Six Flags Entertainment Corporation
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good day, everyone, and welcome to the Cedar Fair Fourth Quarter and Year-End Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Stacy Frole. Please go ahead.

[Stacy Frole:]

Thank you, Kim. Good morning, and welcome to our 2014 year-end conference call. I am Stacy Frole, Cedar Fair’s Vice President of Investor Relations. This morning we issued our 2014 fourth quarter and year-end earnings release. And a copy of this release can be obtained on our corporate Investor Relations’ website at ir.cedarfair.com, or by contacting our Investor Relations offices at [phone]. On the call this morning are Matt Ouimet, our President and Chief Executive Officer; and Brian Witherow, our Executive Vice President 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 filings by the company with the SEC 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 I’ll turn the call over to Matt.

[Matt Ouimet:]

Thanks, Stacy. Good morning, everyone, and thank you for joining us. On behalf of our team, we are pleased to report we finished 2014 strong, and as a result, achieved our fifth record year in a row. For the full-year, we reported record net revenues of $1.16 billion, and record adjusted EBITDA of $431 million. The success of 2014 was led by increases in both, our admissions per cap and in-park spending, while comparable park attendance was consistent with last year’s record levels. For the year, the majority of our parks performed in line, with, or ahead of expectations. Kings Island where we build Banshee, a world record-breaking rollercoaster, was one of our top performing parks in 2014. As we expect with major new capital, Kings Islands new coaster help the park generate increases in both, attendance and guest spending. Banshee is a great example of the success we continue to have with our strong capital programs, where we focus on building scale and creating environments where people choose to go to create and share memories with families and friends. Knott's Berry Farm, where we completely renovated the Camp Snoopy children’s area as well as the park’s iconic Calico Mine Ride this past year, also contributed nicely to the attendance and guests per capita spending increases. We are also pleased with the fourth quarter performance of our parks in the Great Lakes region. These parks faced some difficult challenges throughout 2014, including a harsh winter season that extended school calendars; a water main break leading to a June weekend closure of our flagship park, Cedar Point and unseasonably cool temperatures throughout the peak vacation months of July and August. Despite these challenges, the parks finished our operating season strong, generating increases in attendances, and in some cases, record guest spending post-Labor Day. As many of you have experienced, it can be difficult for organizations to execute successfully in the moment while staying committed to milestones associated with long-term goals. The risk of slippage and compromise exemplified when in-season targets are under pressure. We certainly felt that pressure this summer, particularly at Cedar Point, which was following an exceptional performance in 2013. We recognized that this park’s challenges were unique and that representative of our broader consumer trend, especially when taking into account the strength we were seeing throughout the rest of our portfolio. One of our primary goals at Cedar Point heading into the 2014 season was to enhance the overall family entertainment experience, similar to what we have done at Knott’s over the last two years. We revitalized the parks Gemini Midway with new family rides and attractions, introduced more midway entertainment throughout the park and extended operating hours. I call this out to confirm for this audience that our team is committed to producing strong results in the current year, while remaining respectful to what we need to do in order to protect and grow our business going forward. It would have been an easy decision to cut back on some of our initiatives to reduce costs and improve margins in the short-term. However, this would have negatively impacted the overall guest experience, possibly impacting a family’s decision to visit our park again in the future. We believe Cedar Point’s record post-Labor Day performance, and the fact that 2014 was the park’s second best performance in its 145-year history, reflects the success of our commitment to delivering a compelling value for the price paid at every park every day. This past year we also advanced important long-term initiatives that supported our ability to grow our business in the years to come. These include

[Brian Witherow:]

Thanks, Matt. From a financial perspective, we are very pleased with our 2014 performance, which as Matt mentioned, represented our fifth straight year of record results. While the past year presented its share of unique challenges, I want to take a moment to highlight the impressive achievements of our parks. In 2014, we achieved record net revenues and adjusted EBITDA, which included record fourth quarter net revenues and adjusted EBITDA, as our fall and winter events continue to grow in popularity. We refinanced the portion of our debt with a 10-year unsecured bond, resulting in annual cash interest savings of approximately $13 million going forward, and we announced a 7% increase in our annualized distribution rate to $3 for 2015, which became effective for the December 2014 distribution payment. To emphasize Matt’s earlier comments, we achieved these accomplishments while also advancing many key long-term initiatives that we expect to fuel the next layer of our growth. Looking forward to the 2015 season, although still very early in the year, we are already seeing positive trends in several long-lead indicators including; season pass sales, adoption of our new all season dining programs, group bookings including more catering events and advanced reservations at our resort properties. Now onto the financials. For the year, we reported revenue growth of $25 million or 2% to $1.16 billion. This was primarily driven by a 3% or $1.39 increase in average in-park guests per capita spending, which reached an all-time high of $45.54. Driving the increase in guests spending was a 3% increase in our admissions per cap and a 4% increase in pure in-park spending. As we’ve discussed over the past few years, the development of our CRM and revenue management platforms and the introduction of a more aggressive group sales program have all contributed to our increase admissions per cap. These programs have enabled us to do a better job of segmenting our guests and providing the right offer to the right guests at the right time. In 2014, guest spending and Food & Beverage was the lead driver of the growth in in-park spending, as we successfully introduced bundled value meals, all-day dining programs and all-season dining which was successfully tested at three of our parks. The all-season dining program is being rolled out company-wide for 2015. F&B spending also continued to benefit from our productive system-wide relationship with the Coca Cola Company which we entered into at the end of 2012 season. We are very pleased with our ability to drive improved guest spending in 2014, while also entertaining 23.3 million guests, a record number when compared with 2013’s comparable park attendance. Finally, out-of-park revenues in 2014 increased to $127 million, up $3 million or 2% from 2013. A large portion of this increase reflects the fourth quarter proceeds from our business insurance claim related to Cedar Point’s water main break earlier in the year, as well as revenue received during the third and fourth quarters for the days Great America was closed to accommodate events at the new Levi’s Stadium. Moving onto the cost front. Operating costs and expenses for 2014 totaled $748 million, up $32 million or 4% from the prior year. The increase in costs was largely due to budgeted increases in operating expenses, including increases in both, seasonal labor hours and rates and initiatives focused on enhancing the overall guest experience. Cost of Food, Merch and Games also contributed to this increase due to greater capture rates in our F&B category. As a percentage of sales, these costs remained comparable to last year. Adjusted EBITDA, which we believe is a meaningful measure of our park level operating results, increased 1% or $6 million to $431 million for 2014. This increase is a direct result of the record revenues produced by our parks this year. Adjusted EBITDA margin for 2014 was down slightly to 37.2%, the result of attendance growth at lower margin properties as compared with 2013’s record performance at our highest margin property, Cedar Point. I’d also like to note that in 2014, we continue to build on the success of our fall and winter events, which contributed to our record fourth quarter net revenues of $161 million and our record fourth quarter adjusted EBITDA of $37 million, a $22 million and a $16 million increase over the last year’s fourth quarter results respectively. As you can see, the incremental revenue generated during the fourth quarter flowed through nicely. Lastly, as many investors have begun discussing the impact of the weakening Canadian dollar, it’s important to note that our exposure to foreign exchange rates are limited and had a nominal impact on our 2014 results. However, if the deterioration of the Canadian dollar continues, there will be some downward pressure on reported U.S. dollar operating results for 2015. Now let me highlight a few items on our balance sheet. As we stated in our earnings release this morning, our record 2014 performance and solid operating cash flow have resulted in another year of improvement to our balance sheet. We ended the year with approximately $132 million in cash on hand and no outstanding borrowings under our revolving credit facility. This of course improves our financial flexibility and lessens our reliance on off-season revolver borrowings. In 2014, the maximum outstanding balance under our revolving credit facility with $85 million compared with a $123 million in 2013. As I previously mentioned, this past year, we refinanced our highest cost of debt with a new $450 million 10-year unsecured note, lowering our average cost of debt going forward to approximately 5.3%, down from approximately 6.3% last year. This refinancing saves us $13 million annually, reducing our projected annual cash interest costs to approximately $85 million in the coming years. We ended 2014 with a consolidated leverage ratio at 3.6x which is well within our comfort range in the current credit market environment. Overall, we are extremely pleased with our capital structure and the strength of our balance sheet. To summarize, we are very pleased with our 2014 operating results, as well as our solid financial position. We continue to generate a significant amount of free cash flow, and our capital structure provides us with substantial operating flexibility. We are well positioned heading into 2015 and will continue to prudently manage our cash flows to maximize value for our unitholders through a combination of cash distributions and organic growth opportunities. With that, I’ll turn the call back over to Matt.

[Matt Ouimet:]

Thank you, Brian. We’re looking forward to the 2015 season, as our leadership team continues to identify new areas to drive profitable growth and even higher returns from our capital investments. As I mentioned earlier, we dedicated our efforts in 2014, both to the operation of our parks for the current season, as well as pursuing initiatives whose impact would occur in future years. The payback for these efforts will begin to come in 2015. As mentioned in our release earlier this morning, these include

[Operator:]

Thank you, Mr. Ouimet. [Operator Instructions] Our first question is from Afua Ahwoi from Goldman Sachs.

[Afua Ahwoi:]

Thank you. Good morning team. Just two questions for me. First of all, given the harsh winter from last year, is there any sense you have on the school calendars for this year so far. Is it better or worse? Any thoughts on that. And then secondly, maybe if you can talk a little bit - I know you might give some long-term goals later on, but just curious - we just had SIX report, and they have been very successful with some of their holiday events. And is that an opportunity for Cedar Fair as well?

[Matt Ouimet:]

Great. Good morning, Afua. The school calendar, I think that it’s just - it’s probably too early to conclude pro or con and whether the school calendars will change as a result of weather. On a fundamental basis, independent of weather, the school calendars are essentially where they were last year. There has been some flexibility built into the system in some states as they’ve gone to total hours requirement versus a total days requirement. But I think, as we sit here at this time of the year with a predicted temperature tomorrow of minus 17 in Sandusky, it’s probably too early to address that. We continue to look at opportunities to expand our calendars. Quite honestly, Knott has a very successful holiday program that we continue to invest into and see results from. And so we’ll continue to explore where it makes sense for our parks, where either the climate is favorable or they are already in operating mode.

[Afua Ahwoi:]

Thank you.

[Operator:]

Moving on, we’ll take a question from Barton Crockett from FBR Capital Markets.

[Barton Crockett:]

Thanks for taking the question. I was interested - Brain, you said that outset in your script that you’re seeing positive trends in season pass adoption of all-season dining, group bookings and advanced reservations at the properties. But I’m not sure I heard any numbers. Is there any details you could give us around whether your stance is positive there?

[Brian Witherow:]

Yes, Barton. At this point in time, it’s such a small window. We’re not going to get into any specifics. Probably the largest components or the one that’s most far along in its development would be season pass. What I can't tell you there is we are well into the double-digits in terms of units and pricing continues to pace up as well. We went into 2015 with a plan to focus on reestablishing volume in seasons pass sales at some of our parks. And so we’re a little bit more discrete with some of our price increasing, but we’re very pleased with the overall revenue lift we’ve seen to this point. To give you some flavor what I will tell you is at the end of 2014, deferred revenues were a little north of $61 million compared to $45 million at the same time in 2013, so up $17 million or a north of 35%. That’s reflective of the season pass - positive momentum in season pass sales, as well as the initial sales around the season long dining. Just to refresh, we weren’t selling seasoned dining at this point in time last year. We didn’t introduce that until late in the spring at the three parks we tested it, but the early penetration rates on that have been very encouraging, as have trends in those other areas I mentioned.

[Matt Ouimet:]

And Barton I might just add that part of what’s sitting in the deferred revenue is accelerated renewals that is a direct function of our CRM - the application of our CRM systems. Our ability to communicate very effectively with those on a renewal basis is continuing to show results. So you may see a little acceleration there as well.

[Barton Crockett:]

Okay. Great. And I was also curious what the renovation of the hotel there, when will we be able to get some visibility into the impact of that on your business? When does it start to generate advanced bookings lifts, or can we see a lift in rate - can we see that now or is the work any out, or is that more close to the season launch?

[Brian Witherow:]

Yes, when it comes to hotel bookings, Barton, we’re already up at this point in time meaningfully over 2014 levels. It is a small - as I said moment ago, it’s a small window of performance or bookings versus the full-year. The booking lead time is a lot more compressed today than it was maybe three or four years ago. So we’re not going to give specifics at this point on any results in Q1, but I can tell you that as it relates to the Hotel Breakers, the early booking numbers look very good and the response from the guests have been encouraging.

[Matt Ouimet:]

And we have just recently started pushing out photos of the renovation, which is dramatic. Brian and I walked out with Richard Zimmerman the other day. So I suspect word of mouth will build pretty strongly on this. And it’s encouraging because it could initiate a longer length of stay. I think the hotel will produce an environment now that people want to stay longer, and then also attracts a little more of the benefit oriented consumer, which tends to spend lower in the parks. So we have good hopes for it, Barton.

[Barton Crockett:]

Okay, great. And then just one final thing. The accommodation and other revenue line was up 20% or so on a relatively small base. You mentioned that you got some insurance proceeds. Was that in that line in this quarter, and if so, can you cite that?

[Brian Witherow:]

Yes, there is a couple of items going through the largest of which, Barton, would be the business interruption insurance on the Cedar Point’s closure from the water main break. That was in the low single-digits. So not a material number, but that’s a part of it. The other piece that’s sliding through there is some of the revenue on events related to the closures around Great America with the Levi’s Stadium activity. That revenue associated with events there, that isn't really part of the parks normal operations. That’s flowing through there as well. So I would anticipate as that partnership with the 49ers in Levi’s Stadium continues to develop that we will hopefully see growth in that channel, but those would be the two items that are driving some of that incrementally you see in that line item.

[Barton Crockett:]

Okay, that’s great. I appreciate it. Thank you.

[Operator:]

And Joel Simkins from Credit Suisse has our next question.

[Christie Frederick:]

Good morning. This is Christie Frederick on for Joel. I just have two questions. First is, how are you currently viewing M&A opportunities?

[Matt Ouimet:]

So Christie, welcome. It’s nice hearing your voice. So the way we look at this. Look, over the past few years, we’ve focused on strengthening our balance sheet and creating a flexible capital structure. This allows us to take advantage of opportunities when they present themselves. At this point in time, we believe there are plenty of opportunities for granite [ph] growth within our parks and we’re going to be aggressive about pursuing those Charlotte expansion at Carowinds would be a very good example. But in regards to M&A, we’re always looking for potential acquisition opportunities, but only if it’s at the right price, at the right time.

[Christie Frederick:]

Great, thanks. And also given just the improvement on guest spend thus far, how do you anticipate changes going forward with lower gas prices?

[Matt Ouimet:]

Traditionally we haven't seen an impact from gas prices, either pro or con. Obviously, if that contributes to the investors - the consumers feeling like they have a little more disposable income, that should be a positive. But we have to yet to see that play out.

[Christie Frederick:]

Okay, great. Thanks.

[Operator:]

Our next question is from Tim Conder from Wells Fargo Securities.

[Tim Conder:]

Thank you. Brian on the Canadian dollar, you said that it really didn’t have an impact here in the 2014 year just completed. At current spot rates, would it be more noticeable in ’15?

[Brian Witherow:]

Well, welcome Tim. Yes, first let me say that our exposure to the Canadian exchange rate - what we’re talking about here is a non-cash item. It’s unreported U.S. dollar EBITDA or revenue whatever line item you want to pick. But yes, at current spot rates as well as what we’re seeing some of the forecasts we’re seeing for the next six to nine months, it has the potential to be somewhere in the $5 million to $10 million range, which would make it more meaningful than it was in 2014, but still something that’s very manageable I think on the overall landscape.

[Tim Conder:]

Okay. And thank you for the color both on the deferred revenue and the outlook on the season passes. Little comment you can make there on season passes as it relates to what that represented in ’14 versus ’13 of your total attendance?

[Brian Witherow:]

Sure, Tim. I would say that what we saw in 2014, as it relates to season passes continue to be encouraging. They continue to represent a little north of 40% of our overall attendance. Matt mentioned some of our CRM initiatives in 2014. We’re very much focused around season pass, both trying to drive higher renewal rates, which we saw a positive movement in to drive increased visitation, which was up in 2014 over ’13. So the average season pass coming to the park more often which gives us - the more we can drive that, the more pricing power we have in that channel. So that’s very encouraging. And we’re also looking to activate the season passholder earlier which we were successful on. So I would say, most key metrics as it relate to season pass in 2014, other than maybe the total units sold compared to ’13 were all very positive.

[Matt Ouimet:]

And Tim I might build on that a little bit, which is also to talk about a group sales business which if you are experiencing more broadly some recovery in the consumer economy and the business is doing better. That’s a place we see considerable traction last year. We just came back and celebrating with the sales teams. And so that’s a business that we’re going to continue to build. And that’s one of the reasons we’ve got the investment in the catering facilities that are going on at many of our properties, including Santa Clara next to the Levi’s Stadium, which we just briefly touched on. But we have a facility there that sits at the edge of our property that is now serving essentially as a hotel ballroom with revenue generation in the off-season for a lot of events that are either connected to the stadium or just connected to the community at large. So I think businesses are feeling a little better and that’s translating into the group business as well.

[Tim Conder:]

Okay, great. Thank you both for the color.

[Matt Ouimet:]

Thanks Tim.

[Operator:]

[Operator Instructions] Our next question is from Josh Borstein from Longbow Research.

[Josh Borstein:]

Hi, good morning, Matt, Brian and Stacy. Congrats on a good year. Just looking into 2015, how should we think about the operating leverage of the business right now? Should we anticipate something similar in 2015 that will balance investment and flow-through like we saw in 2014?

[Matt Ouimet:]

I think yes, you should anticipate similar there. I think one of the things that we’re trying to be respectful of, Josh, is the opportunity to continue to make investments that have multiyear payoffs. I do think that, that will probably keep our margin about where it is today. The caveat is obviously there is great leverage in this business and we saw it in the fourth quarter. But there are things and we haven't talked much about it yet at all. But we do think things like Wi-Fi in our parks are become a fundamental requirement. And those in a near-term from an expense standpoint or capital standpoint, it’s not overly expensive but it does pressure you a little bit on the flow-through.

[Brian Witherow:]

Just to add to Matt’s comments, Josh, I would say that as we look at ’14 versus ’13, one of the things that I mentioned on the call was how the mix of the parks’ performance plays in. As we are extremely focused, as you can imagine on getting Cedar Point to return to its 2013 levels of performance. Well,’14 was a great year. It was the second best year ever, it was down. And so whenever your highest margin property isn't performing up to the prior year standard, that puts some pressure on the overall mix. So I think some of that will be a play as well. But I echo Matt’s comments that we will continue to stick to our initiatives and objectives when it comes to investing in the guest experience.

[Josh Borstein:]

Great. Thank you for that. And how should we think about admissions per caps growth rate versus in-park growth rate. Do you expect a balanced result this year?

[Matt Ouimet:]

Yes, I think it will be a balanced result, but what we’re very pleased with is that we continue to have strong price value feedback from our consumers. And that’s one of the reasons we’ve done the rise rebuilt [ph]. It’s one of the reasons we operate parks longer hours etcetera. So I feel like we still have a lot of room to run there. That may vary by park. The other is our in-park offerings, particularly Food & Beverage. As the quality and variety of the offerings have improved, we’ve seen greater capture, because in the parks it’s traditionally about capture. And then finally, we touched on initiatives that our head of merchandizes is starting to rollout, which is not an area of particular focus over the past several years. So I think we’re going to see at, both the front gate and in-park spend this year.

[Josh Borstein:]

Great. And just last for me, looking at 4Q and peeking into 2015 here, how does the consumer behavior look to you? Do you think the consumer has gained additional confidence that might translate into higher consumer spend?

[Matt Ouimet:]

Clearly, the consumer felt good about themselves in the fourth quarter. Maybe better by indication versus the prior year. We’re hopeful about that. I think it tends to swing with the mass media some times. But all the early indications that we’ve got and although the metrics are relatively small relative to our total season pass sales etcetera, indicate that people are looking forward to this summer and they’ve got a little extra money to spend.

[Josh Borstein:]

And are you still satisfied right now with the price elasticity you’re seeing in the consumer?

[Matt Ouimet:]

I am excited about that quite honestly. And that varies by park. So our new systems let us take advantage of that in a way that we probably had to do in a more prudent manner before. So I am excited about that.

[Josh Borstein:]

All right. Thanks so much for taking my questions. Good luck on the rest of the year.

[Matt Ouimet:]

Thank you.

[Operator:]

[Operator Instructions] And it appears there are no further questions today. Speakers, I’ll turn the conference back to you for additional or closing remarks.

[Matt Ouimet:]

First of all, thank you everyone for your interest in Cedar Fair. As I hope, we’ve conveyed today, we had a very strong finish to 2014, which reaffirms our confidence in our long-term business strategy and the strength and loyalty of our consumer base. During this past year, we were also able to advance important long-term initiatives and we hope these initiatives, combined with our strong capital program, will make 2015 another record-year for Cedar Fair. We are proud of where we’ve come from and we’re optimistic about the growth opportunities ahead of us. From an investor standpoint, this is a great industry, and Cedar Fair is an exceptional company. We produce a significant amount of free cash flow, which, when combined with our strong balance sheet, will allow us to continue to deliver value to our unitholders, both in the near and long-term. We look forward to speaking with you on our next earnings call. Stacy?

[Stacy Frole:]

Thank you 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 about three months to discuss our first quarter results and long-term targets. Thank you.

[Operator:]

And that does conclude our conference call today. Thank you all for your participation.