Six Flags Entertainment Corp (FUN) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen, welcome to the Cedar Fair First Quarter Earnings Teleconference. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host to Mr. Brian Witherow. Sir, you may begin.

Thank you, Halley. Good morning, and welcome to our first quarter earnings conference call. I am Brian Witherow, the Corporate Director of Investor Relations for Cedar Fair. Last night we issued our first quarter earnings release and a copy of that release can be obtained on our corporate website www.cedarfair.com or by contacting the company 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 more detailed discussion of these risks.

In compliance with the 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 content of the call will be considered fully disclosed. Now, let me turn the call over to Dick Kinzel.

Thank you for joining us on the call this morning. Bruce will review the details behind the first quarter results with you in just a bit.

Before I get to the upcoming season on our expectations for the year, I would like to say how proud I am with the fact that we were able to increase our cash distribution rate again in March. As we mentioned in our last conference call, our Board considered another increase in the distribution rate based on the fact that our 2003 full year results came in at the high-end of our range of expectations. After reviewing our solid fourth quarter and full year results, the Board determined that an increase in distribution rate to a $1.80 per unit or 45 cents per quarter was appropriate. This represents our thirteenth increase in the past 10 years, during which time the distribution level has increased to 80%, something we are all very proud of. After the upcoming operating season, our only year round park, Knott's Berry Farm has started the 2004 season not fairly well. Favorable weather comparisons have helped the park generate improvement in both attendance and in-park guest standing to the first four months of the year.

Meanwhile, operations are getting started at our seasonal parks. In Kansas City Worlds of Fun opened its gates for the 2004 season back in early April and our newest park Geauga Lake debut this past weekend, and Cedar Point and Dorney Park both open later this week.

On Memorial Day Weekend all of our seasonal properties, including our five water parks would be open on a daily basis. We have got a nice mix of new attractions and guest accommodations facilities in place this season and we're confident they would generate strong interest in each of our markets. In total, we have invested $27 million across to our 12 properties this year, highlighted by the expansion of our water park and resort properties at Cedar Point, as well as the addition of new intermediate sized show rides at Knott's Berry Farm, Dorney Park, and Worlds of Fun. Although, this is amore moderate capital program than in recent years, we believe this year's investments along with more normal weather patterns at Dorney Park and a strong second year draw of Top Thrill Dragster at Cedar Point, and Steel Venom at Valley Fair will combine to produce solid results across the company.

At Cedar Point, we followed up last year's addition of the world's tallest and fastest roller coaster with the CAPEX program, as focus back on the resort part of the park. Cedar Point's 2004 capital program is highlighted by expansions to our Lighthouse Point luxury camping complex and our Soak City Water Park. At Lighthouse Point, the addition of 44 new lakeside cottages and cabins and 38 new luxury RV sites has added needed capacity to one of our most popular guest accommodations facilities and early reservations there have been solid so far.

Meanwhile, the expansion of Soak City is highlighted by the introduction of a high-energy interactive play area give towards the entire family. The same kind of attraction proved very successful in helping Oceans of Fun, achieved record results in 2003, and we are confidant it will be just as popular this year at Cedar Point. In 2004, Cedar Point has also invested in an exciting restaurant expansion program, which has added three completely new food service experiences for our guests. Highlighting the expansion program is the addition of a Famous Dave's Barbecue restaurant, which should be located in the former Boathouse restaurant in Cedar Point Marina and the schedule to open on Memorial Day Weekend

We have also converted an existing in-park restaurant into a sports bar and grill called Game Day Grill and added a new quick serve bakery, which will allow guest to enter the park before opening for an early cup of coffee and a fresh doughnut. We are confident that these new restaurants will help stimulate further growth in guest per capital spending at the park.

In 2004 capital plans at Knott's Berry Farm, Dorney Park, and Worlds of Fun featured the introduction of a new mid-sized thrill ride at each park. Each of these rides will provide strong marketing opportunities for the parks and should be popular additions in their core markets for the 2004 season. In fact, early season response from the guests at Worlds of Fun have been very good. There're new family roller coaster, Spinning Dragons.

The 2004 season should also be an exciting one for our newest park Geauga Lake. Our acquisition of that property from Six Flags close on April 8 and the park opened for the season on May 1, not leaving as much time to get the park ready. There was a lot of work to be done in the short period, but our employees pulled together. And with the help from all of our Cedar Fair parks we got the park opened on schedule and it's looking great. I am confident that we've assembled the strong operating team at Geauga Lake. With more than several individuals from our other properties, we bring a great deal of experience with them including the Park's new General Manager, Bill Spehn, who has 25 years of experience working in the park operations area for Cedar Point. I know he and his team will do an excellent job in running that park and they are already off to a good start.

We've also got some exciting capital projects in the works for later this year. Not included in the $27 million CAPEX figure are two other major projects, both of which are already in the work, but will not benefit the 2004 season. At Cedar Point, construction is well under way on a $22 million indoor water park, which will convert our Radisson Hotel into a year round Caribbean theme family resort called Castaway Bay. This new resort will give us the opportunity to entertain families all year long and it will be an ideal compliment to our other resort properties at Cedar Point.

In addition, we have also begun construction on a new $16 million world-class roller coaster at Knott's Berry Farm. The new coaster called Silver Bullet will be one of the largest single investment in Knott's Park's history and should be a strong draw for that market in 2005. Both Castaway Bay and Silver Bullet are scheduled to open in late 2004 and will not have a significant impact on earnings until 2005.

Looking towards the upcoming season, there are several challenges that lie ahead of us. In California tourism has yet to return to normal levels and discounting in that very competitive market remains a concern. On a positive note, we have seen improvements in guest spending levels at our California parks over the past 18 months.

In addition, in 2004 we also continued to face uncertain economic conditions in several of our key regional markets. Over the last year, we proved that with the right mix of capital programs and marketing plans in place our parks could grow the bottom line in spite of these challenges. We have been cautious in our capital investment plans for the upcoming 2004 season, which we believe is a prudent approach given the current economic and competitive situations. Because our parks are primarily regional [drawn], so there was an easy driving distance of their major markets. We continue to believe that they serve as an attractive alternative to a more expensive long-distance vacations, which makes them less vulnerable to soft economic conditions. In addition, our properties enjoy strong reputations in each of their markets for quality and guest services, and I believe we can build upon that positive momentum we established last year. However, seasonal staffing levels look very good at the parks and the parks look great, so we are ready for another exciting season. Although, we are still too early to accurately forecast 2004's full year performance. We are confident that each of our investments along with continued momentum from last year's capital programs and new strategic marketing plans will position our parks for a successful year in 2004.

Looking at some early season indicators, we are encouraged by several trends, Bookings of group outings and season's past sales have been solid so far and both are trailing slightly ahead of last year's levels at this time. In addition, the pace of bookings at our resort properties is comparable with last year's solid performance including a high-end accommodation facilities where reservations have been strong, particularly at Cedar Point.

Because of the timing of the Geauga Lake acquisition, we had little time to implement significant changes at that park or take advantage of some of the marketing and operational synergies that we know exist. In addition, we fully expect that some attendance will be lost due to the fact that the live animal attractions were not included in the acquisition. That being said, we have already been able to implement numerous cost saving strategies at the park and we are confident that Geauga Lake will be accretive on both earnings and cash flow basis immediately.

For the year, we estimate that the new park will contribute approximately $35 million to $40 million in net revenues and $10 million to $15 million in operating profits before depreciation of $6 million to $8 million. Given our expectations for Geauga Lake, we are now planning for full year consolidated net revenues in the range of $550 million to $570 million in 2004. This can be achieved by maintaining attendance levels at our other parks and by generating improvements in guest per capita spending in our water park revenues and our resort properties. Based on these revenue expectations and a continued focus on controlling costs, we hope to be able to generate full year operating growth in the low-to-mid single digits, with our moderate 2004 capital program this should allow us to increase our cash distribution rate again this year.

At this point, I will turn the call over to Bruce Jackson to discuss the first quarter numbers in more detail.

Thank you, Dick. Let me begin by emphasizing that virtually all of the revenues from our seasonal amusement parks, water parks, and other seasonal resort facilities are realized during a 130-day operating period, beginning in the second quarter, with the majority of the revenues concentrated in the peak vacation months of July and august.

In addition, Knott's Berry Farm our only year round park operates at its lowest attendance level in the first quarter, thus I will caution you that the first quarter is not material to our full year operating results and it's always risky to jump to any conclusions based on first quarter numbers. It's also important to note that first quarter operations do not include any results from Geauga Lake, which was acquired in early April.

Having said that, net revenues in the quarter increased to $23.2 million from $21.5 million a year ago, which included admission revenues of $9.0 million; food, merchandize, and games revenues of $11.5 million; and accommodations and other revenues of $2.7 million. The 8% increase in net revenues for the period was primarily due to improved early season attendance at Knott's Berry Farm compared to last year's first quarter, which was hurt by unusually poor weather.

During the first quarter of 2004, Knott's experienced only 6 days of rain compared to 9 last year, which included 5 days on which the park was forced to close early. Results at the park remain solid in April, and through the first 4 months of the year attendance at Knott's was up about 3% from a year ago. Over the same period in-park guest per capita spending was up about 4%. Consolidated operating results for the first quarter include normal off-season operating, maintenance and administrative expenses at our seasonal amusement of water parks, together with daily operations at Knott's Berry Farm. Total operating costs, and expenses in the quarter excluding depreciation and all other non-cash charges increased 3% to $42.5 million from $41.4 million in 2003. This increase was primarily attributable to the earlier timing of advertising programs at Knott's Berry Farm.

In the quarter, we recorded the non-cash charge of $1.3 million for unit options, which was comparable to last year's first quarter charge of $1.2 million. We also recognized the non-cash credit of $863,000 for the change in fair value of two interest rate swap agreements during the period compared with an expense of $185,000 in last year's first quarter. After these non-cash items and interest expense on a provision for taxes, both of which were down slightly between years. The Net loss for the quarter decreased to $29.9 million or 59 cents per unit from $31.5 million or 62 cents per unit a year ago.

Turning to our balance sheet for a moment. As Dick mentioned, we completed the acquisition of Geauga Lake from Six Flags on April 8 in a very plain cash transaction valued at $144.3 million. About half of the transaction was financed with $75 million of new term debt at a fixed rate of 4.72 % and an average term of 9 years. The balance of the purchase price was financed through our revolving credit agreement, which was expanded from $180 million to 230 million of total capacity.

At the end of the quarter total debt outstanding was approximately $431 million including 330 million of term debt, 20 million of which was classified as current and $101 million of borrowings of the expanded bank revolver. We have converted $100 million of our fixed rate term debt to very favorable variable rates through the use of several interest rate swap agreement. A fair market value of these swaps, which have been designated as fair value hedges, on long-term debt, was a net asset of $5.1 million at the end of the first quarter. Under the applicable accounting rules, some amount has been reflected on our balance sheet in intangibles and other assets with a corresponding increased term debt. The expansion of our revolving credit agreement to complete the acquisition of Geauga Lake was planned as a temporary step. In order to complete the permanent funding of the acquisition and bring our balance sheet strength back to previous levels, we intend to enter the equity market later this year.

The proceeds of a planned $70 million to $75 million secondary offering of limited partnership units will be used to reduce the level of debt incurred in the acquisition and allow us to maintain the investment grade credit quality that we currently benefit from both at low interest rates and strong financial flexibility. At the end of the quarter partners' equity total $258 million and our total cash-on-hand was $3.2 million, both in line with historical first quarter levels.

At this point, I'll turn the call back to Dick for some further comments.

Before we open the call up for questions, I'd like to address a couple of additional items. The first is a special meeting of our limited partners, which is coming up on May 13.

As many of you are aware, our Board of Directors has proposed to plan to improve the partnerships corporate governance. The Board believes with management's full support, that the existing governance structure, under which management employees at the partnership elect members of the board, is no longer consistent with the best practices of publicly trading companies of similar size. Although, the structure has served the partnership well over the years, it is no longer an appropriate form of governance.

In its place, the Board is recommending a plan by which unit holders will elect the members of a staggered board of directors. Both the Board and management believe that the implementation of this election process, along with other government changes already enacted, will help maximize unit holders' value by enhancing their voice in the partnerships governance. To date voting on this plan and its related proposals it's strongly favorable. However, because the proposal involved significant amendments to the existing limited partnership agreement, we need the approval of partners holding two-thirds of our outstanding units for them to pass. As such, every unit holder's vote is very important, and this plan can't move ahead without it.

If anyone has not received their proxy information or is having difficulty in voting, please call our Investor Relations Department for assistance at area code 419-627-2233. I will repeat that area code 419-627-2233. Again, I want to remind you the importance of everyone's vote and emphasize that I join our Board of Directors in recommending that you vote four other proposals and also like to mention a change in management that would be occurring within the next month. John Hildebrandt has been promoted to Vice President and General Manger of Dorney Park starting in June. John has been the Vice President of Marketing at Cedar Point since 1993 and has been with Cedar Fair for 30 years. John has played a significant role in developing Cedar Point into the full service destination that it is today, and I know he will bring that same level of enthusiasm and commitment to Dorney Park. He will be assuming the duties of John Albino who is retiring effective, June 4. John Albino has been with Cedar Fair for 29 years and has been the Vice President and General Manager of Dorney Park since 1995, during that time, he self-developed Dorney into one our most profitable properties. Everyone at Cedar Fair wishes John the best in his retirement. At this point, I will conclude our prepared remarks and allow for any questions that you might have.

Thank you sir. The floor is now open for questions. If you do have a question, please press "*" "1" on your touchstone phone. If at any point your questions have been answered, may remove yourself from the queue by pressing the "#" key. We you do ask that while you pose your question that you please pick up the handset to provide optimum sound quality. Once again, that is "*" "1" to ask the question.

Our first question is coming from Kit Spring of Stifel Nicolaus.

Hi, good morning. Your 4% per capita spending, I think is little bit up in improvement or an uptick versus the last couple of years, maybe I am wrong about that, but I -- you know I think that's definitely looks like you are getting some pricing power. Is this an industry trend? Do you think that an improving economy is helping or it's just reflective of the fact that last year the comparisons were so easy and there're some discounting, I believe in southern California? Thanks.

I couldn't recall any of those reasons. We certainly have reduced some of our discounts this year, which certainly should help the admissions per capita. That's true both in all of our seasonal parks. We tried to hold the prices, though we have reduced our discounts, and we have also made an aggressive effort to increase per capita spending in the park with several new additional menu items and new merchandizing games items. I think it's a reflection of everything and basically gets just an effort -- our continued effort thus to continually to try to improve per capita every year with new items and new pricing structures. I think the main thing is less discounting.

Okay. And did you give a percentage increase as to how season past sales are trending, or can you if you haven't?

Yeah, just, pretty much at all the parks with the exception of Geauga Lake. They are pretty well level with last year. I think we don't -- you know don't put lot as much emphasis on the seasons' passes as may be some of our competitors do for that and give because that is a big discounted ticket. But our seasons' passes all of are [inaudible] without the exception of Geauga Lake because we discontinued sales there while we were doing the closing. They are all just about even with last year.

Okay. Thank you.

You are welcome. Thanks for calling.

Once again, ladies and gentlemen, that is "*" "1" to ask a question. Our next question is coming from Tom Lucky [ph] of Citadel Advisory.

Good morning. I was wondering, Bruce, if you could walk me through how the decision to issue more units was made versus keeping an additional amount on the revolver given the distribution rate and the favorable terms? And as far as flexibility goes, I don't know what the flexibility in the past has helped us with if our debt levels so high that we have to issue units and we can't pump up the debt level for a temporary period of time, especially with the favorable terms that you have gotten on the 75 million term loan. I would think that issuing units probably wouldn't be the cheapest way to do it. Can you comment on that?

Sure, Tom. I think the plan all along was to maintain our investment grade credit quality and we can't do that by borrowing $145 million for this acquisition and leaving it on the balance sheet as debt. We also can't pay it down with cash flow from operations without impacting the level of cash distribution to unit holders. So the goal here was to maintain the balance sheet strength so that the next time an acquisition opportunity comes along. We will once again be able to close quickly with borrowed money and if necessary issue units at a later time. That's the flexibility I am talking about, the ability to close an acquisition within 30 days of having a signed agreement with this kind of a purchase price and borrowings wouldn't have been possible if we had been more highly leveraged, and we just want -- we want to maintain that ability. None of us believe that -- strongly that the dilution from issuing less than 5% of our outstanding units was going to be even a measurable or meaningful amount. I think the long-term flexibility of having a strong balance sheet is more strong positive than the potentially small negative of issuing the equity.

Can I have a follow-up to that?

Sure.

Well, I don't understand something that, if we have -- if we care about investment grade so much and how it is really a mechanism so that we end up issuing shares 6 months after an acquisition. You know, I don't really care about a 4% -- a 4 cent increase in the distribution if I am going to have to suffer dilution and the dilutive affect of the issuance, I mean -- I think it is meaningful and I think it does matter. And I don't see how the map works out, I mean, we get 4 cents a unit, but then we have to knock the share count up. I don't know -- I am just confused. I don't see how it gets us anywhere. I think that it would just make sense to pay that down with deductible interest.

Tom, if you want to discuss it offline, I'd be happy to talk with you later today, but --

Okay.

You know, you are entitled to your opinion and I think our Board is very comfortable with the plan, and we've given it a lot of thought and talked to a lot of outside people. I am very comfortable that it's a suitable plan, it may not be optimal from your point of view and I respect that. But I'd be happy to talk with you further.

That's fine.

Thank you.

Once again ladies and gentlemen, that is "*" "1" to ask a question. Gentlemen there are no further questions, I would like to turn the floor back over to you for any closing comments.

Thanks Holly. At this point, if there're no further questions, I just want to thank everyone for joining us on the call today. Should anyone have any follow-up questions please feel free to contact me directly. We'll look forward then to speaking with you again in early August to discuss the second quarter results and the progress of the 2004 season. Thank you.

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