Six Flags Entertainment Corp (FUN) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cedar Fair third quarter 2003 earnings conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Brian Witherow. Sir, you may begin.

Thank you, Maria. Good morning and welcome to our third quarter earnings conference call. I'm Brian Witherow the Corporate Director of Investor Relations for Cedar Fair. Last night we issued our third quarter nine month earnings release. A copy of that release can be obtained on our corporate website, cedarfair.com or by contacting our investor relations offices at 419-627-2233.

On the call this morning are Dick Kinzel, our Chairman, President and Chief Executive Officer and Bruce Jackson, our Vice President of Finance and Chief Financial Officer.

Before we begin, let me caution you that comments made during this call will include forward-looking statements within the meaning of the Federal Securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. You may refer to filings by the company with the SEC for a more detailed discussion of these risks.

In addition, in accordance with newly adopted Regulation G, non-GAAP financial measures used on the call today are required to be reconciled to the most directly preparable GAAP measures. During the call we will make reference to adjusted EBITDA as defined in our earnings release. The required reconciliation of adjusted EBITDA is also available to investors on our website via the conference call access page. In compliance with SEC Regulation FD, this webcast is being made available to the media and the general public, as well as analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all contents of the call will be fully disclosed.

Now let me turn the call over to Dick Kinzel.

Thank you for joining us on the call today. As you can see from yesterday's earnings release, we're very pleased with our record results through the first nine months of the year, particularly given the poor early season weather and slow start to the year. Although we did not achieve our attendance goals at several of our parks, we're very satisfied with the solid growth we are able to generate in guest per capita spending and out-of-park revenues and, most importantly, at the bottom line.

Weather conditions improved in August and September and results that most of our parks strengthened from the early season softness. Through the first nine months of the year, we achieved record revenues on a 3% increase in average in-park guest per capita spending and a 1% increase in out-of-park revenues. The growth in out-of-park revenues came primarily from another year of strong occupancy rates at Cedar Points Resorts hotels as well as improved results at our California hotel. The gains in guest spending and out-of-park revenues were offset slightly by a 2% decrease in combined attendance through the end of September, although attendance in the third quarter was up 1% between years.

In October, weather continued to be favorable at most of our parks and the positive trends in attendance and guest spending continued. Through the first ten months of the year, combined attendance at our 11 parks was down 1% from 2002, even though it had been up by as much as 7% at the end of June. We're very pleased to have recouped the majority of that early season short fall.

In spite of the slow start, an effective capital program find with favorable weather late in the season helped to produce solid 2003 attendance figures at most of our parks. For the year our flagship park, Cedar Point, performed very well with the introduction of the park's 16th roller coaster, Top Thrill Dragster. In spite of a slow start to the season and some early operating difficulties with the new ride, full year attendance at Cedar Point increased 3% to 3.3 million guests, while occupancy rates or occupancy trends at the park's hotels were also strong. Hotel revenues at the park were up 5% through the end of the season.

We're also very pleased with the performance of Valleyfair! this year. The Minnesota park, which introduced a new roller coaster, enjoyed favorable weather conditions throughout the peak season and the park produced one of its best years ever at the bottom line. For the full 2003 season, attendance at Valleyfair! totaled 1.1 million guests, up 7% from last year, with strong guest per capital spending growth as well.

At our newest amusement park, Michigan's Adventure, attendance increased more than 10% to approximately 480,000 guests on a very modest capital program. Meanwhile in-park guest per capita spending at Michigan's Adventure continued to improve and the park had its best year ever at the bottom line.

Unfavorable weather through much of the year negatively impacted results at our two other seasonal parks. At Dorney Park, record rainfall throughout most of the season led to a decline of attendance of more than 10%. For the year, attendance at Dorney totaled 1.4 million. However, the park was still very profitable and contributed nicely to our cash flow. We're confident that with normal weather conditions, Dorney will rebound strongly in 2004.

At Worlds of Fun, cool and wet weather in the early part of the season was followed by extreme heat throughout most of July and August and results at that park were negatively impacted. For the full season, attendance at Worlds of Fun was down 6% to approximately 880,000 guests. However, the high temperatures during the peak season, along with the addition of a new family activity area, contributed to a record year at Oceans of Fun water park.

For our only year-round park, Knott's Berry Farm continues to perform reasonably well in its market in spite of heavy competition and continued discounting in the soft Southern California market. Through the first ten months of the year, revenues at Knott's were essentially flat with last year on a 5% decrease in attendance and a 4% increase in guest per capita spending.

Some of you have asked about the recent wildfires in California and any impact that they have had on our properties there. First let me say that our thoughts and prayers go out to all of those people affected by those fires. Thankfully, however, none of the parks, none of our parks were in the immediate area of the fires and so we're not directly harmed. In addition, our three California water parks were already closed for the season, leaving only Knott's Berry Farm open. Other than a bit of soft attendance the last week of October, results at Knott's were not significantly impacted in any way.

As I mentioned earlier, although we did not achieve all of our attendance targets, we're very satisfied with the growth in guest per capita spending. Through the end of October, average in-park guest per capita spending at our six amusement parks was up 3% from last year. We're also very pleased with the performance of our five water parks in 2003 where combined attendance was up 3% from last year's record results to roughly 1,550,000 guests, an average in-park guest per capita spending at our water parks increased 5% from a year ago.

Before I turn things over to Bruce Jackson for a more detailed review of our third quarter results, I would like to take a moment to update you on our capital plans for the 2004 season. With the 2003 operating season concluded to all of our seasonal parks, we've already begun to focus on next season. And construction has begun on new rides and attractions that we will be adding to the parks.

Our 2004 capex program will total $25 million and will feature the expansion of our water park and resort properties at Cedar Point, as well as the addition of a new intermediate sized thrill rides at Knott's Berry Farm and Worlds of Fun. Although more moderate than recent capex totals, we believe next year's program, along with more normal weather conditions and a strong second year draw of Top Thrill Dragster at Cedar Point and Steel Venom at Valleyfair! will combine to produce solid attendance and guest spending across the company.

At Cedar Point, our efforts to enhance the park as a resort destination continue with the expansion of our Lighthouse Point luxury camping complex and Soak City water park. The addition of 14 new lakeside cottages, 30 cabins, and 38 luxury RV campsites at lighthouse point will add needed capacity with what has quickly become one of our most popular guest accommodation facilities. Meanwhile the expansion of Soak City will be highlighted by the introduction of a high-energy, multistory, interactive water play area that the entire family can enjoy. In total, we will be investing almost $10 million in capex at Cedar Point for the upcoming season.

In 2004, capital expenditures at Knott's Berry Farm will total $5 million and will feature the introduction of a new midsize thrill ride, which will debut at the park next spring. At Worlds of Fun we will be investing roughly $4 million, highlighting the addition of an exciting new family roller coaster, our first new roller coaster at that park since 1998. We're confident that both of these new rides will be received well by the park's core market. The remaining $6 million of our 2004 capex program will be invested in various new attractions and upgrades at our other seasonal parks.

Not included in the $25 million capex figure are plans for a major upgrade to our Radisson hotel property at Cedar Point. These expansion plans are estimated to cost approximately $20 million and will include the addition of a major indoor water park to make the hotel a popular year-round family destination. Cedar Point will announce full details on this project next week.

At this point I'll turn the call over to Bruce to discuss the third quarter numbers in more detail.

Thank you, Dick. In spite of continued uncertain economic conditions and inclement weather during much of July, net revenues in the third quarter increased 3% to $282.2m from $273.5m in 2002. This included $148.7m in admissions revenue, up 5% from last year, $104.8m in food, merchandise, and games revenue, up 1%, and $28.7m in hotel and other nonpark revenues, up 2%. The increase in in-park revenues in the quarter was the result of a 1% increase in combined attendance and a 2% increase in average guest per capital spending.

Total operating costs and expenses for the third quarter before depreciation and other noncash charges increased just slightly to $134.9m from $134.5m for the same period a year ago. Each of our parks did an excellent job of keeping operating costs in line this season and all costs as a percentage of revenues remained in line with or below historic levels.

For the quarter, earnings before interest, taxes, depreciation, and amortization and noncash and nonrecurring items, or adjusted EBITDA increased 6% to a record $147.3m on the strength of improved attendance and guest spending levels coupled with flat expenses. Adjusted EBITDA is the critical park level cash operating measure that we use in budgeting and monitoring our park operating performance.

After depreciation and a $1.3m noncash charge for unit options, compared to a slightly higher charge a year ago, operating income in the quarter increased $7.2m, or 6% to $126m. In the current quarter, we recognized a noncash credit to income of $1.2m for the change in fair value of two interest rate swap agreements in the period. This compares with an expense of $3.5m in last year's third quarter. These amounts represent purely a timing issue and $6.2m expense last year's remains to reverse into income over the next six quarters as the swaps continue to serve their purpose of leveling cash interest costs through their maturity in the first quarter of 2005.

After the noncash credit and after interest expense and a provision for taxes, both of which were comparable between years, net income for the quarter increased $11.7m to $111.4m, from $99.7m in 2002 on a diluted limited partner basis, net income increased to a record unit from $2.16 per unit from $1.94 per unit one year ago. For the nine month period net revenues increased 1% to $449m from $445m in 2002 in spite of the poor early season weather. This resulted in a 3% increase in average guest park operating, a 1% increase in out-of-park revenues and a 2% decrease in combined attendance.

Cash operating costs and expenses through the end of September actually decreased slightly to $276.6m from $277.2m last year due to a strong emphasis on expense controls at each of our parks, thus our adjusted EBITDA increased $4.5m or 3% to $172.3m for the nine month period.

After higher depreciation and an increased noncash charge for unit options, operating income still grew 3% to $129m from $125m last year. Through the first nine months of the year we recognized a credit to income of $1.4m for the change in fair value of the swap agreements. This compares to an expense of $6.8m in 2002. After this noncash credit and interest expense and a provision for taxes, both of which were comparable again, net income for the nine-month period increased to $96.6m or $1.88 per unit from $84.5m or $1.65 per unit for year ago.

As Dick mentioned, weather continued to be favorable for most of October and our operating results remained solid. On that basis and with these strong third quarter results we now expect to achieve full year revenues of $500m to $510m compared to $503m last year and a full year adjusted EBITDA of $170m to $175m compared to $170m last year. This level of operating cash flow combined with our moderate capital expenditure programs in 2003 should allow us to comfortably fund our cash distribution rate of $1.76 per unit and could allow for another increase next March at the board's discretion.

Turning to our balance sheet for a moment, total debt outstanding at the end of quarter was $339m, down approximately $10m from our debt level of a year ago. This included $230m of fixed rate term debt, $20m of which is payable in the third quarter of 2004, and $109m of borrowings under our bank revolver. $100m of the revolver borrowings have been converted to fixed rates through interest rate swaps.

In late October, we arranged a private placement of an additional $100m of new term debt that has an average maturity of 11 years and an average fixed interest rate of $5.38%. At the same time we entered into variable rate swap agreements on these borrowings in order to establish more favorable interest rates than we currently have available under our existing revolving credit agreement.

When funded in December of this year, the proceeds from the new term debt will be used to reduce borrowings on our revolver and accordingly, we have already reduced our revolving credit facility to $180m. These transactions will improve our already very favorable borrowing rates and balance sheet strength.

We remain comfortable with our current debt levels and have no immediate plans or needs to significantly pay down debt at this time. In addition, at current market prices, we have no plans for buying back any more limited partnership units, nor have we been actively buying back units over the past several quarters.

At the end of the third quarter, partners equity totaled $340m and our total cash on hand was $6.1m, both amounts in line with normal seasonal levels.

At this point I'll conclude our prepared remarks and allow for any questions that you might have. Maria?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press the number 1 followed by 4 on your touchtone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, to ask a question, you may press 1, followed by 4 on your touchtone telephone at this time. One moment while I poll for questions.

Your first question is coming from Kit Spring of Stifel Nicholas. Please go ahead with your question.

Hi. Good quarter, guys. My question is regarding capital expenditures on your base business, it's $25m versus kind of a $50m-ish number the past couple of years. How confident are you that this level of capex is enough to drive attendance growth at your typical historical rate? Thanks.

Hi, Kit, this is Dick. Thank you very much for your kind remarks. We feel it's very comfortable. I think one of the things that drove us to this decision this year was our key park, Cedar Point, we had to pull our advertising of Top Thrill Dragster for the entire, up until basically the fourth of July and the ride wasn't operating properly. So consequently, we feel we lost the early part of the season not being able to market that ride and so we feel we have more than a normal second year bump-back on Top Thrill Dragster. That's really the only park where we cut back. On our other parks, it's pretty much in line. We do have major attractions planned at a couple of our parks in 2005.

Great. Thank you.

You're welcome.

Once again, ladies and gentlemen, to ask a question, you may press 1 followed by 4 on your touchtone telephone at this time. Your next question is coming from Robert Routh of Natexis Bleichroeder. Please go ahead with your question.

Good morning and congratulations on the quarter, guys. A few quick questions. First, I wanted you to comment a little bit on the decision to build a water park inside of the Radisson hotel. It seems like this is the first time you've ever decided to take this kind of strategy and we're wondering what, kind of, made you come up with that decision and whether or not you plan on expanding that concept if it proves successful.

Second, I'm wondering if there's any discussions among management about possibly splitting the stock, considering the level that it's reached now; and third, I was wondering if management would consider in an effort to increase liquidity in the name, doing a rights offering at this level.

Robert, this is Dick. I'll answer the operational end of it and then let Bruce respond to the stock split. The reason for the water park at the Radisson, ever since I've been at Cedar Point and attended board meetings, whenever a new board member comes on, the first question they have is, with all the assets and the management we have here at the park, isn't there any way that we can generate revenue on a year-round basis, and with the success of this type of entertainment, it was constant, we've studied it for several years, we did a purchase of Radisson hotel a few years ago. While it is very successful for us on a 12-month basis, that hotel, along with the TGI Friday's, actually loses money nine months a year. However it's so strong during our operating season it makes up for all the losses and it is a profitable operation for us but certainly not nine months a year.

What we have, what we're trying to do here is attempt to generate positive cash on a year-round basis and when you look at it, we already have management in place, we already have the financial marketing, foods and merchandise people in place and it's just basically a matter of extending the talents that these people have to a 12-month operation. If this works out successfully at Cedar Point, certainly we are going to look at expanding it at our other operations. We have a couple of parks that have room, plenty of room to do this concept if it's deemed feasible. A couple of our locations, mainly Dorney Park and Knott's Berry Farm, of course, were sort of tied in there, locked in there so it wouldn't be applicable to those two but certainly our other parks we do have land available if this concept proves successful.

Robert, on the question of split, we haven't discussed it. I think the last time we split was when the units got up to 40 and stayed there for some period of time. So I don't hear anybody talking about it yet, but, you know, if the units get up consistently in that range, I think that would be my guess when we would start talking about it again. And with respect to rights offering, tell me a little more what you are asking about because I'm not sure of the question yet.

I'm just curious about given the lack of liquidity in the name whether or not management's considered any way to, without diluting existing shareholders, percentage ownership of the company of a way to kind of rectifying that as well as a way to even, you know, raise additional cash that could be used to pay down debt and increase liquidity, which would increase institutional ownership of the name.

Well, I guess right now we look at the debt levels and the debt markets as being more attractive than the equity markets for us to raise capital principally because on a cash flow basis our distribution is something of a 6% plus rate and the cost of debt capital is much lower. So I don't think anybody's likely to be issuing or talking about issuing new units anytime soon. Of course, in an acquisition that would be considered. But as we sit right now, I think the balance sheet we're pretty comfortable with and the liquidity is something that's been with us for a lot of years and because a lot of the big institutional investors stay away from partnerships, it just always been that way.

You know, some of you are aware of the mutual fund legislation that's been kicking around in congress and we keep our eye on that, too. So maybe someday mutual funds will be interested in publicly traded partnerships but under the existing tax rules, I guess that's not on the horizon until the law changes. I hope that's an answer to your question, Robert. I don't anticipate any equity issues anytime soon.

Okay. Great. And just one more follow-up. Could you give us a sense as to what your expected internal payback would be based on your projections for the indoor water park you plan on building?

It's the hardest thing to estimate that we've ever done. The stuff, the capital we invest in the park, we've got so many years of history and background, we feel like we know pretty well what to expect, but this one is a year-round operation that the ROI is probably not going to be as high as it is in park investment. So we knew that going in.

And another question that will affect the ROI is to what extent other people go ahead with the plans that have been kick around and rumored for years in this area for other indoor water parks. So with all that, I guess I'm reluctant to say anything specific about the ROI except it's not going to be at the level that investments and park assets have delivered over past years.

Great. Thank you very much.

Thank you.

Thank you. As a reminder if you do have a question, you may press 1, followed by 4 on your touchtone telephone at this time. Your next question is coming from Dean Gianoukos of J.P. Morgan. Please go ahead with your question.

Hi, this is actually Rami Abdel-Misih in for Dean. Just one quick question. Have you guys begun to take group sales or season pass sales for next year and if so how are they trending versus last year?

Well, Rami, yes, we have started that. We start those promotions right after Labor Day with special prices at all of our parks to get early season discounts for next year. The trend is growing. It's really too early to see. Some of the reports that I've seen right now, Cedar Point is basically trending the same as last year, Dorney Park's is down a little bit. It's really too early to say. Our big kick really starts after Thanksgiving, people start buying them for holiday gifts. So we'll have a good report for you, an update on that at our next conference call.

Okay. Thanks.

You're welcome.

Thank you. Gentlemen, I'm showing no further questions at this time.

All right. At this point if there are no further questions, I want to thank everyone for joining us on the call today. Should anyone have a follow-up, they are free to give me a call at 419-627-2173. At this point let me just again say thank you and we look forward to speaking with you again in January to discuss the fourth quarter and full year results.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful weekend.