International Speedway Q3 2007 Earnings Call Transcript

Oct. 4.07 | About: International Speedway (ISCA)

International Speedway (NASDAQ:ISCA)

Q3 2007 Earnings Call

October 4, 2007 9:00 am ET

Executives

Wes Harris – IR

John Saunders - EVP, COO

Susan Schandel - SVP, CFO

Analysts

Gregory Badishkanian - Citigroup

Joe Hovorka - Raymond James & Associates

Tim Conder - Wachovia Securities

Bob Simonson - William Blair

Dennis McAlpine - McAlpine Associates

Operator

Good morning and welcome to the International Speedway Corporation 2007 third quarter conference call. (Operator Instructions) I will now turn the conference over to Wes Harris, Senior Director of Corporate and Investor Communications for International Speedway. Mr. Harris, please go ahead.

Wes Harris

Thank you, Doreen. Good morning, everyone and welcome to the International Speedway Corporation conference call. We're here to discuss the company's results for the third quarter ended August 31, 2007.

With us on this morning's call are John Saunders, Executive Vice President and Chief Operating Officer; and Susan Schandel, Senior Vice President and Chief Financial Officer. After John and Susan have provided their formal remarks, a question-and-answer period will follow. The operator will instruct you on procedure at that time.

Before we get started, I'd like to remind everyone that statements made in the course of this conference call that express the company's or management's beliefs and expectations and which are not historical fact or applied prospectively are considered forward-looking statements. It's important to note that the company's actual results may differ materially from those contained in or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings including, but not limited to, the 10-K and subsequent 10-Qs. Copies of these filings are available from the company as well as the SEC.

The company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be needed to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Inclusion of any statement in this call does not constitute an admission by ISC or any other person that the events or circumstances described in such statements are material.

So with these formalities out of the way, I'd like to turn the call over to John Saunders.

John Saunders

Thanks, Wes, and good morning, everyone. We are pleased to report year-over-year revenue growth for the third quarter of fiscal 2007. Significantly contributing to our consolidated results were event weekends held at Chicagoland Speedway and Route 66 Raceway, of which we purchased the remaining 62.5% interest in February of this year.

Turning to the specific events of the third quarter, on our last call we discussed Watkins Glen's increased attendance for the Sahlen’s Six Hours at the Glen Grand Am race weekend. The Glen also hosted an exciting weekend of open wheel racing, culminating with the Camping World’s Watkins Glen Grand Prix.

In other IRL action, Richmond posted a 25% increase in weekend attendance, anchored by the SunTrust Indy Challenge presented by XM. Route 66 Raceway hosted the NHRA Nationals in June, highlighted by increased attendance over the prior year. Michigan hosted Nextel Cup and Craftsman Truck as well as the ARCA Series races in June.

As previously mentioned, there were several significant improvements to the fan experiences. Most notably was the overwhelmingly positive response for the enhancements in the post-race traffic on Sunday, which reduced egress time to approximately two hours. However, ongoing weak economic conditions in the region continued to impact attendance for Michigan's events.

Daytona hosted a thrilling weekend of NASCAR and Grand Am racing, highlighted by the second-closest finish in cup history. The Pepsi 400 weekend has been challenged by inclement weather over the past few years, and this year's Friday Night Busch Race was rained out and run on Saturday morning.

We said before that local weather issues combined with the more regional consumer trading area for this event has impacted ticket sales. This year's event was also affected by the timing of the July 4th holiday, which fell on Wednesday instead of a three-day holiday weekend.

Turning to our events held since the last call, the NEXTEL Cup and Busch Series traveled to Chicagoland Speedway in mid-July for a thrilling weekend of stock car racing, culminating in Tony Stewart’s 30th cup victory and his second at Chicagoland Speedway.

On a related note, last week the track announced it will install lights in time for the 2008 NEXTEL Cup weekend. Track lighting will allow events to be run later in the day when the temperatures are cooler, enhancing the atmosphere while providing a hedge against bad weather. We look forward to racing in the nation's third-largest market under the lights.

In early August, Michigan hosted an exciting weekend of open wheel racing anchored by the Firestone Indy 400. The race ended with Tony Kanaan's victory over Marco Andretti by only 5/1,000ths of a second. Regrettably, this will be the last IRL event at MIS for the foreseeable future. While we provided several workable options to the IRL for this event going forward, we were unable to reach an agreement on a mutually beneficial event date. Open wheel racing has a rich tradition at Michigan International Speedway and so we're hopeful for its return at some point.

We hosted a successful inaugural NASCAR Busch and Grand Am weekend at Circuit Giles Villeneuve in Montreal. The historic road course hosted a strong crowd to witness the first-ever Busch Series race in Canada. The race itself was exhilarating and the enthusiasm of the fans was highly evident throughout the region. We are pleased with the results of this event and are excited for its future prospects as we build upon this success with our Canadian partners.

Watkins Glen hosted a successful NEXTEL Cup, Busch and Grand Am series weekend, anchored by the Centurion Boats at the Glen. Total weekend attendance increased more than 5% over the prior year, as fans enjoyed premier road racing at one of America's most historic venues.

NEXTEL Cup and Busch Series racing returned to Michigan in August. While we were pleased to see considerable increase in weekend attendance over the facility's June event, inclement weather forced postponement of the 3M Performance 400 until Tuesday. While the facility has had some weather delays in the past, this is the first time a Michigan cup race has been postponed due to weather in 30 years. Nonetheless, the fans that stayed were treated to a great race which ended in an exciting green-white checkered finish. Our many compliments go out to the staff at Michigan for putting on a successful show despite the weather challenges and the reduced temporary staff.

To provide fans with additional peace of mind in the event of another similar occurrence, we recently partnered with World Access to offer fans event ticket insurance beginning in 2008. This optional purchase will cover the price of a fan's ticket should they be forced to miss an event for a covered reason such as medical emergencies, jury duty or other extenuating circumstances, including weather-related postponement. Moreover, fans that are forced to miss a postponed event due to work obligations would also be covered. This offer is another example of our focus on maximizing the fan experience and providing top service to our guests.

Now turning to events held to-date in the fourth quarter, California Speedway hosted cup and Busch racing on Labor Day weekend. Despite very exciting racing, the weekend posted less than anticipated results. Mother Nature negatively impacted attendance-related revenues as the region experienced an intense heat wave of 100 degree plus temperatures during the week leading up to the races. On the day of the cup race the temperature was a record 113 degrees, marking the hottest day of the year. By comparison, weather in the area usually measures in the low to mid-90s.

The facility is aggressively implementing innovative marketing and awareness-building campaigns to drive consumer demand. While these efforts will take time to fully resonate with fans, we remain encouraged for the long-term opportunities of operating two major NASCAR weekends in the nation's second-largest media market.

The following weekend, the Chase for the Championship field was set in Richmond at the Chevy Rock ‘n Roll 400. Highlighting the weekend was the 32nd consecutive NEXTEL Cup sellout at the track known for racing perfection. Attendance for the Emerson Radio 250 Busch Series race again posted a solid increase over the prior year.

Chicagoland Speedway hosted an exciting season finale weekend for the IRL Indy Car Series. Scott Dickson ran out of fuel in the last lap, allowing Dario Franchitti to narrowly pass for the victory and the 2007 series championship.

Last week we hosted our first race in the NEXTEL Cup Chase for the Championship at Kansas Speedway. We were pleased to once again record sold-out attendance for both the cup and Busch events. Unfortunately, Sunday's Lifelock 400 was shortened due to rain. This weekend we will host NEXTEL Cup, Craftsman Truck and ARCA racing at Talladega.

While we expect to draw a strong crowd for the weekend, advance ticket sales are trending behind prior year. We believe this is due to several factors. First, awareness for last year's event was significantly raised by the debut of newly paved racing surface, the track's inaugural truck race and the significant national promotion surrounding the release of the hit movie, Talladega Nights. Additionally, fans for Talladega travel farther than any of our events other than the Daytona 500. As a result, we believe some of these fans are more sensitive to higher fuel prices.

Despite these challenges, it's important to note that we have significantly improved attendance for this year's event weekend as compared to 2005 and have retained a sizable percentage of new event attendees from last year. We remain confident in the positive long-term trends for Talladega's events.

For our other events fourth quarter, Martinsville will host a NEXTEL cup and truck weekend; Phoenix will host a NASCAR triple header weekend, of cup, Busch and truck racing, and Homestead Miami will host the Ford Championship Weekend.

Turning our attention to corporate sponsorship, corporate partner spending trends remain solid for the company, highlighted by sold-out inventory of NEXTEL cup and Busch Series entitlements for 2007. During the third quarter, we signed agreements with Lifelock for Kansas City's Speedway cup race, and Sharp Aquia’s for California's Labor Day Cup Week.

In July, we discussed our new ten-year multi-track agreement with Coca-Cola beginning in 2008. This comprehensive agreement will officially kick off during the 50th running of the Daytona 500 in February. We are looking forward to their debut.

We have developed a major Daytona 500 promotional platform to support the event and build consumer and corporate awareness. Companies representing more than 40 brands are spending a combined $100 million in activation during our year-long promotion of the 2008 event. We have partnered with Kroger to launch the largest in-store retail promotion in the history of motor sports. All of the participating brands have changed their primary packaging to prominently promote the 50th running of the Daytona 500.

This promotion has already been running exclusively at nearly all 2,500 grocery stores under the Kroger Corporation nationwide, including Kroger’s, Ralph's, King Super, Dillon’s, Payless and several others. Some of the brands involved include Nabisco, general Mills, Kellogg’s and Unilever. These efforts are generating more awareness for the event as advanced ticket sales are trending well ahead of the prior year.

This marketing platform and our other major partnerships further demonstrate the strength of our collective assets. We remain ideally positioned to provide major corporations with business-building opportunities across the country and all season long.

Turning to capital spending, our estimated range for capital spending at existing facilities remains unchanged between $80 million and $90 million for 2007. This year’s significant projects include the Commonwealth Grandstand and exclusive Torque Club in Richmond as well as enhanced seating areas and a new premium RV parking area at Michigan. Also included in this estimate are significant changes currently underway at Darlington, including a new tunnel, suite renovations and the repaving of the racing surface.

Other capital spending for existing facilities during the year is expected to include land and related improvements at certain facilities for expansion of parking, camping capacity and other uses, and a number of fan enhancements and amenities that enable us to effectively compete with sports and entertainment venues for consumer and corporate spending.

Looking ahead to 2008, as I mentioned earlier, we announced that we will install lighting at Chicagoland in time for its July event next year. We are also making further improvements at California to enhance the fan experience, including installation of escalators to improve the fan traffic and mobility.

On the external development front, we continue to explore the possibility of pursuing public/private partnerships to develop motor sports entertainment facilities in Metro Denver, New York, as well as Pacific Northwest.

On a related note, we are pleased to report that we have entered into negotiations with a potential buyer for the 676 acres we currently own on Staten Island. We are in discussions with ProLogis, the world's largest owner, manager and developer of distribution facilities. ProLogis has a proven track record of developing projects that positively impact the communities in which they are located. We will provide further details upon the execution of any definitive agreement and hope to close the transaction by the calendar year end.

In the interim, we continue our cleanup efforts on the property in accordance with the consent order signed with the New York Department of Environmental Conservation. We have resolved all issues with the DEC concerning non-compliant fill and began removing the fill from the property last week.

In Florida, we continue to make progress on Daytona Live, a mixed use entertainment destination development we are pursuing in a 50-50 joint venture with the Cordish Company. While there remain many permitting and local project analyses to complete, we are pleased with the support the project has received thus far from local government officials and the community.. In fact, just last night our proposal received unanimous approval from the Daytona Beach city commission. This is an important step forward for this project. Should we succeed through the additional permitting processes and receive positive results from our study, we look forward to beginning construction in 2008.

Turning briefly to legal matters, we continue with the preparation of our defense in the Kentucky litigation. Including spending for the third quarter of $1.2 million, we expect litigation costs related to our defense for fiscal 2007 to range between $6 million and $7 million or $0.07 to $0.08 per diluted share after tax. The court deadline for submission of summary judgment briefing materials was extended to the middle of this month and the trial, if necessary, is still scheduled for March 2008. Based on all of the evidentiary materials reviewed to date, we continue to believe that the vague allegations of this complaint are totally without merit. At this point, we believe the likelihood of a material adverse result appears to be remote, although there is always a level of uncertainty in litigation. As we have repeatedly stated, we will defend ourselves vigorously in this matter.

Turning to an update on Motorsports Authentics, our 50-50 joint venture with Speedway Motorsports, as we discussed on our last call, to accelerate a turnaround in the business, in late June MA hired Mark Dyer as the new President and CEO. He most recently served as the head of NASCAR's global licensing efforts. Since July, MA has made important changes to the business and is finalizing their plans for 2008.

In July, less than three weeks into Mark's tenure, the preliminary assessment of the new management team at MA anticipated a loss for 2007 of between $15 million and $20 million. The primary contributor to this outlook was associated with Dale Earnhardt Jr.'s decision to leave DEI. This resulted in significant reduction and cancellations of pending and anticipated merchandise orders.

Since our call in July, several additional significant team and driver changes for 2008 have been announced which has negatively impacted the salability of existing merchandise. These include Kyle Busch’s move to Joe Gibb's Racing, Kasey Kahne’s sponsor move from Dodge to Budweiser; Joe Gibb's Racing’s transition to Toyota; and Ginn Racing's merger with DEI. The combined impact of these additional changes and further visibility of the full impact of Dale Jr.'s move from DEI to Hendrick Motorsports, including sponsor and car number changes, has resulted in a revised estimate of a non-GAAP loss between $20 million and $25 million for MA in 2007.

It's important to note that this non-GAAP estimate excludes MA's third quarter charges to reflect the writedown of certain inventory and related assets primarily associated with the previously discussed driver and team changes, and other excess 2007 merchandise on hand. Our 50% portion of these changes was $12.4 million and is reflected in our third quarter equity earnings. While we are clearly disappointed, we believe this addresses the significant operating issues related to 2007.

In addition, it's important to note that this year has been very unusual in the total number of high profile driver and team changes. Also the timing of these changes, which is earlier than usual, exacerbates current year sales and inventory issues. While MA continues to find ways to optimize results for 2007, their efforts are primarily focused on ensuring that the company is on a solid footing to begin 2008.

These initiatives include first, ensuring the organization is resourced appropriately. This includes hiring the best people for key positions as well as optimizing the total number of employees that work for the business. To assist in this effort, in mid-September more than 5% of MA's headcount was reduced in an effort to right size the operation.

Second, the implementation of a more rigorous buying and inventory control systems will allow MA to better source and manage inventory. This is especially critical as it relates to drivers that are nearing the end of their team contracts.

Next, MA is evaluating opportunities to improve the profitability of its distribution channels. One example includes optimizing the number of merchandise trailers that travel to event weekends, including discontinuing the operation of non-profitable rigs.

Finally, MA is focused on ensuring that its future licensing agreements are structured to limit exposure to changing market dynamics.

We continue to believe the sale of licensed merchandise represents a significant opportunity in the sport, and are confident that the management at MA is developing a solid plan for the future. We fully expect that MA has the potential for generating solid growth and earnings and cash flow for ISC.

Before I turn the call over to Susan for the financial review, I would like to take a moment to talk about some recent company updates and industry trends. As you have heard me discuss, we have faced some unique challenges due to weather, coupled with the ongoing challenges in consumer discretionary spending. Demand for NASCAR racing remains strong and fan affinity for the sport has in no way diminished. However, it's important that we continue to provide a compelling value-added experience so that attending a live race continues to be one of the leading options for the consumer discretionary dollar.

We are doing this by continuing to invest capital in facilities to further enhance the guest experience. This includes additional amenities and segmented experiences, but it is also heavily focused on establishing a base level experience for fans and ensuring that the basic amenities exceed expectations.

At Michigan, we worked very closely with local and transportation experts to significantly reduce post traffic for their event. In California, the new escalators will make it easier for fans to move from their seats in the grandstands to concessions and facilities below. Again in Michigan and in Richmond we installed more comfortable seats with improved sight lines to enhance the race-watching experience. In fact, across our entire portfolio of facilities we are exploring opportunities to further enhance our ability to provide superior, innovative and thrilling guest experiences to drive renewals and attract new fans.

From an industry perspective, the on-track product remains very strong and the sport is continuing to attract both consumers and corporate sponsors. In fact, we're on pace to sell out a comparable number of events this year as in 2006, despite some of the unique challenges I discussed earlier. We are also experiencing ongoing strength in our corporate partner spending across our facilities.

Industry developments put in place this year such as the Car of Tomorrow, and the enhanced chase format are helping to further raise awareness for the sport. We're looking forward to the full launch of the Car of Tomorrow next year beginning with the 50th running of the Daytona 500.

Also, we believe that several notable driver and team changes for 2008 will help further raise fan and media awareness of the sport. Yesterday, NASCAR announced a seven-year deal with Nationwide to be the new title sponsor for the Busch Series beginning in 2008. We believe this will help further raise exposure for the series, and position it for continued long-term success.

Lastly, Sprint is hard at work planning for ways to leverage new title position for the cup series next year. They have launched an aggressive promotion of their brand which is closely tied to this new series. We look forward to working closely with Sprint on their marketing campaign and are encouraged by the long-term opportunities of aligning our premiere racing event with that company’s most recognizable brand.

With that, I would like to turn the call over to Susan Schandel for the financial review.

Susan Schandel

Thanks, John and good morning, everyone. Year-over-year comparability of our results for the third quarter of 2007 were impacted by the following factors.

First, while the average annual rights fees for the new combined television agreements are substantially higher than the former agreements, 2007 rights fees are approximately 12% less than the 2006 rights fees, resulting in lower motor sports-related revenue.

Second, we closed on the acquisition of Raceway Associates, owner and operator of Chicagoland Speedway and Route 66 Raceway, on February 2, 2007. Since then, the results have been included in our consolidated operations. Prior to closing, we had accounted for their operations as an equity investment. As John discussed, a NASCAR NEXTEL Cup and Busch weekend was held at Chicagoland and an NHRA PowerAde drag racing event was held at Route 66 in the 2007 third quarter.

Third, Kansas hosted an IRL weekend in the 2006 third quarter, which was held in the second quarter of fiscal 2007.

Fourth, we recognized $6.9 million or $0.08 per diluted share after tax, for accelerated depreciation on certain buildings which are expected to be razed as part of our Daytona Live development project.

Next, we recognized $1.6 million or $0.03 per diluted share after tax, in deferred income tax expense attributable to the enactment of an income-based tax system in the state of Michigan.

Finally as John discussed, our 2007 third quarter equity earnings includes a charge of $12.4 million or $0.24 per diluted share, to reflect our portion of MA's writedown of certain inventory and related balances.

Now looking to the detailed income statement. Admissions revenue increased to $63 million, primarily due to the consolidation of Chicagoland Speedway and Route 66 Raceway. Offsetting this increase was the timing of the Kansas IRL weekend, and to a lesser extent, lower than anticipated results at Michigan and Daytona.

Motorsports-related income increased for the third quarter to $113.7 million, including $57 million from television and ancillary rights. The previously discussed decrease in broadcast rights for the quarter and the timing of events at Kansas were offset by the consolidation of Raceway Associates.

Food, beverage and merchandise revenue decreased to $17.7 million. The decrease was primarily driven by the timing of the IRL weekend at Kansas and inclement weather at the August Michigan race. The decline was partially offset by the consolidation of concession and catering revenue at Chicagoland and Route 66 this year.

The increase in NASCAR direct expenses to $35.1 million was primarily attributable to the consolidation of Chicagoland Speedway, partially offset by the previously mentioned lower television broadcast rights fees, a percentage of which are paid as part of the prize money.

Motorsports-related expense increased in the third quarter to $47.1 million, primarily due to the consolidation of Raceway Associates. The increase was partially offset by the timing of events at Kansas.

Food, beverage and merchandise expense decreased to $10.6 million for the quarter, primarily due to the timing of the Kansas weekend and lower variable costs.

General and administrative expenses increased to $31.4 million for the quarter. The increase was primarily related to the consolidation of Raceway Associates and costs related to our ongoing business.

Depreciation and amortization during the quarter increased to $23.8 million. The increase was primarily related to the previously discussed accelerated depreciation of approximately $6.9 million associated with our Daytona Live project. If we proceed with the project, we expect that our existing corporate headquarter offices, which are not fully depreciated, and certain other buildings will be razed during the next three to 21 months. In the fourth quarter, we anticipate approximately $500,000, or $0.01 per diluted share after tax, in additional depreciation related to this project.

The remaining increase in third quarter depreciation expense is substantially related to our acquisition of Raceway Associates. The $108,000 impairment charge in the third quarter is attributable to estimated additional fill removal costs at our Staten Island property.

Interest income was flat, at approximately $1.4 million. Interest expense for the quarter increased to approximately $4 million, due to lower capitalized interest and interest related to the debt assumed as part of the Raceway Associates acquisition. The $17.1 million net loss from equity investments substantially relates to our interest in Motorsports Authentics.

Our effective tax rate for this year's third quarter increased to 66.4%. The increase is substantially due to the tax treatment associated with the losses of Motorsports Authentics and the previously discussed change in Michigan's tax laws. As a brief update to the IRS exam, as of August 31 we have deposited $117.9 million with the IRS for requested downward adjustments to our reported fiscal 1999 through 2005 federal tax depreciation expense. This amount also includes interest related to the federal adjustments.

Including related interest, we currently expect the combined after-tax cash flow impact of additional federal tax adjustments for fiscal 2006 and related state tax revisions for all periods to range between $30 million and $40 million.

It's important to remember that any deposits we make with the IRS are not considered a payment of tax. They prevent us from incurring additional interest that would be charged at significantly higher rates. We'll receive interest on any of the funds returned to us. In June, the IRS commenced the administrative appeals process which is expected to take six to 15 months to complete. In August, we provided additional information requested by the IRS and look forward to their response within the next several months.

Turning back to the income statement, income from continuing operations for the three months ended August 31, 2007 was $9.5 million or $0.18 per diluted share on approximately 52.6 million shares outstanding. Excluding the additional depreciation associated with our Daytona Live project, the increased tax liability in Michigan, and the writedown of certain inventory and related assets at MA, we posted earnings of $0.53 per diluted share.

Now looking to the balance sheet. At August 31, our combined cash and short-term investments totaled $96 million. Current deferred income was $192 million and shareholder's equity was $1.2 billion. Total debt at quarter end was approximately $378 million, including $301 million in senior notes, $67 million in bonds associated with Kansas, and $10 million in debt associated with Chicagoland Speedway and Route 66 Raceway, which is now consolidated.

Also during the third quarter, we purchased 495,000 shares of our Class A common stock for approximately $25 million, bringing the total number of shares purchased from December through August to approximately 1 million shares.

In terms of our financial outlook, while we were on pace to sell out a comparable number of events as the prior year, lower than anticipated attendance-related results at a few of our events has led us to be slightly more conservative for the remainder of the year. Therefore, we are revising our full year financial outlook. We now expect full year total revenues will range between $810 million and $815 million. We now expect our non-GAAP earnings estimate for fiscal 2007 to range between $2.70 and $2.75 per diluted share.

This estimate excludes the following: additional depreciation related to Daytona Live, impairment charges related to the discontinued development efforts in Washington and fill related costs in Staten Island, the additional deferred income tax due to the change in Michigan state tax laws, and our 50% portion of MA's inventory-related write-down.

Looking ahead to 2008, while we're still in the budgeting process, we are encouraged by several factors. First, advance ticket sales for the 50th running of the Daytona 500 are trending well ahead of the prior year. There is also a considerable amount of corporate interest in that event. In addition, renewals for events beyond Speed Week are positive and we expect corporate sponsorship will continue to grow at a solid pace.

In conclusion, while we continue to closely monitor consumer spending trends and broader macroeconomic environment, we believe we are well positioned for future growth. Corporate spending remains strong and we continue to attract new partners to the sport who are interested in leveraging our unique portfolio of premier events and team markets to drive their business. From an industry perspective, the sport is continuing to attract new drivers and team owners, and the competition is better than it has been in many years.

With this backdrop, we will continue to focus on our core business of motor sports entertainment, including enhancing the fan experience and delivering incremental value for our guests. Combined with our strategy of financially prudent external expansion, we look forward to building shareholder value for many years to come.

With that, I'd like to open up the floor for questions.

Question-and-Answer Session

Operator

Your first question comes from Gregory Badishkanian – Citigroup.

Gregory Badishkanian – Citigroup

If you were to exclude the losses on the merchandising and the other joint venture, what would you have put out for earnings, EPS guidance, for ’07?

Susan Schandel

Excluding MA entirely?

Gregory Badishkanian – Citigroup

Yes.

Susan Schandel

Let me see, we talked about the estimate of $20 million to $25 million in losses for the full year and if I pull out the earnings release, we had about $12.4 million of the inventory-related writedowns. We are talking about $32 million to $37 million which actually is about $0.02 because you don’t get a tax writedown, so it would actually be twice that. I guess it would be $0.64 to $0.74.

Gregory Badishkanian – Citigroup

And if you were to look at the core business, modeling it out for this year, if that had not have happened, would you have changed your guidance, or how much would you have changed it by?

Susan Schandel

Off the top of my head, we probably would have changed our guidance slightly because we had some impacts on a couple of events that we mentioned, Michigan and the summer event here in Daytona. Back earlier in the year we had some weather-related issues in Daytona as well, so you probably have a small modification in the guidance, but I wouldn’t expect anything significant because our other revenue categories and expenses are tracking pretty well.

John Saunders

I think it would have been pretty close to about $3 per share.

Gregory Badishkanian – Citigroup

When you look at ticket price trending, trends there, what are you seeing and where do you think it will trend in ’08 based on the underlying demand? In terms of ticket pricing, maybe what your expectations are for 2008 based on the underlying demand for attending the races.

Susan Schandel

We are probably looking at a blended increase of maybe 1% to 3% across all of our facilities on a comparable seat basis. That is consistent with what we have experienced this year and last year. It varies by event a little bit and certainly by track, but overall something in the low single-digits.

Gregory Badishkanian – Citigroup

Good. Also, looking at your CapEx, you talked about a number of projects. If you were to break that out, how many of your projects and what portion of your CapEx this year and maybe going forward, is going to be spent on creating a better experience for your customers, versus creating opportunities to enhance revenues? I know they both work hand in hand, but if you could help me think about it that way.

Susan Schandel

We separate out our capital spending as you describe; the first thing is going to be safety and critical maintenance, but then we look at revenue-producing projects, some are direct revenue producing like grandstands or suites, easily tied to revenue. Other are going to be amenities and enhancements that we think indirectly are tied to revenue because they enhance the guest experience, increase renewals, they lower the cost of acquisition per customer and grow demand for the events overall.

This year we have probably 35% or 40% of revenue-producing projects. We had a big slug that came in this year with some improvements at Darlington that we’ve got; track paving and things that more indirectly, the better the show the more the demand. But we wouldn’t consider that in the revenue-producing bucket.

I think in general, we don’t have the slate of all of our capital projects for next year, but I would say that it is safe to say that half of our capital is going to be spent on revenue-producing or amenity-enhancing projects for next year.

Operator

Your next question comes from Joe Hovorka - Raymond James & Associates.

Joe Hovorka - Raymond James & Associates

I had a couple of questions regarding Motorsports Authentics. Dale Earnhardt, Jr. is he signed beyond 2007 at this point?

John Saunders

Joe, they are currently in negotiations with him. Those negotiations are proceeding well and they fully expect to come to terms but we don't have a definitive agreement at this point in time.

Joe Hovorka - Raymond James & Associates

Is that still an exclusive negotiating period or has that ended?

John Saunders

It's still an exclusive.

Joe Hovorka - Raymond James & Associates

What categories have you had him sign for in the past?

John Saunders

Mass, track side, die cast are the primary drivers.

Joe Hovorka - Raymond James & Associates

Apparel is included in that as well?

John Saunders

Yes.

Joe Hovorka - Raymond James & Associates

What percent of revenue is Dale? If we're looking at this writedown that we've got this year and the shortfall we are seeing because he's changing the teams, how much does he account for the top line in Motorsports Authentics?

John Saunders

Are you asking what percentage of the industry he is?

Joe Hovorka - Raymond James & Associates

Since he's changed teams and you've obviously had the order cancellations and then the inventory writedown, how much revenue is he affecting, is what I am trying to get at, for Motorsports Authentics?

Susan Schandel

I'm not sure that I know that number off the top of my head.

John Saunders

For this year, it's been a substantial impact to our reduced guidance. But what's changed and we talked about that in July, that more than half of it was associated with that when we went to $15 million to $20 million loss. Now they're at $20 million to $25 million and the biggest piece of that is we've had a slew of other drivers, which is very unusual for this business, where they're making these changes still in the middle of the season.

I believe Mark Dyer and his team there are trying to put some things in place to make sure clearly we're not in this situation again. Drivers are going to change. We just need to make sure that we're producing the right amount of inventory in advance so we don't get ourselves into that type of situation.

Joe Hovorka - Raymond James & Associates

You talked about last quarter, but the loss has obviously increased and part of it is the other team changes. I was trying to get a handle on how the revenue is concentrated through Motorsports Authentics.

One of the things that you had talked about too when you took over the company was changing the distribution channel to dealer direct. Now you are talking about some additional distribution initiatives. Are you still going dealer direct or has that model changed as well?

John Saunders

Joe, Mark is currently working through that. There will be a change. He is evaluating what he refers to as a hybrid model where he'll be leveraging the best opportunities for his distributors as well as doing the dealer direct to drive more revenues. He's evaluating that now. We do expect that to be modified in the near term.

Joe Hovorka - Raymond James & Associates

Did it ever make the transition to a full dealer direct model?

John Saunders

It was something that was started about the time that we acquired Action and I don't believe it ever raised anyone's expectations.

Joe Hovorka - Raymond James & Associates

One last question -- can it be profitable in 2008?

John Saunders

The business itself overall?

Joe Hovorka - Raymond James & Associates

Yes.

John Saunders

Well, they're working through their '08 plan right now. We expect to see that soon and as well as their long-term strategic plan. We certainly expect it to be a turnaround year. Until I see what that plan is, I couldn't definitively comment on what the outlook is going to be. We'll have more to say about that later.

Susan Schandel

Before we take another question, I need to clarify that the MA adjustment for the full year, I used half of the full number and half of our half. So if you look at the total this year including that inventory-related writedown, it was probably $0.45 to $0.50. That inventory-related writedown was $0.24 so excluding the inventory-related writedown, it is $0.20 to $0.25. Hopefully that clarifies it.

Operator

Your next question comes from Tim Conder - Wachovia Securities.

Tim Conder - Wachovia Securities

Can you talk a little bit about -- again, just to quantify the potential rain impact here with the Michigan, the Daytona in the quarter and the earlier rain out. I think you said that was offset in the quarter by the Chicagoland benefit, but just if you can in any way, Susan, maybe quantify that.

What is the total that you have on the deposit with the IRS? If I understood you right, you commented how much additional deposit you made, but what's the total? You said that could be, if I heard you right, about 15 months before you may get some clarity on that. Should some of that money free up, what would you be looking to do with that when that comes back on your balance sheet?

Susan Schandel

The total amount on deposit right now is about $118 million. That includes the federal tax adjustments for 1999 through 2005 and the related interest on the federal tax. So the 2006 period, we have not gotten a notice on that. If we estimate the federal 2006 and the state tax for all the periods, 1999 through 2006, that's another $30 million to $40 million.

Tim Conder - Wachovia Securities

$30 million to $40 million you said?

Susan Schandel

Correct, $30 million to $40 million. The administrative appeals process we think is six to 15 months to complete. The good news is we started it. It took a long time to get it in front of them but we have initiated that process. If we get some of that money back, which we hope and expect to do, we will get not only the tax back but we would get related interest because we made this deposit with them. The timing of it is somewhat unclear; some time in the next year or so.

We would obviously look at what opportunities are available to us to grow the business. If there aren't opportunities that we think generate a sufficient return, we would give serious consideration to returning some or all of that cash to our shareholders, either in the form of a repurchase or a more aggressive dividend strategy. We don't have anything on the table right now because the timing and the amount is uncertain, but those two things would certainly be on the table.

Tim Conder - Wachovia Securities

Potentially Susan, from a cash flow impact here, there could be an additional $30 million to $40 million between now and the end of the fiscal year?

Susan Schandel

No, the $30 million and $40 million, a big piece of that is the state piece and I don't think that you're required to pay the state piece until the federal situation is resolved. So we would have some amount of that, less than half of that would be the 2006 estimate.

Tim Conder - Wachovia Securities

State or federal?

Susan Schandel

For federal, correct. We talk about the state piece just so it doesn't fall off of the radar screen for people. Potentially, there is some amount that would have to be paid there.

Wes Harris

On your first question, I believe you're trying to get a better handle on when you exclude the non-comparable events, what did we look like year over year? You mentioned Chicago and their weekend as well as Route 66 had NHRA PowerAde Nationals drag racing weekend. The other thing to remember is last year's second quarter included the Kansas IRL weekend. So when you exclude out all of the non-comparable events, we were only down on our attendance-related revenue probably a little less than $3 million.

The challenge you have is those numbers will typically -- your costs are pretty fixed once you get that close to the race and they impact your bottom line. As we move closer to the events, we try to do things to try to lower our cost structure. But there's not a whole lot you can do once you get two or three weeks from the event.

Tim Conder - Wachovia Securities

Could we assume the same approach you would take with any cash received once the Staten Island sale is consummated here at the end of the calendar year?

Susan Schandel

Absolutely. We don't have a definitive agreement signed on that yet so we hope to close by the end of the year. But until we actually have something signed, I would caution you don't put that money in the model in the next couple months, but that's certainly our hope.

Tim Conder - Wachovia Securities

I think you wrote it down to about $65 million. Is it looking like you will realize something greater than that at this point?

Susan Schandel

Well again, because we don't have a definitive agreement signed, we can't talk specifically about the terms or the pricing. We gave guidance last year when we wrote it down that we would expect to receive over $100 million for the property when it sold and we haven't made any updates to that guidance at this point.

Tim Conder - Wachovia Securities

Refresh me again on the Kentucky timetable. You touched on that briefly in your prepared comments. The Kentucky timetable for the litigation?

John Saunders

The submission of documents for the motion to dismiss, the summary judgment, are due this month and we expect we would hear something by the end of the year. If that does not result in a positive outcome for us, the parties have agreed that a trial would begin in March of '08.

Operator

Your next question comes from Bob Simonson - William Blair.

Bob Simonson - William Blair

You mentioned some ticket insurance in the context of Michigan. Will that be offered across all tracks?

John Saunders

Yes Bob, it will. This is something new that we are launching. What it is, it's a very simple model. We're partnering with a third party who -- for a surcharge -- will insure the consumer's ticket for in the event that they cannot attend the event or there are covered reasons where they would receive a refund. It's the consumer's option to do it.

Bob Simonson - William Blair

Do you get a little bit of a commission on that?

John Saunders

Not that I'm aware of.

Bob Simonson - William Blair

The tax, do you have an estimate, Susan, for the tax rate in the fourth quarter, and what it might look like next year?

Susan Schandel

Tax rate in the fourth quarter will continue to be impacted by Motorsports Authentics because we don't get to offset any of their losses against our income. If you exclude MA, going forward we're probably in the 38.5% to 39% next year. I think John or Wes mentioned that they haven't done their business plan for next year so I don't know exactly where that will fall. Aside from that, probably the 38.5% to 39% next year.

Wes Harris

For the fourth quarter we're looking at somewhere, including the fact that you can't deduct MA, somewhere close to 40%, 39.8% is what we're forecasting right now.

Bob Simonson - William Blair

Do you have a number for a percentage change? Normally you don't give a dollar amount, but a percentage change in sponsorships for the third quarter?

Wes Harris

For just the quarter itself, you've got Chicago in that so you are up well north of 10%. When you look at it on a comparable event basis and you look at motor sports-related revenue and you exclude out television and ancillary rights fees, we actually were up around 5%.

Bob Simonson - William Blair

Is that slowing down?

Wes Harris

It's definitely been more challenging than it would have been in a very strong economy. But we continue to attract sponsors, and hospitality continues to attract folks. The challenge you've got is -- and we've talked about this in years past -- the base just keeps getting bigger. You've got to be creative in the way that you try to tailor make these marketing opportunities with your partners.

Bob Simonson - William Blair

You mentioned on CapEx, John, that a lot of projects are under consideration. Is there a ballpark estimate for CapEx for next year yet?

John Saunders

I would say right now, we haven't presented capital to the board in totality for all of '08, but it would be in that $80 million to $100 million range and we would true that up as we had more clarity towards the end of the year.

Operator

Your final question comes from Dennis McAlpine - McAlpine Associates.

Dennis McAlpine - McAlpine Associates

Thank you and good morning. Would you go into a little more detail on the problems with the IRL and what the potential impact is? Specifically, what went wrong in Michigan? Does the loss of the IRL race amount to anything and is it likely to expand into the other IRL races?

Second, would you talk about the impact of the Montreal race, whether that came in as you expected?

Lastly on Motorsports Authentics, why you had a number of writedowns this year for inventory because of people not being with who they were going to be with later on? Isn't there a converse that says that next year you'll have all of these drivers with new teams and new numbers and new cars and all of that? Doesn't that mean that those sales should go up substantially?

John Saunders

To take your first question on the IRL, the IRL in recent years has come out with a scheduling model where they usually open up in Florida, generally Miami, in March. They like to have their season concluded no later than the first or second weekend of September. With the addition of Belle Isle coming on the schedule, which is basically downtown Detroit, we were sandwiched with a date right there in the first week of August. It didn't make any sense for either venue to be promoting at the same time to the same market.

In addition to that, two to three weeks later we have our stronger cup race in Michigan. So with mid-Ohio coming on the schedule and some other variables there, we worked back and forth with the IRL team and just could not come up with a date that worked for everybody.

We believe that open wheel racing should continue there. It was profitable, I wouldn't say it's material. We'll see what happens in the future, because obviously we have the month of July to work with, given that the cup events are in June and August.

With regard to Montreal, we were extremely please with that event. It truly had a Monte Carlo-type feel to it with the Saint Lawrence Seaway there and then on the Isle of Notre Dame with the skyline in the background. The Canadian fans are very, very enthusiastic race fans. We made a little bit of money on the event, as we anticipated we would and we think we've got tremendous momentum. The feedback from NASCAR and the teams was that they really, really enjoyed it. It was a whole different experience. So we look for good things to come there.

With regard to your MA, I can't quantify, at this point, certainly. But one would expect that with driver changes, such as Dale Jr, Kasey Kahne, Gibbs going to Toyota, that naturally there's going to be a lift here as fans seek to get the new latest, greatest, freshest souvenirs.

Dennis McAlpine - McAlpine Associates

Tied in with that, can we assume that you don't have any of the Mattel-related problems of paint and so forth coming in?

John Saunders

That's correct.

Dennis McAlpine - McAlpine Associates

Are there any other major drivers signed with MA coming up for renewal?

John Saunders

I'm not aware of any that we haven't already touched on. However in my comments, one of the things that Mark is going to be doing as a matter of business discipline going forward, is having a full future outlook of when these contracts expire and when a driver particularly could become at risk, with enough lead time that we manage the inventory buying process. That's a discipline that he's working and will, no doubt in my mind, instill in the business.

Operator

There appear to be no further questions. At this time, I'd like to turn the floor back over to John Saunders.

John Saunders

Thank you all for joining us on this third quarter call. Certainly we discussed some issues, such as macro economic issues, weather-related issues and the challenges at MA. But generally speaking, we're optimistic about '08. We talked about the trends looking into the first quarter, particularly with the 50th running and we have a very, very solid focus on our core business and our teams across the country are very, very committed to delivering superior, innovative and thrilling experiences at their venues. We've got Nationwide coming on board for next year as a new series sponsor so we remain optimistic.

We'll look forward to talking to you on the next call. Thanks, everyone.

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