Speedway Motorsports Inc. Q1 2010 Earnings Call Transcript

May. 5.10 | About: Speedway Motorsports, (TRK)

Speedway Motorsports Inc. (NYSE:TRK)

Q1 2010 Earnings Conference Call

May 5, 2010 10:00 AM ET

Executives

Marcus Smith – President and COO

William Brooks – Vice Chairman, CFO and Treasurer

Analysts

Howard Bryerman – Evergreen Investment.

Operator

Good morning my name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Speedway Motorsports Inc. first quarter earnings release 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)

This conference call 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’s control.

These factors and other factors including those contained in the company’s annual report on Form 10-K and subsequently filed quarterly results on Form 10-Q involve certain risks and uncertainties that could cause actual results or events to differ materially from management’s view and expectations. Inclusion of any information or statement in this conference call does not necessarily imply that such information or statement is material. The company does not undertake any obligation to release publicly, revised or updated forward-looking information, and such information included in this release is based on information currently available and may not be reliable after this date.

At this time, I would like to turn the conference over to Marcus Smith. Please go ahead sir.

Marcus Smith

Hey, good morning ladies and gentlemen, thank you for joining us today as we announce first quarter 2010 results for Speedway Motorsports. For the first quarter we reported total revenues of $118.5 million and income from continuing operations of $10.3 million or $0.24 per diluted share. Although the company did not meet the Street’s consensus, our results are within our expectations.

If you recall during our yearend earnings conference call, we projected that the first quarter results for this year would not be as robust as prior year because of sizeable portion of this 2009 results reflected revenues or tickets sold in 2008 before the recessionary conditions peaked and likewise it will take relatively longer for the company’s results to again reflect sales growth as conditions improve.

For our first quarter racing highlights, during the first quarter we hosted three major NASCAR weekends, one in Las Vegas, one in Atlanta and one at Bristol Motor Speedway. Attendance was essentially unchanged at all of these events with the exception of Bristol Motor Speedway whereas hard as it is for us to say we had actually an event for the first time in 55 races at Bristol that we didn’t actually sell out; that’s reflection of the economy but the good news is people had a super time and it was a great racing, we have high hopes for the August event at Bristol.

We also hosted one major NHRA event at zMax Dragway at Charlotte Motor Speedway where we hosted the four wide nationals, a first time ever event there at (inaudible).

Our ticket pricing philosophy remains unchanged for 2010. We continue to offer fans our variety of affordable ticket packages and fan affinity programs. Our advance ticket sales are not where we’d like them to be compared to last year. However, we are seeing more purchasing activity occurring within the three to four week window prior to an event weekend.

For television ratings the Sprint Cup ratings over 2009 are down this year 5%. However, two of the races have been on Monday and we had the pothole event in Daytona. So the ratings are not very comparable to last year. And when you consider the ratings of even the last event in Talladega where we were up 4% to 5.2% and compare that to NBA playoff games with an average 3.1 over the same day at the same weekend, we’re very pleased with how NASCAR ratings are holding up.

Most of our NASCAR Sprint Cup Nationwide and Camping World Truck Series event sponsorships are sold for 2010 and beyond. For 2010 we have one open entitlement at Atlanta for our Labor Day night race. We have high hopes to get that sold as well.

Customer interest in corporate area seems to be reviving. Our sales teams are seeing good activity in the pipeline compared to this same time last year and we’re seeing companies like Dupont, AAA and others come back into sport and increase their activity with hospitality and sponsorship.

Motorsports Authentics continues to chug along as we work with NASCAR and various teams to have a strategy that will transition the sport and the company to the next step and at this time we will continue our position to not put any cash into the business while we look forward to the next steps happening there.

Our second quarter events are well underway. We have already hosted our NASCAR series event weekend at Texas. We’re looking forward to the Sprint All Star Race and the Coco-Cola 600 events in Charlotte and then we travel to Sonoma in the Infineon Raceway for the Toyota/Save Mark 350 Sprint Cup Event and then finish up the quarter at New Hampshire Motor Speedway for the LENOX Industrial Tools 301 Event weekend.

And to talk further detail, I’ll turn the call over to Bill Brooks.

William Brooks

Well thank you Marcus. Before I talk about the quarter in some detail, I wanted to bring up to date about some developments in the litigation among the former owners of the Kentucky Speedway NASCAR and International Speedway.

If you recall there was a lawsuit a few years ago by the former owners against those two parties that it has been winding its way through the courts. There was some dissension among the former owners as to whether an appeal of these various decisions should be mounted to the United States Supreme Court and they have another week or two in which to do that.

So on Friday last week the District Court that’s hearing this litigation among the former owners issued an order stating that they had been verbally advised that the parties resolve their dispute and they were requiring the parties to submit an order to the court for dismissal on or before the end of this month. Now whether that’s going to happen or how it’s going to happen is still to be determined.

So while we remain pretty confident that we’re ultimately going to succeed in obtaining a Sprint Cup Series race for Kentucky it’s hard for us to predict with any certainty when that realignment might occur and it may not be feasible until after the 2011 NASCAR Sprint Cup season.

There are a lot of factors that we have to consider did it affect any type of realignment including the popularity and profitability of the various races that we already conduct, relative seating capacities of the different speedways and alternative uses for a speedway in the event of a race was moved and particularly costs of any capital expenditure to upgrade or expand our facility at Kentucky, the lead time to do it and alternative uses of the capital and there are a host of other considerations that we have to undertake and then I’m sure that NASCAR would undertake. So we can’t give you any certainty as to what’s going to happen other than we ultimately think that we’ll have a Sprint Cup race there.

Marcus has often times described our revenue sources as a stool consisting of three legs of broadcast revenue, event related revenues, which are predominantly corporate type revenues and admissions which are for the most part individual customers. And this is really the first time in the last few months that we’ve experienced a significant downturn from both our corporate customers and individual customers simultaneously.

At first glance our first quarter earnings appear off, but remember as Marcus said last year first quarter results were better than anyone expected and this has likely occurred because many of our admissions and event related revenues were sold in 2008 before the length and severity of the recession became widely understood.

This year our first quarter resembled the latter part of 2009 when we experienced substantial weakness. Even a casual observer could see this when we had the Bristol Motor Speedway now thrown off for the first time in more than 20 some years.

Unfortunately this will probably lag and we will probably lag the general economic recovery somewhat because it’s still politically incorrect for companies to entertain, companies are still very cautious and 60% of our fan base is male. You should probably know males have been disproportionately affected by this recession since they are more the predominant workforce in construction and manufacturing that experienced 15%, 20% plus unemployment.

But that said we’re still pretty comfortable with our 2010 earnings guidance of a $1 to a $1.40 per share. Now the quarter as compared to 2009 was down in its income from revenue, which was off about $15 million and from the net between interest expense and the loss that we experienced in 2009 at Motorsports Authentics and those two items basically comprised the big difference.

Our revenues were down about $15 million. Admissions in particular were off about $9.7 million or 21% from such period a year ago. It’s a combination of low admissions and lower ticket prices, it’s about 50-50 between the two although the number of people attending the race at Las Vegas and Atlanta was pretty consistent year-over-year.

Our event related revenues were off about $5 million or 12.9%. That $5 million decline, about 20% of it comes from ancillary broadcast rights and radio broadcasting, so basically company’s advertising; another 18%, 20% from luxury suite rentals; 14% from our souvenir merchandising; 10% or so from our sponsorships. So basically corporate dollar weakness there.

Our NASCAR broadcasting revenue is up $1.1 million year-over-year by 2.8%. Other operating revenue decreased by about $1.5 million but other direct operating expense also decreased by a similar amount basically from weaker sales at non-event souvenir merchandising to less extent to US Legends cars and those weaknesses were offset by increased sales at Oil Chem.

The expenses tracked revenues. For this first quarter our direct expenses were down about $500,000 over the prior year and this is off about 6.5% from the prior year but we now conducted an NHRA event at Charlotte Motor Speedway which was new to us in the first quarter. Our direct expenses would probably been down about 8% maybe 8.5%.

NASCAR person sanction fees declined about $510,000 which was as expected. General administrative expenses increased about $1.3 million over prior period. This was somewhat less than the increase that we had forecasted internally and it was attributable to higher property taxes, legal cost, basically cost that we’re having to incur because the economy is down and governmental agencies are seeking additional revenues and individuals are seeking additional money.

It’s pretty consistent anytime we see a downturn in the economy to see some of these expenses increase.

The depreciation and amortization for the period was up a little bit about $434,000 over the same period last year and that was from the additions that we did last year as you can imagine.

Interest expense is up rather significantly from $7.8 million to $13.5 million. The bulk of that reflects the interest expense associated with the new senior notes we issued in last May and keep in mind that the interest expense we had in 2009 was artificially low. Most of it was from our revolving credit facilities and it was about a 2% rate. So for us to move up to a more normalized interest if we look at the history of the company is not totally unexpected but obviously it’s painful within the quarter.

We were not recording any equity investment losses for the three months of 2010 because we had written off the investment at the end of the year and that’s a difference between this year and 2009 and the first quarter when we had about $1.6 million of expense or loss to recognize.

The tax provision was pretty consistent to the first quarter of last year at 40.5% and the loss from discontinued operations was similarly to the – similar I should say to the prior year and we hope that we will keep pushing on that strength and see some reduced expenses after the second quarter of this year.

As we look at our balance sheet for period ended in March reflects that our cash has increased from the end of the year, it’s increased from $99 million to $118 million. And yet at the same time we’ve reduced our long term debt by $20 million in the quarter from $672 million at the end of year to $652 million. Deferred race revenue income declined by about $15.3 million from March of ‘09 to March 31 this year. And most of the decline is attributable to decline in advanced ticket sales.

We’ll find it for the first quarter of 2010, CapEx was about $3 million this year, whole year we’re still expecting perhaps $40 million to $50 million. So at this time Stephanie, I would like to have you poll our participants and see if anyone has questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Walsh with Wells Fargo.

Michael Walsh – Wells Fargo

Hi guys, how are you doing? Thanks for taking the question. I just wanted to touch base on Kentucky. If there’s not going to be ever likelihood of a Sprint Cup race being pushed back to 2012 I know there is some projects that you guys wanted to do there. Does that push those back for you guys in 2011. How do we think about that?

William Brooks

I think Mike that’s an accurate assessment if we find that there is no way, we’re unable have a realignment for 2011 then the expenses would be delayed into the calendar year 2011, I would rather actually say the capital projects we’d like to do.

Michael Walsh – Wells Fargo

And there is no guidance that you guys have now at this point in terms of what that would be in terms of CapEx spent for Kentucky, is there on some of those projects?

William Brooks

We don’t have that finalized at this point.

Michael Walsh – Wells Fargo

Okay, and then just on walk-up sales, has that sequentially increased at all, I know over the last several races there’s been comments of the sales increasing, I just wanted to see how those have done in the last couple of races?

Marcus Smith

Sure, it actually ahs Michael. We’ve seen the sales in the last three to four weeks prior to an event be significantly better on a year-to-year than previous years and then walk-up is primarily driven by weather. So if we have a good weather forecast than your week-of sales and your walk-up sales can be really great.

Michael Walsh – Wells Fargo

Got you. Thanks guys.

Marcus Smith

Thank you.

William Brooks

Welcome.

Operator

(Operator Instructions) Your next question comes from the line of Brandon Taylor with Raymond James. Mr. Taylor, you may go ahead.

Brandon Taylor – Raymond James

Hi, good morning guys.

Marcus Smith

Good morning.

Brandon Taylor – Raymond James

What I wanted to ask about was specifically about the advanced ticket sales for the rest of the year. Could you give us some color with respect to maybe units versus last year and also maybe dollars?

William Brooks

Brandon, it’s really hard to give you a accurate assessment on units because basically we don’t track it like that day-in and day-out in aggregate just by individual Speedways. I would say for the second quarter obviously the bad weather affected us in Texas at Charlotte Motor Speedway we’re pretty good with the All-Star Race where we had a great race last year. We’re off little bit with the 600 where we had rain. We’re a little bit far out with today’s ticket patterns to assess where we’ll wind up at New Hampshire and Infineon Raceway but it looks as though we are experiencing sales that are somewhat similar to last year at both of those.

So I would say as far as we ascertain and it looks close to 2009.

Brandon Taylor – Raymond James

Okay, thanks.

William Brooks

You’re welcome.

Marcus Smith

Thank you.

Operator

Your next question comes from the line of Russell Lynde with Park West Asset Management.

Russell Lynde – Park West Asset Management

Hi good morning guys, just a question on Texas and the weather and how that’s going to impact Q2 results, and then just sort of a general comment sort of a follow-on to the earlier question about walk-up ticket sales. Is a greater percentage of your sales from walk-ups and does that make you more vulnerable to bad weather in this environment?

Marcus Smith

Okay, the quick general comment Russell the walk-ups are still very small portion of our sales, what is – and most of our tickets, a large majority of our tickets are sold far in advance of the event in the event month, however we are seeing people and this is consistent in other leisure businesses from what we read and speak with others, that a large of number of people are waiting to book their trips, their tickets and what not three to four weeks out and even two weeks out.

So while we are continuing to sell the majority of our tickets months in advance, we’re seeing more and more people book closer than we have in years past, but that’s consistent with what seems to be today’s consumer. And then anecdotally, in Texas one of the things that I think is a great indicator of fan avidity out there is that for our Monday race in Texas we had a tremendous crowd that came back on Monday, that to watch the race that was rained out on Sunday. So it was great show of fan avidity I think and the race itself was a tremendous race on Fox that’s spurt on some good challenging stories and robberies with Jeff Gordon and Jimmie Johnson and Bill.

William Brooks

And Russell as far the impact, I don’t think we changed in our assessment that pretty much any rain delay that puts the event to the next day usually has an impact of some between one and $2 million on our earnings.

Russell Lynde – Park West Asset Management

Okay, and then can you talk a little about the NHRA event in Q1 and how much of an impact that had on the quarter. How much incremental it was?

William Brooks

It was a very interesting event. It was an inaugural event and I’ll let Marcus tell you a little bit about that aspect but as far as the financial ramifications, NHRA events are not traditionally as large as the NASCAR type of events. It’s probably a positive impact of 700 or 800,000 which is about $0.01 per share.

Russell Lynde – Park West Asset Management

Okay.

Marcus Smith

And for a little color on the events though, we did have rain, we had forecast for rain which hurts in NHRA event more than a NASCAR event and however we’re believers in NHRA and that’s why we’re investing in it, right now they don’t have the television package that they need and hopefully one day we’ll have which will really drive just pour down the revenues in this sport.

Russell Lynde – Park West Asset Management

Great. Thanks for taking my questions.

William Brooks

You’re welcome.

Operator

(Operator Instructions). Your next question comes from the line of Howard Bryerman with Evergreen Investment.

Howard Bryerman – Evergreen Investment

Yes, thank you. Good morning.

Marcus Smith

Good morning.

Howard Bryerman – Evergreen Investment

In regards to event related revenue, more specifically sponsorship and advertising revenue, what’s the lead time on that revenue? Do you have a window that you can see down through the rest of the year? And can we expect similar types of declines through the remaining quarters of the year?

William Brooks

Howard, that’s a very insightful question. We think specifically in event entitlements, sponsorships, those are pretty much set for a longer period of time and we can see those and assess their effects fairly clearly. But a lot of the local advertising that goes on it at Speedway or people renting of some of those space for display – to display their products or for sampling, those things can happen very quickly.

As far as we can assess, our sponsorships are mostly impacted this year from the – from a couple of large sponsors that aren’t doing as much as they were, particularly the Lowe’s sponsorships and some sponsorships with Nationwide, they have all been cut backs significantly from what they were. That’s the bulk of the decline in year-over-year.

Howard Bryerman – Evergreen Investment

So what was Lowe’s last year and what are you expecting this year?

William Brooks

I think the difference is probably $3 million or $4 million before taxes.

Howard Bryerman – Evergreen Investment

For all sponsorships or just Lowe’s?

William Brooks

Just for the Lowe’s sponsorship.

Howard Bryerman – Evergreen Investment

And are there other significant sponsorship declines in there?

William Brooks

The only other one that I am aware of as I mentioned was the Nationwide which went from more of a one or two Speedway sponsorship versus sponsoring across our whole company, that amount is not quite as high. I don’t know it precisely, but it’s – if I would estimate it, it’s probably $3 million or so. And the bulk of the sponsorship changes.

Howard Bryerman – Evergreen Investment

Nationwide is $3 million annually or $3 million decline expected?

William Brooks

Decline.

Howard Bryerman – Evergreen Investment

Okay. And then, I would assume broadcasting revenues are also contractual. And are there any contracts that are coming due that we should be aware of?

William Brooks

No, not really. The broadcast contract goes through 2014 and it shouldn’t start getting discussed – I wouldn’t think until probably 2012 or 2013.

Howard Bryerman – Evergreen Investment

So those revenues are pretty consistent now pretty firm?

William Brooks

Yes.

Howard Bryerman – Evergreen Investment

And then just one or two other questions. Admissions, I was just curious to know do you run promotional activities coupled with consumer – maybe consumer products to push ticket sales similar to what Six Flags does with Coca-Cola and things of that nature, kind of spur admissions and drive ticket sales?

Marcus Smith

We do. Howard, we have great partnerships with various sponsors. We have one particularly with Coca-Cola. And around the Coca-Cola 600 and many other sponsors that we partner with in promotion and cross promotion.

Howard Bryerman – Evergreen Investment

So are those promotional activities ramping up?

Marcus Smith

They are. And thankfully there is great success with our sponsors in those programs. They see results that work for them and us. So it’s a good sign for our partners to see that it does promotions worked to help drive their business. And it’s nice for us that that helps drive people to the tracks.

Howard Bryerman – Evergreen Investment

Alright. And then just finally, direct expense, is that predominantly a fixed cost category? Because I would think as there is some variable components of that. So as admissions kind of decline as you try and get through the economic downturn, that expense category can be reduced somewhat. And I hate to use Six Flags as an example again, but there is a fair amount of variable component in their labor staff, so that when things take a bit of a downturn, they are able to temporarily lay off people.

Marcus Smith

Well, the Six Flags and the Speedways are similar in a lot of areas. In one context in certain events we can scale back our event time labor which we do on a regular basis and we can make changes the day before an event to determine how many people we need to have in a particular area.

For the larger weekends or NASCAR weekends, one of the focuses that we have is to make sure that – while we want to make sure our staffing is appropriate for the number of people we have, we also to want to make sure that that every person who comes has an unforgettable time and enjoy themselves. So we are balancing between expense cutting and making sure that we do have the right number of staff there to provide that excellent experience.

Howard Bryerman – Evergreen Investment

Well, it just looks that direct expenses, given the somewhat significant decline in admissions that direct expenses are kind of flat year over – quarter-over-quarter.

William Brooks

And you are right, that they were, but that was impacted probably more from conducting the NHRA event in 2010 that we did not conduct in 2009. The relative profitability of those direct expenses as a percentage of revenue is very different from the NASCAR races.

Howard Bryerman – Evergreen Investment

So how much of that expense is in the first quarter of 2010?

William Brooks

Let’s see. Bear with me a moment. It’s probably somewhere in the $800,000 to $1 million before taxes.

Howard Bryerman – Evergreen Investment

Okay. And then finally just the same question regarding – a similar question regarding general administrative. What is in that category and why is it increasing as opposed to –?

William Brooks

Well it increased because we are a convenient target for municipalities frankly. Taxes are – property taxes are up, we have large amount of professional fees, because everywhere we go, people are trying to get more money out of this for additional taxes.

And any time that there is a downturn like that, people are filing a numerous frivolous lawsuits, so those are the reasons more than anything that costs are up or actually not up as much as we thought they would be and I think they will be tracking closer to last year’s as we go through the remainder of 2010.

Howard Bryerman – Evergreen Investment

Okay, great. Thanks for your answers.

William Brooks

You’re welcome.

Operator

At this time, there are no questions in queue. (Operator Instructions). Your next question is a follow-up from Howard Bryerman with Evergreen Investment.

Howard Bryerman – Evergreen Investment

I am sorry, gentlemen, I lied, I forgot one question. Deferred race event revenue, am I reading that correctly?

William Brooks

The comparison that you see is between December and the first quarter. And of course that went up, because seasonally it’s fairly low in December. But compared to year-ago March of ‘09 and March of 2010, it was down about $15 million. That’s a function of people buying tickets later and also our ticket deadlines being later than they used to be.

Howard Bryerman – Evergreen Investment

Okay. But that explains the increase in cash, right?

William Brooks

Yes, that’s part of the increase in cash. But we also had less capital projects during the period as well.

Howard Bryerman – Evergreen Investment

Okay, very good. Okay, thanks a lot.

William Brooks

You’re welcome.

Howard Bryerman – Evergreen Investment

Bye-bye.

Marcus Smith

You’re welcome.

Operator

At this time, there are no further questions. Gentlemen, do you have any closing remark?

Marcus Smith

No, Stephanie. Thank you all very much for your time. And we will see you again next quarter.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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