Hemisphere Media Group, Inc.
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Third Quarter 2018 Financial Results Conference Call. My name is Imani, and I will be your operator today. A replay of the call will be available beginning at approximately 8

[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 afternoon, everyone. Third quarter represented another strong quarter of revenue and EBITDA growth at excellent performance. We experienced solid growth in affiliate and advertising revenue across our networks once again defying overall trends in the U.S. WAPA delivered strong increases in advertising revenue over Q3, 2017. While September was a favorable comparison due to the hurricanes. WAPA impressively also grew ad revenue in both July and August versus the comparable months in 2017, a testament to the true strength of Puerto Rico’s recovery as well as WAPA’s dominant market power. Economic indicators in Puerto Rico remain favorable and reflect an ongoing and study recovery. The September unemployment rate is that historic low. New car sales in August, increased by 27%, and hotel occupancy rates through June were five percentage points higher than the comparable pre-storm period in 2017. As I mentioned in our last call, net migration out of Puerto Rico was currently estimated at approximately $130,000, lower than most early projections. We are optimistic that this number will continue to shrink with families returning for the start of the school year. The economic recovery is being fueled by the inflow of insurance and federal funds. Moreover, the updated PROMESA fiscal plan project $82 billion of federal and private insurance proceeds over the coming years, which discontinued drive growth. As I had discussed in prior calls, long-term growth will also depend upon implementation of needed structural reforms and a permanent solution to Puerto Rico’s inadequate power infrastructure. While the Puerto Rico government and PROMESA has still not aligned on a fiscal plan, we are encouraged by progress in privatizing the power authority. More importantly, we are impressed by the resiliency of the Puerto Rico population in the face of a horrific natural disaster. While there is much work to be done, the pride and optimism of Puerto Ricans has been truly inspiring and we believe speaks to the healthy long-term outlook for the island. This was the first full quarter of Nielsen ratings since the hurricanes and WAPA remains the clear leader. In fact, the three highest rate of programs this year were all WAPA programs broadcast in September, including Miss Universe Puerto Rico, which obviously 25 household rating. Turning to our U.S. cable channels. We once again show strong organic subscriber growth across all our networks, as we continue to defy overall subscriber trends and dramatically outperform other U.S. cable channel groups. Importantly, we’re also optimistic that we will have an announcement shortly regarding a significant new MVPD launch. Cinelatino, once again delivered impressive ad sales growth with robust increases over a year ago numbers. We’re excited to roll that an unprecedented slate of theatrical blockbusters and Cinelatino originals, reinforcing our commitment to provide unique and compelling premium content for our viewers. We’re also extremely proud of our marketing team at Cinelatino, which was nominated for five Promax Awards for outstanding achievement in creative marketing. The most of any Hispanic cable network. WAPA America’s prime time ratings in Q3 with the highest in its history. WAPA America’s large and growing audience also drove robust ad revenue increases in Q3. For the seventh consecutive quarter, Pasiones deliver the highest ratings in its history, and for the first time ever Pasiones out rated the Univision telenovelas channel, beating them by 69% in primetime. Centroamerica TV, experienced robust 32% growth in total day audience versus Q3, 2017. In Q3, we were proud to launch our new original series Inmigrantes [ph] exploring the true struggles and triumphs of immigrants from Central America. This series could not be more timely or relevant, and has been incredibly well received by our view and community. Finally, in September, we launched an entirely new on-air look and graphics package, which is modern and stylized while retaining a folkloric edge. Television Dominicana successfully launched an AT&T U-verse in Q3 and in October began to air in the new season of Dominican Professional Baseball League games, the most popular sport among Dominicans. Turning to our strategic investments. Canal Uno in Columbia continues to grow ratings and share, and we have some exciting productions and transactions in the pipeline, which we believe will accelerate our growth. Pantaya continues its impressive subscriber growth trajectory, and will soon be introducing premium original series to its offering, which we believe will broaden its appeal even further. We continue to pursue strategic investment that will accelerate our growth profile. We have an active M&A pipeline and are optimistic that we can execute on one or more of these opportunities. Thank you everyone. I’ll now turn the call over to Craig.

[Craig Fischer:]

Thank you, Alan, and good afternoon everyone. Net revenues in the third quarter were $37.2 million as compared to net revenues of $32.2 million for the year ago period. The increase was due to revenue growth across all of our networks, including a 27% increase in advertising revenue. Net revenues for the nine month period ended September 30, 2018 were $101.1 million compared to $100.5 million for the year ago period. The increase was primarily due to higher affiliate and other revenues offset by a decline in advertising revenue. The decline in advertising revenue was driven by the negative impact on WAPA by Hurricane Maria in the first half of 2018 offset by an increase in advertising revenue at our cable networks. Additionally, net revenues for both the three and nine month periods were positively impacted by the current period adoption of a new revenue recognition standard. Affiliate fees in the third quarter increased $1.3 million due to rate increases and overall subscriber growth. This increase was achieved despite the termination of Television Dominicana by DIRECTV in September 2017. Affiliate fees were up slightly in the nine month period due to rate increases and overall subscriber growth offset in part by the interruption to pay TV subscriptions in Puerto Rico caused by Hurricane Maria, the blackout of WAPA on DIRECTV during the second quarter of 2018 and the aforementioned termination of Television Dominicana by DIRECTV. Other revenues, which are primarily related to the licensing of our content to third parties, increased $500,000 and $800,000 in the three and nine-month periods respectively. These increases were due to higher fees from the licensing of our content. Operating expenses in the third quarter were $25.4 million as compared to $23.8 million for the year-ago period. The increase was primarily due to higher programming and production expenses including the production and broadcast of Miss Universe Puerto Rico, which did not take place in the prior year period. Operating expenses for the nine month period were $76.1 million as compared to $74.6 million for the year-ago period. The increase was primarily due to hurricane related expenses of $900,000 incurred in the first half of 2018. Additionally, operating expenses for both periods increased as a result of the current period adoption of the new revenue recognition standard, offset by proceeds of $600,000 received from the SEC related to the spectrum repack, and an incentive payment of $300,000 for vacating spectrum earlier than required. The gain on the SEC proceeds and the incentive payment are both included in operating income, but backed out of EBITDA. Adjusted EBITDA was $16.1 million for the three month period as compared to adjusted EBITDA of $13.8 million for the year ago period. Adjusted EBITDA for the nine month period was $41.5 million as compared to adjusted EBITDA of $44.4 million for the year ago period. Turning to the balance sheet, we had $209.1 million in debt and $95.9 million of cash as of September 30. Our gross leverage ratio was approximately 4.3 times and net leverage ratio was approximately 2.3 times. We expect our leverage ratios to tighten by year end as we roll off the impact of the hurricanes. During this third quarter, we repurchased approximately 43,000 shares of common stock at a weighted average price of $12.83 for an aggregate purchase price of approximately $550,000. Capital expenditures were $3.9 million in the quarter, including $1.6 million to replace equipment damaged by Hurricane Maria, and $1.5 million for equipment purchases required by the FCC mandated spectrum repack. During the third quarter, we received net insurance proceeds for property damage of $2.1 million and reimbursements from the FCC of 600,000. We continue to incur CapEx to replace equipment damaged by Hurricane Maria and equipment required by the spectrum repack. We anticipate that insurance proceeds and FCC reimbursements will cover most of the expenditures. During the quarter, we funded $12.1 million into Canal Uno, including an installment of $4.6 million for the concession. With the recovery in Puerto Rico’s economy, our business continues to improve and we believe our unique and compelling content and channel offerings will continue to drive revenue and EBITDA growth. With that, we’re reaffirming our previously issued guidance for the full year of 2018 of mid-teen percentage growth in adjusted EBITDA as compared to the full year 2017. We’ll now open the call to your questions.

[Operator:]

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

[Steven Cahall:]

Thanks. Maybe to start off on your run rate for ad revenue in WAPA Puerto Rico. I kind of had you add low double digits maybe even teens in Q4, prior to the storm. It sounds like you’re getting back to sort of normalized run rates. So as I’m thinking about how you come out in ad revenue in Puerto Rico this year, I mean does it feel like we’re now back to normalized run rates at WAPA PR for ad revenue?

[Alan Sokol:]

I think, Steve, we’re starting to see advertising return to a level of normalcy. I think we’re a bit reluctant to forecast too far into the future given that we don’t have a lot of post-storm history. So we don’t know how much it is long-term versus short-term pent-up demand. That said, I think we feel, cautiously optimistic that fourth quarter will be a fairly normal quarter. Before the storm, as you know, Puerto Rico ad revenue had been declining by low to mid-single digits annually. And so, I think, that if you apply those sorts of continued declines, I think, we feel reasonably good about where we are in the fourth quarter.

[Steven Cahall:]

Yes. Thanks. And then at cable networks, you talked about some ad revenue growth there as well. Should we think about that as being driven by ratings? I don’t think you do much in the upfront so should we also – I guess how can we think about sort of scatter pricing there as well?

[Alan Sokol:]

I think you can – we’ve had very good results in advertising this year, particularly in Cinelatino and WAPA America. I think it’s largely a function of audience, and just improved ad sales efforts and improved execution. I think you should expect that to continue for the near term as long as we continue to grow audiences and the market remains solid. One – there are two counter-veiling factors also that are playing into this, one of which is the Univision’s decline in ratings, advertisers are unable to fill their volume requirements through just being on Univision, so we’ve been a beneficiary of that. At the same time, both Univision and Telemundo are taking direct response advertise that in past years they probably would not have taken.

[Craig Fischer:]

But I would add that we have seen positive trends in the cable networks even leading up to the Univision drop by DISH.

[Steven Cahall:]

Okay. And then Just on the affiliate revenue side of things. That $1.3 million growth that you talked about, should we think about that all as being retrans? Because I know you’re still cycling through some of the loss of cable subscribers that you have on your total cable networks, or is some of that allocated to the cable network part of the business as well?

[Alan Sokol:]

Some of it is allocated to the cable network businesses as well. While we certainly had some delays from the prior year, we still continue to see year-over-year growth overall in our subscribers and obviously, annual rate increases as well.

[Steven Cahall:]

And are you still getting ad backs to subscribers on TV Dominicana? Or is the current reported subscribers kind of the new run rate after the recent deals that you got?

[Alan Sokol:]

I believe that is the new run rate that reflects the recent – relaunch back on AT&T. So that should be the more – the current install base.

[Steven Cahall:]

Great. And then you mentioned that you’ve got an upcoming MVPD launch. Is it correct to assume that, that’s a U.S. mainland launch, not in Puerto Rico?

[Alan Sokol:]

Correct.

[Steven Cahall:]

And then could you give us any update on how Pantaya is going? You mentioned a little bit in the release and the success it is having, any subscriber numbers would be great.

[Alan Sokol:]

Yes, we’re – Steve, unfortunately we’re not, we and Lionsgate have decided not to release subscriber numbers, but we’re – suffice to say that we’re really pleased with the growth. We feel that the growth and the take-up, and the churn rates are all indicative of an improved concept here. We feel we have a really good product, a differentiated product, a product that the big boys in the business don’t really focus on, and a product that’s in demand, and we’re about to introduce original series to the service, which we believe will create some step function growth for us.

[Steven Cahall:]

And then last one for me. You mentioned the leverage tightening, I know you’ve got tons going on between CapEx and insurance and the repack, so is that basically just kind of a working capital swing, Craig, that you’re expect in Q4 to tighten up the leverage?

[Craig Fischer:]

No, it’s actually because we’ll be rolling off a challenged Q4 of 2017 from an LTM leverage ratio perspective and picking up in the current fourth quarter, so..

[Steven Cahall:]

Yes, makes sense, makes sense. Okay. Thank you.

[Alan Sokol:]

Thanks, Steve.

[Operator:]

Thank you. Our next question comes from Curry Baker with Guggenheim. Your line is now open.

[Curry Baker:]

Hey guys, thanks for the question. Could you maybe update us a little more on Canal Uno? Sort of how you’re doing in terms of share there? The overall health of the ad market and advertiser demand for that broadcast network?

[Alan Sokol:]

Sure. We’re right now at about eight, nine share, so we feel very good year plus into the existence of this network going from essentially no share to an eight, nine share in a competitive, and a market with two strong and well entrenched competitors. So we feel very positive about that. We also feel that we have some new programming in the pipe, as well as some deals we are working on that could be somewhat transformational in terms of the growth of the network. At a minimum, we believe we will have – significantly accelerate our growth. As we said before, we don’t need to be number one in the market, we don’t have any – it’s not in our plan, that’s not what we – that’s not what we depend on in order to make this, this business a success, but we believe we will be kind of in the mid-teens, in the not too distant future, and at that point we think we have a network that’s very viable. Advertisers, we believe are welcoming of a third option in the market. This market has been a duopoly for 20 years, and it’s one of the few if not the only market in the world of this size that only has two incumbent broadcasters. So I think, advertisers and viewers both welcome a third, original innovative option in the market.

[Curry Baker:]

Okay. And maybe another one on retrans. Can you give us a sense of the delta that still currently exists between where pay TV subs are in Puerto Rico now versus where they were pre-hurricanes last year? Any sense of how much more ground you think there might be to make up there?

[Alan Sokol:]

Yes, we think that – I mean, we continue to see month-over-month growth among subscribers in the market. We don’t have real-time numbers. We generally receive statements on a two-month lag. So right now, we’re – the most recent numbers that we have are as of August, but we expect the trends that we are seeing to continue, and everything we’ve heard from the distributors down there is that growth is continuing. The population loss will definitely have an impact on the overall sub-numbers, but we see subs, ending up, based on today population, you kind of – maybe around 90% of where they were pre-storm.

[Curry Baker:]

Okay, that’s helpful. And I guess finally for me, you have issued a new $25 million authorization in August, any color you can provide in terms of a timeframe there or how you expect to pace that buyback? I think you guys did about $0.5 million in the third quarter?

[Craig D. Fischer:]

Yes, the activity level in the quarter was a result of the plan design and the overall volume limitations of the trading in our stock. The $25 million that we announced in August is intended to be used opportunistically to give us maximum flexibility. So can’t really give much guidance beyond that as far as how it will be utilized.

[Curry Baker:]

Okay. Understood. Thanks guys.

[Alan Sokol:]

Thank you. Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to Alan Sokol for closing remarks.

[Alan Sokol:]

No further remarks. Thank you everybody for joining us this afternoon, and we will talk to you soon.

[Operator:]

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