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Speedway Motorsports Inc. (NYSE:TRK)

Q3 2010 Earnings Call

November 03, 2010 10:00 am ET

Executives

Marcus Smith - President and COO

Bill Brooks - VC and CFO

Analysts

Michael Walsh - Wells Fargo

Eugene Fox - Cardinal Capital Management

Joe Hovorka - Raymond James

Peter Lee - Plough Penny Partners

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 third 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 our future operations and financial results. There are many factors that affect future events and trends of our business including but not limited to economic factors, weather, the success of NASCAR and other sanctioning bodies, the success of Motorsports Authentics merchandising joint venture, capital projects, and 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 our 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 views 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.

On today's conference call we have Marcus Smith and Bill Brooks. I now turn the conference over to Marcus Smith.

Marcus Smith

Thank you, Stephanie. Good morning, ladies and gentlemen, thank you for joining us today, as we announce our third quarter 2010 results for Speedway Motorsports. For the third quarter, we reported total revenues of $123.2 million, and income from continuing operations of $7 million or $0.16 per diluted share. Nine-month 2010 total revenues were $419.3 million, and income from continuing operations of $41.3 million or $0.98 per diluted share.

During the third quarter, we hosted several motor sports events, including five major NASCAR-sanctioned event weekends. We began the quarter at Bristol Motor Speedway, for the NASCAR Sprint Cup here as IRWIN Tools Night Race and the Nationwide Series Food City 250, and the Camping World Truck Series, Rally 200 presented by WaveLink. Kyle Busch dominated the weekend capturing the checkered flag in all three series, becoming the first driver in NASCAR history to do so.

Labor Day weekend also brought us some great racing at Atlanta Motor Speedway, where we have the NASCAR Sprint Cup Series Emory Healthcare 500! And the NASCAR Nationwide Series Great Clips 300. Tony Stewart broke his 31 race by edging out Carl Edward to claim the victory. And then, we rounded out the quarter in New Hampshire Motor Speedway where we hosted the NASCAR Sprint Cup Series Sylvania 300 and the Camping World Truck Series race as well.

Tony Stewart came up empty on the white flag there allowing Clint Bowyer to steel his first race and the chase for the Sprint Cup.

TV ratings remain under scrutiny, as the Sprint Cup Series and Camping World Truck Series continue a downward trend. NASCAR has seen some unique challenges this season including weather and unusual increased competition from the Olympics and the World Cup. We don't have any definitive answers, however, NASCAR and the broadcasters are keeping a close watch on this, and hopefully their efforts will provide us with better incite when we begin the 2011 racing season.

From a positive perspective, the nationwide series has seen a 2% increase in ratings over 2009 on ESPN. NASCAR Sprint Cup racing remains dominant in the regular season sport from February to July, and continues to be the number two regular season sport on television, trailing only the NFL. Out of 32 events weekend conducted, NASCAR has been the number one or number two sport on television for 20 of those weekends.

Our operating results continue to be challenged by the ongoing effects from the weak economy, though. Admissions and various event related and other revenues have been negatively impacted by the clients on consumer spending, corporate spending and unemployment. This is consistent to what other major professional sports and entertainment facilities and venues have been experiencing over the past year.

Admissions revenue has declined from both fewer fans attending our races and events and from lower average ticket prices, as we have mentioned in previous calls we have taken appropriate actions in adjusting ticket prices, creating various promotional packages and infinity programs, which will continue over in to 2011.

We have something for everyone. It's family friendly packages, or for groups and fans, who want more for their money, such as special access passes or experiences. In terms of attendance our events are still drawing crowds larger than any professional sporting event, and keep in mind that the large portion of NASCAR's core fan base have been severely impacted by the recession, and we don't expect to see much improvement on our admissions volume until our fans will gain consumer confidence, discretionary spending and of course employment rates improve.

On the corporate spending, our sales team is deep into renewal discussions with all of our national partners and prospects many of our Sprint Cup and Nationwide Series event entitlements are sold for 2011 and years beyond. We do currently have three Sprint Cup Series entitlements yet to be sold or announced for next year. One of those is in effect of the realignment from the Atlanta Motor Speedway to Kentucky Speedway. This is nothing unusual or out of the ordinary and we are confident this will be sold going into 2011.

We have seen some revived interest on the corporate sales side, as ad spending begins to return to corporate budgets and corporate revenues come back. Sponsors are not just looking at buying marketing assets anymore, they are also looking for creative platforms to engage consumers such as direct interaction, demonstrate sponsor's products, and the NASCAR race and other events that we host at our facilities at the best price to do that.

We're still receiving positive feedback from our sponsors, our events remain in productive venue for brand to interact with consumers and drive them to sample or purchase like know other marketing venue. Our philosophy of putting premium speedways in premium markets was keeping sponsors and fans interested.

SMI remains a leader in providing unrivalled fan amenities and fan experiences, and yet another innovative industry leading first, we have recently announced a partnership with Panasonic to create the world's largest High-Definition Television Board, which will revolution our fan experience with Charlotte Motor Speedway and something that which will be hard to duplicate at other venues.

During these difficult challenging times, our business model has continued to solidify. We have repaid a significant portion of our debt this year, and continue paying dividends to our shareholders.

At this point, I would like to now turn the conversation over to Bill, who will provide additional details on our financial results.

Bill Brooks

Thank you very much, Marcus. Ladies and gentlemen for the quarter ended in September, our adjusted net income is down about 43%, somewhat more than the year-to-date numbers, which are down about 41%, and relatively consistent. The number of events in for the quarter was fairly similar, but we have experienced weakness in both corporate and individual admissions, and almost all of the categories of event related revenues are down for the quarter, and also down for the year, as compared to the prior periods.

So, its sound like the sky is falling. What have we done with these results? We'll combat this weak demand, we provided more content to our corporate partners and more access to our individual race fans to improve their value proposition. We currently reduced supply of seating by converting the seats to premium RV access.

We have reduced our prices. We have worked really hard with NASCAR to enhance our 2011 event schedule over 2010. We have realigned the race weekend from Atlanta in March to Kentucky in July, and worked on rescheduling Infineon Race one week later and the New Hampshire Race two weeks later to weekends, we had previously occupied in which we believe will help the sales in both of our venues.

We have also reduced and cut our expenses, but we don't want to cut them to a level which degrades the customer experience, and we look at the comparative results for the three months ended September of 2010 compared to the three months ended in 2009. The total revenues declined by $11 million or about 8.4%.

Admissions for the three months decreased by $6.2 million, or 13.5% from such revenue over the last year. That revenue is, decrease is due both to lower admissions and lower average ticket prices, but more than half of the reduction in revenue was from lower ticket prices.

Our event related revenues for the three months ended September 2010 decreased by $4.1 million or about 10% from the same period last year, and that was primarily due to declines in sponsorships, other corporate marketing and souvenir merchandising. The broadcast revenue for the three months ended in September increased by $1.2 million or about 2.9% over the same period last year, as we expected.

Other operating revenues for the three months decreased by $2.2 million, from the same period last year. It's primarily due to lower souvenir merchandising sales that are not at race events, and to a lesser extent outcome revenues that have declined.

Looking at the other direct operating expenses, which move somewhat in tandem with the other operating revenue, those expenses for the quarter declined about $1.2 million for the similar reasons as the operating revenues. Our direct expense of events for the three months ended in September decreased about $550,000 or 1.8% from last year, and it's primarily due to lower operating costs associated with our events, which include our cost reduction efforts, somewhat lower attendance and lower souvenir merchandise sales and it is offset somewhat by purses and fees and costs associated with our inaugural U.S. legends race that we held in Charlotte during the quarter.

General and administrative expenses for the quarter were decreased by $1.6 million or 7% primarily because of lower compensation costs in the current period, and a host of small, smaller insignificant reductions.

Depreciation increased $138,000 or 1%, compared to the same period of last year because of additions to our properties. Our interest expense for the three months was $12.7 million, compared to $13.7 million for the same period last year.

The change reflects a lower credit facility borrowing and to a lesser extent higher capitalized interest compared to the prior year, but both of those changes were offset a little bit by higher average interest rates on the credit facility. We did not have any equity losses this quarter, but we did in 2009.

The income tax provision for this quarter is about 43.2% and for the year-to -date, it's probably about 41%, and I think that's more indicative of what we'll see for a 12-month period of time. The discontinued operations have declined somewhat from those in the prior period, and hopefully we're seeing somewhat of a reduction in that by the end of this year.

So, despite our recent meager results, Speedway Motorsports remains profitable. Our cash flow is positive. We have reduced our debt by $20 million in the quarter. And since September of last year, we have reduced our long-term debt by $70 million or more than 10%.

Cash balances are about $116 million in September of this year, and only about $3.5 million less than last year, despite the September 2010 deferred revenue balance being $46.4 million, roughly $24 million less than it was in September of 2009, so we have definitely experienced some rough sledding and as Marcus alluded to because of the weakness in the general economy, and we have done as much as we can to try to alleviate those results.

We'd be happy to answer any question that you might have at this time, so Stephanie, if you would just allow our participants to ask 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

Good morning, guys. I just wanted to touch base on the corporate side of things. I think you had mentioned you had three entitlements left for '011. How does the pricing look for '011 versus '010? How would you characterize that?

Bill Brooks

Thanks, Michael, that's a good question. The pricing, much the same, as we're seeing when we go out and buy advertising, the pricing is no longer in desperation mode, where very few buyers and a lot of sellers. We're seeing good activity and fair prices out there. It's not the highest pricing market that we have seen, but that's to be expected, but it's far from desperate prices also.

Michael Walsh - Wells Fargo

You said you think it would be down from 2010 or?

Bill Brooks

2010, I would say it's probably in line would be fair, but, as things improve, that will improve as well. A lot of the 2010 agreements that we have had were either short-term deals that spanned us through the recession time, or they are finishing up, longer-term deals that are turning over, so I would say on balance they are about even.

Michael Walsh - Wells Fargo

Okay. In terms of the 2010 guidance for some of the other items like CapEx and depreciation, have those changed much? I think before in your last call, I think CapEx was $40 million to $50 million on your guidance. Has anything changed with Kentucky? Have any potential sponsors asked about what you are doing there in Kentucky? I mean, do you guys have any more incite there?

Bill Brooks

Guidance, we really haven't had any update or change. We still think capital expenditures in 2010 and 2011 will be between $40 million and $50 million. The capital expenditures in Kentucky will probably span the two periods.

Michael Walsh - Wells Fargo

Okay. And then lastly, your weighted average ticket price, how has that been affected year-over-year? How much is that down?

Marcus Smith

We don't really track them, Michael, because it's not relevant. And the reason it is not is that we have multiple different types of events, and putting all of those events together doesn't lend you anything that you can use for management purposes. So, we look at rather the dollar change in the whole admissions area, and of that dollar change, for the quarter, about 64% of it was from price, and the rest from lesser attendance, so attendance is kind of stabilizing. Pricing is down a good bit. We hope to have from, be more stable in both areas for 2011.

Michael Walsh - Wells Fargo

Got you, thanks a lot, guys. I appreciate it.

Operator

(Operator Instructions)

Your next question comes from the line of Eugene Fox with Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Thanks, guys. I guess my first question is, did you say, Bill, that you paid-off $20 million of debt in the quarter or for the year?

Bill Brooks

$20 million in the quarter, and for the 12 months ended in September, it's actually $70 million.

Eugene Fox - Cardinal Capital Management

Okay. Bill, can you give me what your CapEx was in the quarter?

Bill Brooks

Eugene, I don't recall what it is for the quarter. It's about $17 million year-to-date, so we have had less CapEx, and we have been able to apply it to debt reduction.

Eugene Fox - Cardinal Capital Management

Got it. But you are still, in answer to an earlier question, you said you still expect to spend $40 million to $50 million this year?

Bill Brooks

I think so, because we're going to have about half or so of the Kentucky project underway.

Eugene Fox - Cardinal Capital Management

Okay. Let me just leave back for now. I'll get back. Thanks.

Operator

Your next question comes from the line of Joe Hovorka with Raymond James.

Joe Hovorka - Raymond James

Thanks. You were actually breaking up when you answered the last question. I just wanted to clarify, did you say 64% decline in admissions revenue was related to lower price?

Bill Brooks

That's correct, Joe.

Joe Hovorka - Raymond James

Okay. And a balance would have been lower admission counts.

Bill Brooks

That's correct. Those are for the quarter.

Joe Hovorka - Raymond James

Do you happen to have the occupancy numbers for third quarter '010 versus third quarter '09? What percentage did you sell?

Bill Brooks

Actually, we didn't track that, so I don't know.

Joe Hovorka - Raymond James

Okay. And then, the deferred revenue on the balance sheet was down a bit more than what we have seen year-to-date. Is there something that's causing that, or is that just a general sense of business? I think the number of events are same in four Q versus four Q last year, right?

Bill Brooks

Yes, sir. The number of events are the same, but the ticket deadline dates are quite a bit later in 2010 versus 2009, so I think that attributed to some of the decline.

Joe Hovorka - Raymond James

Those ticket deadline dates have been later all year, right?

Bill Brooks

Some of them had not been established early in the year. For instance, we probably started selling tickets in 2010 for 2011 somewhat later than when we were selling 2009 tickets for 2010. And we also have set up installment payment plans, which is probably a little more pronounced this year than last year.

Joe Hovorka - Raymond James

So, you are saying deferred revenue on the balance sheet now going into '011 is probably less than what it was or it maybe be accounting for part of the difference compared to last year looking into '010?

Bill Brooks

Yes, that's part of the difference, yes.

Joe Hovorka - Raymond James

Okay. I'm just curious because the first two quarters were down 10% or 12% in deferred revenue, and then the third quarter we're down 34%. I just want to, is there a number you could put on maybe units or something like that that will give us some kind of comfort that things haven't gotten worse. Could you say tickets in units are down X versus Y last year, and the rest is this installment payment, or how should I get comfortable with the 34% decline deferred revenue, I guess, is what I'm asking.

Bill Brooks

It's my sense there hasn't been that significant erosion in deferred revenues, and really, we're looking at a timing issue. I think by 12/31 that that would have rectified itself. But in particular, the renewals for Bristol have been quite a bit later than what they were in 2009, and I think that attributed to a lot of the difference.

Joe Hovorka - Raymond James

Okay. And then, I know you said Kentucky was going to be spread or CapEx in Kentucky to be spread in '010 and '011. What is the total amount you plan to spend in Kentucky to get it ready for the Cup date?

Bill Brooks

We think the project will run about $40 million or so, and it would be split between the two years.

Joe Hovorka - Raymond James

Okay. And what would that take your seating capacity to? And what else is done at the track?

Bill Brooks

It would take the seating capacity to slightly more than 100,000, and the enhancements include changing a lot of the access way, changing the parking, and enhancing the camping, putting showers and rest rooms outside of the Speedway. In addition to the seat additions, we would be putting in additional bathrooms in additional areas to sell food and beverage, and to sell souvenirs. So that's primarily where the costs are.

Joe Hovorka - Raymond James

And how much activity has gone on so far at from the sales side? Have you sold an entitlement yet for Kentucky? I don't know, do you have much in the way of advanced ticket sales at this point? Or I want to get a sense of what the pricing looks like at Kentucky versus the Atlanta date that it is replacing.

Marcus Smith

Joe, the tickets just went on sale this week, so it's hard to get in a feel for that. I think the pricing is relatively, relatively similar. Although, we're going to hope with just the one weekend in both locations that we could sell more tickets that are combined ticket for all of the events being held at the weekend, or all of the events being held at the season. So, we hope that that's a success both at Atlanta and in Kentucky. As far as entitlement, we have had a lot of inquiries, but we don't have anything that's definitive yet.

Joe Hovorka - Raymond James

And do you have a sense of what the pricing that entitlement would be versus what have been in Atlanta?

Marcus Smith

I am hopeful, its going to be at least equal if not superior.

Joe Hovorka - Raymond James

And then, just one more last question on this before I will get back in the queue. But the Atlanta date that's its replacing what was it selling as a percentage of, I understand it didn't sell out. Where were you selling tickets at that date?

Marcus Smith

It was in winter, and it was kind of variable, but my guess is it was 60% to 80% depending on how good the weather was.

Joe Hovorka - Raymond James

Okay. Thanks.

Operator

(Operator Instructions)

Your next question is a follow-up from Eugene Fox with Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Bill, I just was trying to understand your guidance for this year. Can you talk about any sort of differences we should think about in the fourth quarter of 2010 versus the fourth quarter of 2009?

Bill Brooks

The largest differences, Gene, are because of the weakness in economy, and this year, we're going to have two events. Last year, we had two events, and I think that that's the largest reason. We haven't had to reduce our guidance in, probably as many as four or five years, and we thought at the beginning of the year, that we would start to see some recovery this year, and although things appear to have stabilized, we haven't seen much in the way of an up-tick, and that's why we have reduced the guidance. We may be able to come in at the high-end of the revised guidance, which as you know, is the lowest of the higher guidance.

Eugene Fox - Cardinal Capital Management

But I was just wondering, there's nothing special that we have the same number of races, and the trends that we were seeing don't seem to, I mean, the trends in admissions and event related revenues seem to have been relatively consistent in the second and third quarter. I understanding there were some issues impressed on in the first quarter there is just nothing special there, other than perhaps you being a bit more conservative?

Bill Brooks

I think that's fair. I don't want to imply that the fourth quarter is going along in any fashion different from the rest of the year. We experienced weakness so far in the fourth quarter, and we expect that that will persist in the fourth quarter, but not any more so than what we have already seen this year.

Eugene Fox - Cardinal Capital Management

Got it. In terms of write-downs or anything like that, Bill, for any of the tracks, that's nothing like that is embedded in your guidance?

Bill Brooks

That's correct.

Eugene Fox - Cardinal Capital Management

Okay. Thank you.

Operator

(Operator Instructions)

Your next question comes from the line of Peter Lee with Plough Penny Partners.

Peter Lee - Plough Penny Partners

Hi guys, just a quick housekeeping question. I was wondering what your operating cash flow was for the quarter?

Bill Brooks

Peter, I'm not sure, I have a really good answer for you on a quarter basis. We have showed some increase from June to now. The cash balance has increased, and we have paid down debt, so it's probably $30 million or something like that.

Peter Lee - Plough Penny Partners

Okay. Great. Thanks.

Operator

(Operator Instructions)

At this time, there are no additional questions.

Marcus Smith

Okay. Thank you, ladies and gentlemen, for joining us today. We look forward to talking to you again next quarter. Have a good day.

Operator

Thank you. This concludes today's teleconference. 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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