Hemisphere Media Group (HMTV) Q4 2017 Earnings Conference Call Transcript

Hemisphere Media Group (HMTV)
Q4 2017 Earnings Conference Call
March 5, 2018 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Incorporated Fourth-Quarter and Full-Year 2017 Financial Results Conference Call. My name is Crystal and I'll be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference.

A replay of the call will be available beginning at approximately 1 p.m. Eastern Time, March 5, 2018, by dialing (855) 859-2056 or from outside the United States by dialing (404) 537-3406. The conference ID for the replay is 2689749. To ask a question at any time, press the * key and the number 1 on your touchtone telephone.

To withdraw your question, press the # key. I would now like to turn the call over to Ms. Erica Bartsch.

Erica Bartsch -- Sloane and Company -- Senior Vice President

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 the 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 applicable to our company. Forward-looking statements included herein are made as of the date hereof and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. During today's call, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP information is included in our earnings press release which was issued earlier today.

Management believes that this non-GAAP information is important to investors' understanding of our business.I will now turn the call over to Alan.

Alan J. Sokol -- President, Chief Executive Officer, and Director

Thank you, Erica, and good morning, everyone. The fourth quarter was a challenging one for our company, our employees and viewers in Puerto Rico as we managed through a difficult and protracted recovery process following the devastation caused by two hurricanes, including the most destructive storm in Puerto Rico's modern history, Hurricane Maria. Restoration of vital services has been a difficult and arduous process. By the end of the fourth quarter, power had only been restored to approximately 50% of Puerto Rican homes.

The encouraging news is that the pace of recovery has accelerated in recent weeks and as of today, power has been restored to 89% of Puerto Rican homes. In addition, virtually the entire population now has access to potable water and telecommunications services.Everyday life in Puerto Rico has stabilized and should continue to improve over the next few months. The extent of Puerto Rico's economic recovery will ultimately be highly dependent on the amount and timing of insurance payments and the federal financial aid package. The consensus feels that Puerto Rico will experience growth driven by the inflow of these proceeds.

The Puerto Rico government's updated fiscal plan released in February now projects a $2.8 billion surplus through fiscal 2023, after accounting for bankruptcy cost and other expenses. This marks a significant improvement from January's forecast, which called for a large deficit over the next five years. In the longer term, with the expected privatization of the Puerto Rico Power Authority and the enactment of much-needed economic and regulatory reform, Puerto Rico has a unique opportunity to hit the reset button and establish a much more stable and sustainable foundation for long-term growth. In the face of all of these issues, our team has continued to drive our business forward.

Our focus at WAPA has been to keep Puerto Ricans apprised in real time of all vital news and information and to ensure that the voices of our community are heard. Our news organization has worked relentlessly to be an indispensable resource that people can rely on during these difficult times. We are extremely proud of the extraordinary work our entire team has performed, often under high-risk conditions.As expected, business during the fourth quarter was challenging. Reflective of the disruption caused by the loss of power and other vital services, the TV ad market was down 70% in Q4, although there was a sequential monthly improvement over the course of the fourth quarter, with December down approximately 50% versus 2016.

We have seen continued improvement in the first couple of months of 2018 as power has been restored to more homes. Nonetheless, because advertising is not bought in real time, there will be some short-term lag between power restoration and ad spend. Also, the unavailability of Nielsen ratings has had a negative impact on spending but we do expect Nielsen to be back online during the second quarter. Given the current status of power and other services, we believe that the ad market will remain lower through the second quarter but we are optimistic that declines will diminish each month and that business will normalize over the second half of the year.Similarly, retransmission revenue in Q4 was significantly affected by the loss of power.

We have begun to see a strong rebound in subscriber numbers as power is widely restored and are optimistic that they will return to normalized levels over the coming months. As we previously disclosed, we suffered a loss of our transmission tower serving the San Juan area. Nonetheless, we've remained on the air without interruption and we expect to soon close on a long-term solution for the transmission of WAPA's signal.While we have shared a lot of information about the challenges we are facing, we also have some very positive developments. First, notwithstanding the challenging business environment, we have successfully executed a new multiyear retransmission renewal at the largest fee increases in our history.

This agreement is a clear validation of WAPA's leadership position and overall indispensability to the Puerto Rican market. Second, on the programming and content front, we recently acquired exclusive franchise rights to Miss Universe Puerto Rico. With Puerto Rico having produced five Miss Universes, the pageant has a rich and proud history and is the most important entertainment event in Puerto Rico. We are excited to have the opportunity to expand this event with content that will be created across all of our platforms throughout the year.

By fully integrating the pageant and TV rights, we will make this event a must-see, year-round television, digital, and live events brand that we expect will generate multiple revenue streams for us.Turning now to our U.S. cable channels, we continue to defy overall subscriber trends with our organic growth. Our U.S. subscriber growth in the fourth quarter was masked by the temporary subscriber losses in Puerto Rico as a result of the hurricane.

Nonetheless, excluding Puerto Rico, we continued to benefit from organic growth, reflecting the continued expansion of opportunity in U.S. Hispanic pay TV. As we noted in our last call, WAPA America was the only network in the U.S. to provide continuous news coverage from Puerto Rico of the hurricanes and their aftermath.

In response to customer demand following the storm, several major distributors added WAPA America to their basic packages, substantially expanding WAPA America's overall carriage and affirming the value of WAPA America to distributors and viewers. Although WAPA America is not receiving additional subscriber fees for the expanded distribution, the wider carriage does provide WAPA America with exposure and a larger audience base. WAPA America successfully began to monetize that larger audience through increased ad revenue. In fact, Q4 was the highest ad-revenue quarter in WAPA America's history and gives us tremendous momentum heading into 2018.Cinelatino is also coming off a strong quarter with record-setting ad revenue.

These results affirm Cinelatino's unique value proposition to its audience and advertisers. During Q4, we began to recognize the results of our upfront successes from 2017 with buys from a number of new national advertisers including Allstate, Fruit of the Loom, GoDaddy, Honda, Johnson & Johnson, and Sprint. We expect these and other major advertisers to partner with Cinelatino in 2018 and drive significant revenue growth. Pasiones continues to deliver impressive results in both the U.S.

and Latin America. In the U.S., Pasiones continues to generate robust ratings with its strategy of programming the best-serialized dramas from throughout the world. Our Turkish novellas have performed extremely well and we recently launched the first Indian novella ever aired on Spanish television with extremely promising early results. In Latin America, Pasiones continues to be a ratings leader.

As just an example, in Colombia, excluding kids and sports channels, Pasiones is the No. 4-rated cable network on DirecTV for the full day and No. 1 from 12 to 6 p.m. Centroamerica TV also had a solid quarter with 17% year-over-year prime-time ratings growth.

Centroamerica TV has proven itself to be an authoritative source of news, information, and sports for Central Americans living in the U.S. During Q4, Centroamerica TV aired live, full-day coverage of the controversial Honduran presidential elections, providing audiences and distributors with news and information they could not find anywhere else. At Television Dominicana, both Verizon and Altice added the channel to their basic packages following the hurricanes, reflecting the unique value the network provides to Dominican-Americans.Turning to our new strategic investments, the strong launch of Canal Luna continues to validate our belief that Colombia would welcome a fresh and differentiated alternative to the two incumbent networks. Six months ago, Canal Luna was virtually nonexistent.

It is now a competitive No. 3 network with tremendous upside. Our ratings performance is ahead of plan and on Saturday, February 24, we had a record-high full-day 10% audience share. We have several new program launches planned for Q2, which we believe will continue to drive share and advertising revenue growth.

Pantaya, our OTT venture with Lionsgate, has performed extremely well in its first few months. Although we are in the very early innings, the results so far clearly confirm that this platform represents a significant growth opportunity. Pantaya ranks among the highest-grossing entertainment apps on both iOS and Android, and is notably ahead of Univision now.A quick note on M&A. We continued to pursue strategic investment that will accelerate our growth profile.

While we've been focused on steadying our business in Puerto Rico over the past few months, we have not stopped in our pursuit of attractive acquisition opportunities and we're encouraged by our pipeline. We will keep you updated on our progress.I'll now turn the call over to Craig. Thank you.

Craig D. Fischer -- Chief Financial Officer

Thank you, Alan, and good morning, everyone. Net revenues in the quarter were $24 million, as compared to net revenues of $39.4 million for the comparable period in 2016. Net revenues in the full year were $124.5 million, as compared to net revenues of $138.5 million for the comparable period in 2016. The revenue decline in the three-month period was driven by declines in advertising revenue and retransmission fees as a result of Hurricane Maria, partially offset by increases in other revenues primarily related to the licensing of our content to third parties.

The revenue decline in the 12-month period was driven by lower advertising revenue, offset by growth in subscriber and retransmission fees and other revenue. Excluding political advertising revenue in the prior-year period, net revenue in the three- and 12-month periods decreased $13.7 million and $11.5 million respectively. Advertising revenue in the three- and 12-month periods declined $11.6 million and $14.5 million respectively. The decreases were driven by the negative impact of Hurricane Maria, particularly the widespread loss of power, which persisted throughout the quarter.

Additionally, in 2016, we benefited from political advertising of $1.8 million in the fourth quarter and $2.6 million for the full year, which did not occur in 2017. Subscriber and retransmission fees in the three-month period decreased $2.5 million due to the interruption caused by Hurricane Maria to paid television subscriptions in Puerto Rico as well as the termination of carriage to Televisión Dominicana by AT&T in September. Subscriber and retransmission fees in the 12-month period increased $1.6 million due to annual rate increases and subscriber growth, offset by the impact of hurricanes Irma and Maria and the termination of carriage to Televisión Dominicana by AT&T. Other revenues, which are primarily related to the licensing of content to third parties, grew $400,000 and $1.4 million in the three- and 12-month periods respectively.Operating expenses in the three-month period were $24.6 million, as compared to $26.8 million for the comparable period in 2016.

This decrease was due to lower programming and production cost as WAPA implemented cost-savings measures following Hurricane Maria and lower stock-based compensation expense. These decreases were offset in part by incremental Hurricane Maria-related expenses of $800,000, which included diesel fuel to power our generators, the cost incurred to maintain our signal, enhanced security to protect our critical sites, and assistance provided to our employees. Operating expenses in the 12-month period were $99.1 million, as compared to $98.5 million for the comparable period in 2016. This increase was due to the aforementioned incremental cost related to Hurricane Maria and higher transaction costs in connection with the refinancing of our term loan in the first quarter of 2017, partially offset by lower stock-based compensation expense.

Adjusted EBITDA for the three-month period was $6.8 million, as compared to $20.4 million for the comparable period in 2016. Adjusted EBITDA for the 12-month period was $51.2 million, as compared to $64.3 million for the comparable period. Excluding political revenue, adjusted EBITDA for the three- and 12-month periods decreased $11.8 million and 10.5 million respectively.A quick note on net loss. On December 22, 2017, the Tax Cuts and Jobs Act amended the Internal Revenue Code and lowered the U.S.

corporate federal tax rate. This had the effect of increasing reported income tax expense by $13.6 million in the three- and 12-month periods, primarily due to the reduction in the likelihood of the utilization of our foreign tax credits created by income taxes paid in Puerto Rico and the revaluation of our net deferred-tax asset at the lower corporate tax rate. Going forward, we expect a reduction in our cash taxes but given that a portion of our income is from outside of the U.S., the cash taxes will be driven by the mix of income from the U.S. and income sourced from outside the U.S.Turning to the balance sheet, we had $211.2 million in debt and $124.3 million of cash.

Our gross leverage ratio was approximately 4.1 times and net leverage ratio was approximately 1.7 times. As previously announced, we implemented a share-repurchase plan in 2017. During the fourth quarter, we repurchased approximately 900,000 shares of common stock at a weighted average price of $12.32 for an aggregate purchase price of $11.2 million. As of December 31, 2017, we had $3.1 million remaining on the original $25 million plan.

As we regularly do, we will evaluate the current share-repurchase program in the context of our overall capital-allocation plans. During the year, we funded $40 million in investments, which is in line with the previously announced guidance range of $35 million to $40 million. On the insurance front, we have had claims adjusters visit our principal sites on the island. In the fourth quarter, in a show good faith by the carriers, we received $3.3 million in insurance proceeds related to property and casualty damage.

This is not a settlement but an advance against what is expected to be a larger total payout. We have prepared claims under our property and casualty policies totaling approximately $13 million. We are optimistic that we will receive payments in 2018 on all of our property losses, subject to deductibles and other costs. Additionally, our business-interruption policies have combined limits of $10 million per occurrence.

We are preparing business-interruption claims to recover a significant portion of the income loss from hurricanes Irma and Maria. We expect that the insurance proceeds will cover a significant portion of the losses incurred and will be received over the next several quarters. The precise amounts and timing of receipt of such proceeds is difficult to predict. We anticipate that capital expenditures in 2018 will be significantly higher due to the replacement of property damaged by the hurricane as well as the FCC-mandated spectrum repack.

Most of these expenditures we expect will be reimbursed by both insurance and the FCC.As we previously announced, we withdrew guidance for 2017, given the situation in Puerto Rico. For 2018, while the conditions in Puerto Rico have improved, we still lack the necessary visibility to provide guidance at this time. We have a solid balance sheet and ample liquidity to fund ongoing operations as well as any business expansion opportunities we decide to pursue. 2018 will be about recovering and reestablishing overall growth and we are confident we will succeed in both the recovery efforts and executing on our strategic initiatives.With that, let's open the call to your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the *, and then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Once again, for asking a question, please press *, and then 1 now.

And our first question comes from Steven Cahall from RBC Capital Markets. Your line is open.

Kutgun Maral -- RBC Capital Markets -- Assistant Vice President

Hi. Good morning. It's Kutgun Maral on for Steve. Maybe first, related to the advertising outlook in Puerto Rico, I know it's still a very fluid situation, but can you provide any more color on the improvements you've been seeing in the market since the hurricanes? And what kind of timeline would be prudent for us to expect either returning to or getting near pre-storm levels? I think you called out getting closer to normalcy in perhaps the back half of the year but any more color would be helpful over there.

And relatedly, for retrans, the pricing growth with the new deals are encouraging, especially given the current dynamics, but given the broader pay TV sub losses in the market, how should we think of the retrans outlook for 2018?

Alan J. Sokol -- President, Chief Executive Officer, and Director

Hi. Good morning. It's Alan. Let me see if I can handle those questions in order.

So, going back to fourth quarter of last year, after the storm, we were essentially out of business because power was essentially unavailable in the island and the island was reeling from the storm. The dynamic has improved sequentially every month and, as I mentioned, by December the market was about 50% of what it was a year ago. That situation has continued to improve and we expect that improvement to continue every month going forward as power is restored and as the island returns to near normal or normal life. Difficult to say exactly when we get back to normalization because it is dependent on the return of power as well as the restoration of Nielsen ratings, which we expect to happen hopefully early in the second quarter, but the best I can tell you right now is I think we're optimistic that in second half of the year we'll be returning to a normal way of doing business and that advertising will return to normal and we think there's going to be a lot of pent-up advertiser demand for inventory, given this situation over the past few months and given the pent-up demand for a product.

And we also think with the inflow of insurance proceeds and hopefully government proceeds will stimulate the economy and create further impetus for advertising growth. On the retrans side, we're really pleased with the new deal we've entered into, really strong and unprecedented growth for us. Hard to know where ultimately the subscriber numbers settle out at. We've seen strong month-over-month rebounding as power has been restored.

We all think that ultimately the numbers will settle out at close to where they were pre-storm, if not at 100% parity.

Kutgun Maral -- RBC Capital Markets -- Assistant Vice President

OK, thanks. That's very helpful. And on your U.S. cable networks, you called out organic sub growth and you had record performance at Cinelatino and WAPA America.

Is there anything you could share in terms of the opportunity to accelerate your affiliate fees or improve carriage further as well as how you're thinking about the ad market in 2018?

Alan J. Sokol -- President, Chief Executive Officer, and Director

First of all, it was sort of hard to really break out Continental U.S. numbers from Puerto Rico in the fourth quarter and it's a little lumpy because of that, because of the temporary loss of Puerto Rico sales, but we did have really nice organic sub growth in fourth quarter in the continental U.S., and we expect that to continue to be the case, given the under-penetration of Hispanics within pay TV and the fact that operators still look to Hispanics as one of the few sources of growth in a shrinking market. We think we have some opportunities to fill in some of the distribution holes that we have and we're optimistic that we'll have some positive and good announcements to make in the short term.

Kutgun Maral -- RBC Capital Markets -- Assistant Vice President

Understood. And maybe lastly for me, how should we think of the cost trajectory and margins in 2018? I think you called out some continued content spend but at the same time, you have ongoing top-line pressures from the hurricane, at least in the first half of the year. So how should we think about cost management throughout the balance of the year?

Craig D. Fischer -- Chief Financial Officer

Yeah. We'll continue to manage it throughout the year and some of the investments in programming will sort of coincide with the expectation for revenue returning in the second half of the year.

Kutgun Maral -- RBC Capital Markets -- Assistant Vice President

OK, great. Thanks so much.

Operator

Thank you. And our next question comes from Curry Baker from Guggenheim. Your line is open.

Curry Baker -- Guggenheim -- Analyst

Great. Thanks for the question, guys. On the subscriber front, do you see any near-term solution to AT&T and TV Dominicana? And can you confirm that your other networks are still on AT&T?

Alan J. Sokol -- President, Chief Executive Officer, and Director

Yeah. The TV Dominicana situation has not affected any of our other networks. We're in constant discussions with them regarding TV Dominicana but I can't comment on the nature of those negotiations or whether they will result in a successful outcome for us. We obviously think, though, that the decision of AT&T to drop TV Dominicana was ill-advised and is in not service to their audience, particularly 2.5 million Dominicans living in the U.S.

Curry Baker -- Guggenheim -- Analyst

OK, thanks. And I guess on the M&A front, is there any more color you can give us in terms of the pipeline? And also in the third and fourth quarter, you guys have been buying back a lot of stock. How do you think about capital allocation going forward in 2018 in terms of M&A relative to buying back stock at these prices versus also the obvious business disruption you're still kind of working through?

Alan J. Sokol -- President, Chief Executive Officer, and Director

I'll handle the first part of the question and I'll hand off to Craig. We are really happy with the M&A pipeline we have. Again, it's no guarantee we will get those deals over the finish line but we think there are some really interesting opportunities out there that we're heavily immersed in and we're hopeful that we can get one or more of those opportunities executed and done over the next few months.

Craig D. Fischer -- Chief Financial Officer

And to answer the second part of your question, we have a little over $3 million left on a share-repurchase plan that we approved last year. Since our Q3 earnings call in November, the pace of the share repurchases had slowed. We'll evaluate the share-repurchase plan within our overall capital-allocation strategy, but M&A continues to be the primary driver of our available cash.

Curry Baker -- Guggenheim -- Analyst

OK. And then I think maybe finally for me, on Pantaya, can you guys give us an metrics, whether subscriber counts, engagement metrics, that you guys have seen now that we're a few months into that? And also, sort of the key priorities and benchmarks you have for the service in 2018?

Alan J. Sokol -- President, Chief Executive Officer, and Director

We're not disclosing specific numbers. We and Lionsgate have made that decision for now not to do that, but both of us are very encouraged by the early returns and the early receptivity to the venture and to the platform. We've seen great takeup on it. As I said, our rankings, which are publicly available, on iOS and Android are among the highest-performing of any entertainment apps out there.

We think it definitely shows proof of concept and we expect this to continue to grow and to grow in a very robust way. We'll continue to invest in programming and content for it to continue to drive that growth. But we think there's a great opportunity here, and we think we have the opportunity to seize the leadership position in the OTT space and really make this the go-to platform for Hispanics seeking first-quality, first-run content on a commercial-free basis.

Curry Baker -- Guggenheim -- Analyst

OK. Thank you.

Operator

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back to Alan Sokol for any closing remarks.

Alan J. Sokol -- President, Chief Executive Officer, and Director

Nothing further, operator. Thank you very much.

Operator

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

Duration: 34 minutes

Call Participants:

Erica Bartsch -- Sloane and Company -- Senior Vice President

Alan J. Sokol -- President, Chief Executive Officer, and Director

Craig D. Fischer -- Chief Financial Officer

Kutgun Maral -- RBC Capital Markets -- Assistant Vice President

Curry Baker -- Guggenheim -- Analyst

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