Six Flags Entertainment Corp (FUN) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Cedar Fair fourth quarter and year-end earnings conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation the conference will be open for questions.

(Operator Instructions) This conference is being recorded today, Thursday, February 12, 2009.

I would now like to turn the conference over to Brian Witherow.

Please go ahead, sir.

Thank you.

Good morning and welcome to our year-end earnings conference call.

I am Brian Witherow, Vice President and Corporate Controller for Cedar Fair.

Earlier today we issued our fourth quarter and year-end earnings a release.

A copy of that release can be obtained on our corporate website, 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 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 FCC regulation FD, this webcast is being made available to the media and 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.

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

As you can see from our earnings release this morning we generated solid operating results in 2008.

In a very challenging year we were able to improve adjusted EBITDA by 4.5% or $15 million to a record $356 million for the full year.

Helping to achieve this record cash flow was a 3% increase in attendance to 22.7 million guests.

Much of our success this past year can be directly attributed to the strong performance at Canada's Wonderland, as well as solid full results at many of our seasonal parks.

With favorable October weather and a combined appeal of our Fall promotion, attendance at our parks was up 8% or approximately 205,000 visits in the fourth quarter.

To summarize, the key factors in the success of our 2008 season were effective capital programs and marketing strategies combined with favorable weather late in the year to produce solid attendance and revenue figures at most of our parks.

Disciplined expense controls dropped most of the revenue increase to the bottom line.

On the call today we will discuss our 2008 performance in more detail and provide our view of the 2009 season.

Fundamentally our business is strong and our 2008 results prove this.

Revenues for 2008 increased 1% to $996.2 million while cash operating costs and expenses decreased 1% to $640.3 million.

This resulted in a 4.5% increase in adjusted EBITDA to $355.9 million.

We believe the increase in cash flows is a direct result of a strong capital expenditure program and solid performances at the majority of our parks.

We invested approximately $83 million in new rides and attractions over the past year and clearly our parks benefited from these strategic investments.

The parks we acquired in 2006 performed well with Canada's Wonderland being the standout performer this year and King's Island also contributing nicely.

We believe the success at Canada's Wonderland is a direct result of our $21 million capital investment there this year.

Behemoth has become the park's signature roller coaster and we believe will continue to contribute to the park's future success.

Michigan's Adventure, our smallest park in Muskegon, Michigan, and Dorney Park in Allen Town, Pennsylvania, also sound success this year with their new roller coasters.

Before I turn the call over to Peter, I would briefly like to address our continued evaluation of our capital structure and various alternatives for reducing the company's debt level.

In light of current economic and market conditions, reducing the debt and strengthening our balance sheet must continue to be a priority.

We are continuing a wide range of alternatives for reducing debt.

No decisions have been finalized on any of these alternatives at this time.

At this point I would like to turn the call over to Peter to discuss these results in more detail after which I will comment on our upcoming 2009 operating season.

Thank you, Dick.

As Dick mentioned, we're very pleased with our performance in light of the poor economy.

For the year we generated net revenues of $996.2 million, a 1% or $9.3 million increase over 2007.

Excluding depreciation, amortization, and other non-cash charges, cash operating costs and expenses decreased 1% or $6 million to $640.3 million.

This decrease was primarily attributable to the closing of Star Trek the experience in September due to the expiration of our lease with the Hilton, in addition the continued disciplined cost controls.

It's important to note that we voided cost increases on a majority of the merchandise and food products sold in our parks that many other companies experienced last summer because we locked in the majority of these costs prior to the start of the operating season.

We have also continued to take advantage of our purchasing power since the acquisition of the Paramount Parks in 2006, to help maintain and in some cases lower our costs.

We have a long history of controlling our costs and improving efficiencies, and we will continue to monitor these areas closely going forward to ensure continued success in the future.

Those of you who regularly follow our results know that we believe 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's important to us we make it a point of sharing it with investors.

For the year adjusted EBITDA increased $15.2 million or 4.5% to a record $355.9 million.

Likewise, EBITDA margins improved to 35.7% from 34.5% in 2007.

As Dick mentioned earlier, we believe the improved cash flows are a direct result of our Capital Investments and strong marketing campaigns at our parks.

Non-cash costs increased to $222 million from $186.1 million in 2007 due entirely to the charge for impairment of intangible assets we recorded when we acquired the Paramount Parks in 2006.

Although on a collective basis the acquisition continues to meet our operating and profitability goals, performance of the individual properties has been somewhat mixed, with certain parks out performing others to this point.

Based on the accounting rules which require us to evaluate our goodwill and trade names for impairment at the individual reporting unit or park level, performance of the parks that have fallen below our original expectations, coupled with a higher cost of capital, have resulted in the estimated recognition of full impairment of goodwill at two of the acquired parks and to a much lesser extent the additional estimated impairment of trade names at several of the parks.

Interest expense for the year decreased $16 million to $129.6 million due to lower interest rates on our variable rate debt and our ability to fix $300 million of term debt at favorable rates through an interest rate swap agreement entered into during the first quarter of 2008.

Also, contributing to the decrease in interest expense, was the lower average daily balance and lower rates overall in our revolving credit facilities compared with 2007.

For the year, a benefit for taxes of $935,000 was recorded to account for PTP taxes and the tax attributes of our corporate subsidiaries.

This compares with a provision for taxes of $14.2 million in 2007.

Net income for the period totaled $5.7 million or $0.10 per limited -- per diluted limited partner unit, compared with a net loss of $4.5 million or $0.08 per unit a year ago.

I would now like to briefly summarize our fourth quarter results.

Net revenues were $119.3 million compared with $115.4 million a year ago.

The improved revenues are a result of another solid Fall operating season at the majority of our parks.

Cash operating costs and expenses during this same period were $98 million, down from $105.4 million in 2007.

Total non-cash costs of $100.7 million compared with $29.6 million a year ago.

Increasing these costs is primarily attributable to the $87 million non-cash charge for impairment of intangible assets that was recognized during the fourth quarter of 2008.

Operating loss for the period was $79.4 million compared with an operating loss of $19.6 million a year ago.

Finally, I would like to review our balance sheet.

At year end our receivables and inventories were at normally low seasonal levels.

And we have the necessary credit facilities in place to fund current liabilities, capital expenditures, and pre-opening expenses as required.

Partners equity totaled $112.3 million and our total cash on hand was $13.9 million and we had approximately $311 million of unused capacity on our revolving credit facility.

At the end of the year total debt outstanding was $1.72 billion of variable rate debt, $17.5 million of which is classified as current, and $22.7 million of which is borrowed under our revolving credit facility.

As of December 31, 2008, $1.6 billion of our outstanding variable rate long-term debt has been converted to fixed rate debt through the use of several interest rate swap agreements.

As a result, our cost of debt is approximately 6.5% at the current time.

At this point I will turn the call back to Dick for some comments on the upcoming season.

As we look to the upcoming season, we believe we have a good plan in place to capitalize on opportunities and overcome challenges we might face.

In these unprecedented times it is difficult to predict with certainty what the future will hold.

Our plan is to continue to reinvest in our parks on an annual basis, increase the value to a park visit through special events and promotions, and to maintain the high degree of customer service our guests have come to appreciate and expect over the years.

In 2009 we will be investing a total of $62 million across our 17 properties highlighted by the addition of a new world class roller coaster at King's Island in Cincinnati, Diamondback, a $22 million steel roller coaster will be king of the hills in 2009 at this park's 15th roller coaster.

We will also introduce two additional coasters, Prowler, a wooden coaster, at Worlds of Fun in Kansas City and Caroline Cobra, a boomerang style coaster at Carowinds in Charlotte, North Carolina.

In addition, family attractions will be introduced at Valley Fair in Shakopee, Minnesota, and Kings Dominion in Doswell, Virginia.

Finally several parks will debut a variety of existing -- or of exciting live shows including the expansion of the All Wheels Extreme Stunt Show to several properties.

Our strategy has always been to offer a variety of activities to our guests and I believe our 2009 program will again capture their attention.

It is still too early to predict what impact the economy will have on the operating performance.

But it is important to mention to date we have seen a small decrease in our early seasons pass sales.

Total sales to date represent approximately 10% of our average annual pass sales and therefore it is difficult to project the full-year impact.

At this point we have not identified any abnormal trends with our preseason group sales although a large portion of these bookings traditionally occur over the next two months.

We are confident that we have some of the best employees in the industry and we have many full time employees who are working with us during the past recessions.

Their experience, along with our position of being an affordable vacation alternative, will help to support our business over the next year.

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

Thank you sir, we will now begin our question and answer session.

(Operator Instructions) Our first question is from the line of Joe Lackey with Wells Fargo Wachovia.

Please go ahead.

Hello, thank you for taking my questions.

First question regarding the 8-K filed on February 4, to amend the credit agreement.

I believe the cut off for lenders to consent was on February 10.

Was the amendment approved by the lenders?

We have extended that date.

We continue in discussions with the lender.

That date has been extended.

Right now we're looking at either late this week or early next week, so we're still in discussions.

Okay.

Can you give any sort of update on your expectations of whether or not you'll be in violation of the distribution provision at the end of '09?

Joe, at this time the season we don't have any visibility on the season.

We're closed.

As the season begins to unfold we can evaluate that as we've reported in the past.

That particular -- the particular covenant that governs distribution steps down to 4.75 times.

I will tell you based on the results that we achieved this year, we are right at that number, so as Dick had mentioned, we're planning for the season, and the season will unfold and we'll have to monitor that as we go through the season.

Okay, okay, thank you.

Can you just give a quick recap of, you know, alternatives that the board's reviewing in regards to distribution, debt repurchase, that sort of thing, and kind of give us some sort of balance that the board is looking at in regards to the distribution specifically, i.e., for example, would the boards tend to be more aggressive to give you some more cushion, should the distribution need to be revised, any sort of discussion around that?

Sure.

We're looking at a number of alternatives, Joe.

We're looking at obviously our cash flow.

We have strong cash flows, and cash flows before distribution are an item that is a real asset to us to take down debt levels, so we're evaluating that.

We're also evaluating some opportunities to sell some non-earning assets.

We've talked about the Canadian land in the past.

As you know this is a difficult credit market, so it takes time to put together a deal and finalize a deal, but we're looking at those things as well, so we have a variety of alternatives.

We continue to discuss them.

We continue to evaluate them and see what we can do, but really everything at this point is on the table to make sure -- to make sure that we are comfortable with our debt levels for the future.

Joe, I think -- this is Dick.

There certainly has to be a compelling reason for us to reduce the distribution.

We're very confident in our management team.

We're very comfortable going forward.

As Peter mentioned, if we can duplicate what we did this year, we certainly will be within the covenants guidelines.

Okay.

Okay, thank you for that.

And then just final question here, in regards to operating expenses as you look forward into 2009, is there anything in your plans right now to reduce expenses as a percentage of revenues?

Yes.

We're sort of fortunate, Joe, we've been close since November we haven't -- with the exception of Knottsberry Farm the money has been in the bank.

We sort of avoided the bank problems and things like that.

We're able to sit back and take a look at what's happening.

We're anticipating a very challenging year in 2009.

However, we are going to do everything we can to make it very, very successful, but in that effort -- why, we have made some reductions in just about all of our parks across the board.

Everything from temporary layoffs to monitoring group sales -- or I'm sorry, monitoring seasonal employees, so we are very, very cognizant of the economy.

We started actually in the -- the minute the park closed we started monitoring expenses.

And that program has been going on since we've closed, and even other things of eliminating any perks that we thought that were out there that were not needed have been eliminated.

Okay.

Thanks again and congratulations on the strong 2008 results.

Thanks, Joe.

Thank you.

Thank you.

Our next question is from the line of Scott Hamann with Keybanc Capital Markets.

Please go ahead.

Good morning.

This is actually Cassandra calling in for Scott.

I guess when you talk about the parks and the differences in performance, could you speak a little bit more to like the differences maybe even on a regional basis, that caused the differences?

Sure.

Certainly the markets, Cassandra, make a huge difference.

We were very fortunate in Canada.

Last year, Canada was our big contributor.

We put in a tremendous roller coaster there, a $20 million plus roller coaster there, Behemoth, that the public accepted.

It drove attendance, it drove seasons passes.

Area's like Michigan's Adventure even though Michigan's Adventure is our smallest park, and it was right in the heart of Detroit, and their main business with a very high unemployment rate, our general manager there had some promotions and some creative advertising.

We appealed to the market -- to the families, and they had a very good year this year.

Again, some of the parks that had some bad weather, we don't like to use weather as an excuse, but some of the parks that had some weather early, that had a -- certainly had a contribution to a soft year, but for the most part we take each of the parks on an individual basis by the region.

We invest our capital accordingly, and we adjust capital accordingly, and of course bigger parks like Cedar Point, King's Island and Canada's Wonderland, we usually get an infusion of a major capital expenditure every -- every other year, while the smaller parks will get it every three years.

And we found that formula works very well.

I hope that answers your question.

But there's really no recipe for saying why one park is doing better than the other with the exception of those things I just outlined.

Okay.

And then I guess in terms of pricing for -- your thoughts on pricing, '09 versus '08, what are the possibilities to increase pricing on average?

Well, some of the -- most of the parks have increased somewhat.

Our group business which comes back, is very -- we're very dependent on our group sales business.

A lot of those pricings have been held to 2008 levels, but for the most part due to inflationary trends the front gate prices at all of our parks have went up I would say on average of $1.

Which I would like to say is -- compared to industry standards we're still a very, very economical and value family vacation.

And of course we have a lot of promotions with our hotels.

If you stay at our hotels either in California or at Cedar Point, why, there's certainly promotions tied into getting into the parks by staying on our property also.

All right.

And then also looking at the operating days for next year versus this year how -- just -- are there going to be any differences in the quarter like what we saw this year?

On the accounting, no, we had a -- we had an off -- one week off fiscal year last year, so 2007 and 2008 will be comparable on a quarterly basis.

For the most part I think the average number of operating days are going to be about the same.

Cedar Point -- a couple of parks are opening a couple -- four or five days later this year, but with the calendar and Easter falling that sort of makes up for it, so I think in the end we'll have almost about the same number of operating days.

All right.

And then, Peter, on the impairment charge, what exactly is the after tax number just to make sure?

The after tax number, 87.

I think we had about $26 million in tax effect, so about $60 million, so on a pro forma basis we would have made $65.5 million net income if not for that impairment or $1.18 in earnings per diluted limited partner unit.

Great.

Thank you.

Thanks, Cassandra.

Thank you, our next question is from the line of Robert Ralph with Wedge Partners.

Please go ahead.

Yes,good morning, guys, a few quick questions.

First, if I heard you correctly, it sounds as though you're going to do everything possible to not cut the distribution unless it absolutely becomes necessary.

I want to make sure I did hear that right.

And then, in the event you were to do that as part of your recapitalization given the economy and just, better be safe than sorry, is it at least safe so assume that were you to undertake some type of dividend cut, that -- or distribution cut that it would be no more than 50% of what you currently pay?

I mean we're not going to see a Bank of America, where you're going down to $0.01, are we?

Robert, this is Dick, its very difficult, you can't really speculate.

The only thing I can really tell you is what I said before, that there has to be a compelling reason for us to cut the distribution.

One of the concerns that the board has and that management has is not so much the covenants on the EBITDA side but our concern is basically refinancing risks in 2012.

To give you any kind of indication of what the cut would be, why, it just wouldn't be appropriate for me to do that.

Yes, that would be premature at this point, Robert.

The -- we' still go through the -- we're going through the analysis evaluating it, so to give you a guarantee or a prediction that it will be half or all its much too premature.

Okay, but you're going to do everything in your power --

I can say one thing though Robert, is the line of communications that, you know, going into this season our board meetings are relatively close now.

Our next meeting is in early March.

And then we go into June, so certainly the market will be kept certainly aware of anything that is happening.

Okay, but is it safe to assume that for now, if possible obviously, you would like to maintain the distribution because as you know a lot of your shareholder base, that's why they own your stock, they depend on that income to live?

You hit it right on the head, Robert.

And again, unless there was a compelling reason long-term going down the road that it would be beneficial for us in 2012 or '13, when we have to refinance the debt, we certainly would not want to cut the distribution.

You hit it right on the head.

80% of our investors are retail, and quite frankly about 40% of that 80% live right here in Ohio, and we've gotten a lot of letters since the press release out that how dependent they are on the distribution and on a personal note I know how my family lives off that distribution.

My mother and father when they were alive and my mother and father-in-law when they were alive, lived off that distribution, and it's very sacred to us and believe me, we would not do anything unless it was -- we thought it was for the long-term betterment of the company.

We have never made a short-term decision.

Everything we've done for this company has always been long-term.

Great, okay.

And that's what we wanted to hear -- what I thought.

But -- because I've gotten a lot of the same calls in terms of the widows and orphans, that this is the only income they still have.

As far as the assets that you had available for sale, I know you had a lot of stuff around a lot of your parks -- a lot of land that you bought years ago and its on the books at nothing basically.

Could you give us a little bit of a sense as to if you were to sell off land, just what you have?

Kind of update investors in terms of what they don't really see on the balance sheet other than in terms of your acres, you know, because obviously it's capitalize at cost?

I think most of the land that we have talked about selling has been pretty well public.

We've talked about the San Francisco 49'ers and Santa Clara, they're interested in building their new stadium on our property.

We have a lease with the city of Santa Clara and we have publicly said that we are negotiating with them on the sale of that property.

We can't -- they wanted to put a stadium there.

We can't agree on how to use it right.

We don't think we can co-exist with a football stadium, and so we don't want to stand in the way of the city of Santa Clara benefiting from not getting that stadium, so we have offered that we would sell that park if necessary to see that the city of Santa Clara benefited.

The other assets we talked about was the land, the 54 acres surrounding Canada's Wonderland in Vaughn.

We've openly talked about that.

We've openly talked about the land we have in Geauga Lake, in Aurora, Ohio, although with the economy in Ohio there has been no movement on that at all and I certainly don't want to get optimistic about that.

We've pretty well put that on the back burner.

Peter, am I missing anything else?

I think that's pretty much it, Rob.

There've been pockets of vacant land and wooded land around our parks but clearly the demand for that, there's not a lot of demand for that, so those aren't items that -- we would be talking about them if they had true value in this market, but they don't.

Our goal would certainly be to sell non-asset -- non-revenue producing assets would certainly be our goal.

Okay, great.

And just one last question.

I know this may be a little out there, but as you are doing your capital structure, you know, rebalancing, which I think is definitely prudent in this environment, better safe than sorry.

Have you considered the option of separating your company into two separate equities?

One being the MLP dividend paying entity that would not be highly levered and another being a common stock that would not pay a dividend that would be higher levered with certain parks as a way to continue the clientele effect and keeping your investors that want the dividend getting it and then people that just wanted to invest in the equity and have a capital gain being able to invest that way?

Because we've seen that would be something fairly simple for you to do structurally and you could have all the benefits you have now and it might work in terms of -- in effect you could almost have an exchange offer where people can opt given in their MLP units for a unit of Cedar Fair common stock the non-dividend paying higher levered entity that's a growth vehicle.

I'm just curious whether you considered any option like that in addition to potential asset sales in other ways to fix the balance sheet?

Rob, yes, in fact we have.

We like to think of that as a hybrid conversion of sorts.

To your point that it is simple, it's probably not as simple as it sounds, there is a little bit of obviously heavy lifting.

Having said that, heavy lifting shouldn't be the reason you don't do it.

What we're trying to do right now is look at those things we can effectuate rather quickly to deal with the issue.

But that's something we've looked at, we evaluate our structure, our capital structure, and our corporate structure often and the answer to your question is yes, we have looked at that.

But right now we're not moving down that path.

Okay great, thank you very much.

Thanks Robert.

(Operator Instructions) Our next question is a follow-up from the line of Scott Hamann with Keybanc Capital Markets.

Please go ahead.

Thanks.

To the extent that the credit markets loosen up, is there an opportunity to negotiant or refinance your current agreement?

I guess, yes, there's always an opportunity to do that.

Having said that, right now for the next 2.5 to 3 years, we have relatively inexpensive money.

I would think that the credit markets, both mid-term and longer term yields, would have to come down dramatically for that to make sense on a cash flow basis.

Okay.

And then what would be the dollar amount that you're allowed to buy back on your debt under the current agreement and under which time -- what timeframe?

Well, under the current agreement we can buy back debt at par at any amount, any level we choose provided we have the funds to do that.

The waiver that we've discussed in the negotiation with the lenders is to allow to us do that at levels less than par, so -- but as I said earlier in the call we have yet to finalize those negotiations.

And then finally, just going back to the cash operating costs, are you -- would you anticipate operating costs to be down on an absolute basis in '09 versus '08?

Difficult to say at this point.

We have very little visibility on the '09 season, so it would be difficult to give you any guarantee that the operating costs would be down year-over-year.

Thank you.

You're welcome.

Thank you.

Our next question is from the line of Justin Harrison with Ramsey Asset Management.

Please go ahead

Good morning, guys.

Peter, first a couple questions on the operating expenses.

Could you just give the breakdown of the three cash ones: food, operating expenses, and SG&A for the quarter only?

Yes, bear with me just a second.

(Inaudible) have those or not, we may have to get back to you on that.

Okay

I don't have them.

Do we have them?

That's fine, Peter

We'll get back to you on it

Okay, and then you mentioned last year you were able to lock in a lot of -- I think you were referring to the food costs.

Is that something you're doing again this year and is there any kind of guidance on what that cost should be?

Is this, you know -- kind of, food costs have come down quite a bit.

Any view on what you're locking them in at this year versus last year?

We don't -- we were not seeing the dramatic increases this year that we had thought would happen and in fact did happened last year.

We don't have any -- we're in the process of doing that right now.

As you know, we're not open yet, so we're in the process of doing that right now, so we have no visibility on exactly what those numbers are.

But we're going about the same process that we did last year.

Got you.

If you could, could you give any more, kind of, color commentary on what the reaction has been so far from the lenders or your updated view on if you're going to be able to get an amended agreement?

At this point because we're still in the negotiations, we really don't want to talk about their views at this point.

We've had a number of discussions, and they are going reasonably well, but we won't know until we have -- we've been able to talk about those things that they would like and those things that we would like in the waiver.

Go you, okay, fair enough.

Alright, that was it.

Thanks, guys

Did you want those?

Yes.

Okay, cost of food, merchandise and games, $90.6 million.

Operating expenses of $418.5 million, and then SG&A of $131.9 million.

Great.

Thanks

Certainly

(Operator Instructions) It looks like we have no further questions.

Please continue.

Well, 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 or Stacy Foley, our Director of Investor Relations directly this afternoon at 419-627-2227.

We look forward to speaking with you again in early May to discuss first quarter.

Thank you

Ladies and gentlemen, this concludes the Cedar Fair fourth quarter and year-end earnings conference call.

This conference will be available for replay after today at 11 a.m.

eastern through March 9 at midnight.

You may access the replay system at any time by dialing 1-800-406-7325 or 303-590-3030 followed by the access code of 3963219 and the pound sign.

Thank you for your participation.

You may now disconnect.