Six Flags Entertainment Corp (SIX) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

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

My name is Brandi 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 Ms. Nancy Krejsa, Senior Vice President, Investor Relations and Corporate Communications for Six Flags.

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

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

We are beginning the call with prepared comments and then will open it to respond to any questions you might have.

Our comments 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 these 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 report, quarterly reports or forms filed or furnished with the SEC.

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

Thanks very much, Nancy, and good morning to everyone on the call.

I'm extremely proud of our third-quarter operating and financial performance.

We delivered the highest quarterly revenue and EBITDA on a comparable park basis in the Company's 52-year history, and we are steadily moving forward step-by-step to achieve our 2015 aspirational goal of $500 million of modified EBITDA, which equates to nearly $3 of cash earnings per share.

On an LTM basis, our cash earnings per share was $2.21.

And using our current share count, the Company generated $2.33 of cash earnings per share, which represents a 12% growth over prior year, while also achieving another new industry high modified EBITDA margin of almost 40%.

We are very proud of our ability to consistently generate the highest margins in the theme park industry.

After adjusting for the litigation accrual related to the accident that occurred at Six Flags Over Texas on July 19, revenue and EBITDA were up 4% and 5% respectively in the quarter, despite some challenging headwinds, and resulted from successful execution of several strategic imperatives.

The first was continued implementation of our multiyear strategic pricing plan that further fueled record improvements in our per-cap ticket yields despite higher visitation by season pass holders.

We generated higher yields in every single ticket category.

Second was continued success of our season pass and membership strategy, which helps drive higher attendance, profit and cash flow for the Company.

We also saw strong revenue growth in our Flash Pass virtual queuing system, our all-season dining pass and our corporate alliance programs, to name a few.

Multi-year initiatives such as these will provide growth opportunities for the Company for many years to come.

I have been particularly pleased with our success in driving food sales through our all-season dining pass and also the success of some of our new and innovative food concepts, such as wings, barbecue wraps and various healthy menu items.

News in every park had a remarkable effect as we delivered exciting and record-breaking rides and attractions in every park.

And we further developed innovative marketing and research tools to draw new guests into our parks, enticing them to return over and over again.

The net result was excellent progress in our guest satisfaction scores once again, as we set new record highs in all key areas, including safety, overall experience and value for the money.

Our strong performance has allowed us to continue using our balance sheet to further create shareholder value.

In the quarter, we paid a $0.45 dividend, which represents more than a 5% yield, and we repurchased $100 million of our shares, bringing our 2013 share repurchases to over $0.5 billion.

I continue to believe that repurchasing shares represents a tremendous value to our shareholders.

In summary, it was an excellent quarter and another big step forward in achieving our long-term goals.

At this time, John Duffey is going to provide more detail on our Q3 results.

John?

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

I continue to be very pleased with our success in generating attendance, revenue, profit and cash flow gains year-over-year.

Let's look at the numbers in more detail.

I will start with the quarter's performance, and then discuss year-to-date results and finish with a review of our cash flow and capital structure.

Total revenue in the quarter increased $19 million or 4% as a result of a 4% increase in admissions revenue, a 4% increase in in-park revenue and a 7% increase in sponsorship and accommodations revenue.

Admission revenue per capita increased 2% to $23.96 as the result of solid pricing gains, which were partially offset by the strong season pass attendance mix.

With our continued focus on driving in-park spending with creative products and marketing, such as our all-season dining pass, in-park revenue per capita increased $0.26 in the quarter to $17.31, even with the higher mix of season pass guests.

Season pass customers typically spend less per visit than single-day visitors, but with multiple visits, they do spend more over the course of a season.

Attendance grew 2% in the quarter, with strong season pass visitation.

As we mentioned the press release, although we will not quantify the impact, the accident at our Six Flags Over Texas Park in July had a negative effect on that park's attendance in the quarter.

Cash operating expenses increased $6 million in the quarter or 3%.

Approximately half of this increase is the result of accruing a $3 million charge for litigation costs relating to the accident.

We do not expect any material changes to this accrual beyond this.

Excluding the charge, cash operating expenses grew 2% and represented 35.1% of revenue versus 35.9% in the prior year's quarter.

So let's move on to discuss year-to-date and LTM performance.

Despite the challenging weather conditions that we referenced on our second-quarter call, which continued into July, year-to-date revenue was up $29 million or 3%, driven by a 2% increase in attendance and a 1% increase in guest per capita spending.

We continue to see the benefits from our intense focus on leveraging our cost structure through programs that drive efficiencies in our operations.

As a result, year-to-date cash operating expenses were up a modest $1 million on a reported basis, or down $2 million after adjusting for the litigation accrual.

Year-to-date and LTM adjusted EBITDA were $369 million and $399 million, respectively.

Excluding the $3 million litigation charge, year-to-date adjusted EBITDA was $372 million and LTM adjusted EBITDA was $402 million.

As we mentioned on our last year's call, in 2012, we had a $3 million benefit from Hurricane Irene insurance proceeds and $6 million of adjusted EBITDA from Dick Clark Productions, which was sold in September 2012.

Adjusting for these two items and the current-quarter litigation accrual, year-to-date and LTM adjusted EBITDA grew by $27 million and $28 million, or 8% and 7% respectively.

The combination of attendance and pricing gains, as well as cost leverage, improved our modified EBITDA margin by 105 basis points and 81 basis points for the year-to-date and LTM results, respectively.

LTM modified EBITDA margin now stands at an industry high 39.9%.

With the continued success of our season pass and membership strategy, deferred revenue at September 30 was $76 million, up $17 million or 28% from September last year.

This increase represents the remaining revenue from the strong 2013 season pass sales and year-to-date sales of 2014 season passes, as well as our successful membership program.

In the first nine months of the year, we generated $223 million of free cash flow, after making $89 million of capital investments.

We also repurchased $504 million of our stock and paid $131 million in dividends.

Net debt as of September 30 was $1.2 billion, and as a result of the improvement in EBITDA, our net leverage ratio declined to 3.0 times.

Our $1.80 per share annual dividend represents 77% of our cash earnings per share based on our current share count, so there is plenty of room to continue our share buyback program in future years.

I am very comfortable with our current capital structure and continue to believe that our policy to return all excess cash flow to shareholders, be it dividends and share buybacks, is prudent.

As I mentioned before, I am very pleased with our financial performance both in the quarter and year-to-date and I believe we are well positioned for the balance of this year and into the future.

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

Thanks very much, John.

Our team is now focused on a strong finish to a fantastic year.

We are headed into the last weekend of Fright Fest, our extremely popular Halloween-themed event.

Fright Fest is a huge brand for us and we have invested in new attractions and more scary ghouls across all our parks for a third year in a row.

Later this year, over the winter holidays, several of our parks will host Holiday in the Park.

This is a very special time of year, especially for families, when we transform our parks into magical winter wonderlands with millions of twinkling lights, holiday-themed shows and a variety of seasonal food offerings.

It is another excellent opportunity to drive attendance and in-park spending.

We have already begun work on our 2014 season and are thrilled with the exciting attractions we will introduce at each of our parks.

We announced these in late August, and you may recall that we are introducing several new world-breaking rides as we maintain our news in every park approach.

Those rides include Zumanjaro, the tallest drop ride in the world, to be located at Great Adventure in New Jersey; the New England SkyScreamer, which will be the tallest swing ride in the world, to be located in our park outside of Boston; and Goliath, which has the tallest, fastest and steepest drop of any wooden roller coaster on the planet, and will be located at Great American near Chicago.

In addition to a variety of other rides, slides and shows at other parks, we are also building a huge, brand-new waterpark inside our Georgia theme park.

That will be called Hurricane Harbor, and we believe it will be a big success.

These product innovations are part of our multiyear strategy targeted at building strong business momentum.

I'm also very confident that our strategic pricing, yield and season pass initiatives will continue to bear fruit for our shareholders for the foreseeable future.

Our long-term success is tied to consistent and high-quality execution, and I remain very confident about our team's ability to deliver on our strategy.

Our goal is to continue strengthening the business through focusing on safety and quality innovation, operational efficiencies, financial excellence, building a high-performance culture and continuing to delight our guests day after day.

I think our future is very bright.

With our strong and consistent cash flow, highly attractive dividend, clear capital allocation strategy and the best team in the industry, all of whom are shareholders, we are very well-positioned to continue generating very attractive ongoing returns for our shareholders.

At this point, I'm going to open the call up for any questions.

Brandi?

(Operator Instructions).

Joel Simkins, Credit Suisse.

Good morning, everyone, and I guess I was the fastest dialer here.

A quick question here for you guys.

I guess as you reflect on the season, how would you rate some of the attractions, the seasons dining pass program, and whether or not this is something you would more aggressively push for 2014?

And how much pricing upside do you see given the current level of uptake for that product?

I think you may remember, Joel, that we tested all-season dining last year in two of our parks and it was highly successful.

This year, we rolled it out to all of our parks, and it has been again highly successful.

And we saw, at the two parks that we had tested it at last year, strong momentum in growth.

So we anticipate that this is a multiyear growth opportunity for us, and we also believe that we do have some pricing opportunity within that program, as we do with our tickets.

Okay, and two quick follow-ups.

Obviously, in heading into 2014, you will have the auto renewal kicking in.

But I guess what else are you going to do to really drive some of that season passholder retention and decrease some of the churn in the business?

And one other follow-up.

You mentioned Holiday in the Park.

How many parks will this be offered at, and I guess how money incremental park days will this add in the fourth quarter?

We are not breaking out how many incremental days there are for Holiday in the Park.

But we do it at four of our parks, and we have seen continuous growth every single year with that program.

So we feel very good about the ability to continue to expand that over a period of time, both in terms of days and in terms of the overall attendance.

In terms of membership, do you want to take the next one, John?

Sure, sure.

Let me just step back and kind of explain the membership program, how that works, and why we see a huge benefit going forward as it relates to this program.

As you think about it, in 2012, we rolled out our season pass Easy-Pay program, which basically allowed people to buy a season pass and pay in installments.

It was hugely successful, and it basically makes it an affordable buy for a lot of people that otherwise may not be able to get a season pass.

The membership is really an extension of that season pass Easy-Pay program, whereby it is very similar, but people buy -- instead of the season pass, they buy an annual pass that goes for 12 months.

They make monthly payments on that pass.

And then the real benefit of a membership versus a season pass Easy-Pay program is that the membership automatically renews at the end of that 12-month period.

So we believe that there's going to be a very significant benefit on retention rates under the membership program versus the season pass.

So I think to further build on John's points, and to your question, we are very excited going into 2014, and really for a number of reasons.

It's not just the fact that we have got great strength in the active base of both members and season pass -- and John described exactly what we've seen in terms of growth there earlier.

But we have what I believe will actually turn out to be the strongest lineup of new capital ready to go for 2014, along with -- we took pricing, and we will continue to look aggressively at ticket pricing.

We have done that across every ticket category, and that's going into 2014.

And, as you pointed out in your question, Joel, we are at a point with not only season pass holders but with membership where we now have access not only to all of their email addresses, but because of the payment method with membership, we think that will dramatically reduce the risk of people walking away from their season pass or from the membership program.

Obviously, you will still have churn, but it will be dramatically reduced.

And also, one of the other benefits that we have seen really from the Easy-Pay program but also the membership program is since it's much more affordable for people, since they are basically paying this on a monthly basis, is we have seen a nice upgrade or a nice penetration on people upgrading to things like our gold pass.

So we are actually getting more people in terms of buying the memberships, but we are also seeing a significant amount of those folks upgrading to our higher-priced passes.

Thank you very much.

Afua Ahwoi, Goldman Sachs

Thank you.

A couple of questions.

First, I notice versus our expectations, SG&A was a little bit higher than expected, even after backing out the accruals.

So maybe can you talk about that.

Were there any stepped-up promotions to drive attendance?

Because that was also quite meaningfully above what we were looking for.

And then secondly, on the buyback, I obviously notice you've run out of your -- or you've exhausted your authorization.

When can we expect, if any, talks about issuing another one potentially?

And then as we think about maybe the Texas park, I know you are not quantifying any impact, but maybe can you tell us how trends in that park proceeded as the quarter went on?

Thank you.

Sure, I'd be happy to do that.

John, do you want to start with SG&A?

Yes, on the SG&A front, actually, we were very pleased with where we are at from an SG&A standpoint.

And you really have to look at us really on a year-to-date basis.

Because from time to time, there are shifts between the quarters.

And as I mentioned earlier, if you actually back out the accrual, we are actually down year-to-date on OpEx, so we are very pleased with that.

There was some cost associated with -- on the Fright Fest side or on marketing that were shifted into the third quarter versus the fourth quarter.

But overall, we are very pleased with where we finished on OpEx.

I think overall, if you look at our performance over the last few years, whether it be in terms of total costs, there have been fairly dramatic reductions as we've gone forward; but also in terms of looking at us as a percentage of overall revenue, we saw a dramatic decline in the overall cost base.

So we continue to perform very well and no one in the industry has the margins that we have at 39.9% versus -- go back to 2009, where we were at 24%.

So we will continue to focus on SG&A.

Obviously, we can't address whatever assumptions you made in coming to your view.

With regard to buyback authorization, we are at the point where we are very close to having exhausted the overall authorization, and as a board, we discuss what we do next.

We have not yet had that discussion or come to a conclusion, but in the coming weeks we will.

And we will obviously let our shareholders know at that point.

With regard to Six Flags Over Texas, you're absolutely right with regard to your question.

There clearly was an impact that occurred in terms of the attendance in the quarter.

And in terms of trends, we have seen very steady improvement as time has gone on.

So this fits very closely with what I said on our last call, that historically you will see an impact especially at the park, and that lasts short to medium-term and then over time it dissipates, and that's we are seeing.

Ian Zaffino, Oppenheimer.

Thank you.

As far as the accident, was it just contained to the Dallas park?

Was there any bleed into maybe the San Antonio Park or any other adjacent parks?

Yes, it was really primarily -- it really primarily impacted the Texas park, Six Flags Over Texas.

There was really no impact elsewhere.

Okay.

And on the $3 million accrual, were there any other costs associated with the park above and beyond the $3 million or was that also rolled in there?

And is there any type of settlement amount also rolled into that $3 million?

There were other costs, but we are not disclosing those separately.

The $3 million represents the -- call it the legal retention and legal costs.

John, do you want to --?

Yes, I would say the $3 million represents our retention that -- what we stated our retention deductible is the [$2.5 million], plus an estimate of what we believe would be legal fees on top of that.

Ian, there were some additional remediation costs, but I would tell you they were immaterial.

Okay.

And then the last question would be on your covenants right now.

Remind us what the minimum cash balance is.

Is there an opportunity to maybe refinance and to change those covenants to maybe increase the distributions to shareholders?

As you know, we are always looking for ways to improve our either pricing or covenants, and we'll continue to take a look at that.

I can't tell you specifically what we would do, but we will continue to look at that going forward.

Okay, all right, thank you very much.

Good quarter.

Tim Conder, Wells Fargo Securities.

Thank you.

Jim, I think it probably is -- if you could give a little more color on the attendance impact from the accident in Texas, just to maybe -- so we can normalize what would have been here, if you can give us just that.

And then secondly, from the perspective of your existing covenants, I know one is based on a trailing 12-month basis, one is based on what you do on an adjusted EBITDA basis on a calendar year.

As things stand now, what do you have available for cash for dividends existing and higher dividends and share repo as it stands now looking into 2014 based on those covenants?

John, why don't you take the second question first?

Yes, on the covenants, there are basically two covenants that we have to look to as it relates to any type of restricted payments.

One is our credit agreement and then the other is the bond indenture.

Under the credit agreement, we are basically allowed to pay out all of the preceding year's excess cash flow, plus any current year's cash flow on our partnership parks.

So we have I think a lot of current flexibility there as it relates to the credit agreement.

On the bond indenture, it's a calculation based on EBITDA less 1.5 times interest expense, and that's a builder's basket.

So I think we've got some fairly flexible covenants as they relate to both the credit agreement and the bond indenture today.

So that will allow us to continue to do not only the dividends but share buybacks in the future.

But as you said on the last question that we had, John, we will never stop looking at how we can continue to improve the structure of our financing.

We made it clear with regard to capital allocations that our goal is to distribute all excess cash to shareholders via dividends and share buybacks.

And so we will continue to look at that to further improve it.

And as soon as we have something that we can disclose, we will do so.

With regard to your other question, I'm not going to break out the actual attendance impact.

But I will say it was material enough to impact the overall Company performance because it was big enough.

But as I reinforced in one of the earlier questions, we are at the point where that impact has diminished and is normalizing.

Okay.

Jim and John, let's go on on the debt question.

So it sounds like you are looking to maybe relever up.

Could we assume that the leverage ratios we saw post your December 2012 bond deal, that those would be the maximum of the Company if you were to relever up here in the near-term and then use those proceeds again, as you did in the past, to repurchase to return to the shareholders?

Tim, we are not going to speculate on what we might or might not do.

We will always look at what we can do to do the right thing for shareholders.

But disclosing to you this scenario or that scenario would be a fundamental mistake.

But again, let me just ask it again another way then.

Were you comfortable that the leverage ratios that you saw post the transaction in December, that those were kind of your maximum leverage ratios, if you would consider (multiple speakers)?

We were obviously comfortable with those leverage ratios, but we've never said this is a maximum or minimum, and we won't do so today.

Okay, okay, that's fair.

Thank you, sir.

James Hardiman, Longbow Research.

Good morning, thanks for taking my call.

I was hoping you could help us tease out some of the contributors to the deferred income number.

You had a really nice 28% increase.

I guess first, how much of that should we think about being units -- actual visitors versus pricing?

And then also, you talked a lot about a little bit earlier the seasons passes, the membership program with the auto renewal.

How much of that is just a function of getting people to commit earlier?

Ultimately the people that are signed up for that membership program, has that renewal already taken place and is that hitting that deferred income number?

On the deferred income, there's really five main pieces of deferred income.

It's the three that I talked about earlier, which is the remaining balance on our 2013 passes.

That will all be recognized in the fourth quarter.

The 2014 season passes that we've already sold.

The membership program that I've referenced earlier.

And then we also have some deferred revenue associated with one-day tickets that were sold in advance.

That will all be recognized obviously in the fourth quarter.

And some sponsorship, which most of that will be recognized in the fourth quarter.

As it relates to the increase, although there is a component in terms of that increase associated with price, I would say that it's predominantly based on higher unit sales.

And then as it relates to the retention question, James, we launched the membership program this year, so we have not seen a lap of that 12-month, that annual pass period.

But we do expect to -- based upon our survey data, we do expect to see some very good retention rates associated with that.

Got it.

And then secondly, if I look at, I guess, either the third quarter or year to date, really balanced makeup of your revenues.

Third-quarter attendance was up 2, admissions per cap was up 2, in-park per cap was up 2. I don't know that you ever gave us a formal indication in terms of the balance between attendance and pricing, but certainly the impression at least that I got was that it would be more skewed towards per cap.

So given the balance that we've seen, how much of that was really the original game plan?

And maybe my perception was a little bit off.

How much of that was calling inaudible, given some early season weather issues and then Six Flags Over Texas?

And how much of that, if any, is a change in sort of the strategy with regards to yield optimization as we move forward?

Thanks.

I think the right way to think about this, James, is that we knew that we were underpenetrated on season passes, and that there were several parks that had a strategic approach to season passes that really didn't make sense.

So over the last couple of years, we've gone through a process of making sure that we get that penetration strategy right.

And we clearly said on every single call that success with that penetration strategy would probably yield negative per caps.

In fact, we said it would put downward pressure on per cap.

We are through that really tough process.

We have driven massive season pass penetration, and we believe that the combination of season pass and membership growth will provide continued growth for us in terms of pure attendance and folks coming to our parks as a result of becoming members or season pass holders.

The single biggest element as we look forward for me is pricing.

I really continue to believe we are in the fourth or fifth inning of this game, and that we have many years ahead of us of being able to take pricing up.

So when I look back, as you described in judging the quarter or the year, I'm really happy that we have managed to grow attendance and grow per cap and taken pricing up all at the same time.

And I think with the sort of pricing increases we've got layered in for next year, I feel pretty confident that we should have another good year and several good years going forward.

But obviously, that's going to be something that will be revealed over time.

Got it, thanks, guys.

Ian Corydon, B. Riley & Company.

Thank you.

A lot of my questions have been answered.

Just wanted to ask on Great Escape, the purchase of the 50% you didn't already own, did that happen after the close of the quarter?

And then can you give us any sense for the margins at that property and the multiple paid?

The acquisition basically happened right at the end of the quarter, and so we will see a benefit starting in the fourth quarter associated with that purchase.

As it relates to the margins, I can't give you a specific margin; we don't provide that on a park-by-park basis.

But I would tell you that they are fairly consistent with -- or maybe slightly below our overall Company margin.

Okay.

And in terms of the seasonality, is it pretty similar to the seasonality of the overall Company?

No, it has a much smoother seasonality than the park seasonality.

Okay, all right, thank you.

Peter Goodson, Eminence Capital.

I wanted to talk a little bit about the aspirational case and this kind of $3.00 cash EPS number, make sure I'm thinking about it the right way.

That $3.00, that still includes the NOL consumption, right?

So if you were in 2015 and you're now closer to NOL exhaustion and you are trying to think about this on kind of like a normalized tax rate going forward, how much would that cost?

Is that like a $1.00, $0.90?

Peter, we are not going to speculate out in the future five, six years from now.

We are generating as of today $2.33.

If you use our closing share count, $2.33 of cash.

Four years ago -- 3.5 years ago, four years ago, we were generating $0.08.

We are consistently generating the cash and we feel pretty good about the ability to grow that further long-term.

So trying to speculate on what happens in the future, we are not going to do.

But it does take into consideration the current NOL benefit that we have today, but also realizing that the size of our NOLs, that will last us at least another four to five years.

Brandi, do you have another question?

There are no other questions.

You may now proceed with your closing comments.

Okay, thank you very much.

I am hoping that some of you can manage to attend Fright Fest at one of our parks this year.

It really is an amazing and dreadfully frightful experience, and I can guarantee that you will love it.

Again, I would like to thank shareholders for your ongoing support of Six Flags and our management team as we continue to build shareholder value in the months and years ahead.

Take care.

Brandi, that's the close of the call.

Thank you.

That concludes today's conference.

You may now disconnect.