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Wanda Sports Group Co Ltd (NASDAQ:WSG)
Q1 2020 Earnings Call
Jun 9, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and for joining Wanda Sports Group's First Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host for today's conference call. Ms. Edith Kwan, Head of Investor Relations at Wanda Sports Group. Please go ahead.

Edith Kwan -- Head of Investor Relations

Thank you, Ralph. Hello, everyone. Thanks for joining the first quarter 2020 earnings call. With us today are Hengming Yang, Chief Executive Officer of Wanda Sports; and Brian Liao, our Chief Financial Officer. A replay of the call will be available on our IR website later today. We have also posted a slide presentation on our website, which Brian will reveal during his remarks. Now, let me quickly cover the safe harbor.

Today's discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements and consequently, could be affected by the uncertain and unprecedented impact on COVID-19 on our business and operations, and a related impact on our liquidity needs. For a detailed discussion of these risks and uncertainties, please refer to our earnings release. Our annual report on the Form 20-F for the year ended December 31st, 2019 filed with SEC annual report and available on the SEC's website at www.sec.gov, as well as other filings that we make from time to time with the SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update these statements except as required under applicable law. Please note that certain financial measures that we use on this call, such as adjusted EBITDA are expressed on a non-IFRS basis. Our IFRS results and reconciliation of IFRS to non-IFRS measures can be found on our earnings release.

With that, I will now turn the call over to our CEO; Hengming Yang. Hengming, please proceed.

Hengming Yang -- President and Chief Executive Officer

Well, thank you, Edith and thanks to everyone for joining us today. First, I hope you and your families are all healthy and safe. So in today's call, I would like to first review our first quarter performance. Then I have some comments on our COVID-19 action impact and strategic initiatives. So let me first start with the first quarter.

Given the pending closing of the sale of The IRONMAN Group, we have treated The IRONMAN Group for the purpose of our results for the first quarter of 2020 as an asset held for sale. And its historical results are reflected as discontinued operations. Our first quarter 2020 on our continuing operations, the total revenue was EUR163.7 million and adjusted EBITDA was EUR20.7 million. Despite the financial impact caused by the pandemic, I want to mention a few of our achievements and wins in demonstrating our resilient business model and long-term contractual relations.

Our Spectator Sports business benefited from a number of major international winter sports events, in which we play important roles as well as expanded the portfolio with new business wins. To summarize, in terms of high-profile events, we delivered a diversified set of experiences including FIM Motocross World Championship, BMW International Bobsleigh & Skeleton Federation World Championships, Biathlon World Championships, Championship [Phonetic] Hockey League Final Four, The Men's European Handball Federation EURO 2020 and the 68th Four Hills Tournament.

Throughout this season -- throughout these events, we provided extensive offerings and expertise in media, marketing, sponsorship, broadcasting, etc. For major commercial contracts and extension of long-term partnerships, we signed an eight-year agreement with International Biathlon Union for exclusive media and marketing rights until 2030.

In addition, German Bundesliga football club FSV Mainz 05 has extended its exclusive marketing agreement with us until 2031, five years ahead of the expiration of the current agreement. In terms of new business wins, we've brokered a successful commercial agreement between Ligue 1 football club Olympique Lyonnais and [Phonetic] Emirates as the official main sponsor. We also launched Serie A Esports competition for Lega Serie A, who governs the Italian club football. These successes in the first quarter are strong testament of our operational excellence and our position as the preferred choice for leading sports federations, world-class brands and media organizations.

Next, I'd like to come to our DPSS business. Our DPSS business continued to adopt leading technology in a leverage this advanced technology to drive more events, production and other sports solutions. For example, we were appointed by the French Tennis Federation as host broadcaster for French Open from 2021 to 2023. In addition, iX.co, our dedicated digital brand launched an upgraded Content Management System platform for Activision Blizzard, as well as successfully piloted and launched a new 5G-based App for a live sports event, which greatly improved fans in-stadium experience.

Turning to our Mass Participation business. The first quarter is typically a low season for Mass Participation Sport Events. This year, because of the pandemic, only a couple events were delivered with much less athletes participation. Although, the Group continued to host some races and sport events in Europe and North America in the first quarter of 2020. By April, all the remaining Mass Participation Sport Events have been canceled or postponed.

We are confident, if and when sport events can resume in our ability to organize successful large scale events in key geographies globally and in attracting diverse athletes and spectators, compliance with regulations and protocols for public health and safety relating to COVID-19 concerns. For our China business, unfortunately, almost all sports events were cancelled or postponed across the country in the first quarter as a result of the pandemic disruption.

We only organize a couple events, primarily for charity or CSR [Phonetic] purposes. To purchase medical protective gears for workers on the frontline as well as in restoring main role [Phonetic] and unifying people on the disaster crisis. As China begins to return to normal and the restrictions are being lifted, we look forward to capturing the significant opportunities by bringing and expanding premium sports events.

Now let me provide some updates on the current environment. In address the COVID-19 disruption, our paramount priority was the safety and well-being of our athletes, employees, fans, valued partners and clients. Our immediate adoption of remote working protocol and now more strict compliance to health and safety protocols for employees who are gradually resuming to work on-site. I fully ensure the well-being of all our employees around the world. Internally, we are very fortunate that our workforce intact, our employees are technically settled, highly collaborative and supportive of each other as well as compassionate in actively serving more partners and clients.

Externally, we continue to deepen our engagement with partners and clients as we assist each other in navigating the unprecedented disruption. Our expertise, innovative creativity and commitment are greatly recognized and valued by our partners and clients under the challenging environment. For example, when the Tour de Suisse, Annual Cycling Race was canceled, we proactively supported the successful launch of the very first digital pro-cycling race series named Digital Swiss 5, as an online alternative within just a few weeks of intensive collaboration with various organizers. This premiere event attracted wide media coverage and considerable public interest.

Our next priority is the planning of postponed events resumption at the right time for different markets. We continue to work closely with the governments, partners, rights holders, sponsors and event organizers to assess the impact of COVID-19 on timing and the protocols for future events as well as to manage the financial impact across the value chain.

For our Spectator business segment football, we are pleased to see the return of German Bundesliga on May 16th, which has been played beyond closed doors. This is the first top European league to resume after March lockdown. Meanwhile, semi-finals and the final of DFB-Pokal are rescheduled for June and July of this year.

The Serie A is also expected to restart in June. We are looking forward to other leagues and clubs gradually resume as well. Our winter sports season was said to be completed in May with partial impact from the pandemic, which started to emerge in mid-March including the cancellation of 2020 Ice Hockey World Championship in Switzerland and 2020 World Men's Curling Championship among others. Summer sports could be the most uncertain as majority events are canceled or postponed to later this year. Furthermore, for our DPSS business in anticipation of the uncertainties at full swing, sports events and games will most likely proceed in the near future without spectators. We are developing additional digital and broadcast solutions to offer to and prepare partners for the expected demand for new forms of live and digital sports consumption.

In address of the COVID-19 issues, although we continue to focus on our long-term strategy, in building a leading global sports events media and marketing platform, we are developing a few near to mid-term initiatives to enable us to emerge from the pandemic even stronger.

First, we are in active discussion to prolong covering the partnership agreement, provide service offerings aligned with the current environment and winning new contracts as rights holders move forward with long-term planning for their sports events. These are all valued long-term partners and we expect to collaborate effectively resolving any potential issues. Second, as we foresee great opportunity in shaping our industry by embracing new technology and trends from direct to consumer activation to virtual advertising and immense viewing experiences. We plan to accelerate the pursuit of and leverage a wider range of content and digital initiatives to enable organizers, broadcasters, sponsors, as well as consumers to be more actively engage with increased efficiency, such as the expansion of virtual sports, esports tournament and the production, virtual training, global social media account management, combination of home and life fitness exercises, cross collaboration with other entertainment segments such as music, etc.

Finally, we will, we have and will continue to be very focused on our cost containment and liquidity protection in order to minimize the overall impact on our business fundamentals, which Brian will discuss further. In summary, while the short term is challenging, these complex challenges will escalate the demand for higher order of strategic advisory, creativity, dependable execution from rights holders, organizers, sponsors, broadcasters and brands as they become more cautious and selective. As we see the sport sector gradually reopen after the COVID-19 related lockdowns, we believe we are prepared to actively serve our partners and clients of different markets. We remain confident of our distinct well-resourced global expertise and broad capability to continue to the ultimate partner of choice.

So, now I'll pass to Brian.

Honghui Liao -- Chief Financial Officer

Thank you, Hengming. Hello, everyone. I would like to begin by echoing Hengming's sentiments that hope all of you and your family stay safe and healthy. Before I start the first quarter discussion, I would like to make three comments. Firstly, as we previously mentioned, the nature of our business has some cyclicality depending on the timing of various events including inter-year cyclicality. This generally results in some volatility of our financials, which we experienced in the first quarter of 2020, in addition to the partial impact from COVID-19 during the quarter.

Second, we have and will continue to adapt and enhance our balance sheet and the liquidity position by working closely with our management team, valued partners, lenders and rights owners around the world for appropriate responses to the crisis.

Finally, we expect the closing of The IRONMAN sale to occur by end of the second quarter. In accordance with accounting rules, we have adjusted our reporting to exclude The IRONMAN business and treated as asset held for sale under discontinued operations. IRONMAN's results and operating data also have been excluded from the comparative first quarter 2019 results and operating data as well. Unless otherwise indicated, the financial statement line items and non-IFRS financial measures are presented on a continuing operation basis. Now for the first quarter financial review, you may follow my remarks in the earnings conference call presentation on our website.

Okay. If you can open the deck and turn to slide number 6. You might say, for the first quarter of 2020, our total revenue was EUR163.7 million, the decline of 26% year-over-year was mainly due to inter-year event cyclicality. Excluding the impact of reimbursement revenues, total revenue was EUR163.1 million, one minor note is that reimbursement revenues are usually the lowest in the first quarter of the year due to the seasonality.

Anyhow, despite revenue decline, our gross profit was EUR57.8 million, which increased by 8% annually, representing overall gross margin improved from 24% to 35%. Our adjusted EBITDA was EUR20.7 million [Phonetic]. The net loss for first quarter 2020 was EUR4.3 million, mainly attributable to increased finance cost and personnel expenses.

Next, I will provide a detailed review of our three segments. Let's start from Spectator Sports on slide number 9. Spectator Sports revenue was EUR139.8 million, a decrease of 28% year-over-year, mainly due to the event cyclicality effect driven by the absence of the FIS Ski World Championships, partially offset by the occurrence of the Men's EHF, that's European Handball -- EHF EURO 2020. FIS Ski World Championship is a biannual event that took place in the first quarter of last year, but not in 2020.

Despite revenue decline, our Spectator Sports gross profit increased 8% year-over-year resulting in gross margin of 34%. The increase primarily reflects a favorable sports event calendar mainly due to the Men's EHF EURO 2020 and the absence of revenue deduction relating to German Football business in 2019.

Let's turn to slide number 11. For DPSS segment, this segment is clearly continue to benefit from the expansion of our digital business with revenue of EUR22.9 million in first quarter 2020, an increase of 6% year-over-year. DPSS revenue excluding reimbursement revenue was EUR22.3 million, gross profit was EUR10.2 million which increased 9% annually representing a gross margin of 45%. This again reflects the continued market attractiveness of our innovative DPSS solutions.

Lastly for our Mass Participation segment on slide number 13. In first quarter 2020, our Mass Participation revenue decreased significantly due to the decrease in total number of gross-paid athletes as a result of the COVID-19 pandemic. Although we still managed to somehow complete two events in the first quarter this year, so the number of events is consistent with the corresponding period in 2019. As a result, gross profit also decreased, although the Mass Participation margin percentage improved to 14%. The gross margin increase is primarily driven by higher margin Mass Participation events due to the quarter.

Let's move to slide number 15 on cash and the capex. As of March 31st, 2020, we had a strong liquidity position with cash and cash equivalents of EUR164.7 million from continuing operations. Our first quarter capex from continuing operations was EUR3 million, similar to the corresponding quarter in 2019. As part of our cost saving initiatives in responses to the COVID-19 pandemic, we are targeting our annual capex in 2020 to be lower than last year. We believe this provide us with a solid cash position in current environment. I would also note that we have always been very disciplined and prudent in capital management. So immediately after the outbreak of pandemic, we implemented various cost reduction measures across our organization in order to preserve our financial position and to minimize the overall impact to our business.

Now turning to slide number 16 on liquidity. As a Hengming mentioned earlier, protecting liquidity is also a vital focus for us, aside upfront cash on hand, we are expecting to receive net proceeds about EUR345 million to EUR363 million cash from The IRONMAN sale. This will further optimize our cash structure, strengthen our balance sheet and provide us greater financial flexibility to navigate -- remain [Phonetic] and to emerge stronger from COVID-19 disruption.

Along with The IRONMAN transaction, we are in consideration to apply the proceeds to strengthen our balance sheet to useful general cooperation purpose or subject to shareholders' approval return capital to our shareholders. We will further review with the Board once the transaction is completed.

Let me conclude on slide 17 and 18. Given the significant uncertainties relating to the scope, duration and impact of the COVID-19, we are not able to provide 2020 guidance at this point. We will reconsider providing guidance once the environment stabilize. Having said that, I do realize the difficulties in projection, especially given the current environment, so I would like to share with you on slide number 17 that we expected to use a part of our proceeds from the sale of The IRONMAN Group to repay some of our debt, as a result, we expected our total indebtedness to largely reduce to EUR473 million from EUR931 million and our associated net interest expenses are expected to be reduced by more than 40% comparable -- comparative to 2019. Also, I understand that there are some questions regarding our partner agreement, especially when sports events in the near future may be proceeded with other spectators outside.

I would like to emphasize that the majority of our contracts are related to media under sponsorship rights. We will still be able to generate marketing, media and all production revenue from this reopened event. Looking ahead, it is still unclear for the full magnitude of the COVID-19 impact on the 2020 financial results, and we will continue to closely monitor the situation. Despite uncertainties, the strength of our balance sheet and liquidity indicate that we remain well-positioned financially and commercially to fully support our partners when they restart.

This concludes our prepared remarks. Operator, we would like now to open the call for questions. Thank you.

Questions and Answers:

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Bryan Kraft from Deutsche Bank. Bryan, your line is now open.

Bryan Kraft -- Deutsche Bank -- Analyst

Thank you. Hi. So, I had two questions, first, I appreciate the limited visibility with respect to Spectator Sports events being held. But I was wondering if you could frame the revenue scenarios at a high level based on what you see now as reasonable worst case and best case scenarios? And then the second question, unrelated to that is with the liquidity and balance sheet strength that you'll have following The IRONMAN sale, it seems like you'll be in a strong position to take advantage of the acquisition situations where small, maybe private companies are in financial distress and available to be acquired at discounted valuations. Just wondering if you're seeing any scenarios out there like that, that you think might represent attractive opportunities for you. Thank you.

Hengming Yang -- President and Chief Executive Officer

Okay. Hi, Bryan. This is Hengming, maybe I ask Brian to give comment on the first question about revenue scenario. I'm going to cover the, any new acquisition opportunity, possibly good opportunities out there. Brian?

Honghui Liao -- Chief Financial Officer

Yeah. Bryan, thank you. Actually, frankly it's hard, especially for Spectator, it's hard to give a range or even a range or guidance even at a high level for the revenue, because the situation, the environment is still uncertain. We can see this move into positive now like the German football was opened and Italy football Serie A will be opened soon and also for Spain football etc. But still we don't know how the range or duration scope will be lasting for COVID-19.

We just can't see for the entire organization. We mobilized our people under the team to get ready whenever the events or sports can be resumed and we will be the first one to catch up the opportunities.

Bryan Kraft -- Deutsche Bank -- Analyst

It's Bryan. If I could ask maybe just a follow-up on that. And thanks for -- I know it's a hard question to ask. But can you talk about maybe what you're seeing on the sponsorship side, because I think that obviously a lot of companies are pulling back on marketing spending and I was wondering if you're seeing that at all with your sponsors, so when sports resume, should we still assume that maybe there is some discount on sponsorship side.

Honghui Liao -- Chief Financial Officer

Sponsorship, we can see for the -- due to the impact of the COVID-19, some impact on the entire sponsorship market. The good thing for us is because especially for Infront and also IRONMAN, we have those sponsorship relationship for over many years, so probably you will see some short-term sponsorship will be, some impact, but overall, we are confident that those sponsorship especially for those long-term relationship partners will be remained as the same.

Hengming Yang -- President and Chief Executive Officer

Yeah, maybe just -- I just want to add something. I think Brian, you're right, I think there is, will be some kind of impact on the sponsorship, particularly the Company market spending as part of the result of the COVID-19 impact. So we will, I think we will need to monitor that, we need to watch out, but we think there will be impact.

I think as Brian said it out, most of our sponsor relationships are long-term and most of our rights-out contract are long-term. So I think and also most important is the event we held are quite premium and internationally unique in nature. So we should be, we believe we're more well positioned competitively to capture more bigger pushing of this sponsorship sales. But I think to some extent, it will be impacted and in 2020, it could actually maybe some of the residual impact may happen in 2020 as well.

And also the, we have to highlight that we're diversified portfolios. We have media rights revenue, we have sponsorship sales. We have digital and all the -- so despite [Phonetic] there is only one stream of our revenue. So their diversified nature of business, it also will help us to mitigate through this difficult time.

So, regarding your second question on the -- with improved liquidity, do we see any new opportunities out there in the market? I think yes, but we watch this out very carefully and really make sure that A, those opportunities fit into our strategy, fits into our portfolio, and B, those opportunities are really very cost effective, very good return. We do look at them, we do see some Ice events -- these come out which might be attractive, but we also on the other hand, we also laid it out very carefully.

Bryan Kraft -- Deutsche Bank -- Analyst

Okay. Thank you. Thanks, to you both. Appreciate it.

Operator

Thank you so much. And your next question comes from the line of Jason Bazinet from Citi. Jason, your line is now open.

Jason Bazinet -- Citigroup -- Analyst

Thanks so much. I just had a question on Spectator Sports. I think that if you break that down in any given contract, you might have media rights, production rights, marketing and hospitality and my question is if an event occurs but there are no participants there, is it just the hospitality sort of revenue that disappears or is there does it spill over into marketing as well? And as the media and production sort of impact that sort of the right way to think about it?

Honghui Liao -- Chief Financial Officer

Yeah, so I think because of the nature of our media rights, the marketing sponsorship rights even without Spectator, we believe there is still demand for media, even increased demand for media rights, broadcasting.

Jason Bazinet -- Citigroup -- Analyst

Okay.

Honghui Liao -- Chief Financial Officer

And exposure for the marketing brands, so that revenue will resume. We think but that's largely depending on how quickly the event will be resumed. So timing...

Jason Bazinet -- Citigroup -- Analyst

Right.

Honghui Liao -- Chief Financial Officer

Actually is the key role of that. The ticketing hospitality as you just [Phonetic] pointed out should be impacted. But I think good thing is that ticketing and the hospitality is actually very small portion of our portfolio in our rights. So we will be impacted but will not be big in our overall business revenue.

Jason Bazinet -- Citigroup -- Analyst

Great. Thank you.

Operator

Thank you so much. And last question comes from the line of Alan Gould from Loop Capital. Alan, you may now ask your question.

Alan Gould -- Loop Capital -- Analyst

Thanks for taking my questions. I hope you guys are doing well. The question is regarding the sale of The IRONMAN, I was wondering what are the -- you said the timing is the second quarter. Are there any hurdles remaining to have that deal sold, is there any change in the price. And then once the IRONMAN is sold, do you have some sort of target leverage ratio. How should we think about how much cash you want to keep at the Company versus how much you might want to return to shareholders? Thank you.

Hengming Yang -- President and Chief Executive Officer

Hi, Alan. So I forgot, what's the first question?

Alan Gould -- Loop Capital -- Analyst

About the timing?

Hengming Yang -- President and Chief Executive Officer

Timing, I remember, sure. Yeah, no -- we don't see any hurdles, both parties are actively prepared for the closing. The only thing, we're waiting is the government clearance of the antitrust filing. We still have one country, there are four countries and we got three clearance. There is one country which we're still waiting for and we expect to get that clearance any time from now to end of June, could be early July. And the government approval slowdown a little bit in the Europe country because of the pandemic. So, and the team are all working preparing the necessary documents due for the closing. So we are working as we planned. For the tough leverage. Brian, you want to cover?

Honghui Liao -- Chief Financial Officer

Yeah, I can cover that. Actually, you may refer to slide number 7 -- 17 that shows a pro forma post sale, repaid Credit Suisse facility about EUR208 million and our total debt will be reduced to EUR473 million [Phonetic] and our gross leverage will be around three times at, I mean pro forma wholesale sale and the net leverage will be around 1.4 to 1.6 times.

Alan Gould -- Loop Capital -- Analyst

And that be 3 times and 1.4 to 1.6 times a projected 2020 type EBITDA, adjusted EBITDA I assume, correct?

Honghui Liao -- Chief Financial Officer

Yes, correct.

Alan Gould -- Loop Capital -- Analyst

Okay, thank you so much.

Honghui Liao -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Edith Kwan -- Head of Investor Relations

Hengming Yang -- President and Chief Executive Officer

Honghui Liao -- Chief Financial Officer

Bryan Kraft -- Deutsche Bank -- Analyst

Jason Bazinet -- Citigroup -- Analyst

Alan Gould -- Loop Capital -- Analyst

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