Hemisphere Media Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Mar 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group, Inc. Fourth Quarter and Full Year 2016 Financial Results Conference Call. My name is Keller [ph], 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 1

[Erica Bartsch:]

Thank you, operator, and good morning, 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 our other public filings for a more complete discussion of forward-looking statements and the risk factors applied 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 are very pleased with the performance of our business both in the fourth quarter and for the full year. In the fourth quarter, net revenues were up 9% and adjusted EBITDA increased by a robust 21%. For the full year, net revenues were up 7% and adjusted EBITDA was up by 11% consistent with our full year guidance of low double-digit growth. Our strong fourth quarter results were driven by continued robust retransmission fee growth, solid U.S. organic subscriber increases and important new and important new MVPD launches in the U.S. and Latin America. For the full year, our U.S. Hispanic share subscribers increased by 5% and our Latin American subscribers increased by an impressive 30%. This growth stands in short contrast to the subscriber losses experienced by general marketing networks and highlights our unique growth paradigm. Distribution win in the fourth quarter include the launch of our Cinelatino and Pasiones on Megacable in Mexico, covering a significant portion of their 3 million subscribers. Importantly, WAPA America, Television Dominicana and Centroamerica TV were added to Charter Cables new national Hispanic programming package in Q4 which we expect will result in significant subscriber growth overtime. These important new distribution gains come on the heels of our third quarter launches of WAPA America and Pasiones in [Indiscernible] markets. Collectively, these distribution successes in 2016 helped drive our growth and will result in significant revenue going forward. Before we discuss performance at our individual networks, I would like to provide an update on two important strategic initiatives which we announced in the fourth quarter. First, our joint venture for Canal Uno in Colombia, Canal Uno was one of only three national broadcasters in Colombia. This is a unique and exceptional opportunity to access the number two ad market in Spanish speaking South America. There are very few of any markets in the world as large as Colombia which have only two incumbent national broadcasters. By capitalizing on our proven expertise and the production infrastructure and capability of our partners, we are extremely well positioned to carve out a meaningful share of a large and lucrative market and to turn this venture into an important and valuable asset. And then shall we assume the control of the network on May 1. Second, we are rapidly progressing towards the launch of our recently announced Spanish language subscription movies in partnership with Lionsgate. We are planning the official launch for the second quarter. Without collective libraries, production resources and expertise and our marketing and distribution lines of Univision we are confident that we will build the definitive streaming service for the millions of Hispanic movie lovers in the U.S. There is nothing like this product in the market and we believe there is a large and passionate audience for this content. Let’s now turn to the performance of our networks beginning with WAPA which once again delivered a very strong quarter in the face of ongoing economic challenges. WAPA achieved an all time high in its share of ad revenue in Q4, once again driven by WAPA’s all start programming line-up. WAPA in fact was the only network in Puerto Rico to increase its total day household in adults 18 to 49 ratings from Q3 to Q4. The advertising environment in Q4 continued to be weak. For the full year, the Ad market was down mid single digit excluding political, and low single digits when including political. These results both excluding and including political were below our expectations. Nonetheless WAPA once again significantly outperformed the market, in fact growing its ad revenue in Q4 year-over-year when including political. Political spending for both the fourth quarter and the full year was at historically low levels. The fall of in political spending from 2012 to 2016 represented several million dollars of lost revenue to WAPA. Notwithstanding the weak economy, our retransmission revenues provide us with strong growth in 2016 and we anticipate continued robust growth in 2017 and beyond. Regarding the Puerto Ricon economy, the new Administrational Governor Rosselló has begun to enact legislation to reduce spending and create efficiencies. We are encouraged by the Governors early efforts to enact legislation to improve Puerto Rico’s competitive position including much needed labor reform. The PROMESA Board is working with the administration to deliver a five year fiscal trend. We believe that reductions in government spending will be difficult but are necessary to restore the fiscal health of Puerto Rico. We are optimistic that these measures will result in restoration of economic growth overtime. Given these circumstances however, we are forecasting a decline in the Puerto Rico TV ad market of mid single digits for 2017 excluding political. Nevertheless WAPA’s dominant market position and continued strong retransmission revenue growth should allow us to once again outperform the market. Our Cable Networks continued to perform well with solid revenue growth in the fourth quarter. In Q4, Cinelatino continued to be the Number 2 rated Spanish language cable network in both households and adults 18 to 49. And 2017 off to a strong start with January primetime ratings among adults 18 to 49 hitting a three year high. Although we are generating meaningful advertising revenue for Cinelatino our growth has been slower than planned. This is a result of several factors including overall softness in the U.S. TV ad market, the absorption of most independent Hispanic ad agencies by large general market agencies are less familiar with Hispanic Cable Networks and Cinelatino’s lack of a long-term Nielsen ratings track record. These challenges have slowed our growth, but we are confident that our value propositions remain bullish that we will generate strong growth over the coming years. It's also important to note that Cinelatino and its library of over 600 titles gives us tremendous flexibility to offer content on various platforms creating new revenue streams. Our OTT venture with Lionsgate is driven by our control of digital rights to the vast majority of our titles, which we believe will facilitate creation of an asset with substantial value. WAPA America continues to dominate viewing among Puerto Ricans living in the U.S. with 29 of the 30 highest-rated Spanish language cable shows in Q4 among U.S. Puerto Ricans. However, WAPA America’s appeal is not limited to Puerto Rican. WAPA America has the highest coverage ratings among all Spanish language cable networks from 6 to 10 AM at 5 to 7 PM Monday through Friday. Pasiones also continues to perform well with its mix of the most popular dramas from throughout the world. The introduction of Turkish Novelas and Pasiones has been a resounding success. Our most recent Turkish Novelas, Sila is our highest rating of novelas ever and helped drive Pasiones the highest rated quarter in history according to comScore. Centroamerica TV continues to be the destination for the six million Centroamericans living in the U.S. to find the best news, sports and entertainment in the region. We will be introducing a new on-air look shortly which we believe will provide the network for the fresh, current and relevant look and feel. Finally, Television Dominicana is now rated my comScore and has seen some impressive results. For example, TV Dominicana is a top four rated Spanish language cable network from 12 to 4 PM Monday to Friday. In conclusion, our networks continue to perform very well and we demonstrated solid revenue growth now withstanding the headwinds we are facing in Puerto Rico. We are confident that we will continue our growth as we move into 2017. We are extremely excited by the opportunities offered by a New Columbia and OTT Ventures. We love the growth opportunities which Columbia present and are optimistic about closing other attractive transactions in 2017. We believe that no one is better positioned to capture opportunity in U.S. Hispanic and Latin American media than Hemisphere. I’ll now turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan, and good morning everyone. Net revenues were $39.4 million for the quarter, an increase of $3.2 million or 9% as compared to $36.2 million for the same period in 2015. For the year, net revenues were $138.5 million, an increase of $8.7 million or 7% as compared to a $129.8 million for the same period in 2015. The increases for both for three and 12 month periods were due to growth in subscriber and retransmission fees and growth in advertising revenue. As anticipated political advertising in Q4 increased over Q3 as we neared Election Day. The political revenue for the full year 2016 was significantly lower than both our expectations and the 2012 election year. Excluding political advertising revenue, net revenues in the three and 12 month periods increased by 4% and 5% respectively. Subscriber and retransmission fees represented approximately 53% of our revenues in 2016, up from 51% in the same period in 2015 due to growth in subscribers and rate increases, as well as significant fee increases in our retransmission deals. We view these developments as very positive as these revenue streams are contractual and not subject to the cyclical nature of the ad market. Operating expenses were $26.8 million in the fourth quarter, an increase of 7% over the prior year period. Operating expenses were $98.5 million for the full year, an increase of 4% over the prior year. These increases were driven primarily by higher personnel expenses and higher legal and advisory fees incurred in connection with strategic activities. Additionally, operating expenses in the fourth quarter increase due to higher stock-based compensation in connection with grants made during the quarter offset by lower programming costs related to the timing of certain programming including Miss Universe and Miss Puerto Rico which were held in 2015, but not in 2016. Adjusted EBITDA was $20.4 million in the fourth quarter, an increase of 21% as compared to adjusted EBITDA of $16.9 million for the same period in 2015. Adjusted EBITDA was $64.3 million for the full year, an increase of 11% as compared to adjusted EBITDA of $58.1 million in the prior year. We are pleased that we delivered on our full-year adjusted EBITDA guidance despite the historically weak political spent in Puerto Rico. Turning to the balance sheet, we had $213.3 million in debt and $163.1 million of cash as of December 31, 2016. Our leverage ratio was 3.3 times and net leverage ratio was 0.8 times. Last month, we announced the successful amendments and expansion of our existing term loan. We are very pleased with the terms of the amendment. 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, and eliminating the previous LIBOR floor of 1%. We also extended the maturity date of the term loan from July, 2020 to February, 2024. With regard to guidance for full year 2017 we are guiding to a mid to high single digit increase in adjusted EBITDA which implies an acceleration of our core business. While we still have headwinds that are dampening our organic growth including weakness in the television advertising market in Puerto Rico and slower than anticipated ramp-up in advertising sales at Cinelatino, our business is performing very well and we expect to see continued growth in subscriber and retransmission fees and advertising revenue. Comparisons to 2016 exclude the impact of political revenue and the forecast does not include our attributable interest in the operating results of both the OTT joint venture with Lionsgate and the Canal Uno joint venture. With that, let’s open the call to your questions.

[Operator:]

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

[Steven Cahall:]

Thank you. Good morning. Few from me. Maybe first with Puerto Rico advertising and political in particular coming in weaker than you expected in 2016, but still achieving your guidance. Can you talk about what may be some of the levers that you were able to pull in order to achieve the guidance? And as we then sort of roll forward to thinking about 2017 where you called out some of the revenue weaknesses, what is it that you are seeing in the budget for the year? Is it retrans? Is it subscriber growth that gives you confidence because I think you have an acceleration in adjusted EBITDA on a like-for-like basis?

[Alan Sokol:]

Hi, Steve, it’s Alan. Good morning. Regarding 2016, I think you hit the nail on the head. I think that, both the core advertising market in Puerto Rico and Uno in particular political were down -- did not perform as well as we had originally expected or weaker than we originally expected. And that’s also part of the reason for our conservative guidance going forward for this year, given the lack of visibility and the weakness that we’ve seen in the market over the past couple years. That said, look our businesses are all humming – our businesses are humming on all cylinders. And if we had no any – they’ve got about tailwind -- if we just had wins in Puerto Rico we would be crushing it. But we are performing extremely well under retransmission fee side, on subscriber fee side. In the U.S. and Latin America we’ve seen some really strong growth and that has driven our – our outperformance in – relative to the poor advertising environment in Puerto Rico. And we see the same trends happening in 2017. We’ve had some nice growth and some nice launches and pickups in subscribers in the U.S. and Latin America which represent meaningful revenue position with that full-year revenue for that this year. And we also expect advertising in the U.S. continue to perform well and [novel] Cinelatino has not grown the way we originally planned. We still expect to see nice pickup this year.

[Steven Cahall:]

And just relatedly, in terms of overall affiliate revenue, maybe first do you expect retrans revenue to accelerate year on year in terms of either the incremental dollars or the growth rate in 2017 versus 2016. And then relatedly on the charter deal, can you let us know how many subs you think that you have added by getting on the basic tier of charter, I know that’s been a long time coming with Time Warner Cable and did we see that in the numbers in Q4 or is that really going to be more of 2017 impact on reported numbers?

[Alan Sokol:]

Regarding Re-trans, – we’ve never specifically addressed rates of growth in that, but I will say just directionally the growth will be very strong in 2017 and we anticipate that’s continuing to going forward within 2018 will also have significant retransmission fee growth. And if you recall our deals are all short term and all staggered. So we typically are dealing with at least one renewal a year and that and every time we renew we have a – we’ve been able to generate a significant step function growth in our fees. I will say generally overall speaking, overall – given the fact that we started so much later than U.S. broadcasters did in generating retransmission revenue, we have quickly caught up to where we believe U.S. broadcasters are. I think we are if we are not there, we are just below their levels and I believe in our next round of retransmission agreements we will meet and surpass where U.S. broadcasters are, so to the extent that, that gives you some helpful guidance. Regarding Charter/Time Warner, those are very recent launches and are really not reflected in fourth quarter at all.

[Craig Fischer:]

The other launches of Mega Cable and Cox that we disclosed....

[Alan Sokol:]

Cox was a full quarter, Megacable was a partial quarter.

[Steven Cahall:]

Okay. And then just a last one on the JVs just so we understand maybe how they are going to impact numbers at least for the year, will you be recognizing these proportionally as the equity items in the investees so essentially below the adjusted EBITDA or are you going to be consolidating these and then read the back the matter of guidance.

[Alan Sokol:]

The venture now is not consolidated not financial statements; their structure may change overtime as this structure evolves. But for now equity might just pick up and if that changes, we’ll update you.

[Steven Cahall:]

Great. Thank you.

[Operator:]

[Operator Instructions]

[Alan Sokol:]

Well there is nothing further. Thank you everybody for joining the call and I wish everybody a very nice weekend and we’ll talk soon. Thank you.

[Operator:]

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