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

Good morning.

At this time I would like to welcome everyone to the Six Flags third-quarter 2010 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Nancy Krejsa, Senior Vice President, Investor and Corporate Communications, you may begin your conference.

Thank you.

Good morning and thank you for joining our third-quarter 2010 earnings call.

With me today are Jim Reid-Anderson, Chairman, President and CEO of Six Flags; Al Weber, our Chief Operating Officer; and John Duffey, our Chief Financial Officer.

Before we begin with our prepared comments, I would like to remind people that the Executive Management team of Six Flags will be hosting an Investor Meeting tomorrow morning, November 4, from 9 to 11 AM Eastern Time at the Waldorf Astoria in New York City.

We hope many of you can join us.

If not, the meeting will be webcast live and be archived on the Investor Relations page of the Six Flags website.

Tomorrow morning in advance of the meeting, we will also post a copy of the meeting presentation on our website.

A webcast of this call is also being made available on the Investor Relations page of the Six Flags website.

The Company cautions you that comments made during this call will include forward-looking statements within the meaning of the 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 and the Company undertakes no obligation to update or revise them.

For a detailed discussion of these risks, you may refer to the Company's 2009 Annual Report on Form 10-K.

In addition, statements made on our call today include non-GAAP financial measures.

These financial measures have been reconciled to the most directly comparable GAAP measure and included in our third-quarter earnings release or other forms filed or furnished with the SEC.

I would also like to share, that as a policy, the Company will not be providing detailed financial guidance.

Now we would like to begin our prepared remarks and I will turn the call over to Jim Reid-Anderson.

Thank you, Nancy, and greetings to everyone on the call.

I do appreciate you joining us this morning and thank you very much for your interest in our Company.

I want to start today by saying that my first few months with Six Flags have been excellent.

Today, I am even more excited about our future than I was when I joined the Company in August.

First and foremost, I have found the Park to be in excellent condition.

The grounds and attractions are clean, well-maintained and up-to-date.

Through the last few years, the Company made smart investments to retain and enhance the appearance of the Parks and so we are in a position today where we can continue growing without the need to make significant investments above and beyond a normal run rate.

In addition, we have excellent safety records at all of our Parks.

The safety of our guests and employees is our top priority.

That is why approximately 20% of all of our Park operating expenses, 25% of our capital, and approximately half of our full-time headcount is dedicated to maintenance and safety at our Parks.

I would also say that the corporate staff and Park level leadership are very strong with deep expertise in the theme park industry.

In combination with other recent personnel changes I've made since arriving at Six Flags, I feel quite honored to work with such a strong, experienced, and capable team.

Our management team has gelled quite nicely and we are moving forward rapidly.

Consequently, you'll be pleased to know that no major management or organizational changes are anticipated going forward.

In addition, those of you who know me realize that I do not like restructuring expenses.

Our current plans do not anticipate any material restructuring charges in 2011 and beyond.

One of my several priorities when I joined the Company was to develop a business strategy that would allow us to consistently deliver top results for our three primary constituents -- our shareholders, our guests, and our employees.

The strategy that we have defined and implemented is straightforward, easy-to-understand, and an effective way to ensure all our employees are working towards the same goals day in and day out.

We are a theme park company and our strategy is based on delivering excellence in all that we do.

And it includes five key imperatives.

The imperatives provide focus for our employees and will help us ensure that we increase shareholder value over the long term.

The five imperatives are, one, enhancing our guests' experiences -- this ensures we retain existing guests and attract new ones; two, developing guest-focused products and programs ,including adding exciting new attractions every year and appropriate theme park-based marketing at every park; three, improving operational efficiencies, both with more rational pricing and by improving the efficiency of our cost base; four, delivering financial excellence by consistently improving our financial results; and finally, five, building a high-performance team culture because I personally believe our employees are our greatest asset in ensuring we achieve our long-term goals.

We have multiple objectives and several metrics behind each of these imperatives in order to track our performance.

It is a simple yet powerful tool to ensure our entire Six Flags team stays aligned and on track in executing our corporate goals.

I might also add that I have been extremely impressed with the quality of the system and tools the Company has in place to measure important metrics, such as per capita sales, guest satisfaction, and others.

As it relates to our financial performance, I am really pleased to share that the third quarter was another solid quarter for Six Flags.

Q3 revenue reached $467 million, representing a 5% growth over prior year on a comparable basis.

Despite attendance levels being flat to prior year, our revenue growth came primarily from higher ticket pricing, fewer discounts and improved in-park sales and really is an indication of our ability to successfully enhance the yield and profit margin of our business long term.

Our attendance was flat with the prior year due primarily to three factors.

One, we reduced the number of discounted and complimentary tickets we gave away versus last year.

Two, we had limited new capital introductions to market in 2010.

And three, we were comparing against a solid Q3 2009.

Although growing attendance is an important long-term goal for us, our primary focus is to drive profitable revenue growth.

And this, of course, is a bit of a change in approach from the past.

In addition, you may remember from our Q2 call that I spoke of our focus on the cost [space] and our multipronged approach to address inefficiencies inside our Company.

As you can see, we have already made tremendous progress in this area, driven primarily by lower marketing costs and headcount reductions.

The net of this is that, going forward, we will be structured as a regional theme park company, not as a global entertainment business.

The 5% revenue growth and significant cost reductions provided good lift in our profitability and cash flow.

Adjusted EBITDA and free cash flow both grew 15% in the quarter and cash earnings per share were $7.83 a share.

LTM cash earnings per share were $3.69, assuming pro forma interest, an indication of a strong cash-generating capacity of the business.

One final point before I hand over to John.

I want to ensure that everybody understands the difference between adjusted EBITDA and modified EBITDA and why modified EBITDA margin is a better yardstick to measure our profitability versus others in the industry.

Adjusted EBITDA measures earnings attributable to Six Flags shareholders and excludes the EBITDA due to our partners in two parks.

Modified EBITDA margin reflects the true profitability of our business when comparing us to others in the industry.

So in Q3 and Q3 year to date, our modified EBITDA margin was 54% and 36%, up 4 and 7 percentage points respectively.

We are extremely proud of our performance in this area.

Now I would like John to walk you through more details on our third-quarter and year-to-date financial performance.

John?

Thanks, Jim, and hello to everyone on the call.

I would also like to share that I am excited to be a member of the Six Flags team and have been extremely impressed with the dedication of the people here who are making Six Flags a great and successful company.

There is no better evidence of this team's ability than the strong financial performance for the quarter.

As Jim indicated, we reported a solid 5% growth in revenue in the third quarter, driven by an increase in per capita revenue for both ticket and in park sales.

The Company's focus on improving yields through focused pricing discipline and increasing guests in park sales has delivered results.

Year-to-date revenue is up 6% on a comparable basis due to both a solid increase in attendance and per capita sales.

On a comparable basis, cash operating expenses declined approximately $9 million in the quarter versus prior year and represented 38.6% of revenue, down from 42.3% of revenue in Q3 of 2009.

Our year-to-date, the Company has reduced cash operating expenses by $22 million on a comparable basis.

The quarter and year-to-date expense reductions are a result of reductions in marketing costs, headcount, and certain corporate level expenses, along with seasonal labor efficiencies.

Management remains committed to reducing operating expenses through sustainable and focused initiatives, while continuing to enhance our guest experience.

The solid revenue growth and expense reductions contributed to a strong adjusted EBITDA for the quarter of $239 million and $273 million year to date.

This represents an increase of $31 million and $69 million over prior year for the quarter and year to date respectively.

Our Q3 diluted earnings per share was $4.85.

Now beginning with this quarter, we will report cash earnings per share, which we believe is a better reflection of our earnings versus reported GAAP EPS.

Now first, as a result of Fresh Start accounting, the Company was required to increase tangible and intangible assets which increases go-forward depreciation and amortization expense well above the Company's capital spending level.

Second, the Company was able to maintain over $1 billion of tax operating loss carryforwards, which will result in materially lower cost taxes -- lower cash taxes versus the tax expense reflected in the GAAP financials.

In the near term, we can expect to pay in the range of $10 million to $15 million in cash taxes each year.

Adjusting earnings for the these two differences, cash earnings per share was $7.83 and $5.47 for the quarter and year to date, respectively.

Reported net debt as of September 30 was $763 million, which consisted of gross reported debt of [$1.018 billion] less cash of $255 million.

The Company did not have outstanding borrowings on his revolver.

As it relates to liquidity, the Company's available cash and revolving facility are sufficient to meet operating and capital requirements.

Overall, an outstanding quarter and year-to-date performance provides us good momentum as we head into the fourth quarter.

I do want to remind everyone that this is a seasonal business and you should look at historical quarterly trends to better understand the impact of this seasonality on our quarterly financial results.

In addition, when you think about modeling 2011, I would point out that the Easter Holiday weekend and Spring Break for many schools will fall in the second quarter of 2011 versus first quarter 2010, causing operating days to shift from Q1 to Q2.

This happens every few years.

So now I would like to turn the call back over to Jim.

Thanks very much, John.

Before we ask Danny to start taking questions, I wanted to spend a few moments to share why I believe Six Flags is well-positioned for the future.

In the last few months, we have narrowed the focus of the Company so we are now solely focused on theme parks.

And the theme park industry is a very solid industry.

There are high barriers to entry and it is relatively resistant to economic downturn.

The task of optimizing Six Flags is a multiyear exercise with a lot of growth opportunities.

The population within a 100-mile radius of all of our parks is approximately 175 million people.

A similar metric for our largest competitor is approximately 115 million people.

Since we have parks in nine of the top 10 BMAs, the per capita income of Six Flags' target audience is approximately 10% higher than the opportunity for this competitor, while our attendance levels and revenue are essentially level.

So you could argue that our opportunity for growth is almost double.

Now clearly, we can't double our attendance.

However, I do believe that with the right new attractions and enhanced marketing approach and consistent leadership, we can register solid attendance gains longer term as we implement our strategy.

We have nearly completed our 2011 operating plan and we are well along the way in inplementing our new rides and attractions for the upcoming season.

Although the 2010 season has been very solid, we are even more excited about 2011, since we will be introducing more rides and attractions in a single season than we have in the last decades.

Our focus will be to have new news in every single park to help draw new guests into our parks and to entice existing guests to return more frequently.

As an aside, the reason we had a limited number of new attractions in our parks in 2010 was due to several factors, including the financial restructuring.

We also continue to refine our pricing strategy both ticket pricing and in park sales, to ensure that we are generating appropriate returns on our investments.

We are carefully reducing our dependence on high discounts to drive attendance.

It is like a drug.

We also have some new creative advertising ready for the 2011 season.

It will be park- and ride-focused and spread across TV, radio, cinema and online channels.

In addition, while we know many of our guests have developed a fondness for Mr.

Six, he will play a less prominent role in our advertising going forward, as he did in the second half of 2010.

We believe the Six Flags brand has tremendous value, and we intend to leverage it with corporate sponsorships and other initiatives in and outside North America.

This will help us grow both revenue and profitability.

We are very cost-conscious and we will focus relentlessly on eliminating any excess cost across our operations.

We also have several items that can potentially further improve cash flow.

Such as our [excess land], our high cost debt structure, and other investments and these will be assessed over time.

In summary, we are well-positioned to increase shareholder value.

Our success, improving revenue growth, guest satisfaction, and the efficiency of our operations will depend on our execution.

As I mentioned at the beginning of the call, I am convinced that we have the right leadership in place, a talented and dedicated team of employees who are eager to take our business to the next level, and we have the right strategy to succeed.

With that, I'm going to ask the operator to open up the call so that Accrual, John, and I can take any questions that you might have.

Danny?

(Operator Instructions).

Ian Zaffino from Oppenheimer & Co.

Thank you.

Very good quarter.

Question would really be more on the revenue side and how we should think about the business going forward.

Is this something where we should just think about overall revenue growth as opposed to kind of disaggregating it between pricing and attendance?

You know, in that -- would it be reasonable to see declining attendance so long as you could raise the deals?

Or is it better to just to look at this from an EBITDA or just a cash earnings standpoint?

You know, as Nancy had mentioned earlier, we don't and cannot provide guidance.

However, I wouldn't look at this and say I'm going to assume attendance is going to go down as long as we are driving higher revenue.

Our focus is on ensuring that we are homing in on all metrics including attendance.

As I described, we are changing the makeup of parks in terms of new rides, new attractions and we also have pricing initiatives.

So our goal is to increase attendance and revenue you know via per cap, so that we get the maximum possible benefits.

I would say that as we plan for the future, we are not assuming huge increases in attendance.

I think in this economic climate it would be unwise to do so.

So I hope that helps you.

I can't tell you how you should model it, but we are not saying something like attendance is going to decline and other things are going to increase.

We are looking to increase everything.

And on the attendance side again, is this something where we should see a steady growth in attendance or could we expect maybe slower attendance growth at first as you wean people off of discounts?

Again, I'm not asking for specific guidance but more how you think about it?

Again, Ian, I can't tell you how to model attendance.

You know, our objective is to ensure that we achieve long-term growth in attendance, revenue and profitability and, obviously, cash flow for our shareholders.

Ken Smalley from Seaport Group.

Congratulations on the quarter.

Couple of capital structure questions.

First, I would have expected your net debt to be slightly lower given the strong cash flow generation and the dividend from dick clark (see press release).

Is there -- were there any working capital adjustments that happened after the quarter or any changes you could point to there?

I would not say there were any material adjustments to working capital.

You know, we -- there were some payments that were made out in the pre-restructuring claims, but nothing that I would say would be significant.

So I think -- (multiple speakers).

And those were --

I think overall we were pleased with the cash flow that we generated for the quarter and as I mentioned, we're -- we've got $255 million of cash on hand.

(multiple speakers).

I would just reinforce that.

As you look at net debt as it went from April to June to September, you know the three quarters' end, it's a substantial reduction in overall.

If you go back to December, net debt was $2.2 billion.

You know, March, net debt was $2.4 billion.

April, $1 billion, June just over $900 million and now we are sitting at $760 million.

So substantial reductions consistently ongoing.

And obviously, we have no idea what you may have assumed or not assumed in the numbers, but we feel very good about where we are.

No, they are strong numbers.

Looking at the capital structure, though, the cash on hand, the low leverage, what do you -- what are your plans in terms of your debt?

Clearly, your securities could be refinanced at lower rates, I believe, in this environment.

Also, now you have a substantial amount of cash on your balance sheet.

What are your plans in terms of potentially returning some of that cash to shareholders?

And I have one follow-up question.

First of all, we will need a portion of that cash to fund operations in the first quarter when the majority of our parks are closed.

And we are currently evaluating our overall capital structure to determine the best use of our excess cash.

And we will look at things like debt, distribution to shareholders as part of that.

Thank you.

And finally, one of your competitors reported that trends into October were strong in terms of attendance.

Are you seeing those same types of trends in your businesses?

We are not going to comment on October or the fourth quarter.

Okay.

Ian Corydon from B.

Riley & Co.

I wonder if you can speak to the Easter shift and historically what kind of revenue and EBITDA shift between the first and second quarter occurs there?

Every few years, you see the Easter shift and Spring Break go between Q1 and Q2.

We are not in a position to give you kind of how that works financially from a revenue standpoint, but it does dance over that quarter line every few years or so, as it will in 2011.

And I wonder if you can provide the ticket per cap and the in park and other per cap?

One second.

Is the question regarding the quarter?

Yes.

For the quarter.

The ticket per cap for the quarter 2010 is sitting at $22.13.

And the in park is $16.77.

(multiple speakers).

-- last year.

Yes and I'm not sure if you can answer this one, but the last one is just on stock-based compensation.

Do you have kind of an annual target there?

Yes.

We incurred some stock-based compensation expense in the quarter and we expect that to continue going forward.

We do not have a specific target, though, Ian.

Ross Haberman from Haberman Management Corp.

Two quick questions.

Historically, could you refresh my memory, I don't recall.

How much do you lose in the fourth quarter of last year?

In the fourth quarter of last year, our EBITDA was approximately a negative $7.5 million.

Okay and just one final question.

When did the options come up to buy out the partners on the two parks which [are] already shareholder in?

At 2026 and 2027.

And what are your thoughts -- are there any thought about possibly buying them or fi'ing them out earlier or is that even an option, based on your existing contracts?

Well, obviously, we are not going to comment on what we may or may not do in the future.

Sorry, we are not in a position to do that.

Let me clarify what I said earlier.

To 2027 and 2028, I got the order slightly wrong.

[Barrett Enon] from [Brownstone Assets].

Just a couple of questions.

You mentioned some new rides and attractions for next year.

Have you outlined with those already yet and how much those will cost?

We have, and if you join us tomorrow we will take you through that detail.

Okay.

Then on the DTP dividend, so you guys still own 39%, you just got a cash dividend during the quarter?

That's correct.

And then I've got one more question about --.

I don't know if you are going to talk about this tomorrow or not, but on corporate sponsorships inside, outside North America.

So is that going to be obviously up to growth strategy and some of you [are continuing to deal] is that sort of you are going to be focusing kind of like a Dubai World Con thing?

Is that what we were being focused on prior to the recession?

Yes and we will talk in a little bit more detail tomorrow.

It is not our primary focus, obviously.

Right now, our focus is making sure that we operate as the best managed theme park, regional theme park company in the world.

But there are opportunities such as Dubai that you just mentioned you know, that could provide long-term revenue gains for us.

And we will cover that in a little bit more detail tomorrow.

There are no further questions at this time.

I turn the call back over to the presenters.

Well, thank you very much, all of you, for joining us today.

We really appreciate your support and look forward to seeing you at our Investor Meeting tomorrow or talking with you very soon.

Take care.

This concludes today's conference call.

You may now disconnect.