Six Flags Entertainment Corp (FUN) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Cedar Fair third quarter 2010 earnings conference call with investors.

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, Tuesday, November 2nd of 2010.

I'd now like to turn the conference over to Ms.

Stacy Frole.

Please go ahead, ma'am

Thank you, Alyssa.

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

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

Earlier today we issued our third quarter earnings release.

A copy of that release can be obtained on our corporate website at www.cedarfair.com or by contacting our Investor Relations offices at 419-627-2233.

On the call this morning are Dick Kinzel, our Chairman, President, and Chief Executive Officer, and Peter Crage, our Executive Vice President and Chief Financial Officer.

Before we begin, I need to caution you that comments made during this call will include forward-looking statements within the meaning of the federal securities laws.

These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements.

You may refer to filings by the company with the SEC for a more detailed discussion of these risks.

In addition, in accordance with Regulation G, non-GAAP financial measures used on the conference call today are required to be reconciled to the most directly comparable GAAP measures.

During today's call, we will make reference to adjusted EBITDA as defined in our earnings release.

The required reconciliation of adjusted EBITDA is in the earnings release and is also available to investors on our website via the conference call access page.

In compliance with SEC regulation FD, this webcast is being made available to the media and the general public as well as analysts and investors.

Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all content of the call will be considered fully disclosed.

Now let me turn the call over to Dick Kinzel.

Good morning.

Thank you for joining us on the call today.

Following my opening remarks, I'll turn the call over to Peter for a discussion of the financials.

Then I'll come back [for] additional comments about our business outlook and other matters before we take your questions.

Cedar Fair's strong momentum continued into the third quarter and the first nine months of 2010, as we achieved revenue growth in all of our regions.

This was due largely to the success of innovative marketing programs, continual investments in our business, favorable weather conditions throughout the region, and a modest recovery of the economy.

Attendance improved by approximately 5% or 547,000 visitors in the third quarter compared with a year ago.

Our aggressive marketing efforts helped increase seasons pass sales and restored group sales to pre-2009 levels.

Competitive pricing and the addition and the attraction of our new roller coasters at Kings Dominion and Carowinds also combined to bring a greater number of visitors into our parks.

This gain in attendance and a 10% improvement in out-of-park revenues were responsible for our overall increase in revenues as average in-park guest per capita spending maintained relatively unchanged during the quarter.

For the nine month period we had approximately one million more visitors to our parks than we had for the comparable period last year, an increase of 6% to 19.8 million.

Out-of-park revenues were up 7% or approximately $6 million to $92.2 million, while average in-park guest per capita spending was down by approximately 1%.

The slight decrease in average in-park guest per capita spending was anticipated due to the increase in group sales as well as repeat visits by seasons pass holders.

Our group visits increased as many of our parks saw the return of group bookings that did not occur in 2009, presumably due to spending cutbacks by businesses and organizations.

Visits by seasons pass holders significantly increased as well.

This improvement continued in October, as we produced record results for our Halloween events.

During this five-week period, in-park revenues increased by more than 25% or approximately $21 million.

Attendance increased approximately 29% or 553,000 visits, while average in-park guest per capita spending was down roughly 1%.

Out-of-park revenues were up approximately 3% for the month.

Throughout the year, our entire team has continued to do an excellent job in serving our guests and controlling our costs.

I'd like to quickly congratulate our team at Carowinds and Michigan's Adventure for achieving record attendance this year, something they should be very proud of.

Now I'd like to turn the call over to Peter to discuss our financial results in more details.

Thanks very much, Dick.

As we go through these numbers, I would like to mention that the fiscal nine-month period ended September 26th, 2010, included 40 fewer operating days at our parks than in the same period of 2009.

This is because the Memorial Day weekend fell a week later in 2010 and several of our parks opened later, resulting in a shorter operating season for those parks.

Net revenues for the nine month period increased $37.4 million or 5% to $847.9 million from $810.5 million in 2009.

The increase reflects a 6% or one million visit increase in combined attendance to 19.8 million visitors.

This increase was largely due to the increase in season pass and group sales as Dick mentioned.

A 7% or approximately $5.7 million increase in out-of-park revenues to $92.2 million, which is primarily attributed to higher occupancy rates at our resort hotels.

Slightly offsetting these increases was a 1% or $0.38 cent decrease in average in-park guest per capita spending.

Per capita spending increased in the northern region but declined in the southern and western regions due to the shift in attendance mix toward group and season pass visits.

For the nine month period, operating costs and expenses increased $8.4 million to $522.8 million, compared with $514.4 million a year ago.

The increase reflects $10.5 million of costs related to the terminated merger and a $6 million increase in scheduled maintenance expenses.

Reflected in the 2009 results is a $9.5 million settlement of a California class action lawsuit and a $2 million settlement of a licensing dispute with Paramount Pictures.

We use adjusted EBITDA, earnings before interest, taxes, depreciation, other non-cash items and adjustments, as defined in our 2010 credit agreement, to provide meaningful insight into our operating results since we use it for budgeting and measuring park level performance, as well as covenant compliance.

Through the first nine months of 2010, adjusted EBITDA increased $30.3 million or 10% to $339.3 million from $309 million for the same period a year ago.

The increase is primarily the result of increased attendance and out-of-park revenues combined with our ability to control operating costs.

Depreciation and amortization expense for the period decreased $2 million to $111.6 million, primarily due to lower amortization expense in 2010, resulting from the accelerated amortization last year related to the Nickelodeon licensing agreement which was not renewed at the end of 2009.

Operating income for the nine month period increased $6.4 million or 3% to $211.8 million from $205.4 million for the same period last year.

Included in the 2009 operating income is a $23.1 million gain for the sale of 87 acres of surplus land at Canada's Wonderland.

As a result of our July 2010 refinancing, we recognized a $35.3 million loss on the early extinguishment of our existing debt.

The refinancing, along with the August 2009 amend and expend of $900 million in term debt also impacted our interest rate spreads which were higher in the first nine months of this year.

Consequently, interest expense for the period increased $12.9 million or 14% to $103.9 million.

The net effect of swaps increased $9.8 million to a total non-cash charge of $12.9 million reflecting the regularly scheduled amortization related to the swaps offset somewhat by gains from marking the swaps to market as well as unrealized foreign currency gains related to the swaps.

During the period, we also recognized an $8.2 million benefit to earnings for unrealized and realized foreign currency gains, $4.8 million of which represents an unrealized foreign currency gain on the US dollar denominated notes issued in July and held at our Canadian subsidiary.

We recorded a $37.4 million provision for taxes during the first nine months of 2010 to account for publicly traded partnership taxes and the tax attributes of our corporate subsidiaries.

This was down from $48.3 million in the comparable period a year ago.

After interest expense, a $35.3 million loss on early extinguishment of debt, a $12.9 million charge for the net effect of swaps, the $8.2 million benefit for unrealized and realized foreign currency gains, other income, and the provision for taxes, net income for the nine month period was $31.6 million or $0.57 per diluted limited partner unit compared with net income of $61.7 million or $1.10 per unit for the same period a year ago.

Turning now to our results for the third quarter, which included the same number of operating days as the third quarter of last year.

Net revenues increased 5% or $25.1 million to $545 million from $519.9 million a year ago.

Attendance increased by approximately 5% or 547,000 visitors, while average in-park guest per capita spending was essentially flat and out-of-park revenues increased approximately 10% or $4.7 million to $54.6 million.

As Dick mentioned, revenues increased for all of our regions as a result of our innovative marketing plans, increases in group sales and season passes, continuing -- continual investment in our properties and favorable weather.

Operating costs and expenses for the quarter decreased 4% or $9.1 million to $246.3 million from $255.4 million in the 2009 third quarter.

This includes the savings from the elimination of the settlement charges we recorded in 2009, as mentioned earlier, somewhat offset by an increase of $1.5 million in scheduled maintenance.

The 2009 third quarter results also reflect the $23.1 million gain from the sale of surplus land near Canada's Wonderland.

Adjusted EBITDA for the quarter increased 8% to $299.7 million from $276.9 million a year ago.

The $22.8 million improvement is primarily attributable to increased revenues resulting from the gains in season pass and group sales visits along with improved occupancy at our resort hotels which helped drive the increase in out-of-park revenues.

The decline in operating expenses, the result of our continued focus on cost control during the third quarter also impact -- impacted adjusted EBITDA.

Depreciation and amortization expense for the quarter decreased $2.7 million as a result of the lower amortization expense, resulting from the termination of the Nickelodeon licensing agreement as previously mentioned.

Operating income for the quarter was $234.6 million up $13.6 million from $221 million for the third quarter of 2009.

As I previously mentioned, included in operating income for 2009 was a gain of $23.1 million on the sale of our surplus land in Canada.

Interest expense for the third quarter increased $10.3 million to $41.5 million, primarily due to the higher interest rate spreads as previously mentioned.

During the quarter, we recognized an $8.2 million benefit to the earnings for unrealized and realized foreign currency gains as previously mentioned.

We recorded an $88 million provision for taxes during the quarter to account for publicly traded partnership taxes and the tax attributes of our corporate subsidiaries.

This is up from $77.6 million in the comparable period a year ago.

After interest expense, the $35.3 million loss on the early extinguishment of debt, a net effect of swaps, $8.2 million benefit for the unrealized and realized foreign currency gains, other income, and the provision for taxes, net income for the quarter was $75.7 million or $1.36 per diluted limited partner unit compared with net income of $107.6 million or $1.92 per unit for the third quarter of last year.

As Dick mentioned, our parks experienced record results during our Halloween events this year.

For the month of October, revenues were up 25% or approximately $21 million.

This improvement during our fall events was largely due to a 29% increase in attendance or 553,000 visits and an approximately $300,000 or 3% increase in out-of-park revenues.

For the same period average in-park guest per capital spending was down roughly 1%.

Based on these preliminary results, revenues for the first 10 months of the year were $974 million compared with $914 million for the same period a year ago.

This is the result of an 8% or 1.6 million visit increase in attendance to 22.2 million visitors compared with 20.6 million visitors in 2009, a decrease of approximately 1% in average in-park guest per capital spending to approximately $39.30 and an increase in out-of-park revenues of $6 million to $101 million due to increases in hotel occupancy.

As of September 26th, 2010, the company had $1.175 billion of variable rate senior secured term debt, $405 million of fixed rate unsecured debt, excluding original issue discounts, no outstanding borrowings under its revolving credit facilities, and cash on hand of $61.7 million.

Of the term debt outstanding at the end of the third quarter, $11.8 million is scheduled to mature within the next 12 months.

The company's credit facilities and cash flow from operations are expected to be sufficient to meet working capital needs, debt service, planned capital expenditures, and distributions for the foreseeable future.

In terms of both liquidity and cash flow, we are comfortable with where we ended the third quarter of 2010.

Throughout the year we have remained vigilant in our strict controls over operating costs while ensuring a best-in-class visitor experience.

This prudent fiscal policy, coupled with the recent refinancing provides us with the flexibility to create value for our unit holders through a combination of EBITDA and cash flow growth, distributions, and a reduction in debt.

Now I'd like to turn the call back to Dick for some additional comments.

As we head into the final quarter of the year, we feel very good about our near-term outlook and long-range potential, and we have updated our guidance as noted in today's release.

Based on our performance to date and our expectations through the end of the year, now we expect to achieve full-year revenues of between $965 million and $980 million and adjusted EBITDA of between $345 million and $355 million.

This is up from our previous guidance for revenues of $940 million to $965 million and adjusted EBITDA of between $320 million and $340 million.

We expect to gain further benefits from our value creation strategy in the coming year.

While our capital spending dollars are down for 2011 in comparison with 2010, we do expect our new attractions such as WindSeeker, a 300-foot tall swing ride at our four largest parks, to have a positive impact on revenues.

Now, before we take on your questions, I would like to comment briefly on two other items.

The first is the other release we issued this morning on executive promotions as part of our leadership secession planning process.

I would like to congratulate Peter Crage, Phil Bender, Richard Zimmerman, and Dave Hoffman on their recent promotions.

We are fortunate to have such talented and dedicated individuals helping to lead our organization.

These promotions are another step in our ongoing secession planning process.

Given that we were in the beginning of integrating the Paramount acquisitions when I signed my [current] employment contract in 2006, the Board felt it was important for me to stay on at that time to ensure a successful integration.

That integration is now complete and the former Paramount operations are a strong contributor to our business.

As a result with my current contract set to expire on January the 2nd, 2012, the time is right to accelerate the secession planning process.

I want to be clear as possible on this to avoid any possible confusion.

I want to strep that -- stress that this process involves a search both internal and external for my successor as CEO and is in addition to the leadership contingency plan that we have already been in place should an unexpected event cause one of our senior executives to be unavailable.

Finally, I am pleased to announce we will return to quarterly distributions beginning next year.

The strong results we have discussed today provide an even stronger base from which we can execute on the long-term plan we outlined for you in early October.

We are very excited and even more confident that we will now be able to grow our profitability while steadily increasing the distribution and strengthening the balance sheet.

Based on these results, the Board intends to pay $20 million of distributions in 2011, which is approximately $0.35 per limited partner unit.

The quarterly distribution will begin with an $0.08 per limited partner unit distribution in March of 2011.

We believe the return of a quarterly distribution properly reflects our financial stability and further demonstrates our confidence in the future outlook of Cedar Fair.

As usual, thank you very much for your time.

At this point, we'll turn the call over for your questions.

Alyssa?

Thank you, sir.

We will now begin the question-and-answer session.

(Operator Instructions) Our first question comes from the line of Joe Latchkey with Wells Fargo.

Please go ahead.

Thank you.

First off, congratulations, Peter, on your promotion.

Thank you very much.

I guess first off trying to decipher the code here of your statements, Dick.

It sounds like given the employment agreement expiring here at the end of next year, is there any consideration that the Board extend your agreement or are you taking yourself out of consideration?

Joe, I think the easiest way to say that is this is going to be a process that's going to be held internally and externally and we'll see how the search goes.

And right now my contract's up and that looks like the way it's going to be.

Okay.

Any discussions on this, I think should be held confidential because of the search process that's in place.

Yes, and that's understandable.

I guess good luck with the search in the next year.

Thank you.

Peter, any consideration -- has any consideration been made to renegotiating with your lenders and reopening the distribution covenants on your financing, kind of raising that $20 million cap?

We haven't considered that at this point in time.

We're -- the plan that we put forth back in October, we thought provides an appropriate balance between distribution and debt reduction so that these could be -- these distributions could be sustainable over the long term.

We haven't considered that.

As you know, we just got done with the Halloween weekends last Sunday.

So we'll obviously be taking a look in the rearview mirror and looking at this year and planning for next year and think about things like that, but nothing to this point in time.

Okay.

And I don't know if I missed it or you just didn't say it.

Did you give a weighted average cost of debt at the end of the quarter?

And if you didn't, could you give it, both with and without the swap in tact?

Sure.

Well, we give it with the swap because our LIBOR on a billion dollars is swapped out through October of '11.

Let me approach it this way.

We previously disclosed that we expect cash interest expense to be about $130 million in 2010.

I would expect that our weighted average cost of debt in 2010 to be about 8.6%, expect about $140 to $145 million to flow through the P&L.

So those should be numbers.

Does that answer your question?

Yes.

Any indication if rates stay at the current level, what it would be for '11?

For '11 right now and based on our plan that we had provided back in October, it goes up slightly next year to about 9.5, in the mid-9s, book-recorded interest expense and sort of the mid-to high 150s.

But then in 2012 it decreases precipitously into the high 6s to low 7s because the majority of those higher rate LIBOR swaps fall off in October of '11.

All right.

And I guess last question here and I'll hop back in the queue.

Looking to '11, I don't know if you have any projection on the number of operating days year-over-year.

And also if you could talk about weather in 2010 just in general or specifically for the third quarter, would you consider 2010 a good weather year or was it more a normal weather year?

Joe, this is Dick.

The number of operating days next year will be very similar to 2010.

That never really varies that much, no more than probably a five or six day swing.

I think one of the things we will see next year, we hope we have a lot of confidence is we're going to extend the hours at Carowinds.

Prior to this year, that park never stayed open past eight o'clock at night.

And what we're doing in that -- at that park is we're extending the hours to 10 o'clock.

We're putting in a light show and fireworks to try to attract higher per capita spending and maybe increase group sales business at that park.

As far as the weather in 2010, it was really an outstanding year as evidenced by the -- just our October business.

And, if anything, it certainly gives credence to why a seasonal business cannot be highly leveraged.

It was just a great year this year when you pick up 500,000 people in the month of October.

We're only open 2.5 days a week during that period of time.

And we had 80 degree weather here in Sandusky and in Carolina and in Virginia.

The weather was fantastic.

And so in 2009 it was just the opposite, we had cold and rainy weather all through October at our major parks.

So the weather does play a big part in our business.

We have a very stable business, a very secure business.

But certainly we can have very high increases or spikes with great weather like we had this year.

So again, I want to stress that one of our reasons for getting our debt inline is that we learned that just a seasonal business should not be highly leveraged and we have to be ready for both the turns in weather and also in the economy.

And I think by getting the debt inline down to four times, why, we certainly will be able to sustain any weather or economic conditions going forward.

Thank you.

Our next question comes from the line of Mike [Paste] with JP Morgan.

Please go ahead.

Hi.

Thank you.

I guess a question for either one of you.

Just looking at the cost line items, it looks like flat cost of goods sold for food, merchandise, et cetera.

Just wondering, did you get better contract terms on anything there?

And as it relates to operating expenses, Peter, I just couldn't follow everything as quickly as you were talking.

The decline in operating expenses, can you just discuss what was going on there?

Just given the rise in attendance, I'm wondering -- I'm assuming staffing costs is in that line item.

Was there -- I'm just wondering the risk of just harming the customer experience.

Obviously it didn't look like that happened.

But can you talk about that cost line item a little bit?

Thanks.

Sure.

Mike, if you're referring to the reduction -- and I'll answer your last question first.

If you're talking about the reduction in cost in the third quarter, we had our one-time $9.5 million cost for the settlement of a lawsuit in the third quarter of 2009.

Essentially, I think the headline here is that we've been able to maintain with slightly increased costs over 2009.

A number of the costs that we had cut from 2008, when we had less revenues last year, we've been able to maintain some of those cuts.

And I'll let Dick comment on the visitor experience.

I have not seen nor have we seen a decline in the visitor experience.

No, we have not.

In fact, the in-park surveys that we do and the quality analysis we do certainly is maintaining the standards that we've always had.

I think basically I think our purveyors are experiencing the same thing that we experienced.

In a lot of areas we had to hold costs and, consequently, that was passed on to the consumer.

With respect to your question, our cost are good.

There weren't any contracts or long-term purchasing arrangements that stand out.

We've just been able to monitor those costs as well and change out products that are not of lesser quality to keep our costs inline.

Okay.

And then can you also just talk about what attractions you have planned for 2011 operating season?

And should we still expect CapEx in the, as you've said in the past, a $90 million area per year?

Thank you.

Mike, next year's cap -- we're pretty excited about next year (inaudible).

Usually what we do is we put two rides in two of our big parks or in two of our four big parks every year.

I think we found an exceptional value this year in the WindSeeker, which is a 300-foot swing ride.

And we're going to put that attraction, it's about $5 million a piece, into each of our four big parks, along with doing some other things, like I mentioned like at Carowinds and Kings Dominion, we'll be doing a few other things to enhance value.

Our capital normally year-over-year is between $80 and $90 million.

But with the WindSeeker this year, our capital will probably be in the area of about $70 million.

So it'll be down a little bit this year, but we certainly don't think that the value we're going to be giving the customer is going to decline a bit.

Okay.

Thank you.

You're welcome.

(Operator Instructions) Our next question comes from the line of Scott Haman with KeyBanc Capital Markets.

Please go ahead.

Hey.

Good morning, everyone.

Just on the in-park spending, is there any way you can kind of break out the difference in spending between the season pass, the group people, and kind of what your just regular walk-up attendance people have done historically and kind of where you are now?

Scott, it's pretty difficult to break that out on a per capita basis.

We know the average number of visits that our seasons pass holders take -- visit the park each year.

And it's pretty difficult to break that out.

We break it out by numbers, but certainly we don't break down the per capita.

Okay.

So, but, I mean, do you think it's -- is it -- is it materially different as we start to see a shift in more season pass -- as you talk about opening Carowinds longer, more season passes in the south region, is that going to be a hindrance to in-park spending going forward?

Well, for example, using Carowinds as the example, we certainly hope it's going to increase per capita spending because of the longer hours and the people that maybe stay and have another Coke or Pepsi or another hot dog or ice cream cone or something like that.

But certainly the more seasons pass people you have in the park, that does have an effect on your per capita spending, especially in your admissions per capita and also in your merchandise per capita because what we've found over the past is seasons pass holders don't buy nearly as much merchandise or play the games as our regular walk-up customer.

Okay.

Peter, can you give us the after-tax impact of the debt extinguishment charge?

I don't have that.

We'll have to -- I have the $35 million here, but I don't have the after-tax number in front of me.

I mean, is it safe to assume that's more of a 35% or would that be -- fall into the other side of the business?

Again, I don't -- I don't know.

We haven't --

Okay.

We haven't done -- we just we have not done -- we finalized the accounting for this just last week and we'll have to get back to you on that.

Okay.

And then just finally, can you remind me of the trigger on the coverage ratios that gets you more distribution dollars in 2011?

It will be 2012 -- or 2011, are you talking about the additional $20 million of distribution?

Correct.

That is a -- we have an additional $20 million of availability under restricted payments if our senior secured leverage is below three times.

Okay.

And where is it right now?

Senior secured leverage right now, if we use the -- we're at $1.175 billion, and let's assume midpoint 350.

We're at 335 at the midpoint of our guidance.

Okay.

Great.

Thanks a lot.

Sure.

Our next question comes from the line of Jane Pedreira with FBR Capital.

Please go ahead.

Hi.

Good morning.

I just had two questions, please.

The first is with respect to your group business.

Can you say if groups that had fallen off during the economic collapse have returned this year in full or is there still upside potential there for the future?

Yes.

As we noted in our comments, the group business did come back this year a little bit.

In fact, it came up to 2008 levels, pretty close to that.

But we never feel that we have enough group business.

We're -- our group, our salespeople, are constantly out there trying to sell businesses to come to the park.

So we certainly think there's upside in that.

But last year was because of the economy, it was very soft, but we did pick a lot of that up this year.

In fact, we're pretty close to 2008 levels.

Okay.

That's good.

and then my understanding is in the bond indenture that you also have restrictions on distribution such that even if the credit facility tests were met, you would still need to comply with the bond indenture test as well.

And I thought that level was set at like 4.75 times leverage.

Yes, that's correct.

That's correct.

Okay.

And the credit agreement is at 4.5.

The bond indenture requires that we also add into the numerator our average revolver for the previous [turning] 12 month period.

But with this stronger cash flow, this stronger cash flow in 2010, allows us to reduce our reliance on the revolver which gives us what we believe adequate head room.

I got you.

Okay.

Thank you so much.

Gentlemen, at this time I show no further questions.

Please continue.

Excuse me.

You're breaking up a little bit, operator.

Alyssa?

At this time I show no further questions.

Please continue.

Thank you.

I'd like to thank everyone for joining us on the call today.

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

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

Thank you.

Ladies and gentlemen, this concludes the Cedar Fair third quarter 2010 earnings conference call.

Thank you for your participation.

You may now disconnect.