Six Flags Entertainment Corporation
Q2 2009 Earnings Call Transcript

Published: 4 Aug 2009

[Operator:]

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Cedar Fair second 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) This conference is being recorded today, Tuesday, August 4, 2009. I would now like to turn the conference over to our host, Stacy Frole.

[Stacy Frole:]

Thank you, Brandy. Good morning and welcome to our second quarter earnings conference call. I’m Stacy Frole, Cedar Fair’s Director of Investor Relations. Earlier this morning we issued our second quarter earnings release. A copy of that release can be obtained on our corporate website at www.cedarfair.com or by contacting our Investor Relations offices at 419-627-2233. On the call this morning 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 2 for a more detailed discussion of these risks. In addition, in accordance with Regulation G, non-GAAP financial measures used on the conference call today are required to be reconciled to the most directly comparable GAAP measures. During today’s call we will make reference to adjusted EBITDA as defined in our earnings release. The required reconciliation of adjusted EBITDA is in the earnings release and is also available to investors on our website via the conference call access page. 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 Dick Kinzel.

[Richard L. Kinzel:]

Thanks for joining us on the call. Today we will discuss our second quarter performance, attendance and revenue trends through this past weekend, and provide an update on our strategy to reduce debt and strengthen our balance sheet. First I’d like to provide an update on our sale of assets. I am pleased to say that we have finalized an agreement with the Vaughn Health Campus of Care to sell 87 acres of surplus land near our Canada’s Wonderland amusement park in Toronot. We expect to close on this transaction in the near future. The net proceeds of approximately $50 million will be used entirely to reduce our term debt. We continue to market undeveloped land in Cleveland as well as Worlds of Fun in Kansas City, Missouri, and Valleyfair in Shakopee, Minnesota. We also continue to discuss the potential sale of California’s Great America with the San Francisco 49ers. I want to stress that these are all profitable parks that produce steady cash flows. We are being proactive in marketing these assets for sale in order to pay down debt. That said, we are not in a position where we have to sell these assets and we will not sell them at artificially low prices. At this point in time we are unable to say if and 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 August 15. As we’re making pre-payments of $13 million on our term debt on a quarterly basis, we anticipate making the same pre-payment going forward. Now onto our operations. The first half of the 2009 season has been a challenge for the majority of our parks. The overall weakness in the economy combined with unusually poor weather has continued to negatively impact our operating results. In addition, on a year-over-year basis we had 39 pure operating days in 2009. Through the first seven months of the year, attendance across our 17 properties was down 10% to 12.6 million visits from 2008. Average in-park guest spending was down 1% to $39.80 and out of park revenues were $59.6 million, a decrease of $7.7 million from a year ago. Since the start of July we have seen a slight improvement in our attendance and revenue trends; however, they still remain behind our record breaking results in 2008. During the month of July we have made some changes in our advertising strategy to highlight the various promotions and special events in our parks. For the most part, the depth of our discounts has not changed significantly. A variety of ticket options we are promotiong has. We have also concentrated our efforts on more online and social media promotiosn which have proven to be successful both in selling additional tickets and controlling costs. Some of these promotions require guests to buy their tickets online in advance for a specifici period to receive the discount. We have found that where there was an economic uncertainty among our consumers, the trended to delay their decisions as to when to bring their families to our parks. These types of promotions help us to create urgency and gain an earlier commitment from our guests. It is important to note that attendance levels have been positive when weather conditions have been favorable. There just has not been enough good weather in this spring and summer to compensate for the decline. As weather typically averages itself out over an operating season, we are hopeful these conditions will continue to improve as we enter the other peak vacation month of August and our important fall season. It is also important to mention that our $62 million capital expenditure program for the 2009 operating season was lower than normal, partially due to the delayed construction of a roller coaster at one of our California parks. Kings Island, which introduced Diamond Back, a world class roller coaster and the highlight of our 2009 capital expenditure program has clearly been the standout performer this year among our parks. The new signature steel coaster has received great reviews from our guests. We look forward to introducing world class rides and roller coasters at our other parks in the near future, some of which may be announced within the next few weeks. We’ve been pleased with the ablity of our individual parks to control their operating costs this year. With our industry continuing to face an uncertain economy and value-seeking consumers, we have made a concentrated effort to control costs while not sacrificing quality and guest service and of course safety would never be compromised under any circumstances. The result was a 9% or $26.1 million reduction in cash operating costs and expenses through the first six months of the year and continued excellent guest satisfaction ratings. With approximately 40% of our season still ahead of us including an additional 70 operating days and our important Halloween events which we continue to expand by adding more haunted houses and attractions this year, we remain focused on adding value to guest visits through special events and promotions while continuing to control costs. It has been my experience over the years to be careful not to overreact in the short term in ways that could negatively affect the guest experience and perception of value. While we never like to see a decrease in revenues and cash flow, as long as we remain committed to providing our guests world class thrills, fun, and family entertainment in a clean and safe environment, we believe Cedar Fair and our amusement parks will be very successful over the long term. At this point I’ll turn the call over to Peter to discuss the second quarter numbers in more detail and provide a more detailed update on the long term strategy of reducing debt and strengthening our financial position.

[Peter J. Crage:]

Thanks very much, Dick. Let me begin by emphasizing that virtually all of the revenues from our seasonal amusement parks, water parks, and other resort facilities are realized during a 130 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 round, with both operating at their highest level of attendance in the third quarter. I’ll also caution you that it’s always risky to jump to any conclusions about full year results based on second quarter numbers alone. Before discussing results through the second quarter, I would first like to mention that our 2009 operating calendar had 39 fewer operating days during the first half of the year when compared with the same period a year ago. This will reverse itself during the last half of the operating season as we add 70 additional days in the third quarter for a total of 31 additional operating days in fiscal 2009 when compared with fiscal 2008. We define an operating day as each day an individual park is entertaining visitors. For example, today would count as 17 operating days as each one of our amusement and water parks are open. The additional operating days during the second half of the year are primarily due to Labor Day falling later into September, allowing many of our parks to remain open several extra days during the first week of September. At this point in time it is difficult to say what impact these additional operating days will have on our full year 2009 results. As Dick said, our performance through the first half of the year has been a challenge for us. Net revenues for the six months ended June 28, 2009 decreased 14% to $290.6 million from $336.6 million in 2008. Sources of revenues are as follows

[Operator:]

Thank you, sir. We will now begin the question and answer session. (Operator Instructions) Your first question comes from Scott Hamann - KeyBanc Capital Markets.

[Scott Hamann:]

Good morning. I’m just trying to peel back the onion here a little bit on some of these drivers for the first half of the year and I was hoping you might be able to kind of give me an order of magnitude on some of these issues that have impacted the results of whether corporate season pass sales, operating days, and just the general economy. Which of those are the big drivers and kind of as you look at whether in particular in past seasons have people that delayed their visits earlier in the year kind of come back and you recoup those later in the year?

[Richard L. Kinzel:]

Scott I think as we said in our prepared remarks, it really is a combination of all the above that you have mentioned. For example, our eastern parks, Dorney Park for example, it was the third wettest summer that they’ve had so far and that’s a very important park to us. Cedar Point, we’ve only had one 90 degree day here in Sandusky all season. The economy has certainly played a big part in it. For example, Detroit has a 17% unemployment rate. It’s the highest in the country. Charlotte, which is another big market for us, happened to be third in the latest surveys that we saw and that of course as a result of seasons pass sales [while with] confidence in the economy so I wish I could narrow it down to one thing, but I honestly believe it’s a combination as Pete said in his remarks that it’s basically the economy, it’s weather, and it’s consumer confidence. Hopefully within the remaining 40% of the season that we have, the people who come out, the weather will turn around, people will get some confidence in the economy and feel that they still want to get a day or two to come out with the family and visit one of our parks. Is there anything Pete you want to add to that?

[Peter J. Crage:]

No, I think you’ve covered it. Scott, we try to zero in on the exact drivers but these are fairly ominous, the weather, the cold temperatures is fairly ominous situations. To carve out and attribute a particular decline to a particular event or a series of events is extremely difficult if not impossible.

[Scott Hamann:]

Okay, and just kind of looking at the cost side going forward, obviously you’ve been planning for a lower revenue environment and I realize you have a high fixed cost structure there. It sounds like you’re going to wrap up some marketing spend here, so how do we think about what kinds of flexibility you had to take, costs out, if trends kid of continue at this rate for the rest of the operating season?

[Richard L. Kinzel:]

Scott, we have really been reducing our costs probably for the last eight or ten months last year when we closed the parks in November. Of course when the economy turned on us, we had a feeling that it was going to be a rough 2009 season. We delayed one of our capital programs that was supposed to go into one of our parks until 2010. We started cutting back on… unfortunately we had to cut back on some of our full time staffing. We went into reducing combining our seasonal staffing, eliminating some of the supervisory positions in our seasonal staffing going forward in anticipation that it was going to be a soft year so we’ve been actually cost cutting probably since last November and I think we’re pretty well there. I think we’ve done all the lay offs that we can do on the permanent staff level and on a day to day level we monitor our seasonal staffing as well as we can.

[Scott Hamann:]

Finally, Peter, on the Canadian land sale, what was the gross price that you paid and do you expect there to be a gain or loss recorded in the third quarter?

[Richard L. Kinzel:]

We expect a gain in the third quarter. We haven’t finalized those calculations for a couple of reasons. Number one, when we close on the sale we’ll have an exchange at which could change between now and then because we’ll be receiving the funds in Canadian dollars but we’ll be calculating that as soon as we close but there will be a gain in the third quarter.

[Scott Hamann:]

I guess I have one quick follow up on the Canadian currency. Was there an impact that was meaningful on the spending per capita numbers coming out of Canada’s Wonderland? Nothing that jumps out, no.

[Operator:]

Your next question comes from Timothy Conder - Wells Fargo Securities.

[Timothy Conder:]

Following on the previous question, could you quantify for us the impact year-to-date of what season and group sales are? Again, I know weather is obviously, the data supports that, the observations support that, it’s obviously a factor, but trying to pull out the ecomony impact, is there a way just to say our group sales are down $X million year-over-year? Our season pass sales are down this amount? Sort of attribute that portion at least to the economy and then there’s obviously weather and the fewer operating days. Could you give us a little more color on that? It would be greatly appreciated.

[Richard L. Kinzel:]

Tim, we’ve identified that season pass and group sales were down. We don’t necessarily attribute those specifically to the economy. I hear what you’re saying, that if people would have made those decisions some time ago and the economy may have impacted it. We’re finding though that a lot of the companies, a lot of individuals are making the decision closer to the date that they come to the park. So to specifically identify those as an economic driven versus the walk up business, weather driven, we haven’t done that and we don’t necessarily think that’s a good comparison.

[Peter J. Crage:]

Tim, one of the things that we’re finding this year that’s never happened before is a lot of companies, it was a benefit to take their employees on an outing. This year what we find is that a lot of the companies are subsidizing that as opposed to making it a benefit. Basically they are charging their employees a certain percentage of the admission to come to the park as opposed to in the past they gave them perhaps a barbeque dinner along with the tickets to the park. This year the employees have to subsidize some of that.

[Timothy Conder:]

Year-to-date, Peter, what was the impact on EBITDA of the closure of the Star Trek

[Peter J. Crage:]

Positive impact, we did have EBITDA in 2008 so it would have been the differential… do we have that number in front of us? We’ll have to get back to you on that , Tim. Obviously the revenues through the first six months were about $6 million so on a pro-forma basis the $336 million that we had mentioned last year would have been about $331 million. EBITDA for Star Trek for the first half of the year was about $1 million, so it was relatively negligent.

[Timothy Conder:]

The, I apologize if I missed this portion, but did you give an update on where things stand with the Minneapolis and the Kansas City Parks?

[Peter J. Crage:]

What was basically said on that Tim was that we are marketing those parks, however we’re not in a position that we feel that we have to sell them and we’re certainly not going to let them go for a fire sale. There’s nothing really new to report at this time.

[Timothy Conder:]

I think you had mentioned that you were surprised at the level of interest that you had in those parks. Is that still continuing and how do you feel in general about the direction of maybe indications of interest?

[Peter J. Crage:]

Right now the level has really slowed down a lot. The first level that we got was certainly below the expectation that the multiples we were expecting to get and I would say that the level of interest now is slowed down considerably. We certainly are continuing to market them but it has slowed down considerably.

[Timothy Conder:]

Can you comment year-to-date on your net promotional activities? It’s been in the press pretty substantially about some of your competitors and will you give us a directional level of how your net promotional activity has been year-to-date and what you expect it for the full year?

[Richard L. Kinzel:]

When you say net promotional activity, could you define that?

[Timothy Conder:]

I know promotions at some parks vary year-over-year depending on if there’s a new ride there. Then the types of promotions that you run at each park each year vary also, so again, if you look at that altogether on a net basis, how are your promotions on a year-over-year basis running?

[Richard L. Kinzel:]

Especially at the legacy parks, we didn’t do a lot of promotions in the past. We relied mainly on new capital that was going in and promoted that way and the paramount parks did an awful lot of promoting with special events. This year though we’ve adopted some of the PPI strategy. For example, things we’ve never done at Cedar Point for example, we have one of the Cleveland Cavaliers coming in this Wednesday to sign autographs. On Thursday at Cedar Point we have the Air Force Band that’s going to give a performance. We have a stay vacation weekend that we’re marketing here at Cedar Point. Next Thursday we have Jeff Gordon, the NASCAR driver, coming in, and basically we have an awful lot of promotions that we’ve never really done before but basically what it’s doing is we’re trying to get some interest in the marketplace and try to stir interest to get people up to try to come out to the parks and to enjoy themselves. But that type of promotion is not only going on at Cedar Point but it’s also going on at all of the other parks within the system also.

[Timothy Conder:]

If you look at all that together on a dollar basis, are your promotions flat year-over-year in percentage of revenue terms or are they up 5%, 3%? I guess that’s kind of the direction, if you have any color on that?

[Peter J. Crage:]

I guess the best number I could give you would be our admissions per capita and that is doing very well. In fact, it’s one of the bright spots that we have this year is admissions per capita. Again, as I said for the most part the depth of our discounts has not changed significantly but basically the variety of tickets that we’re offering is altogether different than we’ve done in the past.

[Richard L. Kinzel:]

Tim, are you asking whether or not we’re directing more marketing dollars to promotions and less to other areas? Is that your question?

[Timothy Conder:]

As you boil it all down, as you look at marketing promotions, however you want to classify it, maybe between the two. Is that number as a percent of revenues up or down on a year-to-date basis and what do you expect I guess for the full year from that perspective?

[Richard L. Kinzel:]

I don’t have that number in front of me. I’ll have to get back to you on that one. Our marketing spend is similar to last year but obviously on a week over week basis as we see how the business is operating, marketing is directing it in different directions, so to get you a specific number, we’d have to get back to you.

[Peter J. Crage:]

I can tell you this. We have not allocated any additional funds towards these promotions. They were already in the budget.

[Operator:]

Your next question comes from James Hardiman – FTN Equity Capital Markets.

[James Hardiman:]

Good morning, guys. A couple quick questions. I apologize on the first one if you’ve already answered this. I don’t think you have. Do you update on your financial covenants? I believe that the leverage ratio, the distribution suspension leverage ratio is the easiest one to trip. Obviously the Canada’s Wonderland deal really helps you from that perspective but seems like the EBITDA numbers are probably off a little bit more than you would initially expect it. How bad would the second half have to be for that to be a concern going into I think it’s end of ’09 that becomes an issue.

[Richard L. Kinzel:]

We’ll run through the calculation real quickly with you. We expect to be after the $120 million debt repayment at about $1 billion 580 on our term debt at the end of this year. The fourth quarter 2009 maximum consolidated revenue leverage ratio covenant that you refer to steps down to $475 million so that would calculate to an EBITDA level of $332 million on a fiscal year basis. Right now our trailing 12 month is $335 million so if we can achieve with the additional 70 operating days in the last half of the year, if we can achieve a level of EBITDA similar to the last year, we should be in good shape. But no guarantees.

[James Hardiman:]

Have you talked to your lenders, is there any chance that covenant can be renegotiated or is that sort of out of the question at this point?

[Richard L. Kinzel:]

We’re talking to them about a number of issues on the amendment and again since that process is still ongoing, I’m don’t want to comment on it.

[James Hardiman:]

Then on the capital expenditure side, is it still safe to say, you’ve talked about the reasons why this year was lower than last year. Still safe to say that we’ll probably see $80 million to $90 million for next year?

[Richard L. Kinzel:]

Yes. We’ll go back to normal spending next year.

[James Hardiman:]

Okay, can you comment a little bit on what the strategy, obviously you don’t want to unveil anything today, but it seems you’re uniquely positioned to comment on some of the strengths and weaknesses on some different regions across the United States. Is the strategy going to be more towards giving new rides and attractions to parks that just haven’t seen them in the longest or are you going to actively seek out maybe some of the markets that would be best positioned to take advantage of a new attraction?

[Peter J. Crage:]

James, I think both. We felt with the acquisition in 2006 that there was some real opportunities in those Southern parts, mainly Charlotte, and in Richmond and our capital will be directed pretty much… As you can see, our big capital the last two years has been Canada’s Wonderland and in Cincinnati at King’s Island and I can tell you that we’re very pleased with the results at both those parks. Both the capital programs in those parks have given us even in the soft conditions that we have this year, one of the bright spots in the company is King’s Island in Cincinatti and certainly I think that you’ll see when we make our announcement in the next 14 to 30 days why you’ll see that we’re going to continue to put emphasis on trying to bring people to the parks thjrough a combination of attractions and thrill rides.

[James Hardiman:]

Finally, in terms of the upcoming Halloween season, we’ve seen over the last few years that you’ve been able to maybe expand some Halloween events. Obviously Cedar Point has been doing stuff forever and some of your other parks have been doing stuff forever, but are there any additional sort of levers to pull this Halloween season I should say that will help that comp positively versus last year or is there anything special going on this Halloween season for some of the parks?

[Richard L. Kinzel:]

Just a little bit of history. That started out when we took that program from Knott’s Berry Farm and we put it at Cedar Point. It started out very slow. It took a few years to build. This will be the third year that we’ve had that at the Paramount parks. We’re adding more attractions and more haunted houses and things like that. We think it’s going to grow. We put a few more marketing dollars into it but that really is a word of mouth type of attraction that sort of spreads through the schools and that because school is in session at that time and it’s strictly a weekend venue so it takes time to build but we continue to put money into it and we’re very optimistic that this being the third year that it’ll get deeper roots each year and hopefully it’ll be much better this year. Even with the dollars we’re putting in it but also with the word of mouth. It’s a great date night but during the day it’s a great family attraction.

[Operator:]

Your next question comes from Jeffrey Thomison - Hilliard Lyons.

[Jeffrey Thomison:]

Good morning, you just answered most of my questions, so thanks for that. But I will just make sure I have a handle on the $129 million term debt reduction if I may. Is it accurate to say that year-to-date you have gone through $34 million or $35 million of that $120 million and then the second half of the year should bring roughly $85 million to go?

[Richard L. Kinzel:]

I believe so. We’re about $30 million to $35 million through the first half and then the remainder will be in the third and fourth quarter.

[Jeffrey Thomison:]

Did you say that you expect to end the year at about $1.58 billion in term debt?

[Richard L. Kinzel:]

Term debt alone. Excluding revolver.

[Jeffrey Thomison:]

I would just pass along that I spent the entire day Sunday at King’s Island and was very impressed and very pleased.

[Peter J. Crage:]

That’s always good to hear, Jeffrey. I’ll pass that along to the team there.

[Operator:]

Your next question comes from Ross Haberman - Haberman Funds.

[Ross Haberman:]

Could you at least touch upon the prospects of perhaps selling, you ran through two or three Great American and Valleyfair and some of the other parks. Any likelihood over this calendar year or is it too early to say?

[Peter J. Crage:]

Ross, it really is too early to say. We are marketing them. As I indicated earlier, the interest has really lightened on those parks and I’m really not too optimistic that a sale on either one of those properties will take place within the next 4 or 5 months.

[Ross Haberman:]

Do you any individual parks which are at a break even on a park level and/or losing money today?

[Peter J. Crage:]

No. All of our parks are operating profitably.

[Ross Haberman:]

I guess after the Canada real estate sale, are there any other excess or superfluous assets which you have up for sale?

[Peter J. Crage:]

We’re actively trying to sell about 700 aces right outside of Cleveland, the site of the old Geauga Lake amusement park. Again, we’ve had some offers on that but they were way low and we feel it’s more valuable than the offers that we’ve had on it. It’s on a lake. We do have a small water park on one side of the lake that ‘s doing very well for us this year. Again I think if economic conditions and the state of the economy in northeastern Ohio that prohibited at this time from getting too much interest on that property but again when the economy turns around hopefully we can divest of that excess land as well.

[Operator:]

Your next question is a follow up from Scott Hamann - KeyBanc Capital Markets.

[Scott Hamann:]

There was recently an environmental impact statement that was released in conjunction with the Great American stadium project. Do you have any thoughts on… I don’t know if you’ve gone through that or not but just any general thoughts on what that might mean or how that changes the position of the situation?

[Peter J. Crage:]

That just came out. We have 45 days to respond to it. Our attorneys are going through that page by page and we will definitely have our responses to that study in plenty of time to make our concerns known. It’s really too early. I’ve not got a report as to what the report says, just a very brief summary, but we will certainly have it broken down in detail within the next 30 to 45 days.

[Operator:]

At this time there are no further questions in the queue.

[Stacy Frole:]

Thank you. At this point if there are no further questions I’d 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 November to discuss our third quarter results.

[Operator:]

Ladies and gentlemen this concludes the Cedar Fair second quarter earnings conference call. This conference will be available for replay today through August 18, 2009 at midnight by calling 303-590-3030 or 1-800-406-7325 followed by the passcode of 4116678. Thank you for your participation. You may now disconnect.