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Hemisphere Media Group Inc  (NASDAQ:HMTV)
Q4 2018 Earnings Conference Call
March 05, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Incorporated Fourth Quarter and Full Year 2018 Financial Results Conference Call. My name is Chris and I'll be your operator for today's call. A replay of the call will be available beginning at approximately 11:30 AM Eastern Time today, Tuesday, March 5, 2019 by dialing (855) 859-2056, or from outside the United States by dialing (404) 537-3406.The conference ID for the replay is 6389568.

I would now like to turn the call over to Ms. Danielle O'Brien.

Danielle O'Brien -- Investor Relations

Thank you, operator and good morning, everyone. I'd like to welcome everyone to today's conference call. I am Danielle O'Brien, and I am with Edelman Financial Communications, 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 US Private Securities Litigation Reform Act of 1995. These statements are based on the current expectation of the management of Hemisphere, and are subject to uncertainty and changes in circumstance, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. In addition, these statements are based on a number of assumptions that are subject to change.

Please refer to our Company's most recent Annual Report on Form 10-K and other public filings for a more complete discussion of forward-looking statements and the risk factors applicable to our Company. Forward-looking statements included herein are made as of the date hereof and Hemisphere undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

During today's call, in addition to discussing results that are calculated in accordance with Generally Accepted Accounting Principles, we will refer to adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier this morning. Management believes that this non-GAAP information is important to investor's understanding of our business. I will now turn the call over to Alan.

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

Thank you Danielle, and good morning, everyone. We are pleased with the strong performance of our business in the fourth quarter and full year 2018. We delivered solid growth across all of our revenue streams and continue to defy overall US subscriber trends. WAPA once again was the number 1 station in Puerto Rico in total audience at all key sales demographics. Puerto Rico's economy is now stable and approaching pre-storm levels and WAPA remains the market leader.

As we look ahead, we expect the Puerto Rican economy to continue its steady recovery and we are encouraged by the restoration efforts across the island. The key economic metrics reflect this ongoing recovery. Puerto Rico's unemployment rate is 8.5% one of the lowest in recent decades. New car sales in 2018 were at their highest level in 12 years and cement sales were up 41% versus 2017. Importantly, Puerto Rico has one quarter approval for restructuring that wipes out one-third of its $18 billion in sales tax-backed bonds, a significant step strengthening the -- financial profile and providing with access to capital markets.

Turning to our US cable channels. We saw strong growth across all of our networks, which is a result of our unique and compelling content and the growth profile of our audience.

I will start with Pasiones, which delivered its highest ratings ever in the fourth quarter, making it the eighth consecutive quarter of record ratings, increasing total day audience by an impressive 72% over the prior year period. Significantly for the second straight quarter, Pasiones beat Univision Telenovelas by 40% in primetime. The channel's strong ratings are being driven by novella and series from non-traditional markets such as Turkey and India. We are very excited to announce the impending launch of Pasiones nationally across Spectrum including the two large Hispanic markets in the US, Los Angeles and New York. This is a major achievement and validates Pasiones' unique and compelling content offering. At a time when very few channels are being launched, this is a milestone accomplishment for Pasiones and Hemisphere.

Moreover, Pasiones will be -- will be available on Spectrum in HD, making it the first Hemisphere channel in HD in the US. Cinelatino maintained its strong momentum, continuing as the second highest Nielsen-rated cable network in Spanish and once again delivered impressive ad sales growth. During the quarter, Cinelatino accounted for three of the five highest-rated non-sports programs in Spanish language cable and was a number 1 rated network on both Christmas Eve and Christmas Day.

We are very excited about our 2019 programing slate, between unprecedented lineup of blockbuster hits and original productions. This month, we will be launching our most ambitious original series ever, El descorecido 2 (ph) , which we are confident will surpass the highly successful first season. WAPA America continues to perform -- to perform strongly and set a record for ad sales in Q4. The strength of WAPA America is evidenced by its position as the top-rate, non-sports Spanish language cable network in the early fringe time period. Centroamerica TV experienced yet another quarter of robust ratings, growing 43% in total day ratings over the fourth quarter of 2017.

With the exception of the Spanish-language telecast of the Super Bowl, Centroamerica TV's coverage of the February 3, Salvadorian Presidential elections made it the highest rated Spanish language cable network. This is particularly impressive and demonstrates Centroamerica TV's role as the singular destination for breaking news and all major events from the region. In Q4, we closed on our most recent acquisition, Snap Media.

We are excited about the opportunity to leverage Snap's expertise to drive sales of Hemisphere's content and to identify co-production opportunities in Latin America. These co-productions will provide valuable content for our existing networks and generate new opportunities for content licensing to existing and emerging outlets.

Turning to our strategic investment -- our strategic investments. Canal Uno's ratings and share growth had accelerated impressively. In Q4, Canal Uno entered into a multi-year volume licensing deal with NBC Universal/ Telemundo, one of the leading content producers in the world. The first series under this deal, (inaudible) has been Canal Uno's biggest hit ever averaging a 24% audience share and regularly making Canal Uno the number two network in Colombia. Overall, total day audience share Monday to Friday had increased to 11.5% with a 15% share in prime time. We are very proud of these accomplishments, after only a year and a half.

Pantaya continued its strong subscriber growth trajectory and we believe Pantaya's growth will further accelerate with a strong pipeline of premium original series in 2019, starting with Drunk History, hosted by the biggest star in Mexico, Eugenio Derbez. Before closing, I wanted to address the impact of the ongoing dispute between DISH and Univision. DISH has suffered a meaningful loss of subscribers, which has affected our overall subscriber numbers. While, we can't make a prediction on when or if this issue will be resolved. We believe that subscribers who have left DISH will migrate to other distributors. We're already beginning to see these trends and therefore view this situation as a short-term displacement and not a permanent loss of subscribers.

Finally, in closing, we have a healthy M&A pipeline and continue to pursue opportunities that will accelerate our growth. Thank you, everyone. I'll now turn the call over to Craig.

Craig D. Fischer -- Chief Financial Officer

Thank you, Alan and good morning, everyone. Net revenues in the fourth quarter were $46 million, an increase of 92% as compared to net revenues of $24 million for the year-ago period. For the full year 2018, net revenues were $147.1 million, an increase of 18% compared to $124.5 million for the year-ago period. These increases were driven by growth across all of our revenue streams. Advertising revenue in the fourth quarter increased $12.1 million or 173% over the comparable period and for the year increased $11.7 million or 24% over the comparable period.

Advertising revenue benefited from a favorable comparison with the prior year periods, which were negatively impacted by Hurricane Maria. In addition, we benefited from growth in ad sales at our cable networks and the impact of the current period adoption of the new revenue recognition standard. Affiliate revenues in the fourth quarter increased $3.2 million or 20% over the comparable period. For the full year 2018, affiliate revenues increased $3.5 million or 5% over the comparable period. These increases were driven by rate increases as well as overall subscriber growth, including continued restoration of pay-TV subscribers in Puerto Rico.

Other revenues increased $6.7 million and $7.4 million in the three and 12-month periods respectively. These increases were primarily due to insurance proceeds of $5.8 million received in the fourth quarter on our business interruption policies in connection with Hurricanes Irma and Maria. These increases were also due to higher fees from licensing of our content and we benefited from the contribution of Snap Media, which closed in November 2018.

Operating expenses in the fourth quarter were $26.2 million, an increase of 7% as compared to $24.6 million for the year-ago period. The increase was due to normalization of programming and production expenses in 2018, following cost savings measures implemented at WAPA in the fourth quarter of 2017 due to Hurricane Maria. Operating expenses for the 12-month period were $102.3 million, an increase of 3% as compared to $99.1 million for the year-ago period. The increase was primarily due to higher programming and production costs as well as hurricane-related expenses, which primarily consisted of tower rental cost to maintain transmission of WAPA's signal in Puerto Rico. Additionally, operating expenses for both periods increased as a result of the current period adoption of the new revenue recognition standard, offset by gains related to reimbursements received from the FCC for equipment purchases due to the spectrum repack and an incentive payment for vacating our spectrum earlier than required. The gains on the FCC proceeds and (ph) incentive payment are included in operating income, but backed out of EBITDA. Adjusted EBITDA in the fourth quarter was $18.6 million, an increase of 172% as compared to $6.8 million for the comparable period.

Adjusted EBITDA for the full year 2018 was $60.1 million, an increase of 17% as compared to $51.2 million for the comparable period. Adjusted EBITDA for both periods also excludes the business interruption insurance proceeds of $5.8 million. Adjusted EBITDA growth was in line with our full year 2018 guidance.

Turning to the balance sheet. We had $209.1 million in debt and $94.5 million of cash as of December 31. Our gross leverage ratio was approximately 3.5 times and net leverage ratio was approximately 1.9 times. When including the business interruption insurance proceeds in adjusted EBITDA, our leverage ratios are meaningfully lower with gross leverage ratio at approximately 3.2 times and net leverage ratio at approximately 1.7 times. During the fourth quarter, we repurchased approximately 27,500 shares of common stock at a weighted average price of $12.34 for an aggregate purchase price of approximately $300,000.

This brings our full year 2018 share repurchases to approximately $2.4 million. As of year-end, we had approximately $650,000 remaining on our original share repurchase plan. Capital expenditures were $10.6 million for the full year 2018, including $4.7 million to replace equipment damaged by Hurricane Maria and $3.2 million for equipment purchases required by the FCC mandated spectrum repack. During the year, we received reimbursements on our insurance policies of $2.1 million and from the FCC of $1.5 million. We continue to incur CapEx to replace equipment damaged by Hurricane Maria and equipment required by the spectrum repack.

We anticipate that insurance proceeds and FCC reimbursements will cover most of these expenditures.

Turning to strategic investments. During the quarter, we funded $16.8 million into our joint ventures, including $12.2 million into Canal Uno and $4.7 million into Pantaya. This brings our full year 2018 strategic investments to a total of $53.8 million. We are extremely pleased that Puerto Rico is approaching normalization and are confident that our unique and differentiated content and channel offerings will continue to accelerate our growth. With that, we are issuing 2019 guidance of mid-teen percent adjusted EBITDA growth, as compared to 2018.

We'll now open the call to your questions.

Questions and Answers:

Operator

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

Steven Cahall -- RBC Capital Markets -- Analyst

Yeah, thanks. Maybe first, just, you talked about what's going on with DISH. I think your subs in the US were down sequentially. Can you help us quantify maybe the DISH impact on those subs and if you think that's a temporary trend?

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

Hi Steve, good morning, it's Alan. We can't talk about specific numbers as it relates to any distributor. But maybe I'll try to give you some guidance. There is definitely -- as you know, there was definitely a meaningful loss on DISH subs, which has been publicly disclosed by both DISH and Univision. That said, we are starting to see those subs migrate and resettle with other distributors. If you look at our numbers for Television Dominicana, which is not carried on DISH that will give you somewhat better proxy for our actual organic growth among the other distributors excluding DISH and as you can see, growth continues in a nice and robust way even though the overall ecosystem is contracting. And another point worth mentioning is that with the exception of DirecTV, all other distributors carry all five of our channels, DISH carries four of our channels. So to the extent that a DISH subscriber migrates toward another distributor that carries all five of our channels. We will have a meaningful pickup in terms of our subscriber fees as a result of that migration.

Steven Cahall -- RBC Capital Markets -- Analyst

Great. And then kind of relatedly, congrats on the launch of Pasiones' spectrum. I was wondering if you could provide us maybe what the contribution is to your EBITDA guidance from that alone, do you expect that to be -- even if it's qualitative, is that a major kicker to adjusted EBITDA growth for the year?

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

It is a significant addition to our EBITDA growth. Well obviously, we can't comment on it. You will see, as we report subsequent quarters, the sub change in Pasiones probably draw (ph) a view on what the contribution is but it's a meaningful contribution for us.

Steven Cahall -- RBC Capital Markets -- Analyst

Great. And then just on ad and affiliate revenue, I was wondering if you might be able to give us the breakdown of ad and affiliate revenue at US versus Puerto Rico or anything qualitative on that side?

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

We don't get into the details, specifically on Puerto Rico between the mix. You do know that Puerto Rico skews more to advertising revenue than to affiliate fees. That said, we've had affiliate fees has continued -- they grow as a faster growing stream of our revenue in Puerto Rico, given the -- the renewals of our retransmission deals there, and we also as throughout this year as the pay-TV subscribers came back online and reached historic levels. We benefited from that as well. We will continue that going forward into 2019.

Steven Cahall -- RBC Capital Markets -- Analyst

And then maybe just lastly a couple of OTT questions. I think Alan, you said, you saw strong sub growth on Pantaya. I was wondering, if you might be willing to tell us what the sub counts look like for that yet? And then also, Viacom recently acquired Pluto TV. There is some talkings there about a Spanish language tier. So I wondering, if you could give us any indication as whether you see that as a threat? Whether you are in discussions with them for your content et cetera?

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

Steve, unfortunately, we're not. We and Lionsgate have agreed not to disclose specific numbers on Pantaya. I just can tell you though from a trajectory standpoint that the growth has been really good and in fact has accelerated over the past quarter, and we believe that that growth will further accelerate with the introduction of the premium original series that we're starting to launch. Our first one launched this past Friday and we saw really tremendous viewing and response to that series. So we're feeling very good about the opportunity to growth potential and we're on plan for that. So we're excited about it. We think this proof of concept there, we don't think it's anything else like that in the market.

We think, we have major first mover advantage and we also feel we have a lock on the best content in that space. So we're, I think we -- speaking for our partners as well, I think we're both very excited about the opportunity there.

In terms of the Viacom acquisition of Pluto. I can't comment on our ongoing discussions. But I will say, I think it's a -- I think their comments and their intent to develop a Spanish language or Hispanic strategy for Pluto is a good one. And I think that for us frankly that -- that's a complementary to what we're doing. We have a tremendous amount of content that we could potentially make available to them that I think would be very valuable to them and would help them launch and accelerate the growth of that platform and content, which is in no way competitive with what we have on Pantaya.

Steven Cahall -- RBC Capital Markets -- Analyst

Great, thank you.

Operator

Thank you. And our last question comes from Curry Baker with Guggenheim Securities. Your line is now open.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Thanks for the questions, guys. Good morning. Could you maybe give us a little more color and update as to where we are in Puerto Rico in terms of the ad market recovery. WAPA of Puerto Rico's just sort of ad pacing relative to where we were pre-storm. Are we kind of back at like 90 plus percent levels? And then also could you maybe provide a little color on the retransmission subscriber counts as they currently stand in Puerto Rico relative to where they were pre-storm?

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

Sure. I think, Curry, generally speaking, I think Puerto Rico is fairly normalized. Now, I think they will continue to be ongoing -- improvements, ongoing efforts to finish the rebuild. Craig and I spend a good amount of time down there and you can visibly see the growth and improvement in the market and the markets return to normalization, if not a 100% yet, but it is getting there.

From an ad sales perspective, I think your comment about 90 plus percent versus pre-storm is an accurate comment and -- that's a way that I would characterize it. On the sub growth, it is not back to pre-storm levels.I don't know that it will get fully back there, but we think it will get relatively close to that number. I mean, Puerto Rico did lose, estimates are around 130,000 people. So call that 4% of its population or so. So by virtue of that alone, you're going to see -- probably see some loss of subscribers. But I think, we are feeling good that it's going to getting close to where it was pre-storm.

Craig D. Fischer -- Chief Financial Officer

And remember, we are on a lag basis. So we're still a couple of months behind from where they are, and we've seen month over month continued growth throughout the year.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay, great, thanks. And then maybe on your joint venture commitments for 2019, can you provide us any outlook for your funding commitments for Canal Uno and Pantaya for this upcoming year, any cadence or breakdown as well would be helpful?

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

Yeah, I can't get into specifics on the funding for the year. As far as cadence and the case of Canal Uno, if you recall it, concession, the 10-year renewable concession is payable over two years. So we'll have made four payments in 2018. We have one remaining that will be made in the first quarter of 2019. So that portion of the funding will largely go away in 2019. So the ongoing funding will be the working capital around the business.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay. And more of a housekeeping question that you had the $5.8 million of business disruption insurance coming in the fourth quarter. Do you expect any further meaningful insurance proceeds on that business disruption front or was this pretty much the payment?

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

This is pretty much the payment that we were expecting.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay. And I guess finally for me, is there any incremental color you can provide on the M&A pipeline, just what you guys are seeing, whether or not you expect to close any deals in '19?

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

Obviously Curry, we can't comment on existing, on our negotiations or deals that we're looking at, but I will say that we are encouraged and enthusiastic about the opportunities that are out there. Doesn't mean we will get any deals done. I've said that -- I've said that we're (ph) encouraged and enthusiastic before, but we do feel that there is some really interesting opportunities out there and we're hopeful that we can execute on one or more than in the next couple of quarters.

Curry Baker -- Guggenheim Securities, Inc -- Analyst

Okay, great. I appreciate the question, guys.

Operator

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Mr. Alan Sokol for any further remarks.

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

No further remarks, operator. Everybody have a nice day.

Operator

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

Duration: 24 minutes

Call participants:

Danielle O'Brien -- Investor Relations

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

Craig D. Fischer -- Chief Financial Officer

Steven Cahall -- RBC Capital Markets -- Analyst

Curry Baker -- Guggenheim Securities, Inc -- Analyst

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