Six Flags Entertainment Corp (SIX) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Six Flags second-quarter 2013 earnings conference call.

My name is Lindsay and I will be your operator for today's 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).

I will now turn the call over to Nancy Kresja, Senior Vice President, Investor Relations and Corporate Communications for Six Flags.

Good morning and thank you for joining our call.

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

We are going to begin our call today with prepared comments and then we will open our call to your questions.

Our comments 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 our statements and the Company undertakes no obligation to update or revise the statements.

In addition, on the call we will discuss non-GAAP financial measures.

Investors can find both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the Company's annual reports, quarterly reports or other forms filed or furnished with the SEC.

At this time I will turn the call over to Jim for his prepared remarks.

Thank you, Nancy.

Good morning, everyone on the call.

We join this call today with heavy hearts.

As you may already have heard, one of our guests died last Friday in an accident at our park in Arlington, Texas.

We are actually hosting the call today from the park and we have been here throughout the weekend to support our team as we work through this tragic event.

Utilizing both internal and external experts, we are investigating the cause of the accident and until that process is complete, we have no additional information to share with you about the incident.

The ride has been closed and you can rest assured that it will remain closed until we are certain it is safe to ride.

Our deepest sympathy goes out to the family and we are providing them support as best as we can.

We ask that you keep the guest family in your prayers.

Let me now turn to reporting our financial results.

I am extremely proud of our performance both in the quarter and year to date especially given the challenging weather conditions that we faced in May and June.

Through the first six months of 2013, we delivered record financial results with 1% attendance growth, 3% revenue growth and 15% adjusted EBITDA growth on a comparable basis.

In addition, on an LTM basis, the Company generated $2.29 of cash earnings per share and we achieved a new industry high modified EBITDA margin of 39.6%.

Obviously we would have preferred to deliver an even better Q2 performance.

However, we had the timing impact of Easter/spring break attendance shifting into Q1 and we also experience much cooler temperatures than average and far higher precipitation in May and June than we had last year.

This primarily affected our Eastern and Midwestern parks on our busiest weekend days.

I can definitely state that for those parks we saw the worst Q2 weather in over a decade.

Historically when there is inclement weather in the early part of the season, guests find alternative days to visit our parks later in the year.

Given the changes in weather patterns from year to year and because operating days can shift from one calendar quarter to another, we have consistently said that the most appropriate way to measure our performance is over multiple quarters.

To that point, our year-to-date financial and operating results are records, all-time highs across every metric.

Our long-term success continues to be tied to consistent execution of our strategy and I remain very confident about our outlook.

I believe we will continue to strengthen the business through our focus on innovation in all of our parks and by continuing to delight our guests, day in and day out.

We are thrilled with the innovation and news in every park that we have delivered in 2013.

Guest reaction has been very positive across the board including for our four world record breaking rides, Full Throttle and Magic Mountain, the Iron Rattler in Fiesta, Texas, the Texas Sky Screamer at Six Flags over Texas, and our Safari Off-Road Adventure at Great Adventure.

Although I have only mentioned a few, all of our new attractions are quite phenomenal and really unique experiences.

Our guest satisfaction ratings continue to rise at the fastest rate since I joined the Company nearly three years ago and they have reached new record highs in the first half of the year including value for the money and overall guest satisfaction.

Our multiyear opportunity to improve ticket yields and further penetrate season pass sales remains intact and these will be the largest contributors to our revenue, profit and cash flow growth going forward.

We saw strong increases in pricing across all ticket types for the first six months of the year and I believe that we are only in the fourth or fifth inning of our long-term price opportunity.

Season pass penetration continues to be one of our key initiatives.

We know that season pass holders over the course of a season generate more revenue and cash flow than a single-day visitor.

Our success in up selling guests season pass is evidenced by a 22% increase in deferred revenue as compared to June 2012.

I am especially excited about our innovative new annual membership pass program, a first for the regional theme park industry.

This program allows guests to pay monthly on an ongoing basis by credit card and has several important benefits.

First, it increases affordability, a critical factor for cash strapped families.

Second, once a guest becomes a member, they only need to be processed for identification once and can actually use the same ID in future years.

Third, memberships are automatically removed on a monthly basis after the first year thereby improving guest retention and most critically further enhancing our recurring revenue base.

I am convinced that they membership program expands Six Flag's addressable market.

Other in-park initiatives such as our all-season dining pass have also been very successful and will provide growth opportunities for many years to come.

Not only is in-park dining spending up nicely but in addition, our dining satisfaction scores are at all-time highs.

In summary, whilst it was perhaps not the quarter we would have all wished for due to the weather, I am extremely proud of the entire Six Flags team.

We have once again demonstrated our ability to generate high recurring cash flow in an adverse environment reinforcing the Company's financial and operational strength.

At this time I am going to have John provide more detail on Q2.

John?

Thank you, Jim, and good morning to everyone on the call.

As Jim mentioned, we are pleased with our execution in the second quarter and our year-to-date performance.

Attendance declined by 400,000 guests in the quarter.

As we mentioned on our first quarter call, there was a shift in attendance into the first quarter associated with the earlier Easter and related spring breaks.

This shift accounted for approximately three quarters of the decline in the second quarter.

As those listening on the East Coast and Midwest can attest, we had adverse weather in May and June that impacted our Eastern and Midwestern parks.

In fact, this year's second quarter was the worst weather at our parks east of the Mississippi in more than a decade.

As an example June rainfall exceeded 10 inches for New York, Boston, Washington and Philadelphia versus a historical average of three to four inches.

Chicago and Atlanta had similar issues and unfortunately a lot of the rain came on weekends, our busiest time.

Having said that, historical data shows that although there may be impacts on a quarterly basis, weather tends to even itself out over the year.

In addition, our continued success in increasing season pass sales brings stability to the business and should help contribute to a rebound in attendance as well.

I should also note that we still have approximately 60% of our average annual attendance still to come.

The second quarter's attendance mix was heavily weighted toward season pass holders.

Although this put downward pressure on per capita revenue, we saw a $0.61 increase in admission per caps in the quarter, a clear indication that our pricing strategy is working.

You will also note that from the press release that in-park revenue per capita decreased slightly.

This was due to a higher season pass mix and lower parking revenue due to higher sales of our premium priced gold season pass that includes parking.

Year-to-date attendance grew 1.2%, guest spending per capita grew $0.36 or 0.9% and revenue is up 2.3%.

Adjusting for the $3 million of insurance proceeds related to Hurricane Irene which was recorded in the first quarter of 2012, year-to-date guest spending per capita grew $0.64 or 1.6% and revenue grew $13 million or 2.9%.

As the result of strong season pass unit sales growth, deferred revenue at June 30, 2013 was $130 million, an increase of $23 million or 22%.

You should note that a portion of this revenue will be recognized in 2014 as our successful new annual membership pass program runs 12 months from date of pass purchase.

Cash operating expenses decreased $13 million and $4 million in the quarter and year to date respectively.

The decrease in the quarter was primarily the result of lower labor and marketing costs, the majority of which was due to effective cost management and a smaller portion to the spring break shift into the first quarter.

We have mentioned on several occasions our ability to scale back costs when we see softness in attendance and the second quarter is another perfect example of this execution.

However, I do want to emphasize that we have not reduced costs relating to maintenance or safety.

Overall maintenance and safety spending represents approximately 1/2 of our total park operating costs and 25% of capital spending.

Year on year, we have increased spending in this area.

The safety and security of our guests is our number one priority and we will never compromise that.

Adjusted EBITDA increased $1 million in the quarter after adjusting for the September 2012 sale of DCP despite the softness in attendance and revenue.

We also improved our modified EBITDA margin 159 basis points to 43.3% in the quarter.

As we mentioned in the press release for the 12 month period ending June 30, 2013, adjusted EBITDA was $388 million and our modified EBITDA margin improved to a new industry high of 39.6%.

Cash earnings per share for the quarter was $0.97, an increase of $0.08 or 9% over prior year.

LTM cash EPS is now $2.29, an increase of $0.29 or 15% over prior year LTM.

I do want to note that both the quarter and LTM cash EPS were favorably impacted by timing of interest as our bond interest payment is only made semiannually and the payment was made in July.

The Company repurchased 0.8 million shares of stock in the quarter all of which was purchased prior to and discussed on our first-quarter call.

Overall I was pleased with our quarter and year-to-date performance especially when you consider the weather-related factors.

Now I would like to turn the call back over to Jim.

Thanks very much, John.

While this has been an extremely sad weekend, I must let you know that I am optimistic about our future.

Our parks are in excellent condition.

Our employees are very positive and our guests are giving us higher ratings than ever before.

We have exciting new marketable capital.

We have successfully taken pricing and our strong season pass sales should provide good momentum into the second half of the year.

The foundation of our success has been and will continue to be excellent execution of our strategy.

Disciplined execution of this strategy enables us to continue delivering sustainable profit and cash flow performance, fund all appropriate business investments and return excess cash to our shareholders via dividends and share buybacks.

And of course with all of our initiatives, we continue to have our sights set on achieving our aspirational target of $500 million of modified EBITDA or approximately $3.00 per share of cash EPS by 2015.

Lindsay, at this point could you please open the call up for any questions?

(Operator Instructions).

Afua Ahwoi, Goldman Sachs.

Thank you, good morning.

I had a couple of questions.

Just first maybe on the buyback, can you address what you are thinking about in the long-term as you get to the end of this current authorization that you have?

Secondly, as we think about the weather impact, is there any way for you to get a sense of how much exactly was deferred into the third quarter from those who didn't come because of the weather?

Is that reflected in the deferred revenue balance or is that solely just the season pass?

And then maybe the economics of that monthly plan that you were talking about, I mean how does it work?

Is it the same margin or cash flow as a regular season pass customer or a regular day visitor?

Thank you.

Let me start with your first two questions and then John will pick up on the third one.

With regard to the buyback strategy, it has been very clear all along and we maintain the same approach which is that any excess cash flow above and beyond what we need to operate the business will be utilized for dividends and share buybacks.

So that has not changed and we will continue down that path not only for the rest of this year but into future years.

With regard to the weather, we commented earlier that it was obviously a difficult quarter, the worst that we have seen in at least a decade.

But we are not going to comment on what happens looking forward.

We don't give as you know comments with regard to current quarter or future quarters but I do believe that we have said and we would reinforce this, that historically what we have seen where there is a weather impact that people simply bide their time and they come later in the season.

And the beauty of where we are right now is the first half is over and the second half that represents approximately 60% of our annual attendance historically.

So there is opportunity for folks to come back and we are optimistic that we will see that in the third and fourth quarter.

Was your question regarding the difference in margins between memberships and season pass?

The membership and also how you would book that on your balance sheet or income statement and how we should be thinking about that would impact attendance?

Sure.

Well, the membership is recorded similar to a season pass so when the membership is purchased, we would recognize all of that as deferred income.

And as the individuals come to the park based upon historical trend, we would recognize a piece of that as they come to the park.

So very similar to season pass.

The only difference would be that a membership extends beyond the current calendar year so there may be a portion of that that gets deferred and recognized in 2014.

As it relates to margins, the margins on the memberships are higher.

The pricing on a membership runs 30% to 34% on average higher than a season pass.

Thank you.

One other point that I will make on the membership is that another difference between memberships and season pass is that a membership is automatically renewed on a month-to-month basis on the 13th month.

Ian Zaffino, Oppenheimer.

Great.

Thank you very much.

You guys did a great job on the cost front and I know you said you were able to kind of flex your spending and your costs.

Can you give us kind of maybe specific examples of what you are doing to reduce the costs and to kind of keep it in check the way you did this quarter?

I think there are several examples both John and I will jump in, Ian.

But in terms of the ability to scale back on marketing costs, we can do that when the weather is as rough as it was, we can scale back the spending there.

The same with regard to our seasonal labor.

As you know, the bulk of the employee base is seasonal.

And so if we know the weather is bad, we are able to scale back the number of people at the park or close down parks on days when that weather is bad.

So those are the sort of examples.

But also internally from a leadership perspective, we can scale back travel within the Company and other expenses.

So there are a series of things that we can do in these circumstances and I think we have shown a couple of times now where the weather has impacted us that we are able to do that.

Okay.

And then can you just remind us about the partnership parks how that works, what their stakes are in the Dallas or the Arlington Park and kind of how (multiple speakers) flow through?

Thanks.

Sure, Ian.

John will take this one.

There are two parks in Arlington.

There is the theme park and the water park.

The theme park is in the partnership, the water park is not.

We own approximately 53% of the Arlington Park with the remaining percentage owned by multiple limited partners.

The way that the financial works is that there is a minimum distribution that is made each year and that is made to all of the partners including Six Flags.

Any cash that is generated above that minimum distribution, 100% of that comes to Six Flags.

In 2013, that minimum distribution for Six Flags over Texas is approximately $40 million of which approximately $19 million goes to the other limited partners and $21 million to Six Flags.

Okay, okay.

And then I figure I will ask this, I don't know if you can answer it.

But if you look back at sort of historical maybe incidents that have happened, can you give us maybe an idea -- because I know you don't break it out on a park level so it is difficult for us to get to it -- but maybe a previous incident what was the attendance impact following that incident or can you kind of give us maybe a framework of how to think about it?

Sure, Ian.

I think that is a reasonable question given the circumstances.

I think you know at this time we can't comment on any future financial impact as we would simply be speculating.

However, given the exceptional circumstance, we wanted to provide at least a quick update.

I think you know the accident occurred last Friday and since then we have seen no significant impact on our attendance across the corporation.

I do want to say though that history in this industry would suggest that there is a lag in reaction time after an accident and there could be a short- to medium-term attendance impact at the affected park.

Obviously we are going to take the opportunity to update everyone in more detail on the Q3 conference call as to any attendance or financial impact.

Okay, great.

Thank you very much.

(Operator Instructions).

James Hardiman, Longbow.

Good morning.

Thanks for taking my call.

Just a clarification on the last point, Six Flags over Texas, given that that ride is a major attraction for that park and it is out of commission at least for the short term, is there any sort of compensation or pricing impact concession given to people that are continuing to attend that park?

There is no pricing concession that we give to people when rides are down.

All theme parks at some point during a day in most of the parks there may be one or two rides that are out of commission and I think people understand that.

Got it.

Thanks.

And then a couple of questions on the per capita numbers.

Not a ton of growth here in the first half.

Obviously you guys continue to see some real nice growth in seasons passes and that typically has a negative impact on per capita spending.

I guess if you think about where you were heading into the year obviously you had a pretty good idea of where seasons passes were going to be.

How much of the lack of growth in per cap do you think is seasons pass growth?

What if any impact do you think weather has on per capita spending?

And I guess ultimately there seems to be a little bit of a divergence between ticket spending and in-park spending and do you have any thoughts on why that might be the case?

I think you have outlined very clearly what we have said historically which is that with success in season pass, there is an effect on per caps.

And the fact that we have had such tremendous success in signing up season pass holders, there is no doubt that that is the single greatest impact from a downward pressure perspective on per cap.

I would say that in terms of in-park spending, there was definitely an effect from the weather as well as you noted.

So those two would have an effect.

I think that if you think about better weather obviously as we look forward, the in-park spending impact should be offset a little bit by that.

And long-term, we really are very happy with the growth in season pass because I think, John, maybe you would outline this now, the effect of season passes long-term revenue wise is very positive, right?

It is extremely positive and typically as we have talked before is that we get more revenue and more overall profitability from a season pass holder not only in the ticket but also every time they come to the park, they are spending money.

So our data shows that typically we get more than twice the amount of overall revenue from a season pass holder over the season than an individual ticket.

So, James, to your point, the single greatest reason that there isn't a bigger improvement in per cap is the strong season pass performance.

Now behind all of that, I must note as I said in my comments, that we have taken pricing across every ticket category and that has successfully held.

You may have also noted that I commented about the fact that our guest satisfaction surveys are at the highest levels we have seen and one of the biggest improvements is in value perception.

So people feel that they are getting a better value than they got before.

Very helpful and then just last question and along those lines, obviously you pay a lot of attention to what your guests are telling you and whenever you are raising ticket prices and in-park prices, your concern is clearly going to be that marginal customer that focused heavily on discounting or value.

What can you tell us if anything about how many of those customers you think have decided not to go to your park as a result of the higher ticket prices?

Any sort of color you can give us on that front would be great and do you ultimately think those people will come back when it becomes evident that that level of discounting is not coming back anytime soon?

Thanks.

It is again another great question, James, and you know the history of Six Flags with regard to discounting.

We kind of led the industry and so we have been very disciplined about removing discounts or at least let me say fencing them and making it harder to obtain the larger discounts.

So we still will use discounts appropriately.

They are part of an overall pricing and marketing mechanism that will never go away but we are being much more careful about them.

Quite honestly we do, we study daily guest feedback.

Literally every single day for every single park, we are able to look at feedback.

So with regard to pricing, we track that very, very closely and there are always some guests who are not happy about pricing I think that is true of every industry, not just ours.

But we are very cautious about the way that we take pricing.

We want to make it very clear to people that we are not looking to gouge or hurt guests in a tough environment.

And so hence, our approach to membership plans and to season passes by offering them the option of a season pass or a membership plan, it allows cash-strapped families to be able to afford to come to our park in a way they may not have been able to do so before.

So actually we are seeing the opposite effect to the one that you are describing.

There are very few people that have walked away because of pricing.

What has happened is that they have shifted into these other programs that we have that offer the best value for the guests.

Very helpful.

Thanks, guys.

There are no questions at this time.

I would like to turn the call over to management for any closing remarks.

Thank you very much, Lindsay.

Thank you to those of you on the call for your ongoing support of the Company.

I do encourage you to visit our parks to personally experience the amazing work we do.

I think you will enjoy your visit and see firsthand how we can continue to build shareholder value in the months and years ahead.

Take care.

This concludes today's conference call.

You may now disconnect.