International Speedway Corporation Q3 2014 Results Earnings Call Transcript

Michigan hosted its second annual Faster Horses Country Music Festival to great success and paving the way for value building ancillary events across our business that can produce incremental EBITDA and cash flow.

Overall, admissions were strong considering the impact of inclement weather for the July event in Daytona. We continue to see encouraging signs of stabilizing attendance and positive impact from our capacity management initiatives with retention rates stabilizing or actually increasing for some events.

While we are still working our way through a tough market in Michigan, attendance was up for NASCAR and IMSA events at Watkins Glen and the standalone nationwide race at Chicagoland. Importantly, again this quarter, we saw a pleasing increase in the average ticket price driven my fans opting for higher price and value offerings.

So far, in the fourth quarter results have been mixed. While attendance was up for the cup event in Chicagoland, units were soft for Richmond and Kansas. It’s important to note we had a new date and inaugural night race in Kansas — at the spring race at Kansas and that we experienced solid attendance and average ticket price increases exceeding expectations. We believe that a good portion of the softness for the fall event was a demand shift to spring event.

Looking to the rest of the year, advance ticket sales and trends are encouraging. Talladega and Martinsville are on track to meet or exceed expectation, and we are optimistic that the Sprint Cup Phoenix and the season finale Homestead Miami events will reach sellout, great success indicators to the new championship format coupled with our capacity management initiatives and a relentless commitment to exceed our fans’ expectations.

TV ratings, as I discussed last quarter, this season have been challenged by inclement weather which has continually cycled week-to-week momentum that broadcasters believe is necessary to support healthy ratings performance. This quarter, we again experienced a negative impact to ratings with the Coke Zero 400 rain out here in Daytona.

Despite this erosion, NASCAR is pulling huge numbers when compared to other sports properties. Looking beyond the broadcast, NASCAR’s digital platform is experiencing explosive year-over-year growth. Coupled with an average of 5.4 million viewers per event, the overall consumption of the sport, particularly on race day, is promising, and we continue to see increases in key demographics, including Hispanic viewership and the 18 to 24 year old male demo.

We are now in the final segment of the broadcast season and of ESPN’s airing of NASCAR events. To date, we have been pleased with ESPN’s promotion of the new Chase format and remain optimistic we will see positive metrics as the Chase excitement builds.

On the corporate partnership front. We are pleased with how the year is progressing. At this point through fiscal 2014, we have agreements in place for approximately 97% of our gross marketing partnership revenue target. We have all 20 NASCAR Sprint Cup series event entitlements sold, and one remaining of our 15 NASCAR nationwide series event entitlement currently in negotiation. This compares well to last year at this time when we also had approximately 96% of our gross marketing partnership revenue targets sold and entitlements in place for all NASCAR Sprint Cup and NASCAR Nationwide events.

In addition, we currently have 16 of our 20 NASCAR Sprint Cup event entitlements under contract for 2015 with three of the remaining four races in contract negotiations. Looking beyond 2015, our sales team is engaged on many fronts pursuing additional founding sponsors for Daytona Rising and as demonstrated by the four championship weekend contract extension securing partnerships that will maintain contract revenues into the future.

During the quarter, NASCAR announced the 2015 event schedule with the following changes that will impact our calendar of events. The spring NASCAR Sprint Cup event in Phoenix will be held two weeks later in March moving from the second race weekend in 2014 to the fourth race weekend in 2015. The Chicagoland Speedway NASCAR Nationwide weekend event conducted in the third weekend of July in 2014 will be held in the third weekend of June in 2015.

The Coke Zero 400 Sprint Cup event at Daytona International Speedway will be conducted on Sunday night of the Fourth of July weekend. The Darlington Raceway Sprint Cup weekend events will move from the eight race weekend in April 2014 to the 25th weekend, Labor Day in 2015. And the fall Kansas Sprint Cup weekend will move from the 30th race weekend in October 2014 to the 31st race weekend in 2015.

We are excited about NASCAR’s 2015 schedule, particularly the moves for Phoenix and Darlington dates. The Coke Zero 400 powered by Coca-Cola will move to Sunday July 5th for 2015 and will mark the kickoff event of NBC’s return to NASCAR. The event will debut several new elements of Daytona Rising at Daytona International Speedway. 50,000 new grandstand seats along the front stretch, vertical transportation, concessions, restrooms, and social areas. The 2015 schedule offers multiple opportunities, and we’ll have more to say about the impact as part of our 2015 guidance when we speak with you in late January.

Regarding Daytona Rising, the project continues to proceed on schedule and on budget. In fact, we have scheduled the topping out ceremony celebrating the midway mark for October 15. Daytona International Speedway and the France Family along with Bart Malow, our general contractor, will preside over the installation of the highest piece of steel on the project, commemorating this construction milestone. We are making great progress on additional founding sponsors and hope to have exciting news soon that will augment our tremendous Toyota partnership.

We filed the necessary documentation with the Florida Department of Economic Opportunity to be eligible to receive Florida state sales tax incentives through the newly created Florida Sports Development Program. These incentives can in total up to $3 million per year for the next 30 years to be utilized for speedway improvements.

Our proposed mixed use development across from Daytona International Speedway, One Daytona is steadily gaining momentum. We continue to advance project leasing, financing, and finalizing contractor agreements.

One Daytona has selected Shaner Hotels and Prime Hospitality Group as its hotel partners. Shaner Hotels and the PHG are planning 145 rooms, full service boutique property and we are working with global hospitality leader Marriott International to bring an exclusive Marriott autograph collection hotel to One Daytona. This type of upscale property reiterates our commitment to offering an unparalleled hospitality experience for our fans, visitors, and residents in 2016.

Earlier this year the One Daytona joint venture formed a community development district or CDD. The CDD is a local special-purpose government framework under the Florida statutes for managing and financing infrastructure required for community development.

As previously discussed, the CDD completed negotiations with the city and county for a $40 million incentive package to finance a portion of the estimated $53 million in infrastructure required for One Daytona. This agreement is monumental for making One Daytona a reality that will create much needed jobs for our community and build value for our shareholders. We hope to have news of a groundbreaking date in the near future.

Hollywood Casino at Kansas Speedway continues to deliver strong operating performance and cash flow. In fiscal 2014 the property has met or exceeded operating profit every month and we have received cash distributions of $22 million to date, $15.5 million of which was received prior to August 31, 2014.

The joint venture’s board continues to evaluate the next phase of Hollywood Casino Hotel. As we have discussed previously, the JV is subject to a 1% of gross gaming revenue penalty if it has not commenced construction on an adjacent hotel by the second anniversary of its opening which was February 2014.

This deadline for commencement was extended pending a convention center feasibility study by the Unified Government which could impact the location and design of the hotel. In the interim, our JV is not being charged the penalty. However, the final decision to move forward with a proposed hotel will be market based and approved by the JV board. Should the JV decide not to build the hotel it will be subject to the penalty from the second anniversary of its opening forward.

Accordingly, beginning February of 2014, the casino joint venture began accruing the 1% penalty. Included in our income from equity investment amounts for the quarter is approximately $300,000 expense related to this penalty.

I look forward to talking with you on our year-end call and will now turn the call over to Dan Houser.

Dan Houser – CFO

Thanks, John and good morning everyone. As noted in our release 2014 third quarter revenue exceeded comparable results for the same period in 2013, driving by contracted increases in television broadcast rights.

Items affecting quarterly comparison for our third quarter 2014 results include: the consolidation of Motorsports Authentics, including an incremental tax benefit; an IndyCar event at Auto Club Speedway held in the third quarter 2014 was held in the fourth quarter 2013; revenues and expenses related to the Faster Horses event where operations were outsourced last year; certain costs associated with Daytona Rising; asset retirements primarily attributable to our capacity management initiatives; the capitalized interest for Daytona Rising; and a one-time property tax refund realized at Hollywood Casino in the third quarter 2013. All of these are outlined in the earnings news release and are included in our GAAP to non-GAAP reconciliation where appropriate.

Looking at the income statement. Third quarter admissions revenue of $26.3 million exceeded prior year by approximately $900,000, primarily attributable to the timing of the IndyCar event at Auto Club. Also contributing to the increase were Sprint Cup and IMSA events held at Watkins Glen. Partially offsetting these results was the rain delayed Coke Zero 400 at Daytona.

As John mentioned, we continued to see favorable results from our capacity management initiatives, including an almost 1% increase in the average ticket price to approximately $42.93 for the third quarter. The increase in Motorsports related revenue to $82 million was primarily attributable to contracted increases in television broadcast revenue and the timing of the IndyCar event. Partially offsetting this increase was media advertising revenue associated with Motor Racing Network.

For the quarter, ISC’s domestic television broadcast and ancillary revenues were approximately $53.7 million. The increase in food, beverage, and merchandise revenue to $17.5 million is primarily a result of higher merchandise sales after consolidating operations from Motorsports Authentics. Also contributing to the increase were concession sales related to the Faster Horses Music Festival held at Michigan.

Prize and point fund monies and NASCAR sanctioned fees increased to $30.9 million. The increase is due to higher television broadcast rights fees for the NASCAR Sprint Cup, Nationwide, and Camping World Truck Series events as standard NASCAR sanction agreements require specific percentage of television broadcast rights fees be paid to competitors.

Motorsports related expense increased to $33.7 million. The increase is primarily due to the IndyCar event timing as previously noted. Also contributing to the increase were cost driven by inclement weather for the rain delayed Coke Zero 400 in addition to certain pre-racing guest experience related costs for other events.

Food beverage, and merchandise expense increased to $14.6 million primarily a result of higher merchandise sales after consolidating Motorsports Authentics and the Faster Horses Festival as well as the date change for the IndyCar event. Food, beverage, and merchandise margin compression for the third quarter is primarily attributable to the MA consolidation and to a lesser extent Faster Horses.

General and administrative expense increased to $28.2 million for the quarter. This is primarily attributable to the budgeted increase and certain administrative costs as well as the consolidation of Motorsports Authentics. Partially offsetting the increase were carrying costs related to our Staten Island property incurred in fiscal 2013 but not in fiscal 2014.

Depreciation decreased to $22.4 million primarily due to assets related to Daytona Rising and capacity management projects that were fully depreciated and/or removed from service prior to the third quarter 2014. Otherwise, depreciation was consistent with the prior year. The $3.9 million retirement of long-lived assets is primarily attributable to the removal of certain assets in connection with capacity management projects.

Interest income was comparable to the same period of the prior year while interest expense decreased to $2 million primarily due to higher capitalized interest associated with Daytona Rising.

Equity and net income from equity investments of approximately $2.3 million represents our 50% equity interest in the Hollywood Casino at Kansas Speedway. This compares to $2.9 million in the third quarter 2013. Included in the equity income amount for the third quarter 2013 is approximately $600,000 related to a onetime property tax refund for which there is no comparable amount in the current year.

Also contributing to the year-over-year decrease in the third quarter 2014 is approximately $300,000 accrued for the hotel penalty John previously discussed. When normalizing for these two factors, equity income for the casino for the quarter is up over 21% compared to 2013.

Through August 31, 2014 cash distributions to ISC from the casino joint venture totaled $13.5 million. Subsequent to quarter end we received an additional $6.5 million bringing total distributions for fiscal 2014 to $22 million.

Income taxes for the quarter included an approximately $2.1 million tax benefit related to the consolidation of Motorsports Authentics. Excluding this benefit and certain immaterial state tax positions, the effective tax rate for the third quarter of 2014 is 39.2%.

Net income for the three months ended August 31, 2014 was $191,000 or less than $0.01 per diluted share on approximately 46.6 million shares outstanding. However when you exclude certain costs incurred and accelerated depreciation associated with Daytona Rising, asset retirements, capitalized interest related to Daytona Rising and the MA related tax benefit, we posted earnings of $0.02 per diluted share for the 2013 fiscal third quarter.

As described in the release, this is compared to non-GAAP net income for the 2013 third quarter of $0.05 per diluted share. The decrease on a non-GAAP basis is primarily due to higher costs, including the impact of inclement weather for the Coke Zero 400 and the previously mentioned items impacting the year-over-year comparison of Hollywood Casino results.

As for the balance sheet and future liquidity, at August 31st our combined cash and cash equivalents totaled $171.9 million. Current deferred income was approximately $77.9 million and shareholders’ equity was $1.3 billion.

At the end of the quarter total debt was approximately $274 million which includes approximately $165 million in senior notes, $58.9 million in TIF bonds associated with Kansas Speedway, $49.7 million for the term loan on our headquarters office building and $421,000 in revenue bonds.

As it relates to capital spending, for the nine months ending August 31st we spent approximately $132.5 million on capital expenditures for projects at our existing facilities, including Daytona Rising and to a lesser extent a variety of other improvements and renovations.

In fiscal 2013, our board endorsed a capital investment plan for 2013 through 2017 not to exceed $600 million over that period. The five-year plan encompasses CapEx for all of our 13 facilities, including Daytona Rising and any commitments to undertake One Daytona.

The majority of Daytona Rising’s construction will occur in fiscal 2014 and ’15. We estimate ISC’s total CapEx, excluding capitalized interest, will be approximately $200 million and then $180 million in fiscal 2014 and fiscal 2015, with a target completion date for Daytona Rising in January 2016. Spending will then decrease significantly with an expectation of capital expenditures for projects at all of ISC’s existing facilities to be between $60 million to $70 million annually in fiscal 2016 and ’17.

While we will leverage our revolver on a short term basis we will not take on additional long term debt to fund Daytona Rising. However, accounting rules require that we capitalize a portion of the interest on our outstanding debt during the construction period. We estimate we will recognize approximately $11 million to $13 million of cap I from 2014 through 2016 with roughly half being recorded in 2014.

Keep in mind that we will adjust for the Daytona Rising related capitalized interest in our non-GAAP presentation so you can expect interest expense on a non-GAAP basis to be approximately $4 million per quarter. We lowered the capitalized interest estimate from previously released amounts due to plans for a portion of the new grandstand construction to go into service for Speedway’s 2015, thus suspending capital utilization of interest on those assets on their in-service date.

As a result of a portion of Daytona Rising’s assets going into service during fiscal 2015 ahead of the final completion in 2016, depreciation expense related directly to Daytona Rising will increase incrementally by approximately $12 million to $14 million in fiscal 2015 and another $9 million to $10 million in fiscal 2016.

Total annual depreciation expense for fiscal 2015 is estimated to be between approximately $90 million and $95 million and approximately $100 million to $105 million in fiscal 2016. Then decreasing due to lower capital spending to approximately $85 million to $90 million annually beginning in fiscal 2019.

In terms of our fiscal 2014 outlook, we are reiterating our previous guidance revised for the consolidation of Motorsports Authentics. We expect total revenues for fiscal 2014 to range between $635 million and $650 million. EBITDA margin will range between 29.5% and 30.5%; operating margin between 17.0% and 18.5%, and non-GAAP earnings of $1.30 to $1.50 per diluted share.

Our fiscal 2014 non-GAAP earnings per share guidance excludes any accelerated depreciation associated with shortening asset service lives and future losses on disposals of long-lived assets which could be recorded as part of capital improvements where assets are removed prior to the end of their actual useful life. Any income statement impact attributable to the Daytona Rising project, the MA fair value adjustment and income tax benefit, any gain or loss on the sale of assets and legal judgments and settlements.

During the quarter we announced that based on information received during the sanction agreement negotiations with NASCAR, ISC’s contracted TV broadcast revenues under the new contracts beginning in 2015 will increase to approximately $316 million or 3.8% and that our rights revenues under the new contract are expected to increase between 3% and 5% annually over the 10 year contract term at an average of 3.9%.

The net broadcast revenue allocation between industry stakeholders reflects no change in the historic participation in the sports only shared revenue model 65% to promoters, 25% to race teams paid through price and point fund monies, and 10% retained by NASCAR. Broadcast rights represents ISC’s largest revenue segment and these recent deals provide us with long term growth and visibility to continue investing in our business to the benefit of our fans, partners, and shareholders.

In closing, we remain well positioned for ongoing success with our largest revenue source secured through 2024, a strong balance sheet, and stabilizing consumer and corporate revenues. Although macroeconomic improvement remains tepid and inclement weather can impact event weekend performance, we’re encouraged by the results of our consumer marketing and capacity management initiatives working in concert with NASCAR’s industry action plan.

As well we continue to focus across our business on keeping costs down. Thanks for joining us on today’s call. I’ll turn it over to the operator for Q&A.

Question-and-Answer Session

Operator: (Operator Instructions) Your first question is from the line of Jaime Katz with Morningstar.

Jaime Katz – Analyst, Morningstar

You had commented on stabilizing admissions in the press release, and I’m curious if you have any color on either advance ticket sales or pricing for the period that you’d be willing to share with us.

John Saunders: Well, Jaime, this is John. From an advance ticket sale perspective for our remaining events in 2014, we’re currently up about 7% in revenue on our advance and about 9% on our units, which is encouraging as I mentioned earlier. And from an average ticket price perspective, last year we finished up somewhere around, and I’m talking about Cup, around $82.74 on an average ticket price and currently we’re trending up on the Cup average ticket price in the low-single digits. Again, stabilizing and as well as seeing some of our capacity utilization increase across certain venues in the portfolio.

Dan Houser: As well Jaime at quarter end, you see that year-over-year deferred revenue is down about $1 million, and in that actually the deferred revenue for tickets is pretty flat year-over-year at quarter end. The decrease is primarily due to the timing on some of the sponsorship revenues coming in, and as John spoke to, we’re knocking on the door of our target for the year there, so not a concern.

Jaime Katz – Analyst, Morningstar

And then in the past you guys haven’t really called out any of these ancillary events that you’ve been hosting. So is there a way we should be thinking about how that adds to positive EBITDA in the future or maybe how that business scales up going forward, and if interests from outside parties like these concert promoters have picked up?

Dan Houser: Well, I think first of all, Jaime, the reason we called out that particular event as well as the IndyCar event was the timing of those and the comparison year over year had some significant flux on revenues and expenses. Neither of those had what we would probably call out on an operating income contribution. So, if the IndyCar event was held again in the third quarter next year and the Faster Horses Event continues in the third quarter next year, we’re probably not going to be talking about those. It’s really because those impacted the increase in both revenues and expense lines.

Jaime Katz – Analyst, Morningstar

And then finally, when should we hear about the completion of the feasibility study in either Kansas or the progress of the tax incentives in Florida?

John Saunders: The feasibility, it is our understanding that the Unified Government sometime in the fall here will be reporting out the results of that feasibility study, so hopefully certainly by the end of the year. And I am sorry, what was the second part of your question?

Jaime Katz – Analyst, Morningstar

The tax benefits in Florida, what’s the timing on that legislation or how does that sort of pass through?

John Saunders: With regards to the Daytona Rising sales tax rebate program, we’ve filed our application and the timing is in the next 60 to 90 days.

Dan Houser: While they review that and then on that process, it begins after that in the next calendar year.

Operator: Your next question comes from the line of Steve Altebrando of Sidoti & Company.

Steve Altebrando – Analyst, Sidoti & Company

The 3% admissions growth in the quarter, is that fairly comparable on a same event basis? I know that there’s a little bit of a shift of events but I think it’s fairly minimal.

Dan Houser: I think the admissions growth, a lot of that is driven by timing of that IndyCar event which isn’t huge, but you don’t have that in the base. Otherwise, admissions revenue on a comparable basis is pretty flat year-over-year. Keep in mind that we had that inclement weather leading up to the Coke Zero which really impacted us there. So, what offset that was we had a very strong event at Watkins Glen. Our June event at Michigan had a nice increase in the average ticket price, which again goes back to the capacity management at Michigan and kind of build that up. So all-in-all we had pretty stable admissions year-over-year which we thought – we were pretty happy with considering the impact that we had here in Daytona which was significant.

Steve Altebrando – Analyst, Sidoti & Company

The additional sponsor that you’re expecting soon for the Daytona Rising, was that contemplated in the $15 million EBITDA guidance for that project?

Dan Houser: Absolutely.

Steve Altebrando – Analyst, Sidoti & Company

And then just lastly, the schedule changes for next year, do you expect them to be a net-net benefit to you?

Dan Houser: Yeah, as I said we’ll have more to say on our year-end call, but particularly with Darlington, the Labor Day weekend historically when you go back many many years for decades was the home of the Southern 500. That is a traditional weekend that we had drifted away from. And so we think that bodes well for Darlington as well as Phoenix which used to follow – this year followed the Daytona 500 was the second race in the season is now the fourth race. And one of the things that we as an industry have done working in concert with the other track promoters and NASCAR is we now will have a so called west coast swing, which will – after we have the Daytona 500, we go to Atlanta, and then from Atlanta, it will be Las Vegas, Phoenix, and Auto Club Speedway. We think that and some other enhancements to the schedule are going to be a benefit to our admissions in 2015.

Operator: (Operator Instructions) Your next question comes from Tim Condor with Wells Fargo Securities.

Tim Condor – Analyst, Wells Fargo Securities

Thanks for the coverage on the average per capita on the cup events. Any color that you can give us as it relates to the other two series and then looking forward here, given the change in the schedule John that you just talked about here in a little more detail, how should we kind of frame what potentially you could see in overall admissions going forward? Would it be reasonable to think very low single digits potential increase looking into ’15 at this point?

John Saunders: Well, Tim, with respect to the other series, we expect that the Nationwide probably on an average ticket price will be roughly flat year-over-year. Although, we are seeing some trending upwards on the truck series of low single digits.

With regard to the 2015, again, we’ll have more to say in our next call but you know, when you look at the strategic initiatives of the company where we – our managing capacity and this capacity management has really been addressing seats that are not the full benefit of what the experience can provide such as seats on the back and so forth.

So getting capacity out of the system and more or so getting less desirable seats out of the system and then looking at the stabilization or slight trending in the average ticket price particularly on the Cup. Then, our tiered pricing initiatives in the sales cycle that our advance sale customers in the renewal process get the best pricing. But we have, for lack of a better word, a variable pricing system at all of our racetracks that trends upwards depending on demand as we move closer to race week and race day.

Specific to your question I hesitate to quantify in terms of percentage increases but we believe these initiatives are going to yield some favorable results in our 2015 projections.

Dan Houser: Tim, Just to follow up on that where we’re seeing this lift on the cup side which is where we’re seeing most of the lift which is where we like to see it, is not – it isn’t really other than John’s talking about taking some pricing late in the cycle, it isn’t that we’re raising ticket prices per se but as we take out the less desirable seating that are generally a lower entry point, while we still have all the different tiers of pricing available for the fans, fans are making the choice in many instances to purchase a higher value race experience. So that’s really where you’re seeing this lift and where the capacity management is driving this.

Tim Condor – Analyst, Wells Fargo Securities

If I may, on the at track spend do you have any comparable metrics there, an average metric trend that you’re seeing at the track itself year-to-date?

Dan Houser: Well, I think that our big beverage and merchandise have stayed flat to growing. Merchandise has been good this year because Dale Jr. has done good and some of the other drivers so we’re actually seeing a very healthy increase in the per capita spend there, knocking on the door of close to 10%. But a lot of that is driven by what’s happening on track.

Tim Condor – Analyst, Wells Fargo Securities

Then lastly if I may, with the changes you outlined in timing of putting some of the assets in service and how that impacts when depreciation starts to be realized, what’s the outlook for the GAAP non-GAAP however you want to approach it, profitability of the significant improvements that you’re doing at Daytona?

Dan Houser: Well, I mean, I think that you really have to look at that on the basis of 2016 going forward. The assets, we’re taking advantage of using some of these assets in service in 2015 will have basically the west end of the grandstand ready. It remains to be seen how does that drive demand next year. It certainly is a challenging year. We’ll be coming off of a rain at the Daytona 500 rain at the Coke Zero. I think that in our mind we’re really looking to when the project goes fully online in 2016 that’s when we begin to see the boost there.

You know the thing that would be great for us, if we are able to – we’re certainly watching this tax appreciation legislation and hoping that the tax extenders get improved late here in the year and they go into 2015 and if that happens having these assets – a good portion of these assets in service in 2015 will be very advantageous.

Operator: Thank you. And at this time there are no further questions.

John Saunders: Well thank you operator and thank you everybody for joining us on the third quarter call and we look forward to speaking to you on our year-end call. Have a great day.

Operator: Thank you ladies and gentlemen. This does conclude today’s call. You may now disconnect.

 

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