Six Flags Entertainment Corp (FUN) 2005 Q2 法說會逐字稿

Good morning, and welcome to the Cedar Fair Second Quarter Earnings Conference Call.

At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to Brian Witherow.

Sir, the floor is yours.

Thanks, Alan.

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

I'm Brian Witherow, vice president and corporate controller of Cedar Fair.

Last night the Company issued a second quarter earnings release.

A copy of that release can be obtained on our website at www.cedarfair.com, or by contacting Investor Relations offices at 419-627-2233.

On the call this morning are Dick Kinzel, our chairman, president and chief executive officer, and Peter Crage, our vice president of finance and chief financial officer.

Before we begin, I need to caution you, the 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 the 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 Regulation G, non-GAAP financial measures used on the conference call today are required to be reconciled to 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 in the earnings release and is also available to our 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 content of this call will be considered 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, results for the second quarter of 2005 were somewhat mixed.

For the quarter, revenues were up 3 percent, driven by a 3 percent increase in average GAAP spending, and an 8 percent increase in out-of-park revenues.

These gains were partially offset by a 2 percent decrease in combined attendance.

Although attendance was soft at a few of our parks, we're pleased with the solid growth we have been able to generate in in-park guest spending and out-of-park revenues, particularly at our Castaway Bay Indoor Waterpark Resort.

During the quarter, both occupancy levels and average daily room rates at Castaway Bay improved from last year, when the property was operated as a Radisson Hotel.

In addition, we generated solid increases in food, merchandise and games revenue at the resort during this period.

Castaway Bay's strong second quarter performance, combined with increased attendance at our Midwest water parks, and the improved guest spending helped offset attendance shortfalls during the period at some of our seasonal amusement parks, including Cedar Point and Geauga Lake.

Looking at more current results, during July, combined attendance across our 12 parks was up 2 percent.

Average in-park guest spending for the month was up 2 percent, and out-of-park revenues were up 8 percent, or approximately $1.5 million, again driven primarily by the strong performance at Castaway Bay, as well as improved results at our Knott's Berry Farm Hotel.

Through the end of July, combined attendance at our 12 properties was down 2 percent, or approximately 110,000 visits from last year.

Over this period, average in-park guest per capital spending was up 3 percent, and out-of-park revenues were up 15 percent, or $7.5 million.

Overall, combined revenues for the first seven months of the year were up almost 4 percent, or $11.1 million from the same period of a year ago.

At the individual park level, our results have been mixed.

The hot, dry summer weather has had a favorable impact on our water parks.

Combined attendance at our five water parks was up 8 percent through the end of July, with the majority of this increase realized at our two Midwest water parks, Soak City, located next to Cedar Point here in Sandusky, and Oceans of Fun, next to Worlds of Fun in Kansas City, Missouri.

Average in-park guest spending at the water parks is also improved between years, and total park revenues for the first seven months of the year were up 9 percent from 2004.

Dorney Park and Michigan's Adventure both introduced great new attractions this year.

A new world-class roller coaster at Dorney, and new hydro water attraction at Michigan's Adventure has helped drive attendance gains at the parks of 10 percent and 15 percent, respectively, through July.

In-park guest-per-capita spending was up nicely at both parks.

In addition to the strong capital programs, we believe that weather conditions favorably impacted 2005 operating results at these parks where the water park attractions are included as part of the admission to the amusement park.

Our largest park, Cedar Point, weak economic conditions in some of our key market areas continue to negatively impact attendance.

Unemployment rates in Michigan and Ohio continue to exceed the national average and fears of further layoffs in the automotive industry loom.

To combat this, we have increased our marketing efforts, particularly in Detroit, through the use of deeper discounted tickets.

Although we have had positive responsive to our efforts, attendance at the park has been inconsistent.

Through the end of July, attendance at Cedar Point was down 4 percent, while average in-guest spending remained relatively flat.

On a positive note, out-of-park revenues at the park were up 19 percent through July, with the bulk of the increase, again, due to the performance of Castaway Bay.

Results of our newest park, Geauga Lake and Wildwater Kingdom, have also been negatively impacted by the tough economy, and attendance there remains well below our expectations.

Through the first seven months of the year, attendance at Geauga Lake was down 5 percent from 2004; however, average in-park guest spending was up 5 percent.

The majority of the attendance shortfall was realized early in the season, and since the debut of Geauga Lake's new water park on June 18, attendance has increased 5 percent over last year.

We're very pleased with the response from guests at the new water park and are hopeful that Geauga Lake will be able to recoup some of its attendance shortfall over the remainder of the season, although we no longer expect it to meet our full year's attendance expectations.

We still know that there is a great potential for the park, but realize it will take some time to re-establish its reputation and image.

We remain committed to turning Geauga Lake around and believe that with the completion of the second phase of the water park in 2006, and a continued focus on bringing the park up to Cedar Fair standards, we will achieve the park's full potential.

At our other two seasonal parks, Valleyfair and Worlds of Fun, attendance through the end of July was down 4 percent and 11 percent, respectively, while guest spending levels at both parks were up nicely.

At our only year-round park, Knott's Berry Farm, we have been unable to recapture any of the early season attendance shortfall that resulted from the record rainfall in Southern California during the first quarter.

Through July, attendance remained down 6 percent, or approximately 110,000 visits from the same period of a year ago.

On a positive note, we are very pleased and remain encouraged by the solid growth in average in-park guest spending, up 8 percent through the first seven months of the year, as well the growth in our out-of-park revenues and the performance of our Knott's Berry Farm Resort Hotel.

Overall, out-of-park revenues at Knott's were up 4 percent, or approximately $600,000 between years through July.

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

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

Although operating costs and expenses through the first six months of the year are up 6 percent, a vast majority of this increase was attributed to the first quarter downtime costs and expenses of Geauga Lake, which was acquired in April 2004, and the incremental operating costs of Castaway Bay, which opened in November of 2004.

The management teams of our other parks have done an excellent job in keeping costs in line this year.

Although we have not been able to meet all of our park level objectives to this point, we are pleased with the positive trends in in-park guest-per-capita spending and out-of-park revenues for most of our properties.

With almost half of our budget attendance to go, including the month of August and our important fall season, we are hopeful that we can still recoup some of our attendance shortfall.

At this time, based on preliminary results through July, and our lower expectations for Geauga Lake, we now anticipate generating full year revenue growth of 5 to 7 percent over last year's $542 million level, down slightly from our original guidance of 6 to 8 percent growth, and full year adjusted EBITDA on the lower end of our original guidance of $185 to $195 million.

At this point, I'll turn the call over to Peter, to discuss the second quarter numbers in more detail.

Thanks, Dick.

Let me begin by emphasizing that virtually all of the revenues from our seasonal amusement parks, as well as our water parks and seasonal resorts are realized during the five-month 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.

Both Castaway Bay and Knott's Berry Farm are open year-round, but Knott's Berry Farm operates at its highest level of attendance in the third quarter as well.

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

That being said, net revenues in the second quarter increased 3 percent to $148.9 million from $149 million in 2004.

Overall, revenues included 74 million in admissions, 60.5 million in food, merchandise and games revenue, and 14.4 million in accommodations and other revenues.

The 3 percent increase in second quarter revenues reflect increase of 2 percent, or approximately 62,000 visits in combined attendance, 3 percent increase in average in-park guest per capita spending, and an increase of 8 percent, or 2.1 million in out-of-park revenues driven primarily by Castaway Bay, whose incremental revenues were partially offset by revenue shortfalls in some of our seasonal hotel properties.

Operating costs and expenses for the quarter before depreciation and other non-cash charges total $108.9 million, representing an increase of 4 percent over the second quarter of 2004.

This increase was due primarily to the incremental operating cost of Castaway Bay in the period.

Breaking total operating costs and expenses down, we had 16 million of cost to products sold, 71.6 million of operating costs, an 21.3 million of selling, general and administrative costs.

After depreciation and a small non-cash charge for unit option, operating income for the quarter decreased slightly to 22.4 million from 22.9 million a year ago.

Because we strongly emphasize generating cash flow for distribution [inaudible], we believe that a very meaningful measure of our operating results in adjusted EBITDA, or earnings before interest, taxes, deprecation, and all other non-cash items.

For the quarter, adjusted EBITDA remains unchanged at approximately $40 million.

Included in 2004 net income is a non-cash credit of 1.6 million, to account for the change in fair value of two interest rate swap agreements that expired during the first quarter of 2005.

As such, there is no similar non-cash credit in the current period.

Interest expense for the quarter increased approximately $500,000 to $6.8 million.

While the provision for taxes remains relatively flat, the increase in interest expense is primarily attributed to higher short-term rates.

Let me remind you, earlier this year we restated our provision for taxes for the interim periods of 2004, in order to properly account for the tax attributes of our corporate subsidiaries.

This restatement included recording a tax credit of $1.7 million in the second quarter of 2004, compared to a tax credit of 1.8 million in the second quarter of 2005.

This had the effect of increasing net income for last year's second quarter from the originally reported 13.2 million to 14.9 million.

After interest expense, provision for taxes as restated and non-cash credits, our net income for the period was 12.3 million, or 22 cents per diluted limited partner unit, compared to net income of 14.9 million, or 29 cents per unit a year ago.

Looking at the six-month period for a moment, net revenues increased 3 percent to 173.7 million on a 4 percent increase in average in-park guest per capita spending, a 20 percent, or $6 million in out-of-park revenues, and a decrease of 3 percent in combined attendance.

A 20 percent increase in out-of-park revenues was driven primarily by the strong performance of Castaway Bay, as well as improved results at our Knott's Berry Farm Resort Hotel.

Over this same six-month period, adjusted EBITDA decreased 3.8 million to 16.9 million.

This was primarily attributable to the first quarter down time, expenses of Geauga Lake, which we did not incur in 2004, since the park was acquired in April of 2004.

Excluding depreciation and other non-cash charges, operating costs and expenses through the first six months of the year increased 6 percent to 156.8 million, again, primarily due to the first quarter costs of Geauga Lake, and the incremental operating costs of Castaway Bay.

After depreciation expense and a one million non-cash charge for unit options, the six-month operating loss was $5.1 million, compared with an operating loss of $1.2 million in 2004.

As Dick mentioned earlier, operating results have begun to improve slightly at some of our parks in recent weeks.

For the month of July, consolidated revenues on a preliminary basis were up 4 percent between years, or 5.9 million on a 2 percent increase in combined attendance, a 2 percent increase in average in-park guest-per-capita spending, and an 8 percent increase in out-of-park revenues, including resort hotels.

Turning to our balance sheet for a moment.

At the end of the quarter, total debt outstanding was $556.9 million.

This included $385 million of fixed rate term debt, $20 million of which is classified as current, and $168 million of borrowings under our bank revolver.

In 2003, we converted $100 million of our fixed rate 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 with a net asset of approximately $3.9 million at the end of the second quarter.

Under the applicable accounting rules, this amount has been reflected on our balance sheet as an increase to intangibles and other assets with a corresponding increase to term debt.

At the end of the second quarter, partners' equity totaled $310.7 million, and our total cash on hand was $18.8 million, both in line with historical second quarter levels when considering the equity offering completed in July of 2004.

At this point, this concludes our prepared remarks and allow for any questions that you might have.

Thank you.

The floor is now open for questions. (OPERATOR INSTRUCTIONS) Our first question comes from Chuck Cerankosky of Key McDonald.

Good morning, everyone.

A couple of things I just want to ask you about what you said, Dick, make sure I got it down right.

Through July, the attendance at Cedar Point is down 4 percent, and 5 percent attendance pickup in July at Geauga Lake; is that correct?

In July, it was actually -- Geauga Lake attendance was up 7 percent.

It's up 5 percent, I think, through the 27th for seven months.

For seven months it's up 5.

It was up -- for July, it was up 7 percent, Chuck.

All right, okay.

And then at Cedar Point, down attendance hit 4 percent in July?

Chuck, attendance at Cedar Point was down 4 percent through the end of July.

Okay.

So that's basically year-to-date.

Correct.

Correct.

All right.

There were some of those union picnic issues that impacted a couple of the Ohio parks during the second quarter.

What's the update there, and might we see a return of any of that business?

Well, we sure hope so, Chuck.

As you know, most people in Ohio and part of Michigan know that we did have a disagreement with the unions at Geauga Lake, but I am pleased to say that our COO, Jack Falfas, and Dave Moran, who is president of the Tri-County Building and Construction Trades Council, sat down to lunch last Monday and they worked out an agreement, and there was a letter dated August 1, that went out to all the members of the Tri-County Building Trades Association and basically said that the issue was resolved.

Hopefully, that's behind us, and we'll start getting some of our good union picnics coming back to the park, and also the union families coming back to the park -- at both of our parks.

Do you have any feel for what kind of attendance impact that had in the second quarter?

Chuck, it could be as high as 30 to 40,000 people at both of our parks.

We're hopeful that we still have a lot of the summer left to go and that we can get some of these people back into the park.

Dick, what do you think Top Thrill Dragster is doing to attendance this year at Cedar Point?

It's a year older, but hopefully operating a little more efficiently or with less downtime.

You're right, Chuck.

It is operating much more efficiently.

It's given a lot more rides.

It's given more rides this year than it's ever given, and it runs better and better every day.

Of course, it is three years old now, and a lot of the bugs have been worked out of it.

As far as what it's done for attendance, it's still -- when that ride, you know, it's certainly a lot of electricity into the air.

We're disappointed -- we've very disappointed in the attendance at Cedar Point, and we're looking at reasons for that, but certainly Top Thrill Dragster is not part of it.

With Top Thrill Dragster running, that should only be an asset for us.

All right.

I'll let some other people ask questions.

I'll follow up with a few later on.

Thanks, Chuck.

Thank you.

Our next question comes from Robert Routh of Jefferies.

Yes, good morning, guys.

I've just got a few quick questions.

First, I was wondering, given the attendance not being quite what you expected year-to-date, and kind of the down revision in guidance, does management still believe that there is a fairly decent chance of an increase in the distribution again in September, or does that look less likely than it did previously?

And, second, I was wondering if you could kind of go over again in a little bit of detail what your capex budget is for '05 for the full year, and what you plan on building, what you're looking at on a going forward basis.

And, finally, when it comes to the Ohio and the Michigan markets that you mentioned, I'm wondering if you could give us a little bit more information on the marketing that you are doing to try and stimulate those markets?

Robert, I'll hit the distribution.

That certainly is -- that's how I personally keep score is the distribution that's very important to us.

As you know, it's been increased every year for the last 18 years.

We certainly are going to take a hard look at it in any way possible.

We certainly want to keep the distribution increasing every year.

As you know, it was increased last year probably the lowest amount at about 4 cents, but we certainly want to increase the distribution, if possible.

If the -- as far as the capex goes, we have -- for the season we had previously disclosed 83 million for the season, of which a portion of that was early started projects in 2004.

Going forward, we'll get capital projects that we believe are appropriate for the cap.

And as far as the Ohio-Michigan market goes, Robert, what we've done is we've instituted some additional weights in those markets, along with additional discounting programs.

How effective have they been so far?

Well, right now it's been inconsistent.

We've had -- this last week at Cedar Point was a real good weekend, and then it sort of slowed down yesterday.

It's really -- as we said in our opening remarks, it's really been inconsistent.

We have one real good week, and then it falls off the next week.

So there has really been no trend this year.

The momentum just doesn't seem like it's there that has been there in other years, where you start a trend and it just keeps building and building.

One good week and then it falls off the next with no apparent reason at all.

We're certainly doing all the same surveys, but basically, we do know that our Detroit market, which is our number one market, is down considerably from last year.

Okay, great.

Thank you very much.

Thank you.

Our next question comes from Rami Abdel-Misih of JPMorgan.

Hi.

Most of my questions have just been asked.

Did you guys touch, or can you give any color thus far what group and season pass sales look like for the remainder of the year?

Our group business at all of our parks is positive.

Group sales at Cedar Point, our biggest park, and at all the parks -- well, I shouldn't say that.

Dorney Park season passes are up, Cedar Points are down a little bit, and the remainder of the other parks are pretty flat.

But our group sales business looks positive going forward.

Okay.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is a follow up from Chuck Cerankosky.

Hi Chuck.

Chuck, can you hear me?

There we go.

Can you hear me now?

Sorry about that.

Dick, in looking at Geauga Lake's business plan and running below it, what's it based on in terms of building the plan, and why do you think the shortfall is there despite the efforts?

And I should throw in there, I've been noticing in the Cleveland market, a lot more radio advertising for Kennywood in Pennsylvania, and do you think that plays a role?

Is competition a bigger factor?

Chuck, going forward, our plan is pretty much the way we laid it out when we acquired the park, or we announced last year.

It was a two-year project to complete the water park.

The majority of that was done this year and it will be completed next year.

Part of our efforts this year -- that's the plan that we think is the right plan to go on, and we're going to continue with that plan.

With the Pittsburgh market, we also are advertising very heavily in their market also.

We have a hotel there in Geauga Lake, and we've done considerable business from the Pittsburgh area, certainly not as much as we wanted, but we have some packages we're using there, that we're implementing there in the Pittsburgh area as well.

You see a lot of their ads coming in here, but we also are in the Pittsburgh area trying to get some of that business here.

Chuck, some of the -- we look at the negative sides of Geauga, but there are some positive sides of it.

Number one is, certainly I think our service levels are certainly up to Cedar Fair standards now.

I think that the public is receiving our new uniforms and the training that our employees are going through.

Our per capita spending is very strong there and, in fact, our revenues -- even though our attendance is down -- revenues are actually ahead of last year.

So we're optimistic going forward.

We think we have a good game plan and with the completion of the water park next year and again with word-of-mouth.

If anything, I think I under-estimated the power of the animals that the Sea World park has, the Six Flags park had.

That's certainly when -- the most comments that we received is when we took the animals out of the park, was that the elimination of those animals certainly had more of an impact than I had given them credit for.

But, I think that, again, with the new program we have with the water park and trying to appeal to the family unit, we'll get those families back to the park.

Dick, I don't want to sound like I'm rehashing last year, I apologize for that.

But, I mean, in looking at the Geauga Lake plans, attendance plans for this year that you had at the beginning of the season, you mentioned the economy is perhaps a factor, but what else were those based on?

It doesn't appear to be taking place at this time.

[Inaudible] water park, the attendance has increased.

We got behind the ball because we opened that late, but certainly weather has been favorable for us.

We certainly can't blame the weather.

Hot weather when you have a water park is certainly made for it.

So we certainly think that the economy had some effect, and perhaps the negative impact from the local unions might have had an impact on us.

Hopefully, all of those things are behind us and now we'll have a great August.

All right.

And then looking at a real long-term thing, but we're -- oh, before I get to that, how about fuel costs?

What's your feeling about what higher gasoline prices are doing not only to attendance, but also to in-park spending?

We haven't noticed it too much at in-park spending.

It's not quite what we'd hope for it to be, but, again, we took surveys as to what the impact fuel costs were having and it had basically a neutral effect.

People were not saying they weren't coming because of fuel prices, but that survey was taken right after the park opened, so we probably should update that.

But we have not heard any negatives on fuel prices, reasons for not coming to the park.

Okay.

So and more and more, the macro economy type of issue.

Yes.

How about the politics in Ohio with regard to gambling; any insight on that?

It's definitely a long-term development, but what can you say about that at this point?

Well, we've always stated that we're certainly not lobbying for it against it, but we feel it's another form of entertainment that eventually is going to come to the state.

Ohio is only one of fourteen states that does not have some sort of gaming, and we think eventually it's going to come to the state of Ohio.

When that happens, we certainly want to be in a position to at least look at it and perhaps apply for a license for that, that would be up to the board.

But we follow it very, very closely, because it is a form of entertainment, but, as you know, living in Ohio, Chuck, that it's pretty well a dead issue with the governor and with the Native Americans.

That whole issue is pretty well dead, so I don't really see that moving for a couple of years anyway.

Mayor Campbell has pulled her petition out of Cleveland, and all we do is, we just follow it and we're not getting involved in the politics of it, but we just -- we want to be prepared and if it should come, we at least want to be in a position that we can make a decision that we either want to be involved in that form of entertainment or not be involved in that form of entertainment.

Thank you very much.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) At this time, I show no further questions.

I'm sorry, one question just came in from Candace Goforth of Akron Beetle (ph) Journal.

That's Akron Beacon Journal.

I just wanted to follow up on a report that I saw some time ago earlier last month regarding Michigan Adventure and some question about whether -- if there would be considering a capital improvement project to bring a water park to that property?

I wonder if that is still on the table or where those plans, if they are even in the planning stage, where they stand?

Thanks, Candace.

Certainly, with the success of Castaway Bay, that is certainly something we're considering for all of our properties, and certainly Michigan -- the Muskegon area, we have over 300 acres there, but we certainly have over 700 acres in Aurora, Ohio, and we have 250 acres in Valleyfair, and another 300 acres at Worlds of Fun.

And so if we feel that the indoor water park phenomenon is real and it's going to be successful, why, we certainly looking forward would consider that for all of our properties, and certainly Muskegon would be one of those areas that we would consider, but so would the other five areas -- the other six amusement parks that we have are all under consideration for that concept.

Thank you.

You're welcome.

Thank you.

At this time I show no further questions.

I'll now turn the floor back over to management for any closing remarks.

Thanks, Alan.

If there are no further questions, I just want to thank everyone for joining us on the call today.

If there are any follow up questions, please feel free to contact either myself or Stacy Frole in the Investor Relations Department at 419-627-2233.

As a reminder, our next monthly attendance release will be out estimated September 6, to discuss our attendance and per capita trends through the Labor Day weekend.

We look forward to speaking with you again in early November to discuss third quarter results.

Thanks, and have a good day.

Thank you.

This does conclude today's conference.

You may disconnect your lines at this time, and have a wonderful day.