Hemisphere Media Group, Inc.
Q2 2018 Earnings Call Transcript

Published: 4 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Second Quarter 2018 Financial Results Conference Call. My name is Shelby, and I will be your operator today. A replay of the call will be available beginning at approximately 1 p.m. Eastern time on Friday, August 3, 2018, by dialing [phone] or from outside the United States by dialing [phone]. The conference ID for the replay is 3479626. I would now like to turn the call over to Ms. Danielle O'brien.

[Danielle O'Brien:]

Thank you, Operator, and good morning, everyone. I'd like to welcome everyone to today's conference call. I'm Danielle O'Brien, and I'm with Edelman Financial Communications, 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 1985. These statements are based on the current expectations of 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 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, Danielle, and good morning, everyone. Our second quarter results reflect continued strong execution across all our assets and further affirm the tremendous quality of our portfolio businesses and our unique growth paradigm. Our performance also benefited from a strong recovery in the Puerto Rico ad market in the second quarter, and so the market approached normalized levels of business, a recovery pace which accelerated over the course of the quarter. At last earnings call, I discussed how we will see meaningful progress towards normalization of Puerto Rico. And the second quarter saw even more dramatic improvement in the island's economy. In fact, in June, Puerto Rico registered its lowest employment rate in 5 decades, at 9.3%. Despite population losses, the absolute number of employed percentage is now at its highest level since 2013. We are also seeing encouraging population front data. Based on airline passenger data, through April, approximately 200,000 people left Puerto Rico after the storm, and 72,000 have since returned to Puerto Rico, equating to a net migration of fewer than 130,000, a much lower number than previously estimated. In addition, Puerto Rico started to see the benefit of the flow of insurance proceeds and federal funds. PROMESA has reported that $3 billion out of an expected $8 billion in insurance proceeds have been delivered to the island and $6 billion in federal funds have been dispersed. While the pace of funding has been slower than expected, PROMESA anticipates an additional $8 billion in recovery funds to reach the island in the next 12 months, with another $50 billion anticipated over the next 6 years. All of these metrics point to a promising recovery and future of Puerto Rico. However, in order to sustain growth, it is crucial that the disagreements between the Puerto Rico government and the Oversight Board be resolved to facilitate implementation of necessary structural reforms. Of critical importance is the island's need to find a permanent solution to address the rebuilding of the power grid. We are encouraged by the recent settlement agreement between the Electric Authority and its bondholders, an important step towards privatizing utility and reducing cost to customers. The accelerated path toward normalization resulted in strong sequential growth in the TV ad market in the second quarter. While the TV ad market was down 39% in Q1, the second quarter saw marked improvement with the ad market approaching year-ago numbers, a dynamic recovery, which reflects restored commercial confidence and provides us with strong momentum heading into the second half of the year. The second quarter ad market did include some World Cup-specific advertising, but nonetheless, we are very encouraged by these trends. TV ad spending was augmented by the return of Nielsen ratings as of May 16. The ratings provide a terrific story for WAPA, which continues its uninterrupted 9-year streak as the ratings leader in Puerto Rico. In fact, in prime time, WAPA is delivering a 50% share of adult 18 to 49. Among the highlights of WAPA's performance is the #1 rated show in Puerto Rico, the blockbuster Turkish novella, Mother. In June, WAPA reached a new multiyear retransmission link with DIRECTV resulting in a rate dispute, which resulted in the channel going dark on the service for six weeks. Although we were hopeful to avoid a blackout, we are very pleased with the terms of our new agreement, which represent a substantial fee increase. The results reflect WAPA's leading market position unparalleled ratings and make clear that WAPA is indispensable to distributors of Puerto Rico. Turning now to our U.S. cable channels. All of our cable networks benefited from significant launches this quarter. We are pleased by the launch of Cinelatino, WAPA America, Centroamerica TV and Pasiones and DirecTV Now, affirming the value and appeal of these networks. We are also pleased to announce that Television Dominicana has been relaunched on AT&T U-verse as of July 1, an important addition, as U-verse reaches some key U.S. Hispanic markets. Our U.S. cable channels continued, once again, to defy overall subscriber trends, with our sustained organic growth. As cord cutting continues to be a major challenge facing English language networks, our organic growth this quarter, in fact, exceeded our first quarter growth. Cinelatino once again delivered robust ad growth driven by a number of new national advertisers. Cinelatino continues to be the number two Nielsen-rated Spanish language cable channel in both total day and prime time viewing, and, in fact, grew its total-day ratings by 7% versus Q2 of 2017, the only Nielsen-rated Spanish language nonsports show ratings growth. We have a terrific, pipeline of movies in Q3 and Q4 and are confident that this will continue to drive ratings and advertising. WAPA America also continued to experience strong consistent ad revenue growth, driven by its huge audience deliveries for its unparalleled news coverage and unique and compelling entertainment programming. Pasiones had a tremendous quarter growing its ratings by 42% over Q2 2017 according to comScore, and once again, delivered the highest ratings in the channel's history. Our growth has been driven by our diverse, nontraditional dramas, including blockbuster novellas from Turkey and India. Centroamerica TV experienced 38% growth in full-day audience versus Q2 2017 according to comScore despite strong competition from the World Cup. Our audience growth drove strong ad revenue increases in the quarter. As previously noted, Television Dominicana was added to the AT&T U-verse lineup. In addition, we have reached a multiyear agreement for U.S. rights to the Dominican Professional Baseball League, the most popular sport in the DR. Turning now to our recent strategic investment. Canal Uno, our broadcast television network in Columbia, continues its strong ratings growth trajectory. We are now at an 8% full-day audience share Monday to Friday and are regularly reaching a 20% share for certain program. We have some exciting projects in the pipeline, which, we believe, will drive further share growth. Pantaya, our OTT venture with Lionsgate, continues to perform well with significant growth at a differentiated offering. We are very encouraged by the audience's response to this product and believe that the upside is very strong. We announced last quarter, our agreement to acquire a 75% ownership in Snap TV, a leading independent distributor of content to broadcast, pay-TV and OTT platforms in Latin America. We are excited by Snap's potential to realize new revenue streams in Latin America for Hemisphere's pipeline of content as well as our ability to leverage the strength of its existing business. Our M&A pipeline remains strong, and we continue to actively look at evaluate attractive opportunities in our space. Thank you, everyone. I will now turn the call over to Craig.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Net revenues in the second quarter were $34.8 million as compared to revenues of $35.2 million for the year-ago period. For the six months ended June 30, 2018, net revenues were $63.8 million compared to $68.3 million for the year-ago period. These decreases were due to decline in advertising revenue at WAPA, driven by the continued negative impact of Hurricane Maria and the impact of the blackout on DIRECTV, offset by an increase in advertising revenue at our cable networks as well as the impact of the current-period adoption of the new revenue recognition standard. Conversely, in the first quarter of 2017, we benefited from the World Baseball Classic on WAPA. Subscriber and retransmission fees were flat and down $1 million, respectively, in the 3- and 6-month periods over the comparable period of 2017. This was a result of growth in subscribers and rate increases, offset by the negative impact caused by Hurricane Maria on paid television subscriptions in Puerto Rico, the blackout of WAPA on DIRECTV during the current quarter and the termination of Television Dominicana by DIRECTV in September 2017. Though the DIRECTV blackout negatively impacted our results this quarter, the DIRECTV renewal, along with the relaunch of Television Dominicana on AT&T, will positively impact our revenue growth going forward. Other revenues, which are primarily related to the licensing of our content to third parties, decreased $300,000 in the three-month period and increased $300,000 in the six-month period. The variances are due to the timing of delivery of our titles. Operating expenses in the second quarter were $26.5 million as compared to $24.7 million for the year-ago period. Operating expenses for the six-month period were essentially flat at $50.7 million as compared to the year-ago period. The increase in the three-month period was primarily due to incremental Hurricane Maria-related expenses of approximately $500,000, which consist primarily of rental expense for a transmission tower to replace WAPA's tower that was damaged by Hurricane Maria. Additionally, the increase was due to severance cost and higher insurance expense as well as the current-period adoption of the new revenue recognition standard. These increases were offset, in part, by lower programming and production cost as a result of cost reduction measures implemented at WAPA following the hurricane. As you know, we suffered a total loss of our tower, serving the San Juan metropolitan area as a result of Hurricane Maria. I am pleased to report that we have come to a long-term and cost-efficient solution to co-locate on another broadcaster's tower, which provides equivalent signal coverage. Through 2019, we expect the rental expense associated with this tower to be fully covered by our insurance policies. After 2019, we will no longer incur this rental charge. Adjusted EBITDA was $14.8 million for the three-month period, a decrease of 8% as compared to adjusted EBITDA of $16.1 million for the year-ago period. Adjusted EBITDA for the 6-month period was $25.4 million as compared to adjusted EBITDA of $30.6 million for the year-ago period. On a sequential basis, we realized a 41% increase in adjusted EBITDA over the first quarter as Puerto Rico approaches normalization. Turning to the balance sheet. We had $209.1 million in debt and $98 million of cash. Our gross leverage ratio was approximately 4.5 times and net leverage ratio was approximately 2.4 times. We expect leverage ratios to tighten by year-end as we roll off the impact of the hurricane. As previously discussed, we implemented a share repurchase plan in 2017. During the second quarter, we repurchased 126,100 shares of common stock at a weighted average price of $12.06 for an aggregate purchase price of approximately $1.5 million. As of June 30, we had $1.5 million remaining on the original $25 million plan. Capital expenditures were $4.5 million in the quarter, including $1.9 million to purchase equipment damaged by Hurricane Maria. This was prefunded by the $3.3 million in cash we received in the fourth quarter of 2017 from our insurance carriers. Also included in the CapEx spend was $1.7 million for equipment purchases required by the FCC repack for which we expect reimbursement from the FCC. We continue to expect to incur CapEx to purchase equipment damaged by hurricanes and equipment required by the FCC repack. We anticipate insurance proceeds and FCC reimbursements will cover most of these expenditures. During the quarter, we funded $10.1 million in investments towards our strategic ventures, primarily, related to Canal Uno. We remain encouraged by the recovery being made in Puerto Rico and believe that while there is still progress to be made; our businesses are performing well, highlighting the strength of our entire portfolio. And with the market approaching normalization, we are now in position to provide guidance for the full-year 2018 for which we are forecasting mid-teen percentage growth in adjusted EBITDA over the full-year 2017. We'll now open the call to your questions.

[Operator:]

Thank you. [Operator Instructions]. And your first question comes from Steven Cahall from Royal Bank of Canada. Your line is now open.

[Steven Cahall:]

So a few for me this morning. It sounds like a much more positive tone with some stabilization in the recovery. So maybe just to start off on WAPA in Puerto Rico. I'd estimate that in the back half of 2016 you did about $28 million, $29 million of ad revenue. I just wanted to know if you think that you'll be getting back towards that sort of run rate in the back half of this year? Or we still kind of not quite to that historical rate?

[Alan Sokol:]

Steve, it's Alan. I think, it's little hard to know, I mean, I think, we're starting to have some visibility into the market but it's still a little soon. But I think, from our perspective, we're cautiously optimistic that we will get to numbers that -- excluding political because 2016 was not political here, excluding political, approach 2016 levels.

[Steven Cahall:]

And then, your TV Dominicana subs, I know that they have been down from where they were a year ago, but they were up sequentially, which is nice to see. Based on the level they are there, does that reflect the recent add back you had on U-verse or is that like an average of that number?

[Alan Sokol:]

[Indiscernible].

[Steven Cahall:]

Okay. So we will see big pickup there.

[Alan Sokol:]

Big pickup because the U-verse launch was in late June, and these numbers are reflected on lag based on remittances. So it's not in the numbers yet.

[Steven Cahall:]

Can you tell us what that number was, kind of, to-date? Just to give us a sense.

[Alan Sokol:]

We have not actually received the remittance from them. It is six-figure -- it's a low six-figure number.

[Steven Cahall:]

Okay. That's very helpful. And then, just a couple of housekeeping items. Maybe first, in the adjusted EBITDA guidance, can you give us a sense as to the few moving parts? What kind of nonrecurring expenses you expect in the back half of the year that you'll be adjusting out for adjusted EBITDA?

[Craig Fischer:]

Yes, I think the -- what you see in the hurricane-related expenses in the current quarter, which is about $500,000, which is largely around the tower rental, I think, you'll continue to see that go through. But the hurricane-related adjustments that we had earlier in the year have largely gone away now that power has been restored, and the only cost we really have going forward at this point in time is the tower rental.

[Steven Cahall:]

Got you. And then maybe just last on the buyback. Can you give us any sense of how you're thinking about just being opportunistic or the cadence there for your share repurchase program?

[Craig Fischer:]

Yes. I mean, we've put a plan in place last year. It was set to expire in July. The board authorized a four-month extension to that plan. We had a $1.5 million remaining as of June on the plan. And as we regularly do, we will evaluate our capital allocation plan with the board.

[Operator:]

And your next question Curry Baker from Guggenheim Securities. Your line is now open.

[Curry Baker:]

With regards to the DTV renewal in Puerto Rico, I know you can't get into specifics, but I think the main sticking point was the price. Did you guys ultimately, get to a price that's consistent with other deals and in the growth expectations that you have baked in for retransmission growth in Puerto Rico from WAPA?

[Alan Sokol:]

Curry, as you said, we can't really get into the details. And I can't really give you a roadmap on the -- to get to the price. But I think, you can tell by our words as well as our body language that we're very pleased with where we wound off. Obviously, we are not happy that our viewers were deprived of our channels for six weeks, and we would not have gone to that length, had we not gone very strongly about both the fairness and the -- and our ability to secure the price we wanted. And we feel very good about where we settled out.

[Curry Baker:]

Okay. And for the six weeks, you guys were dark in Puerto Rico. Was there a true-up in payments for those six weeks? Or is that revenue just lost?

[Alan Sokol:]

That revenue was lost and it's reflected in the second quarter numbers. And there was also a modest impact on ad revenue in the second quarter as a result of that as well.

[Curry Baker:]

Okay. That makes sense. And then on your investment funding for the year. I think you guys are up to $25 million in funding through the first half of the year. What's your expectations for the full year number? And do you have any sense as to what that number will be in 2019?

[Craig Fischer:]

We're not giving guidance on the incremental funding for the investments. The bulk of the investment has been around Canal Uno. As you know, the concession payment is payable over 8 quarterly installments. We have three remaining as of June 30. So one of those falls into next year. There is still working capital funding into the business as we reach scale and our share of the ad pie starts to reach the level of our share of audience. So we'll continue to have some investment going forward into next year. But we're happy with how the asset is performing, and we'll continue to invest in the opportunity.

[Curry Baker:]

Okay. And then maybe lastly on the U.S. networks, the advertising trends there. Can you guys maybe share just an aggregate? I know, you probably don't want to break out individual networks, just sort of what the ad growth looks like? Is it growing at like a double-digit rate? And sort of, I guess, longer term, kind of, what inning are we in? What do you see as the opportunity still left in U.S. ad growth at the cable networks?

[Alan Sokol:]

Yes. I think, if you think of them, the aggregate growth has been double-digit and been driven largely by Cinelatino and WAPA America. And we still feel there's still a lot of runway left for us to grow. We feel like our networks are all under index in ad revenue relative to their viewership, and we feel that our CPMs and our rates are extremely low relative to market. So we feel that there should be continued growth in the networks. And you know, as we continue to grow our distribution, as we continue to grow our audience, get new launches, that should only continue to propel that growth.

[Operator:]

And that concludes today's Q&A session. I would now like to turn the call back over to Mr. Alan Sokol for closing remarks.

[Alan Sokol:]

Nothing further. Have a good weekend, everybody.

[Operator:]

Ladies and gentleman, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.