Hemisphere Media Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Incorporated First Quarter 2016 Financial Results Conference Call. My name is Kelly, 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 the conference. A replay of this call will be available beginning approximately 12

[Josh Hochberg:]

Thanks, Kelly and good morning, everyone. I would like to welcome everyone to today's conference call. I'm Josh Hochberg, 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 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 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'll now turn the call over to Alan.

[Alan Sokol:]

Thank you, Josh. Good morning and thank you all for joining us today. Our results in the first quarter represent a strong start to the year. For the first quarter, net revenues were up by over 5% and adjusted EBITDA was up by 4.4%. We achieved our first quarter financial goals and our affirming our full year adjusted EBITDA guidance of low double-digit growth. During the quarter, we continue to show attractiveness and uniqueness of our business model. We drove significant retransmission of subscriber fee growth. Our subscribers continue to grow organically in an environment of overall contraction. We're seeing early results from last year's conversion of Cinelatino to an ad-supported model and we continue to invest in our channels, both in a compelling slate of programming as well as an upgrading our networks on-air look to enhance our brands and ensure consistently strong viewership. Our overall U.S. Hispanics subscriber base grew by more than 5% year-over-year in the first quarter, proving yet again that we're uniquely positioned to connect to and grow with an underserved and underpenetrated audience and we have a long runway in front of us. Growth of Hispanics television households and expanded levels of PayTV penetration create a significant continued opportunity for us. In addition, we were optimistic that we will augment our organic subscriber growth with meaningful new launches over the course of the year. Let's now turn to our individual networks beginning with WAPA and what we're seeing in Puerto Rico. From a macro standpoint, the Puerto Rican TV Ad market declined at high single digits in the first quarter. We're encouraged at some point the action of Congress should take place shortly though my gut in Puerto Rico, we would like Congress to act much more swiftly. Until we receive some clarity from Washington, uncertainty and anxiety will continue to affect the ad market. In the meantime, the economy is stagnant as many businesses remain in a wait-and-see mode and are delaying investment decisions until there is further visibility on policy. We esteem the impact of this in upfront commitments being delayed or converted as scattered buying, but it's important to note that the economy while it's up is hardly following off a cliff and once the cliff congressional action is approved, we're optimistic and confidence and accordingly spending will improve. There has been virtually no political spending to date, which is consistent with expectations. We still do not know the status of the availability of the government matching funds. While WAPAs Ad revenues declined in Q1, WAPA once again outperformed the overall market with its massive audience deliveries providing a major buffer against overall market conditions. WAPA again grew its share of the TV ad market tying it's all-time high set last quarter. Ratings at WAPA were nothing short of outstanding as we posted our highest rated quarter since the inception of Nielsen ratings on the Ireland. Demonstrating our un-rival position, WAPA's ratings in key adult 18 to 49 demographic were higher than those of Univision and Telemundo combined in both Primetime in total day. Fatmagul, our Turkish Telenovela, which recently concluded with a broadcast phenomenon. It was the highest rated series in the history of Puerto Rican TV and we're excited to build on that success later this year with Celal another blockbuster Turkish Series that has performed tremendously throughout Latin America. WAPA continues to benefit from robust retransmission fee growth and we do not see any reason for this growth to abate. With ratings that are higher than ABC and MBC, CBS and FOX combined in the U.S. we're in a position of tremendous leverage with our distributors and are the crown jewel in their channel's offering. Finally, we're very proud that WAPA’s website WAPA.tv is now the number one most visited local website and number seven most visited site overall in Puerto Rico. Our cable networks continue to perform well in the first quarter. Cinelatino had the highest coverage ratings for six of the top 10 non-sports Spanish language cable programs in Q1, including the premier of Pulling Strings, the number one rated program. Advertising sales of Cinelatino are moving ahead and we are looking forward to participating in our first upfront selling season. WAPA America is continuing to see growth in subscribers and revenues and is delivering strong Nielsen ratings. In Q1 WAPA America was the highest rated Hispanic cable network in the key based on week days 5 PM to 7 PM. Pasiones is performing very nicely as well. Pasiones is benefiting from our investment of programming and marketing. According to Rentrak, the channel grew its total day audience by 32% year-over-year and the first quarter was the highest rated quarter since Rentrak began its measurement of the channel in 2012. We have just launched our first Turkish drama series of Pasiones and we're confident that new audiences will continue to discover our unique content offering. Centroamerica TV also continues to perform well, growing its total day audience 18% year-over-year. We launched our first corporate audition of Centroamerica TV in Q1, a daily reality series entitled [Acapulco] [ph] and we're very excited about this opportunity. Finally we continue to invest in programming for Televisión Dominicana new series in Q1 and developing our new on-air local. Televisión Dominicana is our smallest network and not yet rated, but we are confident in our ability to continue to grow its audience, distribution and Ad sales. Latin America also continues to experience strong subscriber growth. In the first quarter, Pasiones grew subscribers by more than 90% year-over-year and Cinelatino's subscriber base increased by 14%. We continue to actively explore options to make our content available to consumers through over-the-top and another emerging digital platforms and given the appeal of our content in the 35 million-plus Hispanics who do not receive our channels today, we believe that this represents an important secular growth opportunity. On the acquisitions front, we continue to be very active in the market as we explore variety of opportunities. We're disappointed that we've not consummated any acquisitions recently, but we're excited by the pipeline of opportunities we're exploring and we're optimistic that we will consummate one or more transactions in the near term. In conclusion, our businesses performed well in the first quarter and we are reaffirming our full year guidance. More importantly, we are executing our plans to investing and grow our businesses with strong results to date and a great foundation for future organic and strategic growth. With that, I will turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan and good morning, everyone. Net revenues for the quarter were $31 million, an increase of 5.1%. The increase was primarily driven by continued robust growth in subscriber retransmission fees due to subscriber growth and rate increases. In addition, we experienced growth in advertising revenue at our U.S. cable networks. Net revenue growth was impacted by a decline in advertising revenue at WAPA due to the contraction in the Puerto Rico television advertising market. The comparison of the ad market to the prior year period was also negatively impacted by the Easter holiday falling in March this year as compare with April in 2015. The impact of the decline in the ad market was mitigated in part by growth in WAPA's share of the market, which was driven by record ratings. While the vast majority of our revenue is sourced from the U.S., we do have some distribution deals priced in foreign currency, which were affected by the appreciation of the U.S. dollar. Excluding foreign currency effects, our revenue growth was 5.4% in the quarter. Subscriber and retransmission fees represented approximately 58% of our revenue in the quarter, up from 55% last year in Q1. We expect the full year to be closer to a 50-50 mix as our advertising and total revenues historically have been seasonally lowest in the first quarter and highest in the fourth quarter and are expected to be even more so this year. Operating expenses were $23.8 million in the quarter an increase of 6.2%. The increase was driven primarily by increased investment in programming and higher sales and marketing costs, consistent with our efforts to drive advertising sales across our networks, including the launch of advertising in Cinelatino. Adjusted EBITDA was $13.3 million an increase of 4.4%. Excluding foreign currency effects, our adjusted EBITDA growth was 5.1% in the quarter. Turning to the balance sheet, during the quarter we made an $8.3 million mandatory principle payment on our term loan as a result of the excess cash flow generated in the prior calendar year. The principle payment will be allocated in direct order maturity and as a result, we will not be required to make scheduled loan amortization payments for the next several quarters. As of March 31, 2016, we had approximately $212 million in debt and $170 million of cash on hand. Our leverage ratio was approximately 3.6 times and net leverage ratio was approximately 0.7 times. During the quarter we were able to clean up our capital structure repurchasing 975,000 warrants for total cost of $1 million. There are now 12.3 million warrants outstanding convertible into $6.1 million common shares. Additionally, we repurchased 100,000 common shares for a total cost of $1.3 million in the quarter. Our capital allocation priorities remain investing in organic growth and the growth through acquisitions both in the U.S. and Latin America. This was a solid quarter delivering on our expectations and as Alan noted, we affirm our full year guidance of low double-digit EBITDA growth. With that, let’s open the call to your questions.

[Operator:]

Thank you. Our first question comes from the line of Ben Mogil with Stifel. Your line is open.

[Ben Mogil:]

Hi, good morning and thanks for letting me on. In terms of questions, so I just want to make sure I got the thing right. In Puerto Rico for WAPA and Puerto Rico, the ad market was obviously down high single digits, your ad revenue was actually down as well. Is that correct?

[Alan Sokol:]

Yes we were down, but down less than the market was down. We outperformed the market by virtue of continuing to grow our share of the market.

[Ben Mogil:]

When you take ad revenue at WAPA and add an affiliate, was their actually combined revenue do you think year-over-year up, down or flat?

[Alan Sokol:]

Well, when we look at WAPA, they also have WAPA American in there as well, but yes and we growth in re-trans fees, the answer is yes, revenue was up.

[Ben Mogil:]

Okay. And even if you were to strip out WAPA America and just allocate the re-trans fee portion just to the demand -- just the Puerto Rican one, were you probably still up or flattish?

[Alan Sokol:]

Yes.

[Ben Mogil:]

Okay. That’s great. Okay and a broader question, we’ve seen obviously a lot of number of major around the EPD consolidations, one approved, one are actually less, but now both of them approved. Some of your peers have really noted that they have either seen disruption in terms of subs not moving over and that's been more of an AT&T DirecTV issue or have they just seen more disruption in terms of any kind of marketing momentum with the merger that this just gets put aside on that front. Are you guys seeing either these things in general and maybe talk about when you look the acquires versus the targets, is there a big disparity in terms of penetration and working with you or more or not working with you and your thoughts around M&A from the MVPD side?

[Alan Sokol:]

Well, I think there is two points to that question and I think you have to look at each transaction on its own. On the -- in term of the Charter Time Warner transaction, we're actually very optimistic about the effect of that deal that will have on us. Time Warner essentially has had an out of business times over the last three years while they've been in merger discussions or merger process with Comcast and then Charter. So, we think once the Charter deal is done and they're back in business it will be good for us and we think Charter will be much more aggressive in their approach to the Hispanic subscriber and Hispanic customer based on discussions that we’d had with them historically and given the fact that Time Warner had the two best Hispanic markets in U.S., we do that as an opportunity. In terms of the AT&T DirecTV merger it has not had any kind of significant impact on us. I think as you heard from other programmers it appears that the emphasis on television is shifting from AT&T to DirecTV and there may be send temporary displacement as subscribers move from AT&T to DirecTV, but it has not been anything material for us.

[Ben Mogil:]

And on the on Charter right now does Charter have a better penetration rate with you then say Time Warner does, given the fact that Time Warner obviously has a much bigger market opportunity like when you look at relatively speaking number of Hispanic households in each of their various footprints, do you find that Charter has got a much bigger reach?

[Alan Sokol:]

It really apples and oranges because Charter's footprint has very low Hispanic penetration, very few heavy Hispanic markets other than a portion of Southern California that they have. So they have really not been a Hispanic focused company to date because they markets really don’t align with the Hispanic customer base, but we’ve had a number of conversations with them in the past and recently about their strategy toward Hispanic and our belief is they view Hispanic as a big upside opportunity for them given Time Warner’s relatively low penetration of Hispanics in the key markets. They got New York and LA and Dallas three number one, two and another top 10 market and at very low and stagnant penetration in those markets.

[Ben Mogil:]

Okay. That’s great, thank you. And then lastly I think you touched on there obviously was no M&A consummated in the quarter, are you seeing, obviously there is lots about M&A, is price the issue that you’re seeing? Is it seller? Is there not a lot of supplier in the market, curious of what you’re seeing on that front?

[Alan Sokol:]

I think we’re -- I think our disappointment is that it’s not a function of any of those things -- a function of -- because there is a good amount of deal flow and a good pipeline in the market has shifted more than anything else is just the processes have been more painstaking than we anticipated and largely because we’re dealing in many cases with sellers that are not advised by institutional banks. And as a result, the process and the effort is just more protracted and slower and more painstaking than it otherwise might be, but we think there is, our optimism and our view of the opportunities hasn’t changed and we think especially now with a strong dollar relative to some of the Latin American currencies opportunities may even be better than they have been in the past.

[Ben Mogil:]

That’s great, Alan. Thanks, thanks again.

[Operator:]

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

[Steven Cahall:]

Thank you, good morning. Maybe first question on the Puerto Rico advertising market, how would you put the current state of affairs in terms of in line with your expectations or better or worse and as we think of the balance through the year in any risk and opportunities let's say vis-à-vis your adjusted EBITDA guidance, is this pretty much bad, but was it according to plan or is there any incremental weakness?

[Alan Sokol:]

I think it’s more or less according to plan. If you recall last year’s first quarter was not a good quarter either and the end of the year wound up coming in generally in line with where we projected to which was low to mid-single digit decline and we’re projecting the same this year. Too early at this point to have any definitive view because their third and fourth quarters are larger relatively speaking in terms of the impact in the first quarter. So the first quarter was obviously not a particularly strong quarter and the market is soft, but it's generally in line with where we believed it would be, not materially worse.

[Steven Cahall:]

And then maybe secondly you mentioned OTT and exploring an option in the $35 million households that sort of your addressable market, so how should we think about maybe how aggressive you want to be on timing with the potential OTT product and is that product at the very lease something that gives you incremental leverage when you negotiate with MVPD?

[Alan Sokol:]

Look we're looking at a number of opportunities a little premature for us to tell you timing of give you any further description. Possibly by our next quarterly call, we might have some more information for you that we feel comfortable dishing out, but I think we feel good that there are opportunities out there for us to take advantage of the Hispanic consumer that has never subscribed to any PayTV service for when I am talking about cannibalizing existing customers, we're talking about reaching customers that don't have PayTV that never -- they had and never will have PayTV. So relative to our general market counterparty potentially more incremental opportunity as opposed to just a salvage opportunity and we're looking at something that we find very interesting for us and exciting in terms of reaching the new audience.

[Steven Cahall:]

And then maybe just a couple for Craig, first it looked like maybe free cash flow was a little weaker year-on-year. So can you give us any idea if there was a working capital swing and how we think about free flow for the balance of the year and also can you give us any indication as to what your pricing has been on retransmission fees or specifically what sort of maybe pricing growth you're seeing on retrains? Thank you.

[Craig Fischer:]

Sure. On the working capital, historically the first quarter is our weakest cash generating quarter. This is due primarily for the fact that payout agency commission bonuses in Puerto Rico on March 31 of every year. So we typically see a working capital hit from that in the first quarter. Now of course we had that last year as well but since we had growth advertising revenue in Puerto Rico last year that -- those payouts were higher this year than they were last year. In addition to that, we made the $8.3 million principle payment that I had noted earlier as a result of the excess cash flow that was generated. This was the first year that we had that payment. We didn't have it last year. So last year we only made our quarterly loan amortization. So that was about $600,000 as compared to the $8.3 we made this quarter. Additionally, as I noted we bought back warrants and common stock in the quarter to the tune of about $2.3 million and then CapEx was about $1 million higher this quarter than it was prior year's quarter and that's just timing. We still expect CapEx to come in around the same level as where we finished up the full year last year. And then just the outlook for the year, look, we generated cash flow every single quarter. We expect that trend to continue going forward. On the retransmission question, as we've discussed in the past, we have double-digit increases in our contracts, annual escalators in our contracts. We have seen historically upon renewal, retransmission agreements that the step-up was significantly higher than what we have contractually earned annual escalators and I think you can -- that's been reflected in our numbers for the quarter.

[Steven Cahall:]

And do you have much coming up in terms of renewal?

[Craig Fischer:]

We don't really comment on the timing of our renewals. They are all staggered. We typically keep our re-trans deals short term in nature given the historic success we've had upon renewals. So from that you can take away that regularly we were coming up for renewals in Puerto Rico for the re-trans deals.

[Steven Cahall:]

Great. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.