International Speedway Corporation F1Q09 (Qtr End 02/28/09) Earnings Call Transcript

| About: International Speedway (ISCA)

International Speedway Corporation (NASDAQ:ISCA)

F1Q09 Earnings Call

April 7, 2009 9:00 am ET


Wes Harris - Senior Director, Corporate and Investor Communications

John R. Saunders - Chief Operating Officer

Daniel W. Houser - Chief Financial Officer


Analyst for Gregory Badishkanian - Citigroup

John Fox - Finmore Asset Management

Timothy A. Conder - Wachovia Capital Markets

Thomas Russo - Gardner Russo & Gardner

Barry Lucas - Gabelli & Company

Josh Brown – Boston Harbor Capital


Good morning and welcome to the International Speedway Corporation 2009 first quarter conference call. (Operator Instructions) I would now like to turn the conference over to Wes Harris, Senior Director of Corporate and Investor Communications for International Speedway.

Wes Harris

Good morning everyone and welcome to our first quarter call for the quarter ended February 28, 2009. Joining me today are John Saunders, Executive Vice President and Chief Operating Officer, and Dan Hauser, Chief Financial Officer. After John and Dan have provided their formal remarks, a Q&A session will follow and the operator will instruct you on the 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 and which are not historical facts or applied prospectively, are considered forward-looking statements. It is important to note that our actual results may differ materially from those contained in or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in our SEC filings including, but not limited to, the 10-K and subsequent 10-Q’s. Copies of these filings are available from ISC and the SEC. ISC undertakes no obligation to publicly release any revisions to these forward-looking statements that may be needed to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Inclusion of any statement in this call did not constitute an admission by ISC or any other person that the events or circumstances described in such statements are material.

With that, I will turn the call over to John Saunders.

John R. Saunders

Good morning. Although the on-track competition remains exciting and we have significant longer-term visibility in a number of our key revenue categories, we cannot escape the reality that the macroeconomic landscape is having an impact on our business. Like other companies, we are feeling the effects of high, single-digit unemployment and historic lows in consumer confidence.

Having said that, we know that the economy will eventually recover and we are taking important steps to ensure that we remain strongly positioned. These initiatives are broadly based with a dual focus on driving top line revenues while also managing costs to minimize margin erosion.

Based on the current economic reports, we do not anticipate seeing any recovery in the economy until sometime in 2010, and even then we are expecting very gradual improvement. Accordingly, our top priority is to maintain a solid capital structure that allows us to comfortably weather short-term volatility and the flexibility to capitalize on any potential opportunities that will increase shareholder value.

A significant portion of our revenue is contracted. The largest contributor of that revenue is the domestic media rights for our NASCAR events extending through 2014. Also contributing to our revenue visibility are our corporate marketing partnerships, which are typically multi-year agreements.

Our two largest partnership categories, in terms of revenue, are official status relationships and race entitlements. While the race entitlements typically have higher visibility to media and investors, official status partnerships are actually the most significant component of our gross marketing partnership mix, accounting for over 50% of the total.

Our entitlement inventory is finite and limited by the number of events that we conduct but we have an almost unlimited opportunity for the sale of official status inventory. In fact, during 2008 we leveraged positions in over 150 distinct official status categories. We are pleased to have recently signed entitlement positions for our cup races at Watkins Glen, Darlington, and Kansas. Currently we only have one Sprint Cup and three nationwide title sponsorships that either open or not announced.

Looking at the total gross marketing partnerships, we currently have agreements in place for 90% of our current 2009 target. This target has been reduced somewhat from our original expectations but we are still pleased with our progress in light of the challenging economic environment.

Now, these challenges are not unique to NASCAR racing. All sports are feeling pressure as securing sponsorships and hospitality is more difficult because corporations are very closely scrutinizing all marketing expenditures. As we all know, one of the most visible industries that are struggling is the domestic auto manufacturing. There is no question the Big Three are facing incredibly difficult times and must cut overall spending.

Contrary to what you may read in the national media, any reduced spending in NASCAR will not lead to the sport’s demise. Independent research reported that Ford, General Motors, and Chrysler spent between $480.0 million and $495.0 million in total sponsorship spending in 2007, the latest data available.

This spending included festivals, the arts, various social causes, and of course, sports. While sports sponsorship is a large component of the total, it is divided between a number of groups including football, baseball, basketball, hockey, and auto racing.

Last year approximately 10% of ISC’s total gross marketing partner revenue came from the domestic auto manufacturers. This includes a sizeable spend by Toyota, that is in much better shape than the Big Three. I would note, however, that a significant portion of their investment with ISC was non-cash as we utilized vehicle fleets to service our events and ongoing track operations.

For 2009 we anticipate the domestic auto manufacturers will drive less than 10% of our total gross marketing partner revenue. Having said that, we expect they will continue to actively invest in the sport of NASCAR. Similar to hundreds of other corporate partners, the auto manufacturers participate in the sport because as racing is uniquely suited to showcase their brands in competition. The sponsorships help sell products and are one of the few marketing vehicles that can deliver a clearly measurable return on investment.

Looking at the specific events of the first quarter, for the start of the motor sport season Daytona hosted its annual lineup of events known as Direct TV Speedweeks, which combines the best sports car, truck, and stock car racing in the world and culminates with the Daytona 500, the Great American Race.

Unfortunately, the 51st running of the Daytona 500 was rain-shortened to only 152 of the scheduled 200 laps. While the on-track competition was extremely exciting, the inclement weather contributed to television ratings being lower than expected.

Also during the quarter Auto Club Speedway hosted a NASCAR week and a Sprint Cup nationwide and camping world truck events. In the second quarter Daytona hosted a successful weekend of motorcycle racing that included a Daytona Supercross and the 68th running of the Daytona 200. Auto Club Speedway also held successful AMA motorcycle events in the nation’s second largest media market.

Martinsville Speedway hosted a weekend of Sprint Cup and Camping World truck series events. Unfortunately, weather caused the truck series event to be postponed to Monday. We did benefit from brisk walk-up sales for the Sprint Cup race on Sunday, the strongest we have seen in years at the track.

For the remainder of the second quarter we will host four Sprint Cup and nationwide series events at Phoenix, Talladega, Richmond, and Darlington. The Talladega weekend will also include an ARCA Re-Max event. Kansas Speedway will also host an IRL and Camping World truck weekend.

As we look to the remaining events in the quarter and beyond, we are keeping a very close eye on consumer-spending trends. Our strategy of reduced [08:56] pricing on certain grandstand tickets is proving successful and has helped drive an increase in call volume for our on-sale events.

ISC’s sophisticated call center operation allows us to better match the expectations of the callers with appropriate tickets to our events. In many cases, we have been able to upsale, or provide added value ticket packages for our customers.

Overall, advance ticket sales are currently trending behind approximately 20% from where we were at this time last year. While part of this decline is associated with the timing of our renewals and related programs, we believe that many fans are making their purchasing decisions closer to race day.

This has been validated by the strong increase in sales we have seen during race week for our events held year-to-date and we expect this trend to continue for the remainder of the year.

On the expense side, we are aggressively managing our controllable expenses supported by a number of company-wide initiatives. As an example, for this year’s Coke Zero 400 at Daytona, which is more of a regional event, we are not opening up the back-stretch grandstands. This eliminates scalable costs for concessions, ticketing, security, etc. that would otherwise be required to service that area of the race track.

All of our cost-control measures we have undertaken are designed to ensure that our business remains strong and continues to generate substantial cash flow. Having said that, we remain committed to providing a positive guest entertainment experience.

One of the things we have always prided ourselves on, and has proven to be a sound capital allocation strategy, is our solid balance sheet with manageable debt maturities. This contributes greatly to our ability to fund our working capital needs, debt service, and capital expenditures at existing facilities from operating cash flow. In addition, our capital structure provides significant financial flexibility for us to capitalize on opportunities that will drive an increase to shareholder value.

In that regard, last week we announced that we have resubmitted a revised joint proposal for the development of a casino and certain dining and entertainment options adjacent to Kansas Speedway. Unlike our proposal that we approved last fall, this bid contemplates the development, depending on market conditions and demand, of a hotel, convention facility, and retail entertainment district at a later stage of the project.

The initial phase of the project, which is planned to be approximately 190,000 square feet, includes a 100,000 square-foot casino with approximately 2,300 slot machines and 86 table games, a high-energy center bar, and dining entertainment options. This phase is project to cost approximately $390.0 million.

The full budget of all potential phases is projected at approximately $700.0 million and would be financed by the joint venture between ISC and Cordish. Again, depending upon market conditions, the 50/50 joint venture anticipates funding the development with between 20% and 40% equity. The remaining portion is expected to be funded by secured project debt financing obtained by the JV.

The Kansas Lottery Commission is presently evaluating the proposals for the Wyandotte County casino projects and will then seek to negotiate management agreements with those it intends to recommend to the Kansas Gaming Commission. The entire process is expected to be completed by October of 2009.

Should we be fortunate to win the casino management contract, again, we would anticipate having the casino opened as early as the fourth quarter of 2010.

In addition to building a first class gaming and entertainment destination, if we are awarded the contract we have also committed to petition NASCAR to realign its second Sprint Cup date to Kansas from one of our existing facilities. The earliest I would expect the date to be realigned, if approved by NASCAR, would be the 2011 season.

The significant development, if awarded, is expected to significantly contribute to ISC’s bottom line financial results. In addition, we believe it will help drive increased interest for attending races at the track, which is the basis for our decision to request a realignment of the second cup date to Kansas.

Switching to our Daytona Live project, the office building is currently under construction for the scheduled opening for late in the fourth quarter of 2009. The retail, dining, and entertainment portion continues to be actively marketed by Cornish.

Final design plans for the development of the retail, dining, and entertainment and hotel components are being completed. We are incorporating the results of local market studies and further project analysis into the plan. These phases of the development will be market-driven and no construction will begin until the timing is appropriate.

Now turning to capital spending, for the three months ended February 28, 2009, we spent $20.0 million on capital expenditures, including $14.0 million for projects at our existing facilities. For the remaining $6.0 million in the first quarter of 2009 a little more than $4.0 million was associated with pre-funded construction of our new headquarters building as part of the Daytona Live project. The remaining balance of $1.0 million to $2.0 million is associated with additional capitalized spending for our Staten Island property that is being marketed for sale.

For the full year, we anticipate spending between $50.0 million and $55.0 million on capital expenditures at our existing facilities. In this environment, we view this as the minimum amount of investment necessary for maintenance capex, safety and regulatory requirements, and yet, preserving the guest experience.

Excluded from our capex guidance for 2009 is approximately $45.0 million in spending for our headquarters building, of which approximately $41.0 million was funded by the construction loan we entered into last July. We also have approximately $2.0 million to $3.0 million of capitalized spending, including property taxes, for Staten Island.

Now, with that, I would like to turn the call over to Dan Houser for the financial review.

Daniel W. Houser

While motorsports, like other sports properties, is not immune to fluctuations in the economy, the industry’s business model remains sound and ISC is well positioned to weather this challenging period.

Significantly impacting our year-over-year fiscal first quarter results are unprecedented adverse economic trends, particularly credit availability, the decline in consumer confidence, and the rise in unemployment. These factors began to hit home in mid-2008 and will, in all likelihood, continue throughout 2009.

Further impacting the comparability of the periods were strong consumer and corporate demand for last year’s 50th running of the Daytona 500. This historical event provided significant unique opportunities to drive attendance in revenue above the otherwise strong appeal of Speedweeks and its marquee event.

Turning our attention to the specific line items on the income statement, consistent with the factors just discussed, admissions revenue decreased to $47.8 million. To a lesser extent, attendance for NASCAR events conducted at Auto Club Speedway in fiscal 2009 also contributed to the decrease. Partially offsetting these decreases was a slight increase in the weighted average ticket price for certain events conducted during Speedweeks.

The decrease in motorsports-related revenue to $102.5 million was primarily associated with lower sponsorship, suite, and hospitality revenue for certain events conducted during Speedweeks, and to a lesser extent, events at Auto Club Speedway. Partially offsetting these decreases was in increase in television broadcast and ancillary rights.

For the first quarter, ISC’s domestic television broadcast and ancillary rights were $64.3 million with $62.1 million associated with the domestic broadcast contracts and $2.2 million of ancillary rights.

Food, beverage, and merchandise revenue decreased to $13.4 million, which was primarily attributable to the previously discussed attendance decreases, as well as strong demand for Daytona 500 50th merchandise in the prior year.

The increase in NASCAR direct expenses to $34.1 million was primarily attributable to higher television broadcast rights fees, a percentage of which are paid as part of prize money. To a lesser extent, the reclassification of raised sanctioned fees for our Grand Am events from motorsports-related expense in prior years to NASCAR direct expense in 2009 also contributed to the increase.

Grand Am was purchased by NASCAR in late 2008, which results in this change in financial statement presentation.

Motorsports-related expense decreased to $29.1 million with the majority of the decrease associated with lower promotional, advertising, and other race-related expenses during the period, resulting from focused cost containment initiatives in 2009 and higher promotional and advertising expenses surrounding the Daytona 500 50th Anniversary in 2008. Also contributing to the decrease was the previously mentioned reclassification of Grand Am sanction fees to NASCAR direct expense.

Food, beverage, and merchandise expense decreased to $9.5 million for the quarter, primarily due to variable costs associated with lower merchandise catering and concession sales during Speedweeks.

General and administrative expenses decreased to $24.9 million for the quarter. The decrease was the result of focused cost containment initiatives, including reductions in legal and other professional fees, personnel-related expenses, and a variety of other costs associated with our ongoing business.

Depreciation and amortization during the first quarter increased to $18.4 million. The increase was largely attributable to ongoing capital spending for facility enhancements and related initiatives.

The year-over-year increase in interest income is almost entirely due to a 2008 first quarter non-cash charge of $3.8 million to correct the carrying value of certain other assets. Slightly offsetting the increase were lower interest rates on higher cash balances as compared to the same period in the prior year.

Interest expense for the quarter increased to approximately $6.3 million due to lower capitalized interest and higher average borrowings on our credit facility as compared to the same period in fiscal 2008.

Our 2009 first quarter net loss from equity investments of $1.6 million was related to our 50% interest in Motorsports Authentics. During the 2008 first quarter MA benefitted significantly from product sales associated with a new team, car number, and sponsor for Dale Earnhardt, Jr., NASCAR’s most significant license. In addition, merchandise sales from the 50th running of the Daytona 500 rose strong results for the prior-year period.

Our effective tax rate for this first quarter decreased to 41%. The decrease was substantially a result of the tax-exempt nature of the previously discussed non-cash charge to interest income during the first quarter of fiscal 2008. Partially offsetting this decrease was the tax treatment of the MA loss in fiscal 2009.

Income from continuing operations for the three months ended February 28, 2009, was $25.2 million, or $0.52 per diluted share, on approximately 49.0 million shares outstanding. However, when you exclude the additional depreciation associated with the Daytona Live development project, the impairment of long-lived assets with net book value of certain assets retired from service, and equity and net loss from equity investments, we posted earnings of $0.56 per diluted share for the 2009 first quarter.

As described in our release, this is compared to non-GAAP net income for the 2008 first quarter of $0.78 per diluted share.

Now let’s take a look at the balance sheet. At February 28, 2009, our combined, non-restricted cash and short-term investments totaled $241.0 million, $150.0 million of which are proceeds from our revolving credit facility. Deferred income was $148.0 million and shareholders’ equity was approximately $1.2 billion.

Total debt was approximately $575.0 million, including $300.0 million in senior notes, $150.0 million in borrowings on our revolving credit facility, $66.0 million in TIF bonds, associated with Kansas, $51.0 million for a loan to construct our headquarters office building component of the Daytona Live project, and $8.0 million in debt associated with Chicagoland and Route 66.

This month we will be using our revolver borrowings, which we drew down last October, to pay our $150.0 million senior note maturity. This will leave us in a very strong financial position to weather through these challenging economic times. We currently abide by a defensive capital allocation strategy reflecting a prudent approach to capital expenditures and foregoing open market share repurchases.

The good news for ISC is that we are not in a position where we are forced to refinance our current maturity at less than desirable rates and if need be, we believe we can pay down our revolver borrowings from operating cash flow well in advance of the June 2011 maturity of that facility.

In addition, a sale of our Staten Island property and/or a favorable settlement with the IRS on our issue under appeal will provide us further financial security and flexibility, including an opportunity to resume some level of share repurchases.

In terms of our 2009 financial outlook, while we provided detailed 2009 guidance in December, we are revising our full-year guidance as a result of further weakening of the macroeconomic environment.

We now expect our 2009 full year total revenue to range between $700.0 million to $720.0 million. Our guidance assumes admissions could be down as much as 15% as compared to 2008.

Television broadcast and media rights revenues are expected to increase by approximately 3%.

Other motorsports-related revenues, which are primarily comprised of sponsorship, hospitality, and advertising, could be down as much as 15% year-over-year.

Food, beverage, and merchandise, driven by lower units, pricing, and per cap spending, could be down more than 20%.

On the operating expense side, as John mentioned, we are focused on many cost-containment measures. We are pleased to note that the increase in NASCAR direct and depreciation expenses in 2009 are expected to be offset by our reduction of other operating expenses. This should result in a slight decrease in overall operating expenses year-over-year.

Based on this, we currently expect our full-year operating margin for 2009 to be between 23% and 25% of total revenues.

Looking below operating income, we expect interest income to range between $1.0 million and $2.0 million.

And given that we are currently utilizing our credit facility to finance the $150.0 million April note maturity, we now expect interest expense to range between $20.0 million and $21.0 million.

With regard to our equity investment in Motorsports Authentics, the organization recently underwent a top level management change. As such, MA’s management team is currently doing a thorough re-evaluation of the business’ 2009 prospects, given the daunting economic environment.

While trends in track-side sales are apparent, determining reliable trends for sell through in other distribution channels with less visibility is currently proving to be a challenge. Given the dramatic downturn in the economy, licensed apparel and related merchandise is experiencing double-digit revenue declines. This is not just in NASCAR but in other sports as well.

Given this backdrop, we currently do not have the visibility to provide an accurate forecast for Motorsports Authentics, other than that we expect it to post an operating loss for 2009. As such, we are not including MA in our revised non-GAAP earnings guidance.

We believe it prudent not to cloud our core operations, which have good visibility, with an equity investment under new leadership that is still working through significant sales and operating issues.

Turning our attention to forecasted income tax expense, our anticipated 2009 full year effective tax rate, after excluding any impact from MA, is approximately 39%. Therefore, based on the factors above, we expect our 2009 full year non-GAAP earnings guidance to range from $1.80 to $2.00 per diluted share, and as we are still early in the year, at this point we are now more comfortable at the low end of this earnings range.

In conclusion, although these are challenging times, ISC remains a dynamic company, uniquely positioned to prosper well into the future. The major reason for our continued success over the past 50 years has been our execution of a proven long-term business plan. Most important, we have always operated in such a way as to maintain a strong financial profile and will continue to do so moving forward.

With that, we will open the floor for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Analyst for Gregory Badishkanian - Citigroup.

Analyst for Gregory Badishkanian - Citigroup

I was just trying to figure out, for admissions revenue in the quarter, how much of the decline was attributable to the pricing, if there was an impact from that?

Daniel W. Houser

Actually, there was a slight overall increase in the weighted average ticket price, so that was somewhat of an offset to the admissions revenue, although you are right that we have some reduced pricing on some select seating.

That, again, was select seats and that was a very successful effort for us because it really fired up getting the phone ringing. And a significant amount of those calls were really upsold, where we moved them up to higher priced seats and included some other benefits.

Analyst for Gregory Badishkanian - Citigroup

So for the rest of the year, most of the declines that you expect in admissions revenue are probably going to come from just attendance?

Daniel W. Houser

Yes, it’s mostly a volume issue.

Analyst for Gregory Badishkanian - Citigroup

And regarding that, how are advanced ticket sales trending, to date?

Daniel W. Houser

They are still running behind. They are in the 20%, around there. What we have seen, to date, through Martinsville, is a real pick up in the trend, about three weeks out from the event.

This has brought us up, really, kind of in line with our revised forecast to date so we’re feeling pretty good where we’re now pegging, with this revised guidance. We have a lot to go still through the year here.

What that does is leave us very vulnerable to is weather. So, if the weather doesn’t look good and we’re reliant on sales increases close to the event, that could have an impact.

Analyst for Gregory Badishkanian - Citigroup

Could we get an update on efforts to open facilities in Colorado, the Pacific Northwest, and New York.

John R. Saunders

Right now we don’t have any efforts underway, given the economy. We don’t have any efforts underway in either market. We have in the past expressed interest in those markets but we are not deploying any expenses against those markets. At the appropriate time we will revisit them.


Your next question comes from John Fox - Finmore Asset Management.

John Fox - Finmore Asset Management

What was cash from operations, that was generated in the first quarter?

Daniel W. Houser

It was $25.4 million compared to $47.6 million in the first quarter last year.

John Fox - Finmore Asset Management

And I’m wondering if you could comment on, I know you had a very tough comparison with Daytona with 51 versus 50. Could you talk about what you have seen for some events later in the year? Have you seen any improvement in attendance, have you seen any behavior change other than more of a walk-up sale? Can you comment on trends that you’re seeing in terms of attendance.

Daniel W. Houser

Sure, as I said here previously that advanced sales are running about 20% behind. We are seeing a pick-up closer to the event and we think that admissions revenue is probably going to be off this year about 15%.

To some extent it will be a little more dramatic earlier in the year than later in the year because we started to feel the—the economy started to turn down pretty solidly in the fourth quarter last year so probably will not be as—we hope that it’s not as big of a gap going into the fourth quarter.

One of the things that this is all predicated on is that there is some stability here in the macroeconomic environment, which we’re starting to see that we’re not continuing to be just in a total free fall. But if there is some other macro event that drastically changes the current outlook, that’s probably going to have an impact on us.

Because it’s really about the consumers’ confidence right now, whether they feel like they’re going to have a job next month.

Wes Harris

These trends that we’re seeing where people are purchasing closer to race day, this is very consistent with what we’ve seen in other downturns, too. So from a forecasting perspective, clearly these are more challenging times than the most recent downturn and even the ones prior to that in recent history, but that is typically what we’ve seen. People wait closer to race day and we’re going to get harmed, or we’re going to get harder on the margin on our supportive ends because people still want to go to that big race event but they may not go to all the other support events, and they’re not going to spend as much money there, primarily on merchandise.


Your next question comes from Timothy A. Conder - Wachovia Capital Markets.

Timothy A. Conder - Wachovia Capital Markets

Back on the admission line of questioning, you said your advance sales are trending down 20% or so. What is kind of the mix between what you would call just regular one-off advance sales and your more of a broader season ticket holder type of sale? Are you seeing any change in the mix of those types of tickets?

Daniel W. Houser

We don’t rely a lot on a season ticket model, other than a couple of specific facilities like Kansas and Chicago. The two sectors we have are the tickets that are included in the corporate deals as well as basically your consumer side of the business.

When we focus on our advance sales we’re really focusing on the consumer side of it and again, what it seems to be is really a consumer confidence issue that people, several months out from an event, are maybe feeling that, gee, I don’t know if I’m going to have my job three months from now. When it gets to a few weeks out they’re feeling a little more confident there and still are avid fans and want to attend the event. So I think that’s largely what we attribute the trend toward the later run up in sales close to the event.

Wes Harris

Dan talked about our reduced seating pricing that we’ve done on a limited quantity of tickets. Those are typically the ones that we’re the last anyway and we’re still seeing that trend, that the cheaper seats, or I guess the least premium seats, are the ones that are slower to sell. And that’s what we’ve seen.

We have seen some premium seats that are taking a little bit longer but this re-pricing issue—and it’s not discounting. I just want to make sure that we’re clear on that. It’s not discounting. We’ve gone back and in those sections, if there have been other people that have bought in advance of that, we have offered the same types of price and come back to them.

This has really helped kick-start the sales process and that’s how we think we’re going to be able to get, and we’ve been seeing these trends, how we can be behind 20% on advanced sales but when we think we’re done for the year we won’t be that far off. We won’t be 20% off, we’ll be closer to as much as 15% off on admissions.

Timothy A. Conder - Wachovia Capital Markets

I know, again, you made some comments on the entitlement side, but as far as the renewal rates of the sponsorships that roll over every three to four years, what type of rates are you getting there as you renew those contracts, given the negative macro backdrop here. Does it kind of come down in general to being plus mid-single digits? Last year has that continue to erode or what type of rates are you seeing there?

Daniel W. Houser

Kind of when you roll it all together it’s really showing to be pretty flat. It’s certainly a challenging environment right now for corporate budgets. A lot of companies are really scrutinizing that stuff and then you also have some of the perception factor going on out there. But we’re still getting deals done at a good value.

A lot of what we are focusing on now is we want to have companies have the opportunity to remain in the sport. So we’re interested in doing longer-term deals and trying to find ways and manage inventory, etc., etc. that helps them to stay engaged rather than exclude them from the sport in the short term and risk the fact of losing that companies engagement on the long term.

Timothy A. Conder - Wachovia Capital Markets

So you’re saying the renewals are coming in flattish or you’re saying overall, all in with what’s on the books and the renewals, you’re coming in flattish?

Daniel W. Houser

That category is going to be down year-over-year. But what I’m saying is we’re not seeing a huge erosion in the value equations.

Timothy A. Conder - Wachovia Capital Markets

Do you see any other potential or need for restructuring from a cost perspective, or given that his year is basically already a wash out and looking more to 2010 and then the opportunities with Cordish in Kansas, do you feel your cost structure in a normalized environment is already right-sized or are there some other things you may be taking a look at?

John R. Saunders

We have done a significant amount, beginning in the late third quarter, fourth quarter of 2008, and early into 2009. We are not done yet. There are a number of things that are under review. As I mentioned in my remarks, there are a number of company-wide initiatives so my expectation is that more costs will come out of the business.


Your next question comes from Thomas Russo - Gardner Russo & Gardner.

Thomas Russo - Gardner Russo & Gardner

Can you describe in somewhat further detail what steps are underway at Motorsports Authentics, with the new team, and what steps they might embark on?

John R. Saunders

As Dan touched on in his scripted remarks, we did have a management change at the senior level of the company recently and the interim management entered into a very aggressive restructuring where a number of fixed costs were eliminated from the business.

What the challenge is right now is trying to understand and trying to gain some visibility to what the licensed, particularly the apparel, but the licensed apparel channels of distribution look like for 2009 and beyond.

As Dan mentioned, they’re down. They’re down significantly. Not just in NASCAR, but for all sports. And so we’ve got a market-driven issue out there and the management is working through an assessment of that and so we will be keeping you posted.

But right now we just don’t have the visibility, other than what we know is happening at track side. We have some indicators but we’re not prepared to make strategic decisions about the business until we get our arms fully wrapped around what’s going on.

Thomas Russo - Gardner Russo & Gardner

Is your sense that the apparel sales are being lost to other vendors or other venues or is it just that the consumer can’t sustain?

Daniel W. Houser

We don’t believe that we’re getting cannibalized by any other vendors or anything. We’re seeing it in our other track-side merchandise. That’s one of the shares of wallet that’s hardest to come by in tough economic times.

And with this business, the track side is a significant channel and probably branding-wise is the most important thing for the health of that licensed merchandise. But we’ve got other channels like mass and specialty shops that are rally impacted by this current economic situation.

Thomas Russo - Gardner Russo & Gardner

Under delivery of audience due to a wet Daytona 51, do you have make-good obligations for that? Back to the broadcast sponsor.

John R. Saunders

There is nothing like that.


Your next question comes from Barry Lucas - Gabelli & Company.

Barry Lucas - Gabelli & Company

Starting with the venues, you talked about taking capacity out for the second race at Daytona. Are there other tracks where you can remove capacity and what is the real advantage of that?

John R. Saunders

Referencing Daytona, we are going to close what is called the super stretch, which is on the back stretch, for the event. We just don’t see the need to open that up, from a volume capacity, and there are a number of costs associated with doing that.

But to your other questions, which is more of a strategic question, we are taking a close look across the company at our supply of seats. Obviously with some contraction, which we have done in some markets already, eventually you work your way back to matching supply and demand where price then becomes part of the equation going forward.

So Roger van der Schrick and his team are working through that with all the race tracks right now. It’s going to be a very thoughtful process, it’s not knee-jerk reaction and it took a long time to build them up to the volumes that they’re at today and so it’s going to be a very strategic view to the future, but we are looking at capacity.

And I would also say that many of our seats are being, for lack of a better word, repurposed, meaning that the seat of yesteryear was an 18” seat and didn’t have a whole lot of leg room and today’s fans, when you look at new venues and so forth, want and need more space. And so we are also looking at expanding width of seats, leg room, things of that nature, and when you do that within the existing footprint of the facility, by default, you will have a decline in seating capacity. But the experience goes up.

Barry Lucas - Gabelli & Company

Switching gears to Kansas, maybe you could talk a little more about the difference in the bid this time, how realistic is it to think that you could be successful again and in particular with the change in rules in the neighboring state of Missouri, how does that impact your thinking in terms of overall profitability?

John R. Saunders

I think it’s important to point out why we withdrew last December. Our initial proposal to the State of Kansas, which there were other competing proposals, was an all-in construction of the Hard Rock Casino and Resort and the proposal did not allow for a phased approach.

And in that period of time of submitting the proposal, the application, as we all know, credit markets froze up and we got very concerned about having to be obligated to a $700.0 million project right out of the gates.

So we withdrew our proposal and that caused that part of the state, Wyandotte County, to reinitiate the new process. We do have competition for this next go around, but as I mentioned in my remarks, our approach will be to phase this in over time, as the market supports it, rather than coming out with a big project and no market.

Barry Lucas - Gabelli & Company

Less the area of, I think John mentioned, opportunity and the strength of the balance sheet and how that can be utilized down the road, do you want to identify the types of opportunities you think may be out there?

John R. Saunders

We always have talked about being positioned to capitalize on acquisitions but I stress acquisitions at the right price. We are not going to do a dumb deal and load up our income statement with bone-crushing interest expenses. So there are still a few acquisition opportunities.

There was an ask earlier on the call about Denver. We remain very interested in that market. That would be a greenfield development but our approach to that market is much different than the approach that we took in Seattle and the economy has just got it slowed down.

So there are some things within the core business that we think we can continue to grow. But there is a limitation to what’s out there for purchase. But right now we’re hunkering down. We’re going to rely on our defensive capital strategy until we see the uptick in this economy.

Daniel W. Houser

A follow-on on one point with that is that we still see open market share repurchase as an important component of our capital allocation strategy. Right now we have kind of defensively positioned ourselves to be sure that we’re not overextended in this tough economic environment but our share price has been down at a very attractive level. We’ve got some opportunities out there with some things that could turn the right way for us, like the sale of Staten Island or a resolution with the IRS. As well when we see, when we’re convinced that the business and the macroeconomic economy has stabilized, we fully intend to resume that component of building shareholder value.


Your next question comes from Josh Brown – Boston Harbor Capital.

Josh Brown – Boston Harbor Capital

I’ve been following the ratings on the broadcasts and they seem to be down between 10% and 20%. I can understand why the economy would affect the tenants but can you help me understand that dynamic? And also, does there come a point when the networks will push back on the contract?

Wes Harris

There is nothing in the contract that is ratings-contingent. We are going to get paid the same amount. Clearly, we want to have ratings as high as they can be, just like the broadcasters do. And of course, we don’t like to see ratings down. But I think it’s important to, you just can’t take a snapshot in time of a few races and try to come to a conclusion on that.

The television landscape has changed quite a bit and what you’ve really got to take a look at is how is your property faring against the other properties. And sports programming is always to remain a key piece of any broadcaster’s portfolio of programming.

They’ve got a 6.0 rating today on the Cup series, that’s 7.0 million households, 10.0 million viewers every week. That’s big; it’s been the number one sporting event on television, four of the six event weekends.

NASCAR has outperformed 75% of prime time broadcast programming.

You have to put it all into context and so it definitely was challenging to start with a rain-shortened Daytona 500. You know, our sport is unique; we start with our biggest event. And so that definitely then had an impact probably on the next several races, just from a momentum perspective, but I’ve seen published reports from the broadcasters that says that they are pleased with advertiser support given the current economic environment. The fundamentals are good with NASCAR and so we are really looking at it for the long term.

And this contract does go through 2014.

Josh Brown – Boston Harbor Capital

I understand there is not any short-term variability in what they pay you based on ratings but is there any mechanism in there for Fox, for instance, to push back and say ratings are down “x” percent, I want to renegotiate that. Or is there any out in their contract at all?

John R. Saunders

There is nothing that I’m aware of, nothing that I’ve ever heard of. I don’t believe there’s anything like that.

Josh Brown – Boston Harbor Capital

So they’re locked in completely between now and when the contract ends.

John R. Saunders

They are locked in.


There are no further questions in the queue.

John R. Saunders

Thank you all for joining us on the call today. Clearly it’s a tough economic environment but ISC’s in pretty good financial shape compared to many other companies out there and we’re in a good position to weather this storm. We’re going to stick to our capital allocation strategy and we’re not going to deviate from it. So we’re in good position. Look forward to talking to you on the next call.


This concludes today’s conference call.

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