Speedway Motorsports Inc. Q2 2010 Earnings Call Transcript

Aug. 4.10 | About: Speedway Motorsports, (TRK)

Speedway Motorsports Inc. (NYSE:TRK)

Q2 2010 Earnings Conference Call

Aug 04, 2010 10:00 am ET

Executives

Marcus Smith - President and COO

Bill Brooks - VC and CFO

Analysts

Michael Walsh - Wells Fargo

Brandon Taylor - Raymond James

Edward Williams - BMO Capital Markets

Jamie Williams - Intrepid Capital Management

Michael Walsh - Wells Fargo

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 Second 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 economic factors, geopolitical conditions, weather, the success of NASCAR and other sanctioning bodies, the success of the company's Motorsports Authentics merchandising joint venture, capital projects, expansions, financing needs and a host of other factors both within and 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 report 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 conference call is based on information currently available and may not be reliable after this date.

I would now like to turn the conference over to Marcus Smith. Please go ahead.

Marcus Smith

Good morning, ladies and gentlemen. Thanks for joining us today as we announce second quarter 2010 results for Speedway Motorsports.

For the second quarter, we reported total revenues of $177.6 million and income from continuing operations of $24.1 million, or $0.57 per diluted share. Six-month 2010 total revenues were $296.1 million and income from continuing operations was $34.3 million, or $0.81 per diluted share.

During the second quarter, we hosted nine major in NASCAR sanctions at weekend, which was the same as last year.

At Texas Motor Speedway, we hosted the NASCAR Sprint Cup Series, Samsung Mobile 500, and a Nationwide Series O'Reilly Auto Parts 250, both events had to be postponed to Monday, because of adverse weather conditions.

At Charlotte Motor Speedway, we hosted the NASCAR Sprint Cup All-Star Race, and the NASCAR Camping World Truck Series, North Carolina Education Lottery 200 events, and then following weekend, the NASCAR Sprint Cup Series, Coca-Cola 600, and Nationwide Series TECH-NET Auto Service 300. The Nationwide Series event was delayed and shortened slightly due to rains at evening as well.

At Kentucky Speedway, NASCAR Nationwide Series Meijer 300, presented by Ritz was held, and at the Infineon Raceway, we held a NASCAR Sprint Cup Series, Toyota/Save Mart 350.

And New Hampshire, the NASCAR Sprint Cup Series LENOX Industrial Tools 301 and the Nationwide Series New England 200.

As we discussed in prior earnings calls, our ticket pricing philosophy of 2010 was to offer our fans with variety of affordable ticket options and fan affinity programs to help bolster fan support. You will continue to see these efforts, through remainder of the year and they were successful in generating fan excitement enthusiasm.

However, attendance and admission revenues have been trending down thus far. Throughout the first half of the season, we saw the consumers increase the purchasing activity within a three-week window prior to the events. However, our walk-up ticket sales were negatively impacted by inclement weather at several events during the period.

For TV ratings NASCAR has had some unique challenges this season as it relates to weather, some unusual increased competitions like airing up against events such as Olympics and the World Cup Soccer Tournament.

The important thing to look at is that NASCAR viewership is averaging 5 million households and 7 million viewers for each week, which is close to 2009 levels. NASCAR continuous to be the number two regular season sport on television and has been the number one or number two sport on television for 15 of the 20 event weekends since 2010 season.

NASCAR Sprint Cup Series on Fox earned an average of 4.8 and this is more than double of ABC's ratings for 2010 season and NBA, which is 2.3 and NASCAR on CMC average a 3.5 rating with 5 million viewers, which more than doubles the viewership of this year's World Cup Soccer Tournament on the ESPN and ESPN2, which averaged 2.1 million viewers.

We are pleased that all of our NASCAR Sprint Cup entitlement for 2010 are sold, some of our NASCAR Sprint Cup Nationwide and Camping World Truck Series event sponsorships for 2011 are sold and also beyond.

The business trends in corporate marketing continues to show some light at the end of the tunnel. We are working hard right now on what we call the selling season and planning with our corporate partners and new corporate partners to develop their plans and spending for years in 2011 and beyond.

At Motorsports Authentics, as many of you are probably aware, MA was unable to renegotiate its license agreements with certain licensees with the NASCAR teams. And in July, the industry the industry formed the NASCAR Teams Licensing Trust.

The Trust includes the Board of Directors comprised of NASCAR and its 11 participating NASCAR teams. The trust essentially restructures the entire NASCAR souvenir merchandising and licensing business. There are four key product categories, die-cast, toys, apparel and trackside retail rights.

At this time, MA's operations will consist principally of trackside event souvenir merchandising. Concurrently with this formation, MA negotiated its release from future guaranteed minimum royalties as well as current unearned guaranteed minimum royalties payable to all NASCAR team licensors, except the one significant licensor with respect to that one agreement secured by the company guarantees, SMI and International Speedway renegotiated a reduction in a contingent guarantee obligation.

As a result SMI's guarantee exposure to MA in case that obligation is not met is approximately $5.5 million and it should be satisfied upon MA's success in the business in making payment to that licensor through January 2013.

There has been a lot of news, a lot of discussion about the Kentucky Speedway lately. And as we have said in our press release, we are increasingly confident about the successfully realigning a NASCAR Sprint Cup Series racing event to Kentucky Speedway, and believe that event will be held in 2011 season.

I'll now turn it over to Bill Brooks who will provide some additional details on MA as well as the financial results and review.

Bill Brooks

Thank you, Marcus. Our results for the three months and six months ended June 30, continue to be adversely affected by the persistent recession and a general lack of confidence by, both individual customers and corporate customers.

We faced double-digit declines in most of our revenue categories and we reduced our expense where we could without adversely impacting our customer experience in our events, and we believe our results are consistent with others in the industry, other destination-based entertainments in our early projections. And consequently, our full year earnings guidance remains unaltered.

As Marcus mentioned, we had inclement weather this year causing us to postpone the Samsung Mobile 500 Sprint Cup race and the O'Reilly Auto Parts 300 Nationwide events in Texas from their regular scheduled time to Monday.

While the crowd for the Monday events was larger than expected, the bad weather clearly adversely impacted our financial results. We are also experiencing and expected an admission shortfall of the Coca-Cola 600 this year, because of poor weather last year, which caused postponement and eventually shortened the 2009 event.

Historically, adverse weather events have reduced the attendance the next subsequent event. In comparing the quarter, ended June 30, 2010 to the quarter ended June 30, 2009, total revenues decreased by $14.2 million or 70.4%.

Admissions for the three-month period ended in June 30, decreased by $6 million, or 12.7% from such revenue in the prior year, and it's a combination of lower attendance and lower average ticket prices at our NASCAR sanction events. The lower prices in this particular quarter were approximately 25% of the decline in comparison to last year.

Our event-related revenues for the three months ended in June, decreased by $8.9 million, or 13.9% from such period last year, and it was due primarily to declines in sponsorship, other corporate marketing arrangements, souvenir merchandising and revenues associated with our NASCAR events.

The decrease in sponsorship revenues reflect the expiration of the Charlotte Motor Speedway naming rights of Lowe's that occurred after 2009. The NASCAR broadcasting revenues for the three-month period increased by $2 million, or 2.8% over the same period last year as expected.

Our other operating revenues net of the other direct operating expense for the three months ended in June, decreased by about a $0.5 million to 22% from the same period last year, primarily because we had lower non-event souvenir merchandise revenues in operating results in that period.

The direct expense of events for the three months ended in June, decreased by $2.7 million, or 7.4% from the same period last year. This reflects lower operating cost associated with our events from our cost reduction, lower attendance, lower cost of goods associated with the event revenues in the period. That overall decrease was offset somewhat by increased advertising cost in the period.

The NASCAR purse and sanction fees increased $1.2 million, or 2.5% from the prior period is contracted. Our general and administrative expense for the three months ended in June increased by $810,000, or 3.5% over the same period last year primarily because of higher property taxes, non-event insurance, professional fees and repairs and maintenance.

The depreciation and amortization for the three months ended in June increased by $412,000 or 3.1% over such period in the prior year, primarily because of the additions that we made in last year.

We saw a dramatic change in our interest expense for the three months ended in June 30, 2010 from $13 million compared to $9.9 million in the same period last year, and this reflects the higher interest rates associated with the 2009 senior notes that we issued in May of 2009.

Higher average interest rates on our credit facility, the borrowing and of course lower investment earnings. These were offset a little bit, because we had lower balances on our revolving credit facility during the period ended in June 2010.

As Marcus mentioned, we had a renegotiation of the agreements under Motorsports Authentics, and the biggest change in the financial statements between the periods ended June 30, 2010 versus 2009 will be at equity investee losses that we recognized in June 30th of 2009, which were $57.2 million.

We do not recognize any results of the equity investee in the quarter ended in June 30, 2010, we're no longer reporting those shares unless their carrying value, which is zero has been increased by us putting in more money into the company.

Other income was up, a little better, in comparison of 2010 and 2009. The income tax provisions of the quarter ended in 2010 was about 40.6%, and that would compare to an adjusted income tax provision for 2009 and this quarter of about 37.4%.

Net income for the three months ended in June was $23 million, compared to a net loss last year $23.4 million. Our cash balance through June 30, 2010 was $118 million versus $99 million for year end, and we also reduced our long-term debt by $10 million during the quarter to $642 million from $652 million at March.

Long-term debt has been reduced $30 million since December. Our deferred race event income declined by $8.3 million from June 30th of 2009 to June 30th of 2010, mostly from declines in advance ticket sales..

We expect the quarter to reflect $10.7 million of capital expenditures for the first six months of 2010, and we still anticipate $40 million to $50 million for the full year of 2010.

Stephanie, at this point, I would like to allow all of our participants to ask any questions that they have.

Question-and-Answer Session

Operator

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

Michael Walsh - Wells Fargo

Just filling in here for Tim Conder. It looks like we have to wait here for another week or so to getting the official word on Kentucky, but can you just remind us again exactly what type of improvements, if any, would have to be done at that location and if you can give us any idea of what that CapEx spend would be?

Marcus Smith

Michael, first of all the capital improvements that we are going to make are ongoing, we don't know for certain what it is we are going to do. In general terms, we'd expand the ceding somewhat and improve the number of restrooms and increase the number of foods and souvenir distribution points, and maybe we will increase the number of gates.

So the scope of the project is somewhat uncertain. The cost of that obviously would also be uncertain since we don't know exactly what we are going to do, but we feel really comfortable that for this year, any capital improvements would be reflected in that $40 million to $50 million figure we estimate for the year. We are hopeful, next year is similar.

Michael Walsh - Wells Fargo

Is there any other guidance that you guys can give us in terms of revenue, I think back in March-May timeframe, you had mentioned revenues between $500 million and $533 million, and I don't know if that's something that still stands here, you are willing to give?

Bill Brooks

Michael, we haven't made any changes to our thoughts about the revenues issued early in the year.

Michael Walsh - Wells Fargo

You had alluded to in your press release and in your recent comments about the comparability issues between Q2 '10 and Q2, '09, because of the negative impacts from weather and some of the races.

Can you give us any idea of whether or not the events at Texas this year in Q2 '10 was more impactful to your results as opposed to the events that were impacted in Q2, '09. Is there any color there?

Bill Brooks

That's a very good question, and I don't know if we have a ready answered for it, because so much of the impact is intangible. It's easy to look at incremental expenses, but it's rather difficult to access lost revenues.

Historically, we believe that loss of an event has occurred costing us somewhere between $0.01 and $0.02 a share. In fact frequently that impact will be experience at the time of the event or at that time and also in a succeeding year.

It doesn't seem logical, but if you think about it from a perspective of a customer, they spend a lot of money and time, come to a race and then the race is not held timely and they are unable to see it or shorten, they are greatly inconvenienced, so their experience was not good and less frequent we will decide that we are going to do something else on that weekend for the next year. So, long story short I think the impact usually $0.01 to $0.02 if we have a race that's rained out.

Operator

Your next question comes from the line of Brandon Taylor with Raymond James.

Brandon Taylor - Raymond James

I want to kind of get back to Kentucky for a second. You seem pretty confident about the 2011 date, or realignment. So, I guess where do you think the race they would come from to realign to Kentucky?

Marcus Smith

Come from one of our existing speedways, and we obviously think that this would be a plus or else we wouldn't do it. But we are going to make further announcements about that within the next two weeks.

Brandon Taylor - Raymond James

Okay. If I could just touch on the other income for a second? Can you give us any more new color on that exactly? It was about a penny a share, it looked like?

Bill Brooks

Yes. We had right away some of our lands was sold to a gas company.

Operator

(Operator Instructions) Your next question comes from the line of Edward Williams with BMO Capital Markets.

Edward Williams – BMO Capital Markets

Just kind of follow-up on the Kentucky stuff for a moment. What actually needs to be done in your view at the track in order to get the race there next year and how much time do you think it might take to actually do the work on the track?

Marcus Smith

That's a good question, Ed. We are evaluating something right now. We don't have final plans, but as typical we want to make it even better as we tend to do at our Speedways and we've already made some great improvements. So, until we really have the full plan it's tough to say exactly what the final plans might be, but we're making those right now.

Bill Brooks

As far as whether we'd start, hopefully this year and then obviously, we could not do a lot of work in the harsh winter, but as soon as we could get back at it, we will.

Edward Williams – BMO Capital Markets

Okay. Then just to be clear on it. The work that you would do on it this year is already included in your budget for CapEx, and whatever would spill into calendar 2011 would be in that kind comparable $40 million to $50 million CapEx?

Bill Brooks

That's our best estimate at this time.

Operator

(Operator Instruction) Your next question comes from the line of [Jamie Williams with Intrepid Capital Management.]

Jamie Williams - Intrepid Capital Management

Good morning. I was wondering if you guys could tell me what your plans are for free cash flow in the coming years besides the dividend?

Marcus Smith

Jamie, I think the quarter is fairly illustrative of the cash flow from operations. The cash flow from operations for six months has a bulk of the money applied to debt reduction and we had capital expenditures, we had some increase in our cash during the quarter and then we had some share repurchase and dividend. We hope to do that consistently going forward, so that we have a balance of debt reduction and still able to keep up with some improvement at our Speedway.

Jamie Williams - Intrepid Capital Management

Well, there as just one shareholder, we stronger support you guys continuing to pay down debt as a clear path to increase value. I know, a couple of quarters ago, there was some discussion about the possibility of participating in a casino development in New Hampshire. I am not sure that's still being explored. It's our hope that you guys aren't pursuing that project any longer and we really hope that you guys stick with your core competency of running races. So I don't know if you have any comments on that casino talk from a couple of quarters ago.

Marcus Smith

Thank you for that feedback, Jamie. That is something that made the radar. Right now, it has been reviewed but there aren't any plans to do anything like that but we appreciate the feedback and we will definitely keep that in mind.

Operator

(Operator Instructions). Your next question is a follow up from Michael Walsh with Wells Fargo.

Michael Walsh - Wells Fargo

Just wanted to ask what you guys have seen over the last couple of months. Did you feel like you are pretty comfortable with where you need to be on ticket prices? Do you really see any more reductions there, at least over the next quarter or so?

Marcus Smith

Michael, I think that's a good question and we do feel like we are at a good place with our ticket pricing. We have brought tickets down to a place where it's affordable for our fans that need to have affordable tickets and yet we are still providing more luxury opportunities or value packages for our fans that think they want those, and we are using good, better, best strategy to offer fans opportunities to get more for their money, whether it's by buying things upfront in packages for a weekend by bringing a lot of their friends with them to get a better price, and we'll continue to do that, because we've gotten lot of great feedback from our fans, but that's something that they prefer.

Then when it comes to the corporate side of things, it looks like the overall market, based on some of the stories in earnings, we've seen from companies like OmniComm and Interpublic, and General Electric, that ad spending is starting to come back and that's a good sign for our business as sponsors make decisions and make those plans going into the coming season.

Michael Walsh - Wells Fargo

Really quickly on the expense line, I think we talked about this just last time that your G&A expense line year-over-year is up with revenues down. I think, you guys have commented previously that that maybe impacted by higher legal expenses and possibly property tax. Is that still the case, or is there anything else going on in there?

Bill Brooks

I think you've assessed it pretty accurately, Michael, but it also had some repairs and maintenance that were higher than the prior period as well. It's just unfortunate to bring revenues down. A lot of these other expenses of seem to get raised up as local municipalities and others seek to get money that they don't have somewhere else, but we're addressing that as we can and we are trying to keep those expenses down.

Operator

(Operations Instructions) At this time there are no additional questions. Gentlemen, do you have any closing remark?

Marcus Smith

Thank you all very much for your time today and we will look forward to speaking with you next quarter. Have a good day.

Operator

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

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