Live Nation Entertainment Inc (LYV) 2007 Q2 法說會逐字稿

Good afternoon. My name is Mary, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Live Nation second quarter 2007 earnings 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) Before we begin, Live Nation has asked me to remind you that this afternoon's call will contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to Live Nation's SEC filings for a description of risks and uncertainties that could impact the actual results. Live Nation will also refer to some nonGAAP measures in this call. In accordance with SEC regulation G, Live Nation has provided a full reconciliation to the most comparable GAAP measure in the earnings release and on the website. The release, reconciliations and other financial and statistical information to be discussed on this call can be found on LiveNation.com under the about us section. It is now my pleasure to turn the floor over to Michael Rapino, Chief Executive Officer. Sir, you may begin.

Thank you. Thank you everyone for joining the call. I'm going to keep my comments brief today, then turn it over to Al and my CFO and then we'll open it up for questions. It is a challenging yet exciting time for the music industry. The traditional fragmented music industry has been turned upside down by internet distribution, and at the same time Live has become more and more important to the artist and become their main driver and foundation to its long-term career. For Live Nation, these changing times provide an opportunity. As the global leader in live music business the internet is providing an opportunity to expand our business model, not challenge it. Our vision is to build a vertically integrated live music platform that provides touring artists the opportunity to maximize their revenue all aligned under one platform. We are already the leader in concerts globally and we seek to solidify that position and grow our business by providing our artists with the triple play of services. As our base business, we are the most efficient global concert promotion and venue provider for the artist. Combined with that, we're building our one-stop shop of live and (inaudible) services and to layer on that and to become a powerful marketer and e-retailer for them we're building a direct sales channels to fans via Live Nation.com. To achieve this vision we have a well defined strategy to transform our business. By fixing our core North American business and improving our margin while at the same time expanding our platform and service offerings.

During the second quarter we had made great progress on both fronts. In 2007, we turned our attention to fixing and improving our North American business. We're seeing great success in Q2 as we have doubled our North American amphitheater margin and helped to improve our overall North American margin, one of our biggest accomplishments this year. We achieved this accomplishment despite a softer 2007 concert season. Our main strategies to achieve this result have been a more disciplined buying strategy and the reduction of variable costs. Also this quarter we solidified our North American platform by buying the remaining interest in House of Blues Canada, we already did not own. This live music market in Canada is incredibly vibrant market and provides great opportunity for us in its synergistic relevance to our U.S. market base. And our international vision, which is our highest margin business, continues to grow and had a great quarter with strong growth as Alan will take you through, driven mostly by increased promotion, strong festival and better than expected performance by our recent acquisition in Spain.

As we fix and focus on running a more efficient core business, we are also expanding our business offerings. Two fundamental divisions that look to expand our core business are our on-line and artist nation division. Artist nation seeks to create a deeper relationship with artists, providing them with additional service and products that we can market to our massive fan base. This quarter we announced we were successful in consolidating and aligning objectives in this division by acquiring the remaining stakes in Trunk and Musictoday. And our on-line division is beginning to flourish. During June the traffic on our combined websites reached an all-time high of 11.9 million visitors. This is driven in part by the success of sale of exclusive tickets that we sell to registered members and other product services we launched on-line in April of this year. Already we have sold $2.6 million of inventory. In closing, we are thrilled with the progress this management team is making in tracking our transformation and turning Live Nation to the number one music company in the world. I'm now going to turn it over to Alan, who will take you through the financial results.

Thank you, and good afternoon, everyone. You probably have noticed our earnings release is a lot shorter than in previous quarters. We've decided to shorten our presentation to focus on the key drivers of the quarter. If you're looking for more information, the financial tables that were in previous releases are posted on our website and there's more detail in our 10Q that was filed earlier today. For the second quarter of 2007 on a pro forma basis including all of the acquisitions and divestitures completed through the end of the quarter, our adjusted OIBDA was $46.6 million, representing a 4.4% margin. These results were an improvement or both the dollar and margin basis over 2006, as, adjusted OIBDA increased $17.1 million or 58% and our margin increased over 110 basis points. These results were driven by both North American music and international music operations.

As Michael mentioned, in North America on a lower number of shows, we successfully improved our amphitheater operations for a combination of better buying and reduced costs. Our international music operation benefited from strong promotion activity and a great start to the festival season. On a reported basis adjusted OIBDA for the quarter also improved by $18.5 million to $45.6 million. In addition to organic growth that I just mentioned, these results also benefited from our acquisitions of CPI, House of Blues, Musictoday, Gamerco and Jackie Lombard, offset by the divestitures of our sports agency business and various other small assets. I'll now provide you with a quick overview of the reported results for each of our segments. Starting with North American music, OIBDA increased by $5.9 million and margins improved by .5%. This improvement was primarily due to the operation and improvements at our [AMPs] and acquisition of House of Blues. These were partially offset by increased legal costs related to our ongoing antitrust litigation existing prior to spinoff, as well as costs associated with our Live Nation studios initiative where we are filming content in our venues for distribution on both LiveNation.com and for other upcoming distribution channels. We also experienced reduced profit from arena events compared to the same quarter last year.

For international music, OIBDA increased by $11.8 million, $9.8 million on a constant currency basis. And margins improved by 1.6% due to the acquisitions promoted in Spain and France at the end of last year, and improved results in several of our festivals including download and Hyde Park calling in the U.K. and Rock Werchter in Belgium. In addition, we benefited from generally strong promotion and agency activity in the quarter, as well as a successful tour of the Mama Mia musical in Denmark and Finland. In particular, our new acquisition in Spain had a great quarter with 11 shows by Louis Miguel and shows by Roger Walters, the Rolling Stones, The Who, and Beyonce, amongst others. Global artist OIBDA decreased by $327,000. This segment benefited from the acquisitions of CPI, Musictoday and Trunk. But this was offset by timing of tours in the year and an overall reduced volume of global tours compared to 2006, which is as we previously said was a record year for these mega tours. Global digital OIBDA increased by $382,000, due to increased sponsorship associated with our in-house ticketing business principally from the new Nokia Ticket Rush program.

Global theater OIBDA increased by $3.5 million due to strong results from our UK operations, which featured productions of The Producers and Wicked. This was offset by a reduced number of events and attendance for our North American presenting market. The process to sell our North American theatrical business has moved into the final round. There has been significant amount of interest in this asset and we've now narrowed it down to a number of bidders. We expect to make a further announcement on the sale prior to our next earnings call. Finally our other operations, adjusted OIBDA decreased by $3 million, due to the sale of the majority of our sports agency business, the sale of Donington Park Racetrack in the UK and the bankruptcy of [Altamobile] our motor sports business.

Turning to some other financial metrics, capital expenditures were $25.7 million for the quarter. Of this amount $13.9 million was associated with maintenance expenditures and the remaining $11.9 million was from other revenue generating projects, such as equipping our venues to film shows, completing the build-out of HOB in Dallas and refurbishing the Gramercy in New York. Pre-cash flow for the half year was a $12.4 million outflow, excluding a 20 -- $20.9 million investment in Academy Music Group compared to $2 million inflow for the same period last year. This reduction in free cash flow is driven by increased interest expense and cash taxes due to taxes paid in connection with CPI, which does not form part of our U.S. tax group and FIN 18 requirement to review operating losses by tax jurisdiction and to exclude losses in certain cases when calculating quarterly tax expense. As of June 30th, our reported cash balance was $467 million, and our total debt in preferred stocks totaled $650 million. We estimate our free cash balance, that is cash excluding cash related to future shows was a negative $36 million. Our free cash turn negative as we used excess tax to temporarily reduce our revolver bonds and thereby reducing interest expense.

On July 16th we completed an offering of $220 million convertible senior notes, June 20, 27 with a coupon of 2 7/8%. We received net proceeds of approximately $212 million which we used to repay our revolver balance to repay $19 million of a term loan of the general corporate purposes. Adjusting for this offering as of June 30th we would have $567 million of cash and cash equivalents, $65 million of free cash and $758 million of total debts in preferred stock. That now concludes our prepared remarks, and with that I'll open it up to questions.

Certainly, sir. (OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Our first question comes from Mark Wienkes from Goldman Sachs. Please go ahead.

Great, thank you. Very efficient. So the improvement in the North American ad margin great to see, first. Is there anything that is coming in the third quarter that might affect the ability to do that again in -- so for the main concert season? And then, second, if you look at the year-over-year improvement in operating income in North American music it looks like the amp business is about 30% of the total or so. So there is $340 million in North America music revenue at about a zero margin. What stops you from buying the shows better and running them cheaper, like you do in the amps, in the rest of that segment? That's it.

On the -- yes, the amp improvements that we've seen in the second quarter, and I see no reason why those won't continue into the third quarter. It is really from the better buying on those under 7,500 capacity shows and controlling our costs, so that actually will continue.

I guess on the better buying, is it something you centralized the buying? Or is it a new process, like, what structurally has changed?

Yes, we just instituted a much more centralized data bank of history on how we buy and what we buy, and Jason Garner, who is running that division now working with the presidents of the regions, have gelled us a more synergistic strategy on how they buy their shows across the country, based on a much more knowledge-based background.

Right. Okay. So it worked in, I guess, in your extending that -- those buying practices into the nonamphitheater businesses as well as just arenas were down year-over-year.

Yes, we knew -- I think we've been saying since the first call back in March that we knew that 2006 looked like a lighter year from a top arena show perspective. Whether that is arenas, tours or amphitheaters, the 10,000-plus artists looked to be a little low this year. So we knew that we had to not rely on wind on our back from show count, but it was the year that we had put in our plan originally that said in year two we would start looking at our fixed cost, variable cost structures in the North America and running it more efficiently, and attacking the amphitheater's business model as the first, and we're happy that in the year with reduced show count, and a softer market, we're able to increase our margins, which was not an easy feat this year.

Okay. Great. And then just one quick followup. If you could just touch on the impact or implications of adding AMG as you go into the 3Q. How does it help strengthen the portfolio or your offering?

Yes, that's brought in 12 great music venues in the UK which, is one of the strongest music markets. We already had a few music venues in that market, but this has really strengthened our position there.

Okay. Great. Thank you.

Our next question comes from David Kestenbaum from Morgan Joseph. Please go ahead.

Okay. Thanks. Can you provide an update on your thinking towards Ticketmaster? And have you done any test runs on what it would be like to operate your own ticket system?

No, we don't have any -- any updates yet. It's one of our key strategies of the future, and we've been working hard with Ticketmaster and others to review all options on how do we change our model and what has been most efficient and attractive option for our shareholders. So we are not ready yet to talk about that publicly.

Okay. And then also during the quarter you made a move into Latin America. Can you talk about those markets as, are they favorable, like the UK market or is it more like the United States?

We think it is a great market. We've talked openly that we have a global platform. We make more money on a international basis than we do in America given that we're in over 18 or 19 countries. And when we do tours we're in over 40 countries, depending on where the tour touches base. So international is a strong business. We think Mexico and Brazil are very strong markets. We do a lot of shows down there over the years in terms of bringing tours down there and it makes sense that we continue to look at that market and it is synergistic to America to be an expansion market for us, where the margins, if you look at a company called [Sia], which is a public company, you can look at their margins versus the North American basis and see that it is an attractive market.

Okay. And then, can you provide us an update on the Ozzfest, how that is shaping up and what are the ramifications and implications on your business going forward. Have you learned -- what have you learned from that?

Yes. We are in the start of, in the middle of, and we've got lots of learning. We've achieved the first and biggest success we wanted was the ability to distribute over 400,000 tickets online and have that direct interaction with the customer, and we -- online division did that flawlessly. We're driving lots of per caps. We're learning for the first few weeks a lot of the redemption rates which are ending up somewhere in 65% to 90%, depending on the cities. So we're making quick adjustments along the way to maximize the attendance at the shows and drive both our on-site consumption and sponsorship through it. So I think in the end it will be a successful model that says, if you can drive that many people through your venues and drive auxiliary revenues, the missing piece that we didn't have this year, because it was year one, was the one or two gigantic sponsors which really help to underwrite and add to the pot. So I think the credibility of this year's attendance base and execution would put us in an opportunity next year to probably attract sponsors much earlier and much bigger.

Okay, and then, finally, I know you don't like to give guidance, but can you give us consensus estimates, are you comfortable with where they are in the third quarter, since that's such an important quarter in the year? Thanks.

No. We can't comment on that.

(OPERATOR INSTRUCTIONS) Our next question comes from David Joyce from Miller Tabak & Company. Please go ahead.

Thank you. Could you clarify the reduction in amphitheaters, less than 7,500 that's in these. Were those garnering 7,500 or less, but had greater capacity? Is that why you got those out of the system?

In booking concerts, a band that sells 4,000 tickets can be a wild success when you put them in a Wiltern and a disaster when you put them in an arena. So sometimes we're too single mindedly obsessed with putting things in our amphitheaters, and this year we realized that if a band can sell -- sells less than 7,500 tickets it doesn't make sense to overpay and put that band in your amphitheater, but they are a great act to put at the Fillmore or some other venue in town that has a natural 4,000 to 5,000 capacity, and capacity equals demand, and thus the price is right. So this year we just -- as I've said over the last year, we tend in North America to be for the -- historically we tend to be too amphitheater-focused. It is a great business line. It is one of our largest, but we're looking to have a very diverse portfolio in our businesses, and when we look at our House of Blues and our Fillmore's and our arena relationships and our amphitheaters, putting the band in the right venue at the right price is the most fundamental policy we have to stick to, not put it in the amphitheater at all cost. And that's what we did this year, is just make sure we line up the artist with the right venue.

Great. Yes, that clarifies it for me. Because you've talked about liking the medium and small sized venues, so I guess it is an amphitheater capacity issue here. And secondly, are you done reviewing your asset portfolio of where you -- markets you're going to be getting in or out of?

Yes, we completed a review really this -- at the end of last year and, as you know, we've got certain venues that are on the market at the moment and we're working through those sales. Absolutely. We're selling them as real estate rather than venues, so that takes a bit longer as the developers have to add their diligence to it. But, with that, that review of the estate is complete.

Okay. And where in your financials do you have the economics of your participation with Korn, since there there was the chatter that maybe you're looking to do something similar with Madonna. Is that in the global artists division?

That's -- yes, our investment in the Korn joint venture is about a 6% investment, so that's actually come down in our equity investment, it isn't up in the EBITDA numbers. Okay. Thanks.

Ladies and gentlemen, this concludes our Q&A session, and this also concludes our conference call for this evening. You may disconnect your lines at this time, and please have a wonderful day.