International Speedway Corporation (NASDAQ:ISCA)
December 12, 20079:00 am ET
Wes Harris - Senior Director, Investor Communications
Susan Schandel - Chief Financial Officer, Senior VP,Treasurer
Dan Houser - VP, Chief Accounting Officer, Controller,Assistant Treasurer
Edward Williams - BMOCapital Markets
Alvin Concepcion - Citigroup
Good morning and welcome to International SpeedwayCorporation 2008 Financial Guidance Conference Call. During the presentationall participants will be in a listen only mode. Afterwards you’ll be invited toparticipate in a question-and-answer session (Operator instructions). As areminder this call is being recorded on Wednesday December 12, 2007.
I would now like to turn this conference over to Wes HarrisSenior Director of Investor Communications for International Speedway. Mr.Harris, please go ahead.
Well thank you, Operator. Good morning everyone and welcometo the International Speedway Corporation conference call.
We’re here to discuss the company’s financial guidance for theyear ending November 30, 2008.Joining me in this morning’s call are Susan Schandel Senior Vice Presidentand Chief Financial Officer and as well we have Dan Houser Vice President andChief Accounting Officer joining us.
After we have provided our formal remarks aquestion-and-answer period will follow. The operator will instruct you onprocedure at that time.
Before we get started I would like to remind everyone thatstatements made in the course of this conference call that express thecompany’s or management’s beliefs and expectations which are not historicalfacts or planned perspectively are considered forward-looking statements. It’simportant to know that the company’s actual results may differ materially fromthose contained in or implied by these forward-looking statements. Additionalinformation concerning factors that could cause actual results to differmaterially from those in the forward-looking statements is contained from timeto time in the company’s SEC filings, including but not limited to the 10-K andsubsequent 10-Qs. Copies of these filings are available from the company andthe SEC.
The company takes no obligation to release publicly anyrevisions to these forward-looking statements that may be needed to reflectevents or circumstances after today hereof or reflect the occurrence ofunanticipated events. Inclusion of any statement in this call does notconstitute an admission by ISC or any other person that the events orcircumstances described in such statements are material.
With these formalities out of the way, I’d like to turn thecall over to Susan Schandel. Susan.
Thanks, Wes. Good morning, everyone and thanks for joiningus on today's call.
We had a strong finish with our event weekends in fiscal2007 and we remain comfortable with our previous four year guidance of totalrevenues ranging between $810 an $815 million.
As a result of our solid fourth quarter we are increasingour previous four year earnings guidance of $2.70 to $2.75 per diluted share tobetween $2.75 and $2.80 per diluted share. This guidance excludes charges foraccelerated appreciation on certain office and related buildings in DaytonaBeach, impairment charges related to the company’s decision to discontinuedevelopment efforts in Kitset County, Washington, and costs related to fillremoval in ISC’s Staten Island property and a 2007 third quarter write-down ofcertain inventory and related assets at Motor Sports Authentics our 50-50 jointventure with Speedway Motor Sports.
In addition our earnings guidance excludes an anticipated2007 fourth quarter impairment to be recognized by Motor Sports Authentics.I’ll discuss this in more detail later in the call.
Looking forward our 2008 event schedule will be very similarto 2007. Our press release details major events by series and quarter. And I’dlike to highlight the two significant year-over-changes. First as Labor Dayfalls on September 1st in 2008, the results for California’sFall Cup weekend will be reported in the third quarter as compared to thefourth quarter in 2007. And second, as announced several months ago, Michiganwill not conduct an IRL weekend in 2008. This event weekend was held in thethird quarter of 2007.
These schedule changes will result in the fourth quarter of2008 being the most financially significant followed by the third, first andsecond quarters. We continue to keep a close eye on economic trends andcurrently estimate 2008 full year total revenues will range between $805 and$825 million. The top half of this range anticipates growth in all of our majorrevenue categories.
During 2007 we experienced overall solid consumer demand forour events and we expect events that sold out in 2007 will do the same in 2008.While we did have challenges in 2007 they were primarily associated withspecific regional issues, like the economic challenges in Michigan.In addition we had weather challenges at a number of break weekends mostnotably at California and Michigan.We will be watching renewal trends closely for these events.
Presuming more challenging consumer trends as compared toyears past we currently anticipate low single digit growth in admissions incomeduring 2008. This will be driven by a combination of modest ticket-pricingincreases and attendance growth at non-sold-out events. Impacting ouryear-over-year trends will be the loss of Michigan’sIRL weekend for 2008.
Looking at the nearer term we are extremely encouraged bythe trends we are seeing at Daytona for the first quarter. Anticipation if the50th running of the Daytona 500 is driving a double-digit increasein advance ticket sales. And corporate marketing partners are activatingagainst the property in record numbers.
Turning to motorsports related revenue we expect the mostsignificant driver of growths for the next several years to come from corporatesponsorship. We had great success establishing and renewing marketingpartnerships in 2007 and we expect these positive trends will continue in 2008.One of the most notable is our 10 year multi-facility agreement with Coke. Aswe are early in the year, we currently expect solid full year growth forcorporate spending in at least the mid-single digits.
Looking at race-type sponsorships we currently have sixsprint cups and four nationwide title sponsorships open. We’ve reachedagreements with partners for certain of these events but will not announce themuntil we have executed contracts. By way of comparison, at this time last yearwe had five cups and five bush entitlements open for the 2007 season. It’simportant to note that we sold all of our cup and Busch entitlements in 2007and we look forward to similar success in fiscal 2008. As a reminder Nationwidehas replaced Busch as title sponsor of the nation’s second most popular racingseries. In addition the Nextel cup has been rebranded as the Sprint cupbeginning in 2008.
Also contributing to growth and motorsports related revenuewill be a 2% increase in combined domestic television rights fees for NASCAR’sthree top racing series. We currently anticipate beverage to merchandiserevenue to increase in the low to mid-single digits compared to 2007. Thisgrowth rate is slightly higher than admissions primarily as the result ofincreased sales for the 50th Daytona 500 as well as the expectationof better weather from what we faced in several major event weekends in 2007.
We expect NASCAR direct expenses which include prize money,point fund and sanction fees for NASCAR events will be approximately 21% ofcombined admissions income and most sports related revenue for the 2008 fullyear. This is comparable with our expected results for 2007. As a reminderNASCAR sanction agreements require that track operators take competitor’s prizeand point fund money equal to 25% of the gross television broadcast revenue foreach sanction event conducted. This line item includes the television relatedprize and point fund money, non-television related prize money, point fundmoney and sanction fees for our NASCAR events.
We expect full year motorsports related expenses to rangebetween 22% and 23% of combined admissions income and motorsports relatedrevenue for fiscal 2008. It is comparable to our expected 2007 results.
There are a number of strategic consumer and corporateinitiatives we plan to launch in 2008. It will take time to fully realize thebenefits. These initiatives are focused on several areas, most notablyincreased consumer insight and more innovative direct marketing programs. Wecan wait to invest in these strategies till after economic trends improve butwe believe it is more important to be in a position to fully leverage thesebenefits beginning later in 2008.
We anticipate 2008 four year food, beverage and merchandiseexpense to range between 57% and 58% of food, beverage and merchandise revenue.This represents an improvement in our food, beverage and merchandise marginscompared to 2007, and primarily driven by the expectation of improvedperformance for certain events that were impacted by inclement weather orrelated conditions in 2007.
We expect 2008 G&A expense to be between $114 and $117million which is lower than our expected spending levels in 2007. Included inthis range is between 5 million and 6 million in expenses associated with ourdefense in the Kentucky Speedway litigation. In 2007 we spent approximately $6million on litigation. We are currently waiting on the court’s ruling about oursummary judgment motion, which we expect to receive sometime next month. Thetrial is necessary is scheduled for March of next year.
As we stated repeatedly we continue to believe that thevague allegations of the complaint are totally without merit. At this point webelieve the ultimate likelihood of a materially adverse outcome appears to beremote although there is always a level of uncertainty in litigation. As we’verepeatedly stated we will continue to defend ourselves vigorously in thismatter.
We currently expect our full year EBITDA margin to rangebetween 40% and 41% of total revenues which is similar to our anticipated 2007results. We anticipate depreciation expense in 2008 will range from $69 to $71million. The increase is primarily associated with large projects being placedin service partway through 2007. These include the acquisition of RacewayAssociates in February of 2007, the completion of Richmond’snew grandstand and club-seating last May, and other projects at variousfacilities.
Also contributing to the increase in depreciation expensewas ongoing capital spending at our existing facilities which we expect to bebetween $90 million and $100 million for 2008. This range of spending isconsistent with our long-standing guidance of between $80 million and $100million annually. It’s important to note that approximately $5 million of ouranticipated spending for 2008 is associated with the timing of spending forcertain projects that resulted in the shift from 2007 to 2008.
Our significant projects for 2008 include: track lighting atChicagoland Speedway which will enable the facilities July cup event to run underlights on Saturday night; the addition of a second-story viewing deck in theSprint fan-zone at Daytona International Speedway; grandstand seatingenhancements at Michigan International Speedway; new media centers atHomestead-Miami Speedway and Watkins Glen International; renovations atDollington including a new tunnel; suite enhancements and a repaving of theracing surface; land and related improvements at certain facilities fromparking, camping capacity and other uses; and enhancements and amenities thatenable us to effectively compete with other sports venues for consumer andcorporate spending.
Excluded from our CapEx guidance is approximately $15million in spendingfor Daytona Live, amixed-use entertainment destination development we arepursuing in a50-50 joint venture with theQuarters Company. While certain permitting and local project analyses need to becompleted, we arepleased with thesupport the project hasreceived thus far from local government officials and thecommunity. As we discussed inour call in October,should we succeed in thelocal permitting process and receive positive results from our studies, we lookforward to beginning construction in2008.
Also excluded from our 2008 CapEx guidance is CapEx spendingtotaling between $5 and $7 million for our mediation efforts on theStaten Island property as well as related interest andproperty taxes. As announced atthe end of last monthwe were disappointed that Prologis haselected not to complete thetransaction for thesale of the Staten Island property. However since this is thelargest tract of undeveloped acreage inNew York City we areconfident that in atimely basis we will agree to terms with abuyer interested inredeveloping this tract. We expect our full year operating margins for 2008 to bebetween 32% and 33% of total revenues which is similar to our expected resultsfor 2007.
Looking below operating income we expect interest income torange from $4 to $6 million, and interest expense between $13 and $14 million for2008. We anticipate capitalized interest in 2008 of approximately $7 million ascompared to approximately $5 million in 2007.
Turning our attention to our equity investments line weexpect great performance in 2008. In terms of quarterly expectations wecurrently anticipate break-even income of $1 million for the first and second quartersand a loss of $1 million to break-even for the third and fourth quarters. Includedin equity income is our share of the estimated in come from our joint venturewith GMI to conduct a NASCAR Nationwide and Grand American Race weekend in Montreal.The facility hosted a successful inaugural weekend in 2007 and we remainexcited for its future prospects.
Finally, our guidance for income for equity investmentsincludes the expected operating results for Motor Sports Authentics amotorsports related merchandise 50-50 joint venture with Speed Way Motorsports.At the customer call in October the accelerated turnaround in the business inlate June, MA hired Mark Dyer as its new president and CEO.
Mark previously led NASCAR’s Global licensing efforts andhas more than 25 years experience in sports business. Since July, MA has mademany important changes to the business. In addition over the past several weeksthey finalized their plan for 2008. MA anticipates an important turnaround yearin 2008, and our guidance today projects MA to break even for the full year.This is a dramatic improvement compared to the estimated pre-tax loss ofbetween $45 and $50 million for 2007 that we discussed in October.
As discussed in previous calls, MA has implemented severalspecific management strategies to streamline operations, includingconsolidating locations, reorganizing the management structure and reducingheadcount by more than 20%. Thesestrategies have reduced cost while improving product development, pricing,buying, inventory management and administration. However, these efficiencieswill not fully offset the reduced long-term forecast in sales trends in EBITDAgross at MA.
Along with its operating plan for 2008 MA has prepared alonger range forecast that will be used in its goodwill and intangible assetvaluation. While its valuation is not complete, it has not MA’s auditors, it’santicipated that MA will record an impairment of which ISC’s portion will be$25 million to $50 million. This will be reflected in our 2007 fourth quarterresults. This charge is not deductible to ISC for tax purposes, but will reduceour GAAP earnings between approximately $0.48 and $0.96 per diluted share.While we are clearly disappointed in the magnitude of the impairment wecontinue to believe the sale of license merchandise4 represents a significantopportunity in the sport and we’re confident that the current management at MAhas developed a solid plan for the future.
Part of our revenue increase in 2008 will be generated byimproved merchandise sales for Dale, Jr. and the other team and driver changesannounced to begin this next racing season. Also contributing to improvedresults is a more targeted apparel and novelty strategy which will result inreduced inventory positions. In addition, as discussed in our call in OctoberMA is improving the profitability of its distribution channels. One exampleincludes optimizing the number of merchandise trailers that travel to eventweekends.
On the cost side of the business as previously mentioned theMA management team is ensuring the organization is resourced appropriately.This includes both optimizing the number of employees as well as hiring thebest people for key positions. In that regard MA recently announced the hiringof Patrick Harvey as CFO. Pat comes to MA with more than 25 years of financialand general management experience, including important expertise in turnaroundsituations.
In addition the implementation of more rigorous buying andinventory control systems is allowing MA to better source and manage inventory.This is especially critical as it relates to drivers that are nearing the endof their team contracts. Finally, MA is keenly focused on ensuring that itsfuture licensing agreements are structured to limit exposure to changing marketdynamics.
Moving down the income statement we expect our effective taxrate in 2008 to be approximately 39% for the full year. Driving the full yearestimate is an estimate tax rate for the first and second quarter of between39.5 % and 40%, and a third and fourth quarter tax rate of between 38% and38.5%.
We currently anticipate earnings for 2007 to range between$3.05 and $3.15 per diluted share. And at this point, we’re more comfortable atthe low to mid-point of this range.
As I discussed earlier our quarterly year-over year rateschedules are comparable except for the timing of California’sFall NASCAR weekend and the elimination of Michigan’sIRL weekend. We anticipate that the fourth quarter will be the most financiallysignificant followed by the third, first and second quarters in that order.
Contributing to our expected earnings per share growth in2007 will be a lower number of shares outstanding. In December of last year, weannounced a $50 million share repurchase program that was increased to $150million in July. Through November we have spent approximately $81 million topurchase more than 1.6 million shares on the open market, which leaves $69million in remaining capacity. Over the past year, we’ve spent over $10 millionper month and we anticipate being more aggressive in the coming months. We’realso considering expanding the share repurchase program as appropriate.
In conclusion we believe the future of motorsportsentertainment is bright and we remain excited about the opportunities in 2008and beyond. The fundamentals of our business remain strong driven by solidconsumer and corporate interest. Our business model has evolved over the yearsinto one that provides significant earnings and cash flow visibilities with asubstantial portion of our revenues are contracted on a multi-year basis withstaggered maturities. You’ve heard about continued execution of our long-termstrategy of growing the profitability of our existing events and leveraging ourpresence in key markets. We believe we are in a string position to help furtherpromote motorsports entertainment into the American mainstream.
Before we open up the call for Q&A I wanted to sharesome additional news with you this morning. Effective February the 1stI will be moving over to NASCAR and Dan Houser will be promoted to ChiefFinancial Officer at International Speedway Corporation. I’ve worked with Danfor the past 14 years at ISC and many of you have had the opportunity tointeract with him in recent years. Dan has fantastic experience in both theoperational side of the business and the strategic side of the business, and Iam confident that he’ll do a great job moving ISC to the next level andcontinuing to provide shareholder value. Dan.
Thanks, Susan, you’re going to be a hard act to follow. Forthose of you on the phone, Susan brought me into this business 14 years ago andI have benefited tremendously from her leadership and mentoring, It’s been aprivilege and a great growing experienceto be able to work closely with Susan over the years. I feel I'm well preparedto take on the challenge of this position. Congratulations, Susan, in your moveto NASCAR.
As far as the company going into 2008 I’m excited that we’rein very solid financial footing going into some times in which we’re facingmacro-economic challenges as well as some regional economic challenges. One ofmy focuses is going to be on continuing to drive efficiencies in the businessand also focusing on certain strategic initiatives that are going to contributeto not only our short0term growth but the longer-term growth and stability ofthe company.
As with many of us here in senior management, I’ll be veryfocused on Motorsports Authentics. I’ve spent a lot of time over the past fewmonths with Mark Dyer and his team putting together a rock-solid plan to bringthat company to profitability. I feel very good about our opportunities thereand I will remain focused and invested on those plans successfully executing.
In addition, following in Susan’s leadership is maintaininga prudent and optimal allocation structure, maintaining liquidity, keeping upwith investment in our facilities and also with our share repurchase plans. Ilook forward to working with all of you in the future in the capacity of thechief financial officer. I’ve had the opportunity to meet many of you atvarious events over the years. I'm excited about what’s ahead. Thanks.
Thanks, Dan. Congratulations to Dan, as I said he’ll do afantastic job.
That concludes our formal remarks. I’d like to turn the callback over to the operator who will open it up for Q&A. Operator.
[Operator instructions] Our first question comes from EdwardWilliam of BMO Capital Markets.
Edward Williams - BMO Capital Markets
Good morning and congratulations, Dan and Susan. Susan,first of all what will you be doing for NASCAR?
I’ll be moving over there as their Chief Accounting Officer.
Edward Williams - BMO Capital Markets
Okay, congratulations on that. A couple of questions foryou, one is the capital structure in stock buyback plans. Can you just give usan idea as to what your thoughts are as to the ideal structure that is to bothDan and Susan. And how aggressive and the timing of when we might see you getmore aggressive with buying back stock?
And a related question is looking at Staten Island, when do you think we can get some timing on the potentialsale of that plan with regards to fiscal 2008?
On Staten Island, we had anumber of interested buyers inaddition to Prologis when we selected them to moveforward and committed them to go through thediligence period. We areback in discussionwith other parties interested inthe property. There isdefiantly some very solid interest. Our hope is that we will beable to, sometime during 2008, close inthe sale of thatproperty. Although atthis point there is nothing definitive to announce I can’t give you anexact timeline.
On the share repurchase program, if you recall the firsttime that we really embarked on a share repurchase program was last December.We put $50 million into the plan. As it became clear that some of ourdevelopment opportunities had a longer term horizon we added to that in Julyand set it up to $150 million. Certainly as the share price has declinedsomewhat in the last quarter we’ve been more aggressive in our purchasing. Ithink you will continue to see that into next year. There’s a very strong freecash flow. We want to have dry powder for development and acquisitionopportunities. But the extant that they don’t appear to be in the near-turnhorizon we will be more aggressive in the share repurchase program.
I echo what Susan has to say there. Certainly we feel ourshare repurchase program up to this point has been a very good strategic movefor us. It’s been well received in the marketplace. We continue to view that aspart of our capital allocation strategy in the long-run. As Susan saidcertainly while we’re in a lull at this point on certain acquisitions anddevelopments, we certainly have an eye to what makes sense in the future that’sgoing to provide a good return and also has a reasonable risk in coming tofruition.
Edward Williams - BMO Capital Markets
Along those lines what do you think could be the timing fordeveloping something if you were to look in place like Denver or the Pacificnorthwest or the New York Metro area, how many years out do you think it couldbe before a track is actually able to be active in one of those markets?
I think inan era of old markets orany other markets that theshortest timeframe would probably athree to five year period. That would beif we had a siteidentified and were working through thelegislative issues. Just theconstruction timeline is atleast two, maybe three years depending on theweather conditions. It’s apretty long lead time.
We’re definitely interested in - remain interested in theNew York Metropolitan market and other development opportunities. We’ve gotsome string interests out in Denver,but we’re approaching it a little bit differently that we have in the past.Where we’ve always gone to markets where there have been political interests,we stalled on that end in Seattlewhen it came to the legislative front. What we’re hoping to do now is get thepublic support out in front of us a bit to try and get a broader base ofsupport before we start working more solidly on developing prospects.
It’s a long-winded answer, but I’d say at least a three tofive year time horizon on any development.
Edward Williams - BMO Capital Markets
Okay, then looking at Motorsports Authentics, can you giveus an idea to how much you’ve actually invested into it? Have you had to putfurther cash into the business?
No there have been no additional cash infusions since theoriginal purchase of that business. I’ve looked pretty closely at their cashprojections coming into this year we expect to be cash positive. We don’tforesee any parent company infusions of cash there.
Edward Williams - BMO Capital Markets
Okay, thank you.
Ed, this is Ed Harris, I wanted to make one other comment onthe share repurchase. Through the end of the third quarter, we have purchasedabout a million shares on the open market. We’ll put this into our year-endfilings, in the fourth quarter we purchased about 650,000 shares. We were a lotmore aggressive, about $30 million worth of purchases. As of year end, wepurchased about 1.6 million shares, a little over that, and invested around $81million in that program.
Your next question comes from Alvin Concepcion with Citigroup.
Alvin Concepcion – Citigroup
Yes, you mentioned some higher advanced ticket sales forDaytona 500, how were your other events in the first quarter returning?
We feel very good about going into the first quarter. Speedwaymakes up a great percentage of that, it’s looking strong overall driven by the50th Daytona 500. Other events as well, it stacks up looking prettysolid.
Alvin Concepcion – Citigroup
It sounds like your assuming a little fairer weather in ’08,do you assume weather was similar to 2007, is that baked into the lower rangefor ’08?
Yes, I think that that’s baked into the low end of theguidance portion. We would also assume that we’ve got a similar economiccondition moving forward. If it improves, hopefully that will help us. Ifthere’s deterioration, though, that will probably put us in the lower portionof the range as well.
Alvin Concepcion – Citigroup
Okay, great. Can you go over thetiming of some of your CapEx projects in’08? Particularly thegrandstands in Michigan,when those will beready?
Michigan hastwo cup races, one in June and one in August, the expectation is that thegrandstand seating enhancements there will be completed for the June race, thefirst cup race.
Alvin Concepcion – Citigroup
Okay, thank you.
At this time there appear to be no further questions.
Alright, I want to thank every one for joining us on thecall this morning and in closing I want to say that I’ve thoroughly enjoyedworking with all of you over the years, and certainly at ISC. I’ve been herefor a total of 15 years, and I’ve had the opportunity to see the company growand prosper, and I’ve enjoyed it along the way. I know that the business modelis very strong with our stable cash flows and the contracts with staggeredmaturities. We’ve got a great ability to weather any kind of economic downturn.I think we’re in a great position, the future is bright and I’m looking forwardto continuing to watch the company grow.
I echo Susan’s comments again that we’re poised I think foran exciting and successful 2008. We’ll be mo4ving in here to execute that plan.
Alright, thank you very much. The year end call is at theend of January.
Thank you that concludes today’s teleconference. You may nowdisconnect.