Six Flags Entertainment Corp (FUN) 2006 Q3 法說會逐字稿

Good morning, my name is Elsa and I will be your conference operator today. At this time I would like to welcome everyone to the Cedar Fair third quarter earnings conference call. [Operator Instructions] Thank you. It is now my pleasure to turn over to your host, Stacy Frole. Ma'am, you may begin your conference.

Thank you, Elsa. 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 earnings release. A copy of that release may be obtained on our corporate website at www.cedarfair.com or by contacting our investor relations office at 419-627-2233.

On the call this morning are Dick Kinzel, Cedar Fair's Chairman, President and Chief Executive Officer, and Peter Crage, our Corporate Vice President of Finance and Chief Financial Officer.

Before we begin, I will remind you that comments made during this call will include forward-looking statements as defined by the U.S. Securities and Exchange Commission. 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 the company's filings with the SEC for a more detailed discussion of these risks.

Also in accordance with Regulation G, non-GAAP financial measures used on this call today will be reconciled to the most directly comparable GAAP measures. As such, in today's call we'll refer to adjusted EBITDA as defined in our earnings release and the required reconciliation as provided in the release and is also available on our website on the conference call access page.

Because this webcast is made available to all audiences with fully disseminated public notification provided in advance, all of this call's content will be considered to have met full and fair disclosure requirements in accordance with SEC regulation FD.

Now, I'll turn the call over to Dick Kinzel.

Good morning. This morning we will discuss our performance on a combined and same-park basis and provide an update on the Paramount Park acquisition, including the progress we've made in integration thus far. Then I'll provide our near-term outlook and broader view of the company going forward.

Starting with our performance review, I have to say overall we've been encouraged by our parks' ability to sustain results comparable with last year's record, especially in light of high energy prices and economic challenges in the Midwest effecting consumers and the entertainment sector.

As much as we'd like to be able to turn factors like the weather and the economy to our advantage, we made decisive moves to respond to these issues, most directly by adjusting admission prices at our park. We believe this may be why our attendance figures were stable this year, when our regional industry generally saw declines. Of course, we also addressed these issues with our acquisition, in that we were able to add strong demographic fair weather locations like Carowinds in Charlotte, Kings Dominion in Richmond, Virginia, and Great America in Santa Clara, California.

When we look at our results on a combined basis for this quarter, it seems our modest reduction in pricings at our parks and our original business may have offset economic pressures on park attendance.

The Paramount Parks this year had quite a different strategy, focused on higher priced one-day admissions and deeper discounts that we have offered on season passes. The thinking behind that was guests might be more inclined to visit more frequently and spend more in the parks, increasing per capita and in-park revenues, even if attendance drops.

We think perhaps the balance between these two strategies is probably appropriate and we're now getting the benefit of detailed comparisons to see how each one performed. From the analysis, we know it's not a matter of one right answer. Each region has its own economy, consumer profile, income and spending levels and each park in itself is different.

For that reason, we'll continue to take a location market-based approach, evaluating each of our parks individually to determine the right strategy for growth and the best value for our guests and increased profitability.

At all of our parks, including the acquisitions since July the 1st, we entertained 13 million visitors on a combined basis during the quarter. Average in-park per capita spending was $38.81, compared to $37.68 last year prior to the acquisition.

On a same-park basis without the acquisition, year-over-year attendance in the quarter ended September 24th was off by roughly 51,000 visits, less than 1%. In-park spending and out-of-park revenues were virtually the same as last year.

Through October, our fall events continued to show successful results and a favorable trend we've seen in a number of states, Michigan and Virginia among them, has been to restore the tradition of schools starting after Labor Day. We certainly support that and know for a fact that our guests do, too. This year, we saw a 36% increase from Michigan Visitors to Cedar Point in the last two weeks of August through Labor Day.

Despite the economic challenges, Cedar Point finished its season with attendance off about 2% and, as we said during our last conference, call Valleyfair had some challenges this year with a decline in visits. Attendance was off at Canada's Wonderland and Kings Island, but to my point earlier about finding the right balance and pricing strategy, per capita spending at both of these Paramount properties was strong and higher than last year.

We also should mention that, while we made progress at Geauga Lake, especially with the needed water feature improvements we added, the park still has a footprint too large for its attendance. We have more to do to balance our operating costs more appropriately for this market and we are looking at ways to reduce overhead at this location.

In the Western region, with the benefit of hot summer weather, our water parks again posted solid gains in attendance and revenue during the quarter. Knott's Berry Farm is on pace for a good year and its adjacent hotel and TGI Friday's restaurants also continue to attract a steady stream of visitors with an increasing contribution of in-park and out-of-park revenues.

And from the Paramount acquisition, the Bay Area's Great America followed the pattern of its sister parks in lower attendance, but with higher per capita spending.

Among the Southern properties, World of Fun and the separately gated Oceans of Fun water park had a good year. Two new additions to this region from Paramount are Carowinds and Kings Dominion. With attendance being down and with strong per capita spending, both of these parks contributed strong in in-park revenues.

With revenue growth the acquisition brings we are also confident we can achieve margin improvements at our parks by combining the best of both organizations. As it is the objective of our integration effort, which is on track, I will briefly review what we accomplished in our first quarter, while we are also running the parks.

We assessed our management teams and matched up both Paramount and Cedar Fair people in the roles they were best prepared to serve for our style of streamlined, hands on integration. We put together a team with solid disciplined people from both businesses, then rebalanced staffing across the organization. Cuts were made as quickly as possible, but handled with respect and consideration for people involved.

We reviewed critical operating procedures to ensure all of our standards for safety, cleanliness and service were met. We implemented immediate cost reductions and aggressively pursued savings wherever we found duplication or favorable terms. And we are consolidating purchase agreements for a variety of products and services.

Conservatively, we've already captured between $4 to $6 million in savings for the remainder of 2006 and next year we expect to achieve $10 to $15 million. This is in line with what we expected when we made the decision to acquire the parks earlier this year.

We are standardizing our financial reporting and capital planning models and have begun to implement some of the information system using- - used by Paramount throughout Cedar Fair for automation of shared services. In addition, we initiated some integration activities to generate more revenue and in recent weeks we launched a new Cedar Fair MAXX Pass that offers the outstanding value of all twelve amusement parks on one seasons' pass, which is also available for sale on line.

Of course, we also are sharing knowledge that stands to improve every area of our business and the best part of the integration process, is it really does go both ways.

That brings me to our outlook. In the near term, we're on track to achieve revenues as forecast in August of between $815 and $835 million, with adjusted EBITDA of between $285 million and $305 million. And, as I stressed in our earnings release, Cedar Fair remains in good shape financially and, as such, we are committed to maintaining regular quarterly cash distributions to our unit holders.

Our primary focus will be on integration, with selected projects and fundamental improvements where we can add value and impact quickly. We will provide more details of our capital plans later this month.

Going forward for the near term, we want to maintain and, wherever possible, internally grow our position as a leader in regional amusement parks, water parks and active entertainment. It's important to understand what's included in that picture: our own consistently booked hotels and resorts, revenue leading restaurants, concessions and games, specialty stores and out-of-park activities. This is why our board of directors recently moved to modify our corporate brand as Cedar Fair Entertainment Company. It is a subtle change that clearly identifies our company with its industry and more adequately reflects the bigger picture.

Now, I'll turn it over to Peter for more details on our financial report.

Thanks, Dick. Given that this is our initial quarter with combined results, including the Paramount Parks acquisition, I'm going to provide you with analysis on a consolidated or combined basis. And for ease of comparison, I'll discuss our results, excluding the acquisition, on a same-park basis. We'll continue to detail our results in this way, until we can make appropriate year-to-year comparisons, including the acquisition.

On a combined basis, we generated $542.1 million in net revenues for the third quarter, up 71% with benefit of the acquisition, from $317 million last year.

Overall, revenues included $309.6 million in admissions, $193.2 million in food, merchandise and games, and $39.3 million in accommodations and other revenues.

On a same-park basis, third quarter revenues, without the acquisition, were $315 million, representing less than 1% decline from the third quarter of 2005.

Cash operating costs for the quarter were $256.6 million combined, compared with $152.7 million last year, as a result of the acquisition.

A breakout of these operating costs is as follows.

$47 million in costs of products sold. $157.5 million in operating expense and $52.1 million in SG&A costs.

On a same-park basis, quarterly cash operating costs were $156.1 million, representing a 2% increase from the third quarter of 2005. Approximately a third of this increase is due to corporate integration costs, expected to be offset by reductions at the combined company level.

After depreciation and other non-cash charges, our combined operating income for the quarter improved to $229.2 million, from $136.2 million a year ago.

Those of you who regularly follow our results know we believe that adjusted EBITDA, or earnings before interest taxes, depreciation, and other non-cash items, provides meaningful insight into our operating results, since we use it for budgeting and measuring park level performance. Because it is important to us, we make it a point of sharing it with investors and we reconcile it back to net income in our financials, including within our earnings release.

On a combined basis, we achieved $285.5 million in adjusted EBITDA during the third quarter, representing an increase of $121.2 million over last year, reflecting the benefit of the acquisition.

On a same-park basis, EBITDA was $159 million, a decline of $5.3 million, or 3%. This decline reflects softness in the northern region and higher operating costs necessary to integrate the acquisition, which we expect to be more than offset by cost reductions on a combined basis.

Interest expense for the quarter was $35 million versus last year's $6.5 million, reflecting borrowings to fund the Paramount acquisition and refinancing of existing debt.

After interest expense and a provision for taxes, our combined net income was $132.9 million for the period, or $2.42 per diluted limited partner unit, compared with net income last year of $170.8 million, or $3.11 per unit. Please keep in mind the third- - please keep in mind in 2005 third quarter comparison includes a one-time reversal of $66.1 million in contingent liabilities we had previously recorded for publicly traded partnership taxes.

Looking at the nine-month period for a moment, on a combined basis, consolidated net revenues were $711.5 million, an increase of 45% with the acquisition on a 52% gain in attendance contributed by the addition of the Paramount parks.

With the acquisition, we also saw and 8% increase in out-of-park revenues and average in-park guest per capita spending that increased 2% from last year to $38.68, which reflects the benefit of the Paramount parks focus on driving in-park spending rates.

On a same-park basis, nine-month revenues were $484.4 million, 1.3% lower than last year's $490.7 million. This increased ties to our same-park attendance analysis for the nine months ended September 24th, which also showed a decline of 1.2% caused primarily by softness in the northern region.

Overall, on a same-park basis per capita for the nine-month period was essentially flat versus 2005.

On a combined basis, excluding depreciation and other non-cash charges, operating costs and expenses through the first nine months were $412.1 million versus $309.5 million in 2005.

Our combined operating income for the nine months was $221.4 million, compared with $131.1 million for the nine months ended in 2005.

Excluding depreciation and other non-cash charges, total cash operating costs and expenses for the nine months on a same-park basis increased less than 1% to $311.5 million from $309.5 million in 2005.

Operating income for the nine-month period on a same-park basis was $122.4 million, a 7% decline from $131.1 million achieved a year ago.

Adjusted EBITDA on a combined basis increased for the nine-month period to $299.4 million for the current year, from $181.2 million last year. On a same-park basis, without the benefit of the acquisition, EBITDA was $172.9 million, which is $8.3 million lower than the prior year. Again, this decline is associated with shortfalls in the northern region and, to a lesser extent, higher costs related to our acquisition.

Finally, we'll review the balance sheet.

At the end of the quarter, we had $1.75 billion of variable rate term debt, $17.5 million of which is classified as current and no outstanding borrowings on our revolving credit facilities. This compares with debt of $437.5 million in 2005 for the same period.

During the quarter, the partnership entered into several interest rate swap agreements as a means of converting $1 billion of this debt into fixed rate debt. And recently we entered into a currency hedge on the Canadian term loan to protect against adverse foreign currency fluctuations.

As we previously communicated on June 30, 2006, in connection with our acquisition, we terminated our existing term debt and revolving credit agreements and entered into a new $2.09 billion credit agreement with several financial institutions.

The credit facilities provided under the credit agreement include a $1.475 billion U.S. term loan, $310 million in U.S. revolving loan commitments, a $270 million Canadian term loan, and $35 million in Canadian revolving commitments. All facilities, other than the Canadian revolving commitment, bear interest at either a rate based on LIBOR rate, plus 2.5%, or a rate based on the prime rate, plus 1.5%.

Loans made under the Canadian revolving commitment bear interest rate- - interest at either a rate based on the banker's acceptance, plus 2.5%, or a rate based on Canadian prime, plus 1.5%. The credit agreement also provides for the issuance of documentary and stand-by letters of credit.

The U.S. term loan matures on August 30, 2012 and amortizes at a rate of $14.8 million per year. The Canadian term loan matures on August 31, 2011, and amortizes at a rate of $2.7 million per year.

The U.S. revolving commitment and Canadian revolving commitment expire on August 30, 2011.

In addition, we have communicated our intention, subject to market conditions, to raise approximately $250 million through the issuance of additional equity at or near the end of 2006. Given the way we structure the acquisition as a purchase of stock of a corporation by a subsidiary corporation of the partnership, our cost of debt is now lower than it used to be, since the interest costs are tax deductible. So, we will continue to monitor the market conditions and will act when we can ensure that an optimal capital structure can be obtained by avoiding unacceptable levels of dilution.

At the end of the third quarter, partners' equity totaled $469 million and our total cash on hand was $87.8 million. And I'm pleased to reiterate we finished the quarter in sound financial condition in terms of both liquidity and cash flow.

Our working capital ratio, which was a negative 1.3 as of September 24, 2006, reflects two key factors: the highly seasonal nature of our business and our recent refinancing of debt due to the Paramount Parks acquisition.

Receivables and inventories are at normal seasonal levels and cash and credit facilities are sufficient to fund current liabilities.

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

[Operator Instructions] Our first question is coming from Kit Spring with Stifel. Please go ahead.

Hi guys. Congratulations on closing the Paramount deal. Wondered if you have any estimate of what the impact of weather for the year might have been? I know it's kind of hard to parcel out just the weather versus local economies and that type of thing. But, wondered if you had just kind of a broad range of what the impact might have been, so I can try to come up with a normalized growth rate for next year? And then maybe kind of a similar analysis for gas prices. We've seen a huge seesaw. You know, have you seen any evidence recently when you adjust for local economies and that type of thing that gas prices have had a- - as they've come down, is that helping you guys out? Thanks.

Kit, this is Dick. The weather, you know it's so hard- - the weather is just something we have to live with. It doesn't matter how rich you are or how much influence you have. There's just some things you have no control over and that's the weather. This year was exceptionally hot, especially in the West and our water parks had a really good year because of that. It was extremely hot here in Sandusky, our corporate offices. It was hot at Kings Island. Now, whether that had- - the water parks did fine here and there. It really is hard.

The weather is just something we have to live with and, rather than make excuses for it, I've pretty well just come to the conclusion that we're going to have some sort of weather every year. We're never going to have a summer in all twelve of our properties where it's going to be 75 and, you know, and sunny.

So, I think the normal is that we're going to have some bad weather. We just sort of live with it. It's never easy to really live with, but we sort of accept it. But, this year was- - I would say on a scale of one to ten, it was a very hot summer at most of our locations. But again, with the, with the acquisition of the Paramount properties, why it sort of balanced off a little bit. The southern parks turned- - you know, had some decent weather, whereas the Kings Island and Sandusky and Geauga Lake had extremely hot weather.

So, again, it was- - part of the acquisition was to diversify our, you know, the weather that it has on the company.

As far as gas prices go, that was hard to measure. You know, they were at a peak in August, July and August. And certainly we think it had an effect on our Detroit market, along with the regular automotive industry economy being soft in Detroit. Certainly, when you don't have confidence in your job and there's layoffs, talk of layoffs and closing plants. And gas is over $3.00 a gallon, why I think that does have an effect on people visiting the parks. And, again, it showed this year at Cedar Point that Detroit, our biggest market, we suffered our biggest decline there in attendance.

So, gas prices did have an effect on us and hopefully why those will come down for next year if- - and we'll see what happens.

Thanks guys.

Thank you. Our next question is coming from Robert Routh with Jefferies. Please go ahead.

Yes, good morning. I had a few quick questions. First, when it comes to the industry and what you see going on, do you think that going forward this is an industry that's going to be kind of flat? Is it growing? Or will it- - do you think there's potential for it to grow? Or, do you see it kind of steadily declining a little bit as there are new forms of entertainment coming online? And, I know you have to track the younger generation as time goes on.

And second, if you could comment on the parks and the land. Do you have any intention of selling any of the parks in order to reduce debt, or any of the excess land that you have? Or are you going to keep that to continue building new rides to drive attendance?

Robert, this is Dick again. Going forward, you know, I think the industry for the most part is not certainly the growth industry it was in the '90s. However, going forward we certainly think there's growth in increasing per capita spending and adding extra charge attractions like hotels and things like that to properties. We've always been able to increase prices accordingly. So, we certainly don't think it's an industry that's in decline. But I certainly don't think it's going to have the growth potential that it had, as I mentioned, in the '90s.

As far as our real estate and our- - we certainly have property available around all of our parks, with the exception of Cedar Point. And, of course, we lease the property in Santa Clara, California. But, if there's an opportunity to use some of that property for commercial development or for hotels, either by us or by an outsider, we certainly are willing to look at that. Our goal is to try to get the debt reduced and if that would take either leasing or selling some of our properties around the parks, we certainly would do that.

As far as selling properties like- - we have to do whatever is in the best interest of the unit holders and so we're not putting anything off. We know we've got a big nut to crack with the interest rates. We also have an awful big obligation to our unit holders to increase that distribution and keep the distribution the way it is.

So, really, nothing is off the table. We have a lot of land in a lot of our properties and we are- - in fact, we are talking to people about trying to expand that asset to see if a more valuable asset to the partnership.

Okay, great. And just one last question. Obviously, you've done a lot on the integration front so far while you're in your biggest season. Now that you're, you know, entering into a slower period, I'm curious as to what is your estimate as far as when do you think the full integration of the two properties, you know, Cedar Fair and Paramount Parks, will be completed.

I think we're still on line with what we said back in July. It will probably take between three to five years to get the full integration process completed.

Okay great. Thanks very much.

In fact, I'm very pleased with what we've done just in the first six months.

Okay. Thank you very much.

[Operator Instructions] Our next question is coming from Tim Conder with A.G. Edwards. Please go ahead.

Thank you. And a couple of questions, gentlemen, primarily relating to the integration. Could you just remind us or clarify here again, in the quarter the amount of integration-related expense in the quarter. Peter, I think you alluded to it as a certain percent, but just if you have a dollar number? And then any anticipatory integration expenses in the fourth quarter? And then, as an additional level of detail of that, how much of that is cash versus non-cash?

Sure, Tim. This is Peter. In the third quarter, we had about $2, $2 to $3 million in integration costs which were showing up in the same-park EBITDA. We expanded some responsibilities and added some people. So, that's the number for the third quarter and that was cash.

Okay.

The- - in the fourth quarter, we're expecting that many of the costs in the off season that we think that we can have an impact on will- - will offset any additional costs, additional integration costs, such that we'll be in a cost-cutting mode in the fourth quarter. So, we do not anticipate any additional costs in the fourth quarter as a result of integration. We in fact expect cost reduction.

Okay. Will there be any type of, Peter, integration-related charges and, again, mixed cash, non-cash, any guesstimate at this point?

No, and no, we don't expect any, any non-cash integration charges in the fourth quarter. And those costs that are integration in the fourth quarter, we believe will be offset by cuts in the parks.

Tim Conder; Okay. And again, we're talking here, all these costs operation and then you also have the related financing on the debt and then whatever happens on the equity side.

And from that, yes, from that standpoint, no. Those are- - those obviously were cash, cash costs that flowed through the [T&L] that, through our purchase accounting, we were able to capitalize in our opening balance sheet.

Okay, so, so far, all of that has been capitalized.

Yes.

Okay. Okay. And the dollar amount at this point, that number has been capitalized?

Total, total costs capitalized as part of our purchase accounting including all acquisition costs, deal costs, financing costs, as well as a severance cost in the $45 to $50 million range.

Great. Okay. Okay. And, I know, either you or Dick, one, you mentioned there that you would give us some additional detail here over the next month or so regarding your CapEx plan. Can you maybe talk about your strategy looking over, into '07 here immediately, with the Paramount Parks? You know, you said from the get-go, you know, you saw significant opportunity as their in-park spending per capita was lower by, I think, about $3.00 than the core Cedar Fair. What type of strategy do you, are you looking at to getting that up? If you could just sort of talk about that a little bit.

And then, again, I think, in the answer to previous question, you said total integration would be about three to five years. Is there a time frame on a shorter end of that spectrum, or less as far as getting the in-park spending up? I mean, do you have a goal sort of set for that?

Tim, let me address- - this is Dick. Let me address per capita first. We were very pleased on going into the 2007, or the 2006 season, the Paramount management team made some strategic moves to increase the per capita spending. And those worked very well for them. They took the approach that they raised the front gate and they raised some of the season passes' prices. They increased prices in the park. They did suffer, as I mentioned, a decrease in attendance levels, however, they did increase their per capita very nicely. So, a lot of that I'm pleased to say was done, was done prior to us taking over, on taking over the park.

So, going forward next year, if we can maintain the per capita, you know, just go up. A lot of that we thought was going to have to happen, actually happened this year.

Okay.

So, basically next year should be- - if we can just get the Cedar Fair and the Paramount Parks up and normal, normal percentage of [mouth], we'll be in good shape.

And Tim, this is Peter. One of the things that, as Dick had mentioned in his prepared remarks, we had the opportunity to look at really two different approaches this year and, and break down the numbers and understand the drivers for each of those, both on per capita and attendance. And in the off season we plan to do that. In terms of an interim step, clearly a three to five year horizon is for a full integration, but next year we'll be talking as a team about what we need to do in 2007 to improve per capitas and improve revenue based on what we've learned this year.

Okay, so, so again- -and I apologize because I missed a little bit of Dick's prepared remarks there- - but so you've seen a lot of the per capita caught up from the numbers you cited. So, you really don't see too much of additional low-hanging fruit so to speak on the per capita side?

No, we're not saying that. What we're saying is the per capita, because of our pricing decisions at the original seven parks, we saw per capita as relatively flat. We saw increase per capitas at the Paramount Parks. And then we saw different attendance dynamics. And now we need to take a step back and really break down the numbers and understand why that happened and try to bring the best of both of those approaches together.

Okay. Okay. Thank you, gentlemen, for the clarification.

Thanks, Tim.

Thank you. There appear to be no further questions at this time. I'll turn the floor back over to you for any further closing remarks.

At this point, 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. Thank you.

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