again, that's hard to tell at this point, and that will impact the ultimate size of the ad market. At the same time, we have the positive effect of insurance proceeds and government proceeds coming into the market, which will stimulate jobs and stimulate growth in the market. So it's a little hard to tell how it all shakes out for the second half of the year, but we think the new normalization should be close to what the pre-storm numbers look like.

[Steven Cahall:]

Got you. And just while we're on Puerto Rico funding, do you have an outlook on political at this point, or too soon to tell?

[Craig Fischer:]

There's no political revenue expected in the current year for Puerto Rico. The cycle there is really every 4 years, so it will be 2020 -

[Steven Cahall:]

Got you. And just on DIRECTV, I mean, is there any guidance you can give us on what the blackout results in terms of lost revenue per day, as you two work through the negotiation?

[Alan Sokol:]

We can't - we don't give out that specific information, and we're not at liberty to talk about the specifics of our negotiation with DIRECTV. We do think that it was misguided that they did not continue to negotiate with us. We think it was a bad decision for them to deprive Puerto Ricans of programming from WAPA and WAPA Deportes. It's the equivalent of depriving Puerto Ricans - depriving Americans in the U.S. of programs from ABC, CBS, Fox and NBC combined. So it's a - we think it's a disastrous move by DIRECTV, and we're hopeful that we will get it resolved promptly.

[Steven Cahall:]

Got you. And then on the U.S. side, maybe first, just on PANTAYA, are you able to let us know how many subs that platform has at this point?

[Alan Sokol:]

As of now, we're not discussing the specific numbers of subs, but we're really pleased with the growth. We think it's - up to now, the results are very validating of the concept of PANTAYA, and we're going to continue to invest and to grow it and to make it a major SVOD platform in the U.S.

[Steven Cahall:]

And then on Snap, is there any financial disclosure you can give us there? And is there any earn out related there as well, just as we think about modeling snap in - for the year?

[Craig Fischer:]

Yes, the price is not yet fixed because it is subject to some future performance. That said, as you think about modeling, the business historically has done approximately $2 million of EBITDA. We're paying a little over 4 turns of EBITDA for the business, and it will be a mix of cash and stock.

[Steven Cahall:]

That's very helpful. And then last one for me. I think last year, you sort of hold back heading into upfront in season in terms of what you were going to do in the market. It sounds like you had a really strong advertising quarter in Q1 domestically. So what are your expectations and approach to the upfront season this year?

[Alan Sokol:]

I think we're going to be very aggressive, and I think we feel really good about it. I think last year was sort of a tipping point for us. It took us a while to get momentum going on Cinelatino. It's very hard to launch new advertising-driven networks. But I think last year, we successfully broke a number of big agencies and accounts. And I think that once you break those accounts, it becomes much easier to break additional accounts. So we feel very positive about the growth outlook on Cinelatino for national, and we're going to continue to mind that. And we really think rate growth in our other networks as well, non-Nielsen networks, just I think as a result of our strong programming, strong audience deliveries and particularly at WAPA America, I think a lot of people found WAPA America during or after - right after the storms, and I think realized what a wonderful service and channel it is and have continued to watch it over time.

[Steven Cahall:]

And sorry, just one I forgot. Just on the DIRECTV negotiation, are there any big marquee events upcoming that you would have on WAPA that could drive that negotiation more quickly to a close? Like I know you had a Little League World Series not long ago. Is there anything sort of that's like that where it's going to be really tough for a distributor to continue through that process? Or is this quarter a little more just sort of normal daytime programming?

[Alan Sokol:]

Well, I think WAPA is sort of a different animal than a traditional U.S. network in the sense that we're at 20% rating every day in prime time. So prime time every day is a Super Bowl for us. So we're not reliant on one event or one game or one competition to drive that decision-making. Because literally, every day, 20% of Puerto Rico is watching our air. That said, we just launched this Turkish novella, and we know we've gotten a lot of U.S. hook whole turners already. I think it's going to be very difficult for DIRECTV to deal with the complaints from those viewers who cannot watch it. We've also got exclusivity on Major League Baseball and that season's in high gear right now. And we've got the start of the Puerto Rican basketball league, which is - which we have on WAPA Deportes as well, and it's a huge local event.

[Operator:]

Our next question comes from the line of Curry Baker with Guggenheim Securities. Your line is now open.

[Curry Baker:]

Hey, thanks, guys. I guess just following up on DIRECTV. Is this the first time a provider has allowed WAPA to go dark in Puerto Rico?

[Alan Sokol:]

It is the first and, hopefully, it's the last. It's not something that we wanted to have happen. We're not happy that our viewers are being deprived of our programming. But sometimes, you have no choice when your distributors don't value your programming the way that they should be valuing it. And in the case of WAPA, we just - we really feel that we have a unique product that's different than any channel in the U.S., and we deserve to be paid appropriately for it, and frankly, we are pressing it forward.

[Curry Baker:]

Correct. So is it really just coming down to a disagreement on price, or are there other rights or considerations, which I think may play more of a role in negotiation in the U.S. also?

[Alan Sokol:]

No, it's a pricing issue.

[Curry Baker:]

Okay. And can you remind us roughly what share is DIRECTV of subscribers in Puerto Rico?

[Alan Sokol:]

I don't think we're at liberty to talk about their specific subscriber numbers. But historically, they have not been the largest distributor in the market.

[Curry Baker:]

Okay. I guess next I know in March, Cox added Cinelatino in some of its Southeastern markets. Can you fill us in on where other pockets for increased distribution may be for your U.S. cable networks?

[Alan Sokol:]

Sure. And we've discussed this somewhat before. Pasiones is not distributed on Charter or the legacy Time Warner systems. And we're optimistic that we'll have a solution for that in the near term, and that will be a significant tick-up for us. And then Television Dominicana has hold with both Dish and now DIRECTV and AT&T. Those are our primary holds, and there are smaller, less material pockets in and specific systems that we're not on.

[Curry Baker:]

Okay. And on Canal Uno, it seems like you're getting good share gains. Is the receptivity among advertisers in Colombia still strong? And can you maybe share what your goals are for that business for the remainder of the year?

[Alan Sokol:]

Sure. I mean, I think we would like to get it to a double-digit share by year-end, and I think that that's achievable. Not a slam dunk, by any stretch, to go from zero to double-digit share in a very competitive market, but I think we're on track for that. And I think once we get to that share, advertising will follow. There is a lag with the ratings and advertising because advertising is - most advertising is bought in advance in an upfront manner. So it's sort of a show-me thing. And I think we have shown advertisers that we are differentiated, that there's growth, that it's a great value proposition, and it is in the interest of advertisers to support a third strong competitor in the market.

[Operator:]

Thank you. I'm not showing any further questions. I'll now turn the call back over to Alan Sokol for closing remarks.

[Alan Sokol:]

Nothing further. Thank you, everybody, and have a good weekend.

[Operator:]

Ladies and gentlemen, this does conclude the program. You may now disconnect.