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Speedway Motorsports, Inc. (NYSE:TRK)

Q2 2014 Earnings Conference Call

July 30, 2014 10:00 AM ET

Executives

Marcus Smith - COO

Bill Brooks - CFO

Analysts

James Taylor - Bank of America Merrill Lynch

Steve Crystal - The Clark Estate

Barry Lucas - Gabelli & Company

Operator

Good day ladies and gentlemen and welcome to Speedway Motorsports’ Second Quarter Earnings Release and Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

This conference contains forward-looking statements, particularly statements with regard to the Company's future operations and financial results. There are many factors that affect the future events and trends of the Company's business including, but not limited to, economic factors, weather, the success of NASCAR and other sanctioning bodies, capital projects, expansions, financing needs and loads of other factors, both within and 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 certain risks and uncertainties that could cause actual results or events to differ materially from management's view and expectation. Inclusion of any information or statements 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 including in this conference call, is based on information currently available and may not be reliable after this date.

I would now like to introduce your host for today’s conference, Marcus Smith. You may begin.

Marcus Smith

Thank you, Nicole and good morning ladies and gentlemen and thank you for joining us today as we discuss the Company’s financial and operating results for the second quarter ended June 30, 2014. For the second quarter, we reported total revenues of $175.9 million and adjusted non-GAAP net income of $27.3 million or $0.66 per diluted share and GAAP net income of $27.2 million or $0.66 per diluted share.

For the first six months of 2014, total revenues were $260.4 million and adjusted non-GAAP net income was $28.4 million or $0.69 per diluted share and GAAP net income was $29.1 million or $0.70 per diluted share. During the quarter, we hosted eight major NASCAR-sanctioned events. We began the quarter at Texas Motor Speedway with a Duck Commander 500 and the O'Reilly Auto Parts 300 events. Poor weather impacted the Sprint Cup race therefore postponing to Monday.

And then in May, we had back-to-back racing weekends at Charlotte Motor Speedway or the NASCAR Sprint Cup All Star Race and the 55th running of the Coca-Cola 600. And then in June, we went to Sonoma Raceway for the Toyota/Save Mart 350 Sprint Cup Series event weekend and then finished the quarter out at Kentucky Speedway with a Quaker State 400 presented by Advance Auto Parts.

In addition, we hosted several other racing events this quarter including two NHRA national events at Bristol, Charlotte, three NASCAR Camping World Truck Series events at Charlotte, Kentucky and Texas and one Indycar Series event at Texas Motor Speedway.

Despite significant challenges with this economic uncertainty and weather related conditions, we are pleased with how the year is progressing. The financial results are within our expectations, however they are not where we would like them to be. Looking at corporate spending, our results reflect strong increases in facility rental revenue and higher suite, hospitality revenues. We currently have one NASCAR Sprint Cup Series entitlement available and one nationwide series event entitlement that we announced, were sold for 2014.

This puts us about where we were last year and we are confident these open entitlement positions will be secured. Aside from the macroeconomic conditions and weather risk, attendance remains a challenge and has been declining for most live sporting events over the past few years. We have increased efforts and investments to make sure our fans are getting a far better fan experience than what exists in the home. Some of our recent efforts include installing two of the largest HDTV video boards in the world at Charlotte Motor Speedway and Texas Motor Speedway which have both been cheered by our fans.

Also we are offering fans exclusive event experiences they cannot get at home and have not been previously available for purchase. In addition, since fans want to stay connected and engaged in the social media during live event experiences, we are in the early stages of installing a distributed antenna system at each of our speedways. This will provide our fans improved wireless performance and connectivity to various social media and other mobile digital interactivity.

Television ratings for the first half of the season were impacted by poor weather. Through 19 events, NASCAR Sprint Cup Series is averaging 5.9 million viewers per event. The TNT season concluded with an average of 4.2 million viewers per event. And all TNT telecast ranks among the top five sporting events of their respective cable weekend.

We are anticipating that the new Chase format will drive increasing excitement and viewership. And lastly, we continue to weigh on the information from NASCAR and our broadcast partners regarding revenue breakout per year for the new contracts beginning in 2015 but we anticipate that will come sooner than later.

Now for further detail, I will turn it over to Bill Brooks.

Bill Brooks

Thank you, Marcus. We’ve experienced many and fairly infrequent occurrences both in the quarters ended in June ’14 and June 30, ‘13 that renders direct comparisons of the actual net income unhelpful. Reportedly I am going to direct your attention initially to the non-GAAP reconciliations which we think are more useful. So, besides from lack of comparability from race date migration and rainouts, our June 30, ‘14 second quarter results are better than last year on both the non-GAAP and actual basis. And notwithstanding weaker revenues and other non-recurring items we will discuss directly, the financial impacts, restructurings that we undertook over the past two or three years have helped us reduce expense which to a great extent offset other weaknesses.

Much of those weaknesses we attribute to a poor economy and bad weather. This year, SMI and a whole Sprint Cup Series has been adversely affected by weather. Temperature extremes and rain have increased our expenses and decreased our revenues. Just during the second quarter alone our Sprint Cup race in Texas was rained out. We had an all day rain and up until the start of the race at the Kentucky Speedway which curtailed business.

Specifically during the second quarter, we recorded accelerated depreciation and some damage to retired assets of about 1.1 million, again from an involuntary conversion of about 620,000 and 397,000 decrease of accrued interest and penalties on income taxes. So, the net income was 27.2 million versus a non-GAAP income of 27.3 million, about the same. Remember that during the second quarter last year, we recorded $86.7 million goodwill impairment and $11.6 million loss on debt redemption refinancing and a $4.1 million gain and some state income tax restructuring benefits.

Those adjustments reconciled a substantial 2013 second quarter net loss of 67.3 million to non-GAAP income of about 26.5 million, so this year 27 million, last year about 26 million. Consider also that the Las Vegas NHRA event was conducted in the first quarter of 2014, in the second quarter of 2013. While this change doesn’t significantly affect the net income, it does reduce comparability between the admissions revenue, event related revenue and direct expense of events.

For the three months ended in June 2014 compared to the three months ended June 2013, the total revenues for those three months decreased by about $886,000 or 0.5%. Admissions for the three months ended in June 30, 2014 decreased by about 3.1 million or 9.1% from such revenue for the same period last year. Approximately one-half of this increase is due to lower overall admissions at NASCAR-sanctioned race events on a comparable year-over-year basis. But the decrease also reflects Las Vegas hosting major NHRA racing event in the second quarter of 2013 that was held in the first quarter of ‘14.

The event related revenue for the three months ended in June 2014 decreased by about $530,000 or 1% from last year. And the decrease is once again primarily due to the Las Vegas Motor Speedway NHRA date migration and the decreases in certain marketing agreement, radio broadcast revenues that were associated with our NASCAR racing events. This overall decrease is partially offset by some higher track rainouts at some of our speedways.

As expected, the broadcasting revenue for the three months ended in June 2014, increased by about 3.3 million or 4.1% over the prior year according to the contract. The other operating revenue for the three months ended in June, decreased by 583,000 or about 7%. The decrease is primarily due to December 2013 expiration of the two year agreement associated with Texas Motor Speedway, long-term natural gas mineral rights expiration and extraction. The overall decrease was partially offset by current period royalty revenues of about 400,000 under our recently extended lease agreement associated with those Texas Speedway activities.

The direct expense for events decreased by $241,000, again the decrease primarily to the date migration of the Las Vegas Motor Speedway NHRA event that overall decrease was partially offset by higher operating cost associated with some of our NASCAR-sanctioned events particularly because of the inclement weather.

The NASCAR event management fees formerly referred to as the purse and sanction fees for the quarter ended in June, increased by a $1 million over the same expense for the prior year and that reflects an improved higher annual contracted race event management fees which we expected. Other direct expenses for the three months ended in June, decreased by about 136,000 due to a combination of individually insignificant items.

For the quarter, general and administrative expenses increased by 1.7 million or about 7%. This reflects some wage cost inflation, higher repairs, higher maintenance and utility cost and a combination of individually insignificant items. Our depreciation and amortization expense increased by $1.5 million for the quarter compared to the prior year and that reflects the accelerated depreciation on damaged property and retired assets in the current period.

Overall increase was partially offset by lower depreciation on certain assets that are fully depreciated. Our interest expense for the three months ended June 30, 2014 was 5.3 million compared to 9.2 million for the same period last year.

And as I mentioned again this change reflects the early second quarter 2013 redemption of our higher interest rate, 2016, 8.75% senior notes and its replacement with lower interest rate credit facility borrowings and some lower outstanding debt in the current period. Remember also last year that we had a significant impairment of goodwill and a loss on our early debt redemption and refinancing which we have spoken about previously.

Our other income net for the three months ended in June 30, 2014 was 1.1 million compared to other expense net of about 160,000 for last year and that’s primarily due to a net gain from involuntary conversion of certain Texas property and to a lesser extent by unused loan commitment fees and some insignificant items.

Our effective income tax rate for June 30, 2014 quarter was 36.1% including the derecognition of the crude interest and penalties, the effective income tax rate for the three months ended in June 30, 2013 was 37.1% but that excluded the negative impact of recording no tax benefit related to a significant portion of goodwill impairment charges and certain one-time benefits of the income tax restructuring. So, all those adjustments resulted in our net income of 27.2 million compared to a net loss for the quarter last year of 67.8 million.

We look at some of the highlights on the selected balance sheet data. Our cash balances of 95.4 million is down about 2 million from year-end and about 24.9 million from June 30, 2013. Deferred race revenue of 64.5 million is down about 5.6 million from June 30, 2013 and is up about 6.6 from year-end.

Long term debt has decreased from 508.8 million at June 30, 2013 to 425.9 million at June 30, 2014 for a reduction of about $82.9 million in those 12 months. So, through June 30, 2014, our capital expenditures approximated 14.2 million and we estimate that the capital expenditures will approximate 20 million to 30 million for the entire year.

So, Nicole at this point, please open the lines to any questions that participants may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from James Taylor of Bank of America. Your line is now open.

James Taylor - Bank of America

I guess the first question, you sort of alluded to this in the opening comments but I was wondering if you give any additional color on the new contract. I remember when the current contract came into effect, there was a step down in the first year and then a ramp up from there. Would you expect without knowing the magnitude yet, would you expect to be a similar pattern this year or is it possible that it’s sort of a flatter transition between ‘14 and ‘15?

Bill Brooks

James, we really don’t know. We hope that it’s a flatter transition than we experienced back in 2006 and ’07. In the call that International Speedway had, they speculated that the year-over-year changes would be flat and with low single-digit increases, if I remember their comments correctly. And we’re anxiously anticipating the official release of that information but we don’t have anything further just yet.

James Taylor - Bank of America

And just to clarify, is that something that is being negotiated or it’s already been negotiated, just hasn’t been announced? And I guess who knows, is it just stocks that knows what it is?

Bill Brooks

No, it’s being negotiated actively between NASCAR and the two broadcasters. I think that the total payments are outlined but I am not sure that the individual payments for year have been finalized or the actual network upon which the event would be broadcast have been finalized and there is some interaction between the two.

James Taylor - Bank of America

Obviously we will find out sooner rather than later, ‘15 is coming upon us. Just bond, debt guy question, the bonds becomes callable in early 2015. Any sort of initial thoughts on whether you would expect to refinance those at the call? Whether it would make any sense to take them out early? And if you would stay in the bond market or potentially look at just going to all bank?

Bill Brooks

James that’s a subject of our discussions right now in fact and thankfully if the market stay as they are right now, we have some choices. I think our preference is to be involved in the high yield market in some fashion whether that means that we would leave the current facility alone or call some or replace it, it is under some discussion as we speak. But I think our preference is to have some of that high yield fixed rate debt outstanding.

James Taylor - Bank of America

And just the last one. Can you give us any update or color on any potential acquisitions? I know there is a very limited universal stuff that could even theoretically be for sale. Have there been any changes in the few sort of standalone tracks, ownership or their circumstances?

Bill Brooks

Not good I am aware of. I don’t think anything is changed, I don’t think any are actually for sale.

James Taylor - Bank of America

Okay, just one follow-up on the contract I guess. Do you have an idea what the sort of flow through would be, I mean we have what the life of the contract will be and obviously the revenues are significant increase. Are there increasing costs associated with that or is the cost side relatively stable?

Bill Brooks

The cost side gets apart from the split between NASCAR, the promoter and the teams and drivers. The other cost part is negotiated annually and we’re hopeful that that stays as it has in the last couple of years where the growth has been somewhat flat to low percentages growth to reflect lower inflation and keep cost low for everybody.

Operator

Thank you. Our next question comes from the line of Steve Crystal with The Clark Estate. Your line is now open.

Steve Crystal - The Clark Estate

I have a couple of questions for you. The first question is what was the change in attendance and pricing per comparable event year-over-year?

Bill Brooks

Probably the vast majority of the change that we experienced in admissions revenue that doesn’t relate to date migration, was through actual declines in attendance, very little, is really related to a pricing issue. And the pricing is more complex than you might think because it could simply be a mix issue now since we have a variety of prices within the grandstands. They are not both and people couldn’t select to be in different locations one period over another. We do think that a lot of the admissions pressure we experienced or tied to inclement weather and the economy however.

Steve Crystal - The Clark Estate

And so at the events where there wasn’t a weather issue, did you see admissions was fairly flattish?

Bill Brooks

What we saw Steve some speedways are seem to be relatively flat and others are still seeing declines in admissions and it’s really more geographic. We hope that all of them will get to that point and see some recovery in the near future but they haven’t all exhibited that yet.

Steve Crystal - The Clark Estate

Okay. And my other question is that I actually have a comment and hopefully maybe you could just respond to my comment. It seems to me that the public market really continues to under appreciate your unique assets here at the tracks and also the long-term broadcast contracts. And the good side to that is that it puts you, the management team in the company, in a really good spot to drive per share value over time and also a total shareholder returns. And at this point where debt markets being extremely friendly, I don’t know if they can get friendlier but yet we continue to reduce debt.

So I am wondering if there is a discussion about using excess cash flow to reduce shares while the public market continues to ignore the really attractive assets that you have or even to pay higher dividends over time. Could you talk about why those things to be the priority on reducing the debt and maybe just comment on my question about returning cash to shareholders?

Bill Brooks

You hit on the fundamental question that faces us through is the capital allocation and you are right, the debt markets are about as good as they would probably be. We have debated this and we’ve kept our share repurchase just at a level to prevent dilution and we have paid a relatively robust dividend for the earnings per share we have. And we are actively contemplating should we adjust that and if so, when would we do it. And we’d ideally like to see the longer term debt down a little bit from what it is now perhaps if we continue the same rate of pay after another year or so and then make decision on higher dividends, higher share repurchase or both.

Steve Crystal - The Clark Estate

Okay. Well, I appreciate your response to that. I hope that something like the share repurchase I know you do have the authorization but that is really attractive to and accretive to all shareholders when you do it when the market is ignoring what you have. I would hate to see a share repurchase when your stock is in the mid-20s or something like that when everybody appreciates it. So, it seems now it’s a great time to do something really accretive and if the market responds quickly you could always pause the repurchase plan and pay it as a dividend. There is a lot of things I think you guys could do. Thank you.

Operator

Thank you. Our next question comes from line of Barry Lucas of Gabelli & Company. Your line is now open.

Barry Lucas - Gabelli & Company

A couple of items, one, going back to the contract, has there been any sort or any information suggesting change in splits for the various series?

Bill Brooks

Barry, I read that, that there was some discussion about changing the split particularly as it relates to the nationwide series but we haven’t had any substantive discussions with NASCAR on that subject yet. I think the goal for them is to get the annual increases resolved and then if there is any change among the series to do that. I don’t think it has, but it’s difficult to answer team, whether it has a big impact but when you start talking about percentages and percentages and percentages I would think it would not be a big impact.

Barry Lucas - Gabelli & Company

Thanks, Bill. A couple of items here on, good guess, short and long term. So short-term, going back to the questions about physical attendance and what you are doing about it and the weather impact, is here a way to sort out the kind of actions that either NASCAR or you are taking to enhance the fan experience. I guess the real question is, are you seeing anything either at the sanctioning body level or at the individual race tracks that saying to you that you found some of the key to either bring in new fans, younger fans, different ethnic fans, I mean what can you point to that would give us a little more confidence?

Bill Brooks

That’s obviously something that we are looking at very carefully and we found that additional amenities and additional access to the drivers is a big factor for the participants and fans that are really coming to the events now because unbalanced compared to prior fans, I think that those still attending are relatively more affluent. So, they are willing to pay more to do more things, to be in the garage area to talk to series of drivers and those kind of things, are pretty successful.

We have seen an uptick and some interest in our other ethnic groups which is exciting and I think as NASCAR continues their diversity program, we are going to see some more of that and that’s a tremendous opportunity for the whole sport. And I think we have seen some traction from the change in qualification for the Chase and people are really focusing on the win which is a tendency to create more drama on the track. So at some of our speedways where the demand is closer to the supply of the seats, I think we’re seeing more stable results particularly if we can offer some of these other enhancements. Marcus what other thoughts do you add on this?

Marcus Smith

I think it’s a great question Barry and it’s certainly one that we’re working on all the time, how do we increase the interest and ultimately the attendance from fans of all sorts. And so we try things all the time that’s one of the things that we really sit out, when the recession hit we have decided that we’re going to invest in the fan experience and take care of all the fans that come to the event. And we have done so many things that we never even thought of doing before by way of fan experience opportunities, some paid, some additional value at no charge. And I think it’s shown to be effective. We see more families, new people coming in and across the board we are seeing positive signs there.

Barry Lucas - Gabelli & Company

And is there a way to gauge some of the pricing actions that you have taken on seats in premium access or however you want to describe it. Is it fair to say or can you say with some confidence that the yield is actually up or improving if it’s not up in real dollars?

Marcus Smith

One thing to think about is the facilities are so big that you really have to look at it, I call it our neighborhoods. So if you look in different neighborhood of a speedway, you’ve got high-end camping that didn’t exist 10 or 15 years ago. And so the yield of that is much better than it used to be in the background that we have on site. And then we have other areas where we provided a lower cost camping opportunity. And we’ve done the same things in seats, so I think when you look at the property overall, it’s kind of like your cable lineup, you got more channels now than we ever had and at speedways you’ve got more choices than ever to customize your event experience. And I think that’s something we’re seeing in a lot of different areas of the country.

Barry Lucas - Gabelli & Company

Last couple on kind of the corporate side. You said there are two entitlements unsold yet but one unannounced, the nationwide is unannounced or it is still open in negotiations on those?

Marcus Smith

Feel good about our prospects of closing those, it’s not out of the ordinary to have one or two available and we feel good about the current discussions that are underway to fill those slots.

Barry Lucas - Gabelli & Company

And longer-term I think International Speedway you also commented on their call that they have seen renewal rates on sponsorships kind of improving both in terms of rate and the lengthening term and just wondering if you could confirm that or if you can’t what you are seeing on the hospitality and sponsorship side?

Marcus Smith

Things improved in that area. I think it’s the biggest opportunity for improvement when you look at the business and certainly companies in general are healthier financially right now than general consumer is. So, we feel good about the prospects for that.

Bill Brooks

Just the only caveat to that there is a sponsorship or entitlement comes in real close to the date of the event. It’s sometimes hard to get to full value out of it but if it’s sold in time when there is an adequate promotional period, I concurred with all of Marcus’s comments.

Operator

Thank you. (Operator Instructions). I am showing no questions at this time. I would like to hand the call back over to Mr. Marcus Smith for any closing remarks.

Marcus Smith

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

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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Source: Speedway Motorsports (TRK) Q2 2014 Results - Earnings Call Transcript

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