Hemisphere Media Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. First Quarter 2017 Financial Results Conference Call. My name is Taqiyya, and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. A replay of the call will be available beginning at approximately 7

[Erica Bartsch:]

Thank you, operator, and good afternoon, everyone. I’d like to welcome everyone to today's conference call. I am Erica Bartsch, and I am 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 announcements 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 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. We're off to a strong start in 2017 with net revenue up 7% and adjusted EBITDA increasing by 9% in the quarter. We remain on target to achieve our adjusted EBITDA guidance for the year. Our strong first quarter is emblematic of the continued success we're having executing against our long term and differentiated business model. We continue to drive subscriber fee increases as well as robust retransmission fee growth with much upside remaining and we're making important new strategic investments that leverage our strength and which we believe will drive significant value. With regard to distribution, during the first quarter, we expanded our reach on Charter Cables national Hispanic package for WAPA America, Television Dominicana and Centroamerica TV and continue to experience overall organic subscriber growth. I would like to spend a few minutes now updating you on our new strategic ventures. We began operating Canal Uno in Colombia with our partners on May 01. As I mentioned last quarter, Canal Uno is one of only three national broadcasters in Colombia and represents a rare opportunity to access one of Latin America's most robust economies and the number two advertising market in Spanish-speaking South America. Over the last few months, we've made several key hires at Canal Uno including a new President and a CFO that will help us more effectively manage and scale the business over time. We will be launching our new programming and branding campaign for Canal Uno over the next few months. We have several exciting and innovative original productions already planned and we have closed several important content licensing agreements with major program suppliers. We are well-positioned to be competitive within a short period of time. We're encouraged by our progress and believe there is vast runway of opportunity ahead of us in Colombia. Turning to our new subscription movie service joint venture with Lionsgate, we are excited to be launching in the next few months. We believe that this one-of-a-kind platform is well-positioned to be the dominant player in the Hispanic over the top space. This service will allow audiences to access the best and most current movies from Pantaleon and Televisa as well as Hemisphere’s and Lionsgate’s world-class movie libraries and will be supported by a marketing and distribution alliance with Univision. The tremendous appetite among U.S. Hispanics for top-quality, relevant movie content is well-established with Hispanics significantly over indexing a movie theater attendance. Most recently, Hispanics comprised 90% of the opening weekend to audience for Pantaleon's record-breaking box office hit, How To Be A Latin Lover, reinforcing this terrific opportunity we have to reach this underserved market. We believe that there is nothing like this over the top service in the market and we couldn't be more excited to be launching this groundbreaking offering in partnership with Lionsgate. Finally, I would like to take a few minutes to discuss our investment in REMEZCLA, which we announced today. Based in Brooklyn, REMEZCLA is a grassroot-driven digital media company that targets primarily English speaking and bilingual Hispanics and we believe is the most authentic and credible creator of compelling and unique content for young Latinos living in the U.S. Of the 57 million Hispanics in the US today over 60% of them are millennials or younger, making this a very attractive audience and one that is hard to reach through traditional advertising vehicles. REMEZCLA speaks to this audience with an urban and edgy voice that fully resonates with today's Hispanic millennials. REMEZCLA has a proven track record of developing compelling, custom branded content and we are excited to leverage their expertise to bring a digital first mindset to Hemisphere and gain even greater exposure to large and fast-growing digital ad market targeting millennials generally and young Hispanics in particular. Importantly our partnership provides us with a more robust digital strategy for our ad sales and will provide cross-selling opportunities between sales organizations that will benefit both companies. We will also leverage REMEZCLA’s newly opened production studio to co-develop both short and long-form digital video content that can be used across our channels and OTT platform. Ultimately, the opportunity to bring a digital DNA to Hemisphere and gain exposure to the highly desired young Hispanic demo will greatly benefit all areas of our business. Turning to our channels WAPA remains Puerto Rico's clear ratings leader. We enjoyed a strong quarter at WAPA with revenue increasing notwithstanding Puerto Rico's continued weak economy. In fact, WAPA once again delivered an all-time high in its share of the TV ad market in Q1. WAPA's terrific performance was bolstered by the World Baseball Classic, which delivered record ratings results for our sports channel WAPA 2. The World Baseball Classic in March -- the World Baseball Classic Final in March galvanized the entire island delivering the highest ratings any program in Puerto Rico over the past 12 months. This year's World Baseball Classic also outperformed 2013's tournament by an impressive 41% and delivered ratings 61% higher than 2016 Summer Olympics. In terms of the fiscal situation in Puerto Rico, as many of you know, following the expiration of the legal stamp bond holder litigation, the federal oversight Board elected to invoke Title three bankruptcy like protection. We spent a lengthy and contentious battle with creditors and certainly we can expect some difficult austerity measures to be implemented as part of the recently approved 10-year fiscal plan, but we believe that these measures together with an orderly restructuring of debt will place Puerto Rico on solid footing and will enable returns to growth going forward. All of our U.S. cable channels continue to perform well. WAPA America remains a top rated Hispanic cable channel of the week day early fringe period of 5 to 7 PM. Cinelatino is now the highest-rated Spanish language entertainment channel on weekends among adults 18 to 49 and all our other networks Pasiones, Centroamerica TV and Television Dominicana saw ratings increased from Q4 to Q1 according to comScore with Pasiones delivering all-time high record ratings. While we've obviously been very active in completing three strategic transactions recent months, we continue to remain active and aggressive in pursuing additional acquisitions. I'll now turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan and good afternoon, everyone. Net revenues were $33.2 million for the quarter, an increase of $2.2 million or 7% as compared to $31 million for the same period in 2016. The increase was due to growth in both of our primary revenue streams. The increase in subscriber and retransmission fees was driven by growth in subscribers and rate increases. The increase in advertising revenues was a result of our growing market share in Puerto Rico, due in part to the success of the World Baseball Classic on WAPA. There was no political advertising revenue in the current and prior year quarter. Subscriber and retransmission fees represented approximately 59% of our revenue in the quarter up from approximately 58% in the same period in 2016. As Q1 is seasonally lowest for advertising revenues, we expect the contribution from subscriber and retransmission fees to be in the mid-50% range for the full year. Operating expenses were $26.1 million in the quarter, an increase of 10% over the prior year period. The increase was primarily due to costs incurred in connection with the amendment of our term loan and strategic investment activity as well as higher marketing and personnel costs offset in part by lower stock compensation expense. Adjusted EBITDA was $14.5 million in the quarter, an increase of 9% as compared to adjusted EBITDA of $13.3 million for the same period in 2016. As Alan mentioned, we remain on target for mid to high single digit increase in adjusted EBITDA for full year 2017 excluding political advertising revenues and our attributable interest in minority investments. Turning to the balance sheet, we had $212.8 million in debt and $164.4 million of cash as of March 31, 2017. Our leverage ratio was 3.2 times and net leverage ratio was 0.7 times. As previously disclosed, during the quarter, we amended and extended our existing term loan. Pricing on the amended term loan facility is now LIBOR plus 350 basis points, decreasing the spread to LIBOR from the previous facility by 50 basis points. We also extended the maturity date of the term loan from July 2020 to February 2024. With that, let's 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 open.

[Steven Cahall:]

Thank you. Maybe just to start off on Puerto Rico, it seems like that a lot has been done and maybe there's still a long way to go on the fiscal front as well. So, in your conversations with major advertisers on WAPA is there any sense in change in tone from them yet or are still things still pretty tough on the ground and maybe get a little further through the process before we see the light at the end of the advertising tunnel.

[Alan Sokol:]

Hi Steve, this is Alan. I think it's really too soon to tell. A filing occurred last week and I think the question how this is all going to shake out is still a little unclear and foggy at the moment. I think advertisers as they have been doing in recent history are adopting a wait-and-see approach and buying really on scatter basis for near-term needs as opposed to long-term planning.

[Steven Cahall:]

Got you. Okay. And then on we just think about re-trans and reverse comp for the year, I was just wondering if you can give any indication of what sort of pricing growth you're seeing and are you seeing an acceleration in this year versus next year and any color you can give us on, I know you won't get into specific pricing but anything on the pricing trends there would be helpful.

[Craig Fischer:]

We don't separate out re-trans growth numbers, but I'll tell you just directionally our re-trans growth continue to be outsized. As you guys know, we don't pay any reverse comp, because we don't have an affiliation with any networks. So, it's $0.100 for us. We anticipate retransmission fee growth to continue to the outsized going forward. Our ratings in Puerto Rico are multiples of the highest rated TV station in the United States and accordingly we think we're ultimately tied to get multiples of the retransmission fees that networks in the U.S. are getting. So, we don't anticipate that happening this cycle or the next cycle, but as I said earlier, we're pretty close to being caught up to where the U.S. networks are and we're anticipating meeting and exceeding them going forward.

[Steven Cahall:]

Thanks, and then on REMEZCLA, can you give us any idea of what the financial impact of this transaction may be either on the investment side or on any dilution or accretion probably on your equity invest fee line?

[Craig Fischer:]

Yes, it's a $5 million investment for minority stake in REMEZCLA. It will be picked up with our equity investment. So, won't be consolidated into our operating results.

[Steven Cahall:]

Got you. Okay. And then just on the domestic sub growth outlook, is there anything that you're seeing on the U.S. domestic distribution side of things that makes you think that the growth rate that you've been posting last few quarters and it's very healthy at 3% to 4% year-on-year, is there anything you've seen there either some tearing that makes that growth accelerate or decelerate through the course of the year?

[Alan Sokol:]

No, I think what we've seen in the first quarter was consistent with what we saw last year and I think the prior year, which is nice, steady quarter to quarter and year-over-year growth, a growth rate that defies and is far better than the overall ecosystem, which continues to decline. I think we continue to have a lot of runway for growth given the under-penetration of our target audience to the Hispanic program package and I think that the acquisition by Charter of the Time Warner systems is a big positive for us because I think Charter is much more focused on Hispanic audiences low hanging fruit and a big opportunity for them. And as I mentioned, we've got several of our networks launched on the new Hispanic program package.

[Steven Cahall:]

And then just a final one for me as you get into the upfront just maybe what your expectations are this year? Are you still seeing some of that pricing differential between yourselves and I think it's Univision that you mentioned before and is there any sense that the U.S. economy is heating up to the extent that it's improving your scatter pricing or are we getting your scatter pricing and changing your hand going into the upfront?

[Alan Sokol:]

I think we're optimistic about the upfront. We're in the midst of it right now. We've gotten some positive feedback and we think we're going to get some good results going forward and we've gotten some scatter buying on some Latino from major U.S. advertisers that we had not previously had. So, we're feeling reasonably optimistic. That said, we're not immune from the softness in the U.S. -- in the overall U.S. advertising market and we're feeling some of that as well in our networks.

[Steven Cahall:]

Great. Thank you very much.

[Operator:]

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Alan Sokol, CEO for closing remarks.

[Alan Sokol:]

Well thank you for joining us everybody and have a good evening.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.