Speedway Motorsports, Inc. (NYSE:TRK) Q4 2017 Earnings Conference Call March 7, 2017 10:00 AM ET
Marcus Smith - President and Chief Executive Officer
William Brooks - Vice Chairman, Chief Financial Officer and Treasurer
Karen Tan - Wells Fargo Securities, LLC
Good morning, and welcome to the Speedway Motorsports Fourth Quarter and Year-End 2017 Earnings Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. As a reminder, this call is being recorded on Wednesday, March 7, 2018.
With us on this morning’s call is Marcus Smith, Chief Executive Officer and President; and Bill Brooks, Vice Chairman and Chief Financial Officer. After formal remarks, a question-and-answer period will be conducted.
Before we start, the company would like to address forward-looking statements that may be addressed on the call. This conference call contains forward-looking statements, particularly statements with regard to the company’s future operations and financial results. There are many factors that affect future events and trends of the company’s business, including, but not limited to, economic factors, weather, the success of NASCAR and other sanctioning bodies, capital projects and expansion, financial needs and host of other factors of both within and outside of management’s control.
These factors and other factors, including those contained in the company’s Annual Report on Form 10-K and subsequently filed Quarterly Reports on Form 10-Q involve the certain risks and uncertainties that would cause actual results or events to differ materially from management’s views and expectations. In conclusion (sic) [Inclusion] of any information or statement in this conference call does not necessarily imply that such information or statement is material. The company does not undertake any obligation to release publicly revised or updated forward-looking information and such information included in this conference call is based on information currently available, and not be – may not be reliable after this date.
So with these formalities out of the way, I will turn the call over to Marcus Smith. Marcus?
Thank you, and good morning, ladies and gentlemen. Thank you for joining us on today’s call as we announce fourth quarter and full-year results for 2017. During the fourth quarter, we hosted the Monster Energy NASCAR Cup Series Bank of America 500 and the Xfinity Series Blue Cross Blue Shield 300 events at Charlotte Motor Speedway.
At Texas Motor Speedway, we hosted the O’Reilly Auto Parts 300, XFINITY Series and the Monster Energy NASCAR Cup Series, AAA Texas 500. Other race events this quarter included the NHRA Toyota Nationals at Las Vegas and the NASCAR Camping World Truck Series JAG Metals 350 at Texas.
In 2017, we sold all Monster Energy’s NASCAR Cup Series entitlements and all XFINITY Series entitlements. 2018, only one NASCAR event weekend sponsorship is unsold at this time. 2017 marked the third year of our 10-year broadcast agreements with NASCAR, NBC Sports Group and Fox Sports Media Group. While TV ratings have declined for the past few years, the NASCAR Cup Series was still the number two sports property on television, trailing only the NFL. An average of 4.1 million viewers tuned in per minute with 58 million unique viewers for the 2017 season.
NASCAR also ranked as the number one or number two most-watched sport of the weekend 22 times during the 2017 race season. It’s important to note the shift in media consumption as traditional TV viewership, both in sports and entertainment has been on the decline as other forms of viewing platforms have become available. Additionally, social and digital media are important channels for content distribution and consumption.
NASCAR reported 223 million visits to nascar.com in 2017, generating more than 1 billion page views. NASCAR also reported more than 4 billion impressions through its social media platforms. Speedway Motorsports remains more focused than ever on taking care of our longtime fans and also on capturing the next-generation of new race fans.
NASCAR’s introduction of the stage-based race format for all three of NASCAR’s national series has been well received by both fans and drivers. These changes along with new formats for awarding championship points and ongoing NASCAR enhancements to on track competition make this an exciting time for both current fans and potential fans of our sport.
We continue to capitalize on our first-class facilities in premium markets and are extremely excited to showcase them in 2018. New multipurpose bar and high-end hospitality areas offering enhanced fan experiences debuted at Atlanta Motor Speedway and Las Vegas Motor Speedway during the first quarter and will open at Texas Motor Speedway in the second quarter.
In addition, as previously reported, Las Vegas Motor Speedway will host a new triple-header NASCAR weekend in September 2018, featuring all three premier NASCAR touring series. Las Vegas is also expanding the strip at Las Vegas Motor Speedway into distinctive and exciting four-lane racing configuration for the NHRA.
In late September in Charlotte, the Monster Energy NASCAR Cup and XFINITY Series races will compete on the new, much-anticipated ROVAL Charlotte Motor Speedway’s new 2.3-mile combined super-speedway and infield road course, which is another industry-first by SMI.
Our long-term business model remains solid and our long-term strategic initiatives of debt reduction, capital spending, dividends and share repurchases remain a primary focus. We will continue to focus on consumer marketing initiatives, superior at-track entertainment experiences and increased utilization of our facilities through ancillary events and third-party track rentals.
I’ll now turn it over to Bill Brooks, who will give us further financial review.
Thank you very much, Marcus. One of the largest items contained in our fourth quarter 2017 and our 2017 financial statements is a one-time significant reduction in net deferred income tax liabilities, resulting in a corresponding income tax benefit of approximately [Technical Difficulty], or $202 and $0.91 earnings per share.
For the most part, this benefit was triggered by the Tax Cuts and Jobs Act of 2017, which among other provisions lowered the U.S. corporate tax rate to 21% from 35%. Our significant deferred income tax liabilities rose because of our previous substantial capital improvements, which were depreciated more quickly for income tax purposes than for book purposes.
The change in corporate tax rate was especially timely for Speedway Motorsports, because our deferred income tax liabilities had started to reverse in 2017. When you see our Form 10-K, you’ll note that we reduced our long-term debt by $54 million in 2016 versus $36 million in 2017. We couldn’t conveniently reduce our long-term debt as much, because our cash income taxes increased by about $18 million year-over-year.
Our future deferred tax provision is very complex and difficult to project, but we expect our cash taxes to approximate the income taxes that we reflect in our [Technical Difficulty]. The fourth quarter was relatively similar to the prior year. Our Charlotte race was somewhat weaker because of poor weather, our Texas race was somewhat stronger from better weather, and our Camping World Truck race at Las Vegas Motor Speedway was held in the third quarter 2017 versus the fourth quarter 2016. Apart from the items that are highlighted in the non-GAAP reconciliation, the general and administrative costs for the fourth quarter increased mostly because those of the prior year were reduced by a property tax refund.
For the 12 months ended in December 31, 2017, the most significant [Technical Difficulty] prior year aside, from what we’ve already discussed is the Battle at Bristol football game and concert that we conducted in the third quarter of 2016. Shortfalls in 2017 admission and event-related revenues were substantially mitigated by increased net NASCAR broadcast revenues and reduced expenses.
And in fact, if we excluded the 2016 football weekend results, SMI’s 2017 full-year adjusted non-GAAP net income actually increased over 2016. Remember that some of our Monster Energy NASCAR Cup Series, XFINITY and the Camping World Truck Series events are at different times or places in 2017, excuse me, in 2018 relative to 2017.
Some of the most significant changes to the Monster Energy races are the date migration from New Hampshire to Las Vegas in the third quarter of 2018, and the movement of the Charlotte events from the fourth quarter back to the third quarter in [Technical Difficulty]
Again, the details for the year ended December 31, 2017 compared to the prior year admissions for 2017 decreased $3.7 million, or 4.1% from 2016. This decrease is due primarily to lower overall admissions at some of our NASCAR events. The decline was relatively evenly divided between price changes and attendance changes.
Our event-related revenues for 2017 decreased by $8 million, or 5.9% due to lower marketing sales, luxury suite rentals, souvenir sales and radio broadcasting revenues from some of our NASCAR racing events. The overall decrease was partially offset by some higher track revenues and to lesser extent higher ancillary broadcasting revenues in 2017 as compared to 2016.
Our NASCAR broadcasting revenue for 2017 increased by $7.4 million, or 3.7% over such revenue for 2016, reflecting higher contractual broadcast rights fees. Our other operating revenue of 2017 decreased $31.8 million of such revenue for the prior year, and obviously most of this decrease is due to revenues associated with hosting the Battle at Bristol collegiate football game and concert in 2016, and to a lesser extent, some lower oil can sales and natural gas royalty revenues at Texas in 2017 relative to 2016.
Looking at our direct expenses for 2017, they decreased by $8.6 million from the prior year. This reflects some lower advertising cost, lower souvenir cost of sales and other operating costs associated with our race events. So overall, decrease was somewhat offset by higher pre and post-race entertainment costs. The NASCAR event management fees for 2017 increased by $3.8 million, or 3.3% as expected.
Our other direct operating expenses for 2017 decreased by $25 million. Most of the decrease is associated with the direct expense hosting the Battle at Bristol football game and concert in [Technical Difficulty].
General and administrative expenses for 2017 decreased by $2.5 million from the prior year. This decrease reflects lower overall wage costs in 2017, other lower or other compensation and indirect costs associated with the 2016 Battle at Bristol and a bunch of smaller individually insignificant items. The overall decrease is partially offset by some higher legal and professional fees [Technical Difficulty]
Depreciation and amortization for 2017 increased by $10.5 million over such period for 2016. And this increase is due primarily to recording pre-tax accelerated depreciation of about $11.1 million on retired assets in 2017. The increase also reflects depreciation on new capital expenditures placed in service, partially offset by some lower depreciation on fully depreciated assets.
Our interest expense for 2017 was $12.2 million, compared to $13.1 million. This change reflects lower total outstanding debt, higher interest income was partially offset by higher interest rates on our credit facility borrowings. Remember, that in early 2017, an impermanent of goodwill, representing a non-cash charge of $1.1.
Other expense for 2017 was $1.3 million, compared to net other income of $997,000 for 2016. The change occurred, because removal costs associated with retired assets in 2017 are current year numbers, as well as having lower gains on disposal of certain properties in 2017, 2016 have an estimated loss from storm damage at our Atlanta facilities in 2017 versus having estimated fire loss [Technical Difficulty].
Our income tax benefits this year changed our effective income tax rate [Technical Difficulty] benefit of 234%. In 2016, we had expense of 35.4% As I mentioned, our 2017 tax reflects a one-time material reduction of net deferred tax liabilities, predominantly [Technical Difficulty] lower federal statutory rates.
The 2017 tax rate also reflects some non-recurring tax benefits for reduced net deferred income tax liabilities for lower state tax associated with the date realignment [Technical Difficulty] differences in state income tax law changes. Those items are partially offset by deferred taxes from certain state net operating loss carryforwards. So a lot going on in the tax area.
During this year, our cash increased $2.6 million to $81.9 million at [Technical Difficulty] the year. Our net deferred race event climbed from $44.8 million, $41.5 million, or about 3. [Technical Difficulty]. Our gross long-term debt also declined by $36 million, as we previously mentioned, and finished the year at about $231 million. Capital expenditures were $25.7 million for 2017. We expect 2018 capital expenditures of $20 million to $30 million somewhat consistent to the last couple of years.
Michelle, at this time, please allow the participants to ask any questions that they may have.
[Operator Instructions] I do have a question from Karen Tan from Wells Fargo Securities. Your line is open.
Hi, good morning. This is Karen calling in for Ken Connor at Wells Fargo. Just wanted to kind of circle in, I guess, on your deferred income at the end of the year. Just deferred income kind of continues to slide a little bit. I wanted to see what will be the biggest driver of that decline, whether it would be kind of this pre-sales or other items in the business that’s kind of a bigger driver at the decline there overt the year?
For the most part, it is a decline in ticket sales that people are generally purchasing tickets closer to the time of event nowadays, because we have some remaining excess capacity.
Okay, great. And then some general, I guess, the overall transformations in 2017. Will you say this, the admission decline is more on ticket, or is it also key factor of average price?
It is a combination of both. It – ironically, is about half a change in price and about half a change in actual attendance. The price change is difficult to ascertain, whether it is a change in mix or just a change in rate.
Okay. And last question is on the guidance for 2018. It’s a full result than what we had expected. Could you maybe kind of just go over some of the components or assumptions baked in for both your assumed, I guess, decline in total revenue based on the midpoint of guidance and also, I guess, on the net income side? Could you maybe kind of walk through some of the assumed components of each?
The income guidance for 2017 was $0.90 to $1.10 and our adjusted earnings came in at $0.91 kind of on the low-end of that range. For 2018, we’ve adjusted the range upward to $1.10 to $1.20. We hope to be in the midpoint of the upper-end of that range. It’s really hard to assess when we have a major migration in dates, the time of race, exactly how things are going to play out, and we needed to look at a relatively conservative presentation in our view, because the last two years we’ve had what is excessive inclement weather based upon historical trends.
Okay, great. And then actually just one last question. I guess, could you provide guidance as to what you think the effective tax rate we should assume 2018 would be? And then in regards to, I guess, tax savings starting in 2018. Have you – had those discussions about potentially giving back some of those savings to shareholders in a form of maybe incremental one-time dividend or increase in the quarterly dividend or whether it would be buybacks, or are you continuing to see further debt reduction in 2018?
Well, that’s a good question in several respects. We have two things going on in terms of the taxes. One is, we’ve experienced a rate decline, which is very helpful. And our rate has been averaging around the 37% range for the last few years. We think it’s going to be 10 or 12 points lower than that going forward.
But that said, the remaining 200 million or so of deferred income taxes may continue to reverse and to the extent they do, that could eat up some of the cash flow – extra cash flow that we would hope for from the reduction in tax rate. Certainly, we would be better off than under the old tax regime, but perhaps not as well off as we might think.
Our primary goals for 2018 are to continue to make payments on our debt. Our credit facility has a remaining balance of approximately $30 million. We can see that paid during the calendar year, then we will have a better opportunity to assess for 2019 what we’d like to do in terms of [Technical Difficulty] dividend, share repurchase or capital projects.
But at this juncture, I think, our primary focus is to pay the cash taxes, continue to pay the dividend that we have, avoid dilution from some studied share repurchases and continue to pay down our debt. So I don’t think you’ll see much change for the calendar year 2018.
Okay, great. Thanks so much for taking the question.
[Operator Instructions] I have no further questions in queue. I’ll turn the call back over to the presenters for closing remarks.
Okay. Thank you very much for joining us on today’s call. We look forward to speaking with you next quarter.
Thank you, everyone. This will conclude today’s conference call. You may now disconnect.