International Speedway Corporation (NASDAQ:ISCA)
F4Q08 Earnings Call
January 29, 2009 9:00 am ET
Wes Harris - Senior Director, Corporate and Investor
John R. Saunders - Chief Operating Officer, Executive Vice President
Daniel W. Houser - Chief Financial Officer, Vice President, Treasurer
Joe Lackey - Wachovia Capital Markets
John Fox - Finmore Asset
Edward Williams - BMO Capital Markets
Good morning ladies and gentlemen and welcome to the International Speedway Corporation 2008 Fourth Quarter Conference Call. (Operator Instructions). I would now like to turn the conference over to Wes Harris, Senior Director of Corporate and Investor Communications for International Speedway. Mr. Harris, please go ahead.
Good morning everyone and welcome to our call. We are here to discuss ISC’s results for the fourth quarter and full year ended November 30, 2008. Joining me today are John Saunders, Executive Vice President and Chief Operating Officer, as well as Dan Hauser and Chief Financial Officer. After we have provided our formal remarks a Q&A session will follow and the operator will instruct you on the procedure at that time.
Before we get started I would like to remind everyone that statements made in the course of this conference call that express the company’s or managements beliefs and expectations and which are not historical facts or applied prospectively, are considered forward-looking statements. It is important to note that our actual results may differ materially from those contained in or implied by such forward-looking statements.
Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in our SEC filings including but not limited to the 10-K and subsequent 10-Q’s. Copies of these filings are available from ISC MSEC.
The company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be needed to reflect events or circumstances after the date here of or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call did not constitute an admission by ISC or any other person that the events or circumstances described in such statements are material.
With all of that out of the way I will turn the call over to John.
Thanks Wes and good morning everyone.
We are very pleased with the level of competition on the racetrack in 2008 across all motor sports events, particularly NASCAR. While the economy and high gasoline prices had an impact on our results, we hosted many successful weekends highlighted by huge crowds. This includes the season ending Ford Championship weekend at Homestead-Miami Speedway. The track was packed with throngs of fans that witnessed Jimmie Johnson capture his third consecutive NASCAR Sprint Cup Championship, a feat that hasn’t been accomplished in 30 years.
With NASCAR accounting for over 85% of our revenue, our long-term success is ultimately tied with the sports success. I can assure you that NASCAR continues to be a healthy sports property.
For the past 60 years NASCAR has become one of the most recognized sports properties in the world. Its success is supported by a stable, growth oriented business model that allows all constituents, track operators, competitors, team owners, sponsors, media partners and other interests to prosper. As it was this year and has been historically NASCAR’s hallmark remains that it provides a consistently competitive and exciting sports entertainment experience for the fans.
Although we expect the sport will continue to be impacted by a challenging micro economic environment in 2009, I would note that NASCAR remains a leading sports property with tens of millions of passionate fans, making NASCAR the number 1 spectator sport in the United States.
Collectively NASCAR fans have demographics that mirror the United States population in income, age and a number of families with children. These strong demographics are terrific for ISC when marketing our vast array of assets and intellectual property to corporate America. Furthermore, we remain encouraged about the continued popularity of NASCAR. Television ratings for all three of NASCAR’s national touring season series were up in 2008. The Sprint Cup remains the number two regular season sport on television. This combined with the live attendance of more than 100,000 attendees, on average, for the Cup events, provide solid evidence that the sport of NASCAR continues to be extremely popular with fans.
For ISC we were pleased that in light of the challenging micro economic environment we still ended the year with solid results. Dan will provide a detailed review of our financial performance later in the call.
I would note that our 2008 fourth quarter results were impacted by holding one last NASCAR Sprint Cup weekend as compared to 2007. We hosted seven major event weekends in the 2008 fourth quarter with six of those weekends anchored by Sprint Cup events. In the fourth quarter of 2007 we held eight major event weekends including seven anchored by Sprint Cup races.
Our 2009 season has already started with the annual line up of events known as the DIRECTV Speedweeks, which combines the best sports car, truck and stock car racing in the world. Kicking off the two weeks of events was Grand-Am’s Rolex 24 at Daytona which was held this past weekend.
The weekend was an overall success and was highlighted by exciting on-track competition that makes the Rolex 24 the premier endurance sport car race in the world. The event didn’t disappoint, at it ended in the closest margin of victory in the history of the Rolex 24 with less than 2/10 of a second separating the winner.
DIRECTTV Speedweeks concludes with the 51st running of the Daytona 500, the most prestigious motorsports race in North America and some would argue the world
As we move into the new season, we continue to see that the economy is having an impact on our fans discretionary spending. As a result, we are more focused then ever on ensuring that the millions of fans who attend live events at our tracks get a great value for their dollar coupled with a terrific at-track experience.
Collectively across all of our facilities we recently lowered ticket prices on approximately 15% of our capacity. Illustrative of this is for the Daytona 500. We have a ticket entry point of $55.00 on a substantial number of tickets. The last time pricing was at that level was in 1995. Across certain of our other facilities we have created ticket packages that provide value added opportunities. These include all you can eat components, hospitality experiences, fuel savings cards, military discounts, and expanded or enhanced installment payment programs. We have also added general admission only grandstands where, in many cases, children will be admitted for free.
Our combined strategy of reduced pricing on certain grandstand tickets and providing value added packages are proving successful. Over the past two weeks we have seen an increase in call volume not only for the Daytona 500, but at a number of our on sale cup events.
To ensure our guests have a first rate experience when they come to our event, we also continue to enhance our facilities. We have made significant improvements through better traffic management, enhanced seating and amenities, and other investments that are proving successful.
To assist us in finding ways to enhance the at track experience, during 2008 we invested in consumer marketing technologies and began undertaking a more formal and proprietary process to secure immediate feedback from our customers following a major event. Through these efforts we are better able to understand our customer’s trends and habits as well as their likes and dislikes. More importantly, this type of consumer marketing initiative assists us in operational and capital investment planning to ensure we make the live event attendance a premier experience for our customers.
We spent $107 million on capital expenditures in fiscal 2008, including $92 million for projects t our existing facilities. The significant majority of this spending was focused on adding fan enhancements and amenities that enable us to effectively compete with other sports venues for consumer and corporate spending.
For the remaining $15 million in 2008 capital spending, approximately $8 million, which came from joint venture financing, was associated with the construction of our new headquarters building as part of the Daytona Live! project. In addition, approximately $7 million of capital spending was recorded for on going site work and capitalized interest associated with our Staten Island property that is being marketed for sale.
Turning back to the income statement, while we remain focused on our top line result we continue to manage our controllable event and administrative expenses through on going cost containment initiatives. We are aggressively reducing costs and are spending only in areas that directly contribute to the successful execution of our long-term strategic plan.
As I mentioned earlier in the call, the sport of NASCAR continues to be healthy and popular with not only fans, but also corporate America. It is not by accident that more Fortune 500 companies are involved in NASCAR than any other sports property. These companies see the tremendous value in the sports demographics that lean towards consumers with behaviors and avidity to purchase products of companies invested in the sport.
Given the current economic environment, it is true that many companies are being forced to scale back their involvement in sports and requiring strong justification in terms of return on investment. By integrating and leveraging traditional marketing disciplines and focusing on research and measurement, ISC is well prepared to succeed in the current environment.
The racetracks themselves are the culmination of NASCAR’s fans experience and passion for the sport. Our ability to marry this with a companies brand and utilize innovative marketing program that delivers measurable results makes ISC the partner of choice in the industry. Two significant examples are Auto Club’s Speedways facility naming rights agreement and our multi-faceted agreement with Coca Cola across most of our tracks. More recently, we announced a five-year multi-track partnership with Service Master and an official status and corporate partnership with Next Era Energy Resources, the nation’s largest provider of wind and solar energy.
We are also very pleased to have General Motors recently renew its long-standing partnership with Daytona. While they have reduced the level of their direct investment with the speedway, we believe this continued relationship with GM provides credence that auto manufacturers continue to see the value in motorsports. No other sports property offers auto manufacturers the direct connection that NASCAR can to their product.
Looking specifically at race entitlements, we secured title sponsors for all of our major events in 2008. We currently have agreements in place for almost 80% of our 2009 events. Four Spring Cup and three-nation wide title sponsorships are currently open for 2009. This is compared to last year at this time when we had entitlements for five Spring Cup and two nation wide races either open or not yet announced.
With that, I would like to turn the call over the Dan to discuss the financial results from our fiscal fourth quarter.
Thanks John and good morning everyone. When economic conditions are severe they obviously affect disposable consumer income in corporate budgets, impacting our ability to sell tickets and secure revenues from corporate partnerships. This was certainly the case for our fourth quarter. Considering the overall state of the economy, we were pleased with our strong attendance in Q4 and thank all the fans that came out to support NASCAR racing.
Also impacting year-over-year comparability was the timing of Auto Club’s fall NASCAR Sprint Cup and nationwide race weekend being held in the fiscal third quarter of 2008, versus being held in the fiscal fourth quarter of 2007.
Year-over-year comparability for the three month period ended November 30 was also impacted by the following:
$500,000.00 or $0.01 per diluted share after tax for accelerated depreciation related to the Daytona Live! project. The 2007 fourth quarter reflected similar accelerated depreciation charges.
The fourth quarter of 2007 includes impairment charges of $3.9 million or $0.05 per diluted share after tax for costs associated with the fill removal process on the Staten Island property and the impairment of certain other long-life assets. In contrast our 2008 fourth quarter included charges of only $323,000.00 to remove the net book value of certain assets retired from service.
In the 2007 fourth quarter Motorsports Authentics recorded impairments of goodwill and intangible assets. ISC’s 50% portion was $34.8 million or $0.65 per diluted share after tax. There were no impairments of goodwill or intangible assets recorded by MA in 2008.
In the 2007 fourth quarter we recognized a deferred income tax credit of $1.6 million or $0.03 per diluted share after tax attributable to a revision to the income based tax system in the state of Michigan. In accordance with the enacted legislation, the credit was equal to the deferred income tax liability recognized in ISC’s 2007 third quarter results.
Finally, in the 2008 fourth quarter we recognized a charge of $2.3 million or $0.03 per diluted share after tax for working capital advances to our Kansas joint venture associated with the development of a gaming and entertainment destination. This is recorded as part of our net loss from equity investments.
Looking to the income statement admissions revenue for the fourth quarter decreased to $63.9 million, a little over half of which is a result of the timing of the fall events at Auto Club Speedway. Despite strong attendance at Richmond, Phoenix, and Homestead, Miami the fourth quarter experienced lower overall attendance for comparable events.
Motorsports related revenue for the quarter decreased to $119.2 million. Included in this amount was NASCAR media revenue of $64.5 million for domestic broadcast rights and approximately $660,000.00 for ancillary media rights. The $23.8 million net decrease in motorsports related revenue was attributable to the timing of the fall events at our club as
The decrease in food, beverage, and merchandise revenue to $19.3 million for the 2008 fourth quarter was primarily attributable to the fall events at Auto Club and the previously mentioned attendance decreases in the quarter. The decrease in NASCAR direct expense to $42.8 million was primarily attributable to the timing of Auto Club’s events. Offsetting the decrease was higher television broadcast rights fees for comparable events, a percentage of which are paid as part of prize money.
Motorsports related expense decreased to $41.1 million for the 2008 fourth quarter. The decrease was largely attributable to the net impact of the previously noted of fall events at Auto Club.
Food, beverage, and merchandise expense decreased to $12 million for the quarter due to the timing of Auto Clubs fall race weekend and lower variable costs associated with the decrease in attendance for comparable events.
We are pleased to report that general and administrative expenses have decreased approximately 11% to $25.8 million for the 2008 fourth quarter. Our focused efforts on company wide cost containment played a significant role in this reduction, as well as certain one time non-income tax adjustments and reduced legal fees for the Kentucky litigation.
Depreciation and amortization during the fourth quarter increased to $18.3 million. The increase is primarily attributable to capital spending for facility enhancements and related initiatives.
Now looking below at operating income, the decrease in interest income to $648,000.00 is primarily due to lower cash and short-term investment balances and lower interest rates.
Interest expense increased during the fourth quarter to $5 million due to $150 million drawn on our revolver in October 2008 to ensure our ability to fund our April note maturity and interest expense associated with financing for the new headquarters building.
The $5.8 million loss from equity investments primarily represents the combined impacts of our 50% equity investment and Motorsports Authentics and the charge for the Hard Rock Hotel and Casino project.
Before I discuss Motorsports Authentics I wanted to take a minute to discuss the Hard Rock Hotel and Casino.
As we discussed in December it was with much regret that our joint venture with Druids application for the lottery gaming facility manager of the Northeast Kansas Gaming Zone. As you are all aware in the months since the Kansas Lottery Gaming Facility Review Board awarded our joint venture the right to operate a casino in Wyandotte County, Kansas, there has been an unprecedented crisis and disruption in global financial markets.
While the joint venture would have been able to finance the initial Hard Rock Casino development, that financing for the full build out of the project was not expected to be available at acceptable rates. Had we had the flexibility to phase in the non-gaming components of the development, which would have mitigated the risk of potentially not having the necessary financing, we could have undertaken the project. Unfortunately the existing agreement with the Kansas Lottery Commission did not contemplate a phase development and it could not be modified. As such, the joint venture elected to withdraw its application.
Fortunately the state of Kansas has reopened the bidding process for the casino management contract and we look forward to resubmitting our proposal with a phased approach for the non-gaming amenities. All bids are due by April 1.
As we mentioned previously, our proposal will also include our commitment to petition NASCAR to realign the second date to Kansas from one of our existing facilities by the time the development opens. And to attract Grand-Am and Car Club events, we will also commit to build a state-of-art road course in the in-field at Kansas Speedway. It should be noted that both the second date and the road course are contingent on our proposal being selected, the lottery gaming facility manager of the Northeast Kansas Gaming Zone.
With regards to Motorsports Authentics our 50/50 joint venture with Speedway Motorsports, 2008 benefited from robust sales surrounding the Dale Earnhardt Jr.’s move to a new team sponsoring car, as well as well as historic 50th running of the Daytona 500. These unique opportunities, combined with an ongoing turn around of the business, helped motorsports authentics post an operating profit of $3.2 million in fiscal 2008, of which recorded $1.6 million or $0.03 per diluted share after tax as an equity investment. This is a far cry from fiscal 2007 when Motorsports Authentics posted an operating loss of $19.6 million and we recorded an $8 million equity loss to reflect our 50%.
Including inventory write-downs and impairment charges, our fiscal 2007 net equity loss from MA was $1.04 per diluted share after tax. Last week MA announced the president and CEO Mark Dyer left the company. Despite this change at the executive level, with the elevation of certain existing management within MA and the dedicated executive support from both ISC and SMI, we are confident that our joint venture is ready to meet the demands ahead in 2009.
Our effective tax rate for the 2008 fourth quarter was 38.8%. The substantial decrease in the effective income tax rate from the 2007 fourth quarter was due to the tax treatment associated with the net losses incurred at Motorsports Authentics partially offset by a fourth quarter 2007 benefit recorded to offset changes in Michigan tax law recognized in the 2007 third quarter.
Income from continuing operations for the three months ended November 30, 2008 was $33.7 million or $0.69 per diluted share after tax on 48.7 million shares outstanding. However, when you exclude the additional depreciation associated with the Daytona Live! development project and the charges associated with our joint venture project in Kansas for the development of a gaming and entertaining destination I just discussed, we posted earnings of $0.73 per diluted share for the 2008 fourth quarter.
As described in the release, non-GAAP net income for 2008 was $2.80 per diluted share as compared to $2.85 per share for 2007.
Now let’s look to the balance sheet.
At November 30 our combined non-restricted cash on short-term investments totaled $219.1 million, $150 million of which are proceeds from our revolving credit facility. Current deferred income at year-end was $103.5 million and shareholders equity was $1.1 billion.
Total debt was approximately $575 million, including $300 million in senior notes; $150 million in borrowings on our revolving credit facility; $66 million in tip bonds associated with Kansas and $8 million in debt associated with Chicagoland Route 66. Also included in total debt at November 30 was approximately $51 million of financing associated with the construction of our headquarters building component of the Daytona Live! Project. The headquarters financing is non-recourse and is secured by our lease payments to the joint venture. The unexpended portion of the loan proceeds are recorded as restricted cash and investments.
In accordance with FASB’s interpretation we have determined that the headquarters building should be accounted for as a variable interest entity for which we are considered to be the primary beneficiary. As a result, we have consolidated this variable interest entity into our financial statement. The construction loan for the headquarters building into in July is financed at an interest rate of 6.25% and matures 25 years after the completion of the headquarters building in late 2009.
We anticipate the headquarters to be completed and open in the fourth quarter of 2009. The retail, dining, and entertainment component of Daytona Live! is being actively marketed by our partner Cordish and we are currently anticipating it to come online some time in 2010. Top Theatres has already announced its intention to anchor the complex with a state of the art 65,000 square foot theater. We remain encouraged by the response of other potential tenants despite the current economic environment.
Our current portion of long-term debt at November 30 includes $150 million of senior notes due in April 2009 that we plan to refinance. As we have discussed on previous calls, in June 2008 we entered into an interest rate hedge agreement to effectively lock in a substantial portion of the interest rate. This agreement with a principal notional now of $150 million and an estimated fair value of a liability totaling $21.8 million at November 30 expires in February. The estimated fair value is based on relevant market information and quoted market prices at year-end. If we are not able to secure accessible terms for the refinancing of the saner notes in early 2009, we expect to extend the current interest rate swap for a period yet to be determined prior to expiration.
In accordance with FAS 133 accounting for derivative instruments and hedging activities, any ineffective portion of the hedge related to the extension will be recognized in current earnings. Accordingly, we expect an immaterial amount of ineffectiveness related to the hedge to be recorded in the 2009 first quarter.
At the beginning of October, in response to the uncertainty of the credit markets, we drew down on our revolving credit facility the $150 million necessary to fund our April maturity. Accordingly, in a scenario where we cannot achieve an acceptable refinancing in early 2009, our plan is to use the revolver borrowing as a bridge to a more favorable credit market or, in a worse case scenario, use operating cash flow to pay down the balance on the revolver by June 2010 which is one year prior to the revolver maturity.
In such a scenario we will likely reduce our 2009 CapEx for existing facilities below $65 million and greatly reduce or suspend open market share repurchases until we can again achieve a more robust cash position.
Turning attention to other matters, during our 2008 first quarter we purchased approximately 182,000 shares of our Class A stock for $7.5 million bringing the total number of shares purchased from December 2006 through November 2008 to approximately 4.7 million shares.
As previously discussed, consistent with our desire to conserve and build cash in a time of limited credit availability, we halted our share repurchase program in September 2008. We currently have approximately $42 million in remaining capacity on our $250 million authorization. We continue to consider our share repurchase program an important component of our long-term capital allocation strategy, however we feel it is prudent to conserve cash in this current economic environment.
We also continue to have productive conversations with the IRS and potential buyers for our Staten Island property. As such, we remain hopeful for a resolution on both fronts during 2009. Once we sell the Staten Island property and/or secure a settlement as part of our appeals process with the IRS, we will evaluate opportunities to further invest in the business including additional share repurchases.
In conclusion, despite the current economic environment, motorsports and particularly NASCAR remains a stable and growing industry. ISC’s business model is supported by a solid foundation of contracted revenues. This significant top line visibility combined with aggressive cost containment measures helps ensure that our business will continue to generate substantial cash flow.
Finally, our solid balance sheet and investment grade credit rating uniquely positions us on the motorsports industry. Over the long term we plan to use this significant financial flexibility to take advantage of prudent growth opportunities that will build value for all of our shareholders.
With that I will turn it back over to the operator who will lead us through the Q&A portion of the call.
(Operator Instructions) Your first question comes from Joe Lackey with Wachovia.
Joe Lackey– Wachovia Capital Markets
I was wondering if you guys could discuss or give us an update on advanced ticket sales and sponsorship trends that you are seeing right now?
Sure. Right now, I think in December when we gave guidance, we said that advanced sales were behind about 15%. They are currently behind about 17%. They were behind a little bit more than that a couple of weeks ago, but John talked about some of these ticket initiatives and again this isn’t discounting with reduced pricing, it is not discounting, but some of the initiatives that we put in place at some of our facilities, and I would note that this ticket inventory is the inventory that was typically going to be selling last anyway, so we are trying to make it a good price entry point for folks. We were higher than 17% but we have seen an up turn, so we are hopeful with that, but clearly we are still behind.
On the sponsorship side, again, we are very happy that we continue to bring new partners into the sport. John mentioned the Service Master deal; it is a very innovative deal. We are very proud of this Next Era deal. Next Era is a subsidiary of Florida Power and Light and they have got a nationwide presence in this renewable energy space. That is not really typically an official status category that you would sort of think would marry well with NASCAR, but it does very much and so we think that is very innovative. It is going to allow us to have access to some other databases of consumers and things like that and be able to touch a wider audience and get some people out to the track, so we are excited about that.
Those trends, it is still tough to sell, but we have got a, people are talking to us and we are getting deals done.
Joe Lackey – Wachovia Capital Markets
Okay, you know there is a lot of news out there about NASCAR teams having trouble getting sponsorship. Any sort of issues with the TV agreement, how that could affect you guys, or competitiveness on the track?
As long as we run the race our broadcast partners are required to, are contracted to pay the rights fees for the event. It is not tied to numbers of entries or ratings or anything of that nature. There is no performance metrics in there other than what I just stated, which is that you have to run the race.
And just talking about the quality of the race, we are going to have and it has happened in this sport, it has happened in the last five years when we had the down turn earlier in this decade, you are going to have some fields that are going to be smaller than others. The reality is though it is not going to in any way impact the quality of the show. I mean you have a lot of cars on the track.
Quite frankly, the reality is that a lot of those cars that potentially would be impacted that may not be able to come to an event or two of those teams, were probably ones that clearly weren’t running up front anyway. So this isn’t going to impact any of what I would call your real stars; having said that, clearly the health of the sport and the teams is very important.
NASCAR has been trying to be very aggressive and we are trying to work with them on trying to figure out how we can take more costs out of the business and out of the industry. Stopping testing, doing some other things, they have been after some things in the truck series. I don’t have all the particulars here today, but they are really trying to figure out how to save some money for the teams. But, it is definitely harder out there. There has been lay offs, just like every business and the teams are having to learn how to do more with a little bit less.
Joe Lackey – Wachovia Capital Markets
My last question, thanks for the color on the IRS and Staten Island; any sort of timing that you would expect to get those issues resolved?
As we said in our scripted comments, we are hopeful that this will be in 2009. Both of the issues, again, we’re having very positive movement in. I think that our prospects for something favorable with the IRS are good. The caveat you have to put with that is the process has not moved rapidly. It seems reasonable to me that we should be nearing the end of the process. My experience to date is, the other issues can take them off the air. The service has actually been impacted by a reduction of personnel and things like that, so if you get some kind of a pressing issue, particularly in litigation on a completely different case that draws the attention of the people that we are dealing with, then our issue sits on the desk unfortunately.
I think the outlook is good. The timing I am hopeful on. Nobody would love more than me and Lisa Kennedy and Jim France to see these things get resolved and we work daily on pushing it forward.
Yo Liki – Wachovia Capital Markets
That’s great. And, what about the timing on the sale of the Staten Island property?
I would essentially echo what Dan has said. We continue to be involved in very serious discussions with a couple of parties. We certainly had hoped that it would have been concluded by now, but we don’t control everything with these potential buyers. Again we are hopeful that ’09 will see something happen. Again, we don’t control everything and some of the timing is controlled by others; so we remain cautiously optimistic that something will get done in this fiscal.
The other thing I would add to that is that while we are hopeful on both of these points, our approach to our cash flow situations and capital allocation we’re approaching very prudently and not counting on these developments to in any way prosper the business. These are going to be some real upsides for us if and when they happen.
Your next question comes from John Fox with Finmore Asset
John Fox - Finmore Asset
Could you just give the break out in motorsports between TV and the other part of that motorsports revenue?
Yes, for the television and ancillary, well let me break it up separately. The domestic television rights for Q4 were $64.5 million. Ancillary rights for the quarter were $700,000 for a total of $65.2 million for the quarter.
John Fox - Finmore Asset
Okay and G&A looked like it came in very nicely and I’m just curious what the run rate is for that going forward?
I think Dan talked a lot about [interposing].
We continue to be very focused on cost containment like most companies in this environment and we will continue to do that through the upcoming year, particularly on general administrative expenses. We had a couple of one time things in there in the fourth quarter, but it was also significantly impacted there, so our goals have been to at least keep our G&A flat and concentrated efforts on reducing those costs and sustainable reductions.
John Fox - Finmore Asset
Okay. What is the outlook for capital expenditures right now for 2009?
What we have said previously in our guidance was that if we accomplished our refinancing, that we expected to spend $65 million on CapEx as well as $65 million on share repurchases. Due to the credit markets currently, we have drawn down on our revolver, we did that this fall, we are kind of looking for acceptable rates that we feel we can live with on longer-term money. In that scenario we are most likely have a drop in our CapEx below the $65 million. Probably not any lower than $50 and that we currently suspended open market share repurchases and we will stay in that mode until we have got a stronger cash position developing. Whether it is money from these IRS or Staten Island as we discussed, or we get some improvement in the credit markets and get a window we feel that we can go out and get some longer-term money.
John Fox - Finmore Asset
Right. So if we could just walk through the timing with the balance sheet. You have $220, $19 million in cash right now. $150 is due April 1st in terms of your debt matures?
John Fox - Finmore Asset
And you are going to generate cash, at least you did last year in your first quarter. So given the reduction in buy back and the reduction in CapEx you are probably going to generate net free cash in the first quarter which will go on the balance sheet?
That is correct and we will strategically manage when we do pay downs on our revolver. I mean, right now that money is about 2.2% so it’s pretty good rate in this environment. That revolver does mature in June of 2011. We would like to have that balance paid down a good amount of time, a year or so out from when we go to renegotiate our next revolving credit facilities. That is kind of what I am weighing as we approach that balance sheet management.
Your next question comes from Edward Williams with BMO Capital Markets.
Edward Williams - BMO Capital Markets
First of all, if you look at the tax rate what should we be assuming for ’09 at this point for the fiscal year?
I think on a normalized basis around 39% plus or minus and that is barring any things that come in that fluctuate it significantly. One of the things that happens with Motorsports Authentics because they have got accumulated losses and the accountants there don’t allow them to record a income tax benefit, when they have earnings or when they have losses, if they have losses you don’t record a tax benefit, when they have earnings you don’t record an income tax expense against it, because then they are taking advantage of their long-term losses from a tax basis.
That is one thing that can ratchet the tax rate around a bit for us.
Edward Williams - BMO Capital Markets
Looking at Motorsports Authentics specifically, how are you thinking about that business in ’09 versus ’08 and what sort of timing do you think it will take for a new CEO to come in?
I will speak to the first part of the question and let John answer the second one.
We had some real momentum last year from some pretty unique things, the Dale Jr. change and the 50th run of the Daytona 500 that were some real boosts to us. In addition there was a lot addressed on the cost side of the business.
This year we are in a very challenging consumer market. We often times see that, you know as we look at the share wallet on property a lot of times merchandise is one of the first thing to take an impact. So we are cautious on ’09. We certainly, with the change in management up there is, you know we are going back and doing a deep dive and assessing now what do we know about the business. What are we finding out as we go through that change.
It is going to be a challenging year because this is a very consumer based business. If we had some things, if we had a Dale Earnhardt winning the Daytona 500 and the Sprint Cup, that might be the thing that makes a huge difference in that business.
But, cautious on the outlook and I will let John speak to the replacement there.
Mark, as I mentioned in our scripted remarks, Mark Dyer has left the company. We do have an interim management structure put in place. We have elevated some key people. We have an interim CEO Mr. Don Hawk who is an officer at SMI on a day-to-day basis. As we are currently in market searching for a new CEO we are going to be pretty aggressive about this, but not rush it, because we do have an interim management team there. We are very comfortable with the strength that ISC and SMI can provide on top of that. But we are in the market and I don’t expect this to take several months. I would think we would have something wrapped up in the next maybe four to six or eight weeks or so.
Edward Williams - BMO Capital Markets
Looking into ’09 at your various operating expenses, how might those expenses change over the course of ’09 relative to ‘08? You mentioned G&A trying to hold that flat and exerting a lot of influence on that. What about some of the other various expenses?
Well when we gave our guidance in December, what we talked about was motorsport related expense, food beverage and merchandise expense, and G&A expense sort of collectively, that we were looking at trying to keep those costs flat year-over-year; so you get a little bit of boost of savings in G&A. You can’t take too much out of the motorsports related expense line, because at the end of the day we are still going to have a ton of people at these events and you have got to entertain them. I mean, it is important. It helps us on renewals and all of that, so it has got to be a good experience. So we are going to be very aggressive on the G&A side.
We are going to be very aggressive in all of the pieces, but we are going to make sure that we don’t impact the experience for our fans.
Edward Williams - BMO Capital Markets
And what about depreciation?
We had talked about depreciation of $72 to $74 million. It could be lower than that, if we don’t spend $65 million. We are on track right now if we just spend the $50 as Dan talked about earlier in this call, so that would have an impact there, but I don’t see, even if you spend $50, it is not going to be significantly less than $72 million just because you have still got depreciation assets that were put into place partway through the year last year.
Your next question comes from Joe Lackey with Wachovia.
Joe Lackey – Wachovia Capital Markets
I didn’t notice any comments on the guidance. Is it safe to assume that in the last month and a half you are still comfortable with the guidance range you laid out in early December?
Well we gave guidance in December. The challenge that we are facing right now is, I mean, we haven’t really run any events. We had a very successful weekend with the Rolex Grand-Am event here at Daytona, but once we get to mid-February and we run the 500 and we really see what is going to happen with the – you know we just put these new ticket sales initiatives with this reduced pricing in place and it is really starting to catch hold, but will it continue to keep the sales volume up? I don’t know.
Once we get to April we will come back and either reiterate or provide an update at that time.
There are no further questions at this time. Mr. Harris are there any closing remarks?
I will turn it over to John?
I just want to thank everybody for joining us on the call today. I hope you ascertain that management is very focused on the balance sheet. It is very healthy. It is providing us good flexibility in terms of our overall capital allocation structure. At the same time, we are very focused on managing expenses and yet dedicated and committed to providing great racing experiences for our consumers and corporate partners that come to our events.
We look forward to seeing you on the next call which will be Q1 of ’09 and again, thank you for joining us today.
Thank you. This concludes today’s conference call.
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