Six Flags Entertainment Corp (FUN) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Cedar Fair second-quarter earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your host for today's conference, Mr. Brian Witherow.

Sir, you may begin.

Good morning and welcome to our second-quarter earnings conference call.

I'm Brian Witherow, the Corporate Director of Investor Relations for Cedar Fair.

Last night we issued our second-quarter and six-month earnings release, and a copy of that release can be obtained on our corporate website, www.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 conference call today are required to be reconciled with the most directly comparable GAAP measures.

During today's 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 the 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 this call will be considered fully disclosed.

Now let me turn call over to Dick Kinzel.

Good morning.

Thank you for joining us on the call today.

I would first like to briefly comment on the Geauga Lake acquisition and the park's performance to date, which unfortunately has been a slower start than we would like to have had.

The combination of poor spring weather, the late start to our early season advertising and promotions and the elimination of the animal life attractions has resulted in softer than expected first-half attendance numbers.

Although we anticipated a drop in the park's attendance due to the elimination of the animal attractions, we expected that we could still maintain a solid attendance base this year focused around the excellent amusement park and water park attractions that we acquired.

However, due to the late timing of the acquisition we were unable to put together an effective early season marketing program and the park got off to a slow start that we have not been able to recover from as yet.

We still know that there is great potential for the attendance and profitability at Geauga Lake.

However, it will take a few years for the park to reach its full potential.

On a positive note, in-park guest per capita spending at Geauga Lake is up nicely between years.

For the full year, we now expect Geauga Lake to be slightly dilutive on an earnings per unit basis and close to break even on a cash flow basis.

I also want to mention that we recently completed a successful secondary offering of 2.4 million Limited Partnership Units.

The feedback we received on our road show was excellent and the offering was fully subscribed.

The net proceeds from the sale of the Units of approximately $68.5 million were used to repay borrowings we incurred under our revolving credit facility in the acquisition of Geauga Lake.

As we indicated on previous conference calls, a 100 percent debt financing of Geauga Lake acquisition was possible, but we felt it was important not to over-leverage our balance sheet.

Paying for almost half of the acquisition with equity allows us to maintain the investment-grade borrowing rate we currently enjoy and positions the Company with more flexibility to take advantage of the next acquisition or other business opportunities that may arise.

Now to our overall operating results.

First-half results at our Midwest parks have been negatively impacted by below normal temperatures and frequent rainfall throughout much of the first half of the year, as well as the timing of the 2004 operating calendar which shifted several operating days from the second to the third quarter.

I don't like to use weather as an excuse, but the reality of our business is that you can't have a good season without decent weather.

Through the first seven months of the year our combined attendance was down 2 percent from 2003 on a same park basis, and average in-park guest per capita spending was up 3 percent, so internal revenue growth has been very small.

Including results from Geauga Lake combined attendance was up 4 percent through the end of July and average in-park guest per spending and out of park revenues were up 3 percent and 2 percent respectively.

We're very pleased with the second straight year of solid growth in in-park guest per capita spending across our parks.

In addition, attendance levels have been relatively good when weather conditions have been favorable.

In recent weeks, operating results began to improve at some of our seasonal parks.

For the month of July combined attendance increased 5 percent over last year.

Average in-park guest per capita spending increased 4 percent and out of park revenues increased 8 percent.

On a same park basis attendance was down 2 percent, but average in-park guest per capita spending was up 4 percent and out of park revenues were up 2 percent.

At the individual park level, Knott's Berry Farm, Dorney Park and Michigan's Adventures have performed well this year.

At Knott's good weather and improving competitive conditions in the Southern California market have helped operating results and attendance at that park through the end of July was up from 2003 with strong guest per capita spending as well.

At Dorney Park we benefited from favorable weather conditions to last year for most of the early season and results were solid.

Unfortunately, the park experienced a sharp decline in attendance over the past two years as weather conditions on the East Coast have been terrible.

Through the end of July attendance at Dorney Park remains slightly up from last year.

Our smallest park, Michigan's Adventures, has continued to perform well in 2004.

Through the first seven months of the year attendance at that park was again up from last year's record levels and in-park guest spending was also up nicely.

Our other seasonal parks have not fared well on the weather front, and attendance at those parks has remained somewhat below our expectations.

At Cedar Point, a cool and wet spring led to a slow start that the park has not been able to completely recover from.

Through the first seven months of the year, attendance at Cedar Point was down approximately 6 percent from last year.

Although the attendance showed signs of strengthening in July as weather improved, it remains close to our budget.

At our other two mid-sized seasonal parks, Valleyfair and Worlds of Fun, attendance through the end of July was down 8 percent and 3 percent respectively.

At our five water parks the comparisons entering 2004 were very difficult coming off of last year's record performance at several of the parks.

Through the end of July combined attendance at our five water parks was down 9 percent from last year, with the majority of that decrease coming at Oceans of Fun in Kansas City.

However, average in-park guest per capita spending at the water parks was up 9 percent, making water park revenues nearly flat between years.

Although we have not met all of our park level objectives to this point, we remain encouraged by the positive trends in in-park guest per capita spending at our out of park revenues across our properties.

In addition, we expect to benefit from several additional operating days at the end of August and in the first week of September due to the late timing of our 2004 operating calendar and Labor Day weekend.

As I mentioned at this time last year, we also continued to make a concentrated effort to control costs at our parks while not sacrificing guest service.

This is even more important in a year like 2004 where we experienced such inconsistent weather.

While we can't control the weather, we can remain focused on operating our parks as cost effectively as possible.

I'm very pleased with the job our managers have done in controlling their operating costs again this year.

The result was a 3 percent reduction in cash operating costs and expenses on a same park basis through the first six months of the year.

With almost half of our budgeted attendance to go, including the month of August and the important fall season, as well as the late timing of the operating calendar, we are hopeful that we still recoup some of our attendance shortfall.

At this time, based on the slow start of Geauga Lake, as well as the preliminary July results, we now expect to generate full-year revenues of between 540 and $560 million and full-year adjusted EBITDA of 175 to $185 million, up slightly from last year.

Although we may only achieve a slight increase in EBITDA, this level of operating cash flow should still produce an increase in cash available for distributions to our unit-holders at the end of the season because of our moderate 2004 capital expenditure program of $27 million.

As we mentioned before in news releases, we have done some exciting capital projects towards completion later this year.

Castaway Bay, a new family indoor water park resort, is on schedule to open in early November at Cedar Point.

This new resort will give us the opportunity to entertain families all year long and it will be the ideal complement to our other resort properties at Cedar Point.

In addition, construction is progressing well on Silver Bullet, a new world-class roller coaster at Knott's Berry Farm.

Silver Bullet is scheduled to open the first week of December and should be a strong draw for Knott's in 2005.

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

Thank you Dick.

Let me begin by emphasize that virtually all of the revenues from our seasonal amusement parks, as well as our water parks and seasonal resorts, are realized during a 130-day operating period beginning in early May, with the majority of our revenues concentrated in the third quarter during the peak vacation months of July and August.

In addition, Knott's Berry Farm, our only year-round park, operates at its highest level of attendance in the third quarter.

Thus, I will caution you that it is always risky to jump to conclusions about our full-year results based on second quarter numbers alone.

That being said, net revenues in the second quarter decreased slightly to $145 million.

Revenues included $71.2 million in admissions, $60 million in food, merchandise and games revenue and $13.8 million in accommodations and other revenues.

The slight decrease between years was the result of a 1 percent decrease in combined attendance, a 2 percent increase in average in-park guest per capita spending, and a 4 percent decrease in out of park revenues, including the resort hotels.

Excluding results from our newest park, Geauga Lake, revenues decreased 5 percent in the quarter to $138.1 million on an 8 percent attendance decline and a 3 percent increase in average in-park guest per capita spending.

Total operating costs and expenses for the quarter before depreciation and other non-cash charges increased 5 percent to $105 million over the same quarter a year ago.

Excluding operations at Geauga Lake, total cash operating costs and expenses for the period actually decreased 5 percent, or $5 million, to $95.4 million due primarily to the fewer operating days in the quarter.

After depreciation and a $1 million non-cash charge for unit options compared to a $1.8 million charge in last year's second quarter, operating income in the period decreased $4.7 million to 22.9 million. $4.5 million of this was Geauga Lake's second-quarter operating loss, so on a same park basis operating income in the quarter decreased only slightly to $27.4 million.

We believe that a very meaningful measure of our operating results which we use in budgeting and monitoring our park level performance is adjusted EBITDA, or earnings before interest, taxes, depreciation and other non-cash charges and credits such as option accounting.

For the quarter adjusted EBITDA decreased $4.8 million, about half of which was Geauga Lake's $2.7 million operating loss.

And the rest was due to the shortfall in attendance at our other seasonal parks caused by the poor weather in the period, as well as fewer operating days due to the timing of the operating calendar.

In the current quarter we recognized a non-cash credit to income of $1.6 million for the change in fair value of two interest rate swap agreements in the period.

This compares with a credit of $0.5 million in last year's second quarter.

These amounts represent purely a timing issue and $2.5 million originally expensed in 2002 remains to reverse into income over the next three quarters as the swaps continue to serve their purpose of leveling cash interest cost through their maturity in the first quarter of 2005.

After the non-cash credit and after interest expense and a provision for (technical difficulty) both of which were comparable between years, net income for the quarter was $13.2 million or 25 cents per diluted Limited Partner Unit compared to $16.7 million or 33 cents per Unit a year ago.

Excluding the impact of Geauga Lake, net income in the quarter would have actually increased $2.3 million over the prior year to $19 million or 37 cents per Unit.

For the six-month period net revenues increased 1 percent to $168.2 million with a 2 percent increase in average in-park guest per capita spending, offset somewhat by a decrease of less than 1 percent in combined attendance and a 2 percent decrease in out of park revenues.

Excluding Geauga Lake, revenues in the six-month period would have decreased $5.4 million or 3 percent to $161.3 million on a 6 percent decrease in combined attendance and a 3 percent increase in average in-park guest per capita spending.

Over the same six-month period adjusted EBITDA decreased $4.3 million to 20.7 million or a $1.5 million decrease on a same park basis.

Excluding depreciation and other non-cash charges, operating costs and expenses through the first six months of the year increased 4 percent to $147.5 million due entirely to the acquisition of Geauga Lake.

On a same park basis cash operating costs and expenses in the period actually decreased 3 percent to $137.9 million due to a strong emphasis on expense controls at each of the parks, as well as fewer operating days in the period.

After a slightly higher depreciation resulting from the acquisition and a $2.3 million non-cash charge for unit options, the six-month operating loss was $1.2 million compared with an operating profit of 3.2 million in 2003.

However, excluding the impact of Geauga Lake we would have actually reported a slightly improved six-month operating profit of $3.4 million.

For the month of July some operating indicators began to improve from our early season trend, although poor weather at various times continued to be a drag on attendance at several of our properties.

For the month of July consolidated revenues on a preliminary basis were up 9 percent between years on a 5 percent increase in combined attendance, a 4 percent increase in average in-park guest per capita spending and a 7 percent increase in out of park revenues.

On a same park basis revenues were up around 2 percent between years on a 4 percent increase in average in-park guest per capita spending and a 5 percent increase in out of park revenues, offset somewhat by a 2 percent decrease in combined attendance.

Turning to our balance sheet for a moment, as Dick mentioned we recently completed our equity offering of 2.4 million Limited Partnership Units and used the net proceeds of approximately $68.5 million to repay revolving credit borrowings that we occurred in the acquisition of Geauga Lake.

At that same time we reduced our revolving credit facility which had been expanded to $230 million in order to complete the acquisition back to its original capacity of $180 million.

At the end of the quarter total debt outstanding was $585 million, including $405 million of fixed-rate term debt, 20 million of which is classified as current, and $180 million of borrowings under our bank revolver.

We've converted $100 million of our fixed-rate term debt to very favorable variable rates through the use of several interest rate swap agreements.

The fair market value of these swaps, which have been designated as fair value hedges on long-term debt, was a net liability of $2.3 million at the end of the second quarter.

Under the applicable accounting rules this amount has been reflected on our balance sheet as a reduction of the term debt with a corresponding increase to other liabilities.

During the second quarter our limited partners approved a plan to allow unit-holders to elect the Board of Directors of our general partner.

Under this plan, the former general partner, Cedar Fair Management Company, was replaced and the new general partner's interest in the partnership was reduced from 0.1 percent to 0.001 percent.

There were no changes in management of the partnership's business as a result of this new general partner, but the unit-holders did elect to set up a Board member Darrell Anderson who is a member of the Knott family.

At the end of the second quarter partners' equity totaled $248.8 million and our total cash on hand was 15.5 million, both in line with historical second quarter levels.

At this point I will conclude our prepared remarks and allow for any questions you might have.

(OPERATOR INSTRUCTIONS) Kit Spring, Stifel Nicolaus.

This question is can you quantify a little bit how much extra growth you should get in 3Q from the five extra days?

Secondly, bigger picture, based on your revised EBITDA guidance do you have any target range for your projected dividend increase next year?

Obviously that would have to be approved by your Board, but any preliminary guess as to a range as far as what the dividend increase could be next year?

And then finally, as far as acquisitions go historically you've made a major acquisition every three or four years.

Given that Six Flags has had continued weakness and may have to further shed assets might you consider doing another acquisition, picking another property off from them over the next couple of years, kind of ramping up the timetable for acquisitions?

Let me tackle the one about the growth in the third quarter from the extra days.

I think if you just add up the operating days normally there would be 65 or so, give or take a couple in the third quarter.

So if you add three days or four days or five days, you could do the math and pretty well figure what percentage that represents in the third quarter.

And of course with Geauga Lake in the mix, it should be contributing significantly to EBITDA during that third quarter as well.

With respect to distribution, we haven't really started talking about that yet, so it's just premature to make a guess or range of guesses.

There are a lot of factors that go into it, including looking forward to next year as well.

So I think it's just too early to really comment on that question.

As far as the acquisitions go, our position remains the same as it always has.

Certainly if the right opportunity presents itself with the equity offering now our balance sheet is in line to handle additional acquisitions or business opportunities, and certainly our management team is poised and willing to accept more responsibility.

So we would like to grow the Company not only internally but certainly externally, and any opportunity presents itself we certainly look at it and weigh each one on an individual basis.

And of course our main concern is that distribution, and we have a record of increasing that distribution for 17 straight years.

Our number one goal is to keep that distribution growing with the strong EBITDA number.

Thanks.

Chuck Cerankosky, Key McDonald.

Looking at going back to cash flow again and the distribution, Bruce you mentioned 27 million of CapEx for this year.

But I'm thinking that still you have got to add on to that because of the Castaway Bay project and the Silver Bullet coaster project.

What are we maybe looking at in terms of the '04 and the '05 CapEx program?

And how does that relate to funds available to increase the distribution?

That's a good question.

It's not really simple to explain.

Castaway Bay is certainly -- the expenditure of funds is ongoing during 2004, although it won't really contribute much if anything to earnings until 2005.

The same with the Silver Bullet; it will be pretty well paid for by the end of '04.

So '04's calendar year cash flow will have those major projects in addition to the finishing up of the $27 million program for the '04 season.

But the (multiple speakers)

What will that bring it to, Bruce, for the calendar '04 number?

It's hard to guess where we are in timing of '05 capital projects as of year-end.

But I can say that the program for next year, which we have not announced in total but will include the Silver Bullet, it will come out of '05 cash flow for purpose of the distribution, not '04.

So even though it will be on the balance sheet as being fully paid for at the end of December, largely fully paid for, it won't affect the cash available for distribution this year because we take into account for this year just the capital that was put in for the '04 season, and some portion of the Castaway Bay project, even though it will likely really just kick in in '05 to the bottom line.

So it's a complicated question, but for the calendar year I think you can assume there will be a fairly large capital expenditure number just because of those projects that are coming toward completion very late in the year.

So one should look more at the $27 million trying as to get at a number of funds available for the distribution increase in '04?

Right, that's the way we've done it.

And some portion of the Castaway Bay project.

That's the way we've always looked at it, as not on a calendar year basis but on the capital we've subtracted from cash flow on a fiscal year basis, based on the year that the investments were to begin contributing to cash flow.

And Castaway is about a $22 million project?

Right.

What's Silver Bullet again?

16 or 17 I believe are the numbers we --

Excellent.

Dick, a question for you is in looking at Geauga Lake there's some issues there revolving around how you have handled some of the changes in the discount policy that you think may have affected attendance apart from the elimination of the animals.

And also, in looking at the older properties, what can you talk to or speak to about with what competitive factors might have affected attendance year-to-date?

Are you talking just strictly at Cedar Point on competitive factors or all the properties?

All the parks, but if you want to emphasize Cedar Point as well that will be welcome.

As I mentioned in my remarks, Geauga Lake certainly has been a disappointment to us.

We thought we could come in there -- we knew we were inheriting a great ride package.

They have 10 roller coasters, and we thought we could market those roller coasters and come up with a good marketing promotion similar to what we did at Cedar Point.

And it's quite obvious that we certainly discounted the value of the animals, especially when it came to the group business -- the school groups and things like that.

That certainly has had an effect on our attendance.

So now what we have to do is regroup and come up with a good marketing plan and a good capital program that we're already working on, and going to implement in 2005 and 2006 to make Geauga Lake not only have really not only competitive with Cedar Point but also to complement Cedar Point and to try to combine the other promotions and advertising of both those properties being so close together.

As far as the competitive, I'm really glad to say that I think part of the success we're having in California is the competitive nature there is business is improving there.

And we have been able to eliminate -- at least reduce -- some of the discounts along with our competition in that Southern California market.

Chuck, I do want to tell you that I am very, very encouraged with Geauga Lake.

Some of the things we've seen there -- I know you have seen the property, but we have 250 acres over there that we're working on and trying to come up with some sort of plan to complement the total area to make it a total resort complex.

I think we're well on our way of doing that.

Okay.

When you talk about the long-term capital program there, you mentioned through '06, but I am thinking you're looking beyond that as well in terms of development of all those acres.

Absolutely.

Right now we're planning -- or we are working very diligently on what you want to call on the front burner is 2005 and 2006.

Can you talk at all about what plans you might have for that lake?

Not really too much, to be honest with you, for competitive reasons.

And everything we have talked about has been internally.

We've not discussed it with our Board of Directors yet.

So I'm very reluctant to discuss any plans we might have for the property.

Thank you.

Robert Routh, Jefferies.

Just a couple quick questions.

Last year at this time it seemed as though your were kind of in a similar situation, obviously without the Geauga Lake acquisition, in terms of you weren't quite meeting your targets in terms of attendance or revenue generation, etc.

Then you ended up actually exceeding them.

I'm wondering if you think that we have a chance of seeing that same type of phenomena happen this year on a going forward basis based on just what you're seeing.

Second question is I know you just issued some equity units, but at the same time I believe you still have a buy back authorization in place.

I'm wondering if you could update us on how much that buy back authorization is and at what price you would consider buying back stock, especially if interest rates go up and as a result it could have an impact on your equity.

I'll tackle the weather and I will let Bruce tackle the buy back program.

But you're right.

Actually, the last three years have not been good weather for us.

I believe our weather patterns have changed in the last few years and what used to be real nice weather in April and May in this part of the country now has pretty well shifted to September and October.

And that has been the main reason why we've had strong fall attendance with the promotions coming, the Halloweekend promotions and things like that.

But also, ideal weather in September and October have certainly helped us at all of our parks in the Midwest.

But you're right, the last three years May and June have not been very favorable months for us, and that certainly has affected walk-up attendance.

Our school groups still come and educational groups and things like that, but it certainly has hurt our walk-up attendance.

But again, we certainly are hopeful that we will have good weather in the fall.

We have some great promotions coming up not only at Cedar Point, but we have extended our fall promotion calendar to Worlds of Fun and Dorney Park and Geauga Lake this year.

So we are optimistic with good weather in September and October that we will have another strong fall.

As far as the plan to buy back units, I think we've bought back 52 or $53 million on a total authority of 75 million.

We stopped buying back around 21 or $22 at that price level and I wouldn't foresee any urge to buy back more units until it was -- if the units were to drop significantly we would have to rethink it.

But we have not really got any immediate plans to do that at this point in time when the units are close to $30.

Just one follow-up question.

It seems as though around a lot of your parks you have a tremendous amount of land that's obviously carried on the balance sheet at cost, but especially in a place like Cedar Point it probably appreciated dramatically in terms of what their actual market value is.

I'm wondering if you could give us a little bit of an update as to whether you have had any appraisals done as to the acreage around that area, and what it could be worth, and what you have that maybe isn't being reflected in your units at the current time.

We do have a lot of land around several of our parks, but we're not looking at it as surplus assets that would be sold off with the possible exception of some of that Geauga Lake property, which we still are trying to plan out long-term what we want to do with it.

I don't think the land values at Cedar Point, for example, are a number that you would find to be very useful because the value as an operating amusement park is much higher than just the value of the raw land.

I think in the end you could add $100 million or something like that to fair value of land, but I don't think it would really change the valuation of the Company per se because you could not continue to operate the business without that land.

I hope I answered that question.

Great.

Thank you very much.

Chuck Cerankosky, Key McDonald.

Dick, could you repeat which parts will be having fall promotions for the first time this year please?

Not completely full, but at Worlds of Fun in Kansas City we had a Halloween program that was basically geared towards just families.

We're extending that now to the teen market, very similar to what we do at Cedar Point in California.

At Dorney Park we have the same program that was just geared to the family.

And what we've done is we've put in some of the more exhilarating walk-throughs and haunted houses, and we're going to promote that also for the teen market.

At Geauga Lake they had a Halloween haunt.

What they did is that was an extra charge attraction for them, and what we're going to do there is that will be part of the pay one price that when you come into the park it will be extended to seasons pass holders, and we're going to try to promote it that way.

But we are adding some additional activities and dark rides that we have that have been successful both at Knott's Berry Farm and Cedar Point at all three of those locations.

Thank you.

(OPERATOR INSTRUCTIONS) There appears to be no further questions.

If there are no further questions, we would like to thank you for joining us on the call today.

Should you have any follow-up questions that come along later, please feel free to contact me directly at 419-627-2173.

As a reminder, our next monthly attendance release will be September 7th to discuss our attendance trends through the Labor Day weekend.

We look forward to speaking to you again in early November with the third quarter numbers.

Thanks.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this point and enjoy your day.