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Speedway Motorsports Inc. (NYSE:TRK)

Q4 2007 Earnings Call Transcript

March 12, 2008 11:00 am ET

Executives

Lauri Wilks – Director IR

Humpy Wheeler – President, COO

Marcus Smith – EVP Sales and Marketing

Bill Brooks – CFO

Analysts

Timothy Conder – Wachovia Capital Markets

Joseph Hovorka – Raymond James

Chris Simms – [Shankman] Capital

Bob Simonson – William Blair and Company

Edward Williams – BMO Capital Markets

Gene Fox – Cardinal Capital Management

Kevin Toney – American Century Investments

Presentation

Operator

Good Morning, my name is Kimberly and I will be your conference operator today. At this time I would like to welcome everyone to the 2007 fourth quarter and yearend Earnings Release Call. (Operator instructions). Thank you, Ms. Wilks you may begin your conference.

Lauri Wilks

Thank you Kimberly, good morning everybody and thank you for being so patient with us this morning. We apologize very sincerely for some major technical difficulty that has caused a significant delay in our conference call. We thank you for being on the line and listening to our comments today. We have our fourth quarter and year end 2007 earnings release and with me today on the call I have Mr. H. A. Wheeler, the President and Chief Operating Officer of Speedway Motorsports, Mr. Bill Brooks who is our Chief Financial Officer and Executive Vice President of Speedway Motorsports, and Mr. Marcus Smith who is Executive Vice President of National Sales and Marketing with us.

Before we get in to the prepared remarks, I did want to remind you that this conference call may contain some forward looking statements, particularly statements with regard to our future operations and financial results. There are many factors that affect our future events and trends of our business including but not limited to consumer and corporate spending sentiment, air travel, governmental regulations, military actions, natural or local catastrophic events and the success of and weather surrounding our racing events, our relationship with NASCAR and other sanctioning bodies, the success of Motorsports authentic merchandising joint venture, the success of our expense reduction efforts, capital projects, expansion plans, economic conditions, stock repurchases, financing needs, insurance, litigation, taxes, oil and gas activities and associated profitability, geo-political situations in foreign countries and other factors outside of our management’s control.

These factors and other factors are detailed out and included in those contained in our companies annual report on Form 10K and subsequently filed quarter reports on Form 10Q, involves certain risks and uncertainties that can cause actual results to differ materially from our views and expectations expressed here today. With that out of the way, Humpy I would like to turn the call over to you.

Humpy Wheeler

Well thanks and I apologize again for the delay at the start here. But what I want to talk to you about first is the fourth quarter which saw us record record full year admission and event related revenues for ’07. In the fourth quarter our motorsports business was very stable. We saw record levels of corporate marketing and other event related revenues this time we’ll also had three races in the fourth quarter. The first one was the Bank of America at Lowe’s Motor Speedway in Charlotte and the Dickies 500 weekend at Texas. They both had increased attendance revenues over the prior year.

Atlanta we did not fare as well. We, our attendance was softer than the prior year at the Pep Boy’s 500, so there were three races in the fourth quarter and overall we were pleased with what happened motorsports-wise. 2007 overall was a very challenging year for us and we’re definitely eager to see better results in ’08, despite high fuel prices and challenging consumer credit and housing markets, and overall nationwide decline in consumer spending we did record year over year increases in admissions, sponsorships, suite rentals and advertising.

The problem is despite these positives, Motorsports Authentic which is our 50/50 joint venture partner with International Speedway Corporation had very disappointing performance and Bill Brooks and Marcus Smith will talk more about this later. Let’s talk about 2008 though and let me just discuss a minute diverse revenues streams of our motorsports business because this really how you have to understand what we do. And these diverse streams complement and support each other during different business cycles. In years past, we’ve had periods in our business when admissions were very strong and corporate revenues were weak and broadcast revenues at one time were either non-existent or very slight.

About, in those days about 50% of our revenues were admissions, sponsorships and broadcast revenues was less than 10% combined. And then we’ve had periods when admissions were relatively soft but the broadcast and corporate revenues were very strong. Last year, for instance we had 32% admissions, part of our revenue, 25% broadcasting and 11% in sponsorships. We think our current situation is one of flat to soft admissions but we have strong corporate revenues and very stable broadcast income. This gives a lot of encouragement regarding the stability and strength of our motorsports business.

Also one other encouraging aspect is that in January, we completed the purchase of New Hampshire, which we’ve renamed New Hampshire Motor Speedway. We now own first class facilities in four of the nation’s top ten metro markets. And this is very, very positive for us from a national sales marketing standpoint because we can leverage our facilities in a much stronger manner. Through this purchase secured two additional NASCAR Sprint Cup series race weekends and extended our company into the lucrative New England market which is one of the largest media markets in the US.

Looking at 2008 again I think admissions vary somewhat market to market but they tend to be flat to slightly down. We had fantastic weather and a strong crowd at Las Vegas for a NASCAR Triple Header Weekend. That was first weekend in March. We are anticipating sell-outs at Bristol this weekend as well as New Hampshire in June. Construction continues to move along at Lowe’s Motor Speedway for our new driveway. And we’ll open this facility with a NHRA national event on September 11. Also we’re embarking on a new modernization program to bring Lowe’s Motor Speedway back up to the eminence we once enjoyed by a seating upgrade of about 20,000 front stretch seats which will be wider and more comfortable.

Looking at business trends for Speedway Motorsports and NASCAR in general, one of the real highlights of ’08 so far has been the increase in TV ratings. We’ve been very please to see an up-tick in broadcast ratings for the first three cup events of the year. Overall ratings are up 1%, 7.9 versus 7.8 and households are up 3%. Now this is the time when most sports are seeing a decline in ratings because of the dilution that is going on in this country as cable TV continues to add more and more specialty channels. Las Vegas got a 7.1 rating which was up 13% over the 6.3 rating the prior year. It was the highest rating, most watched event in the history of Las Vegas and it was by far the number one rated sports event of the weekend.

So NASCAR continues to solidify its place as the number two spot on television; and as most of you know we’re in the second year of our eight year broadcast agreement between NASCAR fox, which has basically the first half of the season with ABC and ESPN, as well as Speed. Broadcasting will continue to become a core business for us and will provide us with increased revenues of about 3% through 2014 which adds again to the strong stability of this business.

Two thirds of the NASCAR events remained in network broadcast and this is important because this means we’re capable of reaching most every household in America with a TV set obviously. And you know there’s a lot of NASCAR programming available. I mean ESPN, ESPN II, ABC, FOX, FOX Sports and The Speed Channel are filled with various and sundry NASCAR programming. And I think this is going to help long term attendance and certainly is proven strong for corporate marketing appeal.

Now over on the other side we’ve go high gas prices to contend with and I’m not going to say that that’s not going to have an impact on our business, it will. It will impact and then I think it’s one of the principle reasons why we’ve been flat or slow in our, in some ticket sales in some places because obviously it is affected everything in America because of high petroleum prices not only at the gas pump but also bringing goods and services to people. But we’d been through all this before. We went through the ’73 time when we couldn’t even get gas. We went through ’79 when we had even/odd rationing as you remember all that. I think as long as gas is available and we make our events attractive and places to go and give them a festival feeling that people will, people want to have a good time and so over all I feel pretty good about ’08 as far as the motorsports end of it is concerned because we again, we count on the stability of this business and no it’s not all perfect but if you look at what’s going on in the country we’re doing as well or better than most industries.

And in particular over in the corporate side, sometimes in a recession as I said before or slow times, whatever you want to call this, corporate spending goes down. But that hasn’t been the case and I think I’d like right now to ask our Executive Vice President of Sales and Marketing, Marcus Smith to talk about that, so Mark, why don’t you tell them at little bit about what’s going on there.

Marcus Smith

Thank you Humpy, we do continue to see strong trends in corporate spending for all of our facilities at our events. While we’ve seen some people pull back, we’ve seen others continue to move forward and find value in the opportunity that we present to market to the consuming public. Our fans continue to be very avid and loyal and they are where people want put their advertising marketing dollar. All of our major events, our Sprint Cup event entitlements are sold for 2008 and we have only one available for 2009 and we anticipate that that will be sold without much delay and there all very desirable events and all of our nationwide series and the NASCAR truck series events, entitlements are sold for 2008 as well. We do have a few available for 2009 but again the demand has seemed to meet our supply very well and our partners continue to renew in a way that’s very pleasing to us and we’re able to build the relationships we have with those folks and outside of event entitlements corporate partners are continuing to entertain and promote their brands at our facilities and through our radio network.

So all in all, where some things again may be pulling back, others are going forward and we have a very good trend there that continues and in 2009 pre-selling is going well now also. So moving on to the next topic, Motorsports Authentics has not been quite as pleasing. Obviously from the last call we had, things were not going the way we wanted for 2007. We had several well basically all of the major licenses that we own change their colors and sponsors and numbers or brands in some way, some more than other, but all affecting business in a significant way. 2007 was a very significant disappointing year with the $20 million loss that Motorsports Authentics and we continued with the Asset Impairment charge that was the result of all the driver team and sponsor changes as well as renaming of the Nextel Cup Series to the Sprint Cup Series and Busch Series to Nationwide Series along with Car Tomorrow.

We’re into 2008 now and thankfully things are looking better. We’ve got the table set for what ought to be a good year. We’re anticipating a break even year which would be a significant improvement from 2007. And the preliminary results over the last 2 months have been very pleasing. So, Bill I’ll turn it over to you for the rest of the discussion on the finances.

Bill Brooks

Thank you Marcus, our results for the quarter and year end December, ’07 contain three large items that are somewhat unusual. As expected we recorded our share of the losses and asset impairments reflected in the financial statements of our 50% owned subsidiary Motorsports Authentics or MA. Those losses were $36.5 million for the quarter and $57.4 million for the year. We recorded a $12 million allowance on a disputed guarantee in oil and gas business and then thirdly we recorded a $5 million asset impairment for the termination of the Las Vegas condominium projects and abandonment and disposal of some property and equipment at Infineon Raceway and Oil Chem.

The results of these items are as follows. For earnings per share, for the quarter the MA losses resulted in about $0.83. The reserve on guarantee was approximately $0.17 per share and the asset impairment was $0.07 per share. And that totals $1.07 per share. That combined was the reported earning of a $0.46 loss; the adjusted earnings per share are about $0.61 for the quarter. Doing the same analysis for the year, the Motorsports Authentic losses approximate $1.31 per share and the reserves again $0.17 per share and the asset impairment approximately $0.07 per share and those adjustments aggregate a $1.55 in earnings per share. Combine those with our reported earning per share of $0.87 results in about $2.42 earnings per share for the year.

Those adjusted results are somewhat less than our expectations and our previous guidance but not a lot. I attribute the shortfall to somewhat weaker results at our last two weekend events in the fourth quarter. Looking at the various revenue and expense line items in comparison to the year, our admissions increased 4.6% or 3% over 2006 and that reflects growth in admissions at NASCAR sanctioned racing events. We actually expected growth to be higher and we believe that is was adversely impacted by ideal prices and difficult environment and general economic uncertainty.

Conversely our event related revenues for 2007 increased by $13.9 million or 8%. The increase is attributable to higher sponsorship display advertising, camping, track rental, pretty much all of the corporate spending in those categories and that was actually better than what we had expected, so we have a stool if you will of three legs on it, media broadcast revenues which are stable and increasing, our event related revenues, mostly from corporate and a lot of contracted and our admissions. As we noted before, our broadcasting revenue for 2007 decreased as we expected by about $22.2 million or 12%. Other operating revenue for 2007 decreased by $4 million or 9% for the same category in 2006 and that decrease is primarily attributable to oil and gas revenues.

Our direct expenses for 2007 increased about $4.4 million or 5% over such expense for 2006. And that reflects higher insurance costs and higher costs to conduct our events. The NASCAR person sanction fees for 2007 decreased by $5.2 million or 5% and that was expected and related to the decrease in broadcasting revenue in 2007. Our other operating expenses for 2007 increased by $6.5 million over 2006 and this was due primarily to higher recovery allowances for some of our oil and gas transactions in 2007.

General and administrative expenses increase $2.9 million or 4% over such expense for 2006 and $900,000 of it is related to the stock compensation expense reflected under the statement of financial accounting standard form 23R for share based payments and the balance was spread out among a lot of smaller expense accounts but consisted of the usual utilities and property taxes and those matters.

Depreciation and amortization expense for 2007 increased $3.8 million or 9% over 2006 and this is primarily because of the additions that we had at the company’s speedways in 2007 and most of those additions were early on in the year. Our interest expense net for 2007 is essentially unchanged from 2006. And we spoke about our losses on equity investees for 2007 of $57.4 million which was greatly in excess of $3.3 million for 2006 and reflected the host of issues that Marcus previously alluded to.

The other expense are income line for 2007 was a $5.2 million loss compared to other income of about $185,000 for 2006 and this loss reflects the change actually reflects the loss on abandonment disposable of assets in Las Vegas and Infineon Raceway that I spoke of previously. You probably noticed that our income tax provision is high for 2007 at about 60.4% and that reflects valuation allowance in the deferred tax assets associated with the MA equity and investee losses because we’re unable to determine the ultimate realization is more likely than not. The effect of that adjustment is about 22 percentage points and if you combine that with a 60.4% rate that is stated, it would result in a more normalized rate of approximately 38.5%.

Looking forward to 2008 we expect MA to break even. We contemplate discontinuing the oil and gas activities and our need frankly not to building and marketing condominiums in Las Vegas motor speedway considering the very tough market conditions. We estimate our earnings per share to be $2.40 to $2.50 per share for 2008 and subject to the caveats reflected in our earnings release. This is essentially no to low single digit growth forecast reflective of the economic conditions that we find ourselves. We estimate the results of the New Hampshire motor speedway to be break even for 2008. But the seasonality and the quarterly distribution of the earnings is going to be different. Our second and third quarters are going to reflect the major NASCAR event we do in New Hampshire and should increase over 2007. But the first and second quarters will only reflect the increased carrying costs of this acquisition.

So although we have not performed the full APB16 analysis of the allocation of purchase price again we expect that transaction to be neutral to our earnings per share and that’s what’s reflected in our earnings per share. Kimberly at this time I’d like to ask any of our participants to go forward in questions they might have. We’ll attempt to answer them.

Question-and-Answer Session

Operator

Yes sir. (Operator instructions). Your first question comes from the line of Tim Conder with Wachovia.

Timothy Conder - Wachovia Capital Markets

Thank you, a couple clarifications. First Bill on the 240 to 250 EPS guidance for ’08, does that include any anticipated as you said exiting from the oil and gas related businesses?

Bill Brooks

Tim, that is our estimate at the time and it does include those activities.

Timothy Conder - Wachovia Capital Markets

Okay any guestimate so we can kind of get a sense as to what the underlying motorsports business, you’re anticipating from that for ’08? Any guestimates as to what that is versus the charges you’re going to take related to the oil and gas business?

Bill Brooks

Well I’m not sure that we’ll have a lot of additional charges right now. That remains to be seen. As far as ongoing loss is that the easiest way to look at that is to look at the business segment that is in our 10Q or our 10K. Last year that segment was about $11 million in terms of a loss. This year of course we had the reserve and if you can bear with me a moment if you would look at the other operating revenues in 2006 it’s about $46 million and subtract from them the other direct operating expenses of $48 million it shows about a $2 million loss in those activities. If you do the same analysis for this year, it results in a $12 or $13 million loss. So comparing 2006 to this year 2007 it’s about $12 million worse. As far as what’s reflected in $2.40 and $2.50 is nothing more significant than what we experience in 2006 and we hope that it will be better.

Timothy Conder - Wachovia Capital Markets

Okay, and then as far as that normalized tax rate that we should anticipate for 2008 or using our modeling and also I guess along the same lines, what do you anticipate for depreciation/amortization and also capital expenditures for 2008.

Bill Brooks

Our tax rate generally should range between 38% and 39% given our corporate structure and the rate in effect right now. So I would utilize about 38.5% if it were me. In terms of the capital expenditures we expect those to approximately $70 to $80 million in 2008. And as far as depreciation and interest we think those two together would aggregate about let’s see $85 to $90 million next year. You know this year we had about $20 million or so net interest and we’ve got $300 million in additional debt that we incurred in January, so if we multiply it, at 6% of that, that would allow you to ascertain interest in $40 million rang in the total of interest and depreciation of $85 to $90, so about $40 after depreciation.

Timothy Conder - Wachovia Capital Markets

And then a clarification regarding your charges that you took on Motorsports Authentic, how much of the charge was related to an impairment, number one and a true charge and how much of it was due determine an operating kind of loss?

Bill Brooks

The impairment for the fourth quarter was $34.8 million and the total loss was $36.5.

Timothy Conder - Wachovia Capital Markets

Just wanted to double check that.

Bill Brooks

Yes sir.

Timothy Conder - Wachovia Capital Markets

And then relating maybe a question for Marcus, sponsorship renewal, what percent of your sponsorships are renewing each and then what would you anticipate for that revenue type of category type of growth going forward over the next year or two?

Marcus Smith

Thanks Tim, the renewal rates, I don’t have an actual percentage for you on what percentage renewed but I can tell you that it’s the norm for our partners to renew and our less frequent basis they don’t renew so thankfully we’ve got a lot of people that find value and continue to stick with us year after year. And our typical contracts are anywhere between, well the average range is 3 to 5 years, some shorter some longer. In the middle of the contract, the growth rate is in the low single digits, typically.

Timothy Conder - Wachovia Capital Markets

Okay.

Marcus Smith

And then in a renewal year, say when it comes from one contract and then extending into another, there’s typically a jump that’s above 10% but in that double digit range of growth.

Timothy Conder - Wachovia Capital Markets

So collectively over, what you’re seeing now the rates of the contracts that are renewing versus the prior you’re getting mid single digit increases for the blended term of the contract?

Marcus Smith

I guess if we blend them together you get mid to high single digits depending on what the deal is.

Timothy Conder - Wachovia Capital Markets

Okay. And then last question and I apologize for lengthy ones here but getting out of the oil and gas investments, you guys do extremely good job at running motorsports facilities as does your competitor but when you tend to venture outside of that it’s not so great of a track record so to speak. How can you give investors some assurance that you know we won’t see a sold USA again. We won’t see ventures into Russia and Africa and so forth and basically monies that maybe could have been re-deployed better elsewhere within the tracks or repurchasing stock. What type of assurances can investors get from I guess these past lessons?

Bill Brooks

Well Tim we’re constantly reassessing how we deploy our capital and we’ve got a full plan in the next few years for re-modernizing and reinvigorating the Lowe’s Motor Speedway. We just purchased the New Hampshire Speedway and we’ll probably conduct some substantial capital improvements to it. And then we have an additional substantial debt load that requires attention and then thirdly we believe that there will be further opportunities in the motorsport industry in the near future. So I think we’ll be pretty much deployed in the motorsports industry for the foreseeable time.

Timothy Conder - Wachovia Capital Markets

Okay so maybe it’s fair to say that at some point when you do get excess capital you think two three or four times before venturing outside of motorsports?

Bill Brooks

Well I think at this point it’s very likely that we would be in motorsports for a long period of time because that’s the core business and it’s never ceased to be the core business and it occurs to us to add considerable growth and we have a lot of opportunities there.

Timothy Conder - Wachovia Capital Markets

Okay, thank you gentlemen.

Operator

Your next question comes from the line of Joseph Hovorka with Raymond James.

Joseph Hovorka - Raymond James

Thanks actually a couple of questions, the on the impairment charge, the $34.8 million, that’s a bit different than what ISCA took in their quarter, is there a reason for that? It’s not much; it’s about a million dollars different but?

Humpy Wheeler

It probably has to do with the, Joe; in all honesty I don’t know what the difference is.

Bill Brooks

Okay, I’m not certain what the difference is, could be rounding, it could just be the way we construed some of the activities that occurred during the quarter.

Joseph Hovorka - Raymond James

Okay, that’s fine. Your deferred revenue was down for the second quarter in a row; can you kind of talk a little bit about that is it ticket revenues that’s down? Is it sponsorship, a mix of both?

Marcus Smith

Bill, you hit the nail on the head, advanced ticket revenues. We found this in the past. The economy tightens up particularly as gas prices fight people wait longer to purchase or renew their tickets.

Joseph Hovorka - Raymond James

So sponsorship would be up.

Marcus Smith

Yes.

Joseph Hovorka - Raymond James

Okay and then you mentioned that New Hampshire is expected to be break even in 2008, can you talk a bit about when you expect it to be accretive and maybe some how you’re looking at it on a return perspective.

Bill Brooks

Well I hope that it’ll be accretive in 2009, at the latest. And in terms of the actual success, I think we’re going to have to, and returns is going to be dictated about we do there and how we do it and it’s kind of premature for me to give you a credible answer on that because I don’t, we’ve never conducted an event there. And it’s been, way we’re going to conduct them is different than in the past. So right now I’m pretty confident that we’ll break even. I’m pretty confident that we’ll be accretive but I don’t know what the returns will be. I suspect that it’ll be as good or better than what we experience in Las Vegas.

Joseph Hovorka - Raymond James

Okay and the two races that were run, were both of those sponsored?

Bill Brooks

Yes, they were both sponsored.

Joseph Hovorka - Raymond James

And then just one last question going back to Motorsports Authentics, I know there’s still a lot of moving parts for 2008 but and I think Marcus mentioned that at least the first two months you’re feeling okay with, but can you give us a little more detail about, I know there’s been a change in distribution strategy within Motorsports Authentics where you’ve kind of come out on that, if you have finalized that, you know just maybe some more operational color to the first couple months of 2008.

Marcus Smith

Joe, thanks this is Marcus. The on the distribution model that’s we made a change at the beginning of the acquisition and went away from a distributor model with our dealers, the motorsport specialty shops and went to a direct sales model. We’re shifting back now to a, actually a hybrid where we use distributors for a large number of the specialty shops and have direct relationships with some of the larger accounts. And it’s going well. The biggest change that we’re making in the business that will, that should insulate us from the problems that we had in 2007 is in our supply chain management, being able to anticipate changes going forward and not have, not be stuck with so much inventory at the end of the year if we do have driver sponsor changes. The rest of the business is being tuned up with increased sales expertise in our retail channels and in our direct to consumer channels as well.

Joseph Hovorka - Raymond James

Does the improvement in the supply chain side of the business where you’re not going to get stuck with a lot of excess inventory does that help you in your operating losses or is that just taking into account that we won’t have these large impairment charges again?

Bill Brooks

Well it helps on the, it helps all around because you know if you’re able to get closer to just in time, you’re helping yourself with better warehouse, more efficient warehouse usage, more efficient shipping and more efficient deployment of capital.

Joseph Hovorka - Raymond James

So that’s the biggest you’re seeing from ’07 to ’08 that will get you to the break even?

Bill Brooks

Well it’s both sides. It’s both on expense control and on increasing the top end.

Joseph Hovorka - Raymond James

Okay great thanks guys.

Operator

You have an audio question from Chris Simms from [Shankman] Capital.

Chris Simms - [Shankman] Capital

Hey guys, how’s it going? Can you just tell me, I know that you said that $12 million charge for oil and gas and then the $5 million from the condos, where’s that going through in the, on the income statement.

Bill Brooks

Chris if you look under other.

Chris Simms - [Shankman] Capital

It’s other direct.

Bill Brooks

Other operating expenses, there’s $12 million included in that number.

Chris Simms - [Shankman] Capital

Okay.

Bill Brooks

And then if you look under other charges $5 million is included in other expense net at the bottom of the statement.

Chris Simms - [Shankman] Capital

Okay, it works. That all I had, thanks.

Bill Brooks

You’re welcome.

Operator

Your next question comes from Tom Simonson with William Blair.

Bob Simonson - William Blair and Company

Good morning.

Lauri Wilks

Hey Tom.

Bob Simonson - William Blair and Company

Hi Lucy. In New Hampshire, do they have suites and if so, how many?

Bill Brooks

Bob we have about 38 suites there and about 95 or 96,000 grand stand seats.

Bob Simonson - William Blair and Company

Okay is as you direct your attention towards that track would that be, you usually have lots of suites at your tracks, would that be an avenue of expansion?

Bill Brooks

You know that would be a logical assumption but I don’t know exactly what we’re going to do, we’re really studying it as to whether we change the track configuration, or put in new suites or more suites, those are things we’re studying as we speak.

Bob Simonson - William Blair and Company

Okay. And you ended ’07 with I believe $428 million in debt. You have as you spend your money this and assuming you’re $2.40 to $2.50 proves reasonably accurate, where do you think that will end up at the end of the year?

Bill Brooks

We’ve also borrowed an additional $300 million so in round numbers it’s 730. I hope by the end of the year that number is reduced somewhat.

Bob Simonson - William Blair and Company

$1 million? $50 million?

Bill Brooks

Well I don’t want to paint too rosy a target but certainly we’d like to see it reduced, I’m hopeful it’s more in the $700 million range than $730 by the end of the year.

Bob Simonson - William Blair and Company

Okay. And I’m not sure that you did answer this already Marcus but is it possible to say the entitlements, race entitlements that you’ve signed for ’08 either individually or on average how much higher they are, just on the race entitlements or did they go up or are they flat?

Marcus Smith

Well they, we actually didn’t resign necessarily every event entitlement or every other sponsor entitlement for ’08 but we did have a few that were new and in general, when we have a new deal, it’s typically up from prior year in the low double digits.

Bob Simonson - William Blair and Company

Was that the answer that you said on a melded basis it might be in the mid singles?

Marcus Smith

Yeah, mid to high singles depending on what the deal is. You’ve got, if you look at it over several years, it’s in that range always targeting higher of course, but the, anytime we have a new deal, it’s done if it’s coming off of a longer term like let’s say a seven year term, then typically there’s more room for growth to get it up into what the market will bear today. So the events that we have in New Hampshire for instance are both sold and current contracts and good marketing partners in.

Bob Simonson - William Blair and Company

Were those ones that you negotiated or they had been negotiated?

Marcus Smith

They had been negotiated prior to the purchase.

Bob Simonson - William Blair and Company

Okay. You know much of last year, on the Motorsports Authentics it was issues of junior changing in this one and that one and the car of tomorrow. Both you and ISCA have talked about a goal of making it beginning to break even and then moving it forward in future years. I’m still having some trouble understanding why it might not be a better number this year given that all of those issues that you talked about last year other than the impairment charges are behind you. You do have the new car and people can’t buy a res number 8 jacket anymore etcetera. Can you talk a little bit about the potential opportunity beside break even analysis for ’08? Or is that just wishful thinking?

Bill Brooks

Well, it’s a very good question you know the business and the potential of certainly had the table set nicely when you consider all of the new things that a fan could buy this year. If you’re a Jeff Gordon fan for instance you don’t have a new car brand or a new sponsor necessarily to buy or a new color but you do have that Car of Tomorrow and the business is selling dye cast or t-shirts and hats typically have a picture of the car and often times so there’s new, there’s a new design to buy and it’s a new thing along with the Sprint Cup Series entitlement which is often on a piece of merchandise. So when you look at that you do have the table set nicely for a good improvement over years past, not just last year but several years past and you have the impairment charge which of course helps as we go forward this year and into the future.

I think our anticipation guidance of breakeven is not, it’s not necessarily an intention to promise low but it’s a cautious guidance because we had such trouble last year and there were thing that we anticipated and thought this time last year that were going a little better than they ended up going. So I think it’s prudent to estimate that we’ll be breakeven.

Bob Simonson - William Blair and Company

Can you share some guidance as to how it’s been so far this year?

Bill Brooks

Well like we said things have been good for the first couple of months. The sales team has done a great job. And the fans seem to really like Dale Jr.’s new colors and as well as the other teams as well.

Bob Simonson - William Blair and Company

Okay and Bill just a point of clarification. You said the impact of New Hampshire would be breakeven in quarters two and three, but it would cause weaker year over year comparisons in Q1 and Q4. Is that correct?

Bill Brooks

Actually Bob I think it’ll be better in two and three and it’ll be weaker in one and four for the year it will be breakeven.

Bob Simonson - William Blair and Company

Last question, not to end on a negative but it seemed on the race in Atlanta last weekend that it was a lot of empty seats.

Bill Brooks

It was not exactly how we wanted to be but it wasn’t materially different from the prior year.

Bob Simonson - William Blair and Company

Okay, very good. Thank you.

Operator

And you do have a question from Edward Williams with BMO Capital Markets.

Edward Williams - BMO Capital Markets

Morning, just a couple questions, first of all can you just talk about the race schedule this year and what the primary differences are in the ’08 season versus ’07 outside of New Hampshire?

Bill Brooks

Edward Williams - BMO Capital Markets, there aren’t any real significant differences for us this year. Our races are few a week or two weeks earlier in the first quarter but they all fall within the same quarter as last year except that New Hampshire will be running events in second and third quarter.

Edward Williams - BMO Capital Markets

And can you talk a little bit about what your thoughts are with the Atlanta dates. There’s been certainly some speculation about swapping the date with ISCA’s track in California; can you just give us any colors to what may be going on with that?

Bill Brooks

Well I think what we really want to do is run the, try to run Atlanta at night, we’ve got lights down there everything changes at night. By going to September, Labor Day Weekend is a big holiday and we, a day to get people back. We could run it on Sunday night which is a big TV night, or Saturday night, doesn’t matter but it’s. It would make all the difference in the world and I think it would help the track at Fontana also then in October, so it’s a little better weather for them and we continue to talk to ISCA and NASCAR about this. I think obviously NASCAR wants to have, they don’t want to rain out, they don’t want bad dates. The big question is Atlanta then if that is done is what do we do in March and we probably would rather run that March date in June, early June when we could run it at night again so I think that’s our ultimate wish list. I would say the Labor Day thing looks more encouraging everyday. But a lot of politics and so forth have to happen before that comes about.

Edward Williams - BMO Capital Markets

And then just taking a look if I could at the use of cash flow for a moment, your expectation for cap ex this year is somewhere in the $70 to $80 million level, can you just remind us what it was in ’07?

Bill Brooks

Edward Williams - BMO Capital Markets the three quarter we at about $62 million and most of the cap ex occurred in the early part of the year.

Edward Williams - BMO Capital Markets

Okay so is some of that increased amount allocated to New Hampshire or how much will New Hampshire affect the cap ex.

Bill Brooks

Some of that encompasses some additions for cap ex in New Hampshire but it’s not a huge amount. Our credit facilities generally limit us to $80 million in a year unless we ask for permission to exceed that amount so I would say that would be a ceiling and the $70 million now there’s some amount for New Hampshire in there but not a huge amount.

Edward Williams - BMO Capital Markets

And how much would you characterize as being revenue enhancing cap ex versus a maintenance cap ex?

Bill Brooks

Well the maintenance cap ex will probably going to run about $20 million a year now that we have three, excuse me seven speedways. So the balance will be more geared to revenue enhancements, either at Lowe’s with the better seats and, or a new drag race facility or in one of our other speedways last year we and even in Lowe’s a year or two ago, we did a re-profile of the track and some of those things don’t look to be income producing immediately but it helps us to have more entertaining races at our speedway and that drives attendance.

Edward Williams - BMO Capital Markets

And then the last question I have for you is as we look at your stock buyback program, there’s quite a bit still left in the authorization but following the purchase of the New Hampshire speedway, should I assume that you’re more inclined to reduce your debt by the $30 million level that you had suggested before you would buyback more stock or can you just give us an idea to the prioritization of debt reduction and stock buyback?

Bill Brooks

Edward Williams - BMO Capital Markets, we’d like to reduce our share count by engaging in the buyback to the extent that we can and certainly to alleviate any dilution that would occur through option exercises or awards of restricted shares. We may have to have it at somewhat lesser level than it was in the last two years to accommodate our capital expenditures program and our debt reduction but we’re not going to abandon that.

Edward Williams - BMO Capital Markets

Good. Thank you very much.

Bill Brooks

You welcome.

Operator

(Operator instructions). You have a question from the Line of Gene Fox with Cardinal Capital Management.

Gene Fox - Cardinal Capital Management

Hi folks, a couple of questions, first do you all have a estimate of the broadcast revenue for ’08 to include the New Hampshire numbers?

Bill Brooks

I don’t know that we’ve specifically talked about that. Let’s see if we can figure that out. Our broadcast last year was about $143 million, so it would go up about 3% from that and we’ll have a couple of additional races put on there so let us say that it’s more in the $165 to $170 million range.

Gene Fox - Cardinal Capital Management

Okay. I calculated about $170 I just didn’t know if you guys knew that number with certainty yet.

Bill Brooks

Yes I just don’t have it off the top of my head but I would say that’s a reasonable estimate.

Gene Fox - Cardinal Capital Management

Okay, second question, what remains in your oil and gas business and when we think about exposure there given the reserves that you’ve taken, how should we think about where your activities are and what your exposure is?

Bill Brooks

Gene we have two things. We have investments in the two properties that we’re exploring for the, and the pumping out gas and oil and that is about $15.2 million and then we have in round numbers about $2.8 million in receivables that are not reserved so say $18 million at this time.

Gene Fox - Cardinal Capital Management

Okay, in terms of activities, what are you doing today in other words what use of funds is there for the company outside of these investments?

Bill Brooks

They require some further enhancements in terms of roads and well drilling to probably to make them saleable and I think that should happen within a 24 month period. But any items of that nature are included in the $70 to $80 million capital expenditure program that we have and then any losses that we would sustain hence one of the other callers, I though it would be more like what we experienced in 2006.

Gene Fox - Cardinal Capital Management

So just to understand Bill the losses would be associated with some sort of equity accounting for your interest in these oil and gas investments?

Bill Brooks

Yes they would or if we sold them and for some reason they were impaired, you would have to shut them down or something like that but the most that we’ve got invested right now including all the receivables in $18 million. And you can write down as of 12/31/07.

Gene Fox - Cardinal Capital Management

Okay, and basically all the other receivables you’ve written down is there any chance that we’re able to recover any of that money?

Bill Brooks

We’re very hopeful that we will.

Gene Fox - Cardinal Capital Management

And how much in total are we talking about in terms of aggregate write downs thus far?

Bill Brooks

It is in the approximately $25 to $30 million is my best estimate.

Gene Fox - Cardinal Capital Management

Okay right, in terms of the money that we borrowed to buy New Hampshire, can you tell us what the, is that a Libor based borrowing, can you help us understand what the terms of that are?

Bill Brooks

Yes, it’s under our revolver, it’s Libor based and our margin that we add to the Libor depends upon our leverage and it ranges from 0.85% to 1.75%. So I would calculate Libor plus 1.75% for the course of the indebtedness.

Gene Fox - Cardinal Capital Management

Can you give me a sense for what that number is today for you all?

Bill Brooks

It varies because of the tranches of debt but you know the 30 day Libor’s is in the, been going into three’s range so it’s 5% or less right now.

Gene Fox - Cardinal Capital Management

Okay, in terms of you closed on New Hampshire, have you, are you going to issue an AK with that bill or where will we start to get historical or will we get historical information on the operations of New Hampshire?

Bill Brooks

That’s a very good question, Gene. You will get historical information, we’re going to file and AKA and it’ll be between now and the end of this month.

Gene Fox - Cardinal Capital Management

Okay, last question, when I’m looking at your, two more questions, we I look at your income statement in the fourth quarter, your direct event expense looked much higher than last year. You may have covered this but was there anything special about the direct event expense in the fourth quarter of last year, or this year versus last that caused it to be much higher?

Bill Brooks

Yes we had estimates on our insurance last year that caused us to be over accrued and this year we were somewhat under-accrued so that exacerbated the swing between the quarters. And there was also some reclassification of expenses among the various categories in the fourth quarter of last year.

Gene Fox - Cardinal Capital Management

So can you give me the order of magnitude though, was that a couple of million dollars swing each quarter or how should I think about it.

Bill Brooks

That’s a fair estimate.

Gene Fox - Cardinal Capital Management

Okay. Last question, in the other revenue line, this last year you did about $42 million down from $46, when we think about what’s in there going forward, what’s there and how should we think about how that line item should move going forward.

Bill Brooks

We’re thinking that item, that line item should hopefully go up a little bit and the bulk of what they’re, the oil and gas the, we have license car revenues in there sometimes, we have SMI properties as a subsidiary called the Source International that sells electronic media sales and those revenues are included in there and some of our revenues that are from non-event merchandising are included in there and some of our speedway club’s revenue are included in there so I would say that those revenues I think should be fairly stable to increasing in the mid single digits.

Gene Fox - Cardinal Capital Management

Okay, Bill in terms of your planning, is it fair to say that you assumed low single digit declines in admission and event related revenue for the purpose of your forecast and mid plus of sponsorship?

Bill Brooks

More of flat on admission and somewhat down on some of the event related items like souvenir sales and food and beverage sales. And then in terms of corporate involvement with sponsorships and suites that that would increase slightly.

Gene Fox - Cardinal Capital Management

Perfect, thank you all very much. I appreciate it.

Bill Brooks

You’re welcome.

Operator

You have a follow up question from Chris Simms with [Shankman] Capital.

Chris Simms - [Shankman] Capital

Hey guys, you know I don’t know the exact economics of the oil and gas business that you guys are in, but you I was just curious with oil where it is and gas where it is what exactly is going on in that segment that is creating losses.

Bill Brooks

Chris we had some activity in two parts, in trading in other words in buying cargos and selling them and that went awry and that created losses. We also have two properties that are overseas that we’re, one in which we’re exploring ore oil and very likely we think very likely will find and another property that’s an older property that has oil wells that we’re pumping out oil and selling it and that’s the extent of the activities right now.

Chris Simms - [Shankman] Capital

So the, so you’re only selling at of one of the properties and the other one you’re just I guess it’s the expense from exploring and the trading and the buying of cargo and selling is where really the losses came through.

Bill Brooks

That’s where the bulk of the losses came from. Obviously if we’re paying people to come fill out and do some of those things there are some expenses with that but the bulk of it was with the trading.

Chris Simms - [Shankman] Capital

Okay, thank you.

Bill Brooks

You’re welcome.

Operator

And you have another question from Kevin Toney with American Century.

Kevin Toney - American Century Investments

Hi I think I missed a good bit of the call so I have a question I’m not sure if it’s been addressed or not yet. You guys have a number of businesses that you’re in that are some are somewhat related your core business others are unrelated to the core business. I was wondering if you would mind kind of walking us through you capital allocation process or the investment case that you make to kind of continue to be in a different businesses or looking at new businesses maybe discuss your expectations of return on capital versus your core business and maybe kind of why you chose to use this entity to kind of invest in these businesses as opposed to maybe one of Mr. Smith’s other entities.

Bill Brooks

Kevin we spoke about this briefly with Tim Conder and I’m sorry that there was a disruption in the call earlier today. We have deployed our capital in different areas to, in an attempt to enhance our return so we wanted to exceed the cost of capital that we have in the company. That hasn’t always proven to be successful and some cases it has some cases it has not. But in the case of the oil venture, it is not and that’s why we’re seriously considering discontinuing that operation. For the foreseeable future, with the purchase of New Hampshire, have enormous opportunity Motorsports business, we have a lot of capital needs in the business, and then we have a substantially increased debt load that we need to properly manage and we would like to see reduced. So I think for the near term we’re in mid term we’re going to see our capital deployed in the motorsports business in those areas. As far as what goes on the future, it’s hard for me to forecast but I’m aware of your concern and we’ve not been as successful as we’d like to be in some of these other ventures and I acknowledge that and that will factor into our considerations going forward.

Kevin Toney - American Century Investments

And just, thank you. Is the oil and gas business that you’re considering getting out of or how about any of the other ones?

Bill Brooks

Go ahead I’m sorry.

Kevin Toney - American Century Investments

That’s it.

Bill Brooks

Kevin, that’s the one that’s the most problematic that and is the most unrelated to what we’re doing right now. And that’s the one that we’re thinking about getting out of.

Kevin Toney - American Century Investments

Okay. If you were to consider ones in the future, could you kind of discuss the how the board decides whether or not to pursue it or for example, you could just walk us through the, we don’t have to pick on oil and gas but I think the Oil Chem business you’ve been in for a long, maybe the more Motorsports Authentics that would be a more recent one, maybe we could kind of just, how do you what are the factors that you consider when you think about should you allocate capital to a new business or something more in the core. I understand some are related to the core, you can just kind of describe the discussion that you have with the metrics that you look at.

Humpy Wheeler

Well this is Humpy, I think in the future that we’re going to be looking at primarily Motorsports related businesses as of course what you mentioned Motorsports Authentics is we will, there’s a lot of things going on in this country in motorsports and we still think there’s opportunities out there to acquire companies that are involved in that now we’re going to be looking at primarily the board on what future profit potential there is and if that this particular form of Motorsports were, first inside I just we’re not getting ready to get in it so don’t take except for promotion of events but Monster Trucks. Monster Trucks is very lucrative right now it’s there’s a lot of attendance.

The, we’re seeing crowds in the 50’s, 60,000 etcetera, there’s a Monster Truck association that specializes in arena racing, Silverdome, Pontiac’s Silverdome, Georgia Dome, etcetera. We don’t have arenas so that’s not part of what we would look at but there’s another one called the Major League of Monster Trucks Racing and we would look favorably at that in running events from that venue because they’re at a different season then arena racing, they’re at a time when we need to utilize these tracks better and we would look favorably upon that because it’s already got a strong proven track record.

So in answer to your question, we’re looking for strong track record. We’re also looking for good management, we’re looking for potential, we don’t want to get into something that is on the way down, we want to get into something that’s on the way up and that’s the way the board would look at those things.

Kevin Toney - American Century Investments

I see. Well thank you. And then one final question how does a more material share buyback or higher dividend rate kind of, where does that fit in to the menu of choices that you have to use your capital?

Bill Brooks

Kevin we would like to continue on a share buyback and continue to increase our dividend what we have a moderate debt load and have a lot of capital project we’re probably not as willing to increase the dividends significantly as we would to increase the share buybacks significantly so and keep in mind that in 2008 it’s the last year in which we have additional cash tax expense of $28 million. We had that for the last three years and in 2008 as we changed our method of depreciation for tax purposes. Once that’s over we’d like to see that deployed probably in priority to buyback shares, pay down debt and then thirdly to increase dividends but we’re open to all of those.

Kevin Toney - American Century Investments

I see. And if I, my recollection is correct you purchased about $15 or $20 million of your shares over the last three or four years? Is that roughly accurate?

Bill Brooks

It’s a little bit higher than that we but we’ve been purchasing about 400,000 share sin each year. And since the inception which was let’s see 2005 we purchased 10 million that year, about 18 million in ’06 and about 18 million in ’07.

Kevin Toney - American Century Investments

Okay. I hadn’t, I was using, as you were saying, I was using the net number I think

Bill Brooks

Instead of our option exercises, you must right in that our initial attempt was to alleviate any dilution from the exercises but we’re also actively trying to repurchase some shares as well.

Kevin Toney - American Century Investments

I do have one more question from one of my colleagues, you had mentioned the, your debt was up to about $730 million I think?

Bill Brooks

That’s right.

Kevin Toney - American Century Investments

And when is the, can you tell us what the cash is at this point?

Bill Brooks

The cash at the end of the year was $168 million. And we spent $40 million out of that amount towards the purchase price of the speedway, so if we’re cash flow neutral during the quarter we would expect to be about $130 million or so in cash.

Kevin Toney - American Century Investments

Okay. Thank you very much.

Bill Brooks

You’re welcome.

Operator

At this time there are no further questions. Presenters are there any closing remarks?

Humpy Wheeler

Yes, this is Humpy Wheeler and I want to thank all of you for joining us today. And we have again apologize for the delay because of a technical difficulties but we look forward to seeing you as we report first quarter results in the next three months.

Operator

This does conclude today’s conference call you may now disconnect. Presenters please remain online.

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Source: Speedway Motorsports Inc. Q4 2007 Earnings Call Transcript
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