Six Flags Entertainment Corp (SIX) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Six Flags second quarter earnings release conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to Erika Levy. Ma'am, you may begin.

Thank you. Good morning. I'm Erika Levy of KCSA, Six Flags Investor Relations advisor. Last night the Company released its financial and operating results for the second quarter and first 6 months of 2004. A copy of the earnings release is available on the Company's website at www.sixflags.com under the heading "investors."

Before I turn the call over to the Company's executives, they have asked me to remind you that in compliance with SEC Regulation FD, a webcast of this call is being made available to the media and the general public, as well as analysts and investors. The Company cautions you that comments made during this call will include forward-looking statements within the meaning of Federal Securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in such statements. You may refer to the Company's 2003 annual report on Form 10-K which is also posted on its website, for a detailed discussion of these risks. Because the website is open to all constituents and prior notification has been widely and unselectively disseminated, all contents of the call will be considered fully disclosed.

In addition, in accordance with SEC Regulation G, non-GAAP financial measures used in the Company's oral presentation today are required to be reconciled to the most directly comparable GAAP measure. The required reconciliations are available to investors in the earnings release on the Company's website. References by management in this call to EBITDA mean EBITDA modified, which was formerly known as EBITDA adjusted from consolidated operations, but now includes the results of the 4 parks that were previously unconsolidated.

Now I'd like to introduce Kiernan Burke, Chairman and Chief Executive Officer of Six Flags.

Thank you, Erika. Good morning. Thank you for joining us on today's conference call. Last evening we published our second quarter and 6 months results and gave guidance on full-year expectations, which despite improving performance in August will be below 2003 levels. We're clearly disappointed with both the quarterly results and our year-to-date performance, both of which trail prior-year revenue and EBITDA levels. Going into 2004 we knew we faced an uncertain operating environment. We also knew that certain important long-term strategic decisions we were making regarding the nature and level of capital investment and increased operating expenses to enhance guest experience would produce long-term benefits but put some pressure on short-term 2004 performance.

With an exciting new advertising campaign in place and the reasonable expectation of a return to more normal weather patterns, we still hope to grow the business modestly. While the general economic weakness that has negatively impacted the entire theme park industry, regional and destination parks alike for the past 3 seasons has abated somewhat, the reality is that thus far the economic recovery has been uneven and inconsistent, both demographically and geographically.

Lower and middle income consumers who make up the majority of our customers have not benefited from the economic recovery to the same extent as upper income families. Job creation and wage growth, the 2 most important economic factors effectingaffecting our customers have certainly been inconsistent at best. As a consequence, the destination parks, which had declined first and farthest these past 3 years, appear to be enjoying better seasons than regional parks. Benefiting from the return of international tourism and the economic recovery of higher income families.

In addition to continued economic weakness, to date 2004 weather has turned out to be almost as challenging as it was in 2003 just hitting us in different markets at different times. Notwithstanding the fact that our full-year 2004 results will be below original expectations, we are seeing a number of positive signs which indicate to us that we have seen the bottom of a difficult 3 to 4 year period in our industry and our Company's performance, and that we have the correct long-term strategy in place to restore a significant portion of the historic performance capacity of our parks on a sustained basis over the next 3 to 5 years. We will begin in 2005 to experience the tangible benefits of a number of the strategic decision we've taken this year. As we'll discuss further later in this call, we expect that the combination of a capital program with numerous marketable rides and attractions and the second year of our advertising campaign and continued enhanced guest service should deliver as much as 40 million in EBITDA growth in 2005, an additional 25 to 30 million in 2006.

Turning first to 2004 performance, as everyone on the call is aware the second quarter is not the most meaningful period for us. The third quarter is the period in which we do the majority of our business. In light of our disappointing numbers I know all of you are most interested not just in a review of the published numbers, but in a thorough discussion of our year-to-date performance and full-year prospects and our plans for 2005 and beyond. With that in mind, I will let Jim Dannhauser review the quarter and 6-month numbers in detail and will focus my comments primarily on the performance trends to prior year that we are seeing, and our view of the reasons for those trends as well as our strategy for the next 3 to 5 years and the growth targets we expect to achieve.

In terms of year-to-date performance, the best word to describe 2004 season is "inconsistent." While our performance in the initial part of the season was uneven, we were generally tracking slightly ahead of prior year through mid-June. Like so many other businesses, including a number of retailers and the car companies, we experienced a sharp decline in the last 2 weeks of June for no apparent reason other than the economy and consumer confidence. In addition, we were negatively affect by the later Memorial Day holiday, which resulted in significantly fewer operating days in the 2004 period. Further, while weather in the Northeast was significantly better than last year, our parks in Chicago, Atlanta, Seattle and Texas experienced significant periods of adverse weather at various times during May and June which hurt their performance.

An unfortunate accident at our park in New England negatively affected a very strong start at that park, and the change in year-over-year June promotional partner in our Los Angeles park cost us 3 million in revenue for the month. Although we saw improved performance in the early part of July, our results over the last half of July were disappointing, with substantial periods of adverse weather in multiple markets, including several weekend days particularly in the Northeast. For the full month of July our park level revenues were 1.6% behind the prior year, as a result of an attendance decline of 3.3%, offset in part by an increase in per capita revenues of 1.7%. So year-to-date through the end of July we were approximately $7.5 million behind the prior year in revenue.

Our performance in the first part of August has improved markedly, and we still have a substantial portion of the operating season remaining, approximately 30%, plus we expect to benefit from additional operating days in several markets in the third quarter as a result of the later Labor Day holiday this year. However, there is risk that we will not achieve full-year revenues equal to the prior year. With a significant period of operations remaining, it is difficult to predict with precision what our final results for the year will be.

Based on recent performance trends and a thorough park-by-park review of attendance and per capita spending trends, our season pass base and group bookings for the balance of August, September, and October, we estimate that our full-year revenues from continuing operations will be flat to down 1.3% from 2003. In reaction to this performance we have reduced a portion of our planned expense increases, but only in areas which do not directly affect guest service as we continue to regard our improved guest experience to be an important strategic initiative for future performance recovery. Therefore, we expect adjusted EBITDA to be approximately $265 to $275 million dollars for the full year compared to 292.6 million in 2003.

To achieve that range of full-year performance, from July 30th forward we only need to exceed prior-year revenues for the balance of the year by 2 to 2.5%, or roughly $6 to $8 million. Through this past weekend in August we had already picked up 3 million of that amount. So we feel comfortable that we can achieve this performance range with some opportunity for outperformance.

As I mentioned earlier, the inconsistent economic recovery and second straight year of unusually inclement weather clearly took a toll on our business and that of the other regional park companies who have reported on their performance. In addition, we made an affirmative decision to invest less capital in our parks in 2004, approximately $75 million in total, and to direct a significant portion of that investment to improve park appearance and enhance the guest experience, as well as to increase in-park spending. As a consequence, we introduced very few new marketable rides and attractions in our parks in 2004. So despite an extremely successful advertising campaign, we have few new marketable attractions to talk about and help stimulate business.

We stand by our investment decisions in 2004. In addition to those investments which have helped improve in-park spending 6.4% year-to-date, our capital investments in park appearance and guest amenities, combined with approximately 12 million in increased operating expenses to enhance the guest experience at our parks are clearly working. We have seen a substantial reduction in customer complaints and a significant year-over-year increase in guest satisfaction based on our customer surveys. We are convinced that continuing these efforts next year and in subsequent seasons will begin to pay dividends in terms of repeat visitation and positive word of mouth. The good news is that we believe we are now generally spending at appropriate levels to continue to provide appropriate guest service. So we're not expecting or anticipating significant operating expense increases in 2005.

Our new advertising campaign has been another bright spot for us in 2004. Although it failed on its own to overcome the continued economic weakness and second year of below-average weather, the new campaign centered around an iconic character, Mr. Six, the dancing octogenarian,octogenarian has exceeded any expectations we could have set for it. Several of the commercials scored in the top 10 of new national commercials in terms of recall and likeability, based on independent testing by AdAge magazine and the Intermedia Advertising Group. As reported in the August 2nd issue of AdAge, our most recent spot, in addition to achieving very high recall, also achieved the status of the best liked new creative execution of the quarter. Scoring a likeability rating 70% higher than the quarter's average new spot.

Our iconic character has generated enormous amounts of free PR, including guest appearances on Good Morning America and the David Letterman show to name a few. The campaign has generated an unprecedented amount of coverage in the national and local print and electronic media. The commercials clearly break through the clutter to generate high recall. Our guests comment constantly on the character, his signature music and retro Six Flags bus. We cannot think of any theme park advertising campaign that has generated this type of enthusiastic response and recall. This iconic character will be an even more valuable tool in our advertising next year, as we use him to introduce and market a powerful set of new rides and attractions at our parks.

We're still refining our final 2005 capital plans. It is encouraging that in 3 domestic theme parks, Atlanta, Chicago, and San Antonio, where we did add marketable family attractions in 2004 for moderate capital costs, we are enjoying good seasons, generally outperforming the prior year. We expect to invest approximately 90 million in our existing parks and to build a new water park next to our existing Chicago theme park for a total investment for the 2005 season of approximately $125 million.

While we will continue to make some additional investments in our facilities each year to improve their appearance and guest amenities, we accomplished a significant amount in 2004. Therefore, the majority of our investment program in 2005 and subsequent seasons will be for new rides and attractions and in-park revenue opportunities. We will announce our specific plans in the fall. In addition to the new water park in Chicago, a number of parks will receive new marketable rides for 2005, including exciting major additions at our largest park in New Jersey.

Assuming just average weather, with the addition of these new attractions and year 2 of our advertising campaign and enhanced guest service, our target will be to increase our EBITDA by $40 million next season. We would expect that the normal annual investment levels for the theme parks we own, including the partnership parks, will be approximately $90 to $100 million. We may invest slightly more than this in 2006 as we complete the remaining investment commitment we made when we purchased the La Ronde park in Montreal in 2001. We would expect these levels to be sufficient to produce 25 to 30 million in incremental EBITDA in 2006, and sustainable growth of 5 to 10% a year thereafter. With that, I'll turn it over to Jim Dannhauser to discuss the quarterly and 6-months results.

Thanks, Kieran. I'll start by reviewing and providing some greater detail on the quarterly and 6-month numbers which we released yesterday. As a reminder, the reported numbers reflect a consolidation of the results of Six Flags over Georgia and White Water Atlanta, the nearby water park, Six Flags over Texas, and Six Flags Marine World in accordance with financial interpretation number 46. They also reflect the treatment as discontinued operations of our European division, other than Madrid, and our Cleveland park. With all of those park results excluded from revenue expenses and EBITDA and reflected only in a discontinued operations line. The information in yesterday's release for the 2003 periods has been presented utilizing these same principals. And we have previously provided comparable information on a historical basis for 2002 and 2003 on our website and in an 8-K furnished earlier this year.

With that having been said, second quarter revenues were $356.4 million, down 5 million or 1.4% from the second quarter last year. In the 2004 quarter, our domestic operations achieved 336.9 million in revenues on attendance of 10.4 million, versus 342 million in revenues and attendance of 10.9 million in the year-ago period. International operations, which now include only Mexico and Montreal, generated 19.5 million in revenues as compared to 19.4 million in the prior year quarter, on attendance of 1.04 million this year and 1.09 million last year.

Cash expenses including operating expenses, SG&A and cost of goods sold, but excluding depreciation and amortization as well as noncash compensation expense, were 2.1 million lower or 0.9%, in the second quarter of this year than in the second quarter of last year. This primarily reflects lower insurance and advertising expenses in the quarter, which more than offset anticipated increases in salary and wages and repair and maintenance expense reflecting implementation of our plan to make system-wide guest service improvements for 2004. The advertising expense decline was solely a matter of timing, with higher advertising expenses having been incurred in the first quarter and expected to be incurred in the third and fourth quarters of the year. On an overall basis, our expenses for the second quarter were below plan.

EBITDA, including 100% of the performance of the partnership parks, was $110.8 million, 2.8 million lower than the prior year. And adjusted EBITDA, excluding the third-party share of the performance of the partnership park operations was 86.2 million as compared to 91.3 million in the 2003 quarter. Park-level EBITDA from domestic operations including the partnership parks was 112.9 million. Park-level EBITDA from international operations was $5.6 million. Depreciation and amortization expense for the quarter was 36.8 million as compared to 35.6 million in the 2003 quarter. Net interest expense was 49.1 million as compared to 53.3 million last year, reflecting both the replacement of a portion of our previously outstanding 2007 public debt with lower cost bank debt in January of this year and the benefit of debt pay-downs which were begun to be affected during the quarter from the proceeds of the sale of the Cleveland park in the European Division.

During the quarter we finalized the sales of the European Division and the Cleveland park. As a result, beginning with the first quarter of 2004 these parks were considered discontinued operations in our financial statements. We incurred a loss on discontinued operations net of tax of $2.7 million for the quarter. Net loss applicable to common stock was $12.3 million or a loss of 13 cents a share. Loss before discontinued operations were $4.2 million or 10 cents a share, including 4 cents from the loss incurred on debt retirement during the quarter.

In terms of the 6-month numbers, revenues were $401.2 million, down 4 million or 1% from the 2003 period. Attendance was down 544,000 people, or 4.1%, while per capita revenues increased by 3.2% to a total of $31.41. Cash expenses were up 7.1 million for the 6 months or 1.9% from increased salary and wage expenses and repair and maintenance expenditures consistent with our plan for the year. As a result, EBITDA was $30.7 million, down from 41.8 million in 2003, and adjusted EBITDA was 12 million, down from 25.6 million last year.

Net loss for the period reflected the loss from discontinued operations recognized in the first quarter of 287.6 million net of tax benefits. Both periods also reflected a loss on early repurchase of debt. The loss from continuing operations, and before that early repurchase, was 104.6 million for the 6 months ended June 30, 2004, as compared to 95.7 million in the year-ago period. As to the balance sheet, gross debt at quarter end was $2.16 billion, excluding the $30 million then outstanding against our $300 million committed working capital revolver, as well as $3 million then outstanding on the separate revolver at Six Flags over Georgia. Net debt, excluding the amounts outstanding on all revolvers was $2.02 billion.

To date, since the end of the first quarter, we have retired approximately $260 million of permanent debt from the proceeds of our asset sales, with pro forma full-year interest savings of approximately $20 million from that debt retirement affected to date. Our blended interest rate excluding revolvers, but reflecting the debt reductions that we have achieved, is now approximately 8.17%. We have repaid all amounts outstanding on our working capital revolver. We do not expect to be back into that facility until December of this year or early next year. So we remain quite comfortable in terms of liquidity. As to covenant compliance, we expect to remain in compliance with our bank agreement covenants this year so long as we achieve $245 million of adjusted EBITDA. It's also important to bear in mind that these covenants involve our bank agreements only, there are no performance covenants in any of our public debt. Kieran.

Thanks, Jim. I would like to make a few other observations before opening the floor to questions. First, while our parks and the industry generally have endured a prolonged slump these past 4 years, we continue to believe that the downturn is cyclical in nature and not a secular problem. While there certainly are other factors impacting individual park performance, the largest factors by far appear to be the extended economic downturn, particularly its impact on employment levels and consumer confidence and discretionary spending decisions, exacerbated by 2 unusually difficult weather years in a row. Even at these reduced attendance levels, theme parks in general are still an extremely popular and affordable form of entertainment. The industry in North America is still expected to entertain over 300 million visitors in 2004. Our advertising agency's research continues to show high interest by consumers in parks as a leisure activity. The strong recovery of the destination parks this year also supports that conclusion.

While no one can predict the timing and pace of the economic recovery, we can reasonably expect to see improvement over next 3 to 5 years, and the gradual recovery of certain segments of our business which have been so adversely affected by the weak economy, particularly our group business which began to see modest improvement this year. With an improving economy and the introduction of marketable capital, we will also be able to increase our prices over time, something we have not been able to do the last 3 seasons. While the weather for any one season will always be an unpredictable factor in our business, we also know that over any 5- and 10-year periods we can't expect weather to average out, so that even though we have experienced 2 unusually difficult weather years in a row, that will not be the case every year and we can expect our fair share of normal weather over the next 3 to 5 seasons.

In addition, the strong growth in our in-park per capita revenues over the past several seasons underscores the opportunity we have to grow our in-park per capita revenues over the next 3 to 5 years through controlled investment. This in-park revenue opportunity, together with our ability to recover a reasonable portion of our historic average attendance levels, not peak levels, at our major market parks, also for controlled investment levels, make us confident that we can deliver meaningfully improved performance over the next 5 years. Likewise, we believe that our new marketing initiatives and renewed focus on improving the guest experience are the right long-term strategies to help achieve and sustain that growth.

That said, we realize that in addition to increasing EBITDA and producing meaningful levels of sustained free cash flow, we need to de-lever our balance sheet. With the change in our longstanding advertising agency and the successful sale this year of our European Division and our park in Cleveland where we faced a competitive disadvantage, we have clearly demonstrated our resolve to take whatever actions are necessary to restore the equity value of the Company, everything is on the table. We know it will take time for our business to recover, and we have the liquidity and long-lived maturities in our debt structure to enable us to take the appropriate steps thoughtful and carefully.

With that I'll open the call for questions.

Thank you. The floor is now open for questions. If you have a question, please press star then 1 on your touchtone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you please pick up your handset to provide optimum sound quality. Once again, ladies and gentlemen, that is star then 1 on your touchtone telephone at this time. Our first question is coming from Kit Spring with Stifel Nicolaus. Please pose your question.

Good morning, guys.

Good morning, Kit.

Can you tell us, are there any obvious asset sales, maybe parks that are generating very or little cash flow? What do you think they're worth? Secondly, your new guidance long term of 40 million next year and 20 to 30 million in '06, under that scenario when do you get to free cash flow positive? And you're increasing your CapEx to 125ish next year, I think that's a good idea, but how does that affect your adjusted EBITDA covenant, what level of covenants, what level of EBITDA do you get into trouble next year? Thanks.

Thank you. Well, it's several questions. Let me take a few of them. First of all, in terms of park sales, you know, we are not going to be in any rush to sell parks. Obviously, we're coming through what we believe is the end of a 3- to 4-year cycle of, you know, tough economic environment, poor performance, generally in the industry, so we would expect that a number of our parks are going to see significant growth and return to a good percentage of their former performance levels. So, in our view, this would not be a particularly smart time to be selling parks. That said, clearly we will accelerate our efforts to dispose of certain noncore land assets that we have. We have some land at certain parks which would never be necessary in connection with the operation of the theme park, so we may look to accelerate our efforts there. That's not a huge amount of dollars, but, you know, maybe in the 25 million-type level. To the extent over time that there's an opportunity on any asset disposition that we think will improve the performance of the Company and returns to shareholders, obviously, we'll look at that in the performance of time.

One of the things that we clearly believe is that we have an opportunity beginning next year to improve our performance materially. We have the liquidity to do that. We have the balance sheet that gives us the flexibility to do that, and that will be our primary focus. In terms of those targets, we do hope to achieve at least the $40 million increase in EBITDA next year and to follow that up with a $25 to $30 million increase in '06. I would expect us to be slightly free cash flow negative next year and that we would be slightly free cash flow positive in '06 and then you would see the free positive cash flow continue to grow in the subsequent seasons where we'd be investing again, probably in the $90 to $100 million range year-over-year and producing 5 to 10% EBITDA growth. So those would be the targets.

As to the covenant issue, Kit, because the increase is largely the Chicago water park, which we would have the ability to exclude from the calculations as a discretionary capital investment, there is no change to the number that we would need to achieve next year to remain in compliance with the fixed charge covenants so it would continue to be approximately $275 million of adjusted EBITDA that we would need to achieve next year.

Thank you. Our next question is coming from Jill Krutick with Citigroup. Please pose your question.

Thanks very much. Good morning. It seems like diversification might be working against you guys since you have your top 5 or 6 parks in different geographies and each of those being very material to your overall performance, and the expectation of decent weather sort of in each of those markets seems like that might be overly optimistic. I know that park sales aren't really a topic that you want to address at this juncture, but, you know, at which point or at what point would you evaluate that in terms of perhaps diversification actually working against you? That's my first question. Secondly, the 40 million expectation increase for next year, 25 to 30 in '06, what kind of expectations are you baking into that in terms of attendance and per cap trends, and I guess the question is, how do you have confidence that in a recovering economy, in fact, people won't just bypass regional parks and go right to the destination parks? Thank you.

Well, my response to the first question is I believe diversification over time is very healthy for our business so I just don't agree that diversification is a problem. I think what we've experienced these last 2 years are some unusual weather patterns that, frankly, have hit a number of markets and, you know, have frustrated what over time has been an advantage of the diversification, so our decision if we ever should about a park sale is not going to be made based on diversification, it would be made based on level of an offer for an asset that, you know, did such great things for our de-levering our balance sheet that it was one that we would choose to do. And again, as you said, in our view this is not the time to be considering and discussing those things at the trough of industry-wide and our Company's specific performance. So we believe that a number of those markets, including our major markets, have very excellent opportunity in a recovering economy with normalized weather to see a return to just a reasonable level of their historic performance in terms of attendance and that will be a very powerful driver, a very significant cash flow. Likewise, I think while it has not offset the -- it has not offset the attendance shortfalls that we've experienced the last 3 to 4 years, our in-park spending growth has been very impressive year-over-year, really in reaction to rather modest investment levels, which as we indicated 2 or 3 years was the direction we would go to test the capacity there. So we likewise believe that continuing to invest in our in-park revenue opportunities is a clear opportunity to recovering and, frankly, once the 2 things start to happen in concert where we have the increased spending along with return in attendance, again, you know, that will drive a lot of performance for us.

We would anticipate, Jill, that we would be able to deliver year-over-year per-caps of at least 3% since this year on a total basis our per-caps year-to-date are up by -- or we expect our full-year per-caps to be up in that range this year in what is already a difficult economy. That's all in per-cap, including admission and in-park. We anticipate seeing a very significant increase next year in attendance, particularly at the New Jersey park, as well as at the Chicago park with the introduction of a major water park and with other attractions being added throughout the system, so we actually would think that attendance recovery would drive the significant portion of all our growth in '05 and '06.

And I think in terms of people bypassing the regional park opportunity to go to the destination guys, that's not the way this will play out. It's not the way it's played out historically. I think that the destination players are enjoying a faster recovery this year. It's not at our expense, it's not people choosing not to go to our park so much as the international tourism finally coming back is really a big driver for them. The higher income level families making the visits there, I think as we see economic recovery start to come, you know, filter down across the middle income and lower income families, I think we'll see a good snap-back in our attendance levels and, you know, over time will give us some pricing power in terms of our ticket per cap. So we feel very comfortable that we're going to achieve our targets next year and, you know, I think that the plan that we have in place is a well thought out conservative approach and it's a 3- to 5-year plan at investment levels that make sense and we feel good about it.

Thank you.

Thank you. Our next question is coming from Grant Jordan with Wachovia Securities. Please pose your question.

Good morning.

Hi, Grant.

What -- have you had any conversations with the rating agencies yet?

No. As everybody's aware Standard & Poor's in reaction to our mid-July release which indicated the level of performance that for the quarter and 6 months that are confirmed by the numbers we put out last month has put us on watch. I don't know what time frame of any action might be by either Standard & Poor's or Moody's or whether there would, in fact, be any action other than to continue to wait and see how this season progresses and how our plans for next year unfold.

Okay. Since the end of Q2 have you bought back any more bonds, and do you have additional plans now that you didn't close on the water park in the Marine World park?

Yeah, it wasn't the water park. We've decided to defer the exercise of our option which remains in place, incidentally. It's not that that option disappears. It's just that we have decided not to exercise the option at the time being. Yes, since the end of the quarter we did engage an additional secondary market activity. As I said during my remarks, we've now reduced outstanding leverage, if you include the European capital leases, by approximately $260 million. We've purchased in the open market since the end of the first quarter approximately $161 million of public debt. In terms of any further activity, we're going to wait to see how the operations unfold for the next period of time to make determination about what level of proceeds we should prudently apply to further debt reduction based upon our review of our liquidity as the season unfolds.

Okay. And then finally, could you be more specific on what exact markets experienced unfavorable weather in the later half of July?

Well, in the -- again, in the May-June period where we saw weather issues in our Texas market, our Atlanta market, and in Chicago, Seattle, then in the back half of July, we've had weather in a number of markets, but the ones that would be most prominent would certainly be here in the New York/New Jersey market, New England, we have 4 or 5 parks from Washington, spreading up through New York State into Montreal, that probably picked up the bulk of the tough weather in the July period, and then there was some spread around other markets. The good news is is that we have seen in August in these first 10 days as the weather calm down, we saw a very strong performance in our parks across the system and that certainly is an encouraging fact for us as we, you know, complete this season.

Okay. Just to follow up on that, like Dallas, for instance, you said experienced poor weather in Q2, but it seems like Dallas has had pretty good weather in Q3.

Right.

Have you seen a recovery?

Yeah, and that's exactly what's happened. In Dallas, you know, we're going to have an acceptable season because of the fact that we've been able to get out of that weather pattern. We've got excellent group bookings there. That's where it's been an inconsistent period. I mentioned earlier that we've started to see our group business, which clearly was affected with the downturn generally and certainly hitting the corporate group business, we've seen that start to come back in a number of markets. San Francisco, Dallas, very strong come-back. We've got great bookings for the back half of the season. So we'll have a good recovery there. Chicago, which was just in the grip of terrible weather and dug a hole in May has had a great recovery, and it's one of the markets as well for very controlled dollars we put in some nice family capital and I think that's contributing to it. So it's -- you know, we've seen the recovery there. Obviously, you know, in some of the other markets in the Northeast, you know, we had our hands full in the back end of July, but again, those are responding well now. The good news there is that those extra operating days that we pick up that we didn't have because of the late Memorial Day holiday, we pick up a bunch with Labor Day falling a week later, that is particularly helpful in the Northeast where schools go back much later than they would, for instance, in the Southeast and the Southwest, so we should have a very good opportunity for a pickup there and so, you know, that's kind of how it's shaped up on the weather front.

Okay. I'll leave this alone, but just -- if you could characterize Q3 weather, has it been, compared to normal, like trailing 10 years weather, has it been significantly worse or, you know, are you looking for something better than normal to see a recovery?

We're not looking for better than normal. I think it's not a function of just Q3 or just Q2. It's when you take the whole season and you just kind of look at the weather as it's hit us, it's been a difficult weather year compared to what we would expect over a 10-year average. But our performance next year and beyond is not based on our assuming that okay now we're there if we're going to get great weather for the next 3 years. It's just assuming that over that period we'll get normal weather, which may mean that we'll have a tough year in one of them, but we believe that this year, while somewhat better than last year was just another tough year. And part of the issue for us in the Northeast in July in particular was so much of it hit on the weekends, which are, you know, important days for us.

Thank you.

Our next question is coming from Anthony DiClemente with Lehman Brothers.

Hi. How are you? If I just look at the attendance on a year-over-year basis, I understand the weather is very uneven, but it was still, as you said, Kieran, somewhat better than last year, and if I look at consumer confidence and the economy, I understand it's been uneven and inconsistent, but still improved versus last year, how else can we look at the year-over-year shortfall aside from weather and consumer confidence. Is there any other thing we can point to, such as the gas prices, or do you still think that that was a non-issue, the gas prices this year? Thanks.

Look, again, I think that the -- in our view with the economy the real key issue here is we think the guy in the middle is really feeling squeezed, and I think that -- I don't think that that -- which is a big chunk of our customers, I don't think that that consumer is yet feeling great and continues, I think to struggle. Does gas prices weigh into it? I don't think that the the gas price by itself changes someone's decision that day to go to the park. But what I do think happens is that when you are, again, lower to middle income person and you are commuting, say, to your job and every time you're filling up that tank it's an extra $20, at the end of the day it's sucking dollars out of your pocket and so your decision about what you're going to do over the course of the summer, whether you're going to buy a season pass, some of those things, I think it gets affected. So I think, it's all in the mix, and therefore it contributes. I don't think our results this year are just that, the economy or the weather. I think that those 2 are the leading factors. I think, as I mentioned, you know, we did take a step back in our investment approach and really go after our park appearance and certain guest amenities. We obviously increased our expenses to improve the guest service, we think those are the absolute right things to do long term, so not having many new marketable attractions, which is not a normal year for us, obviously, constrained our ability to kind of overcome some of those other factors, so it's not any one thing. The good news is we go into next year and subsequent seasons, we really have put ourselves in a position where for controlled dollars, you know, again, over the long haul, that $90 to $100 million range, we'll be able to deliver numerous new rides and attractions year-over-year, I'd have real news to talk about in our markets and to stagger those appropriately market by market. We think that our advertising campaign, this character has been established now, and we'll be a strong play for us the next couple of seasons in terms of introducing rides and attractions and generating recall of our commercials. So we feel good as we go into next year that this is going to be, you know, the beginning of the return and performance of the Company. We think that the destination parks, which fell first and really the farthest in terms of this 3- to 4-year period, are making a come-back that's very encouraging news for us. We're not competing with them, but I think that we'll see our business return as there's has.

I think it's a strong proxy that theme parks remain a very important entertainment option for the American consumer, so, you know, demographics are very good for us in terms of the number of young people, so I think we're poised now to really start to make our move forward. I think you may recall when I was talking about this year last year, I was far less bullish in terms of -- and I had said that this was going to be a tough transition year for us and we're going to take a lot of steps to get ourselves positioned. I would have liked a little luck on the weather and perhaps a stronger economic recovery, but we're going to manage through this and show up next year and we feel good, and feel very good about a number of other things we've done and continue to do on improving our business, our opportunity for national promotions tied to this advertising campaign. We've got a number of excellent conversations going on. So we feel that we've got a number of strengths to build on, a number of levers to pull, and over the next 3 to 5 years we think we can put consistent sustainable cash flow growth up on the board, and we know that's what we have to do in order to restore the equity value of the Company.

Thanks. I had 1 follow up if you don't mind. While we're on the subject of different levers to pull, the Chicago park, I was just wondering, do you have any expectation for revenue or cash flow? Will it be cash flow positive in year 1? How can we sort of -- how can we incorporate this Chicago park into our expectations for next year? Thank you.

Well, the water park, you know, it's a significant opportunity, it happens to be one of the few major regional theme parks in the country that doesn't have a water park associated with it. The addition of that will enable the park to offer a significant new family product to the marketplace and assist us in recouping a significant portion of the attendance loss that we've suffered in that marketplace. Once that's done, of course, water parks have proven themselves to be regular performers with very low ongoing capital requirement and so they are significant free cash flow contributors in time. It is going to be a major park, as Kieran indicated in his remarks, and therefore, we certainly would not expect to recoup the cost of that water park in a single season. But we would anticipate that we could certainly drive 20% cash-on-cash return in terms of EBITDA from the invested levels in the first year. And as I said, there's very little ongoing capital requirement, it helps to reposition that asset, recapture some of its lost attendance, be very sustainable at very low ongoing capital investment requirement.

Thank you. Our next question is coming from Kathy Styponias with Prudential Equity Group. Please pose your question.

Hi. Thanks, 2 questions. First with respect to your slowdown in operating expenses that are non-guest related for the rest of this year, could you tell us what percent of your total operating expenses are non-guest related and specifically, you know, what kind of expenses are you going to be pulling back on? And then second question for you, Jim, in your 10-Q, your reclassification -- I'm looking at your comprehensive income schedule, and you have a reclassification of amounts taken into operations increasing to 41.6 million in the quarter. I think part of that is your deferred derivative losses. Is the other part of it or part of that your pension contribution? Is that where it's showing up? And or what else makes up the rest of it? Thanks.

In terms of the other comprehensive loss, that adjustment represents the foreign currency translation adjustment from the sale of the European park. Accounting treatment dictated by SFAS 130. So it doesn't have -- that reclassification has nothing to do with the change in value of derivatives. It's just because of the disposition of those investments that foreign currency translation has to hit into a different line item in the calculation of other comprehensive income loss than it otherwise would.

Kathy, it's a little hard to give you a percentage answer on expenses at such a guess because clearly repair and maintenance obviously affects the guest experience, all of the seasonal labor, et cetera. I guess the best way to answer it is that we set out this year and felt that to really pump up the guest experience that we needed to add back about $12 million of expenses. We've done that and we've got a fence around those and we're not trimming any of them. Where we have been able to pull back on some expense is probably in the admin area, a little bit in marketing just because of the way that played out, as well as in some other non-guest related areas, but I think that the more important issue is that we've chosen to stick with what we believe is a very important step that is over time going to really pay dividends. And we've seen it this year. It's been very encouraging to see the guest surveys park by park, very strong improvement in performance, and something that we're going to continue to build on into next year and beyond.

Just a quick follow-up, if I may.

Uh-huh.

You said your promotional issues, you severed your ties with your promotional partner in L.A.

I didn't say that. I didn't say that. I just said there was a shift in the month with that promotional partner. It was unfortunate, it cost us, and I was just using an example of just a couple of the factors that were hitting us other than the economy and weather, and it cost us this year that month, and the park picked right back up in July and we will, you know, have a correction for that for next year.

Okay. Thanks.

Thank you. Our next question is coming from Andrew Susser with Banc of America Securities. Please pose your question.

Good morning.

Good morning.

I'm taking from this phone call that you're not -- clearly not panicking here, you're not going to generate cash flow in '04 and you're planning not to do it again in '05. At what point do you really reevaluate the things that you're doing? Do you say we're spending X amount on ads, and although there's lots of recall, perhaps they're not getting people into the park? Do you say, okay, let's start selling assets, you know, everything's off the table, the preferred dividend, you could pick that at 7-and-change percent could be an attractive source of capital. You know, you're sort of like the same story except you're building a new water park. When do you -- what happens next year if things don't work out?

Well, I think you really said it right in your opening comment, which we are not panicked, and we are not going to take any rash actions. What we are engaged in is a very thoughtful analysis of the business. What you didn't get right is it isn't business as usual. We've taken a number of very significant steps, starting with a review of our advertising agency, which had been our longstanding agency for 8 or 10 years, changing to donor, embarking on an ad campaign that was remarkably different from anything that we had done previously, or anybody else in the business, and while certainly by itself that campaign in its first year has not overcome some of the other factors working against us, I think any measure of what that campaign has achieved would tell anybody sitting in my seat that we need to come back next year and build on that and use it probably more promotionally and certainly to introduce the capital. But a major change, clearly the decision to sell Europe, where we knew we would have long-term growth potential but we knew that potential would demand a significant investment of capital and take time, was not a business as usual move. Likewise, we reviewed all of our parks, thought carefully about whether dispositions made sense, made the decision to sell the park in Cleveland to Cedar Fair, because we were in a weak competitive position and got, in our view, a premium price for the asset and were able, as well to deploy a significant amount of animals and assets into our other parks. We stepped up to the plate and sold a significant tract of land near our Chicago park. We, you know, made a number of other decisions, and the decision based on a thorough review of our guest satisfaction and our park conditions, how we would invest our capital. We didn't -- our investment plan this year was remarkably different from any other year in the history of the Company in terms of its focus on the park appearance and the guest amenities, punching up our guest service in terms of our operating expense, so I think in fairness there's been a tremendous amount of work and analysis done, there have been a number of very important changes and, you know, therefore, our expectation for next year is based on the continuation of those steps, but we're not just sitting around waiting to see how it all turns out next year. The analysis of what level of investment and marketing is appropriate against the current level of attendance and looking at what other players in the business are doing is ongoing. And we see opportunity and there are just a number of other things that, you know, that I could talk about, much greater research effort, which is very important. We're going to be -- we stepped up our research generally.

There's a lot of research projects that are going on right now that are going to bear directly on the marketing levels next year in terms of the type of marketing that we do, and we're engaged in a master planning process at 2 or 3 of our major assets, including the New Jersey park, which is clearly the most significant asset in the Company in terms of the 2000 acre site sitting in the largest market in the Country, and where we have 3 parks and a very significant opportunity beyond what we've identified for the next 3 to 5 years. So we're engaged with outside players in a very thorough master planning process there, as well as in San Francisco and a couple of other markets, so there's a lot going on. Again, as a consequence, we don't believe at what is a low point industry-wide and certainly in our performance that looking to sell parks at this point is the prudent course of action. That said, as we see our efforts and our strategies produce results, we're going to make appropriate decisions over the next 2 to 3 years and we do have the time to do that and so, you know, we've demonstrated that when it's made sense, if we have to make an asset sale we'll do it, but we think that that's not the proper course for us at this moment. And as far as the dividend on the preferred, you can expect to see that being paid in cash.

Right, you know, I -- you have set your capital structure up very well, and you do have plenty of time and the bank covenants aren't an issue, and even if you did break them I don't think would it still be an issue, you don't have amortization. But I guess my issue is is that you haven't seen -- you haven't seen a lot of results here, and at some point you end up in a situation where you need to spend CapEx in order to boost EBITDA and you don't have the financial flexibility to spend the CapEx and you kind of turn into a cycle, and so in order to break that cycle you need to do something dramatic. Do I take it from you that clearly you don't need to do anything next year that's dramatic, but if the numbers don't come out next year, the way you expect, for whatever reason, would you then look to change your financial structure or operating structure in a meaningful way?

I don't want to get in an argument with you, but I guess from my perspective, we've done a number of dramatic things, and we're going to continue to do that, and we expect the steps that we've taken and that we're in the process of taking to deliver the results. I will absolutely continue to react to what our performance is, and you're absolutely right, if over the next several years we weren't able to produce growth in free cash flow, we would have to reevaluate a number of things. It is not, however, my expectation of the way this is going to play out. I am very confident that we're going to see a strong performance next year followed up in 2006 and that we'll be able to sustain that growth. We've got a lot of strong assets, we've got a great brand, we've got great licenses, we've got significant operating expertise that we can leverage across our portfolio and in other ways, so we are certainly mindful of the fact that we have not delivered the level of performance that we expected and our shareholders expected. We are very mindful of what's happened to the stock price. With that said, we believe that this is going to take a 3 to 5 year process to really, you know, reposition ourselves and, you know, we're committed to do everything we need to do, you know, to get there. And if some other opportunity to accelerate de-leveraging were to emerge, we'd certainly consider it and do it if it was appropriate. So there's no lack of understanding as to what the goal is, what the challenge is, where we've been. There's no resistance to considering all appropriate steps. We're just, however, going to do what's in the best interest of our shareholders by doing that carefully and thoughtfully.

Okay. Well, I think we're all in agreement that we need to jump-start EBITDA and let's hope we don't run into a situation where we have to figure out what happens if it doesn't work.

Right.

Thank you.

Thank you.

Thank you. Our next question is coming from Lee Olive with Citigroup. Please pose your question.

Hi, guys. Good morning. Many of my questions were answered. Quickly, Jim, you had said, or I'm backing into a number of public bonds you bought back subsequent to Q2 end of about 30 to 35 million can you give me a rough -- which issues did you buy?

After the end of the quarter most of that activity was in the shorter end.

The 9.5?

No, the 8.78.

The 8.78, okay. Great. And were there any of the 9.5 bought?

Just a small amount.

Fine. The preferred question was just answered. Oh, do you guys track the season to date, year-over-year, on a same-park basis, the frequency of your season pass attendance?

Yes.

What would that number be in terms of how many times do your season pass holders come to the parks this year versus last year?

Well, the utilization is fairly consistent this year compared to last. On a full-year basis last year the utilization was about 3.4 times per pass.

Season to date?

Season to date will be very different market to market.

When the dust settles at the end of the year it will be very close to that number.

Yeah.

In that 3.5 times?

Right.

And what was that number 4 or 5 years ago?

It's varied over the years from anywhere from 3.3 to as much as 4 times, but the 4 times is sort of an outlier number.

Right. And usually what you would see, you know, that's probably going back when there were much lower numbers of season passes out there.

Yeah.

Which would account for the higher number.

It's been around the number of 3.5 to 3.6 times most years in the last 4 or 5 years.

Okay. That's pretty consistent. And then we've beat over the head the asset sale question. But just if could you -- have you been approached on additional asset sales?

No, and I think we probably have beat it over the head.

Yeah. Agreed. All right, guys, thanks.

Thank you. We do have time for one final question and it's coming from John Maxwell with Merrill Lynch. Please pose your question.

Good morning. One last thing on the attendance, Kieran, could you talk about has your customer profile shifted over the past couple of years, whereby you're seeing maybe 1 segment of your previous customers not coming that you expect to come back in '05? Is it that the teenagers aren't visiting the park as often, or is it the young families? Just trying to get a sense of where you see the rebound coming from. Is it just, you know, overall customer base or is there certain population that you haven't gotten over the past couple of years?

It's a really good question. The problem is is that it's difficult to answer it about sort of the entire portfolio. So it varies market by market. So there are some markets where we probably have seen more erosion in the family and some others where it's the teen, and frankly, what it comes back to is it's not any nationwide trend or company-specific thing it's just really a function for us of how we're going to direct our capital investment and our messaging in the marketing. I would say that we continue to be in the excellent position that while we're known for great thrill rides we really do have just a very broad offering at our parks, great children's areas, lots of family rides, you know, the best roller coasters in the world, good shows, and so we're able to fish for the entire family in all the segments and we'll continue to do that. And that's really kind of the way it's playing out, but there's no like category that alarms me or something like that or trend that's endemic to the whole portfolio.

Okay. And, Jim, one final question for you. You mentioned that this year the bank covenant would be compliant up to 245 million of adjusted EBITDA?

That's correct.

And next year it was 275?

That's correct.

So the covenant goes up just based on the regular step-up or is that because of the the --.

It's because of the step-up. The step-up, okay. All right. Thank you.

Thank you. At this time I would like to turn the floor back over to our speakers for any closing remarks.

Okay. Well, thank you, Maria. Listen, we appreciate everyone's attention on the call. And obviously, again, we're certainly not satisfied with this year's results but do feel that we're seeing a number of bright spots that encourage us as we, you know, start to turn our attention to next year. We look forward to talking to you after the third quarter to fill you in on the full-year results and to speak more specifically about our plans for '05 and beyond. Thank you very much.

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