CART Media Conference
RACHELLE FERGAN: Good morning, everyone. Thank you for joining us for our first quarter earnings release tc. Joining me on this call, this morning is Joe Heitzler, Championship Auto Racing Team's president and chief executive officer, who is in Dallas, Texas for our first oval race of the season, and Tom Carter, our chief financial officer. Before I turn over the presentation to Joe, let me remind everyone that with the exception of historical information discussed in this presentation, the items discussed are forward-looking statements that involve risks and uncertainties that could cause actual results that differ materially from those forward-looking statements. Championship Auto Racing Team, Inc. has set forth its risks and uncertainties in its most recent form 10-K, which is filed with the Securities and Exchange Commission. Joe will provide his comments on the results for the first quarter. Tom then will discuss the highlights of the first quarter of 2001 results, and then we'll take your questions. With that, let me introduce CART's president and chief executive officer, Joseph Heitzler.
JOSEPH HEITZLER: Good morning, everyone, and thank you for Your response to our conference call this morning. Due to the annual guidance that we had the conference call on last week, I will reflect the results of the first quarter. It's our continuing effort to more frequently and effectively reach out to our consumers through expanded marketing activities. We are continuing with our strategic plan. We are reinvesting in the company, as I explained last week on the conference call. We have over the weekend had a restructuring of racing operations division of CART. Also, today, we are announcing the senior vice-president marketing position has been filled by Mr. Richard Henley, who comes to us from Royal Caribbean cruise ship lines. He is responsible for $2.3 billion in sales, and for effectuating strategic alliances with Coca-Cola and IBM and other leading Fortune 500 companies. We also find ourselves with continuing marketing and sponsorship activities, and I'm sure in the question-and-answer period, I'll be available to answer any questions that you have relative to our compliance at this time with our annual guidance which we gave last week.
TOM CARTER: Thank you, Joe. This is Tom. I'm going to go over the details of our first quarter results. Total revenues for the three months ending March 31, 2001 were $6.4 million dollars, a decrease of $1.4 million or 18 percent from the same period in the prior year. Sanction fees for the three months ending March 31, 2001 were $2.6 million, an increase of $1.2 million or 81 percent from 2000. We had one event in the first quarter of both 2001 and 2000. In 2001 we held our inaugural race in Monterrey, Mexico, and in 2000 our race was held in Homestead, Florida. Sponsorship revenue for the three months ending March 31, 2001 were $3 million, a decrease of $1.9 million or 40 percent from the same period in the prior year. This decrease is primarily attributable to the loss of guaranteed sponsorship income from our former sponsor partner. Television revenue for the three months ending March 31, 2001 was $259,000 which was comparable to 2000. Engine lease rebuilds and wheel sales for the three months ending March 31, 2001 was $271,000, a decrease of $180,000 or 40 percent from the same period in the prior year. This decrease was due to having fewer Indy Lights entries in the first quarter of 2001 compared to the same period in the prior year. Other revenue for the three months ending March 31, 2001 was $365,000, a decrease of $438,000 or 55 percent for the same period in the prior year. This decrease was primarily attributable to a reduction in royalty revenue and due to fewer entry fees, memberships and credential income from Toyota Atlantics due to zero races being held for the period ending March 31, 2001, compared to two races being held in the same period the prior year. Total expenses for the three months ending March 31, 2001 was $8.3 million, an increase of $2.1 million or 34 percent from the same period the prior year. Race distributions for the three months ending March 31, 2001 were $741,000, a decrease of $79,000 or ten percent for the same period the prior year. The decrease was due to Toyota Atlantics holding two races in the first quarter of 2000 and zero races in 2001. This decrease is partially offset by an increase in Indy Lights race distribution due to one race held in 2001 compared to zero races being held the prior year. Race expenses for the three months ending March 31, 2001 were $1.8 million, an increase of $398,000 or 28 percent for the same period the prior year. The increase was due to new programs and personnel and the related travel and salary costs in the race operations department. Costs of engine rebuilds and wheel sales for the three months ending March 31, 2001 were $99,000, a decrease of $37,000 or 27 percent for the same period the prior year. This decrease is due to fewer Indy Lights entries in the first quarter of 2001 as discussed previously. Administrative and indirect expenses for the three months ending March 31, 2001 were $4.8 million, an increase of approximate $1.3 million or 37 percent. This increase is primarily attributable to an increased investment in strategic planning, personnel, public relations, marketing and advertising that are focused on building our long-term strategic plan and branding awareness. Severance expense was $386,000 with no corresponding expense in the same period the prior year. Operating loss for the three months ending March 31, 2001 was $1.8 million compared to operating income of $1.7 million for the same period the prior year. Interest income for the three months ending March 31, 2001 was $2 million, compared to $1.5 million for the same period the prior year. The increase of $480,000 was primarily attributable to reinvestment of cash flow from operation. Income before income taxes for the three months ending March 31, 2001 was $126,000 compared to income before income taxes of $3.1 million for the same period the prior year. Income tax expense for the three months ending March 31, 2001 was $45,000 compared to an income tax expense of $1.1 million for the same period the prior year. Net income for the three months ending March 31, 2001 was $81,000 compared to net income of $2 million of the same period the prior year. Earnings per share on a fully-diluted basis were one cent compared to 13 cents for the same period the prior year. Those are the highlights for our first quarter 2001. We will now open it up to questions. Please limit your questions to one during your turn, and if there is time available, feel free to jump back in after others have had an opportunity to ask their question. With that, we'll open it up for questions.
Q. Question about staff changes. Obviously, you have a big announcement on your marketing VP. I understand you have had some layoffs in other areas, and obviously, you let some people go over the weekend. Can you talk more strategically about what all is going on with the changes? Are you 50 percent of the way there or are there many more changes to go? Can you give us some color on that, Joe?
JOSEPH HEITZLER: Yes. We are in a situation where we believe in racing operations, with all of the technology issues, our engine manufacturers, tire manufacturers and other very specific contributors to our race environment that we have to be more compliant with and more in sync with their objectives. And by that, when new things are happening at Ford Cosworth, when new things are happening at Toyota, when new things are happening at Honda, we have to have the ability to rise to that occasion, and to, in essence, service that environment from a partnership point of view. So, the reorganization and re-evaluation of the makeup of the racing operations department is specifically skewed to accomplish that goal. On the percentages of where we are at, the issues in racing operations, there will probably be an environment where we will bring on some more technically-oriented individuals, and certainly, a major part of that reorganization structure has taken place.
Q. Just to follow up, did you close your Atlanta office recently relative to licensing and were those material reductions in overhead?
TOM CARTER: The Atlanta's office was closed last year, and we have moved that operation to our Troy offices, and there were not substantial expenses involved in that.
Q. I was talking about the licensing division?
TOM CARTER: Right. That was moved to the Troy offices last year.
Q. Joe, again the direction of the company is looking good. I know it's only been a week, but maybe give us an update as far as your outlook on how things are going with developing the infrastructure for signing up new sponsors, i.e., given the problems at ISL, and also similarly related to progress with FedEx in particular?
JOSEPH HEITZLER: On the sponsorship area, we are continuing to have conversations with -- I think last week your question was on FedEx. Yesterday, we had an in-house meeting relative to the renewal process and the terms and conditions of that process, and we will be meeting with FedEx within the next ten days, according to our conversations yesterday. In addition to that, we have a sponsorship activity here at the Texas Motor Speedway. We have begun the process of developing a pipeline of exposing sponsors to our product and to our sport. So we are beginning that this weekend, and we continue on a very aggressive level, me personally, specifically, skewing firms from the Silicon Valley on the technology area to join in as sponsors with CART.
Q. A couple questions, Tom. I apologize. I think I missed it. Can you explain to me again why race distribution -- sanctioning has -- (inaudible) -- can you update us on where you stand with the share repurchase; if you have an idea of if these levels are attractive to you and if you've begun that program and so forth?
TOM CARTER: With regards to the race distribution, the reason that is down is because we had more races in 2000 for our support series than we did in 2001. And in regards to the share repurchase, we are not commenting on the level that we would be interested in in making those repurchases.
Q. Could you remind us how many Indy Lights races and Atlantic Series races you are going to have this year?
TOM CARTER: Yes. We will have 12 Indy Lights races and 12 Toyota Atlantic races, which are the same number that we had last year.
Q. Last week, your comments on the television contract, going back through my notes, it appears what you are saying, which makes sense given your background, that you will do the production on the races, and then supply that production to the network. The network will then do the advertising, but you will not do the advertising and you will not buy the time; is that correct?
JOSEPH HEITZLER: That's correct. We have no intention of buying -- of making a time buy, and we -- we're not going to directly sell the advertising. But in our negotiations with our partner, our strategic broadcasting partner for the future at CART, we would like to think that we could create an environment where we would assist the network in the advertising, so that our sponsors at our -- have a primary position opportunity, and we would like to negotiate a position for them. We would not negotiate the rate or anything like that, but we would then -- certainly the contractual environment, we would like to make sure that our sponsors had the availability to have the on-air advertising opportunities, and the adjacencies that go with that type of environment.
Q. Wouldn't the network normally want to do the production itself so it could do it's things like the FOX Network does with its insignia on the cars and that sort of thing? Wouldn't they prefer to do it that way, as opposed to having you supply a final package?
JOSEPH HEITZLER: In our discussions with the various entities that we have been involved with, they have recognized that we are very adamant about how our look is on the air. And unless there is some other overwhelming new environment as it relates to that, we feel that in this next contract, at least for a portion of the contract, we need to recapture the opportunity to be responsible for the on-air branding and how our sport and entertainment value is delivered and distributed.
Q. I guess tied into that, how much more will it cost for you to do your own production, as opposed to the network doing it, and will the network pay you for that production cost?
JOSEPH HEITZLER: The inherent issues are that we can probably do this on a basis that would be less costly than the network, and then secondarily, this is inherent in how you negotiate the contract. So there are contracts that you negotiate that are rights only. There are contracts that you negotiate where there are rights that the network produces it. And then there are instances where you have a rights, and the rights fee has inherent in the fee the cost of production.
Q. On the sanctioning fee, is that just the Monterrey sanctioning fee or does that include any payments from Fittipaldi in relation to Rio; and if not, where does that stand in terms of getting money from him for that?
TOM CARTER: The sanction payment is only for the Monterrey race. And as far as your question with Mr. Fittipaldi and the cancellation of the 2001 event, the event has been cancelled and we will not be realizing any sanction fee revenue for Brazil.
Q. Is he not required to put up some deposit, him personally, to be --
TOM CARTER: No, he is not.
Q. And is that normal?
TOM CARTER: That is normal.
Q. So we are really tacitly at risk with these people -- not even -- we are directly at risk --
TOM CARTER: All of our sanction agreements call for the payments to be prepaid, and so prior to us going to an event and taking part in an event, the entire sanction fee is required to be paid. In the case of Brazil and the circumstances in Brazil, we did not receive these payments prior to that race being cancelled.
Q. So really, as a business issue, we should recognize that we are -- we are really at risk in these revenues; they are not guaranteed; and therefore, I guess as a capitalist, I would sit there and say, you know, if I'm -- if I'm tacitly at risk here, I might as well be a partner in a way that I can be -- I can participate in the upside of these events. That's all I'm saying --
TOM CARTER: All of our contracts are multi-year contracts, and depending on the circumstances involved, there could be could be a contractual obligation in that regard if a race should happen to be cancelled or a promoter should default on their obligation. In this particular case, we have not at this point in time pursued any legal options that we may have available to us in regards to the Brazil race.
Q. Well, my statement is really geared to Joe, in that. Joe, doesn't it really make sense if we are going to -- in a situation like Brazil, it's one business proposition to say, okay, we are going to simply be a sanction and we're going to get two, two and a half million dollars an event. We are going to bring the circus to town, but that's sort of it, but we are guaranteed. And the upside is, to you, Mr. Pook (ph), or you, IMG, the situation in Rio has really shown that we are, as I said, tacitly at risk in these situations, which to me said, you know what, if I'm going to be at risk on my revenue stream, I don't really want to be in a position financially where it's heads they win, tails we lose. It seems to me we should be moving forward on a per-event basis with those promoters in more of a joint venture type of arrangement so we share some of their upside .
JOSEPH HEITZLER: We are looking into exactly that situation for exactly that same reason. These are some things that we are doing now, and with us more -- more focused on the data growth aspects of it and developing specific criteria on how you get a sanction for a race and how you keep the sanction. These are things that we are seriously addressing right now, and I think we'll find that there will be some obvious cases. I think Rio would be a bad example, but there will be obvious cases, let's say, if we were to put a race in Washington D.C., we know inherently going into it that the upside is tremendous, and if we control the scheduling and the dates more so, which we are going to do, then we would probably approach this very carefully on how we could get a guaranteed sanction, and then also, a percent of the profits, and these are things that we are seriously addressing as we speak.
Q. Could you just give us some guidance, refresh our memories for the number of events that will be scheduled over the second and third quarters and how that might fare upon a year-on-year basis, Tom?
TOM CARTER: I have to get back with you. I don't have that right in front of me as we speak, but I will look that up and get back with you before we get off this call.
Q. And secondly, can you just refresh our memory also, with cap backs for the full year at this point?
TOM CARTER: Budgeted to be between 1.5 and $2 million.
Q. Just to clarify in a public manner, I assume that you are still very comfortable with the 2001 guidance that you gave in light of your now having reported first?
JOSEPH HEITZLER: Yes, I am.
TOM CARTER: We are comfortable with the guidance that we gave on an annual basis last week.
Q. Could you talk more about your desire to take a sports-driven company and transform it into a sports entertainment-driven company, how you intend to do that and maybe another sports organization that you are using as a model?
JOSEPH HEITZLER: Well, the model that I probably would use -- the NBA would be one; the transition it made around 1980, 1981 when Larry Bird, Magic Johnson, we identified an environment there, and it became commonly known throughout the League and throughout sports that we were making the transition to entertainment, and it was so coined, "Show Time." And the reflection of that was in the adaptation of very aggressive pricing and exposure for court-side seating. Also, in the embryonic manner of -- we had sold out at the Forum with the Lakers and we began the embryonic entertainment issue of the Forum Club and membership. So people would actually come to the Forum building, but not be able to have a ticket for the game, but the ancillary opportunity of being in the building with big screen TV's in the Forum Club, addressing more of the entertainment industry as guests on the floor seats; incorporating that into the on-air broadcasting capability. So that when you saw the NBA advertisements, "I love this game," it was going to Jack Nicholson; it was going to Joe Smith of Capitol Records; it was going to Glenn Fry, Henley from the Eagles Irving Azorf (ph) from Zylux Records (ph). Those are specifics. It also was embodied in the Super Bowl. The vice president of special events is Jim Stiege (ph), and how he over the last 10 to 12 years has been able to move the NFL football Super Bowl game into the entertainment genre. Halftime has become and the commercial entities have become as much a part of the game as the game itself. In fact, I think there are people who have actually done stopwatches on the entertainment versus sports, and maybe in some of these institutions they are stepping over the boundary a little bit. Using those two as an example now, to be specific of how we are going to do that at CART, we have been given an excellent opportunity. Albeit, I was not the CEO of the company when the contractual environment of the movie Driven was entered into, we have 16 screenings tonight in Dallas. There will be two: Our sponsor, Nextel, will be having a private screening of their own premiere for all of their customers in the southwestern region of the country; and Texas Motor Speedway, which we will be running at on Friday, Saturday, Sunday. The whole weekend -- this morning, the whole weekend, which I have to attend here in about four minutes, all of our haulers that haul all of our race equipment, etc., Will be in a parade from Fort Worth to Dallas. Once again, stepping outside the sports box and getting into the entertainment. On the premiere of the movie in Los Angeles, 176 or 177 media institutions' representatives attended that Hollywood opening of Driven. The entire pre-Driven activities were all CART race cars and drivers. And as I said, these will be unfolding between now and Friday night, which is the opening of the movie. So we are taking all of these issues with Driven and showing entertainment value of that. You'll notice in our annual report that's being distributed, you'll see a focus on entertainment, with Paul Newman, Sylvester Stallone, Kip Purdue, Tim Allen. You'll see the branding of entertainment's attraction to this least highly specific skill set environment of racing. Secondarily, we will be bringing the race drivers themselves and putting them into more of an atmosphere of entertainment. For instance: Access Hollywood, Entertainment Tonight, the opening of our Los Angeles office with an individuals there who has matriculated in that market for over 15 years with professional sports teams and in Los Angeles. All of the public relations executives at sports teams are very much sought after for athletes to participate in movies, commercials, etc. But you will be seeing a very high level of intensity, with non-traditional media outlets, which are entertainment-driven.
TOM CARTER: I would like to get back to the question regarding a number of races for the quarterly basis for the rest of the year. We will be having seven races in the second quarter, which is the same as we had in 2000. Nine races in the 2000 third quarter, which is also the same. Four races in the fourth quarter; and in 2000, we had three races. We would just like to thank everyone for participating in the conference call today. We appreciate all your questions and we will be getting back with you if we need to update on an annual basis our guidance, and we look forward to speaking to you soon. Thank you.
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