Hemisphere Media Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Third Quarter 2017 Financial Results Conference Call. My name is Taron, and I'll be your operator today. [Operator Instructions] A replay of the call will be available approximately 1

[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 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 released 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. This has been a difficult and trying quarter due to the unprecedented national disasters that have affected Puerto Rico. I want to start by spending a few minutes discussing the impact of the hurricanes. On September 6, Hurricane Irma skirted Puerto Rico, but due to its size and power, caused significant damage and disruption. As a result of Puerto Rico's antiquated electric grid, approximately 75% of Puerto Rico's population was left without power following Irma. Even two-weeks later, before Puerto Rico was devastated by Maria, approximately 25% of the population was still without power. In the aftermath of Maria, Puerto Rico's electrical grid was entirely wiped out, and the majority of its residents were left without running water or access to cellular communications. Meaningful, although frustrating slow progress has been made in restoring most vital services. While electricity is still not available to majority of the population, restoration of power appears to be accelerating, and at last report, power generation is now at over 40% of normal production levels. Puerto Rico's economic recovery is highly dependent on the pace of restoration of electricity. While recovery will be an arduous process, we are hopeful that the infusion of federal funds and insurance proceeds will jump start the recovery and lead to economic growth as has generally been the case following national disasters in the U.S. We are also hoping that this opportunity to rebuild Puerto Rico will lead to a more modern, efficient and productive infrastructure. With respect to WAPA, our first and most important concern was ensuring the well-being of our employees. Thankfully, no one was injured, although a number of families suffered significant damage to or losses of their homes. We are working with our team in Puerto Rico to provide support and assistance. Our studios and offices and two of our three broadcast towers sustained only minimal damage. However, we suffered a total loss of our tower serving the San Juan area. Nonetheless, WAPA has remained on the air without interruption through a channel share and arrangement with Univision, and we do not anticipate any future interruption. WAPA was able to stay on the air with generators until power was restored at our studios on October 31. The work of our news team in covering the storm was nothing short of heroic. WAPA was the only network to provide nonstop news coverage from Puerto Rico, all of which was simulcast on WAPA America. Immediately following the storm, a number of our large distribution partners in the U.S. responded to customer demand, asked us to allow WAPA America to be carried broadly on their basic packages. These distributors include Spectrum, Altice, Cox and Verizon. We are pleased to open our signal in order to make WAPA America's new coverage available to all interested viewers, and viewer response has been tremendous. From September 21 through the end of October, WAPA America was the Number 1 rated Spanish-language cable channel in the U.S. according to comScore. This is testament to the quality of WAPA America's outstanding content and the unique value we provide to our viewers and distributors. Our business in Puerto Rico was performing well through August. Irma significantly disrupted the ad market in September, and as expected, in immediate aftermath of Maria, the ad market temporarily shut down. The ad market has slowly reopened. We're optimistic that as power continues to be restored, advertising will return, and we believe that there is pent-up demand among advertisers for the holiday selling season. Nonetheless, for the fourth quarter, there will be a significant decline in ad sales, and we anticipate ad revenue will be adversely affected through at least first quarter of 2018. At this point, it's not clear when sales will return to pre-storm levels, as it is dependent on the pace of restoration of power to level of the outbound migration that may take place given the pace of rebuilding and the state of the economy. We also anticipate a large decrease in retransmission revenues in the fourth quarter, as most cable and satellite subscribers have been without power. DIRECTV and DISH are operational, but Liberty suffered significant infrastructure damage and the timing for their recovery is unclear. On the cost side, we're managing our expenses and finding savings where possible to mitigate the revenue losses. Ultimately, we believe in the resilience of Puerto Rico, Puerto Rico se levanta. And specifically, we are confident in our ability to rebound stronger than ever. WAPA's value to viewers, distributors and advertisers was never more clear than it has been over the past six weeks. These storms certainly present challenges to our business, but they will also provide us with unprecedented opportunities to drive new revenue streams and value creation. Moving on to our new strategic investments, the news is very positive and encouraging. Less than three months following the relaunch of Canal Uno in Colombia, we are already at 6% share of viewership, 3x the prelaunch view in share. We've had some early major successes, including our original daily reality competition series, Guereros. Guereros is delivering a 12% viewing share for two hours every night, up from 3% during its first week and continues to show a strong growth trajectory. Regarding PANTAYA, our OTT joint venture with Lionsgate, the joint venture entered into an important strategic marketing arrangement with Sprint and launched its first marketing campaign in October. The results have been very positive with PANTAYA already ranking among the highest grossing entertainment apps on iOS and Android devices. Turning to our U.S. cable channels, we continue to defy overall subscriber trends with our organic growth. While the overall pay TV market suffered accelerated subscriber losses, the growth of our subscribers reflects the continued expansion opportunity in U.S. Hispanic pay TV. Cinelatino experienced another solid quarter, highlighted by the premiere of El Desconocido, our five-part epic drama series and our most ambitious production ever. El Desconocido had a cumulative audience of 1.7 million viewers, particularly impressive, given Cinelatino's total U.S. subscriber base of less than 5 million. Cinelatino also added a number of new blue-chip advertisers in Q3, including Allstate, J&J and Church & Dwight. In Television Dominicana, following Hurricane Maria, both Verizon and Altice expanded tariffs of the channel to their basic package, a clear recognition of the importance of the channel to the Dominican American community. In fact, Verizon specifically highlighted the basic character of Television Dominicana and WAPA America to the FCC in defending their decision to drop Univision from their lineup. That said, the decision by AT&T in September to drop Television Dominicana from DIRECTV and U-verse shows disregard for the fourth largest Hispanic community. We believe this decision was ill-advised and are hopeful we will come to an appropriate resolution. It's important to note that this dispute has no bearing on our other channels carried by DIRECTV and U-verse. Also, while the expanded coverage of both Television Dominicana and WAPA America are not resulting in increased subscriber fees, we should see an increase at ad revenue with larger audiences, and we are building value with the audience and distributors by doing this at such a vital time for these communities. Pasiones continues to deliver terrific results in both the U.S. and Latin America. The channel was recently launched in Cablevision, Argentina's largest cable distributor. Impressively, Pasiones is the 12th highest-rated cable channel, excluding Kids and Sports at more than 300 channels on DIRECTV Latin America and ahead of many of the biggest brand-name channels. Centroamerica TV had a strong quarter with 7% year-over-year audience growth in September. We've recently added professional stocker from Honduras and a top-rated Honduran newscast. While this quarter has largely been about responding to the national disasters in Puerto Rico, we've remained focused on continuing to grow our core business. We've also not slowed down in our pursuit of other strategic investments and remain very encouraged by the pipeline of opportunities. I’ll now turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan, and good morning, everyone. Net revenues in the quarter were $32.2 million, a decrease of 3%, as compared to net revenues of $33.1 million for the comparable period in 2016. Net revenues in the nine-month period were $100.5 million, an increase of 1%, as compared to net revenues of $99.1 million for the comparable period of 2016. Revenues in the three-month period were driven by decline in advertising revenue, partially offset by growth in subscriber and retransmission fees and other revenues. Revenues in the nine-month period were driven by growth in subscriber and retransmission fees and other revenues, which were partially offset by decline in advertising revenue. Excluding political advertising revenue in the prior year period, net revenues in the nine-month period increased $2.2 million or 2%. Advertising revenue in the quarter declined $2.3 million or 16%. Through August, we were tracking consistent with our expectations. The primary cause of the decline was due to the negative impact of Hurricanes Irma and Maria on the television advertising market in Puerto Rico in September. Irma, which occurred in early September, caused power outages to approximately 75% of the island. Maria, which occurred later in September, exacerbated the issue. As a result, the television advertising market in Puerto Rico was negatively impacted for most of September. Advertising revenue in the nine-month period decreased $3.7 million or 8%, due primarily to the impact of Hurricanes Irma and Maria and political advertising revenue in 2016 of $800,000. Subscriber and retransmission fees in the three and nine-month periods increased $900,000 or 5% and $4.1 million or 8%, respectively, due to subscriber growth, new launches and annual rate increases, partially offset by the loss of distribution of Television Dominicana on AT&T and DIRECTV in September and the impact of Hurricane Maria on MVPDs that distribute our channels in Puerto Rico. Other revenues grew $500,000 and $900,000 in the three and nine-month periods, respectively. The increases in other revenues were primarily attributable to the timing of the licensing of our own content, specifically to PANTAYA. Operating expenses in the quarter were $23.8 million, an increase of 1%, as compared to operating expenses of $23.5 million for the comparable period in 2016. Operating expenses in the nine-month period were $74.6 million, an increase of 4%, as compared to $71.7 million for the comparable period in 2016. The increases for the three and nine-month periods were driven by higher stock-based compensation. The increase in the nine-month period was also attributable to costs incurred in connection with the amendments of our term loan earlier this year, legal and advisory fees in connection with our M&A and investment activities and personnel costs. This was partially offset by lower news and programming costs in the year-to-date period. Adjusted EBITDA was $13.8 million for the three-month period ended September 30, a decrease of 9%, as compared to adjusted EBITDA of $15.1 million for the comparable period in 2016. Adjusted EBITDA for the nine-month period ended September 30 was $44.4 million, an increase of 1%, as compared to adjusted EBITDA of $43.9 million for the comparable period in 2016. Excluding political revenue, adjusted EBITDA for the nine-month period increased 3%. As we shared with you in September, as a result of Hurricane Maria and the associated uncertainty around the timing of the recovery in Puerto Rico, we have withdrawn our previously provided full-year 2017 adjusted EBITDA guidance. We did generate some modest ad revenue in Puerto Rico in October, despite the widespread loss of power, particularly around the Major League Baseball playoffs and World Series. The widespread and extended power outage will also impact retransmission and subscriber fees for WAPA and our cable networks distributed in Puerto Rico in the fourth quarter and potentially longer. To mitigate the loss to advertising and retransmission and subscriber fee revenue, we have implemented cost-saving measures at WAPA, including reducing the cost of our local productions. We have also sought, and in many cases, have been granted, relief in the form of term and payment extensions by suppliers of our acquired programming. One housekeeping item. During the quarter, we recorded a $500,000 fixed asset impairment charge related to the net book value of the identified assets damaged by Hurricane Maria. A significant portion of the damaged assets had been fully depreciated. We currently estimate the replacement cost of the tower and equipment will approximate $12 million. We expect most of this to be covered by insurance, subject to deductibles and other costs. We maintain business interruption insurance up to a limit of $10 million, which we expect will cover a portion, but not all of our lost income. There can be no assurances of the timing and amount of the proceeds we may recover under our insurance policies. In the quarterly results, we did not recognize any insurance recoveries related to the hurricane losses. As previously announced, we implemented a share repurchase plan during this third quarter. During the quarter, we repurchased 847,390 shares of common stock at a weighted average price of $12.60 from aggregate purchase price of $10.7 million. Turning to the balance sheet. We had $211.7 million in debt and $140.3 million of cash. Our leverage ratio was approximately 3.3x, and net leverage ratio was approximately 1.1x. Through September 30, we've invested $26.9 million in our joint ventures. For the full year, we expect to be in line with our previously announced range of $35 million to $40 million. We have a solid balance sheet and ample liquidity to fund ongoing operations, as well as any business expansion opportunities we decide to pursue. With that, let's open the call to your questions.

[Operator:]

[Operator Instructions] First question is from Steven Cahall of Royal Bank of Canada. Your line is open.

[Steven Cahall:]

Thanks, good morning. Quite a few from me since it's such an unprecedented period for you. Maybe first, to touch on the four MVPDs that put WAPA on to their basic package during the period. Do you expect those to convert WAPA to paying subs on that basic tier or what's just kind of the outlook for where those networks end up?

[Alan Sokol:]

Hi, Steve. At this point, we don't assume that will happen. However, we do believe that there is - the response has been really positive. The distributors are very happy. In fact, one distributor actually told us that they attribute an increase in take up to their Hispanic tier on the availability of WAPA America on their basic tier because of the exposure it's given to Hispanic tier. So, we think this is - we will be able to maintain the basic distribution hopefully for the long term. In terms of getting fees, I think that's going to be a work in progress.

[Craig Fischer:]

But it does help in terms of having that exposure and helping advertising revenue.

[Alan Sokol:]

It certainly helps in getting WAPA a much broader exposure and a lift in advertising revenue, which we've already started to see.

[Steven Cahall:]

Great. And then, maybe, second, just on advertising with WAPA in Puerto Rico. Are there any challenges with the measurement of delivery of advertising right now? And as you commented about selling in the holiday season and into 2018, is it really just an issue of people being able to watch or is there also a measurement challenge there?

[Alan Sokol:]

There is definitely - it's a good question, Steve. And there's definitely a measurement challenge. Nielsen is not operational right now. We have been in discussions with them. We think it's going to be a number of months before they come back online. The good news is that they already are able to measure some of the homes in the sample today. That they have seen - that most of the homes that are in the sample are still in place, and so they may not have to completely restart the sample. But given the uncertainty regarding migration, they may have to change their universe estimate and the composition of their sample and that won't be known for a little bit of time. That said, I think that what - we will - I don't know that it necessarily will affect the market for expanding, I think their sale proposition will be different. I think it will be more of a sale proposition based on perception and brand and perceived audience. And in that situation, I think we're in very good shape given that we're the market leader.

[Steven Cahall:]

And, maybe, that’s a good segue into the next one. If we think about - where, maybe, retrans is going to look like a year from now versus the baseline that we had? I wouldn't think that pricing changes too much, but there could be some immigration impact on the sub base. Do you have any sense at this point of how different the Puerto Rico market may look in terms of number of subs when some of the noise clears?

[Alan Sokol:]

Hard to know. I think it really - much of it boils down to the pace at which electrical power is restored to the island. There's definitely been at least a temporary outward migration in some meaningful numbers and will - that will continue. But some period of time, because living conditions in Puerto Rico are really awful right now, and it's completely understandable like people would want to leave at least until things normalize down there. The question is, of the people leaving, how many of them will return? And I think, to the extent of that power is restored in an orderly way and to the extent that the economics of the island start to improve based on the availability of federal funds and insurance proceeds that should spur an economic recovery and jobs and an improved and better infrastructure and living conditions on the island, I think we'll see most if not all of those people return to the island.

[Steven Cahall:]

And then, maybe, the last one from me. Any of the potential M&A that you might have had in the pipeline, has what's happened over the last few months that all shifted your ability to fund that M&A or change the way that you approach that pipeline? And similarly, you've been active in the shares through this period, so how are you thinking about allocating capital between probably keeping a little more on reserve given some of the disruption in the business versus M&A versus share repurchases?

[Craig Fischer:]

Yes, Steve, it's Craig. As you know, we have a sizable cash balance on our balance sheet today. We've been prudent in our capital allocation plans. We have been in the market for the share repurchase plan during the quarter and continue to do so. But as part of our typical recurring capital allocation review, we'll evaluate what's in front of us as we exit the blackout window that we're presently in. Our cable networks are still strong free cash flow generative businesses, and we believe that we have ample liquidity to pursue the M&A strategy in front of us. We haven't pulled out of anything since the occurrence of Hurricane Maria.

[Steven Cahall:]

Great. Thank you all.

[Operator:]

Our next question is from Curry Baker of Guggenheim Securities. Your line is open.

[Curry Baker:]

Hi, thanks guys. I guess, I'll start with Puerto Rico. On the advertising front, can you give us, maybe, percentage of where you're pacing down relative to last year? Just, maybe, an order of magnitude, we can try and model for the quarter there on the advertising front?

[Alan Sokol:]

Sure. Without going into specific numbers, I think it's pretty premature to do that because I think the market is in a very fluid place right now, and in large part, the recovery will depend on the recovery of power in Puerto Rico. But I think it's fair to say that in October, the ad market was generally not very active. As Craig pointed out, we had some really good results with baseball playoffs and World Series, a testament to the amazing creative skills in our sales department given they were able to sell meaningful ad dollars with very few people actually being able to watch the games. We’re starting to see money trickle in as power is restored, and we think once power gets about 50%, we think that will represent some critical mass that will start advertising coming in a much more meaningful way. And we're also getting noise from advertisers and agencies that there is a lot of pent-up demand among retailers and other advertisers that are particularly active in the last couple of months of the year to get back on air and to advertise. And then we think that advertising will have step function increases on a monthly basis as we get into 2018.

[Curry Baker:]

Okay. Do you guys have any sense of where you think, I guess, as a percentage of the population power will be by, I guess, like Thanksgiving and Christmas? Have you seen anything reported, I guess, by the power agencies there? Or any sense to where we're pacing to by those kind of holiday markers?

[Alan Sokol:]

As of today, the government releases daily percentages. As of today, it's 42% of power production, which is significantly higher than it was even a couple of weeks ago. Two or three weeks ago, it was under 10%. So - and at that point, we were all sort of very frustrated by the apparent lack of progress, but it appears that it is really ramped up and has accelerated dramatically. The governor originally stated a goal of 95% power restoration by December 15. I think that's probably unrealistic. The Army Corps of Engineers had disavowed that number. But I think we're looking at 50% certainly within the next couple of weeks at the latest, and I think that 75% plus by year-end will be a great result.

[Curry Baker:]

Okay. I guess, next, I saw the equity loss for the quarter was, I think, $2.6 million. I assume that's inflated with the launch of PANTAYA Canal 1. Can you guys give us any help how to think about that line item moving forward and just the losses that will be flowing through there the next couple of quarters? I assume it won't be as elevated as $2.6 million, but just trying to get a sense of that.

[Craig Fischer:]

Yes, it was - it's elevated in the period. You are correct that we've added - we picked up PANTAYA in this quarter. But the other part of it and this will be more fully disclosed in the queue, due to the accounting guidance around treatment of our equity method investment in Canal Uno, since we're funding most of that venture, we're picking up a much larger share of the losses of Canal Uno than relative to our pro-rata interest in Canal Uno's. That's why you see it as inflated. Those losses we expected at this point in time. It's in a development phase. As Alan noted, we're very pleased with the early returns in terms of our audience share and that will continue to build. As you know revenue - the ad revenue typically trails your ratings. So, we think over time, that will sort of work its way out towards being a positive contributor.

[Curry Baker:]

Okay. Thanks for that. I guess, maybe, also on Canal Uno - I'm sorry, Canal 1, can you talk about just the advertising reception so far in Colombia? It seems like you've may get initial early progress. I think you went from 2% share to 6%. Can you, maybe, talk about the advertising reception? And whether you think you can get share over the next year or so?

[Alan Sokol:]

Yes, I think the advertising response has been very positive. Advertisers are hungry for an alternative to the duopoly in the market. I think they're all rooting for us and encouraging our success. As Craig just mentioned, obviously, advertising generally lags ratings, flows up and down, and so advertisers work on a prove-it-to-me basis. So, the fact that we've tripled ratings. We're at 6% share, which is, obviously, not nearly where we intend to be at the end of the day, but it's a very strong start for us in less than three months. We're very encouraged by that. We have very lofty goals in mind for the channel, I think, realistic, but aggressive. We'd hope to be a double-digit share in the not-so-distant future. And as I mentioned, we already have some shows that are already there, so we proved to the market that we can get there with the right programming.

[Curry Baker:]

Okay. Thanks guys. I think that’s it from me.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the conference over to Alan Sokol for any closing remarks.

[Alan Sokol:]

No further remarks. Thank you.

[Operator:]

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