Live Nation Entertainment Inc (LYV) 2008 Q2 法說會逐字稿

Good afternoon. My name Robert and I will your conference facilitator today. I would like to welcome everyone to the Live Nation second quarter 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 session. (OPERATOR INSTRUCTIONS) Before we begin Live Nation has asked me to remind you that this afternoon's call will contain forward-looking statements that are subject to certain 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 results. Live Nation will also refer to some non-GAAP measures in this call. In accordance with SEC Regulation G, Live Nation has provided the full reconciliation for the most comparable GAAP measure in the earnings release on their website. The release reconciliation and other financial or statistical information can be discussed on this call can be found on the livenation.com under the "About Us" section. It is my pleasure to turn the call over to Michael Rapino, Live Nation's Chief Executive Officer. Sir you may begin your conference.

Thank you. Good afternoon everyone and welcome to our 2008 second quarter conference call. On today's call, I'll provide a summary of Live Nation's strategic and financial progress, Kathy Willard, our CFO, will then take you through the financials.

First and foremost, we are pleased to report that live music remains healthy, given the continued the economic slowdown that has impacted so many consumer-oriented businesses as expected concert attendance and per head revenue has held up very well and the pace of ticket sales remains robust. During the quarter our performance supports this. We produced over 5, 800 concerts compared to approximately 4,100 last year representing a 42% increase. Live Nation's total attendance at these events increased 14% year-over-year to 13.7 million. Our total revenue per fan attending these concerts increased 6% over prior year.

During the second, quarter we continued to execute on our strategic priorities. Number one growing revenue and adjusted operating income in our core distribution platform. Two, investing and developing our online platform ahead of our 2009 launch and three strengthening our balance sheet through additional sales of non-core businesses. On the last point we have stated in the past we are not in a position to disclose the status of a potential motorsportssale. I will confirm the sale process started several months ago and we are continuing to evaluate our options.

Live Nation's mission is to maximize revenue generated by the live concert experience. Our business model is driven by monetizing our global distribution pipe serving three clients: artists, fans and sponsors. Our distribution pipe has two levers acquiring and producing artist rights, and two, optimizing and expanding our pipe. And we will soon add a third lever - ticketing/online e-commerce retailing.

I'll take you through a summary of our first lever, artist live rights acquisition. Our North American concert season has been strong to date. Five of the top ten grossing tours through June were Live Nation tours including Van Halen, JAY-Z/Mary J. Blidge tour. We've had a substantial summer season and remain confident in our upcoming concert schedule. During the quarter we continued to execute on our strategy to fulfill our distribution pipe with the right artists at the right economic price, locking revenue streams over the near and long term. We've transitioned from a single promoter business with approximately 1,000 artists with one right each, into an organization that has the resources to attract on average two rights from over 1,200 artists and we expect our share of the artists' rights to continue to grow in the live music space.

The healthy pace of ticket sales that we saw in the first half has continued into the important third quarter and our concert line up is solid for the remainder of the year. Madonna Sticky - and Sweet tour starts August 23rd in Europe and the tour comes to North America in October. Ticket sales for Madonna's concerts have been exceptionally strong. As of early August, her tour surpassed 1.3 million tickets sold. Very impressive sales to date. We continue to believe this will be Madonna's biggest ever with potential of grossing $240 million in total revenues. In addition to Madonna, Coldplay's tour is on sale for the summer and 90% has sold out and will continue into the fall. We have great tours by New Kids on the Block, Jonas Brothers, Journey, John Mayer and Rascal Flatts. We recently added Nickelback and Shakira to long term rights deal. They join the roster that includes Madonna, JAY-Z, and U2.

Under the Nickelback partnership, we secured 11 separate artists rights to feed our global distribution platform, including touring sponsorship, merchandise, VIP travel passages, clothing, licensing and other retail merchandise, non-tour sponsorship endorsements, DVD, broadcast right, fan club, web site and literary rights. We currently expect our approximately ten-year, three-cycle agreement with Nickelback to generate over $700 million in revenue and over $60 million in operating income, representing a margin of 9% and an IRR of 32%. Our partnership with Shakira spans ten artist rights, including touring, secondary ticketing, recorded music, licensing, retail, non-tour sponsorship, DVD, fan club, Web site and literary rights. We expect our agreement with Shakira to generate over $800 million in revenue and over $110 million in operating income, representing a margin of 13% and and IRR of 14%. These deals put us on track and meet our goals of signing a total of four to six major artists to a long-term multiple rights deal in 2008. We believe that all of these deals improve our long term visibility and cash flow growth potential by allowing us to lock in multiple revenue streams, higher margin revenue, with reduced risk. On average, each of these long term deals has ten artist rights.

Now that we have the pipe full, our focus is on optimizing the second lever of our distribution pipe. We have a broad global presence that consists of 94 outlets around the world. We continue to strategically review our distribution platform, seeking expansion opportunities as well as potential areas to contract in order to optimize our asset base.

We will grow our revenue in the pipe by executing on five strategies. Our first is our continued expansion of our platform. In this quarter, we solidified our leadership position by acquiring remaining interests in Sweden Moondog Entertainment with significant promotion and festival experience to Live Nation Sweden. We expanded our global festival footprint of 30, as we acquired a controlling interest in the Main Square Festival in France. We also launched Pemberton, a European style three-day festival outside of Vancouver headlined by Tom Petty, Coldplay and JAY-Z. The first year was a success with 40,000 people. Incredible for its first year.

We've also been very successful in increasing show and ticket sales. We produced 42% more shows in the second quarter and our total attendance increased by 14% in the second quarter versus last year.

Our third strategy for growth in our pipe is delivering improved operating income and our focus has been on reducing operating cost and increasing operating efficiency. We have reduced our operating cost at our amphitheaters by 2% this past quarter versus last year. We've reduced our marketing cost by continuing to optimize our marketing strategy and shift dollars from traditional channels to online which provide the more efficient reach. Our customer database grown over 25 million unique music fans and we remain dedicated to using our portfolio of online services to reach marketing consumers more effectively.

Our fourth strategy is to increase in-venue revenue. Overall ancillary revenues per fan at our amphitheaters are pacing ahead of last year $17.46 per head and we are very optimistic about our prospects for the second half. Our fifth strategy is growing our sponsorship face. We continue to improve our ability to develop national multi-platform sponsorship deals with major corporations. We believe the global sponsorship market continues to hold high growth potential for Live Nation. During the quarter, we executed on 623 sponsorship deals and we remain on track to close over 1,000 deals in 2008. In this quarter, we closed a significant sponsorship deal in Ireland. The newly renovated Point Theater has been renamed "The 02" and is expected to open in December. The venue was renamed as part of the alliance with Telefonica 02 Ireland and it was Ireland's first major naming rights deal.

The third and new lever to our business model will become ticketing and fan retailing. We have made progress with our ticketing build up and we remain on track for our launch in less than five months. Ticketing will complete our transformation as an artist to fan direct relationship. The sale of our in-house ticketing has increased 74% in the first half of 2008 as compared to last year.

To conclude the concert industry remains healthy. It is growing at 10% compounded annual growth rate during the past decade and we believe it will grow again this year. And with artists relying more on touring for the majority of their earnings, it's motivating them to get on the road.Live Nation is positioned in a sweet spot for the first time in history. Our outlook is positive. Our business is solid . Our performance is improving, our pipeline is full and we are on pace to take over our ticketing operation in less than five months. Ticketing will complete our connection to the fan and we believe it will accelerate our growth profile for the benefit of our shareholders.

I will now turn it over to Kathy, who will comment on the

Thank you, Michael. Good afternoon and thank you for joining us. Before I begin reviewing our financial results I would like to direct all of you to the second page of our earnings release which contains a number of key metrics related to our business for the second quarter and six month period. These metrics include the number of music concert and artist ancillary rights that we have secured, ancillary per fan, total revenue per fan and an update on our sponsorship initiatives. We believe these metrics will provide better insight into our business and performance, as we continue to execute on our growth strategy. We will now refer to our reportable segment as North American Music, International Music, Artist Nation which we formerly called "Global Artist" and Ticketing, formally known as "Global Digital".

Now moving on to our financial results. Overall our net income was $1.2 million for the second quarter as compared to $9.9 million for the same period last year. Without the $19.3 million in games on the sale of certain assets we made in 2007, our net income would show an increase in the year even while we were incurring cost for the ticketed project. During the second quarter, consolidated revenue increased $173.5 million or 18% compared to the same period last year. The increase was primarily driven by a $95.1 million increase, due to strong amphitheaters in North American music due to increase events, attendance, in venue ancillary spending, and higher ticket prices. Acquisitions accounted for $123.9 million of this increase and includes $58 million from HOB Canada in North American Music, $28.6 million from the AMG concert and Heineken Music Hall in International Music and $37.3 million from Signatures and Anthill in Artist Nation. In addition, we benefited from an increase of $37.2 million related to the foreign exchange movement, primarily in International Music. These improvements were partially offset by a $19.2 million decline in International Music, which was driven by timing of festivals in the UK, and the closure of The Point in Ireland for renovation, and a $40.5 decline in the volume of global tours for Artist Nation. The shift and timing of the festival also impacts the comparability of the festival attendance quarter-over-quarter.

For the second quarter of 2008, our adjusted operating income was $58.4 million, an improvement of $17.8 million compared to adjusted operating income of $40.6 million during the second quarter of last year. The increase in adjusted operating income was primarily driven by a $5.7 million increase related to our acquisitions of HOB Canada in North America Music, AMG and Heineken Music Hall in International Music and Signatures and Anthill in Artist Nation. And we also had a $34.9 million improvement in North American Music operating results driven by strong amphitheater arena due to an increase in events, attendance and reduction in per show operating cost and also a reduction in fixed expenses related to legal and other cost reductions. Partially offsetting this increase was an $8.1 million decline in International Music due to the timing of festivals and the closure of The Point and a $6.2 million decline due to the timing of global tours and increase salary building the infrastructure for our artist service business. In addition, we experienced a decrease in other operations of $6.4 million for our non-music related events division, due primarily to reduced results related to non-music touring production. We are in the process of selling or shutting down these productions.

Operating income decreased 26.4% to $23.7 million from operating income of $32.2 million in the second quarter of '07. This decrease in operating income was primarily driven by an $18.4 million decrease in gain on sale of operating asset primarily due to gains recorded in '07 on the sale of three music venues and an office building partially offset by a loss in 2007 of the sale of a non-core asset. Also we had an $8.9 million increase in depreciation and amortization expense, due primarily to an increase in amortization expense for Artist Nation intangible assets related to the acquisition of CPI and various artist rights agreements. These items were offset by the previously discussed $17.8 million overall improvement in adjusted operating income.

Moving to the six month results. For the six months ended June 30, consolidated revenue increased $289.7 million or 19% compared to the same period last year. The increase was driven by a $110 million increase in North American Music due to strong results from tours and an increase in events, attendance and average ticket price that are owned and operated amphitheaters in third party venue. Acquisitions accounted for $201.2 million of the increase and include $94.9 million from HOB Canada in North American Music,$44.7 million from AMG and Heineken Music Hall in International Music and $61.6 million from Signatures and Anthill in Artist Nation. In addition, we benefited from an increase of $54.1 million related to the foreign exchange movement primarily in International Music. These increases in revenue were offset by a $21.8 million decline in International Music, driven by timing of festivals in the UK and Belgium and the closure of The Point in Ireland for renovation, a $17.8 million decline in the volume of global tours for Artist Nation, and a $17.6 million decline in our other operations driven by the loss of revenues on a non-core asset sold last year and fewer productions and touring shows in our UK theater operations.

For the six months ended June 30 our adjusted operating income was $56.4 million an improvement of $18.5 million compared to adjusted operating income of $37.9 million during the same period in 2007. The increase in adjusted operating income was primarily driven by a $36.2 million increase in North American Music due to strong results from arena tours and an increase in events and attendance at our owned and operated amphitheaters and third party venues, a reduction in per show operating cost and a reduction in selling, general and administrative expenses for other cost reductions, and a $9.9 million increase due to the acquisition of HOB Canada in North American Music, AMG and Heineken Music Hall in International Music and Signatures and Anthill in Artist Nation.

Partially offsetting these increases was a $11.5 million decline in International Music due to the timing of festival event day and the closure of The Point in Ireland, partially offset by increased promotional activity in the United Kingdom due to strong stadium events and a $10.1 million decline due to reduced volume global tours and consulting expenses related to building the infrastructure for Artist Nation business and $3.1 million of additional cost to build our infrastructure and ticketing.

In addition, we experienced a decrease in other operations of $8.5 million for our non-music due primarily to lower results related to these non-music touring productions. Our operating loss for the six months was $14.8 million compared to a loss of $4.6 million for the same period in 2007. This increase was primarily driven by a $12.4 million decrease in the gain of sale of operating asset compared to the same period of the prior year, due to gains recorded in 2007 on the sale of three music venue and two non-core asset and a $16.2 million increase in depreciation and amortization expense due primarily to increased amortization expense in our Artist Nation and International Music segment for amortization of intangible assets on the AMG and CPI acquisition, along with intangible rights related to artist rights agreement. These decreases were offset by the $18.5 million overall improvement in adjusted operating income noted above.

Turning to some other financial metrics. Capital expenditures for the six months ended June 30 were $76.1 million, which include $19 million of maintenance expenditures and $57.1 million of revenue generating projects including the renovation of the The Point in Ireland, the development of our HOB locations in Houston and Boston, the new AMG venue in Sheffield, England as well as the cost of our ticket rollout. Revenue generating projects for the remainder of 2008 will include HOB venue expansion of the Hollywood, the ticketing roll out and AMG venue expansion in Brighton, Sheffield and Leib. We continue to expect that our total revenue generating capital expenditures will be approximately $155 million for 2008. We remain focused on controlling maintenance capital expenditures and continue to expect total maintenance capital expenditures for 2008 to be approximately $30 million.

As of June 30, 2008 our reported cash and cash equivalence balance was $453.4 million and debt and preferred stock totaled $834.1 million. Free cash flow, which is adjusted operating income less net interest expense cash taxes, maintenance capital expenditures and net distributions and contributions with minority interest partners and nonconsolidated affiliates, was $25.7 million during the second quarter. For the full year, we continue to expect to generate modest growth in adjusted operating income and also expect to invest this growth back into our ticketing, digital e-Commerce and Artist Nation initiatives, as we have previously stated. For 2008, as we previously noted, we expect our ticketing initiative to have an approximately $15 million negative impact to 2008 adjusted operating income. Given the progress we made over the past two years and our current investment plans, we continue to believe that we will be in a position to deliver strong adjusted operating income growth in 2009 and beyond.

With that, I will open to questions. Operator?

[ OPERATOR INSTRUCTIONS ]. Your first question comes from the line of Mark Wienkes with Goldman Sachs.

Good afternoon. Pretty clear to see the improvement in the metrics on the core business this quarter. What are the risks that you see of that not repeating in the third quarter? On ticketing, the Pemberton event was ticketed internally, what are the data points you see or have that give you confidence that your company is on plan to roll that out in January?

Thanks Mark. On Q3 given it's already August and July is in the books and we have all the tickets sold and all the people coming, we believe that Q3 will finish as strong as Q2 in terms of per head concessions and ticket sales. So we are confident that we'll deliver our plan and maintain those numbers for Q3.

Ticketing on plan as I'd like to remind people we already do in-house ticketing through our relationship with Ticketmaster. We get to sell 10% of our tickets through a registered fan club mechanism. As I've stated in my release the good news is we have increased this year versus last year over 74% of the tickets that we are doing in-house from last year. So we've got full staffing in place in all of our venues and in our box offices. We know we do tickets already. We ticketed Bonaroo. We ticketed Pemberton, and we believe once we add the software platform from CTS and the implementation will provide all of the scale and resources we need to handle our full load next year. So, we are fully on track on execution cost and transition and see no stumbling blocks right now.

Early look at the timing of the rollout for third party ticketing?

Because of our scale, when you have figure out how to handle 20 million tickets of your own at Live Nation adding a venue or two becomes, quite honestly, the easy part. So we would expect when we are open for business, for Live Nation we would be open for business for some of the business partners that we are currently in business with supplying them with 30 or 40 shows a year and having lots of those conversations already.

And then two quick follow ups for Kathy. The 42% increase in concerts and the 14% bump in attendance performance, do you have a pro forma number?

I don't have that with me. That is actual numbers.

And then the free cash balance last year was negative as well as this year. Can you remind us how that works with respect to the covenants how they look at free cash?

It doesn't impact the covenants and free cash at this point. There's a lot of differed revenue on the balance sheet. So as we play those events then you would expect that to come into cash flow.

You are able to use some of the cash that is on the balance sheet?

Yes.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of David Joyce with Miller Tabak & Company.

Thank you. One of my questions was to clarify what is in the amortization of artist rights. What part of the rights would be paid up front and amortized over time?

The non-recoupable portion?

So for example, something like JAY-Z, what would a portion be?

We haven't given out the individual on those artists, but if there was a non-recoupable portion paid up front, then we would amortize it.

You talked about a billion dollars or so in buying the artists rights per year. So this $8.9 million figure it's pretty immaterial?

Absolutely. We are in the business of advancing artists for their concert rights. We do that every day. We pay in advance whether it's the show in two months in Cleveland or whether it's the Coldplay tour and the only difference is now we've extended those relationships to a longer period and have an advanced schedule forward. But the net up-front money is insignificant to the amount of money we advance on a daily basis for our core business.

That $8.9 million includes intangible assets on regular acquisitions too.

Great. Another question. Are you seeing increased competition from artist rights or the larger 360 deals from the likes of your regular venue competitors or say from Ticketmaster at this point, Frontline management?

You know, we haven't. Frontline controlled by, we would been his largest business partner. We have a very good relationship. Some of our biggest tours are Frontline tours; Jimmy Buffet this summer, Def Leppard, Neil Diamond, et cetera. So Frontline is just a great supplier to us. Ticketmaster, we would assume they'll stay in their core business of ticketing, and we haven't seen anyone else approach any of these artists in terms of a tour in long term relationship.

Thank you.

Your next question comes from the line of Alan Gould with Natixis Bleichroeder.

Hi. I'd like to just follow up on the competitive environment. Are you seeing any competitive response out there?

The record labels are definitely talking to a lot of their younger artists about increasing some of their share of the artist pie. So they are in that business, and doing that probably on a more junior artist basis. But the artists that are established touring artists that we probably have a long-term relationship with are looking to have one with, we haven't seen anyone step up into that plate.

Thank you.

We have a follow-up question from the line of Mark Wienkes with Goldman Sachs.

Thanks. I guess can you talk to the make shift in terms of attendance per concert? Does that continue to Q3? Is that because of the acquisition? And the payment of growth capital that you are throwing out there this year? Not throwing, investing. Bad choice of words.

I'll start with the second question and then I'll come back to the first. Its more black and white. As we stated this year, our goal was to invest fixed costs in our ticketing division, staffing up basically to be ready to handle our load next year somewhere in the $15 million range of additional fixed cost. So for all of our numbers you could have added $15 million to the bottom line if you wanted to look at pure basis and about $20 million in capital, and we would assume that has a one-year pay back. We would be recouping all that by the end of the year one, which is why we chose this strategy versus a large acquisition strategy or outsourcing strategy. The growth is incredible in the investments/pay back is an incredible metric to be in the money after year one. Number two, the mix of shows or the mix of concessions?

The average attendance per show. But really quickly on the growth capital. With AMG, House of Blues, is the timing when you expect them to contribute cash flow as well?

The Point will open at the end of this year so we will see that come in strongly in 2009. And then the House of Blues will open the end of this year and AMG will open begin of next year. So, they all turn around pretty quickly.

Okay.

And I think your question was is the attendance the revenue per attendance mix is it organic or is it --? Is that the question?

The attendance 14 and concert is 42. The attendance per a lot more shows that are smaller.

Right.

In size?

Right.

Do you expect to continue and where you would take the business, I guess.

We said for a while that the 0 to 5,000 venue seem to have consistent growth for the past few years that's why we are looking to get into the House of Blues and the Heineken music and Fillmore to fill our portfolio. The 10,000 plus shows are the arena amphitheater shows haven't been growing. Our market was not to grow our market share on the larger show. It was to buy and to get out some of the shows that weren't profitable. Our focus is buying the right shows for our arenas and more than enough to fill our pipe. And on the smaller 0 to 5,000 was to increase our market share where there was a high growth potential there, and a much lower cost to participate.

Just to confirm the agreement in place with Nickelback and Shakira are similar to the early ones that all the rights are collateralized? And it's divvied up at the end?

Yes.

Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Dingli Chen with Marsico Capital Management

Hi guys. Can you hear me?

Yes.

Talking about the 360 deals that you are assigning did I hear you right or did you say that the EBIT that you are going to get from these four deals that you signed is basically going to equal your entire market cap?

The EBITDA will equal to market cap?

You are talking about the margin to revenue. Calculating the margin percentage, I'm getting basically your market cap.

Those are the numbers over the term of the agreement.

I guess that's one way to look at it, yes.

Thank you.

And at this time there are no further questions.

Thank you, everybody.

This concludes today's second quarter conference call. You may now disconnect.