Six Flags Entertainment Corporation
Q1 2009 Earnings Call Transcript

Published: 6 May 2009

[Operator:]

Good afternoon, ladies and gentlemen. Welcome to the Cedar Fair First Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) I would now like to turn the conference over to Ms. Stacy Frole. Please go ahead.

[Stacy Frole:]

Thank you, David. Good afternoon and welcome to our First Quarter Earnings Conference Call. I'm Stacy Frole, Cedar Fair's Director of Investor Relations. Earlier today we issued our first quarter earnings release. A copy of that release can be obtained on our corporate Web site at www.cedarfair.com or by contacting our Investor Relations offices at 419-627-2233. On the call this afternoon are Dick Kinzel, our Chairman, President and Chief Executive Officer, and Peter Crage, our Vice President of Finance and Chief Financial Officer. Before we begin, I need to caution you that comments made during this call will include forward-looking statements within the meaning of the Federal Securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. You may refer to our 2008 Form 10-K filed with the SEC on March 2nd for a more detailed discussion of these risks. In compliance with SEC regulation FD this webcast is being made available to the media and the general public as well as analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated. All content of the call will be considered fully disclosed. Now let me turn the call over to Mr. Dick Kinzel.

[Richard Kinzel:]

Thank you for joining us on the call. Today, we'll discuss our first quarter performance, our 2009 operating season, and provide an update on our strategy to reduce debt and strengthen our balance sheet. First, I would like to provide an update on potential asset sales. I'm pleased to say we have entered into a conditional agreement with the Vaughan Health Campus of Care which contemplates the purchase of the 82 acres of land adjacent to Canada's Wonderland in Toronto. We will provide additional information on the sale of land once the conditional period has expired and more definitive terms have been confirmed which we anticipate will be within the next 60 days to 90 days. We're also pleased with the numerous inquiries we've received from potential buyers since announcing our plans to explore the sale of Worlds of Fun in Kansas City, Missouri and Valley Fair in Shakopee, Minnesota. We continue to move forward with this process but at this point in time it would be premature to provide any further details or speculate when a sale may occur. Consistent with our announcement in March, we recently declared our quarterly cash distribution of $0.25 per limited partner unit payable on May 15th. This reduced distribution rate allowed us to make a prepayment of $13 million during the first quarter of our term debt. We anticipate making the same prepayment on a quarterly basis going forward. In light of current economic and market conditions, reducing our debt and strengthening our balance sheet must continue to be a priority. Fundamentally, our business is sound and these actions demonstrate our commitment to reducing our leverage and strengthening our financial position for the long-term. Before discussing first quarter results, I would like to remind everyone the first quarter represents less than 5% of our full year revenues. I'll caution you that the first quarter is not material to our full year operating results and is always risky to jump to any conclusions based on the first quarter numbers alone. It's also important to note that last year's first quarter revenues benefited from early Easter and spring break season which fell during the second quarter of this year. Net revenues for the first quarter decreased to $26.5 million from $40.4 million a year ago. This is a result of 31 fewer operating days when compared with the first quarter of 2008, a direct result of the later holiday. The operating loss for the quarter remained relatively unchanged at $56.3 million. Only four properties of our 17 properties were in operation at the end of the first quarter. The other parks, including our largest seasonal parks, Cedar Point, King's Island and Canada's Wonderland were in the final stages of preparing to open for their operating seasons. These pre-season operating costs were in line with our expectations for the quarter. Peter will review the details behind the financial results with you just a bit but first I would like to discuss 2009 operating season in a little more detail. For 2009, we made changes in our operating schedule at each park based on the current year calendar and when various holidays fall as well as a profitability of shoulder season operations. A decrease in operating days in the first quarter when compared with 2008 will be more than offset by additional operating days in the third quarter due to Labor Day weekend following later September of this year. Currently, we are anticipating a total of 33 additional operating days in the aggregate for the 2009 operating season when compared with 2008. At this time we have seven of our ten seasonal amusement parks in operations with remaining parks scheduled to open within the next several weeks. I am pleased to say our capital projects have been completed, or are scheduled to be completed, on time and within our overall budget. In fact many of our new rides and attractions have already been opened. While a large part of our capital expenditures program is going towards three roller coasters, we will be also be introducing a new wave pool at Valley Fair and family ride at King's Dominion. We also continue to focus our attention on expanding the live entertainment options at our park as well as general infrastructure improvements. In 2009, we will offer more than 50 live shows across our parks with more than 20 of these being new at their respective park. Given that the first quarter is not a meaningful part of our full-year financial performance, and the Easter and Spring break season occurred in the month of April this year, it would be premature to comment on expectations for the season. However, I would like to update you on early season sales for seasons passes and group outings. As I mentioned last year at this time, our seasons pass and group business make up approximately 25% of our annual admissions revenues. Over half of these sales occur after our parks are in operation and therefore it is still too early to accurately forecast 2009 full-year performance based on current trend. Through the first quarter, seasons pass sales were down when compared to the same time last year, but it has improved somewhat through April. Our group business is also trending behind in sales when compared with the same period a year ago. Within the area of group business there's always turnover from year to year and we have consistently been able to replace those groups with new group business. However, 2009 is proving to be a little more challenging for us as the macro economy continues to be a concern for many businesses. We will continue to work with the companies and large groups to offer a package and/or good any day tickets that are attractive to them. Given the general concerns over the economy, I believe it is important to provide a little color on Knott's Berry Farm's early season operations. After a slow first quarter due to a later Easter and Spring break season and some unfavorable weather conditions, including two days where the park closed due to significant rainfall, we have seen improvement in revenues and attendance in April and are hopeful this trend will continue. I must caution you that Knott's operates at its lowest level of attendance during the first quarter of the year and with approximately 80% of its season still to come; it is too early to predict how the regional economic conditions may impact future business. The broader economy will continue to be a challenge for us, but one we are ready to face. This is something we have been dealing with on a regional basis in the Midwest for several years now with some success. Our business strategy has not changed for 2009. We are hopeful that our high quality parks and resorts will meet the demands for entertainment for families that don't want to travel long distances over long periods of time as we have seen in the past during tough economic cycles. We hope that our convenient locations to most metropolitan areas we serve, coupled with the outstanding value we offer in a full day of entertainment and exceptional guest service will prove to be desirable this season and for many years to come. On a personal note, I did want to briefly mention how disappointed I was when I had to sell some units earlier this year in order to meet a margin loan call. This sale in no way reflected my view of Cedar Fair's financial position or its future performance potential. Since that time, the margin call has been settled and no units are pledged as collateral. I believe Cedar Fair is a great investment and my confidence in this Company remains unchanged. At this point I'll turn the call over to Peter, to discuss the first quarter numbers in more detail and to provide a more detailed update on our long-term strategy for reducing debt and strengthening our financial position. Peter?

[Peter Crage:]

Thanks very much, Dick. Allow me to begin by reminding you virtually all of the revenues from our seasonal amusement parks, water parks and other seasonal resort facilities, are realized during a 130 day to 140 day operating period beginning in the second quarter, with the majority of revenues concentrated in the peak vacation months of July and August. Only Knott's Berry Farm and Castaway Bay are open year around, with Knott's Berry Farm opening at its lowest level of attendance during the first quarter of the year. Thus, as Dick mentioned earlier, the first quarter is not material to our full-year operating results, and it's always risky to jump to any conclusions based on first quarter numbers alone. Consolidated net revenues for the three months ended March 29, 2009 were $26.5 million, broken down as follows

[Operator:]

Thank you, sir. (Operator instructions) Our first question is from the line of Scott Hamann with KeyBanc Capital Markets. Please go ahead.

[Scott Hamann:]

Good afternoon. In terms of the park admission prices this year, on average, are they higher and can you give us a sense of how much?

[Richard Kinzel:]

Sure, Scott. Admission parks, on average, each park is different. Some parks we actually held the prices, others, where we put big capital in why we have increased them accordingly. I would say on average our price is probably up somewhere between $0.75 and $1 on average. And as far as seasons passes, in most cases, those were held pretty stable with last year's pricing.

[Scott Hamann:]

Okay. And then, Peter, just to reconcile the operating days for the year are all these going to come in the third quarter?

[Peter Crage:]

Yes, the vast majority. We have a slight fluctuation in the second quarter, but the third quarter is where you will see the vast majority of the add back to get us to about 33 days ahead of last year on an aggregate basis.

[Scott Hamann:]

Okay. And then last year it seems like commodity prices were kind of pressuring the food and some of the other businesses. Is there any potential benefit that you might see this year as some of those roll off or are you able to renegotiate some better pricing going into the season?

[Richard Kinzel:]

Nothing really that really stands out, Scott. We are fortunate we can pass along increased prices in our food as those increases come along to us, in areas such as merchandise and games; we know what those prices are because we buy ahead of time on those, so we feel that we're in pretty good shape there. Food pricing, we just don't know. But again as I mentioned, we are able to adjust to economic conditions as the season goes on.

[Scott Hamann:]

Okay, and then, Peter, on these debt reduction targets, this year just contemplates the distribution and the potential land sale, and I guess the next three years. Is there anything outside of the distribution that, how are you breaking down those numbers?

[Peter Crage:]

Well, the number that I gave you in the call, are you talking about the number I just gave you in the call?

[Scott Hamann:]

Yes.

[Peter Crage:]

Prepared remarks was $200 million over the next three fiscal years is strictly distribution reduction. Distribution reduction, regular 1% amortization on our $1.7 billion in term debt, and the interest cost savings associated with reduced debt levels. So the $70 million this year and the $200 million over the next three fiscal years is strictly distribution reduction related.

[Scott Hamann:]

Okay. And on the Toronto land, are you still comfortable with the prior range you gave us on an acreage basis that was like $600,000 to $1 million bucks an acre, and then what's that land on your books for right now?

[Peter Crage:]

Cost basis really had no bearing on the market value. Right now I would say $600,000 to $1 million is fine, but with respect to what we're talking about with Vaughan, we're not commenting on that at this point.

[Scott Hamann:]

Okay, thank you.

[Operator:]

Our next question comes from the line of James Hardiman with FTN Equity Capital Markets. Please go ahead.

[James Hardiman:]

Good afternoon. Couple of quick questions. On the distribution, given the recent distribution cut as well as the planned debt prepayments, what kind of work have you done from a sensitivity standpoint in terms of figuring out just how bad would things have to get this year for you to be in a position where even after the current dividend cut, you would be in a situation where you might not be able to satisfy your fixed levered ratio covenants?

[Peter Crage:]

James, let me make sure I clarify the question. Are you saying how bad we have to get to not meet our default covenant or our distribution suspension covenant?

[James Hardiman:]

Well, either, really.

[Peter Crage:]

Let's put it this way. It would have to get worse than it's ever been in the history of the Company from a year-over-year reduction in EBITDA. Our worst year in 2001 was a 6%, 6.5% reduction in EBITDA; so in order to trip the default covenant, we would have to do substantially worse than that. We have done the sensitivity, but I don't have the numbers in front of me. With respect to the distribution suspension covenant, with these reductions in debt, although we can make no guarantees about where we'll be at the end of the year, we'd have to have a similarly bad year.

[James Hardiman:]

Similar in terms of that 6% to 6.5% reduction in EBITDA?

[Peter Crage:]

In terms of our worst year, 2001 year.

[James Hardiman:]

That seems unlikely, but let's say it did go in that direction. Would you have the necessary flexibility to see that coming and maybe adjust your distribution payment accordingly or would it be a situation where by the time it happens it would be too late and there wouldn't really be a whole lot you can do about it in terms of maybe scaling back that distribution even more?

[Peter Crage:]

That's a difficult question to answer, for this reason. Most of our business and our upside and profitability comes in the third quarter, so we will not know until the end of September, early October and then if we did not meet that covenant, that would trip on December 31st, so it would be a very tight window between the time that we knew we would be in a non-compliant situation and what we could do over that period of time.

[James Hardiman:]

Great. And then in terms of your capital expenditures, there is going to be a lot less this year versus last year. But if I recall correctly, a big chunk of the delta year-over-year is just some rides that you were potentially going to build this year, which you weren't able to get around to for number of reasons, sort of going forward, should we expect sort of the annual CapEx spend to be more like the $60 million range that we're looking for this year or more like $90 million range from last year or somewhere in between?

[Richard Kinzel:]

James, this is Dick. No, this year's capital is approximately $63 million. Going forward, we expect to get back into the range of the $80 million to $90 million range that we ran the parks with previously. 2010 should be a very exciting year for us. We have some great capital already in process for the parks. By 2010, hopefully the economy will be turned around by then. But this year we do have a lower capital number of $63 million, basically that we made some adjustments at the early part of last year. We were able to work with a ride manufacturer to put off a ride until 2010, so consequently this year's capital just a little bit light than normal.

[James Hardiman:]

Great. And then finally, obviously, you're not really ready to talk about any of the land deals really past the Canada's Wonderland, and even that limited at this point in terms of what you can talk about, but given the fact you haven't even mentioned anything about the Geauga Lake or the San Francisco 49ers deal, should we assume at this point those are more or less dead in the water for the time being?

[Richard Kinzel:]

On the Geauga Lake property, certainly, with the economy we just can't be giving the land away. It is very valuable property on a beautiful lake, and sooner or later, it is going to have some real economic value commercially or residentially. As far as the 49ers go and the property there we still are in negotiations with the 49ers. They're still discussing it with us and we continue to talk to them on a regular basis to see if an agreement can be reached.

[James Hardiman:]

Excellent. Thanks, guys.

[Operator:]

Thank you, sir. (Operator instructions) And our next question comes from the line of Tim Conder with Wells Fargo. Please go ahead.

[Tim Conder:]

Thank you. Just to follow-up on the CapEx question, what was the number for first quarter that you guys spent? And I apologize if I missed that. And then related to that, your expectations again if you just remind us for D&A for this year and next year?

[Peter Crage:]

For the first quarter, Tim, we spent about $23 million on CapEx, that's cash CapEx. And depreciation and amortization for this year I think is in the $120 million to $125 million range. I think that would be a fair number to use on noncash D&A.

[Tim Conder:]

Okay. And then is it similar or a little bit higher, Peter, for '10?

[Peter Crage:]

Probably come down slightly in '10, maybe $115 million to $120 million.

[Tim Conder:]

Okay. And then can you kind of talk about if this is a good or not a good way to look at it, if we look at your operating days in the first quarter on a year-over-year basis, and then just took your total revenues and looked at that per operating day, is that a good way to truly give a good apples-to-apples comparison of revenue or even just looking at expense performance in a given quarter?

[Peter Crage:]

I wish it were that simple, Tim. Really, additional operating days, particularly less operating days in the early part of the year depending on the amount of money that you spend in labor can work to your disadvantage, whereas later in the season they can have a completely different flavor. I wish it were as simple as just doing a quick division, but it isn't. Obviously, weather plays into it, the time of the year. Obviously, the extended summer, we're hopeful that will have some upside for us, but it's not a simple mathematical calculation. Dick, do you have any –

[Richard Kinzel:]

No, in the way that the calendar has fallen last few years, not basically the calendar but with the attendance trends going stronger and stronger into September and October, it would be pretty dangerous to try to base anything on the first month of the operating season, especially when all of the parks, with the exception of Knott's Berry Farm are just basically open on weekends.

[Tim Conder:]

Okay. That's what I thought, but I just wanted to ask the question. And then Peter, you mentioned that cash taxes would be $17 million to $20 million for the year.

[Peter Crage:]

Yes.

[Tim Conder:]

And before that comment, you mentioned that you got some valuation allowances going on with some deferred taxes and so forth. As it stands now, on an annualized basis, and granted there will be substantial variances by quarter, what would be a good guesstimate for an effective tax rate from an accounting perspective?

[Peter Crage:]

I don't have that in front of me. I think the first quarter was about 45%, but as you might expect that can fluctuate from quarter to quarter depending on the attributes and the things that affect the effective rate, but I think the first quarter is 45%, but we can get back to you on that.

[Tim Conder:]

Okay. Sure. And then, Dick, to circle back, you made some comments relating to the seasons passes that were down year-over-year through the first quarter, but you saw an uptick in April, and you mentioned the group business was also down in the first quarter. And I apologize, did you make any commentary how that was trending and how that trended in April?

[Richard Kinzel:]

Yes, I did. Basically, Tim, April's seasons passes did pick up somewhat, however, we are seeing some softness in the group business, and what we're seeing is that basically companies are maybe buying tickets for the park, however, they're not buying the catering aspect of it, lot of companies would do both. Some companies are bowing out and basically just doing the tickets, or in other cases, we have talked to them and they'll subsidize tickets. We're working with them in some way that they come to the park, whether it be as a group or at least we offer them good any day tickets at a discount or things like that. Our sales are down when compared to 2008, both in group sales and in the seasons passes; however, considering the economy, this really is not unexpected. This is what we planned for.

[Tim Conder:]

Okay. And then lastly, gentlemen, again a lot of things have been slow on the corporate development fronts for a lot of companies, but any update as far as plans looking into '10 or '11, thoughts with adjacent hotel properties or JV potential relationships, anything that you have been working on, on that front?

[Peter Crage:]

Tim, we do operate off of a five-year plan, but I can tell you very honestly our main concerns, especially with our balance sheet problems have been to keep the parks operating at maximum capacity. As far as expanding the land at some of the other parks, for example, at the Carowinds or Kings Dominion, places where we feel we have the possibilities of putting in accommodations, those have been sort of put on the backburner until we can get some of the debt down. But certainly going forward, once we get this debt down and we certainly have a lot of potential, we have a lot of land surrounding the parks, we can explore possibilities what we have done at both Cedar Point and Knott's Berry Farm in expanding the accommodations, and not only growing the Company externally, but also internally. But our emphasis right now is to reduce the debt.

[Tim Conder:]

Okay. Would you look at that from any perspective of maybe a license arrangement with a third-party provider?

[Richard Kinzel:]

We certainly would look at it. I can tell you we have not had any talks with anyone nor has accommodations company approached us to do anything like that.

[Tim Conder:]

Okay. Thank you, gentlemen.

[Richard Kinzel:]

You're welcome.

[Operator:]

And our next question comes from the line of Jeff Kauffman [ph] with Siren Capital Management [ph]. Please go ahead.

[Jeff Kauffman:]

Hey, Peter, Dick, how are you?

[Richard Kinzel:]

Hey, Jeff.

[Jeff Kauffman:]

Just a question, I'm going to follow Tim's reasoning down a different path. The seasons early, can't read too much into what you've seen so far, but based on what you're seeing in your parks, based on what you're seeing at Knott's Berry, can you tell us your opinion of how the consumer, not the corporate event, but the consumer is changing in park spend habits this year? And then I guess kind of the back side of the weak economy is I am sure you have a lot of high quality part time labor to choose from this season. Can you talk a little bit about any potential benefit that we might see in terms of quality or cost as you hire into the full park season?

[Richard Kinzel:]

I will start at the end if I could there, Jim. Our seasonal labor certainly in these economic times, especially here at Cedar Point, we're so heavily dependent on the automotive industry, we have certainly had a lot of applications this year and our screening process would be very, very deliberate and very careful and hopefully we're hiring the best possible people out there and the people that visit the park will get the best experience that they have ever had. The first question you had was –

[Peter Crage:]

Consumer behavior so far this year.

[Richard Kinzel:]

It's really a little bit early to tell, Jim, to be very honest with you. There is trends that we have seen over the years, certainly we know that with the advent of the games that the kids have, IT things like that, that our games per capita has held pretty soft the last few years. We don't expect that to increase, but people continue to eat. Even with the economy, while we think we might see a decrease in merchandise, we certainly might see a little bit of a decrease in games, but certainly people continue to eat, and hopefully, they'll come to the park, but it's just way too early to see any trends at this time.

[Jeff Kauffman:]

In a normal year, how does that in park spend traditionally break out between games revenue, merchandise revenue and food?

[Richard Kinzel:]

Lot of it depends on the park. Here at Cedar Point, for example, it's almost 45%, 50% in park, about $0.45 out of park. We don't break out games, merch, and miscellaneous and food, Jeff. We break out the in- park spend versus the admission spend, that's been a 45%-55% mix.

[Jeff Kauffman:]

Okay. Thanks, guys. Good luck this season.

[Richard Kinzel:]

Thanks, Jeff.

[Operator:]

(Operator instructions) Our next question is a follow-up from the line of Scott Hamann with KeyBanc Capital Markets. Please go ahead.

[Scott Hamann:]

Could you provide a little detail if you have any on hotel bookings so far this year relative to last year and kind of what you had to do with average daily rates to draw those people in?

[Peter Crage:]

Sure. Scott, we are seeing some softness. But this has happened for the last couple of years, and we basically have two parks that have hotels, that Knott's Berry Farm and here at Cedar Point. With the increase of inventory in the Sandusky area, we find that there is some softness at this time, but that softness has been for the last few years, and what we find with the internet is there is more last minute decision as opposed to planning their picnic or their summer vacation here at Cedar Point, and also at Knott's Berry Farm, two weeks or three weeks or a month ahead of time. I think with the inventory of rooms and with the economy the way it is, certainly it showed last year, we get more last-minute decisions. They can get on the internet and get their room, except for the weekends, they pretty well could get a room any time they want. So it's really switched to internet sales as opposed to trying to get their reservations two months or three months ahead of time.

[Scott Hamann:]

Okay, thanks. And then, Peter, could you just break out the operating expenses for the quarter, please?

[Peter Crage:]

Sure. We have cost of goods of $3.9 million, operating expenses of $61 million, SG&A of $13.6 million, and then D&A of $4.2 million.

[Scott Hamann:]

Thank you very much.

[Operator:]

Thank you, sir. Our next question is a follow-up as well from the line of James Hardiman with FTN Equity Capital Markets. Please go ahead.

[James Hardiman:]

Hey, guys, just a quick follow-up. The question earlier where we talked about exactly how bad things have to get for some of the covenants to be an issue. I guess the suspension covenant is obviously the more onerous covenant. Am I to assume that excludes any benefit that you guys are going to get from the sale of this Toronto land?

[Peter Crage:]

Yes. Yes, James, it does. We've reached no conclusions on when that, if it would close and when it would close, so we have excluded that from the sensitivity.

[James Hardiman:]

Great. And then assuming that deal closes, the outlook is obviously going to be a lot better. So I guess my question is if that deal closes, maybe some of these other deals come through, clearly, you're in a pretty good position from an operating standpoint. At what point from a leverage perspective, in terms of the debt on your books, at what point do you feel little bit more comfortable to the extent that maybe you consider ramping up the distribution once again or maybe paying down debt isn't sort of your number one priority? What's sort of the long-term leverage number that you're looking to get to before you readjust your outlook?

[Peter Crage:]

Based on what we're hearing from our advisors and our need to recapitalize the Company in a couple of years, that number used to be in the low 4s, and it's beginning to drop into the mid 3s. We really think we need to work toward a leverage, debt-to-EBITDA ratio in the mid-to-high 3s to put us in a good position for the future. In terms of when we would bring back the distribution, that would have to be evaluated once we got to that point. Dick, do you want to make some comments?

[Richard Kinzel:]

James, that certainly would be a Board decision, but I don't think it would even consider increasing the distribution until we got our debt in line, and by that I mean we take the total debt and we get tranches that we see that we're safe for a period of years, where we don't have this big bullet any more coming at us to refinance. What we hope to do during the restructuring or the refinancing phase is to have tranches that maybe expire every two years or three years, as opposed to have one big bullet that we have to face now. Once we get that under control and we can get working with the debt in a manageable way, by then certainly I think we'll go back to our original plan of trying to increase the distribution.

[James Hardiman:]

Perfect. Thank you, guys.

[Operator:]

(Operator instructions) I show no further questions in the queue. I would like to turn the call back over to management for any closing remarks.

[Stacy Frole:]

Thank you. At this point in time, if there are no further questions, I would like to thank everyone for joining us on the call today. Should you have any follow-up questions, please feel free to contact me at 419-627-2227. We look forward to speaking with you again in early August to discuss our second quarter results. Thank you.

[Operator:]

Ladies and gentlemen, this concludes the Cedar Fair first quarter earnings conference call. We thank you for your participation and you may now disconnect.