Live Nation Entertainment Inc (LYV) 2006 Q1 法說會逐字稿

Good morning. My name is Eduardo and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Live Nation First Quarter 2006 Earnings Conference Call. (Operator Instructions.) It is now my pleasure to turn the floor over to your host, Michael Rapino. Sir, you may begin your conference.

Thank you, Operator, and good morning, everyone. Welcome to our First Quarter 2006 Conference Call. I am joined here today by Alan Ridgeway, my Chief Financial Officer. I'll begin today's call with a brief overview of recent developments. I'm going to provide you with some color on our progress of implementing our strategic plan. Alan will then provide a financial overview, including details on the new financial segment presentation, which conforms to the realignment of our business. We'll then open up the call for questions.

Before we begin, let me remind you that this morning's call will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to our recent SEC filing for a description of risks and uncertainties that could impact the results.

It's been four months since Live Nation was spun off from Clear Channel and I am pleased with the progress we have made thus far in implementing our new strategic plan. Our first quarter results are in line with our internal expectations. Our revenues were up a healthy 16%, primarily due to the strong quarter for music and motor sports event business. And we achieved operating income of 8 million for the first--for the quarter, as compared to a loss of 28 million last year.

Overall, our business is trending well and we are optimistic about our near term outlook as we enter the busiest period of the year. As I discussed on our last call in late February, we essentially completed the first phase of our turnaround plan at the time of the spin. This included the realignment of our business from 12 separate units into 6. We also exited several non-core businesses and reduced our workforce by 10%, which should produce approximately 20 million in cost savings in the current year.

So we begin the--began the year with a refocused strategy, the right assets, and the right management in place to move this Company forward. We are now aggressively moving ahead with Phase 2 of our plan. 2006 will essentially be a transition year for us as we complete the shift from a cost-cutting and realignment stage to an aggressive execution phase.

We are fully focused on our strategy of vertically integrating towards the fan as we seek to become the place to go for live entertainment. We are reviewing a number of avenues where we can be more effective at providing value to our customers before, during, and after the event. By expanding our relations with our customers beyond the two-hour experience of a show, we believe we can maximize the value of our key assets - our relationships with our artists, our network of 150 venues that we own, manage, or book, and the 60 million fans who attend our events annually. This will allow us to create and tap new ancillary revenue lines.

I will now take you over our strategic overview of our three core divisions, which are intertwined and rely on each other. These three core activities form the basis of our reorganization and a change of our reporting segments at the beginning of 2006. They are (1) our live event division, (2) our venue management division, and (3) our digital distribution division.

I will now provide an overview of each of them starting with our event division. Our event division--we remained focused on building upon our global leadership in live entertainment, whether it be music, concerts, theatrical, or motor sports. We have initiated the transition to drive clearer focus aimed at maximizing our venue network. As such, we have provided all of our bookers and promoters--producers with a clear show volume and profit objective for the year. This is backed by a tailored incentive program, which is based on meeting these objectives, marking a fundamental change in the way we do business.

Our event division's primary purpose is to fill our network. Our highlights during the quarter include a very successful U2, Coldplay and Aerosmith tours, record-breaking attendance for our Supercross division in Atlanta, and the start of a Spam-a-Lot tour in the U.S. within our theatrical division. As I mentioned, we are pleased with the momentum we are seeing as we enter into the most important season of the--part of the year. Heading into the summer, we have tours as varied as Madonna, Jimmy Buffet, Dave Matthews, Nine Inch Nails, Kelly Clarkson, Rascal Flatts, Crosby, Stills, Nash & Young, Shakira, and Oz Fest, just to name a few.

According to Pollstar, the 2006 concert season is looking much healthier than last year, crediting it to the industry paying greater attention to pricing and producing a more customer-friendly product.

Our second core division is our venue management. Our venue management network is the backbone of our Company. We own, operate, or have exclusive booking rights for over 150 venues around the world. This includes a mix of clubs, theaters, amphitheaters, arenas, and festivals. We continue to build a world-class venue management team and remain focused on maximizing the value of our venue network. In this regard, our President, Bruce Eskowitz, continues to review our footprint and venue mix and remains proactive in seeking opportunities to expand and diversify our global footprint.

We are pleased to announce that we have conducted our first corporate level meeting with Aramark as we seek to enhance our customer relationship in order to improve product offerings, point of sale, and customer service levels. We are committed to providing new products for our fans to driving per head revenue. We will implement 10 test programs this summer that include Fresh For You program, offering alternative food and beverage opportunities at our venues, offering more food served at your seat, offering more value-priced meals, offering more aggressive selling of beer, sodas, and waters. We believe working with Aramark we have great opportunity in maximizing and increasing our service level and our per head volume.

We are also working with a consultant to provide customer service training to all of our amphitheater staff, something we have not done in the past. Again, the focus is on improving the fan experience. It won't happen overnight, but we believe the steps we are making will lead to gradual progress and we know a happy fan will result in higher revenues.

We continue to wire our venues, which will help us drive ancillary broadcast revenues. We began in 2005 by wiring 50 of our amphitheaters, and we will now move forward to wire over 120 global venues, turning them into virtual live studios which are capable of delivering 3G, Podcast, HDTV, Video-on-Demand, Live Streaming. We believe this is a great area of opportunity as we build the largest live digital studio network in the world.

And finally, the review of our property valuation has commenced with the appointment of CB Richard Ellis. And as we noted in our last call, our goal is to have this review completed by the end of the year.

On our sponsorship front, which is mostly rooted in our venue division, we continue to see strong interest in our properties with the renewal of our deal with Anheuser Busch and a new deal with Nikon for the exclusive naming rights of the Jones Beach Amphitheater.

Our third division in priority is our digital website and branding initiatives. At the core of our plan is our new brand and brand strategy, Live Nation. The task we face in the near term is to realign the majority of our 200-plus brands and websites under the Live Nation banner. While building out a centralized website for customers, our goal is to establish and build a focused portfolio of the leading live event sites in the world.

Our music division will be led by our LiveNation.com site. Our theatrical business will be serviced by BroadwayAcrossAmerica.com. And our motor sports division will be served by Supercross.com and MonsterTruck.com. These five sites will be world leaders in delivering information to those key events.

During the first quarter, to build a backbone behind our digital distribution business, we hired a new team of senior Internet executives to manage all of our sites and refocused them under our core banners, which include Live Nation, Monster, and Supercross. This team is focused on implementing our web strategy, which will provide fans with leading portals for music, theater, and motor sports, to access information, content, tickets, and be the backbone to building our eCommerce business of the future for events and venues. We're already starting to build traffic in our sites through radio, branding, and emails, as we spend over $200 million a year on event marketing, and we will now use that to push our websites.

In summary, I am pleased to announce that we have just completed the sale of our interest in some large-scale theater projects. We sold all of our interest in Planet Hollywood Las Vegas, a venture project comprised of two theaters, as well as part of our interest in Phantom of the Opera in Vegas, and a touring property with Cirque du Soleil called Delirium. We've sold these assets as we look to continue to refine our strategy and reduce our high capital investments in projects that are non-Live Nation venues. We remain very committed to Las Vegas. It is a key market for us for our music concert business. We continue to build our annual business in Las Vegas through promoting our music concerts.

To conclude, we are now aggressively moving forward with our turnaround strategy. It's still early in the cycle of our business plan, but we believe we have a tremendous foundation of unique and exclusive content. And we are working hard to extend our relationships with all our customers beyond the two-hour event. We feel that our industry is healthy and growing, and we are optimistic about the peak concert season ahead. We believe we are taking the right steps to turn this Company around with the goal of fully unlocking the value of our assets to benefit our partners, customers, and ultimately, our shareholders.

I'll now turn it over to Alan for a review of our financial results.

Thank you, Michael, and good morning, everyone. Before I begin, let me point out that we will refer to non-GAAP measures in this presentation. And in accordance with SEC Regulation G, we have provided full reconciliations for you in the earnings release of our non-GAAP measures to their most comparable GAAP measures. The earnings release is also available on our website.

As Michael has already noted, our first quarter results reflect our adoption at the beginning of 2006 of new financial reporting segments, which conform to the business realignment that we undertook at the end of last year. The three segments are events, which includes the promotional production of live music shows, theatrical performances, and motor sports events; venues and sponsorship, which covers the operation of our 150-plus music and theatrical venues, the sale of premium seats and sponsorship; and digital distribution, which is responsible for the management of our online and wallet activities, including the development of our websites and managing our in-house ticketing operation, as well as our third-party ticketing relationships.

And turning to our financial results, as Michael mentioned, our third quarter revenues increased by 16% to $516 million, the increase being primarily due to strong growth in our events segment. We are also pleased to report that operating income for the quarter was $8 million, an improvement of 36 million compared to the loss of $28 million in the first quarter of 2005. $7 million of this turnaround was attributable to the gain on the sale of [indiscernible] Sports Agency in Los Angeles, and 25 million was due to a reduction in litigation expenses compared to 2005. However, this still leaves an underlying 4 million improvement in operating income, and an improvement in operating margin in what is always our quietest quarter.

Our OIBDAN, which we define as operating income before depreciation, amortization, non-cash comp, and gain on sale of operating assets, amounted to $16 million, compared to a loss of $12 million for the same period in 2005. $25 million of this $28 million increase is due to the reduction in litigation expenses. In addition, our free cash flow for the quarter, which we define as net cash for operations less maintenance CapEx, improved $12 million to an inflow of 28 million.

Turning to our performance by segment. Our events segment saw revenues increase by 23% to $422 million, mainly driven by strong domestic music tours compared to the same period last year. The main tours driving this increase were Coldplay, Billy Joel, and Aerosmith.

Motor sports also experienced a very strong first quarter, which is when most of our activity takes place. This was driven by an increased number of events and record attendances for the Supercross Series, which averaged over 46,000 people for 17 events, including over 70,000 for the Atlanta event.

The other parts of the event segment, international music and global theater, experienced a decline in revenue in the quarter. In both cases, this is more due to the first quarter of 2005 benefiting from a very strong content, such as The Lion King and Hairspray tours, rather than a lack of product for this quarter, which has seen tours of Wicked and Moving Out, as well as the start of the Spamalot tour.

Operating income for the event segment was $14 million, compared to a loss of $10 million in the same quarter last year. $12 million of this improvement was the result of reduced legal contingencies, but the remaining $12 million is due to domestic music and motor sports events.

Moving on to venues and sponsorship. This segment reported revenue of $78 million for the quarter, an increase of $3 million, or 4%, compared to 2005. This increase was driven by $7 million of revenue from our Mean Fiddler venues in the U.K., of which we acquired a 50.1% interest in the third quarter of 2005. This has been offset by reduced revenues at some of our domestic and international theatrical venues for the same reasons I just outlined for the event segment.

Similar to the events segment, the first quarter is traditionally the weakest quarter for our venues, and therefore, revenues are not usually sufficient to cover the fixed costs associated with running these venues. The segment experienced an operating loss of $14 million in the quarter, which is an increase of $5 million over the loss in the same period of 2005. This increase is due to the combination of the weaker content that I just mentioned and the cost of building our global venue management team.

Digital distribution recorded revenues of $11 million in the first quarter of 2006, an increase of $1 million over the same period last year. As you would expect, this is driven by the increase in ticket sales in domestic music and motor sports. Operating income for this segment was $8 million, a decrease of $1 million compared to the third quarter of 2005. This decrease reduced increased costs related to building the digital management team and developing our online presence.

As for the other operations, it is principally comprised of sports representation business and a number of businesses that were sold or terminated during 2005. Net revenue amounted to $9 million in the quarter, which is 11 million below 2005. It is mainly due to the [indiscernible-accented] an Australian golf event, as well as the sale of part of our sports agency business based in Los Angeles. Despite this drop in revenue, operating income in other operations increased by 6 million to 9 million for the quarter. As you may expect, this is due to the gain on the sale of the sports agency in Los Angeles.

Corporate expenses amounted to $8 million in the quarter, a decrease of $12 million over the same period last year. This is entirely a result of the reduced litigation contingencies and expenses.

Turning to our balance sheet, our balance sheet remains very strong, with our cash balances at the end of the quarter increasing by $5 million to $409 million, and our debt remaining at $406 million. Our maintenance CapEx in the quarter was 12 million and is an increase of 4 million over the maintenance spent in the first quarter of 2005. This is a result of the continuing suppression of our amphitheaters prior to the summer season commencing.

In regards to our Stock Repurchase Program, since the program was authorized on December 22, 2005, we've acquired 3.4 million shares for a total price of $42.7 million. This equates to an average price of $12.65 per share. This is the same number of shares that we reported in our last earnings call.

Regarding guidance, as we noted in the fourth quarter call, we're in the early stages of a turnaround of our business. And having just implemented new segment reporting, we will not be providing specific guidance at this time. We will continue to evaluate our finance practices with an eye towards providing insight on our current performance and commenting on overall trends in the industry.

With that said, we believe we hit a low watermark in terms of cash flow performance last year. As a result of a number of refurbishment projects, we expect 2006 maintenance CapEx to run at a similar level to 2005 before dropping back to more normal levels in 2007. Finally, we would naturally not expect the level of reorganization and litigation expenses experienced in 2005 to reoccur during 2006.

That now concludes our prepared remarks. And now, we'd be happy to take your questions. Operator?

Thank you. (Operator Instructions.) Our first question is coming from David Joyce of Miller Tabak Company. Please go ahead.

Thank you. A couple of questions. On the cash flow statement, you've got purchases of PP&E of 17.2 million. Does that fully include the maintenance CapEx of 11.4 million? And does the rest of that--is that--would that be considered growth CapEx?

David, hi. Yes, that's right. You've got the 11 to 12 million of maintenance CapEx. And then, the balance of that would be growth CapEx, some of that being on the project internally with the Planet Hollywood project that Mike mentioned.

All right. And the PP&E on the balance sheet, when was that last mark-to-market?

Our practice has been as various acquisitions have occurred over the years, obviously the values have been looked at and mark-to-market when necessary or fair value, as I say, when necessary. So there hasn't been an overall reevaluation of the properties since everything has been brought together.

But when Clear Channel acquired SFX, was it all brought up to date at that point, do you know?

I believe it was, but there was no major adjustment at that time, except that the assets had been acquired by SFX and adjustments would have been occurring over time.

Okay. That's it. Thank you.

Thank you. (Operator Instructions.) Thank you. Our next question is coming from Gordon Hodge of Thomas Wiesel Partners. Please go ahead.

Yes, good morning. Just a question on digital. I think the--sounds like most of the revenues are from tickets or service charge rebates, particularly from Ticketmaster. But I'm curious if you could talk about how--what percentage of tickets are being sold to your events by LiveNation.com. Thanks. Roughly would be great.

Yes. We have an exclusive contract with Ticketmaster who sells all of our tickets. We have over the last year started to include www.livenation.com, or at that time it was cc.com to start a relationship with the customer and we ultimately still point them to Ticketmaster to actually fulfill the ticketing. So we currently sell 90% of our tickets through Ticketmaster in North America. In Europe, we have a relationship with Ticketmaster in England--.

--And Holland--.

--Holland and in various countries. There's different suppliers depending who is available to market. So we sell our tickets through Ticketmaster. We try to point them to our website so we can create our database and have our direct relationship with them. And we currently are able to sell 10% of our tickets of a [indiscernible] of ours through our own system and that we have been doing for the last two years.

Great. Thanks.

Thank you. Our next question is coming from [Carol Lynn] with [Fortis Investments]. Please go ahead.

Thank you. On the sale of the assets, was--could you quantify the impact on the revenue line? And also, could you let us know what the proceeds are from the sale?

The--there was--you're talking about the-- you're not talking about the sports [indiscernible], you're talking about the Las Vegas assets?

Yes, the Las Vegas assets.

Yes, they aren't actually generating any revenue at this time.

Okay.

They were--they are not completed yet. They are in progress.

They're in progress. Okay. So what is the financial impact of the sale?

The main impact to us is that we've recovered some of the costs that we'd already spent on those projects, particularly on the Planet Hollywood project.

Okay.

The forward commitment.

Yes. And the forward commitment that we had on those we've now exited.

Which provides us with that capital to reallocate against what we believe are more strategic opportunities in the future.

Okay, that sounds great. And the balance sheet, I would characterize your balance sheet as a little lazy. You have a lot of cash offset by debt. Could you explain that a little bit?

I like the term. Yes, I agree that our balance sheet is probably more than healthy at this stage and provides us with strong resources to implement our strategic plan. I would expect as we go forward in implementing that plan that those cash levels will come down and you'd see a more--perhaps a more normalized balance sheet, not quite so lazy, as you said.

And finally, you did mention that Pollstar is saying that the '06 concert season looks like it's going to be an improvement over '05. Is part of that improvement--could you just let me know how much--could you put a color on that? Is this a price issue? Is this an attendance issue, or--could you just give me a little guidance here why it's a better season?

Well, the--Pollstar would have reported on the industry's first quarter as being up over 20% in attendance and events. So 2006 seems to be off to a strong year in terms of events and attendance, and price always follows that. So the belief in Pollstar's analysis is that there would be--that strong of a start of a season will provide an overall year that will be stronger than last year, just because of the very strong summer--first quarter start.

Okay. That's very helpful. Thank you.

Thank you. Our next question is coming from [Phil Gatner] with GWA. Please go ahead.

Phil Roche. Hi, guys. This is [Phil Roche] at [Church Weiss]. Could you provide us with an update on your strategic evaluation of the real estate assets?

Hi. It's still very early. Like Michael said, we've appointed CB Richard Ellis and they started really about a month ago now--working through the portfolio. So we're not expecting to get anything back from them until sort of--I'd say, late June. And then, there'll be further exercise to complete after that.

Okay.

So it won't be until later in the year we have some more color on it.

Do you expect it will be coming to the market in late June with their--with what they find?

Not. I don't think it's going to be that early.

Okay.

Sir, does that complete your question?

Yes.

Thank you. (Operator Instructions.) Thank you. Our next question is coming from Scott Bush of [indiscernible] Partners . Please go ahead, sir.

Yes, if memory serves correct, your agreement with Ticketmaster expires sometime in the very near future. If you could kind of maybe give any guidance as to maybe what changes might happen if that were--agreement with Ticketmaster were renewed?

We have--December 2008. We have--we've had a long relationship with Ticketmaster. We have a very good relationship with Ticketmaster as they are--as we are evolving our business models with more products and more options for the fan, whether its auctions and secondary ticketing. So we still have two years to evaluate and look at our options. And we would assume we'll have very lengthy discussions with Ticketmaster about how we can continue to work together, if we can both accomplish our business objectives. I think the first and foremost strategy for us is about building the brand Live Nation and being the storefront with the customer.

We spend and invest in live content - over 28,000 shows last year. And one of the primary benefits of that has to be us having a relationship with that fan, building a database, and being able to sell and communicate and market directly to them. So that's the reason for the push with our website and our brand. And Ticketmaster has been very supportive of that as they are truly the sales agent for the transaction and will continue to be. And we'll look at all options going forward and we have great faith that they're a great company with a lot of technology and a lot of back-end tools in the ticketing business. And we'll look and explore all options with them with our new strategy of being the front door.

Okay. Thank you.

Thank you. Our next question is coming from David Joyce of Miller Tabak Company. Please go ahead.

Thanks for the follow-ups. A couple of questions again. On the cash balance on the balance sheet. I guess that's going to be used for part of the strategic implementation. Should we assume that you're going to be acquiring a number of venues so you can have a greater margin from those venues? And sort of what portion of that is the cash level - which is kind on the high side - is just related to timing ahead of the actual performances this summer?

Maybe if I take the second part of the question first. I've not sure if you were on the call we did--the fourth quarter earnings. But I explained on that one that [indiscernible--accented] that the cash balance does move according to the--where you are in the concert season. And as you'd expect, during the first quarter, we're selling a substantial number of tickets for the quarter two and quarter three concert season. So I think you really need to look at the [indiscernible] income on the balance sheet as well, which shows about 386 million at the end of the first quarter. So that's the--that is the advanced ticket sales that we've got, which is obviously a boost in the cash balance.

But then, like I said as well on the last call, I think you've got to factor in the prepaid expenses as well, because that will include some deposits that's going to assets plus some other show expenses that have been paid up front. So that gives you a better idea of the [indiscernible] like the underlying cash.

In terms of where that cash is going to be used, I think it's clear from what Michael has talked about on the strategy a number of times. If the--we're looking to expand in the--sort of the mid-size venue range, both domestically and internationally, as well as investing in our digital infrastructure - our websites and things around those websites. So I think that's where you would expect us to be spending that money.

All right. And conceptually on the tours this summer, is--what are the economics in terms of the number of artists that can command guarantees from you and what are the margins for the--margin ranges for the different types of artists you have going through the summer?

It's hard to sort of give a summary of what those margins would be. That varies a lot from artist to artist. Michael gave a range of the artists that are touring this summer. The majority of those are going through our amphitheaters. I think as we've explained before, if the shows go through our own venues, then we do get higher margins on those than if they're touring third-party venues. Seasonally, then, we usually see that in the first quarter there's more tours perhaps going through third-party arenas. It's more sort of the summer season where our own sort of internal volumes pick up.

Okay. Thank you.

Thank you. There are no further questions at this time. I'll now turn the floor back to Management.

Thank you, everyone, for your time. Thank you, Operator. And we look forward to a great summer concert season. Thank you.

Thank you. This concludes today's Live Nation First Quarter 2006 Earnings Conference Call. You may now disconnect.