Speedway Motorsports, Inc. (NYSE:TRK)
Q2 2016 Results Earnings Conference Call
July 27, 2016 10:00 AM ET
Marcus Smith - President and CEO
Bill Brooks - Vice Chairman and CFO
Matthew Brooks - Macquarie
Karen Tan - Wells Fargo Securities
Good morning, and welcome to the Speedway Motorsports Second Quarter 2016 Earnings Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. As a reminder, this call is being recorded on Wednesday, July 27, 2016.
With us on this morning’s call is Marcus Smith, Chief Executive Officer and President; and Bill Brooks, Vice Chairman and Chief Financial Officer. After formal remarks, a question-and-answer period will be conducted.
Before we start, the Company would like to address forward-looking statements that may be addressed on the call. 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, weather, the success of NASCAR and other sanctioning bodies, capital projects and expansion, 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 Reports 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 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.
So, with these formalities out of the way, I will turn the call over to Marcus Smith. Marcus?
Thank you. And good morning, ladies and gentlemen, and thank you for joining us on today’s call.
For the second quarter, we reported total revenues of $175.7 million and net income of $24.7 million or $0.60 per diluted share. Six-month 2016 total revenues were $258.9 million and net income was $25.6 million or $0.62 per diluted share. SMI reaffirmed its full year 2016 non-GAAP earnings guidance of $0.90 to $1.10 per diluted share, as Bill discuss later.
And our second quarter results were within expectations, we believe that many of our core fans continue to be impacted by certain economic conditions including lingering uncertainty along with high food and health care costs.
In the quarter, we hosted eight major NASCAR events, unfortunately several of our events during the quarter were negatively impacted by poor weather and forecast. At Texas Motor Speedway, we hosted the O’Reilly Auto Parts 300 Xfinity Series event; and the two-hour rain delayed Duck Commander 500 Sprint Cup Series event; and then, at Bristol Motor Speedway, we hosted Fitzgerald Glider Kits 300 Xfinity Series race and the Food City 500 Sprint Cup Series event.
Poor weather was forecasted leading into our back-to-back racing weekends at Charlotte Motor Speedway. Consistent rain cancelled all the Friday’ on track activity including the Sprint Showdown and the Camping World Truck Series race just postponed to the next day prior to the start of the NASCAR Sprint All-Star Race. Following weekend, we hosted the Hisense 4K TV 300 Xfinity Series race and Coca-Cola 600 Sprint Cup Series race at Charlotte Motor Speedway. We finished the quarter out at Sonoma Raceway for the Toyota/Save Mart 350 weekend.
In addition, we hosted several other racing events this quarter including three NHRA National events at Bristol, one at Charlotte which was previously held in the first quarter at 2015. and Friday’s event this year was canceled due to rain but Saturday and Sunday were conducted in front of sold out crowds.
In Las Vegas, we hosted NHRA event as well and two NASCAR Camping World Truck Series events, one at Charlotte and one at Texas. Any car series event held at Texas on June 11th would stop at 71 laps due to heavy rain and will be completed in the third quarter on August 27th.
Now, let me get to the business overall. Corporate interest remains strong. Our corporate sponsors and partners continue to realize the value for their investment. As for event entitlements, we have sold all of our NASCAR Xfinity Series entitlements for 2016 and currently have one NASCAR Sprint Cup Series entitlement open. We continue our ongoing initiatives to manage facility capacity and to capture the next generation of race games. Our initiatives include promotions and attract amenities and access the target families, younger generation, our first time fans and our long time fans all at the same time.
NASCAR’s improvements to the sport over the past few years have been significant and are showing positive benefits on track. There has been a return in racing excitement; for the first 20 points races this year, there have been 11 different winners. On the television front, series has averaged 5.3 million viewers per event through the first 19 races and has been the number one or number two sporting event of the weekend out of 12 events.
And for further financial detail, I’ll now turn it over to our Vice Chairman and CFO, Bill Brooks, who will give you further review. Bill?
Thank you, Marcus. Ladies and gentlemen, we urge you to review our non-GAAP reconciliation, which removes the effects of our 2015 adjustments for impairment of other intangible assets and goodwill, loss on early debt redemption and refinancing and interim interest expense. We believe this will help improve the comparability.
Obviously, our results for the quarter and the six months ended in June were somewhat lower than we’d like through a combination of inclement weather, through comparables, race date migration and some economic challenges for our customers, which I am going to attempt to highlight.
As you all know, SMI promotes outdoor entertainment events, the results of which can be adversely affected by bad weather. And at the risk of sounding like the weatherman, I note that the only major events we conducted through June 30 without bad weather were the Sprint Cup events in Atlanta, Bristol and Sonoma. And the weather was bad on the prior year Sprint Cup events in both Atlanta and Bristol, which adversely affect subsequent results.
The 2015 Sprint Cup event at Sonoma featured local driver Jeff Gordon’s final appearance at the Sonoma race track, positive results of which were not replicated in 2016. You remember that during the first quarter we remarked that surprisingly our results were adversely impacted by global events including lower natural gas prices at Texas Motor Speedway, which were reduced by half over the comparable year period, and this persisted through second quarter ended in June 30, 2016.
2015, we negotiated a reduction in our property taxes which did not yet re-occur in 2016. 2015, we sold some real estate. And in 2016, we had a fire. 2015, the sprint NHRA event from Charlotte Motor Speedway was in the first quarter; 2016, it was rain shortened and in the second quarter. But the IndyCar race was rained out postponed. In short, we experienced excessive bad weather and tough comparables. We believe that even without these headwinds, we experienced less demand for seats, suites and some corporate entertainment, which probably reduced our second quarter earnings 3% or 4%, somewhat similar to the second quarter, year-over-year declines experienced thus far by the much larger companies in the S&P 500, and in our view reflective of tougher economic conditions for many of our customers.
For the three months ended in June 30, 2016, compared to the three months ended June 30, 2015, total revenues decreased by $3.6 million or 2%. Admissions for the three months ended in June decreased by $2.3 million or 7.1%. This decrease reflects the negative impact of the poor weather resulting in the postponement of TMS’s IndyCar race, decrease also reflects lower attendance at NASCAR racing events on a comparable year-over-year basis partially offset by CMS holding the NHRA event in the second quarter that previously was in the first quarter of 2015.
Event related revenues for the three months ended in June decreased by $3.6 million or 6.9%. Again that reflects postponement of Texas Motor Speedway’s IndyCar race and the associated negative impacts, poor weather, lower overall attendance at NASCAR and other racing events. It also reflects some lower track rentals at some of our speedways in the second quarter. The overall decrease was partially offset again by CMS holding an NHRA event in the second quarter; it was previously held in the first quarter. The NASCAR broadcasting revenues for the quarter increased $2.7 million or 3.1%, reflecting higher contract to broadcast rights fees for NASCAR sanctioned racing events.
Our other operating revenues for the three months decreased by $411,000 or 5.2% due primarily to lower royalty revenues associated with Texas Motor Speedway’s natural gas rates. [Ph] The direct expense for the three months ended in June 30, 2016 increased by 132,000, from CMS holding the major NHRA event that was held in the first quarter of ‘15 in the prior year, and to a lesser extent, additional operating cost associated with conducting delayed or postponed racing events due to poor weather. The increase also reflects some higher advertising and pre-race and post-race entertainment costs. These overall increases were partially offset by deferral of some of our direct expenses associated with the Texas Motor Speedway postponement of the IndyCar race.
Our NASCAR event management fee three months ended in June, increased by $1.5 million or 2.9% as expected. And as you might think, our other direct operating expenses for three months decreased by $299,000 from a combination of individual [ph] and significant items.
General and administrative expense for the three months ended in June increased by $1.9 million or 7.3% due primarily to lower property tax associated with some negotiated settlements in the second quarter of 2015 and to some higher compensation costs.
Depreciation and amortization expense for the three months actually increased by $195,000. That reflects depreciation on capital expenditures placed into service this year, which was largely offset by lower depreciation on certain assets that are now fully depreciated.
Our net interest expense for the quarter was $3.3 million compared to $3.6 million for the same period last year and that reduction is due to lower outstanding debt in the current period compared to last year for the most part.
Recall also last year that we had impairment of other intangible assets and other impacts associated with our refinancing. Our income tax provision for the quarter ended in June 2016 was 37.1% and for the prior year 33.5%. The 2015 effective rate also reflects some adjustments associated with the 2015 intangible assets and goodwill impairment charges, and some other deferred taxes. So, our net income in June 2016 is $24.7 million and that’s actually compared to a loss of $35.2 million for the same period last year.
If we look at the six months period ended in June 30, 2016 compared to the prior year, again the total revenues decreased and they decreased by $5.7 million or 2.2%. Admissions for the six months decreased by 5.6 million or 11%, because lower attendance at several of our racing events and postponement of the Texas IndyCar to a subsequent period. Obviously, several of these events were also negatively impacted by poor weather. Our event related revenue for the six months ended in June decreased by 4.2% due to some lower marketing revenues and souvenir sales including the negative impact of poor weather, some lower attendance at NASCAR events and other racing events, and it also reflects the postponement of the IndyCar event.
NASCAR broadcast revenues for the six months ended in June increased by $3.8 million or 3.1% that was expected. Our other operating revenue for the six months actually increased $216,000 over the same period last year, primarily due to higher Legend Cars and non-event souvenir sales. The overall increase was partially offset by lower our royalty revenues from Texas Motor Speedway’s natural gas mineral rights. Direct expense for the six months ended in June decreased by 1.7%, primarily due to the deferral of certain direct expenses associated with Texas postponed IndyCar event; the decrease was largely partially offset by additional operating cost from conducting delayed or postponed racing events due to poor weather.
The NASCAR management fee for the six months ended in June actually increased by $2.2 million as expected. And our other direct operating expenses for the period increased by $452,000, primarily from the increased operating cost associated with higher Legend Cars and non-event souvenir sales in the current period.
General and administrative costs increased by $2.8 million over the same period last year due to higher compensation cost, food and wage, cost inflation, and to lower property taxes associated with some settlements reflected in the second quarter of 2015.
Depreciation for the six months increased by a modest amount of $231,000 that reflects depreciation in our capital projects placed in service this year, which were largely offset by lower depreciation on certain assets that are now fully depreciated.
Our net interest expense for the six months ended in June was $6.6 million compared to $9.9 million from the same period last year. This change reflects the 2015 redemption of higher interest rate 2019 senior notes and replacement of lower interest rate 2023 senior notes in credit facility borrowings and lower total outstanding debt compared to last year. Also last year included some in term interest expense of $1.7 million, included in the first quarter of 2015. We have previously talked about the impairment of intangible assets, loss on debt redemption and refinancing.
Other expense for the six-month was $65,000 [ph] this year, compared to other income of $333,000, [ph] this reflects gain on disposal of property last year and an estimated prior loss associated with an SMI properties facility in the current year.
For the six months, we had income tax provision of 37.1% and last year, it was 33.6%, resulting in a net income of $25.6 million compared to a net loss last year of 39.6%.
Looking at select balance sheet data, our $84.1 million cash balance is up 2.1 from the year-end and it is down about $14 million from June 30, of 2015. Deferred race revenue increased from $66.4 at June 30, 2015 to $73.8 at June 30, 2016.
Our long-term debt was decreased from $348.9 million last year at June 30 to $289.2 million or 59.7%. Through the six months ended June 30, 2016, our capital expenditures approximated $28.2 million, much of this capital expenditures this year were front-loaded into first half of the year. We estimate that capital projects won’t be above $30 million to $40 million for the entire your year.
So, really, if we look at the favorable things or some of the favorable things that happened during the year so far, we continued our $0.15 per share quarterly dividend, we continued our share repurchase to avoid further dilution, we conducted significant capital projects that were finished on time and budget, long-term debt was reduced $32 million this year and almost $60 million since last year. We reaffirmed our 2016 earnings guidance of $0.90 to a $1.10 per share.
At this time, Erica, please allow our participants to ask any questions they may have. Erica?
[Operator Instructions] The first question comes from the line of Matthew Brooks from Macquarie. Your line is open.
There is a lot of one-offs and details in there, which was great in terms of understanding all the money flows. But the 7% fall at attendance is pretty similar to ISC recorded for the second quarter. I am just trying to get a sense, if you take away those one-offs, do you get a sense that you were sort of up, down, flat in terms of attendance for the quarter?
Matt, it’s hard to asses with so much bad weather and the one-off items, but our best assessment is that we are down but not hugely probably, as we said 3% to 4%.
Okay. And you mentioned with the changes have been made by NASCAR, you had this return of racing excitement. Do you have any thoughts on maybe when that will lead to attendants coming back to the track or whether it’s just causing people to watch more on TV?
Great question. I think it’s a combination of the improved racing that fans are being to see and enjoy and also more certainty in the economy that the -- particularly middle class segment needs to feel more certain and confident in their economic position to travel more. And you are seeing that across pretty much all forms of entertainment that sell tickets today.
Right. You mentioned, I think Jeff Gordon boosted some [ph] last year, and obviously he is now retired although back for couple of races I think. But what do you think the retirement of Tony Stewart might have next year?
I think it will have possibly some effect. Tony is certainly one of the most favored drivers in the sport. I wouldn’t be surprised to see Tony back at the track, so to speak in various forms. He’s still a team owner. We will find some ways to engage Tony with fans. And he has got a strong stable of drivers, his driver that he’s got positioned to come in or replace him, Clint Bowyer is a fan favored. And I think next year, he’s poised to really see significant improvement and a lot more limelight, given the prominence of the role he’ll play as the one to fill Tony’s shoes and he’s very capable of doing that. So, plus NASCAR has an amazing group of young and upcoming drivers that are really going to be great for the sport, a lot of great entertainment, a lot of drivers with a lot of charisma and fantastic talent.
It is something to look forward to. The last one, I guess is obviously the sport has had challenges and still has challenges. And you’re focused on debt repayment now, but you’re certainly getting to the end that as that has come down quite a lot. But can you give some thought about whether you should reinvest some of that free cash flow into something other than the tracks where you might get a higher return, maybe you can monetize some of your property assets better?
Certainly, it’s an opportunity and we’ve got fantastic markets and a lot of land. It’s something that we’ve been investigating, but really don’t have a lot of detail at this point.
[Operator Instructions] Your next question comes from the line of Tim Conder from Wells Fargo Securities. Your line is open.
This is Karen calling in for Tim. Just a couple of quick ones, I wanted to see if you can maybe perhaps quantify the Texas shift [ph] due to delay going into the third quarter. Can you maybe highlight on what the revenue or EPS impact might be. And then, I have two follow-ups?
Karen, if you look at the general and administrative changes, the change in the other income and in the other operating income you can see that the one-offs are generally going to run about $0.03 per share, something in that range. And it results in the difference between the two years of about $0.08 if we take three of out there, there’s remaining $0.05 to explain what happened. And it’s the inclement weather and what happened with the sport and the economy. And it’s our thought that probably about 40% of that $0.05 remaining relates to the economy and the rest is weather. It’s somewhat subjective but that would be consistent with what lot of companies are experiencing right now. As far as specific on any particular event, the IndyCars events have typically a little bit more revenue and expense than the NHRA but having one come in and one go out creates a good bit of netting.
And then, it sounds like you guys are a bit sensitive to weather fluctuations and changes at your events. I was wondering if you can maybe just highlight maybe year-to-date what the mix between your presale versus [technical difficulty] sale tickets are and how that kind of compares to maybe a higher year and higher periods?
We actually try to sale tickets way in advance of the event, and that’s frequently better for our customers and for us. But, we have noticed particularly since the great downturn that people buy their tickets closer to the event. I think that that was more so this year than last year. And of course that increases your risk of a low turnout when the weather turns bad. I haven’t really covered the percentage of the change but my subjective impression is that we had more sales days of event now than we did in the past. But that said, it’s still a small portion of the total.
So, you are saying that the presale is still a small percentage?
No, the presale is still the bulk of the sales. So, the last few days, it’s not a huge amount typically.
Okay. So, when you say presale, it means more than half?
Oh, yes, way more than half.
At this time, you are [indiscernible] disclose I guess a percentage breakdown?
We don’t model that and so I don’t have a percentage for you.
And then just last question, in the past, you gave a little more color on your guidance, and then you are speaking $0.90 or $1.10 range, I wonder if you can give a little more color on the other guidance related items like CapEx, depreciation and anything else you can share would be helpful?
First quarter, we outlined some of those figures. And I think we had depreciation in mid-50 range, in 50 millions, and I think that’s probably accurate. As far as the CapEx, we are looking at probably $30 million to $40 million for the whole year and a lot of that as you know was incurred in the first six months.
[Operator Instructions] And your next question comes from the line of Steve Crystal from Clark Estate. [Ph] Your line is open.
I wanted to talk about a couple of the items that are more under your direct control versus the really tough weather and underemployment issues that are affecting the business. One of them was I wanted to ask a question about one of the comments you had in the press release regarding adjusting the cost structure and spending to increase long-term profitability. I was wondering if you could describe that a little bit more in detail?
Sure. We have number of initiatives going on, whether it’s -- you’ve got cost structure of the business looking at our expenses and ways to reduce expenses, and those in our control are a portion of our overall expenses from a management perspective. And then, you have cost structure of operating the events and go to the events. So, we look at our pricing analysis for our fans and opportunities to them to maximize the dollars and enjoy more racing in ways that will be good for both the Company and customers. So, there are number of ways that we can do that.
Is there -- just a follow-up on that. Is there something a tangible I should see in the results going forward; is there some sort of impact on G&A or some other expense line that I should see with some as initiatives?
Steve, it’s not like we have a program that we are going to tell you it’s going to take $10 million of the cost structure right now. I think you can see it in the back that we have very minor increases in direct expenses, quite horrendous weather; that’s because we adjusted our staffing and promotions accordingly. And we are trying to be proactive in that regard to match out this, particularly as it relates to the events, the people we employ versus the people that attend.
Okay. Just on the G&A, I know you highlighted, it sounded like there was something maybe -- if I heard this correctly, there was a larger amount property tax refunds in the prior year and that maybe kept G&A lower. I don’t know if I understood that correctly. But otherwise, G&A was up a bit but it’s -- I know there is some wage pressure but I am assuming that property tax comp was different. Is that the way I should interpret that?
Yes, that was an item that occurred in the second quarter; it was a discreet item over a longer term property tax disputed, a portion of which was resolved last year. And if we get some more resolution, then we will have some other onetime charge this year that will skew the results. But…
You are assessing it correctly.
So, absent that, you guys -- it looks like you are trying to keep expenses sort of flattish the best it can or minimal increases. The other area I wanted to ask about was something I think you could do that would drive shareholder returns, as you have a lot of levy to increase the dividend or buyback and additional amount of stock. Is that something you guys continue to consider going forward?
We do. This year, as I mentioned earlier, in first quarter, we are probably focused on debt repayment. But once we get to a certain level, we are looking at both of those.
Okay. Clearly, in this environment an increase in either one of those would really -- I think would really go a long way to showing you guys are concerned about shareholder value. And then in this market with low interest rates, I think people would be particularly attracted to a higher dividend for sure. And your business certainly has a capability to do that. So, thank you.
Thank you, sir.
[Operator Instruction] And I believe there are no further questions at this time. I’ll turn the call back over to the presenters.
Okay. Thank you, Erica. And thank you ladies and gentlemen for joining us today on the call. We look forward speaking with you next quarter. Have a good day.
This concludes today’s conference call. You may now disconnect.
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