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 - BMO Capital Markets
Alvin Concepcion - Citigroup
International Speedway Corporation (ISCA) Guidance Call December 12, 2007 9:00 AM ET
Good morning and welcome to International Speedway Corporation 2008 Financial Guidance Conference Call. During the presentation all participants will be in a listen only mode. Afterwards you’ll be invited to participate in a question-and-answer session (Operator instructions). As a reminder this call is being recorded on Wednesday December 12, 2007.
I would now like to turn this conference over to Wes Harris Senior Director of Investor Communications for International Speedway. Mr. Harris, please go ahead.
Well thank you, Operator. Good morning everyone and welcome to the International Speedway Corporation conference call.
We’re here to discuss the company’s financial guidance for the year ending November 30, 2008. Joining me in this morning’s call are Susan Schandel Senior Vice President and Chief Financial Officer and as well we have Dan Houser Vice President and Chief Accounting Officer joining us.
After we have provided our formal remarks a question-and-answer period will follow. The operator will instruct you on procedure at that time.
Before we get started I would 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 which are not historical facts or planned perspectively are considered forward-looking statements. It’s important to know that the company’s actual results may differ materially from those contained in or implied by these 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 and the SEC.
The company takes no obligation to release publicly any revisions to these forward-looking statements that may be needed to reflect events or circumstances after today hereof or 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.
With these formalities out of the way, I’d like to turn the call over to Susan Schandel. Susan.
Thanks, Wes. Good morning, everyone and thanks for joining us on today's call.
We had a strong finish with our event weekends in fiscal 2007 and we remain comfortable with our previous four year guidance of total revenues ranging between $810 an $815 million.
As a result of our solid fourth quarter we are increasing our previous four year earnings guidance of $2.70 to $2.75 per diluted share to between $2.75 and $2.80 per diluted share. This guidance excludes charges for accelerated appreciation on certain office and related buildings in Daytona Beach, impairment charges related to the company’s decision to discontinue development efforts in Kitset County, Washington, and costs related to fill removal in ISC’s Staten Island property and a 2007 third quarter write-down of certain inventory and related assets at Motor Sports Authentics our 50-50 joint venture with Speedway Motor Sports.
In addition our earnings guidance excludes an anticipated 2007 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 similar to 2007. Our press release details major events by series and quarter. And I’d like to highlight the two significant year-over-changes. First as Labor Day falls on September 1st in 2008, the results for California’s Fall Cup weekend will be reported in the third quarter as compared to the fourth quarter in 2007. And second, as announced several months ago, Michigan will not conduct an IRL weekend in 2008. This event weekend was held in the third quarter of 2007.
These schedule changes will result in the fourth quarter of 2008 being the most financially significant followed by the third, first and second quarters. We continue to keep a close eye on economic trends and currently 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 major revenue categories.
During 2007 we experienced overall solid consumer demand for our 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 with specific regional issues, like the economic challenges in Michigan. In addition we had weather challenges at a number of break weekends most notably at California and Michigan. We will be watching renewal trends closely for these events.
Presuming more challenging consumer trends as compared to years past we currently anticipate low single digit growth in admissions income during 2008. This will be driven by a combination of modest ticket-pricing increases and attendance growth at non-sold-out events. Impacting our year-over-year trends will be the loss of Michigan’s IRL weekend for 2008.
Looking at the nearer term we are extremely encouraged by the trends we are seeing at Daytona for the first quarter. Anticipation if the 50th running of the Daytona 500 is driving a double-digit increase in advance ticket sales. And corporate marketing partners are activating against the property in record numbers.
Turning to motorsports related revenue we expect the most significant driver of growths for the next several years to come from corporate sponsorship. We had great success establishing and renewing marketing partnerships 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. As we are early in the year, we currently expect solid full year growth for corporate spending in at least the mid-single digits.
Looking at race-type sponsorships we currently have six sprint cups and four nationwide title sponsorships open. We’ve reached agreements with partners for certain of these events but will not announce them until we have executed contracts. By way of comparison, at this time last year we had five cups and five bush entitlements open for the 2007 season. It’s important to note that we sold all of our cup and Busch entitlements in 2007 and we look forward to similar success in fiscal 2008. As a reminder Nationwide has replaced Busch as title sponsor of the nation’s second most popular racing series. In addition the Nextel cup has been rebranded as the Sprint cup beginning in 2008.
Also contributing to growth and motorsports related revenue will be a 2% increase in combined domestic television rights fees for NASCAR’s three top racing series. We currently anticipate beverage to merchandise revenue to increase in the low to mid-single digits compared to 2007. This growth rate is slightly higher than admissions primarily as the result of increased sales for the 50th Daytona 500 as well as the expectation of 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% of combined admissions income and most sports related revenue for the 2008 full year. This is comparable with our expected results for 2007. As a reminder NASCAR sanction agreements require that track operators take competitor’s prize and point fund money equal to 25% of the gross television broadcast revenue for each sanction event conducted. This line item includes the television related prize and point fund money, non-television related prize money, point fund money and sanction fees for our NASCAR events.
We expect full year motorsports related expenses to range between 22% and 23% of combined admissions income and motorsports related revenue for fiscal 2008. It is comparable to our expected 2007 results.
There are a number of strategic consumer and corporate initiatives we plan to launch in 2008. It will take time to fully realize the benefits. These initiatives are focused on several areas, most notably increased consumer insight and more innovative direct marketing programs. We can wait to invest in these strategies till after economic trends improve but we believe it is more important to be in a position to fully leverage these benefits beginning later in 2008.
We anticipate 2008 four year food, beverage and merchandise expense to range between 57% and 58% of food, beverage and merchandise revenue. This represents an improvement in our food, beverage and merchandise margins compared to 2007, and primarily driven by the expectation of improved performance for certain events that were impacted by inclement weather or related conditions in 2007.
We expect 2008 G&A expense to be between $114 and $117 million which is lower than our expected spending levels in 2007. Included in this range is between 5 million and 6 million in expenses associated with our defense in the Kentucky Speedway litigation. In 2007 we spent approximately $6 million on litigation. We are currently waiting on the court’s ruling about our summary judgment motion, which we expect to receive sometime next month. The trial is necessary is scheduled for March of next year.
As we stated repeatedly we continue to believe that the vague allegations of the complaint are totally without merit. At this point we believe the ultimate likelihood of a materially adverse outcome appears to be remote although there is always a level of uncertainty in litigation. As we’ve repeatedly stated we will continue to defend ourselves vigorously in this matter.
We currently expect our full year EBITDA margin to range between 40% and 41% of total revenues which is similar to our anticipated 2007 results. We anticipate depreciation expense in 2008 will range from $69 to $71 million. The increase is primarily associated with large projects being placed in service partway through 2007. These include the acquisition of Raceway Associates in February of 2007, the completion of Richmond’s new grandstand and club-seating last May, and other projects at various facilities.
Also contributing to the increase in depreciation expense was ongoing capital spending at our existing facilities which we expect to be between $90 million and $100 million for 2008. This range of spending is consistent with our long-standing guidance of between $80 million and $100 million annually. It’s important to note that approximately $5 million of our anticipated spending for 2008 is associated with the timing of spending for certain projects that resulted in the shift from 2007 to 2008.
Our significant projects for 2008 include: track lighting at Chicagoland Speedway which will enable the facilities July cup event to run under lights on Saturday night; the addition of a second-story viewing deck in the Sprint fan-zone at Daytona International Speedway; grandstand seating enhancements at Michigan International Speedway; new media centers at Homestead-Miami Speedway and Watkins Glen International; renovations at Dollington including a new tunnel; suite enhancements and a repaving of the racing surface; land and related improvements at certain facilities from parking, camping capacity and other uses; and enhancements and amenities that enable us to effectively compete with other sports venues for consumer and corporate spending.
Excluded from our CapEx guidance is approximately $15 million in spending for Daytona Live, a mixed-use entertainment destination development we are pursuing in a 50-50 joint venture with the Quarters Company. While certain permitting and local project analyses need to be completed, we are pleased with the support the project has received thus far from local government officials and the community. As we discussed in our call in October, should we succeed in the local permitting process and receive positive results from our studies, we look forward to beginning construction in 2008.
Also excluded from our 2008 CapEx guidance is CapEx spending totaling between $5 and $7 million for our mediation efforts on theStaten Island property as well as related interest and property taxes. As announced atthe end of last month we were disappointed that Prologis has elected not to complete the transaction for the sale of the Staten Island property. However since this is the largest tract of undeveloped acreage in New York City we are confident that in a timely basis we will agree to terms with a buyer interested in redeveloping this tract. We expect our full year operating margins for 2008 to be between 32% and 33% of total revenues which is similar to our expected results for 2007.
Looking below operating income we expect interest income to range from $4 to $6 million, and interest expense between $13 and $14 million for 2008. We anticipate capitalized interest in 2008 of approximately $7 million as compared to approximately $5 million in 2007.
Turning our attention to our equity investments line we expect great performance in 2008. In terms of quarterly expectations we currently anticipate break-even income of $1 million for the first and second quarters and a loss of $1 million to break-even for the third and fourth quarters. Included in equity income is our share of the estimated in come from our joint venture with GMI to conduct a NASCAR Nationwide and Grand American Race weekend in Montreal. The facility hosted a successful inaugural weekend in 2007 and we remain excited for its future prospects.
Finally, our guidance for income for equity investments includes the expected operating results for Motor Sports Authentics a motorsports related merchandise 50-50 joint venture with Speed Way Motorsports. At the customer call in October the accelerated turnaround in the business in late June, MA hired Mark Dyer as its new president and CEO.
Mark previously led NASCAR’s Global licensing efforts and has more than 25 years experience in sports business. Since July, MA has made many important changes to the business. In addition over the past several weeks they finalized their plan for 2008. MA anticipates an important turnaround year in 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 of between $45 and $50 million for 2007 that we discussed in October.
As discussed in previous calls, MA has implemented several specific management strategies to streamline operations, including consolidating locations, reorganizing the management structure and reducing headcount by more than 20%. These strategies have reduced cost while improving product development, pricing, buying, inventory management and administration. However, these efficiencies will not fully offset the reduced long-term forecast in sales trends in EBITDA gross at MA.
Along with its operating plan for 2008 MA has prepared a longer range forecast that will be used in its goodwill and intangible asset valuation. While its valuation is not complete, it has not MA’s auditors, it’s anticipated 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 quarter results. This charge is not deductible to ISC for tax purposes, but will reduce our GAAP earnings between approximately $0.48 and $0.96 per diluted share. While we are clearly disappointed in the magnitude of the impairment we continue to believe the sale of license merchandise4 represents a significant opportunity in the sport and we’re confident that the current management at MA has developed a solid plan for the future.
Part of our revenue increase in 2008 will be generated by improved merchandise sales for Dale, Jr. and the other team and driver changes announced to begin this next racing season. Also contributing to improved results is a more targeted apparel and novelty strategy which will result in reduced inventory positions. In addition, as discussed in our call in October MA is improving the profitability of its distribution channels. One example includes optimizing the number of merchandise trailers that travel to event weekends.
On the cost side of the business as previously mentioned the MA management team is ensuring the organization is resourced appropriately. This includes both optimizing the number of employees as well as hiring the best people for key positions. In that regard MA recently announced the hiring of Patrick Harvey as CFO. Pat comes to MA with more than 25 years of financial and general management experience, including important expertise in turnaround situations.
In addition the implementation of more rigorous buying and inventory control systems is allowing 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. Finally, MA is keenly focused on ensuring that its future licensing agreements are structured to limit exposure to changing market dynamics.
Moving down the income statement we expect our effective tax rate in 2008 to be approximately 39% for the full year. Driving the full year estimate is an estimate tax rate for the first and second quarter of between 39.5 % and 40%, and a third and fourth quarter tax rate of between 38% and 38.5%.
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 at the low to mid-point of this range.
As I discussed earlier our quarterly year-over year rate schedules are comparable except for the timing of California’s Fall NASCAR weekend and the elimination of Michigan’s IRL weekend. We anticipate that the fourth quarter will be the most financially significant followed by the third, first and second quarters in that order.
Contributing to our expected earnings per share growth in 2007 will be a lower number of shares outstanding. In December of last year, we announced a $50 million share repurchase program that was increased to $150 million in July. Through November we have spent approximately $81 million to purchase more than 1.6 million shares on the open market, which leaves $69 million in remaining capacity. Over the past year, we’ve spent over $10 million per month and we anticipate being more aggressive in the coming months. We’re also considering expanding the share repurchase program as appropriate.
In conclusion we believe the future of motorsports entertainment is bright and we remain excited about the opportunities in 2008 and beyond. The fundamentals of our business remain strong driven by solid consumer and corporate interest. Our business model has evolved over the years into one that provides significant earnings and cash flow visibilities with a substantial portion of our revenues are contracted on a multi-year basis with staggered maturities. You’ve heard about continued execution of our long-term strategy of growing the profitability of our existing events and leveraging our presence in key markets. We believe we are in a string position to help further promote motorsports entertainment into the American mainstream.
Before we open up the call for Q&A I wanted to share some additional news with you this morning. Effective February the 1st I will be moving over to NASCAR and Dan Houser will be promoted to Chief Financial Officer at International Speedway Corporation. I’ve worked with Dan for the past 14 years at ISC and many of you have had the opportunity to interact with him in recent years. Dan has fantastic experience in both the operational side of the business and the strategic side of the business, and I am confident that he’ll do a great job moving ISC to the next level and continuing to provide shareholder value. Dan.
Thanks, Susan, you’re going to be a hard act to follow. For those of you on the phone, Susan brought me into this business 14 years ago and I have benefited tremendously from her leadership and mentoring, It’s been a privilege and a great growing experience to be able to work closely with Susan over the years. I feel I'm well prepared to take on the challenge of this position. Congratulations, Susan, in your move to NASCAR.
As far as the company going into 2008 I’m excited that we’re in very solid financial footing going into some times in which we’re facing macro-economic challenges as well as some regional economic challenges. One of my focuses is going to be on continuing to drive efficiencies in the business and also focusing on certain strategic initiatives that are going to contribute to not only our short0term growth but the longer-term growth and stability of the company.
As with many of us here in senior management, I’ll be very focused on Motorsports Authentics. I’ve spent a lot of time over the past few months with Mark Dyer and his team putting together a rock-solid plan to bring that company to profitability. I feel very good about our opportunities there and I will remain focused and invested on those plans successfully executing.
In addition, following in Susan’s leadership is maintaining a prudent and optimal allocation structure, maintaining liquidity, keeping up with investment in our facilities and also with our share repurchase plans. I look forward to working with all of you in the future in the capacity of the chief financial officer. I’ve had the opportunity to meet many of you at various events over the years. I'm excited about what’s ahead. Thanks.
Thanks, Dan. Congratulations to Dan, as I said he’ll do a fantastic job.
That concludes our formal remarks. I’d like to turn the call back over to the operator who will open it up for Q&A. Operator.
[Operator instructions] Our first question comes from Edward William 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 for you, one is the capital structure in stock buyback plans. Can you just give us an idea as to what your thoughts are as to the ideal structure that is to both Dan and Susan. And how aggressive and the timing of when we might see you get more 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 potential sale of that plan with regards to fiscal 2008?
On Staten Island, we had a number of interested buyers in addition to Prologis when we selected them to move forward and committed them to go through the diligence period. We are back in discussion with other parties interested inthe property. There is defiantly some very solid interest. Our hope is that we will be able to, sometime during 2008, close inthe sale of that property. Although at this point there is nothing definitive to announce I can’t give you an exact timeline.
On the share repurchase program, if you recall the first time 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 our development opportunities had a longer term horizon we added to that in July and set it up to $150 million. Certainly as the share price has declined somewhat in the last quarter we’ve been more aggressive in our purchasing. I think you will continue to see that into next year. There’s a very strong free cash flow. We want to have dry powder for development and acquisition opportunities. But the extant that they don’t appear to be in the near-turn horizon we will be more aggressive in the share repurchase program.
I echo what Susan has to say there. Certainly we feel our share repurchase program up to this point has been a very good strategic move for us. It’s been well received in the marketplace. We continue to view that as part of our capital allocation strategy in the long-run. As Susan said certainly while we’re in a lull at this point on certain acquisitions and developments, we certainly have an eye to what makes sense in the future that’s going to provide a good return and also has a reasonable risk in coming to fruition.
Edward Williams - BMO Capital Markets
Along those lines what do you think could be the timing for developing something if you were to look in place like Denver or the Pacific northwest or the New York Metro area, how many years out do you think it could be before a track is actually able to be active in one of those markets?
I think inan era of old markets or any other markets that the shortest timeframe would probably a three to five year period. That would be if we had a site identified and were working through the legislative issues. Just the construction timeline is at least two, maybe three years depending on the weather conditions. It’s a pretty long lead time.
We’re definitely interested in - remain interested in the New York Metropolitan market and other development opportunities. We’ve got some 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 Seattle when it came to the legislative front. What we’re hoping to do now is get the public support out in front of us a bit to try and get a broader base of support before we start working more solidly on developing prospects.
It’s a long-winded answer, but I’d say at least a three to five year time horizon on any development.
Edward Williams - BMO Capital Markets
Okay, then looking at Motorsports Authentics, can you give us an idea to how much you’ve actually invested into it? Have you had to put further cash into the business?
No there have been no additional cash infusions since the original purchase of that business. I’ve looked pretty closely at their cash projections coming into this year we expect to be cash positive. We don’t foresee 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 on the share repurchase. Through the end of the third quarter, we have purchased about a million shares on the open market. We’ll put this into our year-end filings, in the fourth quarter we purchased about 650,000 shares. We were a lot more aggressive, about $30 million worth of purchases. As of year end, we purchased about 1.6 million shares, a little over that, and invested around $81 million in that program.
Your next question comes from Alvin Concepcion with Citigroup.
Alvin Concepcion – Citigroup
Yes, you mentioned some higher advanced ticket sales for Daytona 500, how were your other events in the first quarter returning?
We feel very good about going into the first quarter. Speedway makes up a great percentage of that, it’s looking strong overall driven by the 50th Daytona 500. Other events as well, it stacks up looking pretty solid.
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 range for ’08?
Yes, I think that that’s baked into the low end of the guidance portion. We would also assume that we’ve got a similar economic condition moving forward. If it improves, hopefully that will help us. If there’s deterioration, though, that will probably put us in the lower portion of the range as well.
Alvin Concepcion – Citigroup
Okay, great. Can you go over the timing of some of your CapEx projects in ’08? Particularly the grandstands in Michigan, when those will be ready?
Michigan has two cup races, one in June and one in August, the expectation is that the grandstand seating enhancements there will be completed for the June race, the first 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 the call this morning and in closing I want to say that I’ve thoroughly enjoyed working with all of you over the years, and certainly at ISC. I’ve been here for a total of 15 years, and I’ve had the opportunity to see the company grow and prosper, and I’ve enjoyed it along the way. I know that the business model is very strong with our stable cash flows and the contracts with staggered maturities. 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 forward to continuing to watch the company grow.
I echo Susan’s comments again that we’re poised I think for an 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 the end of January.
Thank you that concludes today’s teleconference. You may now disconnect.