Six Flags Entertainment Corp (FUN) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, my name is Rahim and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Cedar Fair third quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Miss Stacy Frole, Director of Investor Relations.

Ma'am you may begin your call.

Thank you, Rahim.

Good morning and welcome to our third quarter earnings conference call.

I'm Stacy Frole, the Director of Investor Relations for Cedar Fair.

Last night we issued our third quarter and nine month earnings release.

A copy of that release can be obtained on our corporate website at 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 our Chief Executive Officer, and Peter Crage, our Vice President of Finance and Chief Financial Officer.

Before we begin, I need to 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 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 third quarter earnings release, and 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 content of the call will be considered fully disclosed.

Now let me turn the call over to Dick Kinzel.

Thanks, Stacy.

Good morning and thank you for joining us on the call today.

We issued our press release yesterday and are pleased with our third quarter results.

For the quarter, revenues were up 4%, driven by a 2% increase in average in park guest per capita spending and a 1% increase in combined attendance.

Out of park revenues increased 10% for the quarter, primarily due to the continued strong performance of Castaway Bay indoor water park, as well as the introduction of a new TGI Friday's restaurant at Knott's Berry Farm.

Through the first 9 months of the year consolidated revenues were up 4% from 2004 on a 3% increase in average in park guest per capita spending and a 14% increase in out of park revenues.

This was offset, slightly by a 1% decrease in combined attendance through the first 9 months of the year.

Castaway Bay's combined strong performance to last year combined with attendance increases at our Midwest water parks, Dorney Park and Michigan's Adventure, helped to offset attendance shortfalls at our other amusement parks.

Looking at more current results, our fall promotions have continued to gain in popularity at our parks.

For the month of October, combined attendance was up 10%, or 100,000 visits between years.

Making up the short fall for the third quarter.

Over the same period, average in park guest per capita spending was up 5%.

At the individual park levels, year to date results have been somewhat mixed.

Our largest park, Cedar Point, continues to suffer from weak economic conditions in several of our key market areas, including Cleveland, Detroit, and Toledo.

The auto industry has its challenges, unemployment is high and much of Michigan and northern Ohio continues to lose jobs.

For the year, attendance was down 3% to 3.1 million guests, while average in park guest per capita spending remained essentially flat.

We believe that these economic conditions and continued high gas prices have limited the amount of discretionary spending that is available to our customers.

In response to this we have decided to lower our 2006 regular price admissions ticket by $5 to $39.95.

We will also continue to offer junior and senior tickets at an every day low price of $9.95, a change that has proven successful since it was introduced this year at the end of August.

Cedar Point also announced yesterday that we will be introducing a new world class thrill ride, Skyhawk, for the 2006 operating season.

The new ride, which will be located in Frontier Town, will be the tallest of its kind and will feature two giant swinging arms that will carry riders more than 12 stories into the air.

Finally, we have hired a new marketing agency, Mark USA, to help us wrap all of this information into exciting new marketing campaign that will communicate our lower ticket prices and an exciting capital program to our customers.

We are making the changes we believe are necessary to achieve increased attendance in the year 2006.

At our only year round park, Knott's Berry Farm, attendance has remained steady since the second quarter.

Through October attendance remained down 3% from the same period a year ago.

As we mentioned before, Knott's lost approximately 100,000 visits during the first quarter due to the record rainfall in southern California.

We are pleased that we have been able to recoup some of this short fall with another strong fall promotion.

Through the end of October, in park guest per capital spending was up 6%, and out of park revenues were up 11%, compared to the same period of a year ago.

A strong capital program in 2005, which included the addition of Silver Bullet, a world class roller coaster, TGI Friday's, a new restaurant, has helped to increase the Park's profitability.

We have been very pleased with the performance of Dorney Park and Michigan's Adventure this year.

Both parks introduced great new attractions and have been able to increase year-over-year attendance significantly.

At Dorney Park attendance finished the year at almost 1.5 million guests, up 9% form last year, and in park guest per capita spending increased 7%.

At Michigan's Adventure, full year attendance totaled approximately 550,000 guests, an 18% increase over 2004, while per capita spending was essentially flat.

These parks were critical to the overall Company's performance in 2005.

Our newest park, Geauga Lake, finished the year below our expectations.

For the full year attendance at the park totaled approximately 700,000 guests, or flat to 2004.

The majority of our attendance short fall to expectations was experienced early in the season, prior to the opening of the new water park area, Wildwater Kingdom.

Since the debut of Wildwater Kingdom on June the 18th, attendance increased 7% over last year, or 37,000 visits.

We have also seen improvements in in park guest per capita spending, which was up 5% between years, as well as guest satisfaction during that period of time.

We believe that we have the completion of the second phase of the water park in 2006, our continued focus on improving guest service standards, and our 2 parks for the price of 1 everyday low pricing, we will be able to improve attendance over the long term.

It's going to take a few years to establish the Park's reputation and image as a Cedar Fair park.

However, we are committed to improving that asset and confident that we will meet all of our expectations over the long term.

At our other 2 seasonal parks, Worlds of Fun and Valley Fair, the lack of a major new attraction negatively impacted attendance in 2005.

For the year attendance at Valley Fair was down 5% to 986,000 guests, while attendance at Worlds of Funs decreased 10% to 800,000.

However, we focused on managing costs, and both parks were still profitable and contributed nicely to free cash flow.

In fact in park guest per capita spending increased at both Worlds of Fun and Valley Fair by 3 and 4% respectively.

For the 2006 season, both parks have announced major new attractions.

Worlds of Fun will be introducing an outstanding new roller coaster called The Patriot.

Patriot will be that park's 6th roller coaster and will have the largest single investment in Worlds of Fun's history.

Valley Fair will be introducing Extreme Swing, an air launch thrill ride.

This will high powered swing will accommodate 40 passengers and take riders up 125 feet in the air.

We are confident both Patriot and Extreme Swing will help the parks generate improved attendance and strong operating results in 2006.

We are also happy to report that combined attendance at our 5 separately gated water parks totaled 1.5 million guests, up 7% from last year, with the majority of that increase coming at our two midwest water parks, where we enjoyed hot, dry weather all summer long.

Looking forward to 2006, our capital program will totaling $58 million, and will feature a new world class roller coaster at Worlds of Fun and a new thrill rides at both Cedar Point and Valley Fair that I mentioned earlier.

The 2006 program will also include a new wave pool at Dorney Park, which will help to increase capacity in an already popular area of the park, and a 1500 foot long river rafting ride that will carry riders through a rocky canyon filled with geysers and a waterfall at Michigan's Adventure.

Michigan's Adventure, which will be celebrating it's 50th anniversary in 2006, will introduce Coasters, a classic 1950's style restaurant that has been popular with guests at other Cedar Fair parks.

The second phase of the Geauga Lake water park will also be completed in 2006.

We believe that the combination of our capital programs, our now value pricing at Cedar Point, and combined focus on guest services, all communicated through an exciting marketing program, will improve attendance and operating results company wide in 2006.

Before I turn things over to Peter for a more detailed review of our quarter results, I would like to briefly discuss our position with regard to the sale of Six Flags.

We have an obligation to our investors to review all opportunities that are presented to Cedar Fair LP, and as such, have requested additional information from Six Flags for the purposes of reviewing a possible transaction.

No decisions have been, or will be made, until after we have time to fully review and analyze this information.

It is important for you to know that our business strategy will not change, and we will continue to focus on increasing distributions to our investors by pursuing growth in our existing parks through strategic capital spending, adding new lines of business within existing parks, and making cash accretive acquisitions, and maintaining a disciplined expense control.

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

Thanks, Dick.

As you mentioned earlier, we are very pleased with our record third quarter revenues and adjusted EBITDA, which has helped to offset dome of the early season shortfalls.

For the quarter net revenues increased 4% to 317 million from 305.6 million in 2004.

This included 166.9 million in admissions revenue, 117.1 million in food, merchandise and games revenue, and $33 million in accommodations in other nonpark revenues.

The revenue growth in the quarter was the result of a 2% increase in average in park guest per capita spending, a 10% increase in out of park revenues, including our resort hotels, and a 1% increase in combined attendance.

Total operating costs and expense for the quarter, before depreciation and other noncash charges, decreased 1% to 152.7 million from 154.9 million for the same period a year ago, due to a continued focus on controlling costs and improving operating efficiencies.

Breaking total operating costs and expenses down, we had 29.9 million of cost of products sold, 92.9 million of operating costs, and 29.9 million of SG&A costs.

After depreciation and a small noncash charge for unit options, operating income in the period increased 9% to 136.2 million from 125.2 million a year ago.

We believe that a very meaningful measure of our operating results, which we use in budgeting and our park level performance is adjusted EBITDA, or earnings before interest, taxes, depreciation and all other noncash items.

For the quarter, adjusted EBITDA increased 9% or 13.6 million, primarily due to improved operating results at Dorney Park, Geauga Lake, and Knott's Berry Farm.

Included in 2004 net income is a noncash credit of 1.2 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 noncash credit in the current period.

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

This restatement included recording a tax provision of 17.2 million in the third quarter of 2004 compared to a tax provision of 19.7 million in the third quarter of 2005.

This had the effect of decreasing net income for last year's third quarter from the the originally reported 108.9 million to 91.7 million.

Interest expense for the quarter was 6.5 million compared to 7.1 million for the same period last year.

After interest expense, provision for taxes as restated, and non cash credits, our net income for the period was 170.8 million or $3.11 per diluted partner unit, compared to net income of 91.7 million, or $1.70 per unit a year ago.

Reflected in our third quarter numbers is the reversal of 66.1 million of contingent liabilities recorded in prior periods related to publicly traded partnership taxes, or PTP taxes.

We began accruing for this when the PTP taxes first came into effect in 1998 because we could not be certain, at that time, how the taxes would be applied.

Now, after a number of years, we have a fair amount of evidence as to how the taxes are imposed, including the completion of an examinations of our tax filings.

Based on this evidence, we have determined that the PTP tax accrual is no longer required, and have reversed 66.1 million back into income in this quarter.

The adjustment to the PTP tax accrual resulted in the net credit for taxes of 41.1 million in the period.

Notwithstanding the effectiveness, net income for the quarter would have increased 8% to 99.3 million or $1.81 per diluted limited partner unit, compared to 91.7 million, or $1.70 per unit in 2004.

It is important to note that since this is a reversal of a previously recorded accrual, it has no effect on the partnership's cash flow in current period.

For the 9 month period, net revenues increased 4% to 490.7 million on a 3% increase in average in park guest per capita spending, and a 14% increase in out of park revenues, and a 1% decrease in combined attendance.

Over the same 9 month period, adjust EBITDA increased to 181.2 million from 171.4 million in 2004.

Excluding depreciation and other noncash charges, operating costs and expenses through the first 9 months of the year increased 2% to 309.5 million, primarily due to the incremental operating costs of Castaway Bay, offset by first quarter operating costs of Geauga Lake not incurred in 2004 as we acquired that park in April of 2004.

After depreciation expense and a small noncash charge for unit options, operating income for the 9 month period was 131.1 million compared to 124 million in 2004.

As Dick mentioned earlier, our fall promotions continue to gain in popularity, and our October operating results reflect this.

For the month, consolidated revenues on a preliminary basis were up 15% between years on a 10% increase in combined attendance or 100,000 visits and a 5% increase in average in park guest per capita spending, and a more that 20% increase in out of park revenues.

Based on third quarter numbers and our preliminary results for October, we believe we will finish the year at the high-end of our most recent guidance of 555 to 565 million in net revenues, and full year adjusted EBITDA of 173 to 180 million.

This level of operating cash flow will allow us to continue to fund our current cash distribution rate of $1.84 per unit, and could allow for consideration of another increase next March, at the Board's discretion.

Turning to our balance sheet for a moment.

At the end of the quarter, total debt outstanding was 437.5 million, including 365 million of fixed rate term debt, 20 million of which is classified as current and 72.5 million of borrowings under our bank revolver.

At the end of the quarter partner's equity totaled 456.4 million and our total cash on hand was 8.6 million, both amounts in line with normal seasonal levels.

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

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Robert Routh of Jeffries.

Good morning guys, two quick questions.

First, I was wondering if you could comment a little bit on the recent pricing change at Cedar Point and how you can see the -- obviously playing with the demand curve, the elasticity there, whether or not -- what you internally saw that lead you to bring down that pricing in terms of how much volume you need to make up for the price cuts.

And second, I was wondering if you could comment at all on any rumors or any talk about the Paramount Parks, whether or not they are going to be coming up for sale and if they were, whether you would have any interest in looking at them.

Hi, Bob, this is Dick.

I'll answer your second question first.

As far as the Paramount Parks, those are strictly rumors and we just don't respond to any rumors at all on those.

We made our statement on Six Flags and I think that pretty well answers everything on our acquisition front.

As far as our pricing decision goes, what we do is we take surveys every day in our parks and we could see, especially at Cedar Point, our median income was increasing and it let lead us to believe that maybe we were not getting the response from some of the lower income families that we had in the past.

We took a hard look at it.

We took some surveys and consequently, we came up with this decision to reduce the prices at Cedar Point $5 and then also reduce, or implement the reduced senior citizen's price and the child's price.

And at all Cedar Fair Parks we are either going to hold the front gate admission price or reduce it.

So we feel we are out to try to attract the total family unit, and certainly if we can get the word out and try to attract that family back, we certainly want to do that.

We are going to have to do a little more volume, but we certainly think we can increase more awareness and get more families into the park and consequently, once we get them into the park, we think we can increase higher per capita spending even though we are going to hold prices in that line also, we think we can do most of it on volume.

Okay, great.

Maybe you said this and I might have missed it.

Is there any intention of cutting prices at any of the other parks at the current time?

Yes, Bob, we are going to hold prices or do some reducing.

Those announcements will be made later on.

Great, thank you very much.

You're welcome.

Thank you, the next question is coming from Chuck [Sarankowski] of Key McDonald.

Good morning everyone.

I have got another question for you on Six Flags, would you look at all of it or just parts of it?

Chuck, this is Peter.

I think Dick's remarks with respect to Six Flags are really where we are at, right now.

We have to take a look at it and at that point in time, we can come to a conclusion.

All right, Peter, looking at all of this year what do you think the reported CapEx number is and what can you tell us about the CapEx number for 2006?

For this year I think we should come in about 75 million for 2006, our program is 58 million and depending on timing of year end projects I see 2006 being at the $58 million level.

Have you done any test marketing or modeling of any kind with these price reductions?

This is the first time you are doing such a thing and maybe, if that's difficult to answer, how did you arrive at the dollar amounts of the discounts in the the very -- at the various parks and at the various age brackets?

That's a tough one, Chuck.

A lot of it was -- we did do some surveys in the park.

We certainly look at all of our guest comments that come in.

I guess the bottom line is it was almost a gut decision, we felt that we had to do something.

We felt that $5 was the amount it was going to take to get the attention of the marketplace.

It was pretty much a decision based on sort of a gut feeling.

Okay, but the idea is more bodies in the park is more total in park spending.

Absolutely, we can certainly -- when we get people attendance is what drives everything.

If we can get more people into the park, paying a fair price, why, that certainly is going to increase our operating profits.

And Chuck, this is Peter, we did, obviously, run some numbers.

We took a look a look at under the different pricing scenarios and evaluated it accordingly.

So, we did put some pencil to paper on this.

All right.

Thank you.

Thank you.

Our next question is coming from Tim Conder of A.G. Edwards.

Hey guys, this is actually Bill [Crayer] calling in for Tim.

You have answered my question for the most part, could you just help me out with Cap Ex on the quarter?

Cap Ex on the quarter, bear with me just a second, about 15 million.

Okay, great, thanks.

Thank you, our next question from Frank Fontana from banyan Asset Management.

Hi everyone.

Hello?

Hi, Frank.

Management team at Cedar Fair has certainly been savvy about prior acquisitions, and I certainly understand and appreciate your comments about Six Flags potential earlier.

I'm a bit concerned that there may be a temptation for Cedar Fair to take on too much debt with future acquisitions, and if an acquisition is made, whether its Six Flags or another firm, what is Cedar Fair's position on how an acquisition would likely be financed?

There are a number of ways they can be financed.

Debt is only one of those ways, when we look at acquisitions, it's -- we look at them in ways to improve our cash flow, to improve available cash for distribution to our partners So, we look at each acquisition individually, we evaluate the level of debt that's appropriate, based on the market, the price for debt at that point in time and look at other structures as well.

So, to conclude that we would take on -- have the temptation to take on too much debt is driven by our desire to increase distribution.

Okay, thank you, I appreciate that.

And then, as far as Six Flags, is there a rough time line weather you expect to have more clarity?

The next month or so?

You are probably looking at at least 60 days, difficult to tell right now, but I would say 60 to 90 days is probably the time frame.

Excellent.

Thanks so much, guys.

Appreciate it.

Thank you, the next question is a follow-up coming from Chuck [Sarankowski], Key McDonald.

Hey, guys.

This is actually Bill Keller here who has a follow-up question.

I am just trying to get to the adjusted bottom line if you take out that tax accrual and I go from the 170.8 net income and then the 66.1.

I don't quite get to the 99.

I'm wondering what I'm missing.

Yeah, in fact, it's through the end of June, we had 66.1 million reserved.

In the month -- in the third quarter, we would have reserved another $5.4 million so on a pro forma basis 71.5 million is the delta.

So if you take 170.8 million, back out 71.5, which would have been the full cumulative accrual for the third quarter, you arrive at the 99.3.

Very good, thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] At this time, I'm showing no further questions.

At this point, if there are no further questions, I'd like to thank everyone for joining us on the call today.

Should you have any follow-up questions, please feel free to contact me at 419-627-2227.

We look forward to speaking with you again in mid February to discuss our fourth quarter and full year results.

Thank you.

Thank you, this does conclude today's third quarter earnings conference.

You may now disconnect and enjoy your day.