WildBrain Ltd.
Q4 2023 Earnings Call Transcript

Published: 13 Sep 2023

[Operator:]

Hello, and welcome to WildBrain’s Fiscal 2023 Q4 and Full-Year Earnings Call. Today’s conference is being recorded. [Operator Instructions] After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] I now like to turn the call over to Kathleen Persaud, Vice President, Investor Relations at WildBrain. You may begin your conference.

[Kathleen Persaud:]

Thank you, operator and thank you everyone for joining us today for WildBrain’s fourth quarter 2023 earnings call. Joining me today are Josh Scherba, our President and CEO; and Aaron Ames, our CFO. Also with us and available during the question-and-answer session is Danielle Neath, our EVP of Finance and Chief Accounting Officer. Before we begin, please note that matters discussed on this call include forward-looking statements under applicable securities laws with respect to WildBrain, including, but not limited to, statements regarding investments and acquisitions by the company; commercial arrangements of the company, the business strategies and operational activities of the company, the markets and industries in which the company operates, cost and expense management, the company’s leverage and financial debt and leverage reduction, refinancing of the company’s indebtedness, the value of the company's assets, and the future growth, objectives, targets, and financial and operating performance of the company and its businesses. Such statements are based on factors and assumptions that management believes are reasonable at the time they were made and information currently available. Forward-looking statements are subject to a number of risks and uncertainties. Actual results or events in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors set out in the company's most recent MD&A and Annual Information Form, which are available on the Investor Relations section of our website at wildbrain.com. Please note that all currency numbers are in Canadian dollars unless otherwise stated. After our remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Josh Scherba.

[Josh Scherba:]

Thanks, Kathleen, and thanks to everyone for joining us today. I just wrapped up my first 100 days on the job a few weeks ago, and in that time across the company, we have focused our strategic vision, executed cost reductions and rightsizing to ensure we have the right resources in the right places to drive our refined strategy, built out our three-year long-range plan, enhanced and rebuilt our budgeting process, and initiated a process to improve our balance sheet. Before I go into detail on our results and outlook, let me start by thanking all of the incredible employees at WildBrain, who have been working so diligently during this period to optimize and streamline our business. In our first all company meeting as CEO, I shared a quote I love from management guru Peter Drucker. Culture needs strategy for breakfast. A company's vision articulates its purpose, but it's our values and our culture that drive us. At WildBrain, we're investing heavily to strengthen our culture. It's our culture that defines our shared commitment to solve problems, share information, serve customers, deliver experiences, and drive growth. We have incredible assets, but it's because of our culture that we will win. When I took over on May 9th, I was in a lucky position of inheriting a healthy organization with a strong pipeline for growth. This allowed me to devote my energy over the past few months to working with the team to refine our vision and define who we are and where we want to go. Over the last three years, we have built a platform that consistently delivers creative excellence. This is the core engine of what we do. Without sacrificing a stitch of that creative excellence, I wanted to enhance our focus, urgency, and accountability across the business to better direct our internal investment, maximize our ROI, make sure we're going after the largest profit opportunities, and really clarify both internally and externally, who we are and what we can be. While our results have shown growth, results also haven't lived up to our potential. We can do better, particularly on the cost side. We needed more focus to remove excess cost, and focus is a key change I'll be bringing to our company. Meaning focus on our core competencies of content creation, audience engagement, and global licensing. Both at the operational level, as well as in our approach to capital allocation. So I'd like to walk you through where this work has taken us, starting on the operating side with our strategic vision. Why -- what we've built is so valuable in today's landscape and how we're positioned to take advantage of the significant opportunities ahead. At WildBrain, our vision is to inspire imaginations through the wonder of storytelling. As we've discussed over the past few years, we've built three strategic pillars across our business that we believe uniquely position us in today's market and have set us up for years of strong growth. These pillars are

[Aaron Ames:]

Thanks Josh. Fiscal 2023 consolidated revenue was $533 million, up 5% year-over-year. Revenue for the year was driven by strength in content production and distribution with 13% growth. Consumer products revenue grew 4% for the full fiscal year with a continuation of sequential improvements after the inventory overstocking challenges we saw in the second quarter. Spark revenue was down 15% for the full fiscal year, but with a sequential improvement in the fourth quarter. Television revenue was $40 million, down 4% year-over-year. Fourth quarter consolidated revenue of $125 million reflected an increase of 11% year-over-year. Content production and distribution revenue was $53 million, was up 6% in the quarter. Consumer products revenue of $52 million was up 24% versus the prior year. Spark revenue was down 9% in the quarter. I reiterate the real value of Spark is in the engagement it brings to our own and partner brands and the insights it provides to all aspects of our business. Lastly, television revenue was $9 million in the quarter. Gross margins in fiscal 2023 were up over 160 basis points and dollars grew 9% as we benefited from the consolidation of the Peanuts representation rights. Gross margin in the fourth quarter was up over 750 basis points and dollars were up 35% year-over-year. We recorded a net loss of $46 million in fiscal 2023, driven by a non-cash impairment charge of $33 million related to our television business. SG&A expenses were $31 million in the fourth quarter and up 7% for the full fiscal year. The increase in SG&A over the past year relates primarily to additional headcount in APAC, which is already yielding benefits like the far-reaching direct-to-retailer partnership, we just inked with international lifestyle retailer, MINISO. We will continue to moderate expenses and harvest the investments we've made. Fiscal year ‘23 adjusted EBITDA of $98 million was up 10% year-over-year. Fourth quarter adjusted EBITDA was $19 million. Free cash flow for the fiscal year was strong at $30 million. Free cash flow in the fourth quarter was positive $17 million, compared with negative free cash flow of $5 million in the prior year quarter. Fourth quarter free cash flow reflected the benefit of improved selections and working capital timing. Our leverage at the end of the quarter was 4.16 times. Leverage may fluctuate quarter-over-quarter, but as Josh mentioned, we are focused on deleveraging our balance sheet. We're exploring several options to refinance or repay down the 2024 convertible debentures and are very confident we will make meaningful strides in deleveraging in the near-term. With strong revenue growth focusing on our most profitable brands, consistent free cash flow generation, improved expense management, and an improved balance sheet, we are positioned for sustainable long-term growth. I'll turn it back to Josh.

[Josh Scherba:]

Thank you, Aaron. Sharpening our focus on key brands and partnerships, we will execute across the full spectrum of our capabilities. As we look at our financial model over the next three plus years, there are several areas of growth. First, our owned IP remains priorities as the economics are advantageous. The premium content known IP will continue driving family co-viewing and with the addition of House of Cool, we have the ability to expand into features with our owned IP, opening another profit stream. AVOD and fast channels are a growing industry opportunity and we are well positioned to capitalize on that growth with our full range of content and expansion to new platforms. And CPLG remains a hugely important driver of our growth. As CPLG grows faster than the consolidated business, we will see that flow through in the form of expanding EBITDA margins. Additionally, with new geographies and new capabilities, like the recently announced LBE expansion, that dovetails very nicely with our IP, so we see several years of growth ahead. We're in process to improve our balance sheet and are taking the necessary steps to ensure we continue to grow, while maintaining financial discipline. The actions we're taking will strengthen our business and build on our foundation for sustainable and profitable growth. With that, let's open the call to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Thank you for waiting. Your first question comes from Drew McReynolds with RBC. Please go ahead.

[Drew McReynolds:]

Yes, thanks, and good morning. Josh, thanks for all the added, kind of, granularity on all the moving parts and the update. So a couple just clarifications for me to start here. The $10 million to $15 million in strike related in packs expected for fiscal 2024. That was revenue, I'm assuming. And just in terms of kind of the last commentary on strike impacts, it wasn't expected to be much even in a kind of prolonged strike. So just wondering, you know, how exactly this is impacting your business? And when you think about fiscal 2024 guidance being conservative, you know, what's the context around that and is it related to strike resolution or perhaps something else and just a couple of follow-ups after that?

[Josh Scherba:]

Sure. Okay, thanks, Drew. So first of all, to clarify, that $10 million to $15 million was in fact EBITDA not revenue. So I think when we take into context that level of really timing shift from this coming fiscal to the next, I think it does ultimately speak to what a diverse set of assets we've built and how we are going to be seeing 15% to 20% growth in everything outside of content and TV, which is ultimately getting us to a place of the slight growth overall for EBITDA. As it relates directly to the strike, I think there's a couple of issues. First of all, we've had a few projects that have been specifically impacted. But it's also created this knock-on effect in the industry of really kind of this cooling where there's been a slowdown in greenlights. And we feel really good about our slate. We feel really good about how we're positioned with the streamers. We're coming off the success of Sonic Prime in a great place with Netflix. We continue to be in a great place with Apple. So we feel our slate is there, but really in this climate, greenlights have slowed down. So when we've been forecasting out our slate, we've gone out on a title-by-title basis, and we've really pushed out the beginning of these projects to earlier than we had originally anticipated. So that's really the context for where we're at.

[Drew McReynolds:]

Okay, okay, super. And just a follow-up here on the consumer products side, you had a strong Q4 and, you know, clearly the outlook remains positive. Can you just give us an update on, kind of, the inventory impact or headwind that may still persist? Are you seeing any kind of broader macro impacts on this segment?

[Josh Scherba:]

So we’re feeling really great about our consumer products business. You can see the growth in the quarter, I think that helps alleviate any inventory concerns that we would have had. And as we move forward, really what we've built out is this, is global infrastructure that we're starting to see the benefits of. You know, we've rolled in Asia Pacific, we also have expanded into LBE capabilities. And all of this is helping our own IP, you know, we announced the MINISO deal, which was brokered by our China team and that is a benefit to Peanuts, but also benefit to Strawberry Shortcake and Teletubbies. We've also recently announced our first location-based entertainment deals and really these tools beyond our own IP are really allowing us to be more attractive to meaningful IP owners. And it really does create this cumulative virtual cycle that we've got with all of our capabilities. So yes, we're feeling really good about the growth ahead for our consumer product business.

[Drew McReynolds:]

Okay, super. One last one, quick one for me. On free cash flow outlook for fiscal 2024, just wondering what you're expecting there and obviously, you know, for modeling purposes, mainly just so we can kind of square off all the movie parts? Thank you.

[Josh Scherba:]

I'll hand over to Aaron for that one.

[Aaron Ames:]

Yes, thanks Josh. So on the free cashflow, as Josh mentioned, we're seeing growth in our consumer products. So that actually improves our cash flow profile, because the working capital timing is better on consumer products for us, especially owned consumer products. And so that's a benefit. There is a bit of a offset related to interest expense, which is higher this year, but we see free cash flow about flat with this year, given both those things.

[Drew McReynolds:]

Okay, that's great, Aaron. Thank you.

[Operator:]

Your next question comes from Adam Shine with National Bank Financial. Please go ahead.

[Adam Shine:]

Thanks a lot. Good morning. So Josh, just going back to the Hollywood strikes, more of a postponement dynamic than necessarily, you know, more aggressive cancellations. Maybe we'll just start there?

[Josh Scherba:]

Yes, I think that's a good way to categorize it. I mean, and again, it's just kind of this general cooling effect where I think it's a moment for the streamers to kind of take a breath, probably collect some cash before they get back into greenlighting anything, whether it's directly impacted by the strike or not. And I also don't want to say that greenlights have entirely stopped. Like we're in active conversation, slates building are fine, it's just taking longer than it typically would. So we've had to work that into our outlook for this year, because it's just a reality of what we're seeing.

[Adam Shine:]

Okay and just when we think about some of the non-core assets in the library, is there anything that particularly jumps out as key IP that perhaps you've attempted to shop in the past and weren't necessarily successful in doing so or it is more of a doer fresher approach to mining the library and looking for some potential monetization opportunities?

[Josh Scherba:]

Yes, so what I would say is this started with the refinement of our strategy. So you know we've been leaning into our three core capabilities of you know content creation, audience engagement, global licensing, and acknowledging that we can really leverage those on a handful of our own IP. And we've noted Peanuts, Teletubbies, and Strawberries as the three priority IP. But outside of that, we have a vast amount of known IP, and the reality is it's a scarce resource. And these past several years have done nothing, but improve the value of that as the audience is fragment. Having something that is known and people have heard of before is a huge advantage. And so when I look at like what we're actually taking advantage of, it's a small portion of our IP. And so if we really can find a way to meet three key objectives, so it's a simplification of our business, its ability to deleverage our balance sheet, and third, drive shareholder value, that seems like a tremendous opportunity in front of us. And I feel really confident from the early conversations we're having around this process that we're going to be able to do all three. Now we left a relatively wide range there in terms of what we could raise between $100 million to $300 million and that's really because we don't actually have to sell any of these assets and we need to make sure that all three of these objectives are being met. But we feel confident that we've got a path in front of us that is going to be a good outcome for WildBrain.

[Adam Shine:]

I'll push you a little bit just on the context of, you know, when we think about the monetization of that $100 million to $300 million, is there, you know, revenue/EBITDA associated with that, that you know, you can help us with a little bit? Or are these just, you know, IPs that have greater potential -- potentially in others hands that are not being successfully exploited or at least not optimally exploited by you guys?

[Josh Scherba:]

So again, I bring it back to those three goals that we're looking to accomplish. And that -- when we look across our portfolio, so again, it's back to simplification, it's back to deleveraging and driving shareholder value. Some may be delivering current revenue and EBITDA, others might not be. But if we're accomplishing those three objectives, that's what we're focused on.

[Adam Shine:]

Okay, and a last quick one for you or for Eric, just related to leverage, clearly you're trying to get sub-4 this year and then to the extent that there are some non-core asset sales, you could perhaps go further into this year or next year. But is there a long-term leverage objective? Is it, let's say, ultimately 2.5 times or, you know, can you help us a little bit there?

[Josh Scherba:]

I'll hand over to Aaron for this one.

[Aaron Ames:]

Yes, so we're seeing, you know, we want to be, we want to start in the nearer term to get below floor. And then of course to continue to gradually improve our EBITDA and with the asset sales, non-core asset sales continue to improve our leverage from there.

[Adam Shine:]

Okay. All right. I will push you further, but obviously, you know, many of the companies that we cover, you know, within your sphere, a little load specifically Canadian names, you know, that bogey tends to be Sub-3 and, you know, somewhere closer to 2.5 times. So blink, blink, blink, is that likely where you're heading? Or attempting to? Are you perfectly happy with something in this 3, 4 range?

[Aaron Ames:]

Okay look I think in the near-term we're going to focus on being below 4 and then continue to approve it from there for sure.

[Adam Shine:]

Okay. All right. Thanks for that. Appreciate it.

[Operator:]

Your next question comes from Dan Kurnos with the Benchmark Company. Please go ahead. Your line is open.

[Dan Kurnos:]

Yes, hey, good morning. Sorry, can you guys hear me?

[Josh Scherba:]

Yes, we can hear you.

[Dan Kurnos:]

Hey, sorry about that. Let's do the mute or something. Anyway, Josh, look, nothing to keep going on with the strike up. I just want to understand kind of two concepts here based on the commentary that you've made this morning. On the one hand, yes, obviously, we know all of the streamers right now are tired of earning billions of dollars, maybe they're not tired of it, but that is clearly tired of it and are having to pull back a little bit on their content, but on the flip side, because of the strikes, there's a huge dearth of content available in the marketplace? And so I just want to get a sense of like, do you feel like you're being too precious with your content? Is it all wrapped up in contract or subsequently, you've made it very clear that you're streamlining the company and focusing on like kind of core IP. Does that mean that is also giving you an opportunity to reevaluate where you're putting your dollars and that's the starting revenue base is maybe a little bit lower as you focus on a more profitable business units going forward? Or am I reading too much into it there?

[Josh Scherba:]

So I would say, first of all, Dan, we're always looking to maximize the value of our library. One thing that has historically happened when you go through labor disruption in Hollywood is that there does seem to be an opportunity for library content to, kind of, refresh services. I would say to-date, we haven't really seen that as a trend. And I think it kind of speaks to the overall cooling of the climate. But that could change. It's not built into our numbers, but certainly could change. If you get resolution of the strikes, sentiment starts to improve, there's going to be a lag between when new content can hit the services, it’s from that resolution by the time it's developed and produced. So does there end up being more opportunity for library in that moment? It's entirely possible. But we don't have a crystal ball, so we'll just have to let that play out.

[Dan Kurnos:]

And then on the cost side, it sounds like you took some pretty -- we took some pretty aggressive moves this summer. Obviously, a lot of it makes sense just given the environment that you just kind of laid out. Is there any way to, sort of, get a sense of how we should be thinking in general about OpEx from here?

[Josh Scherba:]

Well, I think, look, we've certainly seen a moderation in our SG&A. And over time, even though we will continue to invest in our growth areas of the business, over time, you're going to continue to see that moderate and come down as we really sharpen our pencils and make sure that we're spending on the right areas of the business. And again, that also comes back to a refined strategy. So we know where we're going. And so we're spending according to where we're going. Not grabs trying as many things as we have in the past.

[Dan Kurnos:]

Got it. That's helpful. And Josh, just you mentioned LBE. I know that's something I think that you guys started a year or two ago. I just -- APAC in general, sounds like you're expanding there. And I'd love to kind of hear what you think the TAM is? And how much that can be a contributor, both to the top and the bottom line? I know it's small, but just in terms of expansion going after that kind of segment of opportunity.

[Josh Scherba:]

Yes. So first of all, I would say that we've been having -- it's been about a year since we've hired some experts in the LBE field to work with us, and we've been having a really good reaction out in the market to our own IP, whether it be Peanut, Strawberry or Teletubbies. But we're also seeing an opportunity for third-party IP owners that this is a skill set that it doesn't make sense for most IP owners to have in-house given our nature, it certainly makes sense for us as a value add. In terms of economics, these deals do take time and you're just now starting to see them come through. But the accounting on them as well, these are long-term projects, where the revenue is streamlined across a significant term. So you don't get deals quick hits. But as we layer these deals one on top each other, we're going to have repeatable long-term revenue associated, which is -- which again is another stabilizing force to our business and something that we can -- when we look to fiscal ‘25 and the growth outlook we have, that gives us tremendous confidence. We're really building out these repeatable revenue streams. And we're in a moment where we've got a timing issue with content. But when we talk about our outlook for ‘25, I get really optimistic because we're confident condo it's going to come back and then it's going to layer on to these repeatable opportunities. And that, of course, dovetails your question about Asia Pacific. I mean, we are starting to see some contribution from that region. We highlighted the MINISO global retail deal. And it takes a little bit of time to make sure that we've got the right licensees onboard in those markets. And because we're looking for not short-term MGs, but long-term growth in partnerships and royalties. And we're feeling really good directionally about that, where that's going. And that's driven primarily by Peanuts and our own brands, but again, a tremendous opportunity for us on some of these global partnerships where we're having deeper relationships.

[Dan Kurnos:]

Got it. That's really helpful. Last housekeeping, and I'll step aside. Aaron, given the dynamics you talked about on free cash. And given the delay in some of the projects, there not be some improvements in working cap this year that might not be a tailwind for you on free cash relative to last year?

[Aaron Ames:]

I'm sorry, it's a little bit hard to hear you. But can you just repeat that question again?

[Dan Kurnos:]

Yes, sorry. Hopefully, you could hear. I was just saying given the delay in some of the projects on the TV side and given the positive development or the contribution from CPLG and CP is that ramp for free cash. Do you not have some positive other working cap improvements? I know there's some interest noise in there, but I would think free cash might actually from a timing perspective benefit a little bit.

[Aaron Ames:]

Yes. And that's what I was saying. I agree. That's what I was saying before, we are getting some benefits because of the cash flow profile of consumer products is better, and we're seeing a shift to more of those revenues, but it's a little bit offset by higher interest costs. So we're about flat year-over-year because of that.

[Dan Kurnos:]

Okay. Alright, thanks for speaking with me. Appreciate it guys.

[Operator:]

Your next question comes from David McFadgen with Cormark Securities. Please go ahead.

[David McFadgen:]

Hi, yes. A couple of questions. So does the strength really just impact your live action business? Or is there also an impact on the animation business? So I'll just start with that one.

[Josh Scherba:]

So it has impacted a few projects specifically. Yes, some live action, some animation because there are WGA writers involved in some of our animated projects. So yes, it has had an impact on both. But again, though, I would reiterate, David, that the larger impact in terms of delays is just around, kind of, the cooling environment around greenlights. It's just taking longer to move projects forward. They continue to be in a good place with all of these streamers, and we feel positive about our overall discussions. It's just really a shifting of our slate where more of it's going to hit '25 than '24.

[David McFadgen:]

Okay. And then you mentioned earlier that you've targeted some cost reductions. Do you have a target for quarterly SG&A that we could use in our model?

[Josh Scherba:]

I'll hand over to Aaron for that.

[Aaron Ames:]

Yes. Hi, David, so what we're looking at is SG&A that stays around flat or dropping over time. And because we are having also the impact of APAC, which increased our SG&A. However, the cost cutting is going to keep it above flat and start to let it drop and level up and then drop.

[David McFadgen:]

Okay. And then I don't know if you can share this, but have you thought about how much the leverage ratio could be reduced if you execute some of these asset sales?

[Aaron Ames:]

So we gave a target for what our target is on those asset sales, the $100 million to $300 million. So that would be a benefit of leverage. And again, as we discussed before, we expect that leverage to target the leverage to be below 4 and continuing to drop from there.

[David McFadgen:]

Okay. Alright, thanks.

[Operator:]

Your next question comes from Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

[Aravinda Galappatthige:]

Good morning. Thanks for taking my question. Just to go back to the non-core asset sales. Josh, that you mentioned, can you give us a sense of how sort of advanced these conversations are? And how you see sort of the likelihood of achieving sort of your target of $100 million to $300 million? Because to the extent that some of the potential buyers themselves could be other content producers, they could be affected by a lot of the same factors that you're talking about as well and their ability to pay up for assets may be limited? So I just wanted to get a sense of your level of confidence in achieving that at this point because you said 12 months? And then secondly, connected to that, are you just thinking brands at this point? Could it involve a division? I mean obviously, I'm thinking television. Would that -- could that be part of the mix as well?

[Josh Scherba:]

Thanks, Aravinda. So yes, we're certainly focused on IP assets. As we've refined our strategy, it's become clear that there is meaningful IP in our library that could unlock some real value for us. Your question about the kind of the market conditions and how that might impact the ability to sell. I mean we are into a process, it's early stages, but the reaction -- the discussions have been very positive. And I think it really speaks to the resilience of IP. We've continued to see as fragmentation has taken hold in the content world that known IP matters more than ever. And these are scarce resources. There just are not many of them available. And so when -- we're confident that multiples are going to have continued to grow in IP, and we're confident that we're going to be able to realize that. Now timing wise, yes, we put 12 months out there. That's not in our control, along these deals take, but that's every indication we've had so far that, that seems like a reasonable time frame. And look, we really think that we've got this opportunity to unlock value that we don't get credit for right now in our IP library. It is a really unique, scarce collection of assets that we have and presents a real opportunity for us to delever and set us up extremely well for the future.

[Aravinda Galappatthige:]

Thanks, Josh. And just a quick one for Aaron. I know you talked about sort of high interest cost. And I know we saw that in fiscal '23 as well. Can you give us a sense of the magnitude? I know that the interest rate swap is still in place for pretty much the whole year. But obviously, there's a component that it doesn't cover. Any kind of color in terms of how much the interest rate expense could rise by?

[Aaron Ames:]

So first of all, for this year, the hedge is in place through the end of June. And then we'll have the impact of some of the refinancing alternatives that we are down the path on. And so going into '25 and as well as the non-core asset sales that that Josh talked about. So overall, I think we're in a good position for this year and then heading into next year.

[Aravinda Galappatthige:]

Thank you.

[Operator:]

[Operator Instructions] There are no further questions at this time. This concludes today's conference. Thank you all for participating. You may now disconnect.