Madison Square Garden Sports Corp. (MSGS) Q2 2011 Earnings Report, Transcript and Summary

Good morning, my name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to The Madison Square Garden Company second quarter and six months 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to Ari Danes, Vice President of Investor Relations for the Madison Square Garden Company. Please go ahead.

Thanks, Melissa. Good morning and welcome to The Madison Square Garden Company's second quarter and six months 2011 transition period earnings conference call. Joining us this morning are members of the MSG management team including Hank Ratner, President and CEO; Bob Pollichino, EVP and Chief Financial Officer; Mike Bair, President, MSG Media; and Scott O'Neil, President, MSG Sports. Following a discussion of the company's financial results, we will open the call for questions. If you do not have a copy of today's earnings release, it is available in the Investor section of our website at themadisonsquaregardencompany.com. Please take a 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 or developments may differ materially from those in the forward-looking statements as a result of various factors, including financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates, and 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. Let me point out that on Page 4 of today's earnings release, we provide consolidated operations data and a reconciliation of adjusted operating cash flow or AOCF to operating income. I would now like to introduce, Hank Ratner, President and CEO of the Madison Square Garden Company.

Thank you Ari. This morning we released our second quarter and six months 2011 transition period results as we shift to our new fiscal year ending June 30. Our results for both periods reflect continued revenue growth and solid overall adjusted operating cash flow with a strong end of period cash position. We achieved these results even as the Garden and the Theatre at Madison Square Garden was unavailable for events starting in mid-April due to the transformation project. While we cannot precisely determine the number of events which would have taken place if the venues had been open, our second quarter results were clearly impacted by the off season shutdown. Looking back to last year as a frame of reference, from mid April through June 30, we generated nearly $12 million in event-related revenues and approximately $6.5 million in direct AOCF contribution for events that were held at the Garden and the Theater at Madison Square Garden. That being said the impact to our business of the three off season shutdowns was factored into our plans for the transformation project from the start. During the second quarter, we also continued to balance near-term financial objectives with positioning the company for long-term growth by making strategic programming investments and key sports team player personnel decisions. Turning to the MSG Media segment, top line growth continues to be led by our core base of affiliate fee revenues with advertising revenues benefiting during the second quarter from both the Knicks and Rangers participating in the playoffs, the strong ratings results as Mike Bair will discuss with you shortly. We also continue to invest in Fuse core programming to further increase viewership building on two consecutive years of ratings growth. In terms of MSG Entertainment segment, we remain focused on increasing the utilization…

Thank you, Hank. For the six month transition period ending June 30, 2011, revenues and AOCF include the impact from our mid-April to June 30 of the scheduled shutdown of the Garden and The Theatre at Madison Square Garden due to the Transformation project. As previously disclosed, the off-season shutdown is expected to continue until late October. Operating income also reflects an increase in depreciation expense, primarily associated with the Transformation project, specifically six-month 2011 revenues of $564.3 million, a 5.7% increase versus the prior year period. Consolidated AOCF was $95.7 million, an increase of 5.3% and operating income affected by the increase in depreciation expense was $44.9 million, a 19.6% decrease both as compared to the prior year period. The remainder of my comments will focus on the calendar second quarter results. As with the six month transition period, revenues and AOCF for the 2011 second quarter include the impact of the off-season shutdown. Operating and net income also reflect an increase in depreciation expense primarily associated with the Transformation project. For the 2011 second quarter, we generated $233.9 million in total revenues, an increase of 3% versus the prior year period. Consolidated AOCF was $40.9 million, down 3.7% as compared to the 2010 second quarter. Operating income of $14.5 million and net income of $8.5 million, both affected by the increase in depreciation expense, were down 43.7% and 39.1% respectively as compared to the prior year quarter. Turning to the second quarter results of our business segment, our MSG Media segment generated a $139.6 million in revenues, an increase of $5.1 million or 3.8% as compared to the second quarter of 2010. Affiliate fee revenues increased $3.3 million versus the prior year period, primarily attributable to higher affiliation rates with the overall increase being substantially offset by the…

Thank you, Bob. Following strong regular season campaigns with a compelling story line both Knicks and Rangers returned to the playoff this past April. MSG Networks telecast six Knicks and Rangers first round playoff games with strong ratings results. For example, the average total household rating for the Knicks playoff games was up over 60% versus the 2010-‘11 regular season average rating which itself was up with 100% versus 2009-‘10 regular season. The NBA and NHL are now in their off seasons. We continue to maintain a strong presence on MSG Networks during the several months, including New York Red Bulls and New York Liberty regular season games or third annual Summer Block Party featuring themed programming blocks every night through everyday which includes MSG Vault our original series which was back at memorable Madison Square Garden and New York-area sports moments and our weekdays telecast of the Boomer & Carton show. Hockey Night Live, also recently ramped up the 2010-‘11 season. The special episodes in June and July dedicated to the NHL draft in the start of the NHL free agency period. In addition, Scott O'Neil will discuss shortly, in September, MSG Networks and Fuse will broadcast in The Quicksilver Pro New York, the first ASP World Tour Pro Surf competition on the East Coast. MSG Networks again saw a strong increase in advertising revenues in the second quarter. The auto, financial services, telecom and fast food categories were all key contributors to advertising growth during the quarter. We continue to believe we have meaningful long-term advertising upside on MSG Networks from increased interest in our sports franchises. Turning to our national music network Fuse, as we measure the success of our new shows, we will continue to build thoughtfully and invest in Fuse’s core programming to further increase…

Thanks, Mike. The Madison Square Garden was again named the top grossing arena in North America by Billboard Magazine for the six months ended May 2011. Despite the venue being unavailable for almost seven weeks due to the off season shutdown. Radio City Music Hall and the Theatre at Madison Square Garden were ranked at number one and three respectively in the 5000 to 10000 seat category while The Beacon theater, The Wang Theatre and The Chicago Theater all were in the top ten in the 5000 seat and under category. : We also saw strong trends in multi-night performances at the Beacon where over half of the performances for the quarter were multi-night shows. Eddie Vedder, Deep Purple, Earth, Wind & Fire and Chelsea Handler all played two nights each at the Beacon. With Cirque du Soleil's Zarkana playing at Radio City and the Theater at Madison Square Garden being closed, we’ve also focused on driving concerts and events which would have otherwise played at those venues to Beacon theatre. ,For example after a long run at Radio City Music Hall, we hosted the 65th Annual Tony awards this past June at the Beacon theatre, the first of three consecutive years The Tony Awards is scheduled to take place at the Beacon. Cirque du Soleil’s New acrobatic production Zarkana began its preview run on June 9th at Radio City Music Hall, officially opens on June 29th and is expected to run into early fall. The show has been well received and will return in June 2012. Turning to productions, as we discussed on our last earnings call the 2011 Radio City Christmas Spectacular will be one of the most innovative and contemporary productions in the show’s 79 year history. We are making significant enhancements including never before seen 3DLive…

Thank you, Hank. Excitement is building for the Rangers season boosted by the free-agent signing of All-Start center, Brad Richards. The Rangers will open their 2011-12 season against The LA Kings and Anaheim Ducks on October 7 and 8 in Stockholm, Sweden as part of the 2011 Compuware NHL Premiere. The Rangers home opener at the Garden will be on October 27 against The Toronto Maple Leafs, where Rangers fans will be able to experience the transformed Lower Bowl of Madison Square Garden Arena for the first time. As a reminder, this past March we announced the 2011-12 Knicks and Rangers season ticket prices would increase by an average of 49% and 23% respectively with the increases primarily reflecting the significantly enhanced fan experience will provide in the transformed Arena. As you know, our season tickets make up the significant majority of our overall ticket revenue for the Knicks and Rangers. Our renewal rates for the season have been very strong and are inline with renewal rates from last season. We’re pleased to report that the Knicks have over 90% of season ticket holders renewed and the Rangers rate is over 85% for the season. Also we’re tracking towards selling out for season tickets for both teams. Turning to Transformation suite sales, we’re also pleased to report that our 20 Event Level suites, which come online this fall, are sold out. As for our 58 Madison Level suites, which are expected to come online for the 2012-2013 NBA and NHL seasons, these suites are approximately 40% larger and much closer to the action than our current suites. Over 75% of these Madison Level suites are under contracts or have agreements that are in the process of being finalized over a year ahead of the suites coming online. In June, we…

Thanks Scott. Melissa, we would now like to open the call to questions.

Thank you. (Operator Instructions) Your first question comes from Ben Swinburne of Morgan Stanley.

I think you guys said, you sounded a definitive deal for the LA Forums. So I was wondering if you could give us some more color on that with the deal that you signed also. Maybe you need discussion of the due diligence work that you did, anything that came out of that, like thoughts on investment that are required there and how competitive you think that markets are going to be to get bookings on live entertainment? Thank you.

While, we think that Los Angeles is the second largest marketplace in the United States. We think that there is room there for more live entertainment. Forum was available and we worked out of this point in definitive agreement, which as we said, is subject to certain conditions to closing. We continue to work and we continue to do our due diligence and move forward towards hopefully with reaching our closing point for that deal. When we hit that point, you know, we’re going to be happy to discuss more aspects and what are plans are for the Forum, but we put a lot of work into it thus far and we’re very excited about that opportunity and the strategic benefit we think the LA market afford us along with the New York marketplace and the opportunities we’ve with Fuse. So we think it’s a great opportunity for this company and again at this point we get to where we were at the closing of that transaction. We will be talking more about it.

Okay. I guess it’s still early. Are there any thoughts on any investments that might be required I think there hasn’t been a lot going on that Forum for a couple of years now?

That’s true and you know we are reviewing what make sense to go to, what was some more, and when where at the point of finalizing our plan that will make an announcement.

Your next question comes from Vasily Karasyov of Susquehanna Financial.

I have a couple. First, about the margins of the networks; you mentioned that you have programming investment in programming and accelerating now and its fine assume that you are correct you said that it will carry into 2012. So does that mean that we will see margin expansion or do you expect margin – I am sorry contraction in 2012?

Well Mike, why don’t you take the programming question?

Sure. You know first of all we really like the network programming business because which will drive economic scalability and certainly we are investing digital money in the Fuse and that’s because over the last two years we have seen some really consistent ratings growth overtime which proves to us that our music strategy works. Advertisers have responded quite strongly which really gives us some encouragement. Part of the unique opportunity for Fuse is that we are linked with Madison Square Garden Entertainment which provides us certain excess relationships due to that and stronger and powerful set of iconic venues as well as [putting] relationships that we have. And we have been able to build partnerships with the artist and labels and other music industry companies which we will continue to do. But I also want to point out that we do this in a very kind of prudent way. We place money against programming with eye having long-term returns always. We are pretty enough flexibility in our programming model that will allow us to make the appropriate moves if we think that programming doesn’t return. But it’s always an eye of growing ratings and then driving revenue against that prolonged term growth.

And then my second question is about macroeconomic situation; if we were to see a deterioration in macroeconomic situation, what business lines would you expect to be impacted first, is that your advertising which is local NHA, the networks or tantrums of the entertainment events and so after that can you tell us if you are seeing any signs of weakness at this point?

I think we are fortunate in that. Most of our assets are world class assets and what we found overtime is in times of certain economic distress that those are the ones that hold up best that customers, business partners, there’s very much applied to quality and they hold on to what delivers best and what’s most important. So we thus far really haven’t felt much economic distress in our business; it’s still obviously early and we do a lot of fourth quarter business. And in order as it relates to the fourth quarter, we’re making an investment in the Christmas Spectacular which we think is going to blow a lot of people away with the new technology that’s being added to the show that’s going to add a dimension to the show that was never had before as well as keeping the classic favorites that are part of the show. So we sit here and we remain pretty optimistic about where we are, despite the reports of the economic downturn. Our marketplace is focused mostly in New York and then Boston and Chicago seem to fair better than some of the other markets across the United States.

Your next question comes from Bryan Goldberg of Bank of America Merrill Lynch.

Hi thanks. Just a couple of questions; with regards to the transformation, things seemed to be progressing well so far, so from a project management standpoint you’ve been doing a large amount of construction this summer. What are your early lessons learned so far or what are the biggest surprises been; what’s going better than planned and what perhaps has not?

The early lessons I would say from the first summer shutdown are the years we spent in planning were very well spent. It’s amazing to watch the project unfold as we have closed down in mid April, started out looking like it was a war zone where the demolition took place; the whole lower bowl basically was gone. You walk in each week and each week is equivalent of three-four weeks because we have a thousand people there a day working around the clock. So the amount of progress that occurs on a daily, weekly or monthly basis is absolutely fascinating. So all of a sudden there are no seats and now you walk in the building and all the new seats are in the lower bowl or you walk to the concourse and you see the concourse is double the size and you see the windows and light coming in to an area that was much smaller with no light before. Or you go into the locker room which a month ago didn't exist and you see a replica of the Garden ceiling being put on top of the next locker room. So its just wonderful to watch and wonderful to see the progress and fortunately again the lesson was all the time and investment we spent in planning the project has worked out well for us thus far and we are very excited about the progress, we are very excited about October coming around, reopening the building and being able to show off what's happened to all the people of New York.

And also with regards to the company's activities or planning in advance of the upcoming sports season I mean how is the uncertainty surrounding possible game cancellations with the Knicks. How has that impacted dialogue or sales velocity if at all around items like signage, pre-sales in the arena or incremental sponsorship opportunities or even advertising pre-buys on the MSG network?

Specifically we’re pretty well positioned when we go to market. You know Hank alluded to it earlier that flight to quality or there kind Grade A properties having an advantage and I think that really kind of comes true for us. When we go at the market we’re very rarely going to the market with Knicks specific. We go to the market and we talk about Madison Square Garden and the Radio City Music Hall and The Beacon Theatre, The Wang Theater, The Chicago Theater and eventually the Forum. The two regional sports networks, Fuse, the music network, the Liberty, Action Sports platform. It feels like it kind of continues to unfold that you know and we’re kind of in a dialogue and asked them series and series of questions which usually end very well for us. In particular, with the mix and most sport teams you have a good percentage of your marketing and partnership revenue pretty baked in. So we’re standing pretty well out there. I must we’re bullish and optimistic and I think we have good days ahead.

I think on the network side, you know what’s interesting, the Knicks for example are an important component but we broadcast over 700 sporting events each year with over 2100 hours of original programming. So in that we still have the Rangers and the Islanders, and the Devils, the Sabres, the Red Bulls in the Liberty. We’ve also have a very deep archive of historic Knicks games and other sporting and entertainment events that occurred at the Garden. We have some really good history and success over the last few years of programming during the summers, in creating stunts and things like that to drive higher viewership. So I think we’re in good shape and the market is progressing as we thought it would.

Just one last one with regards to the programming. I mean in the absence just should there be fewer games, basketball games this season? What’s the current thinking on programming strategy shifts, what types of programming might go in there to fill the gap.

Well as I had mentioned it before that we do have quite a volume of sporting events already particularly with the NHL and I think we will continue to broadcast these games as we have expanded that programming, we will use our library very aggressively as well. And again we have college and basketball as well as football coming up. So we’ve quite a bit of programming coming up that we are going to manage I think appropriately.

Your next question comes from Robert Routh of Phoenix Partners Group.

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Well when it comes to our entertainment business, you know Live Nation is a critical strategic partner of ours, whether it be from a content standpoint and putting entertainment in our buildings or our relationship with them as it relates to Ticketmaster. So Live Nation will be there with us because they are with us in every venue that we operate right now and we tremendously value that relationship not only as a 2% owner of the company, but just as a commercial partner and all that we go do.

Okay great, that makes a lot of sense and then a second question. And earlier back in 1997, you guys paid $650 million in cash for ITT Sheraton’s 50% of the Garden and you know back then it was just the Garden and Theatre, The Knicks and The Rangers. Ro that would valued at about $1.3 billion just for those assets and looking now at your stock pricing, the amount of money you guys have invested in building this thing, it doesn’t seem to make sense given the adjusted earning price value of the company, so I’m just curious if you guys have any sense as to how much you’ve invested in transforming the Garden like since a 100% of it was acquired by Cablevision, now MSG or if you don’t have a sense of that, how the market doesn’t seem to see the value that clearly is there just going back over 10 years and the cost basis then?

I’m not exactly sure of your questions other than to say to me we’ll talk about our business and we’ll talk about our strategy and we’ll leave it up to you to make those observations about our stock price and where it is or where it should be. I will leave it at that.

Just trying to get a sense to how much approximately you think has been in the Garden since it’s been acquired?

That’s something we could go check, but we wouldn’t have an answer right here.

Your next question comes David Joyce of Miller Tabak & Company. David Joyce - Miller Tabak & Company: Thanks if I could just a few clarifications please. The first, is there a kind of a timeframe we could expect the Forum to close, might it be like in the December quarter? Secondly, if you could go over again the capital expenditures incurred in the second quarter versus what was paid?

No definitive timeframe on the Forum at this point in time. We’ve to work through the remainder of the deal as far.

So just to make sure that everybody is kind of clear on what we’re reporting because we think it’s the most telling and the most informative information for everybody to understand, where we are with the project. So what we said was through June 30, the project to date we have incurred $341 million worth of capital expenditures. We've also said that in the quarter we spent a $119 million on the project. So that is the total amount of work that has been done and completed. It doesn't reflect the amount of cash that we paid because the bills come in on a timing lag, we would be sort of misleading you as to the sort of the status where the project is. So in the quarter $119 million has been completed on the project and as far as cash I think, when you guys get the chance to see the K, there maybe bills in the range of about 80ish or maybe a little more million dollars that have not yet just been paid out in cash. David Joyce - Miller Tabak & Company: And in terms of the hypothetical disruption to the Knicks season, what kind of make-good arrangements might you have if your other replacement programming and stunts aren't able to replicate what you promised on the audience delivery?

I think the question is audience delivery to sponsorship partners and advertisers relating to the Knicks product.

You know at this point, I mean it’s not that a big topic of conversation at this time because it’s difficult to speculate on exactly what's going to happen, we clearly are in conversations with our advertisers. The fact is we do have a fair amount of programming that usually we do try and direct as much of the funding as we can, but those conversations are fairly typical with our advertisers and we will have them depending on how many games we have or don't have at that time. David Joyce - Miller Tabak & Company: And finally I know the Beacon did well in number of events in the second quarter. How did Wang and Chicago stack up versus the prior year?

Yeah, we will come back you on that David. Obviously the main drivers of the quarter were what we said about the Garden and Theater and Radio City offset by the Beacon.

Your next question comes from the John Tinker of Maxim.

Do you still have the dispute with Dish Network, and where does that stand at the moment?

Fuse has been off of the Dish Network for about a year and MSG Network came off Dish about last October. We do have conversations with them from time to time and we clearing are willing to have them as an affiliate, but we were moving ahead without them this time and our business is doing just fine.

And when you do look at the three month and six month numbers, Dish was in the prior year and they are not in the current periods.

Your next question comes from Ben Mogil of Stifel Nicolaus.

I know that you obviously can't talk on specifics about the NBA strike, but I just wanted to get a sense that if the strike lasts for both quarters, i.e. for a whole season, do you anticipate you will have to give some rebates or have to give some rebates to the MSOs, given that you aren't broadcasting the number of NBA games that were likely in the contract?

Well you know every affiliate agreement is different and they all have provisions that usually deal with this. So as the time comes along, we’ll deal with each individual affiliate based on what those provisions require us to do. But I think right now we are not going to speculate this early in the game.

On the CapEx budget, are you still sort maintaining the same guidance you maintained last quarter?

Are you referring to the transformation?

Yes sorry yes Bob from the transformation?

Every thing is the same, no change.

And then last question sort of drilling down a little bit on the Forum, certainly Staples has always been a challenge for concert promoters because there's three home teams and there's a lot of games that are locked up for them. When you look at the Forum opportunity, do you anticipate taking events that weren't able to play Staples, they were playing the Gibson and Nokia and the Hollywood Bowl and smaller venues like that? Where do you sort of see the market opportunity for the Forum given that LA has a decent number of music venues already?

It is very much on what you said and then some. And look at the number of venues here in the New York market place for instance and go to Los Angeles and then go look as you talked about professional sports games at Staples. So I think just from there, there is a need in the market place and there is a void that we can help fill, I think then by also having the building there. I think it is going to create more opportunity than the opportunities that exist today. So we think it should be a great, great market place and again when you put it in tandem with Madison Square Garden and again you have it complemented by Fuse, we think the opportunities there are very significant for our company.

At this time there are no further questions I will now turn the call back to Ari Danes for closing remarks.

Thank you for joining us. Have a good day.