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Speedway Motorsports Inc. (NYSE:TRK)

Q4 2008 Earnings Call

March 11, 2009 11:00 am ET

Executives

Marcus G. Smith – President & Chief Operating Officer

William R. Brooks – Vice Chairman & Chief Financial Officer

Analysts

Joe [Lackey] – Wells Fargo-Wachovia

Eugene Fox - Cardinal Capital Management

[Josh Brown] – Boston Harbor Capital

Marc Cohodes - Copper River

[Jim Custo – Cuyahoda]

Jefferson George – The Charlotte Observer

[Steven Schweitzer – Chinkning Capital]

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to today’s Speedway Motorsports fourth quarter 2008 and year end earnings release conference call. (Operator Instructions)

Joining you on the call today are Marcus Smith, Chief Operating Officer and President; Mr. Bill Brooks, Vice Chairman and Chief Financial Officer.

Before we begin I have been asked by the company to read the following statement. “This news release contains forward-looking statements, particularly statements with regard to the company’s future operations and financial results. There are many factors that affect future events and trends of the company’s business including but not limited to consumer and corporate spending sentiment; air travel; governmental regulations; military actions; national or local catastrophic events; the success of and weather surrounding NASCAR, IRL, NHRA and other racing events; our relationship with NASCAR and other sanctioning bodies; the success of Motorsports Authentics merchandising joint venture; the success of expense reduction efforts; capital projects; expansions; economic conditions; stock repurchases; financing needs; insurance; litigation; taxes; oil and gas activities, including the possibility of discontinuing operations; geo-political situations in foreign countries; and other factors outside of management control.

These factors and other factors including those contained in the company’s annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q involve risks and uncertainties that could cause actual results or events to differ materially from management’s view and expectations. Inclusions of any information or statement in these news release does not necessarily imply that such information or statement is material. The company does not undertake any obligation to release publicly revised or update forward-looking information.

And such information included in this news release is based on information currently available and may not be reliable after this date. With that being said, I would like to turn the call over to Mr. Smith. Please go ahead sir.

Marcus G. Smith

Thank you Cynthia. Good morning ladies and gentlemen. Thank you for joining us today. We’re very pleased to announce our fourth quarter and 2008 year end results for Speedway Motorsports. For the fourth quarter we recorded total revenues of $130.6 million and income from continuing operations of $18.1 million or $0.42 per diluted share. Full year 2008 results include total revenues of $611 million and income from continuing operations of $105.9 million or $2.44 per diluted share. We also would like to provide full year 2009 earnings guidance of $1.70 to $1.90 per diluted share.

And looking back in the highlights given the challenges of the past months and even the past year we are pleased to be able to report these numbers and see continued growth in corporate marketing and other event related revenue for all of our racing events held during the period. Some of our fourth quarter highlights include events held at Lowe’s Motor Speedway, the Bank of America 500 NASCAR Sprint Cup Series event and the Dollar General 300 NASCAR Nationwide Series event where both events hosted high attendance.

At Atlanta Motor Speedway, we had a successful weekend with Pep Boys 500 in October and the American Commercial Lines 200 NASCAR Camping World Series Truck Race. For 2009 in Atlanta we’ll host NASCAR’s very special and historically significant Labor Day weekend race there on Saturday night instead of the October weekend that we have traditionally had there at Atlanta Motor Speedway.

And at Texas Motor Speedway in November we hosted NASCAR’s largest crowd and the chase for the Sprint Cup in the final ten races of the season where we had the Dickies 500 NASCAR Sprint Cup weekend and the crowd enjoyed a fantastic race.

Looking back over the whole year, recapping 2008, we had a lot of things that we accomplished. Early in 2008 we purchased New Hampshire Motor Speedway and had a very successful year of operating it, and it was accretive to earnings. We also acquired Kentucky Speedway in December 2008. It positions is very well in the Midwest. It’s a very strong sports fan market and also a very strong race fan market and we’re excited about our prospects for Kentucky this year and going forward as well.

We also completed construction of NHRA’s biggest and best drag way, zMAX Dragway at Lowe’s Motor Speedway. We also in the face of record high gas prices held one of NHRA’s largest crowds in history in September, coinciding with our NASCAR Sprint Cup weekend in New Hampshire.

Weather did play a factor in some of our events in 2008. We had three NASCAR qualifying days canceled due to weather; one in Atlanta, one in Bristol and one in New Hampshire. Motorsports Authentics was significantly different from 2007 to 2008. We were able to capitalize on Dale Jr.’s move to a new car, a new number and a new sponsor, as well as other events throughout the season and turned around significantly the results at Motorsports Authentics, in spite of the sour economy.

We also announced today that we have put our oil and gas business into discontinued operations and Bill will go over that further later in our discussion to elaborate.

As we look forward to the business trends, we’re very pleased with our business model. In tough times we’ve seen that our business model holds up strong. Our fans are very bullish about racing. They’re very avid and continue to be loyal to us as well as the sponsors in the sport. We have seen TV ratings for all three of NASCAR’s tourings series go up in 2008. Sprint cup racing remains to be the number two regularly scheduled season sport on television, second only to NFL. And the NASCAR Nationwide Series is third on ESPN2 as a very strong cable property.

And overall when you consider the media consumption of race fans, we’re at an all time high, so advertisers in the sport are getting more value than they’ve ever gotten before out of racing. And in spite of a lot of the worries and negative discussion in the press over the last several months, corporate sponsors have gotten a tremendous amount of value and it has stayed strong in the sport and continued to realize the value from their investments.

Also it’s worth noting that we’ve had full fields of race cars at each of the races since Daytona, and the racing has been very strong by most accounts. There’s many fans that have said the racing is strong and exciting and I’m excited to see the cars go around the track and run a little bit harder this year than we’ve seen in the past.

In corporate spending, all of our Sprint Cup entitlements are sold for 2009. All of the Nationwide and Truck Series entitlements are sold as well. We’re seeing good results in renewals and extensions of our partnership relationships where we’ve got many of those partnerships in ten year plus stages and continuing to make progress with those.

When you look at our admissions, we’ve seen the admissions numbers trickle down over the last year and given the economy and consumer sentiment and the extreme negativity around the election time, not to mention record high gas prices, that’s to be expected. But recently with gas prices coming back down, more money is getting its way into the consumer’s pocket and back into things that they enjoy like auto racing and other events that we host.

What we’re doing in the face of the economy is focusing on the fans and they hear us and they’re reacting. We have a fan incentive program we call Fans First at all of our properties where we’ve been able to lower ticket prices and offer more value to our fans. At all of our facilities we have more assistance from teams and drivers and other celebrities in the sport that have reacted very positively for us in helping to enhance the experience for the fans that come from hundreds of miles away to see these events.

Most of our speedways are offering payment terms where our fans can pay over time for their tickets and they’re responding very well to that. Several of our speedways have worked successfully with area hotels on reducing night rates by 15% and achieving a no minimum nights stay guarantee for the hotels in that area, and that’s been very well received by our fans.

One other thing that’s worth noting is that our speedways have been a fantastic boost for area nonprofits in all of our markets. We spend hundreds of thousands of dollars and combined its several million dollars with nonprofit groups that help us put these events on. It takes thousands of people every weekend to put a large NASCAR race on and we funnel and at Lowe’s Motor Speedway alone, $725 thousand alone in 2008 to nonprofit groups. And they’ve actually partnered with us this year in helping us sell tickets in an effort that will yield them additional funds as well.

Most of our speedways, in fact all of our speedways hire the nonprofit groups that work in our concession and souvenir areas and it’s a great opportunity for those groups to earn money and put helmets on football teams and send – put clothes on groups that need help and food on tables. It’s a very large community effort that thousands of people look forward to every year.

Looking into the first quarter 2009, we’ve hosted two NASCAR Sprint Cup Series weekends. At Las Vegas Motor Speedway the weather was fantastic, the crowds were really great and it was a great shot in the arm for the whole season. We had Las Vegas native Kyle Busch win the Shelby 427. He sat on the pole for the race and after several lead changes, he finally came out on top for the day. And the fans had a super time. We had a tremendous crowd Friday, Saturday and Sunday. And in Las Vegas we kicked off our first PRN Up To Speed Program where 4 to 5,000 fans had a chance to see Kyle Busch, Jeff Gordon and Richard Childress up close and they all responded very well to that kind of access that those drivers and celebrities came forward and did a great job in their leadership of appreciating the fans with us.

At Atlanta Speedway we just completed a fantastic weekend with the Kobalt Tools 500. We had excellent weather, super crowds and we hosted our 100th NASCAR Sprint Cup Series weekend at Atlanta. Kurt Busch, Kyle’s brother, won the race; dominated it throughout the event and had a fantastic race and a great finish and finished out the weekend for the Busch brothers. We also are pleased to announce that for the fourth consecutive week, NASCAR’s Sprint Cup Series races were the highest ranked sporting event of the weekend on television.

Coming up also in 2009 we’re pleased to be hosting our 50th year at Lowe’s Motor Speedway in Charlotte where we’ll be running the 50th Coca-Cola 600 May 25 and the 25th running of NASCAR’s Sprint Cup All Star Race on May 16. And the momentum and promotional value is picking up for that as we head into the season.

And to talk further on the financials, I’ll turn it over to Mr. Brooks.

William R. Brooks

Well thank you Marcus. Our financial results for 2008 were real close to our 2008 earnings guidance issued back in March of last year. We expected our revenues to range between $620 to $640 million and they actually came in at about $611 million. Our income from continuing operations was forecasted at $105 to $110 million. We came in at $106.

Depreciation and interest we forecasted to be $85 to $90 million and it was a little better than that at $84. And our diluted earnings per share from continuing operations we forecasted at $2.40 to $2.50 a share and we actually achieved $2.44. These are really stellar results by any measure, especially in the context of our current events.

Now how we achieved such a great result was not strictly according to what we had planned. The results at New Hampshire were better than we had forecasted. Conversely, the fourth quarter was worse. The admissions revenue and corporate revenues apart from sponsorships was held up well, were weaker than expected. Our Motorsports Authentics results for the full year were much improved year-over-year.

And as Marcus mentioned to you, we had studied for a long time the possibility of discontinuing our oil and gas operations and we concluded to do that in the fourth quarter. And we’ll probably incur some additional losses over the next 12 to 24 months. We may even have some recoveries. We really don’t know the extent of either. We’re hoping that the recoveries will offset the losses and that there won’t be any material results when taken over a 12 to 24 month period. Of course there’s no certainty to that, but that’s what we’re hoping for.

So henceforth when we’re talking about earnings or income, we’re going to be referring to our earnings or income from continuing operations. I’m going to talk a little bit about the fourth quarter which is kind of overcome by events at this juncture. But some of the things that we noticed there are going to foreshadow trends in 2009, but it was actually different than what we’d seen so far in 2009.

As I mentioned we had weakness in admissions and spending on food and beverage and souvenirs and our corporate spending and hospitality and VIP suites, display and sampling revenues are also weak relative to the prior year. We overcame some of those by somewhat increased sponsorship and expense reduction. But what we saw were actually fewer people coming to the event in ’08 versus ’07 and that was not atypical from what a lot of corporations had experienced during that same timeframe.

If we look at 2008 compared to 2007, most of the results were impacted by the acquisition of the New Hampshire Speedway. Our admissions were up $8 million for the year and again the vast majority of that was from the New Hampshire Speedway. Without the New Hampshire Speedway, the ticket revenues would be down; most of the decline was in the fourth quarter. Since we didn’t conduct any significant events in New Hampshire you can just look at the fourth quarter results and see that decline.

Our event related revenues for the year were up almost $14 million and about 7% over the same revenues for 2007. A lot of this is from the New Hampshire Speedway. Some were lesser impact from the NHRA event that we had at our new dragway at Lowe’s. They reflect higher sponsorships and other market revenues associated at our Speedways, but we had somewhat lower food and beverage commissions and our radio broadcasting was off and souvenir merchandising revenues as well. But we expected all of these revenues were adversely affected by the decline in corporate and consumer spending we saw as a response to concerns over the economy and high fuel prices.

Our broadcast revenues increased by $25.6 million or 18%, again mostly from the New Hampshire Speedway acquisition but to a lesser extent the increased contractual expense – or excuse me, increased contractual broadcast fees from our NASCAR agreement.

I’d like to look at the other operating revenues net of the other direct operating expenses. And if we do that, notice that the net revenue increased by about $650 thousand or 9% over 2007. And this was primarily due to better results at our non-event Motorsports merchandising and our Oil Chem Research Corporation.

For the year our direct expense of events increased about $13 million and a lot of that was due to hosting the New Hampshire Speedway and another important factor was the NHRA Drag Racing at Lowe’s. But it also reflects lower margins on our souvenir sales, where we were in response to weaker demand reducing our price so that we’d have higher sales and of course that pinched the margin some and resulted in some higher costs that you might not expect with the lesser sales in souvenirs. Our advertising, repair and maintenance costs were also quite a bit higher than they were in 2007.

NASCAR purse and sanction fees for 2008 increased by $18.2 million, about the same story there. Most of the increase coming from the New Hampshire Motor Speedway acquisition. Our general and administrative expenses increased by about $3 million or 4% over the year and again mostly from the operating costs connected with the New Hampshire Speedway purchased in January. And to a lesser degree higher non-event insurances and utilities.

Depreciation increased by $3.7 million and this was primarily from the expense from purchasing the New Hampshire Speedway. Same story with interest expense which was $35.9 million compared to $21.6 for last year, and it was again the cost to fund the New Hampshire Motor Speedway purchase.

I previously mentioned that our equity investee earnings for 2008 increased dramatically. They were $1.6 million this year and there were losses of $57.4 last year. Other expense this year or income was $1.1 million income this year. Last year we had expense of about $5 million primarily because of impairment losses at some fixed asset that we had in Las Vegas and Infineon Raceway and in Oil Chem properties.

Notice last year that our tax provision was at 56% and this was due to the uncertainty with which we were faced on recognizing the tax benefits from some of the equity investee losses. This year the result is about 40% and we probably could use that going forward as a rate. The rate’s a little higher than it has been because we have relatively more income in New Hampshire, which is a higher state tax state there.

We reflected a loss from discontinuing operations net of tax, which I previously mentioned. And we determined in the fourth quarter to discontinue those operations primarily because of ongoing challenges and business risks in conducting these in a foreign country. So all in all, the net income increased by about $41 million over 2007.

And we’ll talk a little bit about earnings guidance for 2009 and we were actually perplexed as to what to even say about that or even if we should give guidance. This is very difficult because we don’t know for sure how the economy is going to perform or our customers are going to react there, too. We’re not sure about the elasticity of our ticket demand or how receptive buyers of tickets are going to be to special promotions or outright price reductions. We’ve not been faced with that. We’ve not been faced with ascertaining how truly variable some of our expenses are going to be and this will be tested again if our ticket demand is soft.

We noticed our ticket purchases are also coming in later, closer to the events. So we’ve been really struggling to provide credible guidance for 2009, but we’ve noticed some favorable trends in our first two events. The number of people actually attending our Sprint Cup events is actually about the same as it was a year ago. That’s quite different than in the fourth quarter of 2008. Now the revenues we’ve derived from each of the customers over a weekend is down because of lesser sales at companion events and migration to less expensive seats, later ticket purchases and more ticket promotions and lesser souvenir sales. But nonetheless, it’s very encouraging to have more people at the events than what we had expected.

Corporate spending on sponsorships is relatively stable, but the spending on hospitality, VIP suites, display and sampling fees are down sharply compared to the same period in 2008. That’s similar to the fourth quarter so the corporate spending is similar but the number of people attending the events is up. So that’s improved. So our guidance for 2009 is for total revenues to be about $480 to $520 million; depreciation and interest to approximate $90 to $100 million; income from continuing operations to range from $73 to $82 million; and diluted earnings per share from continuing operations to approximate $1.70 to $1.90 per share.

Now if we achieve those earnings we’ll be relatively pleased and I think it’ll be a good showing in these economic conditions. At this time I’m going to ask Cynthia to allow all our participants to ask any questions they may have and I encourage you to do so if you have any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe [Lackey] – Wells Fargo-Wachovia.

Joe Lackey – Wells Fargo-Wachovia

I just want to confirm what you saw on the first couple of events there in the way of attendance. You said for your first two events it was about the same year-over-year. Is that kind of what’s been seen across all series or was that just for the Cup events? And is that similar to what’s been seen at other series events, you know, other races that have been held season to date?

William R. Brooks

Joe, the attendances that I was referring to that was the same year-over-year – similar year-over-year relates to the Sprint Cup events. The attendance at the other series has been down year-over-year. Based on the public comments that other promoters have made, they have had attendance that’s been fairly similar to the prior year but again the weekend revenues have been less for the reasons that I mentioned before.

Joe Lackey – Wells Fargo-Wachovia

Can you talk a little bit about TV ratings season to date for the top nationwide in Truck?

Marcus G. Smith

Yes, Joe, they’ve held strong. We’ve had solid ratings for Sprint Cup Nationwide and the Truck series. They’ve held their place in rankings. We’ve been up and down, but it’s pretty even with last year.

Joe Lackey – Wells Fargo-Wachovia

And in regards to advance ticket sales sounds like purchases are coming in closer to the events. You know, on a year-over-year basis at this point can you kind of compare where you are this year versus last year?

William R. Brooks

Joe, you can see that in our deferred revenues at the end of the calendar year. Last year we were at I believe it was $113 million and this year it’s $105, so we’re down that type of a percentage and although I don’t know what it is today I’d expect it to be something similar to that.

Joe Lackey – Wells Fargo-Wachovia

Real quick on Kentucky can you describe your strategy there as far as getting a Cup race in 2010? Might that be a race for example the Atlanta Spring Race moved there? Or can you kind of discuss what your thoughts are in regards to Kentucky?

Marcus G. Smith

Joe, we’ve said many times we’re going to try to realign the race there just as quickly as we can. We hope that that would be for 2010. We haven’t disclosed what Speedway it’s coming from and I’m not sure we’ve made a final decision about that.

Joe Lackey – Wells Fargo-Wachovia

Last question here, any thoughts on or give us some guidance here on capital allocation in 2009, you know, your appetite for share repurchase versus maybe debt pay down versus acquisitions?

William R. Brooks

Okay. That’s a very good series of questions to talk about. We’re expecting our capital projects to probably be $40 to $50 million, which is quite a bit less than we’ve experienced the last couple of years. We hope to continue to repurchase shares and pay dividends at similar levels approximately that we had in the past year. If share prices stay down we may be more aggressive. As far as debt repayment we are also attempting to do that and last year we had a fairly good reduction in our debt repayment and we’ll hopefully continue to do that. So I think those are going to be our focus as opposed to acquisitions.

Operator

Your next question comes from Eugene Fox - Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Capital spending for 2008, could you give me the total for the year?

William R. Brooks

2008 about $75 million Gene.

Eugene Fox - Cardinal Capital Management

So it’s reasonable to say you really didn’t spend much in the fourth quarter, Bill?

William R. Brooks

Right. That is correct. The bulk of the work was done earlier in the year.

Eugene Fox - Cardinal Capital Management

In terms of your $40 to $50 million of capital for 2009, can you talk about where that’s going?

William R. Brooks

We can. Probably half of it or so is maintenance, CapEx, and a portion of it probably $10 to $12 million right now is earmarked for Kentucky where we’re going to change some of the roads in the parking areas and make some enhancements to the infrastructure in anticipation of having some further work done in 2010 if we’re successful in getting a Sprint Cup date relocated there. And that’s the bulk of what we’re talking about spending.

Eugene Fox - Cardinal Capital Management

Bill, I don’t remember whether it was the last quarter or on a separate release you talked about the dilution that you expected for Kentucky for 2009. Have your thoughts on that changed at all?

William R. Brooks

Not a lot. We still think it’s going to range – I think we gave a range of about $0.12 to $0.18 per share and I think that it’s probably somewhere in that range.

Eugene Fox - Cardinal Capital Management

Bill, you all closed on Kentucky at the end of the fourth quarter. Can you give us sort of the cash that would have come out for that?

William R. Brooks

Yes. The cash was $63 million thereabouts. And then we have a note that’s going to be put on the books discounted present value basis of about $7 million or so. And then there’s a contingent note of $7.5 that may or may not be paid in the future.

Eugene Fox - Cardinal Capital Management

In terms of the earlier comments you made on attendance, can you talk about [inaudible] quantify a bit what the concept of perhaps not what you’ve reduced ticket prices but what you envision in your guidance as sort of revenue? I presume revenue per individual who comes to the track, I presume you’re assuming flat to down attendance. But can you help us sort of understand how you put those kind of numbers together?

William R. Brooks

Yes.

Eugene Fox - Cardinal Capital Management

The reason why I say it, Bill, is I’m having trouble coming up with revenues – you know, a revenue decline like that, I just want to understand the pieces that allow us to get there.

William R. Brooks

I think that that’s reasonable. We’ll see a fairly significant drop off in our event related revenues. The sponsorship portion is going to hold up pretty well, Gene, but the other parts of it as it relates to programs and souvenir sales and as it relates to suite rentals and also display and advertising and hospitality, those are things that are pretty easy to cut but they’re also things that are pretty easy to restore if business conditions warrant it. But we saw some of those areas of revenue decline as much as 50% in a quarter, year-over-year. So that’s where the large drops in revenues that are very profitable occurred.

In terms of just admissions, in the fourth quarter that reflected about all the decline in admissions for the year. And we were down about 17% on revenues. And I think it’s fair to use somewhere between 15 to 20% decline in revenues for admissions for this year. And not so much a decline in food and beverage, but a decline in souvenirs of a similar amount, so spending per customer instead of being maybe $10 or $11, and it varies a lot by speedway, but maybe average that would be perhaps 10% less than that.

Eugene Fox - Cardinal Capital Management

Based on your decline in capital spending as well as what I believe your cash tax situation is it conceivable your actual cash flow ultimately is going to be greater in 2009 than it would have been in 2008?

William R. Brooks

Yes, Gene, that’s a good point. I believe that it will be. And we certainly hope that that’s the case.

Operator

Your next question comes from [Josh Brown] – Boston Harbor Capital.

Josh Brown – Boston Harbor Capital

First a clarification, you said ratings were even with last year? I understood that they were down pretty –

William R. Brooks

There are some up and some down. If you look at the ratings of Truck races and Nationwide series and Cup races, the weekend before last in Las Vegas we were down about 8% in ratings compared to last year and on the Sprint Cup series we were up in Trucks significantly and let’s see we were down in Nationwide series [glimpse] it was actually uneven in Nationwide series. So it’s been a – but still a strong rating when you consider a 6.5 is a very strong rating on Fox during that day time and continues to be a very attractive place for our advertisers to put their dollars.

Josh Brown – Boston Harbor Capital

Is there any variable component to the TV contract? Or a risk that if ratings do get bad that it could be renegotiated?

Marcus G. Smith

Good question and the answer is no, there’s no variable based on ratings. And over the lifetime of the contract and depending on the climate of the economy and the business, when the discussion comes up for an extension and renegotiation that will determine what happens in the next several years of the TV agreement. And it goes through 2012?

William R. Brooks

14.

Marcus G. Smith

2014.

Josh Brown – Boston Harbor Capital

And then my other question has to do with Sonic Automotive. I know from their filings that their credit facility with Bank of America pledges Speedway stock as collateral. There isn’t any mention of that in your filing so I was hoping you could help us understand the risk that TRK shareholders that Sonic has to file.

William R. Brooks

Josh, I’m glad you brought it up because there was a lot of confusion about that. Last year’s in our proxy filing Speedway announced that there were about 14.3 million or 5 million shares pledged by the owners of Speedway, Bruton and Sonic Financial. When we file that hopefully early next year it’s going to show that 10.5 million shares are pledged and that that would include any shares pledged for Sonic. When Sonic Automotive filed that exhibit I think it was showing that their credit facility, it reflected that 5 million shares were pledged.

Josh Brown – Boston Harbor Capital

And does the fact that TRK stock is down so far this year, does that change it at all? In the year-to-date?

William R. Brooks

No it does not.

Josh Brown – Boston Harbor Capital

So there’s 10 million shares pledged.

William R. Brooks

But not for Sonic. But 10 million 500 in total.

Operator

Your next question comes from Marc Cohodes - Copper River.

Marc Cohodes - Copper River

How much income did you have from non-racing sources this past year?

William R. Brooks

Marc, what type of income were you thinking about?

Marc Cohodes - Copper River

I think you mentioned on the call you had other income from the –

William R. Brooks

Oh, I’m sorry. There was about $1 million and that was from a sale of some land and last year in that line item we had written off about $5 million from asset impairments.

Marc Cohodes - Copper River

With your cash flow, why wouldn’t you guys retire debt rather than buy stock? Since the debt is ahead of the stock and I think in this day and age people are happy to see reduced leverage rather than increase leverage? And the last question is, how much incremental Kentucky debt will be on the books come March 31 rather than December 31?

William R. Brooks

Marc, as far as the debt, we have retired some debt. Last year we started out borrowing $300 million for the purchase of the New Hampshire Speedway and retired about $50 million of it. Seasonally of course our cash needs change and my best estimate in March is that our debt would be $30 million higher than it will be in December. But I don’t think that that will be the case at the end of the year. I expect that that will be reduced by the end of the year. And that’s our goal. And we are going to work on that as well as some stock repurchases.

Marc Cohodes - Copper River

Can you guys ballpark? I mean, we have essentially two weeks left in Q1. Can you ballpark sort of what Q1 looks like?

William R. Brooks

It’s really difficult because the Bristol race has not occurred and that’s a fairly material race to us and we’re not sure how it’s going to come in. Right now I don’t know how good a job we did at curtailing some of our expenses. So I don’t have a good handle on it.

Marc Cohodes - Copper River

Shouldn’t Bristol sales – I mean, shouldn’t that be sold? Or that should be pretty much done by now, right?

William R. Brooks

Historically it sold out earlier. And as I mentioned it’s not – none of our events are selling as early as they did. We expect that it’ll sell out. But just like Daytona’s usually sells out quite a bit earlier, they announced a sellout I think the weekend of the event. So it’s just a function of people buying tickets later if they can.

Operator

Your next question comes from [Jim Custo – Cuyahoda].

Jim Custo – Cuyahoda

Could you – looking at the credit agreement, I guess that comes due in about a year from now. What is the thinking on either extending that and when will you folks start a chat with the bank? And can you kind of walk us through where we are on covenants and all that other good stuff? And you know, just make us feel good about it?

William R. Brooks

Well, I don’t know, Jim, if I can make you feel good about it but we have plenty of room on all of our covenants and that much is very good. And we have a very excellent credit facility which has a low rate of interest. And we have very supportive banks. So those things are all pluses. The fact that it matures a year from now and the markets are somewhat uncertain probably means we’re going to address refinancing it sooner rather than later. That’s not necessarily our preference, but that’s probably something that’s more prudent to do so we’ll likely start addressing that more seriously in the second and third quarter.

We have had discussions with all of our banks pretty much at the end of last year and all through this first quarter as to what we can and can’t do in terms of our financing. We also have investors that have come directly to us or to our banks that have inquired if we were going to issue additional securities or if we would allow them to participate in financing in some fashion. So we’re fairly confident that we can get the debt refinanced. It will be expensive, more so than now, because we’re paying LIBOR plus 150 to 175 and that’s just simply not the market right now.

So right now we are fairly optimistic that we can get it done and it’ll probably be sooner rather than later.

Jim Custo – Cuyahoda

Would you look for a similar sort of agreement or are you thinking more about doing some kind of a bond offering?

William R. Brooks

We are thinking about both. We don’t know the answer yet, which way we would go.

Jim Custo – Cuyahoda

Which of the covenants are the ones that you are most focused on?

William R. Brooks

Probably the total debt covenant. That would be total debt as it relates to EBITDA. That needs to be no more than 3.5 times.

Jim Custo – Cuyahoda

And I tell you as I recall from that, that excludes special charges like writing off the oil stuff and so forth.

William R. Brooks

It does.

Jim Custo – Cuyahoda

Would you expect in the new year that the souvenirs company will be profitable?

William R. Brooks

Well, it is certainly our hope that it will be profitable. The results are seasonal and they traditionally reflect a loss in the first quarter, so I don’t know that they will be profitable right from the outset. I think a lot of that depends on if there’s any driver that wins a lot and is a compelling story and if the aggregate demand will stay where it is now or improve. Marcus, do you have a feel for that?

Marcus G. Smith

Well, I think, you know, everybody is seeing a tremendous savings in energy costs and that’s playing a big role in helping us curtail some costs out of that business. And it’s actually also playing a role in our admissions number to the positive. I read recently that consumers had an additional $14 billion in their pockets because of lower gas prices compared to last year, $14 billion last month and then there’s an estimated $250 billion energy savings compared to last year for this year. And that’s doing well for places like Wal-Mart and Family Dollar and other discount retailers.

And that’s our core customer. We’re a Joe and Jill America’s sport that attracts regular people and with a little more money in their pocket they’re coming to the races and having a great time. And we’ve seen some positive numbers in our retail sales, but all the same we will be working hard to achieve a breakeven this year with our souvenir business at Motorsports events.

Jim Custo – Cuyahoda

Forgive my ignorance, but I don’t remember how long the supply chain is on that where those products are sourced from? If things get soggier, can you cut back the inventory easily or is it on a boat coming at us as we speak?

Marcus G. Smith

Excellent question. We – because of the global economic downturn, we’ve been able to renegotiate very favorable terms, much more favorable than in years past with suppliers and where we have not been able to achieve better terms, we switched suppliers. And so we’re shortening our supply chain tremendously in that and moving with a target to adjust in time as quickly as we can.

Jim Custo – Cuyahoda

But it sounds like you’ve got a – I won’t say you have open ended patience with this. You finally ran out of patience with the oil company. Is there some point where your patience ends and you become more aggressive at reducing costs on this?

Marcus G. Smith

Well, we’ve already come to that point and made tremendous improvements in cost reduction over the last couple of months. While we’re very pleased with the turnaround from ’07 to ’08, we still feel like there’s a tremendous [inaudible] left on the table that we could improve. So we have made some significant changes to the business in the last couple of months that are positioning us better for 2009. And so we are making those hard decisions already this year.

Operator

Your next question comes from Eugene Fox - Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

A couple of follow ups, Bill. In terms of the other revenue line, can you give us a sense for how that should compare year-over-year ’09 versus ’08?

William R. Brooks

I think that in ’09 and ’08 the other revenue and the other direct expense are going to be fairly similar. I think that the sales that we have experienced so far in the source international, as an example, have been as robust as they were in the year before. And I think that we’re fairly confident that those will be similar.

Eugene Fox - Cardinal Capital Management

Do you all have a hard number yet for what the broadcast revenue will be in 2009, given that it’s contractual?

William R. Brooks

It’s about $174 million.

Eugene Fox - Cardinal Capital Management

In terms of your cost reduction initiatives, can you talk about what they are and where we may see them when we’re trying to forecast expenses for 2009?

William R. Brooks

What we’re trying to do specifically is go first we go to our vendors and attempt to negotiate some adjustment in our pricing, just like most other companies. And we’ve had mixed results but on balance a fairly good result. Then we’ve tried to right size our staffing for our advance, choose the number of people that we expect to be there without cutting back so drastically as to adversely affect the fans experience where they can’t get normal amenities or can’t get in and out of the Speedway properly. And this is, of course, not something that we do on a regular basis with so much vigor, because we haven’t seen such year-over-year declines in the past, especially things that occur rapidly.

But the areas that we’re working on particularly are in general administrative expenses and direct expense of events, and the biggest components of those are going to be outside services and labor to conduct the events.

Marcus G. Smith

We’ve seen some significant declines in some areas and other areas of expenses, not quite as significant, but all of our vendors have reduced costs. And we’re getting more for our money in areas like advertising to help bring people in to the events.

Eugene Fox - Cardinal Capital Management

And the NASCAR purses and sanction fees has been a pretty, you know, that seems to be a number that there’s not any wiggle room in. Is that going to change or should we basically assume that that probably goes up year-over-year in 2009?

Marcus G. Smith

We are speaking with NASCAR on a regular basis and the teams as well, and I’m sure we’ll start those discussions soon as we go into the next season. We are hopeful to have some discussions around that that will yield some savings, but it’s not something that we would really get into at this point without having those advance discussions. But there have been discussions on costs of putting on the events and sharing costs and doing things that make sense for efficiency’s sake at the events, and NASCAR’s been very helpful on that in some areas.

William R. Brooks

Gene, the ’09 purses and sanctions will be up over ’08 probably similar to what we saw in ’08 over ’07, apart from the effect of New Hampshire of course.

Operator

Your next question comes from Marc Cohodes - Copper River.

Marc Cohodes - Copper River

I was just reading the Sonic disclosure. So if Sonic were to hit harm’s way, what happens to the 10 million shares? Do those all of a sudden become owned by a bank?

William R. Brooks

No. There’s only 5 million shares pledged against that particular obligation, Marc.

Marc Cohodes - Copper River

And do those then become owned by a bank?

William R. Brooks

They’re collateral, so that’s a possibility if things were to go badly, I guess. I’d hate to speculate as to what would happen, but they are collateral for a loan.

Marc Cohodes - Copper River

And again, can you – I mean the stock’s getting hit today for a disappointment I guess on the guidance. You can’t give people a little help on Q1? Just a range of what it could be?

William R. Brooks

Marc, we really just don’t know the answer to your question and our forecasts haven’t been particularly great in the last 90 days simply because things changed so much and they’ve been so different than what we’re used to. So we don’t give quarterly guidance at this juncture, so we’re not prepared to do that today.

Marc Cohodes - Copper River

Okay. Thanks.

William R. Brooks

You’re welcome.

Marcus G. Smith

I think, Marc, one thing and everybody one thing to keep in mind is as we go forward into 2009 when you look at the business model and how we’ve made it through this time with strong results, and as Bill mentioned earlier we are projecting to have stronger cash position in 2009 than 2008. And in the face of all the negative downturn, I think it speaks very well to our long term business outlook and business model.

Operator

Your next question comes from Jefferson George – The Charlotte Observer.

Jefferson George – The Charlotte Observer

Thanks for taking the call, gentlemen. Real quick, you talked about the right sizing of the staff at – during NASCAR events. Can you talk a little about layoffs at Motorsports Authentics, particularly given the company’s improvement in ’08 over ’07?

Marcus G. Smith

Jefferson, thank you for the question. We have been doing some right sizing at that business and over the last several weeks and we have made some of the difficult decisions that need to be made in tough times for the betterment of the whole. So as we go forward where we see opportunities to become more efficient and do things better, we’ll continue to make those decisions.

Jefferson George – The Charlotte Observer

Do you have a sense of how many – of a total number that you see in that right sizing in reduction?

Marcus G. Smith

No we sure don’t.

Jefferson George – The Charlotte Observer

Is that just a product of the economy? I mean, do we have any sort of guidance on?

Marcus G. Smith

Its’ actually a combination of the economy and on right sizing the business in terms of efficiency and the right operating mix of the number of staff on hand.

Jefferson George – The Charlotte Observer

Thank you.

William R. Brooks

You’re welcome.

Operator

Your next question comes from [Steven Schweitzer – Chinkning Capital]

Steven Schweitzer – Chinkning Capital

I don’t know if you did this already, but did you do a translation from the mid-point of the EPS up to EBITDA?

William R. Brooks

No, Steven, we generally don’t translate up to EBITDA.

Steven Schweitzer – Chinkning Capital

Should we think of 43 million shares and maybe a 35-percentage tax rate? Is that – does that sound reasonable to you?

William R. Brooks

43 million shares is probably reasonable. As far as the tax rate I think you should use 40%.

Steven Schweitzer – Chinkning Capital

And then, you talked a little bit about the refinancing of the credit facility that comes due next year. And how do you think about that in terms of maybe doing a shorter revolver at a lower cost of capital versus doing a longer bond deal and obviously a more expensive cost to capital? How do you balance that mix and what’s your thought there?

William R. Brooks

You’ve hit the nail on the head and I think a lot of it is just what is the appetite for the banks and what would the appetite be into the future. You’re quite right that any type of bond offering would be more expensive than just a straight bank deal, but we don’t know how supportive all the banks are and how much true bank revolver capacity that we can achieve. So it’s a balancing act as to what’s available and do we want to take a chance of just perhaps extending out one or two years on the revolver and then have to face the same issues again, because the markets are still somewhat disrupted? We don’t think those are likely events, but it’s part of the decision process.

Steven Schweitzer – Chinkning Capital

And then you kind of addressed this but you talked about a share repurchase program and additional dividends being still part of your strategy. I would just say that you know we’re still in the middle of a credit crunch here and we would view that use as not the most prudent thing to do. Capital is very, very precious at this point in the cycle and we really would encourage you to hold onto the cash or pay down debt as opposed to buying back stock and paying dividends out to the shareholders. That’s just my own viewpoint and do with it what you may, but that’s our view here.

William R. Brooks

Thank you.

Operator

At this time there are no further questions. Mr. Smith and Mr. Brooks, are there any closing remarks?

Marcus G. Smith

Thank you all very much for your time and we look forward to speaking with you next quarter.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. You may now disconnect.

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Source: Speedway Motorsports Inc. Q4 2008 Earnings Call Transcript
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