Live Nation Entertainment Inc (LYV) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen. My name is Rahim and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Live Nation Inc. conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Chief Executive Officer, Mr. Michael Rapino. Sir, you may begin your conference.

Thank you, operator, and good morning everyone. Welcome to our fourth quarter and full year 2005 conference call as well as our first earnings conference call as an independent public company. I'm joined here today by Alan Ridgeway, our Chief Financial Officer.

Since many of you are probably new to the Live Nation story, I will begin our call today with a brief overview of our new strategic vision, review some accomplishments, provide some contest on where we are focused on in 2006 and the years ahead. Alan will then provide a financial overview. We will open the call and take your questions.

Before we begin, let me remind to that this morning's call will contain forward-looking statements that are subject to risks and uncertainties that could cause the actual results to differ. Please refer to our most recent filings with the list of risks and uncertainties that could impact the results.

It has been a very exciting few months here at Live Nation. Al and I formally took the reins in the fall of 2005 and on December 31, 2005, we successfully completed our spinoff from Clear Channel Communications. Today, Live Nation is the leading content and distribution company in the world. Content is defined by our concert, theatrical and motorsports events that we promote, produce or create which total over 28,000 on an annual basis and attract over 60 million fans. For a sense of scale, this represents a total annual attendance that is larger than the NFL, NBA and NHL combined.

The backbone of our company of our company is our venue distribution. We own, operate or book 149 venues around the world. This includes a mix of clubs, theaters, amphitheaters, arenas and festival sites. All told, we are the global leader in live content promotion, a proprietary distribution network resulting in a powerful consumer base.

We make our money in essentially two broad areas as we define as content and distribution. In the full year of 2005, approximately 15% of our OIBDAN after adding back severance, reorganization and litigation costs came from the content side of our operations. This primarily includes the promotion of live events, revenue created from the ticket sales. On a revenue basis, our content revenues represented approximately 80% of our 2005 results. Conversely, the remaining 85% of our OIBDAN is attributed to the distribution side of our business, representing 20% of our 2005 revenues. As you can see, this is the higher margin area of our business.

Historically, management focused on owning content and consolidating within the live content segment. Our going-forward strategy is broader. We're focusing on vertically integrating towards the fan. Stated simply, we're focused on providing value to our customers before, during and after the event. By expanding our relationships with our customers beyond the two-hour experience of the show, we believe we can maximize the value of our key assets -- our artist relationships, our 149 venues and our 60 million fan base who come to our events annually. This new approach recognizes that the content side of the business is the engine to filling our venue platform, but our profit drivers are the venue distribution side and all of the opportunities that arise from selling directly to 60 million fans? . We don't own content, we rent it.

Regarding our reorganization we have recently gone through, recognizing this broader shift in strategy, over the past five months, Alan and I have gone through a significant transformation. We have undertaken a thorough review of our management team, our cost structure and the alignment of our businesses. Specifically, we realigned 12 separate business units into six, which currently are made up of music run by [Arthur Fogel] and [Thomas Johansen], theatrical worldwide run [David Ian], sports run by [Dan Roeser], venue and sponsorship management run by [Bruce Eskowicz], marketing run by [Basil Durante] and interactive run by [Brian Perez].

We also in the process exited noncore businesses. We exited a business of content production, our exhibition division and music publishing. All told, we have reduced our workforce by 10%, resulting in expected $20 million cost savings in 2006. We now have the necessary infrastructure and resources in place for us to succeed. So while it is still early in the process, we have essentially completed the first phase of our turnaround. We have the right people in place and we have a clear understanding of who we are, what our mission is and who our customers are.

Importantly, we also have a new brand and a new brand strategy. In the past, local promoters had their local friends. For example, in New York, we have [Ron Dalestrop] Presents, Tea Party in Boston and Clear Channel Entertainment as our national brand. We had over 100 different brands competing in the marketplace. Now for the first time, we have one united consumer brand -- Live Nation. We believe the Live Nation brand growth to become a valuable asset going forward. Live Nation will be meaningful to consumers. We spend over $200 million a year promoting live events and for essentially no incremental cost, we can leverage this opportunity to brand Live Nation as well as livenation.com. We expect livenation.com to become an important consumer touch point for us. Under our current Ticketmaster agreement, we have the opportunity to sell 10% of our ticket inventory ourselves. In the past, we have not aggressively pursued this. Going forward, we will pursue this opportunity and with the benefit of a united brand and a single destination, livenation.com.

As we build livenation.com and build traffic and a database, we're confident we can drive our brand and create new ancillary revenue lines.

Looking forward to the balance of 2006, this year will be about the implementation of our new strategy, execution and from a financial standpoint, realizing the cost savings from our restructuring. Specifically, here is what you can expect from us this year.

Focusing on our venue management business strategy -- we will continue to build a world-class venue management team and we will spend some time determining our current market value of our real estate property. As well as with Bruce Eskowicz now in charge of our 149 venues, we will take a fresh look at our geographic footprint and our venue mix and look for opportunities to expand our footprint and diversify our venue mix.

Another example of how we will move forward is the recent signing of Wembley Arena to a 15-year management deal. We will continue to look at opportunities to manage venues that fit into our portfolio. We will focus on fewer events with a stricter focus on filling our venues. We make more margin when we put events in our venues and we will continue to streamline our business to fill our pipeline.

From an advertising spend, we spend over $200 million in advertising every year. Currently, we spend less than 1% online. However, our fans have told us they find out about concerts 60 to 70% of the time online. We believe this is a great opportunity for us to shift some of our advertising online to achieve better inefficiencies. In 2006, we'll look to shift 10% of our spend online.

Our third prong in 2006 will be launching our livenation.com Web site. We're building out our strategy and technology currently and we look to launch that later in 2006.

And four, we'll continue to secure our base as the leading content promotion company globally, and specifically we will continue to focus on our global and national touring business. This area of content is particularly profitable and provides the best vantage point to build long-term and wider relationships with artists.

Looking into 2007 beyond, in 2007 we begin to realize the initial operating benefits of our new strategy. We also expect to reevaluate our food and beverage relationship with Aramark as our current contract expires. We believe that this is an area that we can improve upon as an economic standpoint given food and beverage is one of our top four revenue drivers in our company. For 2008, we should further see operational benefits as our new strategy continues to take hold. We would also expect economic benefits to our new approach food and beverage we realized. In addition by the end of 2008, we should have clarity on ticketing and that current Ticketmaster deal will expire in December of that year.

So in conclusion, we expect our new strategic direction will unlock and create new opportunities for our partners, customers and ultimately shareholders. From a macro perspective, the live event industry is strong and the dynamics are compelling. Live Nation is becoming a more important partner to the artists as we are now the largest revenue driver to their bottom line. And while still early on, the pipeline for touring is stable as I look ahead to the important summer season. We're looking hard to extend our relationships within all our customers beyond the two-hour event. We think that over the next few years as we build Live Nation brand and leverage our incredible content and venue platform, we're going to become a great solution for artists as well as an everyday stop for the fans looking for a life experience. I will now turn it over to Allen for a review of our financials.

Thank you, Michael, and good morning everyone. Before I begin, let me point out that in accordance with SEC regulation G, we've provided full reconciliations to you in the earnings release for our non-GAAP measures and their comparable GAAP measure. Our press release can be found on the about us section of our website at livenation.com.

Today, I will provide a brief review of our results for the fourth quarter and full year. I will conclude with our thoughts on guidance. Michael and I will then take your questions. Please note that beginning in the first quarter 2006, we will change the format for our presentation and financial results, which will include the new segment data that conforms to the realignment of our businesses, as Michael has just discussed. We expect these segments will be Global Venues and Sponsorships, Global Music, Global Theater and Other. We will provide the new basis of presentation along with the appropriate historical financial data when we release our first quarter 2006 results and file the corresponding 10-Q. In the meantime, our fourth quarter and full year results are provided on the basis that conforms to the Form 10 that was filed in connection with our spinoff.

On December 21, 2005, Live Nation Inc., formerly CCE Spinco Inc., was spun off from Clear Channel Communications. As a result, the financial information provided for the periods discussed has been prepared on a combined basis from Clear Channel Communications' consolidated financial statements using the historical results of operations and bases of the assets and liabilities of Clear Channel Communications' businesses and gives effect to allocations of expenses from Clear Channel Communications.

Turning to our financial results, our revenues for the fourth quarter were $753 million, a healthy increase of $209 million over the same quarter in 2004. This increase in revenue was primarily driven by the strong domestic arena tours by U2, Paul McCartney, the Eagles, amongst others. Despite this increase in revenues, our operating loss for the quarter increased by $43 million to 63 million. As I take you through the operating results by segment, you'll see that 8 million of this increase was due to litigation cost and 26 million due to the reorganization of the business that Michael has already discussed. The operating loss for Global Music increased by 20 million to 29 million in the quarter. This includes 12 million of reorganization expenses and 4 million of litigation reserves, as well as a 3 million write-off in respect to some old music projects and a 2 million acceleration of depreciation as we revise the useful life of a couple of buildings.

Global Theater's operating results deteriorated by $12 million in the fourth quarter compared to the same period in 2004. 10 million of this is the result of severance and other reorganization costs in the quarter and the balance is mainly due to weaker product in our international theaters compared to 2004.

Our Other segment, which includes motorsports, sports representation and a number of other smaller businesses, saw its operating loss increase by $8 million to $15 million. 4 million of this arises from reorganization expenses and 5 million from the loss on sale of various operating assets at the end of 2005.

As for our corporate operating loss, this increased by 3 million to $15 million. The increase arose from 1 million of additional severance costs and 4 million of litigation. This what has been offset by some salary savings and a reduction in management charges in royalties from Clear Channel Communications.

Finally before moving to the full year, I should explain our tax charge for the quarter. For the fourth quarter of 2005, we recorded a current tax benefit of $41 million compared to 13 million in 2004. This increase is primarily due to taxable losses incurred in the quarter and prior to the spinoff which were utilized by Clear Channel Communications. More importantly, the fourth quarter also sees a deferred tax expense of $100 million compared to 17 million in the same quarter last year. This increase is mainly due to a reevaluation allowance of $77 million applied after the spinoff to a deferred tax asset that we've been carrying. Whilst prior to the spin, the tax loss (indiscernible) will be utilized by Clear Channel. Following the spin, we had to evaluate this asset on the basis of our prior taxable results as a stand-alone entity. Since we have a history of taxable losses, we had to make this provision. The final net loss for the fourth quarter amounts to $135 million, or a loss of $2.02 per share compared to net loss of $35 million for the fourth quarter of 2004.

Moving on to our full year results for 2005, combined revenues for the full year were up 4.7%; that's $2.9 billion. This growth of $132 million was mainly driven by a 121 million increase in Global Music revenues. This increase was a result of the strong fourth quarter arena tours which compensated for a reduction in amphitheater events that we experienced earlier in the year. The operating loss for the full year was $13 million compared to a profit of $59 million in 2004. Similar to the fourth quarter, 38 million of this decline in operating results was due to litigation expenses and 34 million due to severance costs, another cost associated with the reorganization of our businesses. This means that on a combined basis, the underlying operating result was flat to 2004.

Turning to the segments, Global Music's operating income for the year decreased by $29 million to 57 million. 11 million of this decrease arose from increased litigation costs and 12 million from severance and reorganization costs. The balance of the decrease is due to the project write-offs and an accelerated depreciation previously mentioned. Global Theater's operating income of $21 million in 2004 turned to a loss of 1 million in 2005. 11 million of this decline was due to the reorganization and 1 million from litigation expenses. In addition, write-offs from theatrical productions increased by $6 million at shows such as Lennon, Sweet Charity and [La Cage] failed to perform to expectations. We also experienced weaker attendances for some of [touring] product, such as Hairspray and Evita.

Our other segment showed operating losses increasing by $0.5 million to $12 million. 6 million of this increase is from severance and organization expenses and 10 million from litigation expenses. This has been substantially offset by growth in our motorsports business, reduced losses in various marketing activities as compared to 2004 and a reduced loss on the sale of operating assets.

Corporate operating loss for the full year was $57 million, an increase of 21 million compared to 2004. This increase was due to 16 million of litigation expenses and 5 million of severance costs. So the final net loss for the year was 130.6 million, or a loss of $1.96 per share, as compared to net income of 16 million for 2004.

Turning to the balance sheet and cash flow. Our cash balance at year end increased by $225 million to 404 million. 107 million of this increase is due to the 125 million of cash that we retained from our term loan, less 18 million that has been spent on stock repurchases to date. I will talk more about this later. Our debt at year-end amounted to $367 million, principally comprising the 325 million (indiscernible). In addition, we have 40 million of preferred stock. We therefore have a very healthy balance sheet and plan to use our cash resources to either fund investments, repay debt or repurchase stock depending on the opportunities that arise in the coming months.

Maintenance CapEx for the year was $56 million, 15 million higher than in 2004 as we commenced the refurbishment of a number of our amphitheaters in order improve the experience for both fans and artists. I would expect this higher level of maintenance CapEx to continue in 2006 as we complete these projects before dropping back to more normal levels in 2007.

New venue expenditure amounts to $36 million, which mainly related to the [Boy's] Theater in Philadelphia and completing the Panasonic Theater in Toronto. Our free cash flow for the year, defined as net cash provided by operations less maintenance CapEx, was a net outflow of $42 million compared to an inflow of 88 million in 2004. This swinging cash flow is primarily due to the costs associated with the reorganization of the business, our increased litigation expenses and an increase in international taxes, as well as the increase in maintenance CapEx that I just explained.

Before moving onto guidance, I'd like to update you on our stock repurchase program. As you may know, our Board authorized a $150 million stock repurchase program through the 31st of December, 2006. As of the year end, we have purchased 1.5 million shares for a total price of $18 million. This equates to an average price of $11.95 per share. Since year-end, we have purchased a third of our 1.1 million shares for a total price of $24.7 million. This amounts to an average price of $13.22 per share. We will continue to make our decisions on stock repurchases based on factors such as stock price, general economic and market conditions and the Company's debt levels.

Moving on to guidance, it's important to keep in mind that we're in the early stages of the turnaround of our business in many respects. As I mentioned earlier, we're in the process of changing our reporting method in regards to our new business segment. Therefore, we are not ready to provide specific guidance on a quarter to quarter or annual basis. We will continue to evaluate our guidance practices with an eye towards providing more insight for you into our future performance. All I would say is that I would not expect the level of organization and litigation expenses experienced in 2005 to reoccur during 2006. In addition, the cuts we've made at the end of 2005 should generate $20 million of ongoing savings, although some of this will be reinvested into our marketing and interactive divisions. At this point, I would like to turn the call back to Michael.

Thank you, Alan. As you can see, 2006 is really a transition year for us. We've just completed the restructuring and fixing of the cost structure. Phase I is now complete, but there's a lot of hard work ahead. Alan, myself and our division leaders are now focusing on communicating our strategy to employees and building a new culture of accountability. We are essentially a brand-new company and while the challenges are significant, there is a real sense now that we're in charge of our own destiny. That concludes our prepared remarks. Be happy now to take your questions. Operator?

(Operator Instructions). David Joyce, Miller Tabak Company.

Thank you. Could you give a little bit more color in the nature of the litigation, the expenses, what the claims were there and why they are actually expensed at this point? And also on the severance, where is all of that going? If you could just shed some more color on that, please?

In terms of the litigation, you will have seen in the Form 10 a number of cases that were opened at the time -- by the end of September. You know that the Jam case, which is the main one that we had outstanding, it was actually settled at the end of the year. So that represents a significant part of those litigation expenses. There's also another case mentioned regarding [Beck] (indiscernible) which is in our music division; that is also being settled before the end of the year. And then apart from that, there's some other minor cases that have been settled and then some where they are still open and we've made a provision for those.

On your question regarding the severance costs, as I just went through the segment, you heard how that is broken down across the different segments. It is basically spread across all of our businesses, both domestic and internationally. And equally, those savings that we mentioned would be spread across those various divisions.

And are those from contractual agreements with senior level employees, or is it a mix?

It's a complete mix. That was a broad range of staff that left the company.

Thank you.

(Operator Instructions). [Brian Broadbent], [Common] Capital Management.

Hi. I was wondering if you could provide some color just on your attendance. I think you said 60 million total fans. But of that 60 million, how much is going through your own venue network? And also, if you had any, you talked about improving capacity at -- improving performance at your own venues, just if you had any type of capacity metrics or anything you could -- color you could provide us, that would be great. Thanks.

Thank you. We have roughly about, if you simplified it, about 50% of our volume goes through our venues and 50% goes through third-party venues that we would rent when we're promoting a show. We are -- obviously when we put a show in our own venue, we maximize our margin. So the more shows that we can put in our venues or our festival network, there's a higher opportunity for us. So we believe that there's an opportunity to reduce some of our third-party shows that are not in high-margin markets or venues, as well as just focus more energy around our current existing network and either increasing show count or increasing the quality of the execution to sell more tickets to the existing shows in our venues. So we're going to continue to build an organization that first and foremost wakes up every day with the objective of filling our venue network to its capacity and is well executing to excellence to ensure that we sell every ticket.

And then you talked about evaluating your real estate. Could you comment -- and then, you're also sitting on a large amount of cash. Do you anticipate yourself being a net purchaser, a net seller of real estate over the next call it two years?

The first step is to understand our real estate valuation. We do not have a current report that we can look at. So Bruce (indiscernible) our president will spend this year really understanding our valuation of our real estate which provides us with great flexibility and opportunities going forward. We know that our venue network is the foundation to our business model and I think we will continue to look for opportunities to expand our network as we've done recently with Wembley's. But we have not at this point absolutely sure on the valuation and all of the opportunities that the report will unlock for us. So that will be our first step is getting it done.

Thank you.

Robert Routh, Jeffries.

My question has been answered. Thank you.

Andy Baker, Cathay Financial.

Thank you very much. Just a couple of quick questions. One, on the cash side, I know that your cash is still pretty high. Is there still an offsetting payable on the balance sheet for the cash received but not yet paid to artists I guess? And secondly, can you talk about the trend of ticket sales? I know through the first nine months of 2005, I think Pollstar had you down about 2%. Can you sort of give us -- and most of that was I guess the Q1 weakness. Can you talk about how Q4 ended up and how Q1 is shaping up?

Maybe if I start with the question on the cash. At the end of the year, we had about $236 million of cash on the balance sheet related to ticket sales for future shows.

When do you expect that to be paid out to the artist, whoever else?

I would say April, although that would go out in quarter one and maybe the early part of quarter two. But it would certainly be, so there's certainly a few large shows in Europe that went on sales before the end of the year for the summer season.

So, should we be looking at normalized I guess for the lack of a better word cash at about 200 million?

Maybe I'll explain the way that as a company we look at the cash. We would take our cash balance at the end of the year, adjust that to be about deferred income of 236 that I just mentioned. But then, I would also factor in the prepaid cost and artist deposits, which also are also on the balance sheet at the end of the year, which is 115 million. So that is really how we look at it.

Great. And on the ticket sales?

As you mentioned, Q1 was a softer Q for the industry and Q4 was a very strong quarter for the industry as you had the Rolling Stones and U2 and Paul McCartney and Coldplay finishing up their U.S. tours. And Pollstar now says that 2005 revenue was up to 3.1 billion, up over 10% from 2004. So for overall ticket sales, from our company, they were basically flat but a lot of that is purposely planned. We spent at the beginning and end of 2005 with being a lot sharper on the shows that we booked than the margins per show. One of our stats that we like to look at in 2005, it was the first time in five years that our per--show attendance went up, our per-show profit went up, our per-show cost went down in our venue network of the amphitheaters. So this year as I've said, when you have 50% of your capacity outside of your venue network, you have an opportunity to focus more on chasing margin, high margin shows, than marketshare, which we've done exclusively in the past.

Great, thanks. If I can just ask one more. You mentioned you think that there's flexibility and opportunity in your real estate. Do you see any real benefit to owning, or would you consider a sale leaseback long-term arrangement if that proved to be -- or some other form of financial engineering, if that proved to be the best use of your capital and your portfolio?

I don't think we're ready to comment on that yet. I think we'll, as I said, once we get our report done, we will look at all opportunities to maximize shareholder value. But there is a whole bunch of work to be done first.

Fair enough. Thank you very much.

(indiscernible), Eagle Capital.

You talked about your cash minus money owed to artists, plus your prepaid. What were those corresponding numbers for the end of the third quarter? You half the 404 minus 236 plus 115 for year-end.

I don't have those numbers to hand for the end of the third quarter, but you will certainly see those in the Form 10.

Okay, thanks.

Steve Shin, [AMTrust].

A couple of weeks ago, there was an 8-K filed where part of your sports business was sold to Arn Tellem. And in that, it mentioned it was sold for $12 million in cash. And I believe that came out to be three or four times EBITDA for that business. My question is, what percentage of your overall operating income before depreciation and amortization and losses on the sale of operating assets is your sports business, your sports representation business?

It's not really an analysis or a figure that we're providing at this stage, but I'd just say, it's not really a significant part of our earnings at the moment.

Was the 3 to 4 times EBITDA multiple of that portion of the business that you sold to Arn, is that in your eyes an appropriate multiple to use on that part of your business?

Yes, I would say that's fair.

Okay, thank you.

(Operator Instructions). Thank you. I would now like to turn the floor back over to management for any further closing remarks.

Thank you, operator. I appreciate everyone's time and interest and we look forward to reconvening at our next earnings call. Thank you.

Thank you. That does conclude today's conference. You may now disconnect and enjoy the rest of your day.