Six Flags Entertainment Corp (FUN) 2007 Q2 法說會逐字稿

Good afternoon. 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 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to Stacy Foley. Ma'am you may begin your conference.

Thank you, Elsa. Good afternoon and welcome to our second quarter earnings conference call. I'm Stacy Foley, Cedar Fairs Director of Investor Relations. Earlier today, we issued our second quarter earnings release. A copy of that release can be obtained on our corporate web site at www.CedarFair.com or by contacting our investor relations offices at 419-627-2233. On the call this afternoon, 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 our earnings release and is also available to investors on our web site, via the conference call access page. In compliance with SEC Regulation FB, this broadcast 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 disseminate, 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. It's been just over a year since we acquired the Paramount Parks from CBS and I continue to be please with the progress our management team has made with the integration. Over the past year, we have been able to improve the operating efficiency of the parks and over the next several years we will focus our efforts on increasing revenues through various pricing and marketing strategies as we introduce new rides, attractions and revenue centers. On the call this afternoon we will provide an update on the integration of the new parks, discuss our performance and provide our near-term financial outlook. We are currently in the second phase of the integration process with the new parks.

During this phase, we have continued to develop our company personnel and wage structures, began to realize purchasing efficiencies and introduce new pricing and marketing programs. Over the past year, we have added new corporate positions such as regional vice presidents, marketing, purchasing, safety and sponsorship to name a few.

As of July 1, our employee benefit plans have also been consolidated resulting in savings to the Company and improved benefits to our employees. Our marking team has also introduced a new pricing structure and marking programs at the new parks to create pricing integrity. As a result of these changes we have seen some softness in some markets which will be discussed later. We will continue to monitor these changes and make adjustments as necessary to optimize revenues. Although, Peter will review the details behind our results in just a bit, I would like to briefly comment on our performance. Consolidated operating income for the second quarter totaled $40.2 million. On a same park basis, excluding the effects of the acquisition and corporate costs, the second quarter operating income increased 8%, to $23.4 million. The improved same park results reflect higher average in-park guest per capita spending at all of our parks and our continued focused on bringing costs in line with attendance trends in our northern region, particularly at Geauga Lake.

Through this past Sunday, July 29, net revenues on a same park basis increased 2% or $5.2 million to $329.8 million in 19-- or in 2007, from $324.6 million for the same period in 2006. This increase is attributed to a 6% increase in average in-park guest per capita spending to $39.76, offset somewhat by a 3% decrease in attendance or 244,000 visits from 2006, and a decrease of 1% or $472,000 in out-of-park revenues from a year ago. Including results from the acquired parks since their acquisition, consolidated net revenues through July 29, totaled $574.3 million, compared with $426.6 million in 2006. Over the same period, combined attendance totaled 12.7 million visits in 2007, versus 9.7 million visits for the same period a year ago, an average in-park guest per capita spending was $40.41, compared with $37.78 last year. Out of park revenues through July totaled $60.3 million up from $58.05 million for the first seven months of 2006. July is the first month we have internal year-over-year comparisons to operations at all of our parks.

For the past four weeks consolidated net revenues were down 1%, or $3.1 million. This is as a result of a 7% decrease or 363,000 visits in attendance due to changes in our pricing strategies, including the elimination of many complimentary tickets. This was substantially offset by a 5% increase increase in in-park per capita spending to $40.39 and a 3% increase or $501,000 in out-of-park revenues. Given these results, I think it's important to provide a little more detail on the changes in our marketing and pricing programs and our plans for the rest of the season.

At the beginning of the year, we lowered the general admission prices in many of our new markets to allow us to eliminate deep discount ticket options, and many complimentary tickets that have been offered by the parks. This is consistent with the strategy we have followed in our legacy parks to establish pricing integrity across the board. To date, we have seen softness at some of the new parks as a result of these changes, but we are reacting quickly to address this with new options for our customers, and have seen some positive responses to our action. We have also experienced increased competition in some markets where other competing markets within the region have offered heavily discounted passes. We have experienced this before and we don't believe that we will have a long-term impact on the performance of these parks. The parks are busy introducing new marketing promotions, including special events and discounts targeting specific groups such as season pass holders and military personnel.

Other marketing initiative include extending operating hours and offering general discounts on specific dates to create customer urgency. Our goal is to create pricing integrity. We do not and will not deeply discount the stated front gate admission pricing and give away our product. As we have stated in the past, while deeply discounting,maybe advantageous in the short-term, but we don't believe it is in the best interest in the long-term performance of the Company. To date, we have eliminated many courtesy tickets that have been issued in previous years at the acquired parks. The number of season pass sales and visits is also lower than in previous years which is as we expected, and we bring the program in line with our existing strategy regarding seasons pass sales and visits. Prior to the acquisition, season pass visits to our legacy parks were much lower than that of the Paramount Parks. We believe our long-standing strategies regarding the issuance of comp tickets, season pass sales and our desire to avoid heavy discounting is why we are able to maintain some of the highest operating margins in the industry. It is also because of these strategies we continue to see increases in average in-park guest per capita spending at all of our parks.

Given these improvements and our ability to reduce cost through improved operating efficiencies, we believe that we are on schedule to achieve our long-term goals over the next two to four years as we ingrate these great parks. While our pricing and marketing strategy will be very important to our overall success, our plans for capital expenditures will be just as important. As we mentioned in the past, we believe we will be able to expand our fall business, especially at the newly acquired parks. We are very excited to introduce new shows and attractions this year which includes parades, monsters and rolling screamsters. We also will be introducing exciting new maze's and haunted houses that guests will enjoy at the new properties.

Over the next several months our parks will also be able to announce exciting new rides and attractions for the 2008 operating season. Although we have not met all of our park level objectives to this point, we are pleased with the positive trends and in-park guest per capita spending and out-of-park revenues at most of our properties. With almost 40% of our budgeted attendance to go, including the month of August and our important fall season, we are hopeful that we will see continued growth in revenue and regain some of the attendance shortfalls. At this time, based on preliminary results through July, we anticipate generating four-year revenues of between 950 and $980 million and four-year adjusted EBITDA of between 320 and $340 million.

Before I turn the all over to Peter for more detailed review of our second quarter results, I would like to briefly address numerous inquiries and questions we have received regarding stories that have appeared in the press concerning a possible sale of the Company. Although it's a matter of a policy we do not normally comment on market rumors, an article reported a claim by an organization referred to as Destiny Capital, that constructive negotiations with the Company had been undertaken. We are not currently in discussions with that organization, or any other party for the sale of the Company. Of course, the board continuously challenges management to find the best strategic alternatives to increase value to our unit holders and I do receive inquiries from time to time about a particular park or group of parks, whether it's to sell or to even buy additional parks. Consistent with our policy, I do not intend to comment on any of these discussions on an ongoing basis.

Thank you for your understanding of this policy. You should know that our focus is on integrating the new parks and driving profitability for long-term unit holder value. At this point, I will turn the call over to Peter to discuss the second quarter numbers in more detail.

Thanks very much, Dick. Allow me to begin by emphasizing that virtually all the revenues from our seasonal amusement parks, water parks and other seasonal resort facilities are realized during a 130 to 140-day operating period beginning in the second quarter. With the majority of revenues concentrated in the peak vacation months of July and August. Only Knott's Berry Farm, Castaway Bay and Star Trek, the Experience are open year round. With Knott's Berry Farm operating at its highest level of attendance in the third quarter. Thus, I will caution you that it's always risky to jump to any conclusions about full-year results based on second-quarter numbers alone.

Since our current year results are not comparable to the prior year results due to the acquisition of the Paramount Parks, I will continue to provide you with an analysis on a consolidated basis including the new parks since the acquisition and for ease of comparison, I will then discuss our results excluding the acquisition on the same park basis. Consolidated net revenues for the three months ended June 24, 2007, were $274 million, broken down as follows, $150.2 million in admission revenue, $106.2 million in food, merchandise, and gains revenue; $17.7 million in accommodations and other non-park revenues. Excluding depreciation and amortization, consolidated operating costs and expenses were $188.2 million. After depreciation and amortization, operating income for the second quarter of 2007 was $40.2 million.

Those of you who regularly follow our results know that we believe adjusted EBITDA, earnings before interest, taxes, depreciation and other non-cash items provides meaningful in sight into our operating results, since we use it for budgeting and measuring park level performance. Because it's important to us, we make it a point of sharing it with investors. For the quarter, consolidated adjusted EBITDA increased $47.7 million to $85.8 million from $38.1 million for the same period a year ago. This increase is principally due to the acquisition of the new parks, as well as improved operating results on a same park basis, which I will discuss shortly. Interest expense for the quarter was $36.2 million, up from $8 million for the same period a year ago. The increased interest expense reflects higher borrowing to fund the acquisition.

For the quarter on a consolidated basis, a credit for taxes of $1.7 million was recorded is to account for public traded partnership taxes and the tax attributes of our corporate subsidiaries. This compares with a provision for taxes of $772,000 in 2006. After interest expense, credit for taxes, and a small miscellaneous expense. Net income for the quarter totaled $5.5 million or $0.10 per diluted limited partner unit compared with net income of $11.1 million or $0.20 per unit a year ago.

For first six months of the year, consolidated net revenues were $304 million and the combined operating loss for the period was $10.7 million compared with an operating loss of $7.8 million in 2006 on $169.4 million in net revenues. Adjusted EBITDA for the six-month period increased $25.4 million, to $39.3 million.

Now I will discuss results on a same-park basis excluding the affect of the acquisition and corporate cost. For the second quarter in 2007, on a same-park basis, revenues increased 1% or $1.2 million to $146.6 million. This is broken down as follows, $72.2 million in admissions revenues; $59.7 million in food, merchandise, and games revenue and $14.7 million in accommodations and other non-park revenues. The increase in revenues is attributable to improved average in-park per capita spending across all the parks, offset somewhat by a decrease in attendance in our southern and western regions. Our northern region parks also experienced a small decrease in out-of-park revenues due to 15 fewer operating days in the quarter, including seven less operating days at Cedar Point and five less operating days at Geauga Lake. Excluding depreciation and amortization, total operating cost and expenses on a same-park basis decreased 3% to $102.3 million from $105.5 million in the second quarter of 2006. The decrease in operating costs is attributable to the reduction in operating days for the period and as Dick mentioned earlier, our continued focus on bringing costs in line with attendance trends at our northern region parks particularly Geauga Lake.

For the quarter on a same-park basis, our operating income increased 8% , at $1.7 million to $23.4 million, from $21.7 million a year ago. Adjusted EBITDA during the same period increased 11% or $4.4 million to $44.3 million compared to $39.9 million in 2006. On a same-park basis, excluding the effect of the acquisition and corporate costs, net revenues through the first six months of 2007 were 2% higher at $172.1 million versus $169.4 million in 2006. Operating costs and expenses were $146 million, versus $150.7 million. Accordingly, operating income increased $4.6 million to $1.6 million compared to an operating loss of $3 million a year ago. Adjusted EBITDA during this same time was $26.1 million, $7.4 million higher than last year, reflecting improved operating results in our northern and western regions.

Twelve month results. Through the second quarter of 2007, we have almost completed a full 12 months of operations with the newly acquired parks and therefore, that is important to discuss these results as well as the progress we have made through integration. Combined net revenues for the 12 months ended June 24, 2007, which includes peak season operating results for 2006 were $966 million, and operating costs and expenses were $630.4 million. After depreciation and amortization of $119 million, operating income totaled $216.6 million. Adjusted EBITDA for this same period was $335.6 million, a 12-month results exclude six operating days from the Paramount Parks in 2006, as we did not acquire these parks until June 30, 2006.

Although, we have much of the 2007 season left to go, performance similar to the 2006 third and fourth quarter in 2007 would place our full year operating results well within our 2007 guidance. To put this into comparison, after the acquisition, we filed an amended 8-K that provided full year pro forma results for 2005. Taking the information provided in that report the full year pro forma adjusted EBITDA for 2005 was $302.9 million. Within a year of the acquisition our trailing 12-month adjusted EBITDA has improved by approximately $32 million or 10% over 2005 pro forma results.

When we announced the acquisition in our time line for integrating the new properties, we stated, that we believed it would be slightly cash flow accretive by 2008 and believed that more significant amount of free cash flow would be generated once our management approach and cost synergies were fully realized within three to five years. Based on the results through the second quarter of 2007, we believe that we are still on track to meet these objectives.

Finally, I would like to review the balance sheet. At the end of the second quarter, our receivables and inventories were at normal seasonal levels and we had the necessary revolving credit facilities in place to fund current liabilities, capital expenditures and operating expenses as required. Partners equity totaled $340.2 million, and our total cash on hand was $36.2 million. As of June 24, 2007, total debt outstanding was $1.88 billion, of variable rate debt, $17.5 million of which is classified as current and $146.7 million, which is borrowed under a revolving credit facility.

As of June 24, 2007, $1.3 billion of our outstanding variable rate long-term debt has been converted to fix rate debt through the use of several interest rate swap agreements and as a result our cost of debt is approximately 7.4% at the current time. I'm pleased to report that we finished the quarter in sound financial condition in terms of both liquidity and cash flow and consistent with our expectations for the quarter and trailing 12 months including the newly acquired parks. At this point, that 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 is coming from Tim Conder of AG Edwards. Please go ahead.

Thank you. A few questions, gentlemen and Stacy. First of all, regarding the quarter. In the -- at the ongoing comp parts, why -- just refresh us why -- and if I misunderstood the portion about the complimentary tickets, I thought that applied to Paramount. Why was the attendance down in the southern parks in the second quarter, I guess, is question number one. And then have you -- maybe this is very hard to quantify, given the unfortunate accident that happened at a competitor, have you seen any fallout from that here in July so far, or is that -- is there a way to gauge any of that?

On the -- Tim, Peter Crage, yes on the comp tickets that primarily related to the new parks. The slight decrease in the southern parks, we are coming off of some difficult comparable, at our park in Kansas City which of course had a major attraction in 2006. So that would be th answer to your question on the same-park basis for the souther parks.

Okay.

On the safety issue, Tim, we have seen some softness in the California park where the incident occurred in the wave pool. The state has not reopened that wave pool yet, but at the other parks, why, we don't think that that -- it certainly has not reflected, that we've had a decrease in attendance or affected our attendance in anyway.

And also the publicity surrounding, again, the unfortunate incidents that have happened at competitors' parks.

We have not seen anything. They have not showed up on our surveys at all.

Okay. Okay. And then the -- can you make some comments, I guess, regarding -- you mentioned you made some recent changes in incentive compensation plan. Can you expand on that a little bit and how, especially at the Paramount Parks, were there any changes recently implemented there that -- that in your opinion could make a -- a benefit going forward here, as far as incentives to drive the action that you want over the balance of this season, or is that more of a next year issue? And then secondly, maybe give us an update on how you are looking at potential land sales, values and what's encumbered and not. And then finally and I apologize here for the series of questions-- Well, I will pause and let you answer those two.

Thanks. On the compensation issue, basically what we did do is we did file a form to bring us in line with 409A Regs and our compensation packages, basically, we bought the -- we dove tailed the Paramount employees in with our systems. I don't think there would be that many changes in some cases why it would be more beneficial to them. We based ours on certain incentives in the park on per capita spending and comp tickets and things like that. But pretty much those are pretty well internally one and no problems at all. But basically you saw-- what you saw is a filing of the 409A Regulations. As far as the land sales go, we are constantly looking at the land and how valuable it is. And if there's opportunities for us to either lease some of it out or to use it in other avenues by building hotels or going under JVs, why we would take advantage of that opportunity. We are very fortunate. We have an awful lot of land in some key markets and we are taking a look at how it could best benefit the unit holder.

Okay. And Peter or Dick, either, one, would you anticipate from that potential avenue some proceeds over the next year to-- I know that's one avenue your looking at to pay down some of the debt? And Dick you alluded to it also over the next year, could we see some JVs potentially develop to use some of that land or a land that's adjacent to some of your parks.

Tim, this is Peter. With respect to proceeds or a JV, we're taking our time to evaluate each of the pieces of property, to make the right decision. Over the next year, it's difficult for me to say. Clearly, as you know a JV might -- they can take time to develop with zoning restrictions and permitting. But before we sell the piece of land outright and take the proceeds, without taking a look at a JV opportunity, we don't want to do that and short change ourselves. We can't promise over the next year but we can tell you it's something we are looking at very closely.

Okay. Thank you both.

Thanks.

(OPERATOR INSTRUCTIONS) . Our next question is coming from Haley Wolf of Rochdale Securities. Please go ahead.

Hi, guys. Can you maybe drill down on some of the attendance trends? I'm surprised by the weakness that you are seeing, particularly in July. And then back up -- and Tim talked a little bit about the attendance by region, with the southern parks weaking to difficult comps. However, Cedar Point had, what, seven fewer operating days in the first quarter. So can we talk about how the attendance at Cedar Fair -- at Cedar Point and maybe some color on what kind of response you are seeing to Maverick and if you think you will get the kind of returns that justify a $20 million expenditure?

Hayley, this is Peter. As you know, reaching conclusions through June the 24 or even through July, with 40% of the attendance to go in our ever even growing popularity in the fall season is difficult to say. No, we are seeing a trend in July it's down; although, at the same time, we are seeing a nice upward trend in per capita. So it's the package of the two that we look at. So before we jump top conclusions and reach conclusions about Cedar Point, and reaching Conclusions about the return on the $20 million coaster, we still have a lot of the season left to go. I think that's an important point to make.

And Hayley, if I could just jump in here real quick, at Cedar Point, our out-of-park revenues are doing very good. Our accommodations are doing very well. Where we are seeing some softness is out of the Cleveland market and the Detroit market. Although, Detroit has come back a little bit on us this year, why the economy in both Detroit and Cleveland is certainly having its effect on attendance at Cedar Point.

Okay. And in terms of the changes in the past programs at the acquired parks, can you give a little bit of color on that, and can you maybe directionally tell us of the decline in attendance, maybe what is due to comp tickets?

Sure. We did change the -- the season pass program. We put a lot of integrity into our pricing, which we have in our legacy parks. But we eliminated a lot of the free tickets that went along when you purchased a seasons passes at the Paramount Parks. Of our short-fall about-- over 60% of it is in season passes and another 25% of that decline is in free passes, courtesy passes to the parks. So we knew when we did our budgets the first year that we -- we expected to have some sort of hit on -- on those -- both those fronts and we are seeing it.

Okay. Great. And then an update on discussions with Nickelodeon.

No. We continue to monitor Nickelodeon. We are in continuous talks with them, and -- and as you know, we have three more years left on that contract and we are pursuing it. I think both of us are anxious to resolve it and we are still talking.

Great. Thanks.

Thank you.

Once again, as another reminder if you do have a question, please press star followed by one on your telephone keypad at this time. Once again, that's star followed by one for any questions. Our next question is a follow-up coming from Tim Conder, of AG Edwards. Please go ahead.

Yes, back to the land. You outlined in your 8-K, what you have as excess usable land in each of your parks. But of that, how much would you view as potential that could be sold versus what you would want to keep for expansion of the park. I guess it's question number one. And then related to all of your -- all of your land, what is unencumbered? I guess whether that be developed land or undeveloped land.

Tim, we would have to take each park at an individual basis. But, certainly, in the legacy parks we don't have that much land to grow the parks. We do have land both in Kansas City and in Minneapolis/St. Paul area. The population base just does not justify the big expansion to go into those areas; however, with the parks we acquired from Paramount, all of those have adequate land with the exception of the California property, which is a lease. But there's plenty of land to develop -- to develop and/or to do JVs on.

And Tim, your question -- this is Peter. Your question with respect to encumbrance, are you referring to debt, instrument encumbrance?

Yes.

Yes, all of the land, all of the assets are encumbered by the credit agreement, except for small sales under a certain threshold. So a sizable transaction would require what we consider a pretty simple, straight forward waiver by the banks.

Okay. Thank you.

Thanks, Tim.

Thank you. Our next question is a follow-up coming from Hayley Wolf of Rochdale Securities.

Hi. The margin expansion on the same-park basis, 280 basis points is that largely attributable to the fewer operating days or is there another dynamic that maybe lasts through the balance of the year?

I think a good portion is we have not drilled down and looked at specifically those days. That was our intent. Clearly our intent was to improve our operating margin and drive the attendance in other parts of the season. So my -- my answer, the short answer would be yes, that's probably the primary piece.

Can you revisit the operating margin gains that you expect now that you have had the parks in operation for a full year on a consolidated basis?

In terms of revisiting where we think they are? I think our --

Right.

Our put-down margin on a trailing 12 month basis was just over 38%, which was about 90 to 100 basis points stronger than our trailing 12 months prior to acquisition. So we have seen what we expected in the new parks and that because they are seasonal parks, we have been able to drive the margins that we had hoped. And that's why we have been able to deliver the trailing 12 months $336 million in EBITDA.

Are there any areas in which there are surprises to the upside or surprised to the downside in terms of cost saving opportunities.

I think as we expected, I think in some instances they were a little bit quicker than we expected but the management team out in the field went to work right away, identified the cost reductions and we got those taken care of quickly. So a little bit faster than we expected. The low-hanging fruit was addressed. Of course, now, give than max dollar of cost saving gets a little bit tougher and now we start to focus, as Dick said on marketing and sales and attractions and capital.

Why are you comfortable taking the revenue range down to the lower end of the range, but maintaining the EBITDA range.

For all the things I think we talked about in terms of attendance and making sure that we are well within what we can deliver.

Okay. Thanks.

Thank you. There appears to be no further questions at this time. I will turn the floor back over to you for any further or closing remarks.

At this point, if there are no further questions, I would 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 early November to discuss our third quarter results. Thank you.

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