Six Flags Entertainment Corp (FUN) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Janelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to Cedar Fair 2006 Second Quarter Conference Call. [OPERATOR INSTRUCTIONS.]

It is now my pleasure to turn the floor over to your host, Stacy Frole. Ma’am, you may begin.

Thank you, Janelle.

Good morning and welcome to our second quarter earnings conference call. I’m Stacy Frole, the Director of Investor Relations for Cedar Fair.

Last night we issued our second quarter 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 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 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.

Thank you for joining us on the call today. First, I’d like to comment on our acquisition of the Paramount Parks and the progress that we have made to date.

We are very pleased that we were able to acquire the Parks on June the 30th and take advantage of the peak operating months of July and August. Over the past several weeks I have been spending time at each of our new parks meeting with employees and visiting with our customers. These truly are beautiful properties and are a nice addition to our family of parks.

Through my visits, I see many opportunity we can take advantage of over the next several years, such as the introduction of new restaurants and food stands, new merchandise outlets and new rids and attractions. These additions will improve our guest experience at the park while, at the same time, improve our operating results.

Through my visits and discussions with employees, I’ve also identified areas that we can improve upon within our existing parks. Our goal is to combine the best of Cedar Fair and Paramount Parks to create an even better guest experience and a more profitable company.

Since we acquired the parks during the operating season, we do not intend to change the marketing strategy or operations for the 2006 summer season. Our concentration this season is to ensure our four cornerstones, service, courtesy, cleanliness and safety, all wrapped up in integrity, are in place at each of our parks. This process is already in place and I’m amazed how quickly these parks are adapting.

Jack Falfas, our Chief Operating Officer, and his team have also been busy visiting each of the parks and are taking this time to understand our new markets. He is evaluating each organization, their customer service and capital needs, not only for the 2007 operating season, but over the long term. These parks are well-run properties and we are not going to make any snap decisions when it comes to their operations. This is going to be a well though out process and will be what is best for the Company over the long term.

As we have done in the past, announcements concerning the capital expenditure plans for the 2007 season at each of our parks will be made at the beginning of the fall.

Peter Crage and his team have been busy finalizing the long-term financings of the acquisition, and we are continually looking for ways to decrease our overall cost of debt. Peter will provide additional details behind this process later in the call.

With this acquisition, we are now 17 distinct parks covering a much larger footprint. In order to more efficiently communicate our results going forward, we have created regional destinations for our parks. The northern region, which is the largest, includes Cedar Point, King’s Island, Canada’s Wonderland, Dorney Park, Valleyfair, Geauga Lake and Michigan’s Adventure.

The southern region includes King’s Dominion, Carowinds and Worlds of Fun.

Finally, our western region includes Knott’s Berry Farm, Great America and the Soak City Water Parks located in Palm Springs, San Diego and adjacent to the Knott’s Berry Farm.

In the future press releases and conference calls, we will refer to these regions.

Now, to yesterday’s earnings release. Excluding the acquisition of the Paramount Parks, combined attendance through July the 30th was down 2%, or 140,000 visits, and an average of in-park guests per capita spending was down less than 1%. Over this same period, out-of-park revenues were up $250,000 to $56.5 million.

Including results from the Paramount Parks since their acquisition, combined revenues through July the 30th totaled $428.2 million. Over this same period, combined attendance totaled 9.7 million visits. Average in-park guests per capita spending was $38.22, and out-of-park revenues totaled $56.7 million.

Guests at our western parks continued to take advantage of the water rides and attractions that we have at these properties to escape the record heat. The Knott’s Berry Farm Hotel and adjacent TGI Friday’s also continue to attract visitors, and have contributed nicely to our out-of-park revenues.

Paramount’s Great America, located in Santa Clara, California, is located in a growing market and I look forward to the new opportunities and to guest experience that we can introduce to this market.

For our southern parks, the introduction of a new inverted roller coaster at Worlds of Fun has also proven to be a success. This region is also benefiting from the first year operations of the Worlds of Fun Village, which was introduced mid-season last year. Both Paramount’s Carowinds and Paramount’s King’s Dominion are great family parks located in growing southern markets.

Our northern region has not performed to our expectations, but has been able to improve operating results during the month of July. And with approximately 45% to 50% of the operating season to go, including our popular fall promotions, we are hopeful that we can improve attendance and our overall operating results.

We continue to review the various promotions and marketing campaigns at each of our parks and make adjustments as necessary.

Both Cedar Point and Dorney Park improved attendance during the month of July. However, it was not enough to recoup the shortfalls that they’ve experienced during June. Continued economic pressures in the Ohio and Michigan areas, where unemployment rates continue to be well above the national average, continue to negatively impact attendance at Cedar Point. While we believe that the decrease in pricing has helped to maintain attendance, it has not had the overall impact that we had hoped for.

Dorney Park is facing some tough prior year comparisons when the park successfully introduced an inverted roller coaster. Although attendance is down from the prior year, per capita spending has increased nicely and, overall, the park is meeting our current year revenue expectations.

Through the end of July, we have seen a decrease of approximately 70,000 visits at Valleyfair. At this point in time, we have been unable to pinpoint a specific reason for the decline, but we believe that extreme heat and higher gas prices have had an effect on the attendance. Valleyfair attracts guest from more rural markets where there are more trucks and SUVs and, therefore, are impacted more by higher gas prices.

We are in the process of updating our advertising campaigns, as well as increasing the number of distribution outlets that the park uses to issue tickets, along with various discounts. With 50% of the season still to come, as well as the introduction of a new fall promotion at the park, we are hopeful that we can begin to recoup some of this attendance shortfall.

Attendance at Geauga Lake is up slightly from 2005. With the continued hot and humid weather, and increased pressure on discretionary spending, park patrons have been able to take advantage of our everyday low-priced two parks for the price of one package at this park. While I am pleased with the improved operating results at Geauga Lake and the continued improvement in our guest satisfaction survey, the park has not met our current year expectations.

Through the end of July, attendance at Michigan’s Adventure is down slightly. However, improved per capita spending at the park has helped to improve year-over-year revenues.

Canada’s Wonderland, located just north of Toronto, another growing market, offers many chances to introduce new products that will make the park even better, and provide additional opportunities for growth.

Paramount’s King’s Island is a beautifully landscaped park and has the best children’s area in the country with the Nickelodeon characters.

We also continue to make a concentrated effort to control costs at all of our parks, while not sacrificing guest services.

I’m very pleased with the job our managers have done in controlling their operating costs again this year. I’m very pleased with the hard work that all of our employees have put forward while integrating the Paramount Park acquisition. The acquisition would not be a success without their knowledge, energy and dedication to Cedar Fair. A very sincere thank you and keep up the good work.

Although we have not met all of our park level objectives to this point, we remain pleased by the performance of most of our parks, given economic uncertainty and continued pressures on families due to increased prices at the gas pump.

With almost half of our budgeted attendance to go, including the month of August and our important fall season, we are hopeful that we can improve attendance and, subsequently, our operating income.

At this point, based on preliminary results through July, we are taking into consideration the acquisition of the Paramount Parks less estimated restructuring costs, we now anticipate generating full-year revenues of between $835 million and $855 million, and full-year adjusted EBITDA of between $295 million and $315 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 other seasonal resorts, are realized during a five month operating period beginning in early May, with the majority of the revenues concentrated in the third quarter during the peak vacation months of July and August.

While Castaway Bay and Knott’s Berry Farm are open year round, the Knott’s Berry Farm operates at its highest level of attendance in the third quarter as well. Traditionally, 45% to 50% of annual attendance at our amusement and water parks occurs after July. Thus, I will caution you that it is always risky 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 decreased 2% to $145.4 million from $148.9 million in 2005. Overall revenues include $71.4 million in admissions, $59.6 million in food, merchandise and games revenue, and $14.4 million in accommodations and other revenues.

As Dick mentioned earlier, the 2% decrease in second quarter revenues resulted from the decline in attendance at some of our northern parks, including Cedar Point, Dorney Park and Geauga Lake, partially offset by improved operating results at Worlds of Fun and an increase in water park revenues at Knott’s Berry Farm.

Operating costs and expenses for the quarter, before depreciation and other non-cash charges, totaled $107.3 million, representing a decrease of 2% from the second quarter of 2005. This decrease was partly due to the later timing of the advertising program at Knott’s Berry Farm, as well as fewer operating days in the period.

Breaking total operating costs and expenses down, we had $16 million in cost of products sold, $71.1 million in operating costs, and $20.2 million in SG&A costs. After depreciation and other non-cash charges, operating income for the quarter decreased to $19.9 million from $22.4 million a year ago.

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 all other non-cash items. For the quarter, adjusted EBITDA decreased $1.8 million to $38.1 million versus $39.9 million for the same period in 2005.

Interest expense for the quarter increased approximately $1.2 million to $8 million, due in large part to higher short-term rates. After interest expense and a small tax provision, our net income for the period was $11.1 million or $0.20 per diluted limited partner unit, compared to net income of $12.3 million or $0.22 per unit a year ago.

Looking at the six-month period for a moment, net revenues decreased 3% to $169.4 million on a 2% decrease in combined attendance, a 1% increase in out-of-park revenues, and average in-park guest per capita spending that was essentially unchanged from last year.

The decrease in net revenues for the period was primarily due to the attendance shortfalls mentioned earlier, as well as soft occupancy and average daily room rates at our Castaway Bay Indoor Water Park Resort during the first quarter of 2006. Over this same six-month period, adjusted EBITDA likewise decreased $3 million to $13.9 million.

Excluding depreciation and other non-cash charges, operating costs and expenses through the first six months of the year decreased 1%, or $1.3 million, to $155.5 million, due in large part to the later timing of the Knott’s Berry Farm advertising program, as well as fewer operating days.

After depreciation and other non-cash charges, the operating loss for the six-month period increased to $7.8 million from $5.1 million a year ago.

Turning to our balance sheet for a moment. At the end of the quarter, total debt outstanding was $561.6 million. This included $365 million of fixed rate term debt, $40 million of which was classified as current, and $196.6 million of borrowings under our bank revolver.

At the end of the second quarter, partner’s equity totaled $368.6 million, and our total cash on hand was $18.8 million, both in line with historical second quarter levels.

Now, I would like to discuss the financing of the Paramount Parks acquisition.

On June the 30th, 2006, in connection with our acquisition of the parks, we terminated our existing term debt and revolving credit agreements and entered into a new $1.895 billion bridge credit agreement with a group of lenders. The credit facilities provided under the bridge agreement consist of a term loan in the amount of $1.745 billion, and a revolving commitment of up to $150 million. We entered into this bridge agreement as a form of temporary financing to complete the acquisition and provide an interim source of working capital liquidity.

We are in the process of finalizing our long-term financing, and expect this process to be completed within the next two to three weeks. The long-term financing is priced at LIBOR plus 250 basis points. In order to insure an appropriate balance of fixed and variable rate debt, we have fixed a substantial portion of the term loan in a swap market. Therefore, we estimate our weighted average interest rate to be approximately 8%.

In addition, we have communicated our intentions, subject to market conditions, to raise approximately $250 million through the issuance of additional equity at or near the end of 2006. The proceeds from this offering will be used to pay down debt. Additional information will be communicated to the public as it becomes available. And as always, we will look for ways to refine our capital structure and reduce our overall cost of capital.

At this point, I’ll conclude our prepared remarks and allow for any questions that you may have.

[OPERATOR INSTRUCTIONS.] Kit Spring of Stifel.

Okay, guys, I have a few questions here. First, the bond market is telling us that there may be a slowing economy coming. Just wondered if you could remind us of what happened in ’91 and 2001 with your attendance and price? Maybe what happened when you exclude whether-- I think my recollection is that theme parks did actually pretty well in a slowing economy. So, let’s start with that one.

Kit, we’re just looking at the annual report there to refresh our memory of what the attendance was in ’91. And the ’91 I don’t in front of me. I’m sorry. We can get back to you on that. And in 2001, attendance-- combined attendance increased slightly, although it was relatively flat. Per capita remained essentially flat as well. Can’t comment on specific financials for 2001, but we obviously didn’t see a significant downturn in attendance or per capita.

Okay. And then it looks like you had very good cost control in the first half. Is that just variable costs due to less attendance, or is there something else happening that’s sustainable into the second half?

No. I think some timing of advertising expenditures at Knott’s Berry Farm is a piece of it. Also, we had a few less operating days in the period. Having said that, we obviously are always looking to keep our costs down. So, where we see softness in attendance we can react fairly quickly.

And then on the-- can you give us pro forma guidance for ’06 revenues and EBITDA that would include the Paramount Parks for the first half? If you want to get back to me on that one, that’s fine.

We’ll have to get back. We’re in the process right now of identifying our pro forma adjustments.

Okay.

We’ll be issuing a release and an 8K update on the pro forma numbers. We’ll have to get back to you on that one.

Okay, great. And then my final question is, do you have any interest in the Six Flags property or is your plate full?

Kit, yeah, you’ve answered that. Our plate is full. We’ve stated that for the next four years, unless there would be a strategic acquisition price that we just could not turn down, our goal for the next four years is to try to get some debt off of the balance sheet. So no, we’re not going to be looking at Six Flags or, for that matter--.

Again, as I said, if there would be something strategically that would benefit us but, other than that, why, our goal is to increase the distribution slightly every year, but our main emphasis is going to be to reduce debt for the next four years. And of course with that, we’ll do-- if we can get the debt off the balance sheet in four or five years, then we will be able to-- we’ll be at a pretty good position to make another acquisition.

Okay. Thanks for taking my questions.

You’re welcome, Kit. Thank you.

[Bill Gresser] with A.G. Edwards..

Hey, guys. It sounds like you’re going to be doing an 8K on the new guidance, but is your 3% to 5% revenue growth, or at least on an organic basis, still intact? And based on your new guidance, is there any implications regarding the distribution? That’s my first question.

The second one regards your integration going forward. Any update on key personnel retention at the new parks? And licensing agreements. Anything to-- any color you can add on that? Thanks.

We’ll start backwards. On the licensing agreement, we are presently in negotiations with both Paramount and Nickelodeon. [Inaudible] those resolved, I would guess, within the next six weeks to two-- the next 6 to 8 weeks we should have those inline.

As far as key personnel goes, our key personnel are all in place. There has been an integration of both Cedar Fair personnel and the existing Paramount personnel in the General Managers’ roles.

And as far as the distribution goes, our goal is to increase the distribution. As you know, we’ve had 19 straight years and our goal is to increase it, if ever so slightly, maybe even a penny just to keep the record going. But again, most of the cash will go to get the debt down.

And Bill, this is Peter. On our question on guidance, no, we would not-- we still believe the organic 3% to 5% growth is intact. We would not have changed same park guidance based on these numbers.

Very good. Thank you.

Robert Routh of Jefferies & Co.

Yes. Good morning, guys. A few quick questions. I was wondering, you’ve given us revenue and EBITDA guidance for the year revised. I’m wondering if you could give us any sense as to where you expect EPS to be for the full year of ’06?

And then, if you could give us a little bit of an update on what the margins are at the Paramount Parks relative to the Cedar Fair Parks. Because if I recall correctly, you guys at the organic parks have significantly higher margins than the Paramount Parks did, which would result in some opportunity for significant improvement in future years.

And then finally, if you could go over again what your CapEx budget is pro forma now for Paramount Parks for ’06.

I’ll start off-- I’ll take the first round, the margins. There was about a 400 basis points difference. We went public with that, Robert. And again, this year it’s going to be very difficult to improve those margins. We pretty well have our team in place and the advertising strategy’s in place, the capital plan is in place for 2006. So, what we’re doing now is concentrating at the Paramount Parks on 2007. I think we’re making a lot of progress on that.

As far as the CapEx goes for 2006, we expect ’06 to come out--.

We’re tracking at about 60 to 65 million. That includes some CapEx for these parks for next year. Right now, on a same park basis, we would be in about the 50 million level based on last year’s announced $58 million campaign. And we expect another $10 to $15 million to be put into the new parks over the next six months.

Back to your question on EPS, we don’t have an estimate of it right now. We’re obviously spending time getting the restructuring put together, identifying our non-cash costs. And we don’t have any guidance on EPS right now.

Okay, great. And then one final question because you went through this a little quick for me. Could you go over again what parks you’ve grouped into each of the regions?

Sure.

I’m sure we’ve got them right here.

The northern region is going to be Cedar Point, King’s Island, Canada’s Wonderland, Dorney Park, Valleyfair, Geauga Lake, the Michigan’s Adventure. The southern region is going to be King’s Dominion, Carowinds and Worlds of Fun. And the western region is going to be the California properties of Knott’s Berry Farm, Great America and the Soak City Water Parks. The one located next to Knott’s Berry Farm in [Bonfante] Park, and also the ones in Palm Springs and in San Diego.

Okay. Great. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS.]

We have no further questions at this time.

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 our Investor Relations Department at 419-627-2233.

As a reminder, our next monthly attendance release will be at the beginning of September to discuss attendance trends through the Labor Day weekend. We look forward to speaking with you again in early November to discuss our third quarter results. Thank you.

Thank you. This does conclude today’s Cedar Fair conference call. You may disconnect your lines, and have a wonderful day.