索尼 (SONY) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Metro-Goldwyn-Mayer second quarter 2002 earnings conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards you will be invited to participate in the question and answer session.

At that time if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded, Tuesday, July 23rd, 2002.

I would now like to turn the conference over to Mr. Joe Fitzgerald, executive vice-president investor relations and corporate communications for Metro-Goldwyn-Mayer.

Please go ahead, sir.

Hello, everyone.

Before we get started, I just want to let you know this is a format you're familiar with by now.

We have with us Al Chimeniechin [phonetic], our chief executive officer, Chris McGirk [phonetic], our chief operating officer, and Dan Taylor, our chief financial officer.

We're going to get started right away, but I just want to remind you and refer you to the Safe Harbor language in our press release regarding forward looking statements.

That language applies to this phone call as well.

With that, I will turn it over to Alex.

Good morning, everyone.

Actually, I'll start with the forward looking statements.

On our theatrical releases, which is one of our core businesses, I think that the bad news is behind us and the good news is ahead of us.

And I say that with confidence because of two specific reasons.

First, the economic profile of our slate of films for the remainder of 2002 and for all of 2003 is very compelling.

And second, we have two, maybe even three sequels coming out in the next 12 months.

Chris will have more details on this.

But as I have said, many times before, the film business is nonlinear.

We have a few pictures that don't work followed by a few pictures that work very well.

It's been like that for the last 80 years in the film business.

Our job to create a portfolio effect that reduces the volatility of the current release business, and I think you will see us doing an even better job of that going forward.

On our film library which is our second core business, we are running just around $300 million in precash flow this year.

Now that's had ahead of plan and ahead of last year which is in itself amazing since last year we experienced exceptionally high growth in library cash flow.

Chris will have details as to what continues to drive the library cash flow numbers and also on what's new in our TV business.

On MGM networks we just announced an agreement to launch much a new M GM channel in grease.

We will own 100 percent of the channel which will be carried on a direct to home satellite service.

The distribution agreement is for a four-year term.

We plan to launch in the fall this year with approximately 100,000 subscribers paying 20 cents per subper month, so we expect to be the business to be profitable on day one.

So, again, we feel very good about our business for the second half of '02 and into 2003, and we have about $1 billion of cash and unused credit capacity which then Dan will talk about in more detail.

So our financial condition has never been stronger and our confidence in the future has never been higher.

Chris?

Thank you, Alex.

Behind the headlines of our overall results this quarter there were several initiatives that I'd like to quickly review.

First, as strong as the home entertainment marketplace is growing, MGM continues to outpace the industry in DVD and video.

Overall MGM's home entertainment revenue grew by 63 percent in the second quarter driven by strong performance on titles such as Bandits, Legally Blond, Rollerball, The Last Waltz, Mutual Suspects and Bold Durham, just to name a few.

In the U.S. total DVD industry unit sales grew by 73 percent in the first half of 2002.

Over that same period MGM unit sales grew at over twice that rate at 151 percent.

As we noted in our earnings release, MGM's worldwide DVD unit shipments increased 102 percent and domestic DVD shipments increased 73 percent in the second quarter.

Our U.S. market share of pre-2000 catalog unit sales rose to 15 percent in the first half of 2002 compared to 12 percent at year-end 2001.

And our close partnerships with key retailers continue to be a major factor behind our home entertainment success.

Wal-Mart, the number one sell through video retailer in the U.S. recently recognized our efforts with a best vendor award for the first quarter of the year.

In the United Kingdom our revenues have increased over 50 percent since we took control of sales and marketing from warner's doubling the industry average growth in DVD sales over the past year.

And we just announced that we will be assuming control of all video and DVD sales and marketing in France and Germany as well.

Once we take control early next year we will fully manage three key territories that represent almost 50 percent of our international business with fox providing back office support.

This should help to continue to significantly increase our home entertainment contribution internationally.

In television production, She Spies, MGM's fourth TV program on the air, debuted this past Saturday on NBC.

Last quarter we mentioned to you that this network launch is a unique debut for a first run syndicated program due to our partnership with NBC, the latest in a series of joint initiatives with NBC including our international TV sales alliance and our joint media buying company.

The first four episodes of She Spies are airing on the NBC TV network prime-time promoted heavily over the last two months.

Then starting in September the program will start in syndication with 20 episodes committed.

She Spies has been cleared in over 94 percent of the country including all of the NBC O and O stations, as well as many of Herstargal [phonetic] stations primarily in the early and late fringe stay parks.

Also we announced a deal with Deek Entertainment to produce a half-hour animated series entitled Stargate Infinity based on our successful Stargate franchise with 13 episodes committed to air on Fox Kids Saturdays beginning September.

We will be distributing this series any internationally.

Finally we have also completed 154 episodes of outer limits, 132 episodes of Stargate, and 20 episodes of our newest show Jeremiah, MGM's three other very successful cable and syndicated si-fi series.

By the end of September we will have five TV shows on the air versus only two at the beginning of the year.

In feature films, following our very disappointing performance in the first half of the year, our very modestly budgeted family film Crocodile Hunter Collision Course premiered on July 12, and has performed very well to date.

We expect it to be a very strong video DVD and TV performer as well, has earned a nice profit for us.

And Crocodile Hunter's low cost and the advantageous risk reward profile is similar to that of many of the films on MGM's release slate for 202 into 2003.

Our remaining two non-Bond releases from MGM this year are barber shop, the whole urban comedy starring Ice Cube and Cederic the Entertainer which comes out on September 13th, and A Few Good Years starring Michael and Kirk Douglas together for the first time in the movie which we will release this December.

Like Crocodile Hunter, both these films feature low investment levels and advantageous risk reward profile.

In fact, our average investment on all three films is only $11 million.

And we completed shooting our new Bond film, die another day in London two weeks ago.

This film, the 20th installment of the franchise, stars Pierce Brasnan [phonetic] and this year's academy award winner, Halle Barry.

The title song is performed by Madonna who also has a cameo role in the film.

We've seen much of dying of the day already and it promises to be the biggest and best Bond ever.

This Bond film has an economic profile differently than the other releases I described mainly because the James Bond franchise has produced the most successful and profitable series of movies ever.

With great strength in the international markets, worldwide TV, video and DVD.

Consistent with our strategy to ramp up production, we already have seven MGM films on the release slate for 2003, including out of time with den sell Washington, Bullet-proof Monk with Sean William Scott and Shavian Fait [phonetic] and agent Cody Banks, with Frankie Munez and Hilary Duff.

Our average investment in our 2003 films, even with our financing activities not yet fully completed, is only $25 million and we have a number of other high potential projects with similar economics nearing preproduction which will further bolster next year's slate.

And united artists gives every indication that it will continue to build momentum through the balance of this year and into 2003.

United artists release recently acquired Michael Moore's documentary bowling for Columbine winner can film festival and has scheduled the picture for early October release.

Nicholas Nicholby [phonetic], scheduled to premier in December in this production on June 30th.

This UA film has an all-star cast including Nathan Lane, Christopher Plummer, Jamie Bell and Ann Hathaway.

Jeepers Creepers II started shooting on June 4th.

This is schedule for release in February 2003.

In addition we have five other UA movies to be released before the end of the year.

Michael winner bottom's 24-hour party people, down starring Susan Seranden, Mike Lee's All Or Nothing, Sundance grand jusry prize winner Personal Velocity, and Evelyn starring Pierce Brasnan.

Now Dan Taylor has a few comments.

Thank you, Chris.

Good morning, everyone.

I have some brief items to bring to your attention on our second quarter financial statements and then some comments on our new credit facility.

Net debt at the end of the second quarter was $757 million.

We had bank debt outstanding of $1.2 billion, cash on hand of $447 million and an unused revolving credit facility of $600 million.

Equity and net earnings of investees was $6 million in the second quarter.

Mostly from our 20 percent interest and the four rainbow entertainment channels.

Entertainment channel.

As you recall net income from the Rainbow Channels on a three-month lag basis.

MGM's international channels were modestly EBITDA positive in the quarter even with the start up expenses at several new channels.

We announced our new credit facility on June 12th.

You should know that we wrote off approximately $12 million of previously capitalized financing costs when we completed our new credit facility in the second quarter.

We actually had about 18 months left under our old agreement.

But we decided to proceed with the refinancing for two reasons.

First, it's always easier to refinance when there's no real need for cash, and secondly we wanted to take advantage of what we perceived as favorable market conditions.

We originally intended to increase our credit facility to 1.$5 billion from 1.$3 billion.

But demand was so strong that it led to a significant over subscription in both the institutional and bank markets for the facility.

The lending banks were very impressed by the strength and transparency of our cash flows.

So we increase the facility to one and three quarters billion dollars consisting of a five-year revolving credit line of $600 million and two six-year [inaudible] of term debt totaling $1.15 billion.

Operator, you may now open this call up for questions, please. 00:36:08

Thank you, sir.

Ladies and gentlemen, to register for a question please press the 1 followed by the 4 on your push button phone.

You will hear a three-tone prompt acknowledging your request.

If your question has been answered and you would like to withdraw your question, you may do so by pressing the 1 followed by the 3.

If using a speakerphone, pick up handset before pressing the number.

One moment, please, for the first question.

Jill Creuchin [phonetic] with Salomon Smith Barney, please go ahead.

Thank you very much.

Good morning.

I was hoping you could clarify whether or not you're reaffirming your target in earnings which I believe was a range of 85 cents to 89 cents as per year preannouncement.

Jill, we confirm our previous guidance indicating that the second half of the year will be much better than the first.

Okay.

And that earnings will fall within the range that you had previously stated?

That's correct, Jill.

Okay.

In terms of Rainbow media, just given how that stock has performed, will you guys be reevaluating the book value of that investment?

Jill, yes, we have taken a look at it and under the accounting rules which apply, we look at this investment as a long term investment.

There has been obviously a lot of noise in the marketplace with cable companies generally, whether they are M.S.

O's that happened also on programming channels or otherwise, the Rainbow Channels continue to perform substantially in line with our expectations when we originally made the investment.

So we see no permanent decline in the value of the channels.

Okay.

And then finally, in terms of DVD shipments, when do you anticipate that shipments or sales will begin to flatten out in that adoption cycle?

As far as we can see, we don't see any flattening in shipments.

At least the foreseeable future.

Right now the marketplace is about 30 to 35 percent sold through for hardware.

That still leaves us 65 to 70 percent of consumers that have yet to start even purchasing DVD's.

We're still very excited about the growth prospects for DVD business.

Even more excited internationally.

Yes, particularly with picking up the two additional territories that Chris mentioned and the fact that we now, being very library focused, will be able to direct the marketing and sales directly with our retailers.

That's great.

And just in terms of sell through pricing trends of DVD's?

We're seeing very, very slight declines in sell through pricing that are much less than one would have anticipated if one looked at the VHS market.

The change in the makeup of the retailer environment, you know, where companies like as Chris mentioned Wal-Mart to a number one sell through, they're paying strong wholesale prices and then we're seeing prices advertised to consumers actually going down to bring people into the stores.

Not only only places like Wal-Mart by also consumer electronic chains and stuff.

All of that is benefiting the volume of DVD and we're not suffering on a wholesale basis for price declines.

Okay.

Thank you very much.

Jeff [inaudible] Madison, please go ahead.

Thank you.

Alex and Chris, given the volatile results that you and most everybody else experiences in the feature film production business, you know, can you just go back over again and really clarify in simplest terms how maybe your film strategy has changed going forward?

Okay.

This is Chris, Jeff.

Currently we had some real disappointments over the last six months, but I can tell you we could not be more comfortable than we are with what our film slate looks like the remainder of 2002 into 2003.

We think our go forward slate has the right risk reward profile of very low average investment.

As I said right now when you look at 2003, before our financing activities are completed, our average investment per film is only $25 million and we have a good mix of quality, highly marketable films in the slate.

And Alex and I are very comfortable the slate going forward fully represents the best of our theatrical production and financing strategy.

The most expensive film that we have going forward, as you know, is die another day.

Our Bond film.

And we're extremely comfortable about the economic model of our Bond films and that is really that's because each new Bond release is part of the most successful and profitable franchise in movie history and that gives the films a unique profitability advantage that we get even in addition to the big up lift we get on the 19 film Bond library and the MGM library whenever a new film comes out.

And the key to the Bond profit advantage and why we're so comfortable about Bond is that the Bond movies have a huge multiplier in terms of their ancillary market performance compared to domestic box office performance.

Again, the Bond franchise performs at an incredibly strong level in international theatrical, worldwide DVD, video and TV, and even in the video game business.

You know, for example, the last three Bond movies have more than doubled their domestic theatrical performance in international theatrical release and the last Bond movie did more than 105 million in worldwide TV revenues alone.

So I think that gives you an indication why we're very comfortable about where we are right now in terms of the go forward film slate.

Next question relative to DVD's what's happening on the manufacturing cost side especially as your volume has been picking up?

Jeff, this is Dan.

A couple years ago when DVD's were really exploding we were finding a bottleneck in manufacturing facilities, just due to the fact that the manufacturing industry didn't ramp up as fast as consumer demand.

That bottleneck has now disappeared.

We in fact have renegotiated both our domestic and international DVD manufacturing deals and we're finding the costs now for DVD are about 60, 65 percent of what they are for VHS and down about 40 percent just over last year.

So we're also benefiting tremendously on the margin side in our DVD business.

Are your unit costs coming down below a dollar, 90 cents, 80 cents?

Below 80 cents actually now for manufacturing costs.

Just a tremendously flush market now for manufacturing and that's benefiting us as well as our sister studios.

Great.

Thank you.

The next question comes from Robert Ralph with with Arnhold and [inaudible].

Please go ahead.

Yes, good morning.

A few quick questions.

First I was wondering if you could shed any light on the recent filing with the SEC they made about their intention to buy another 10 million shares in block transaction, given that they zero already own 120, shares will that decrease yourly which had quit, view thats a positive?

Second I was wondering given the situation cable Rainbow by division is in now they need cash from somewhere, would you be willing to possibly make another investment in Rainbow media national network consolidate them and get the cash they need if they were amicable to such a transaction?

This is Alex.

With respect to your first question, when we did our private placement, our last private placement at 16.50 a share, I specifically asked our principal shareholder not to participate because, as you know, one of the many advantages of doing that transaction was to increase the public flow.

Now, since then, obviously things have changed for everyone.

The marketplace has changed, and obviously we cannot control what each individual investor does in the open market and we can't tell them what they can and cannot do.

Our principal shareholder has decided that at these levels MGM is what he considers an irresistible bargain and that's the reason why he's chosen to buy in the open market.

Whether he eventually will end up buying the entire 10 million shares or not remains to be seen.

Does it go sort of opposite to increasing the public flow, yes, it does.

But again, I have more control over who buys and who doesn't buy when a company is issuing the stock.

But in the open market, obviously each investor is free to do what they want and I cannot keep people back from taking advantage of an irresistible bargains.

With respect to your second question, I think we always consistently stated we would be willing to invest in a controlling interest in the Rainbow Channels.

Whether that opportunity will avail itself to us, given changing conditions in the marketplace remains to be seen.

We continue to enjoy a great relationship with Rainbow on an operational basis.

There are a whole bunch of things we've already done together and a whole series of transactions that are being considered right now.

But as far as any M and A transactions between MGM and Rainbow, there is nothing to report right now.

Okay, great.

And finally with respect to the Legally Blonde television show you were going to do ABC was going to do, can you give us an update on what's exactly is happening with that if anything?

This is Chris.

It's not off.

We're continuing to develop the TV series with touch tone TV and ABC but we're very mindful Robert that we need to hold this franchise to an extremely high creative standard, particularly since, as I said, we're also working on the theatrical see quell we have a great new script for this movie, Red White and Blonde, we're hopeful we'll have more specifics about the theatrical sequel and possibly the TV series in the near future.

And one final question.

With respect to the ancillary revenues that you can get from the Bond franchises, the swatch watches and things they're selling, can we expect to see anything in your financials in the second half of the year, royalties from those type of products or would it be immaterial?

This is Dan, Robert.

It would be immaterial.

The primary focus is promotional partnerships with our movie and those are been very successful.

There are a number of those that will help us both in promotion and publicity for the movie as well as the ancillary markets going forward.

Great.

Thank you very much.

Mr. wrong with J.P.

Morgan please go ahead.

Hi, good morning.

Just a couple quick questions.

Given the performance of some of the films, can you just speak to perhaps some of the changes you're making to either the green lighting process or changes in the marketing department?

And secondly, just to clarify a point Dan had made earlier, is it $12 million write down of the previously capitalized interest cost the reason why net interest expense in the quarter grew so much year over year?

Thanks.

I'll take the second question first, Spencer.

Yes, interest expense just about doubled which happened to be the amount by which we wrote off related to previously capitalized financing costs.

Chris?

Yes.

Spencer, I think as I said before, clearly we made some mistakes with Windtalkers and some of the other film.

I think the key is we look forward, we learn from those mistakes and I think that's clearly reflected in our slate going forward.

Again, when you look at our portfolio right now, what you see is a very, very good mix of quality highly marketable films with the right risk reward pro vial, pro file, low average.

The only expensive film on our horizon right now for 2002 and 2003 is Die Another Day, which has that very advantageous set of Bond economics supporting it.

We did make some changes in our marketing department and we did that primarily because there were two stars who were available in the marketing marketplace, Peter A.D. who we hired to run worldwide marketing and Steve Miller who is our new head of creative advertising.

And again there were stars who were available and Alex and I have consistently said we'll always go after great executive talent to upgrade the division whenever they're available.

Great.

Thank you.

The next question comes from Kim wall as with Bank of America.

Please go ahead.

Thank you very much.

I just have one fairly simple question.

On the Douglas picture that you're producing, I was surprised to hear that your cost on that is very low.

Is there some back end participation that the Douglases will get out of that?

Thank you.

Yes, the movie - we don't give the specific cost of any of our movies but the total cost of the movie is well below $20 million and we've got the domestic on it for a price that's well below $10 million.

Buena Vista has the international on that picture.

And clearly at that budget level, the Douglases have a unique profit sharing formula that kicks in in success, but that's about as specific as I'd like to get about the pictures, economics and participations.

Just one follow-up.

You wouldn't, then, anticipate that then being as profitable as something like Legally Blonde if it's a hit?

You know, without getting into specifics, you know, I think we can be very, very successful with that picture with a very high rate of return.

Clearly because we don't have the international on it, we have the international on Legally Blonde.

That limits our upside to some extent, but we can do quite well on this picture.

Thank you.

Michael Galant with CIBC.

Please go ahead with your question.

Yes, good morning.

You guys have talked a lot about becoming part of a larger organization, but in the last four or five months you've gone out and raised some equity and decreased your debt load so you have the cash to go out and make an acquisition, it looks like you're going to go in the other direction.

Given how expensive cable network transactions have become here in the last couple years, what can you say about any potential transactions you might do in terms of acquisitions that can get investors comfortable with they're not facing the mere delusion in any transaction you might do?

Well, Michael, this is Alex.

First, when you mention with we might go in the other direction, I'm not quite sure what you mean by that.

We've consistently stated we think we need to be part of a larger organization.

We didn't ever say how we become part of a larger organization.

We've always said that our preference is to be the surviving entity, the acquirer and to grow MGM to give it more scale, to give it more diversified revenue extremes and to give it more integration.

Nothing is changed in that regard.

I think that whether opportunities make themselves available in the marketplace, that changes from time to time and that's very fluid.

One thing that you can rest assured of is that we've been very disciplined so far in terms of making sure that we don't go out and over pay just for the sake of doing the transaction and just for the sake of becoming part of a larger organization and you should expect that to continue.

I think that there are too many deals in this industry that are driven by ego and not by reason.

And certainly we're going to remain with that discipline of doing deals that we think make a lot of sense and we can articulate a very clear value proposition for our shareholders as opposed to vanity driven deals where you have to pay the price later.

Great.

And is there anything you can tell us in terms of where Mr. Cacorian [phonetic] is in his purchases, since the deal was announced stock has continued to slide granted it's been a tough market, but has he executed on some of his purchases, anything you can say there?

I don't think it's appropriate for me to comment on transactions of individual shareholders.

I should only comment on things that have to do with the company.

I should correct you, however, Michael, in that I think the stock is - yeah, I guess it's within 50 or 75 cents of when he announced the [inaudible] or his open purchase, call it.

Right.

Thank you.

Jessica Reeve Cohen with Merrill Lynch.

Please go ahead with your question.

Thank you.

Dan, could you comment on the cash position?

It grew substantially since the first quarter from 4 million.

Yes.

Jessica, we - when we refinance our credit facility and was were able to you up size the term debt that increased our cash position substantially.

You know, like I said, we now have almost 450 million in cash, but net debt is up - is down as well and the reason why is we've had very strong video and television receipts in the first quarter.

We are - our production expenses are coming now in late in the second quarter and moving into the second half of the year on some of the movies that Chris talked about.

We're still spending a little bit lower this year than we plan to, you know, our normal plan we'll spend about $340 million net on production in 20002 and get back to our normal level of 400 million or so in 2003.

But again, it's that continuing growth in library cash flow, ancillary markets and current product.

They're starting to pay a little bit and see more of that in future years.

Where would you expect your year-end debt to be, net debt?

About 950 million.

Hopefully not billion.

No, Jessica, I hope not.

What kind of incremental expense do you have from taking back marketing in Germany and France?

We actually will have lower overall expense because our fee to Fox will drop appropriate with the reduced level of their participation in our efforts and our internal overhead costs will not go up as much as the fee savings.

So we actually on an overall basis will save a little bit of money.

Immediately or ramp up first?

Well, we'll ramp up this year, incur some minor overhead costs getting groups into place and take over early next year.

Okay.

And again, we're looking for with having our own control, a substantial up left on the revenue side while really no increase on the overhead cost side.

An immediate up lift.

We'll be doing all our planning, as we get the group in place which we've already hired the heads for both territories and some of their personnel, they'll spend the third and fourth quarter building their plan, starting to talk to retailers and everything, and then hit the ground running.

Okay.

And then a question maybe for Alex.

On Rainbow, cable vision presumably is going to announce what they're going to do in the next couple of weeks regarding their own funding gap.

But if they chose to sell it, clearly will, they chose to sell it, do you have any agreement where you get the first book or right of first refusal?

No.

If they choose to sell it, we assume that Chuck would talk to us first, but if they do sell it to a third-party other than us, we have a tag along right.

[inaudible] sequel at all?

I'm sorry?

[inaudible] position as well?

Do they have any rights along with you?

No, NBC is in exactly the same position as we are.

Okay.

All right.

Thank you.

David Miller with Sanders Morris Harris, please go ahead.

Yeah, good morning just a couple questions.

Al he can can you give us a sense at this time of what percentage of your total film library has thus far been exploited on DVD format in terms of rental and sell through?

And also Chris kind of an off beat question, have there been any kind of initiatives green lit this far MGM stage plays?

Thanks very much.

David, Dan, hi, how are you?

Pretty good, how are you?

I'm all right.

By the end of this year we will have exploited approximately 750 titles in the B V D marketplace. [DVD] in terms of the stage play initiative I think there have been around ten different licensing deals that we've done for MGM stage properties - MGM library properties for the stage that varies all the way from Chitty-Chitty Bang Bang, which is on the stage in London right now and is very successful, all the way through to the title that's been mentioned several times on this call Legally Blonde which we're developing as well.

It's important to note in that business there is absolutely no risk to the company.

It's basically a licensing arrangement and hopefully if two or three or four of these plays actually get mounted and become successful and run for a number of years, they'll be a nice little annuity for us in term of the fees that we generate.

Okay.

Thanks very much.

Ladies and gentlemen, if there are any additional questions, please press the 1 followed by the 4 on your push button phone.

Raymond Katz with Bear Stearns, please go ahead.

Yes, good morning.

Quick question.

For Dan your allowance on [inaudible] counts went up as a percent of the gross receivables from 5 percent to 10 percent.

Could you just fill us in as to what's going on?

Sure.

As you know, we booked a bad debt against Kiers [phonetic].

We talked about that in the first quarter.

We're continuing to work on the Likens [phonetic] deal there and how we recover those monies.

And also planning for German shows going forward.

Similarly, there have been some problems in Argentina as you're all aware.

We had some receivables associated with those contracts that we booked some bad debts on and then we've taken a look at - there's one big retailer in the domestic marketplace, K-Mart.

We had some minor receivables there, and a few smaller retailers that we continue to watch carefully.

Thank you.

All right.

Ladies and gentlemen, nice talking with you.

Should you have any follow-up questions, please give me a call.

Talk to you soon.

Ladies and gentlemen, that does conclude your conference for today.

You may all 00:58:53 disconnect, and thank you for participating.