Madison Square Garden Entertainment Corp (MSGE) 2020 Q4 法說會逐字稿

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the MSG Entertainment Fiscal 2020 Fourth Quarter and Year-end Earnings Conference Call. (Operator Instructions) I will now turn the call over to Ari Danes, Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, and welcome to MSG Entertainment's Fiscal 2020 Fourth Quarter and Year-end Earnings Conference Call. Our President, Andy Lustgarten, will begin this morning's call with an update on the company's operations. This will be followed by a review of our financial results with Mark FitzPatrick, our EVP and Chief Financial Officer. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website.

Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties, and that actual results, developments and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI, a non-GAAP financial measure. And with that, I'll now turn the call over to Andy.

Good morning, and thank you for joining us. I know we've all heard the word unprecedented many times over the past few months, but it truly has been an unprecedented year that no one could have anticipated. Through mid-March, we are experiencing impressive momentum across the company. The Christmas Spectacular celebrated its highest grossing run ever. Our booking business was on track to deliver a record number of events for the year, and Tao Group was on its way to generating strong year-over-year growth. In addition, we are full speed ahead on MSG Sphere in Las Vegas, preparing for the $400 million sale of the Forum and finalizing the details of our spin-off transaction. And then in March, the global pandemic hit, changing the outlook not only for our company but the world. Even with these difficult circumstances, we successfully completed the spin-off of MSG Entertainment in April, followed by the sale of the Forum in May. And despite the current environment, we remain confident in the strength and resilience of our assets and believe establishing MSG Entertainment as its own company sets the stage for long-term value creation for our shareholders.

I'd like to spend a few minutes talking about how COVID-19 has impacted our business and the steps we're taking to position the company to weather these difficult times. Our shutdown began in mid-March when each of our entertainment venues closed its store due to the pandemic. This was followed by the temporary closure of all Tao Group entertainment, dining and nightlife venues and the cancellation of our Boston Calling Music Festival, which was scheduled for Memorial Day weekend. And last week, we announced that the season's production of the Christmas Spectacular has been canceled. It was a very tough decision. We considered a number of factors including the significant time and investment it takes to mount the show and the continued level of uncertainty, just a few months out from when the show did traditionally start. Taking this all into account, we felt moving forward was not worth the risk. Given where our business is today, we have been forced to make decisions, some of them very difficult, to ensure we are a healthy company for the future.

Tao eliminated essentially all of its venue line staff and manager positions in March and recently reduced its corporate staff. On May 31, we ended our financial support of event level employees at our performance venues. At the same time, we've made efforts to reduce discretionary spending while continuing to review our operations. Last week, we took additional measures, including significantly reducing our corporate workforce and cutting spending across all departments. These actions reduced our go-forward operating expenses by approximately $100 million on a run rate basis. Our review also extended the MSG Sphere in Las Vegas. In April, we temporarily suspended construction on the venue. Due to COVID-related impacts, that will be outside of our control. And as the ongoing effects of the pandemic have continued to impact our operations, we revised our processes and our construction schedule and now have resumed work but on a lengthened timetable enabling us to better preserve cash in the near term.

For fiscal '21, we now expect to spend approximately half of what we previously anticipated spending. We also expect that our new schedule will push the opening of MSG Sphere in Las Vegas into calendar 2023. We remain committed to bringing the state-of-the-art venue to Las Vegas. But given the impact of the pandemic on our company, we are going to proceed at a more measured pace, and we'll continue to be thoughtful about our liquidity. We've made some tough decisions but believe these actions will allow us to conserve our cash and successfully navigate these challenging times. As of June 30, we had approximately $1.2 billion cash on hands. And we have essentially no debt aside from a relatively small amount related to Tao Group. Like everyone else, we are learning more each day. The one thing we continue to believe in is community, and that people will gather again to share experiences once it's safe to do so.

Prior to the onset of COVID, we were benefiting from favorable industry dynamics that including steady growth in the supply of live events, and rising demand from our customers for these experiences. Our expectation is that when things do bounce back, they will bounce back quickly. For example, the majority of impacted events in our venues have been or expected to be rescheduled to calendar 2021. In fact, we currently have twice the number of events booked for calendar '21 than we did for 2020 at this time last year. For rescheduled shows, while ticket holders were offered the option for a refund, most are choosing to hang on to their tickets. And while we can't assure you if these events will take place, it does highlight the pent-up demand for artists who want to be on the road and from fans who want to see these acts.

In addition, Tao has recently started reopening venues in 5 cities at reduced capacity, and we have been encouraged by the initial response. While the road ahead is uncertain, we have every reason to believe that the innate desire to be part of shared experiences will return. When that happens, our business will be ready. It starts with our portfolio of iconic venues, anchored by Madison Square Garden Arena, a venue we own, along with the development rights associated with the property. In April, the garden entered into a 35-year agreement to host home games of 2 of the most well-known franchises in professional sports, the New York Knicks and Rangers. When the garden fully reopens, these arena license agreements will provide a significant growing contractual revenue stream for our company.

In addition to the garden, we expect the rest of our venue portfolio, Radio City Music Hall and the Hulu, Beacon, and Chicago theaters to regain our industry-leading positions once we're able to reopen the doors. The same goes for the Christmas Spectacular, a property we own that has played for remarkable 87 consecutive years at Radio City Music Hall. And although this year's production has been canceled, we are confident that it will remain a holiday tradition for years to come and look forward to welcoming guests back for the 2021 holiday season. We also believe Tao Group will continue creating some of the most innovative premium hospitality experiences in the entertainment, dining and nightlife industry. And that Boston Calling will remain New England's premier outdoor music festival. And finally, we are bringing together all of our expertise in venue operations, content creation and hospitality to create MSG Sphere, which we continue to view as a transformative growth opportunity for our company.

I'd like to end by thanking our employees, fans, partners and shareholders for their continued support. For decades, our venues have been the backdrop for some of the most memorable moments in sports and entertainment. And we've been working extremely hard to ensure that when our doors reopen, guests can be confident that there is a safe and secure environment where they can gather once again to share unforgettable experiences.

Before I finish, I'd like to take a quick moment to introduce our new Chief Financial Officer, Mark FitzPatrick, who joined us in April. Mark is a seasoned executive with more than 20 years of finance experience, including WeWork, where he most recently served as the Deputy Chief Financial Officer. Prior to that, Mark spent 10 years at Time Warner Cable, where he held a variety of senior finance roles, including Chief Financial Officer of Residential Services. I am confident that after helping us get back up and running, he'll play a key role in ensuring the long-term success of our company. And with that, I'll turn the call over to Mark.

Thank you, Andy, and good morning, everyone. I'm very excited about joining MSG Entertainment, a company with iconic venues and marquee brand that I am confident will weather this period of uncertainty. I joined this company because I was inspired by its vision for the future, and I look forward to working with the executive team on achieving our long-term goals. Over the next few minutes, I will provide additional details on our liquidity and go forward cash outflows as well as briefly discussing our recent results and segment reporting. So let's start by walking through our current liquidity position and the actions we have been implementing to preserve flexibility, so we are ready to return to business as soon as possible.

First, as Andy mentioned, we had $1.244 billion of cash and short-term investments on our balance sheet as of June 30. Our cash balances include approximately $200 million in deferred revenue and collections due to promoters. These amounts reflect tickets, suites and sponsorship related to future events. A significant majority of deferred ticket revenue is for events that have been or are expected to be rescheduled to calendar 2021. To date, most people have opted to hold on to their tickets for these rescheduled events. But if requested, we have provided refunds. In terms of suites and sponsorships, we are in constant dialogue with our partners discussing ways to address these obligations via noncash means such as credit and make-goods. However, if necessary, we will provide cash refunds.

In terms of debt, Tao's $34 million bank term loan is our only debt outstanding and it was recently amended to suspend certain financial covenants through calendar 2021. And as a reminder, it matures in May of 2024. I would also like to note that we held equity interest in both DraftKings and Townsquare Media. And in June, we were able to monetize a portion of our DraftKings holdings for net proceeds of over $7 million. Currently, we own approximately 1.3 million shares of DraftKings and 3.2 million shares of Townsquare Media.

Now let's turn to our expected cash outflows for fiscal 2021. As Andy mentioned, we've implemented a series of cost-saving measures to preserve our liquidity. Since March, we've cut down significantly on nonessential spending, including marketing, training and T&E and reduced our alliance and associated spending with third-party providers. In March, Tao eliminated nearly all its venue staff and manager positions, and recently, it reduced its corporate workforce. At the end of May, we've ended our financial support for virtually all of our 6,000 events-based venue employees. And last week, we reduced our full-time workforce by approximately 350 positions and eliminated an additional 50 open positions that we intended to fill this fiscal year. I should note that as our business recovers, we will bring back a portion of these positions to support our operations and the associated revenue. Overall, these actions will significantly reduce our annual operating expenditures. While it will fluctuate on a month-to-month basis, we estimate that our monthly operational cash burn rate will be approximately $25 million a month on a going-forward basis. This compares to an average of approximately $35 million that we experienced in the fourth quarter of fiscal 2020.

I would note that our operational cash burn rate reflects our revenue less direct operating and SG expenses. It excludes severance costs,and capital expenditures, including those related to the construction of the MSG Sphere in Las Vegas and capitalized spending on content and technology. It also excludes working capital adjustments including potential cash refunds related to our deferred revenue and collections due to promoters. In terms of the MSG Sphere, Andy noted earlier that we were lengthening our construction timetable in Las Vegas. As a result, we now expect to spend approximately half of what we previously anticipated in fiscal '21.

As previously disclosed, our cost estimate for the MSG Sphere venue in Las Vegas is approximately $1.66 billion. Through June 30, project to-date construction cost incurred were approximately $453 million, which includes nearly $70 million of accrued costs that were not paid as of June 30 and is net of $65 million received from the Las Vegas stand. Finally, I want to note that we can continue to actively pursue potential debt financing option of up to $500 million to further bolster our liquidity position and help finance MSG Sphere in Las Vegas.

Let's turn briefly to our business performance. Before I start, please note that fiscal '19 and fiscal '20 results through April 17 are based on carve-out financials. After April 17, which was the date of our spin-off, the results reflect the company on a stand-alone basis, inclusive of the various intercompany agreements between our company and MSG Sports. Second, due to the impact of COVID-19, Fiscal '20, especially the fourth quarter, was not a true indication of the operating and financial potential of our diversified mix of assets and revenue streams. As a result, fiscal '20 revenue was $763 million with only $9 million achieved in the fourth quarter, and our adjusted operating loss was $43 million, including a $103 million loss in the fourth quarter. In comparison, for fiscal '19, revenue was $1.05 billion, with $215 million of revenue in the fourth quarter and full year adjusted operating income of $104 million.

Prior to opening the call for questions, I would also like to provide an overview of the 2 operating segments that we use to manage our business as this is the first time we have reported with these segments. Our 10-K, which we expect to file next week, provides additional detail on these segments. Our first segment is the Entertainment segment. This is our live events business, which welcomed nearly 6 million guests to over 1,000 events in fiscal '19. It features our portfolio performance venues including the MSG Sphere; the Christmas Spectacular starring the Radio City Rockettes production, which last year -- last season generated record high revenues of approximately $130 million; the Boston Calling Music Festival; and the revenue related to arrangements with both MSG Sports and MSG Networks. These are events that include our 35-year Arena License Agreements and our 10-year Sponsorship Sales Agreements with MSG Sports and our multiyear Advertising Sales Representation Agreement with MSG Networks. Finally, this segment also includes the cost of our corporate functions net of our Transition Services Agreements with MSG Sports and MSG Networks.

Our second segment is Tao Group Hospitality, which features our controlling interest in this globally recognized hospitality group. In fiscal 2019, the Tao Group generated over $250 million in revenue from its popular entertainment, dining and nightclub venues. Today, Tao operates 28 venues around the world and is developing opportunities to expand in select markets. In conclusion, while the entire industry continues to face a challenging and uncertain road ahead, we remain confident that we have the financial flexibility to navigate through this unprecedented period and deliver long-term growth and value creation for our shareholders. With that, I will now turn the call back over to Ari.

Thank you, Mark. Christi, can we open the call for questions, please?

(Operator Instructions) And your first question is from Brandon Ross of LightShed Partners.

Couple of questions. First, New York and Vegas have obviously been hit hard by the events of 2020. Wanted to get your outlook going forward for these cities as entertainment markets. I guess, starting with Vegas, do you see this changing the return profile for the Sphere? And then in New York, how are you planning for the long-term? I guess, with the permanent job cuts you did, is that a signal that you foresee more permanent impairment from the pandemic and the other issues going on in New York? And then I have a follow-up.

Brandon, thanks. Yes. We'll start with these two, and then we'll go back to your follow up. Let's start at the top with Vegas. So I'll tell you our -- both our revenue and our AOI projections have not changed because of this, no. What has changed is our timing, right? We've moved it out, as we discussed. We think Vegas is the best -- one of the best, if not the best entertainment market in the world. We think that -- in running this project for long term, we think people will need to get -- feel safe, both consumers, artists and our employees. But once that happens, and we believe it will, we think the market is going to come back roaring. And our view has not changed. We believe the Sphere is going to be the most utilized venue in our portfolio in terms of events. We think the attractions business is going to play multiple times a day year-round, which is a key part of our strategy. We think the new immersive experiences will take advantage of the venue state-of-the-art technology in a way that will change live entertainment. And we're, as we talked about before, very bullish on our sponsorship opportunity.

So while both New York, Vegas and all of the U.S. are fighting through the pandemic right now, we think live experiences are going to come back roaring once people feel safe and we feel very bullish. In New York, similar message. I think New York is a -- was the hotspot and the center of the -- epicenter of the pandemic in the start. But as we can see, it's been moving all over the country. New York, specifically of all cities, has been resilient through many difficult times over the course of its history. And I think New Yorkers are going to come back strong. The best proof that we have in the pudding, as I mentioned earlier, we have backlog of bookings for 2021. That's twice the size of where it was this time last year. That's made up of both rescheduled events and new bookings, which tells me the artist want to be here. And then when we offered fans the ability to refund their tickets, 80% chose to take their tickets. What does that say to me? Fans want to be -- coming to the events once they feel safe and once we're reopened. So we feel really strong that both New York and Vegas will come rushing back once we're able to be open and running.

Great. And then wanted to ask about venue rental pricing. For this big backlog of shows that you've booked for 2021, have you taken cuts on venue rental pricing or shared the risk with promoters? And have there been any changes to the contract that you had signed on the dates that were rescheduled from 2020?

So simple law of economics, supply and demand, when your supply is twice as high, you can figure out what you could think about on pricing. So I guess the simple answer is no, we haven't changed pricing at all. We feel very good about the future.

Our next question is from John Janedis of Wolfe Research.

I had 2, guys. One on the Sphere, one on costs. I was hoping if you could give us an update on the timing of the London Sphere. Is that getting pushed down the road indefinitely? And then Vegas, how do you think about the potential for cost increase above and beyond the $1.6 billion or $1.7 billion given the delay? And then separately, on the $100 million of reduced run rate costs, to what extent are those permanent? Or do the majority of those come back as you get back up and running?

Why don't I go ahead and jump first-off? Why don't I start and then I'll pass over to Mark? I'll start with the London question. So we are currently working towards a planning approval of the London Legacy Development Corporation. We don't see -- the earliest we see getting planning permission would be in the autumn of 2020. And as we work through this planning process, our design process, our timeline will continue to evolve. So I don't have any -- anything to give you more in terms of our opening timeline. But can tell you we intend to open London after Vegas, once we have a planning approval, once we have the designs filled and we are committed to bringing it -- the Sphere to London, but it's going to be post Vegas. I think the other part of your question was on cost cuts. Mark, do you want to answer that?

Sure. John, I think your second question was just on the overall Vegas cost. Is that correct? I just want to make sure I'm…

Well, I think there are 2 pieces of cost. One would be on the Vegas cost and the second on the $100 million of the run rate cost reduction. Are those permanent or a piece of those, I assume, come back as you guys get back up and running?

Sure. I'll start with the Vegas cost. One, I think we just saw in our release today, we're still comfortable with the $1.6 billion of total cost. We are spending -- spraying the time to spend that, but we are still comfortable with the $1.6 billion. We think over time, we're going to reevaluate some of the spending associated with the different aspects to that, and we think -- we'll be able to offset any potential cost increases and may actually be able to drive it lower. But overall, we're still comfortable with the $1.6 billion -- $1.66 billion. And then in terms of your permanent costs, as I mentioned in my speech, we took a comprehensive look at our operations to find out what we could eliminate. We made the difficult decisions to eliminate some of our headcount to preserve cash, ensure we're healthy for the future. So we've reduced our workforce and spending across all our departments. As our business comes back, some of this spending will obviously return. We don't think all of it will return as we think there's efficiencies, and we'll be able to embed those into our go-forward cost base. So like every other company, we're going to continue to focus on it and make sure that we can reduce our cost base going forward and increase the profitability of our business. So we're excited about the future in terms of lowering our overall cost.

Your next question is from John Belton of Evercore.

I just have one on this Las Vegas Sphere project. So it looks like given the remaining CapEx associated with that project and the events over the last few months that you may no longer be able to fully self-fund that project. So how has your view on financing strategy changed? You've spoken in the past about looking at an array of options for other venue projects like debt financing, joint ventures and strategic equity partners. How are we thinking about those options as they pertain to Las Vegas Sphere? And potentially, you might need to raise capital several quarters down the line?

Sure, this is Mark. I'll answer that question. First, I'll just remind you that we have over $1.2 billion in cash on our balance sheet as of June 30. And as we mentioned in our prepared remarks, we plan to raise another $500 million in debt. Secondly, we've changed the calendar for the MSG Sphere, which will enable us to spend the capital expenditures over a longer period of time. In terms of future of Sphere, as we've mentioned before, our intent is to explore other options, including nonrecourse debt financing, joint ventures, equity partners and a managed venue model. I hope that answers your question.

So you're not necessarily looking into any of those options for Las Vegas at the moment.

Look, we always consider options, both -- potentially that makes sense for the company, strategically and financially, but we're not currently looking into those options right now.

Christie, we'll take the next question.

The next question is from Ben Swinburne of Morgan Stanley.

I have 2 questions. Andy, as you look at the portfolio of assets at this company and think about kind of kind of reopening over the next, who knows, 6, 12 months, what, if any, changes or sort of adjustments do you think you want to make or could make to the various offerings, given we're going to be coming out of this COVID situation incrementally, rather than flipping a switch and going back to pre COVID? I'm thinking about things like the Christmas Spectacular, reopening the Garden, even Sphere, which you obviously haven't built yet. There other changes you're thinking about making given just we're going to be dealing with the lingering effects of this one way or the other, even psychologically, long term. And then I was curious on the sponsorship and suite front, how demand is holding up, given the -- just the economic pressures we're seeing. As you look at -- I know those are multiyear contracts, you've got good visibility, but just give us a sense for what the demand looks like as you have contracts come off and potential new sales. Anything you could tell us there would be helpful.

Well, Ben, first off, nice to speak to you this morning. In terms of what changes we're making to our venues and our events. I mean, we are following it extremely closely, working with our government officials, working with the leagues on the sports side. Obviously, they're our biggest tenant here at MSG Entertainment, as well as all of our partners and our promoter partners. And the first thing that's important to us is the safety of our -- I'll start -- I shall just start with the most important thing, the safety of our guests, our employees, and our partners, right? Nothing has been started until they're safe, right? That is the number one point. And as I think we've shown many times over, but we're the leader in terms of both amenities for our guests and artists as well as safety and protocols. So what I'd say to you is, we're going to do everything we can to make sure people feel safe. We're going to do -- we're going to modify our venue as we need be. But right now, it's still early. We don't know when -- we don't know what does -- to your point, the ramp-up will look like. Will it be capacity constraints, will it be spacing between patrons. Well -- and we're exploring every option and have a task force looking at ways to deliver the best experience to our guests, our artists and our employees as we come back. In terms of the future, I know you mentioned Christmas show, obviously, we -- as I mentioned before, this is a tough decision. We waited until the last minute until we made the decision. We did that for a reason because we believe in the demand of the show. We just weren't -- we couldn't take on the risk of the amount with such uncertainty in a short order. In the long term, we feel very good about the return to the show and its appeal and it's just a question of how quickly can we get to that long term, not necessarily for the back half, but we're saying in terms of our total business. And we think this is coming back. We think people want live events. I think if you look across the world at other countries that have slowly started to open up, the demand has been there. Yes, people have modified their behavior, wearing a mask, et cetera. But we'll -- we're going to stay on top of it, and we're going to get this business back up, and we feel very good about the long-term future.

Anything on sponsorships and suite demand?

It's still -- to be honest, it's still early, right? It's -- these agreements are long term, multiyear. We've got great partners who view us as long term -- see the value of our business long term, and we're working through the stuff right now.

Got it. Okay.

Don't read anything negative or positive into it. Just it's -- it is a long -- these are long-term relationships, and long-term relationships, again, when you have a business and what we could deliver, and we feel good about the long term.

With that, I will turn the floor back over to Ari Danes for any additional or closing remarks.

Thanks, Christie, and thank you all for joining us today. We look forward to speaking with you on our next earnings call. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.