Q4 2019 Earnings Call
Welcome everyone to the Madison Square Garden Company fiscal 2019 fourth 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.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question press the pound key.
Thank you I would now like to turn the call over to Ari Danes Senior Vice President of Investor Relations for the Madison Square Garden Company. Please go ahead Sir.
Thanks, Christine good morning, and welcome to the Madison Square Garden Company's fiscal 2019 fourth quarter earnings Conference call.
Our president and he lost garden well begin this mornings call with an update on the company's operations. This will be followed by a review of our financial results with the Korean make our SVP 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 Companys filings with the Securities 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 five and six of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income already alive, a non-GAAP financial measure.
Lastly on pages eight and nine of the release, we present, a reconciliation of ally to ally excluding the impact of assay topic 606, the new accounting standard for revenue recognition and with that I'll now turn the call over to Andy.
Thank you Ari.
Before I turn to our core business.
I'd like to talk about where we stand with the company's key strategic initiatives.
We made significant progress on our plan to grow beyond our existing portfolio of assets by pioneering the next generation of entertainment with MST sphere.
And as we execute on our vision for the state of the art venues. We continue to actively pursue the proposed spin off of our sports business.
The transaction, we believe would strengthen our financial flexibility and help drive long term value creation for our shareholders.
You've heard US talk previously about the merits of the proposed spin off.
We remain confident that this separation would better highlight the unique value of the Knicks and Rangers franchise.
We continue to expect that the entertainment company would retain an approximate one third equity interest in the sports company.
This equity stake would be used to help fund our growth plans and for other corporate purposes.
And it would also be available for potential tax free exchange for Entertainment company shares.
Well, we know this is taking longer than expected we remain firmly committed to completing this important transaction, which we now anticipate will happen in the first quarter of calendar 2020.
The spinoffs spin off is of course still subject to various closing conditions, including league and final MSG Board approvals.
As I mentioned earlier this transaction would strengthen our ability to execute on our plans for MSG sphere and initiative, we continue to make meaningful progress on.
In June we announced that we engaged a calm as our general contractor for atmosphere in Las Vegas, a calm is known as a leading builder stadium and entertainment facilities and we believe their experiences makes them the ideal partner.
In Las Vegas, we've reached significant milestones over the past several months.
We completed grading mass excavation and drilling deep foundations and have now begun to work on shallow foundations and installation of below grade infrastructure.
We've also started to building a basement walls and stay on elevator cores in columns.
Our goal remains to open Las Vegas venue during calendar 2021, and we are increasingly excited about the transformative nature of the MSG sphere.
Las Vegas is one of the world's top entertainment destinations.
With over 40 million visitors annually.
Many of whom are looking for new experiences.
We're going to give it to them.
Atmosphere will be an entirely new platform. Unlike anything we've ever seen.
Of course, we expect that will attract the type of events you see at any world class venue concerts award shows select sporting events et cetera.
However, we believe it will enable us to create entirely new forms of entertainment some unexpected.
For instance, with interior display the size of three football fields, we believe atmosphere will completely redefine how companies think about product launches.
And when you add that were directly connected to the Sands Ekso Center, we see this as a very compelling opportunity.
Moreover, we do not intend to just rely on traditional content to drive the venues utilization.
We plan to take a page or the Christmas spectacular playbook with the goal of creating original attractions that showcase the venue state of the art technology and won multiple times a day year round.
Criminal then count perspective, we believe these attractions will result in the hemisphere being the most highly utilized venue in our portfolio and also served as content that we can leverage across future hemispheres.
In addition to events I mean, she spheres groundbreaking platform will create unprecedented opportunities for companies to engage with very valuable audience, which we anticipate translating into meaningful high margin sponsorship revenue for the company.
And we've said from the beginning we believe the atmosphere will re imagined the live experience.
Basis, if we take a deeper dive into the results, we see a far more compelling story.
Let's start with MSG Entertainment.
Our booking business had another record setting year with a 10% increase in the number of events held at our venues, which translated into a high single digit percentage revenue growth on an underlying basis.
And while bookings results for the fiscal fourth quarter were lower year over year.
As we look out.
Our start to fiscal 2020, we are currently pacing ahead of last year at this time in terms of the number of confirmed events plus shows that have already taken place.
The Christmas spectacular had an equally impressive year with highlights that include over 1 million tickets sold for the shows a week run.
Mid single digit percentage growth in both paid attendance and average ticket prices and a double digit percentage increase in revenues.
Rounding out the success and entertainment.
Was ongoing revenue growth across both sponsorship and suites during fiscal 2019, our continued reflection of the value we bring to our partners.
There were however items that offset these achievements of fuel, which I'll touch on now first as we discussed previously Calgroup had lower results year over year in the first half of fiscal 2019.
A portion of the decrease was pre opening expenses related to the popular Tao restaurant in Chicago since the first half we have seen improvement as the business was essentially flat year over year honor, our third quarter and return to modest growth in our fourth quarter.
Tell group has can also continued to execute on its venue expansion plans, which in addition to tag Chicago include opening a new venue in yours and Singapore.
Tell group had been us terrific strategic partner for our company.
Both here at the garden, where they will play a larger role this coming season in our food and hospitality offerings as well as in Las Vegas, where they are helping to create a world class guest experience for MSG sphere.
With regard to obscure in Boston, calling while allied for both of these businesses were lower this year.
As we previously discussed we are winding down obscures third party business. So we could focus those resources on MSG sphere.
And for Boston, calling we've reworked our strategy, which we believe will return the vessel to profitability.
Now turning to MSG sports for fiscal 2019, we saw growth across a number of categories, including league distributions local media rights and suite license fees.
We also saw solid growth in our sports booking business as we had a particularly successful year in attracting marquee support sporting events to our venues.
However, there were items that offset this growth in sports.
The team performance of the Knicks and Rangers weighed on our pre per game revenues for tickets food beverage and merch sales.
We were also impacted by higher team personnel costs, including a player waiver earlier this year.
As well as higher marketing costs as we spend more to support our end game sales.
Looking ahead, we continue to strengthen both teams with long term goal of building championship caliber franchises.
The Rangers head into next season with several key additions, including the number two overall pick.
Capo cocoa.
ALLETE forward, our tenant pioneering and defenseman Jacobs drupa.
Meanwhile, the Knicks have continued to build on their young core with a number of.
With a number of additions, including the number three overall traffic Duke Star RJ Barrett, along with free agents, such as Julius Randall markets Morris and body Portis.
We look forward to the new season for both teams.
With respect to sponsorships, we had another year of growth with an increase in entertainment, while sports revenue was flat with the prior year.
Which we again tribute contribute to the team performance.
There were a number of new partnerships that contributed to our growth, including ones with Montefiore health system Horizon and Hulu.
This year also marked the start of our multiyear marketing partnership with Pepsico and as we recently shared we completed a multi year renewal with long standing partner Ticketmaster on both the sponsorship and ticketing fronts.
In addition to everyone everything we've talked about with regard to our segments on a total company basis. We are also impacted by higher ESG in a expenses, including ongoing investment in personnel as we move forward with our growth plans as well as cost associated with the proposed sports spin off.
So in summary, while fiscal 2019 had many moving parts there was much to be excited about in terms of the underlying results of our business and our long term prospects.
At Entertainment, we see an opportunity to continue growing important areas such as booking and productions, while at sports, we see broad based upside potential, especially as both the Knicks and Rangers improve their performance over time.
We have also made significant progress and readying our company for its next chapter and expect fiscal 2020 to be an important year.
As we work to complete our sport spinoff and as our MSG sphere in Las Vegas begins to take shape with that I'll turn the call over to Victoria.
Thank you Andy and good morning, everyone.
Before I discuss our fourth quarter financial performance I'd like to take a moment to discuss the update we provided on costs for our Las Vegas venue in this morning's earnings release.
We disclosed that in May our board of directors approved a preliminary construction budget of $1.2 billion.
In addition, as part of the contractual process of setting the incentive benchmark for establishing a common fees eight calm has provided us with an initial proposal that together with additional core technology and soft costs results in a project cost estimate of $1.7 billion.
We think a coms estimate is too high and as part of the contractual process, we are reviewing and challenging our contractors estimates and assumptions.
We believe as a result of this process that we will be successful in achieving significant cost reductions.
Now turning to our fourth quarter results.
On a reported basis MSC generated total revenues of $263.6 million and an adjusted operating loss of $34.9 million.
Excluding the impact of the new revenue recognition accounting standard we would have generated total revenues of $326.2 million, an increase of 3% and ally of positive $3.7 million, an increase of $5 million, both as compared with the prior year quarter.
At MSG entertainment revenues of $174 million decreased 6%.
The largest driver of the decrease was lower event related revenues from concerts with a decrease at the garden and forum, partially offset by growth at the Beacon and Chicago theaters.
In addition, we had a decrease in revenues for the Boston, calling festival, along with lower suite license fees due to the new revenue accounting standard while segment revenues were also impacted by the wind down of obscure as third party business.
These decreases were partially offset by higher Tao group revenues and higher sponsorship and signage revenues.
Fourth quarter ally of $1.1 million decreased by $7.1 million, primarily due to the decrease in revenues, partially offset by lower direct operating expenses.
The decrease in direct operating expenses was primarily due to lower event related expenses from concerts and to a lesser extent lower venue operating costs as well as lower expenses for obscure digital and the Boston calling festival.
This was partially offset by higher tower group expenses.
Excluding the impact of the new accounting standard entertainment revenues for the fourth quarter would have been $180.9 million, a decrease of 3% and ally would have been $3.6 million a decrease of $4.6 million, both as compared to the prior year quarter.
At MSG sports revenues of $90 million decreased 32%.
This was primarily due to the new revenue recognition standard, which significantly impacted most of our revenue line. This was partially offset by higher event related revenues from other live sporting events.
While fourth quarter revenues at MSG sports were impacted by a topic 606 on a full year basis, the impact of the new accounting standard was negligible.
MSG sports AOCF in the fourth quarter decreased by $16.5 million to a loss of $5.7 million, which primarily reflects the decrease in revenues, partially offset by lower direct operating expenses.
The decrease in direct operating expenses was primarily due to lower net provisions for certain team personnel transactions as we recorded significant expense in the prior year quarter.
In addition, we had lower team personnel compensation costs with the overall decrease in expenses, partially offset by higher event related expenses and other live sporting events.
Excluding the impact of the new accounting standard MSG sports revenues for the fourth quarter would have been $145.7 million, an increase of 10% and ally would have been $30.4 million, an increase of $19.6 million, both as compared to the prior year quarter.
Corporate and other adjusted operating loss of $30.3 million increased $10.1 million year over year, primarily due to higher professional fees and higher employee compensation and related benefits.
Looking ahead to fiscal 2020, we expect to see increased expenses in our corporate and other line.
This reflects additional investment in personnel content and technology to help drive our MSG skier initiatives.
Now turning to our balance sheet.
As of June Thirtyth, total unrestricted cash and cash equivalents and short term investments were approximately $1.2 billion.
In addition, there had been no borrowings made under either our $150 million, New York Rangers revolving credit facility or our $215 million in New York Knicks credit facilities.
In May we refinanced how group's debt to a 40, a new $40 million term loan and a new revolving credit facility $15 million of which was drawn down as part of the refinancing.
In addition, we put into place a $49 million subordinated loan with MSG as the lender to tower group.
The original $110 million term loan was put in place at the time of our acquisition of a 62.5% equity interest in tower group.
This refinancing provides for significantly lower annual interest expense and principal payments, giving calgroup enhanced flexibility to pursue its expansion plans.
With that I will now turn the call back over to Ari.
Thanks, its ARIA Christy can we open up the call for questions.
Sure as a reminder to ask a question press Star then the number one on your telephone keypad and your first question is from Bryan Goldberg of Bank of America Merrill Lynch.
Okay. Thanks, Thanks for the extra color on the Las Vegas fear opportunity I was wondering if we could dig a little into earnings power applications historically.
It's been our observation that you've been able to generate double digit cash on cash returns on capital projects like the transformation of the garden and the Forum and I'm just wondering given the size of the Las Vegas budget do you see a similar path.
Towards double digit returns on this level spend or is there a different return profile. We should have in mind and then I have a quick follow up.
Hey, Brian . Thanks. Thanks for question, Tom So, let's I talked about it before but I'll looming talked about it again in a little more detail.
We believe this project is going to revolutionize live entertainment.
We think that like any other venue. It has the base levels of revenue. It has the ability to book concerts as ability to book some sporting events, just like any other venue for them and has the ability to book a whole host of new types of performances those that we create through our attraction business that we're going to run multiple times a day.
And for the corporate events.
It's going to be the host of.
Anybody looking to launch a product or hopefully anybody looking to launch the product.
And.
This will be the place to tell your story and it will be a place where sponsors need to reach these men.
Multi million number fans coming to experience. Thus story that's been told.
The attractions business is something that doesn't exist, we're going to be taking people places where they have never gone before.
Both experiencing individually as well as feeling it smelling it.
And hearing it and we think that this is going to create a whole new hosted revenue.
No other venue and no other.
No one else has and we really think this is going to be.
Pillar.
Okay. Thanks, and then.
I guess I guess, it's kind of like a housekeeping item with respect to the incentive benchmark that you disclosed that you're negotiating with a calm when do you expect to land on a on a final.
Benchmark figure and is this an item you intend to disclose going forward.
Hey, Brian its Victoria, and so the incentive benchmark has a tremendous amount of detail and information.
A lot of estimates and assumptions. So at this point were in the middle of the contractually mandated period over which we can negotiate this incentive benchmark.
So at this point, we think it could run into the fall. It also could be extended further and of course, we will see when that's resolved with the appropriate disclosure would be at that time.
All right. Thank you very much.
Thank you. Your next question is coming from Brandon Ross.
Hi, guys. Thanks for taking the questions.
First there's a pretty wide Gulf between.
Your $1.2 billion fears estimate and a 1.7.
Maybe you could tell us what what gives you the confidence that the project will come in closer to your projection. Then there are there's maybe specific cost areas that their projections seemed too high and then as a follow up.
Yes, sure Brandon so.
As I had just.
In answering Brian's question in indicating and there is a tremendous amount of detail and estimates and assumptions but.
Let me just take a step back the $1.2 billion cost estimate was for budgeting and forecasting purposes and it was based on a schematic designs at that time.
The 1.7 billion is based on an estimate from the contractor for FY setting purposes, and it's part of a cost plus contract where the contractor of course is incentivized to propose a higher cost estimate as it gives them a more favorable benchmark.
But as we stated we think the estimate is too high and we are in this process of reviewing and challenging those assumptions. We also plan to value engineer aspects of the project to further reduce costs. So we do believe as a result of both of these efforts that we will be successful in achieving significant cost reductions.
And as an aside there are a number of other benefits to a cost plus contract. For example, we pay the cost of the actual materials and labor plus negotiated percentage fee, which means we don't we don't pay an estimated or fixed amount that typically includes a substantial cushion for the contractor.
We're also able to negotiate a more play a more vigilant role in the negotiation process, which we believe will maximize the quality of the work and help manage the project costs.
This includes having full transparency into the selection of the negotiation with all of the labor and materials utilized by the subcontractors.
So we think this is going to be a very detailed process and thats why we are.
We believe there'll be some significant savings.
Great and then just earlier in the call you said that I think you said the timing of the band would be pushed to calendar Q1 of 20 is there a specific reason or any more color that you could give for that.
Hey, Brandon.
So.
We acknowledge it's taken a little longer than we would have liked.
We're fully committed.
Moving forward and.
It's just a process and.
We're working our way through it.
But.
Don't read into anything further than we're working our way through this process.
We're will we're anticipating have done first quarter.
Great. Thanks, guys.
Thank you. Your next question is from David Karnovsky of Jpmorgan.
Hi, Good morning, just following up on this here the numbers you've given of 1.2 to 1.7 can we assume that range.
<unk> is also appropriate to apply to London's here and assuming that is the case can you just update us on the overall financing for the projects. Thanks.
Hello.
On the London sphere, we've you know it will be largely similar to the Vegas fear binoptics not identical.
We are very focused as we've talked about the bills that have the internal will be repaid replicable. So that we can share content across venues and leverage.
A lot of levers that part of the business. So that we can drive utilization of both onions.
But we're also very early in our design, it's a smaller piece of land and there will be there will be things that are not identical.
And so we don't much we don't have a lot further in terms of cost estimates.
For London at this time and David on some of the second part of your question.
The Entertainment company is going to start with over a billion dollars of cash on hand, which we have just about 1 billion one on our balance sheet now plus another 100 million or so in British pounds. So with the proposed spin off we will also have the approximate one third equity interest in the sports companies. So we believe that's going to provide the company with significant financial flexibility to pursue these growth plans and as we said before we'll always explore additional ways to further strengthen our financial flexibility. If we believe it makes sense for the company.
Okay, and then just on how you called out higher revenues versus I think flat last quarter can you just break down that performance a little bit how much of that is driven by new venues relative to your existing locations and then I think last quarter. You had mentioned working with how management to operate the business more efficiently can you just update where you are in that process. Thanks.
Sure.
Yes. So we're pleased I mean that how group return to overall growth in the fourth quarter.
We don't break out the profitability of the various businesses, but I can tell you that have generated a revenue increase of 4.6 million on a year over year basis in the fourth quarter and just as a reminder, we report how group results on a three month lag.
But when we think about the different mix on an overall basis.
A lot of the revenue driver of the 4.6 million was due to the opening of the tower Chicago in September . So we've been really pleased with that with that venue, which has been somewhat offset by the impact of closing one venue. After a 15 year run and another venue in the New York area that was underperforming. So so a bit of a mix there, but I think overall, we have been working closely with the top management group and it really focused and its certainly starting to show in the results which are.
Certainly trending better than they were early this fiscal year.
Thank you.
Thank you. Your next question is from David Miller of Imperial capital.
Yes, Hey, guys a couple of questions Tom Andy once the spin happens.
For Q1 of next year, what are your personal plans in terms of which side you expect to lead and then I will follow ups. Thanks.
We're still working through management structures of both entities.
Jim will be.
Chairman.
And CEO and.
We're working through the rest right now.
Okay, and then Victoria.
I'm, just still trying to parse out whether the miss on the sports line is due to topic six of six or just lower suite.
Suite revenue for teams the narrative would you guys for a long time had been that you know just with the loyalty the fan base. The suites were always sold out regardless of key performance, but it feels like that thats shifted a bit I'm wondering if you agree with that or if this if this is all due to topics associates. Thanks.
Sure. So David Yes, I mean topic 606 has just been a theme throughout this entire year. Unfortunately on a quarterly basis. It's just created so much noise. So and were fortunate that this will be the last quarter.
That noise, but I will say on the if you exclude 606, and we'll look at the suites in Q4.
They were basically flat and do you think some of the the product was impacted by team performance a little bit but on a full year basis, we did with mid single digit increases in our total suite revenue across the company. So I think we continue to be.
Pleased with that but obviously, we look forward to an improving teams in fiscal 2000.
Thank you. Your next question is from Im sorry go ahead.
Hi, Christy we'll take the next caller.
Your next question is from David Joyce of Evercore ISI.
Thank you.
Couple questions really the spheres.
Can you help us think about the phasing of the construction costs for Las Vegas.
And assuming London's cost is going to be in the same range, where are you on the process of getting final approvals and.
It really coming up with the budget there. Thank you.
Sure Let me take the first part of that question, David So as we disclosed in the earnings release inception to date, we've spent $109 million on this core construction costs and we expect to see those costs ramping up and our cash outflow.
Ramping over the next.
Few years until the opening in calendar 2021.
In terms of timing.
With London so.
So we're in the middle of our planning application process Weve submitted it.
In March.
We expect to hear a determination by the end of calendar 2019.
But that could continue and become subject to further discussions with the planning authority.
And.
Once we assume we will receive planning permission.
We will then get further into design and.
Eventually for construction.
It's as quickly as we can but there is.
Clearly some work to be done.
Okay and on the funding options for the spheres.
Do you have any.
More tangible sense of the structure of monetizing the third of the.
The stake in the teams.
So.
It's just we're not we have nothing more to report at this time on that.
Look I am sorry, I can give you more but.
All right. Thank you.
Thank you your next question.
We'll take one last caller.
Your final question is from Brett Harris of GE research.
Hi, Thanks for taking the question just first a quick one.
Any update on the filing of the form 10 for the separation I guess what are the gating factors for that document at this point.
And then just secondly.
Anything more you can see in the timing on the Finalization of the construction costs for the biggest fear I guess given the projects already started.
When do you expect to have a final cost estimate.
Thank you.
So right now we continue to work on the form 10, and the various appropriate SEC filings as we move towards the proposed spin off and now with our filing of our 10-K for the Madison Square Garden Company. Later today, we would expect to be doing are confidential filing in that in the next coming few months.
In accordance with our timeline.
And then as far as the overall.
Overall scare costs I don't think there's much to add beyond what I said previously addressed in the call.
Okay. Thank you.
We have no further questions at this time I will now turn the call over to Ari Danes for any additional or closing remarks.
Thank you all for joining US we look forward to speaking with you on our next earnings call have a good day good bye.
Thank you. This does conclude today's conference call you may now disconnect.