Six Flags Entertainment Corporation
Q1 2009 Earnings Call Transcript

Published: 8 May 2009

[Operator:]

Good day, ladies and gentlemen and welcome to the Six Flags Incorporated first quarter 2009 earnings conference call. My name is Mary and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Miss Sandra Daniels, Vice President of Communications. Please proceed.

[Sandra Daniels:]

Thank you, Mary and good morning everyone. Earlier today the company released its financial and operating results for the first quarter ended March 31, 2009 and revenues through April 27, 2009. A copy of the earnings release is available on the company’s website at www.sixflags.com under the heading investors. Here with me today are our President and CEO, Mark Shapiro, and our Executive Vice President and Chief Financial Officer, Jeff Speed. Before I turn the call over to them, they have asked me to remind you that in compliance with SEC Regulation FD, a webcast of this call is being made available to the media and the general public, as well as analysts and investors. The company cautions you that comments made during the call will include forward-looking statements within the meaning of the federal securities laws. These statements are subject to risk and uncertainty that could cause actual results to differ materially from those described in such statements. You may refer to the company’s 2008 annual report on Form 10-K and its Form 8-K filed on May 7, 2009, both of which are posted on its website, for a detailed discussion of these risks. Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all contents of the call will be considered fully disclosed. In accordance with SEC Regulation G, non-GAAP financial measures used in the earnings release and in the company’s oral presentation today are required to be reconciled to the most directly comparable GAAP measure. Those reconciliations are available to investors in the earnings release. Now I would like to turn the call over to Mark Shapiro, our President and CEO. Mark.

[Mark S. Shapiro:]

Thanks, Sandra and good morning, everyone. As you know, we launched our change offer. We are early into the period and we are not going to offer any partials at this time, so with regard to the restructuring, again we have launched the exchange offer, we are early into the period but we are not going to give any partials at this time. We are giving our creditors well in excess of the minimum 20 days to consent. If successful, this restructuring would eliminate approximately $870 million of debt and the $300 million plus peers obligation we have. If the exchange offer is successful, we would still be left with $1.4 billion of debt, so clearly not a dream situation but certainly a much better situation than we are in today. Just to pre-empt any questions about specific conversations with specific creditors, we and our advisors are having dialog with anybody and everybody at this point, and that’s all I am going to say about those conversations. We know it will be challenging to obtain the level of participation required to make this offer work. We know we are asking a lot. We know we’ve set the bar high but we absolutely want this to happen and we believe it is in the best interest of all of our stakeholders. An in-court restructuring is not our desire -- never was. It comes with increased risk but as we have said from the beginning when we launched this process, we will do and are still committed to do whatever is necessary to right this balance sheet we inherited. I continue personally to be bullish and energized just thinking about the heights to which this company can soar once we truly balance, quote/unquote balance the balance sheet. Our performance last year speaks to that. The overall turnaround of this company speaks to that and the strength, vision, leadership, and creativity of our management team speaks to that. Now turning to the business -- I would tell you that the performance should be viewed through April 27th due to the Easter shift this year. Looking at our first quarter simply isn’t a realistic view of the business, given the Easter shift. I also want to remind you that quarter one, Q1, represents approximately 5% of the company’s annual revenues. Attendance thus far represents less than 3 million guests and as you know, last year we did 25.3 million total visitors, so bottom line, it’s early. So looking at our performance through April 27th when all the spring breaks and Easter trues up, all the spring breaks are over and Easter trues up, our revenue is down 10% or $12 million. Here’s how the $12 million breaks out

[Jeffrey R. Speed:]

Thanks, Mark and good morning. I am just going to spend a few minutes reviewing our first quarter 2009 results, giving a little more details, including our revenues through the last weekend of April which, as Mark mentioned, will allow for a more meaningful comparison of our year-over-year results, as it will include the Easter and Spring Break periods in both years. After doing that, we will open the call up for Q&A. Our revenues through April 27th, which includes the last weekend in April, were down $12 million, or 10% from the prior year period, reflecting a weaker Mexican peso accounting for $5 million of the reduction, and reduced sponsorship licensing and other fees of $3 million due to lower international fees, as Mark mentioned. For that same period, our total attendance was down 2% or approximately 50,000 guests. However, our paid attendance, which excludes comps and promotional tickets, was slightly higher compared to the prior year. Our guest spending per capita, which includes ticket per cap and in-park spending per cap for the period, was also down 2% before taking into account the adverse impact of the weaker peso on the U.S. dollar denominated results of our Mexico City park. Contributing to the reduction in guest spending per capita for the period was an increased mix of season pass visitors which have a lower ticket per cap and who tend to spend less in-park. We’ve seen this dynamic since the fourth quarter of last year, again probably a signal of the economy and people’s search for value. On the topic of Mexico and specifically the exchange rate impact on our U.S. dollar denominated results, it’s important to note that the peso weakened by approximately 30% compared to the prior year period, as well as the fact that our Mexico City park represented 38% of our total attendance for the quarter and 25% of our total attendance through the last weekend in April. And staying on the topic of Mexico, as Mark mentioned earlier our Mexico park has been closed for the last eight days at the direction of the Mexican Government as a precaution related to the swine flu outbreak. Yesterday the park obtained permission to reopen today. The closure during that eight-day period will result in approximately $3 million in lost revenues. Notwithstanding foreign currency impacts and swine flu concerns, we are encouraged by the performance of our park business so far this year while at the same time acknowledging it is still very early in the operating season, with our full-time operations generally beginning Memorial Day weekend. As far as revenues from sponsorship, licensing, and other fees are concerned, Mark mentioned we are currently expecting a 20% reduction from the $59 million we generated in 2008. Our revenues for 2009 will be impacted by the timing and extent of new international development opportunities, as well as the timing of the services to be provided related to our existing international deals. Through April 27th, our licensing revenues reflect a reduction of approximately $5 million due to those drivers, and although sponsorship revenues were stable for the period and we continue to believe we provide advertisers a compelling out-of-home advertising solution, we have to acknowledge that we are not immune to the fact that companies are shrinking advertising budgets and/or going through their own balance sheet restructurings, as in the case of our current partner, Chrysler. With respect to first quarter costs, our total operating costs and expenses benefited from the weaker Mexican Peso by approximately $3 million, as well as the timing of Easter and Spring breaks. This resulted in our costs being down approximately $10 million or 6% compared to the first quarter of 2008. Our net loss from continuing operations improved 8%, or $12 million, compared to the prior year quarter. This was due to lower interest expense, reduced operating expenses, and improved equity pick-up from Dick Clark productions, whose prior year results were adversely affected by the cancellation of the Golden Globe awards due to the writers’ strike. Partially offsetting the lower cost was the impact of our reduced revenues for the quarter. We ended the quarter at close to $80 million in unrestricted cash to fund our operating needs during the second quarter. One of the funding needs that arose during the second quarter was related to our annual obligation to offer to purchase units in the limited partnerships that own Six Flags Over Texas and Six Flags Over Georgia, including Six Flags Whitewater Atlanta. Historically, the total number of units put to us on an annual basis has been no more than $1 million to $2 million. In light of the economy in general, and specifically investors’ need for liquidity, this year approximately $66 million worth of units were put to us. Puts are required to be funded by May 15th. After taking into account the election of the third-party general partner in the Georgia partnership to purchase half of the units put for that partnership, our funding requirement is approximately $59 million. In order to preserve our unrestricted cash to fund our operating needs, we were able to obtain from Time Warner a commitment to loan approximately $53 million to our subsidiaries that are obligated to buy the units. Time Warner also agreed to allow us to release $6 million of funds from escrow which was pledged for their benefit under our partnership park agreements to be used to purchase units. The material terms of the loan are as follows

[Operator:]

(Operator Instructions) Our first question comes from the line of Joe Stauff from CRT Capital.

[Joe Stauff:]

Good morning -- a couple of questions, please. On the sponsorship revenue, can you provide I guess a little bit more commentary about corporate -- you know, the corporate alliance piece? Is it that there are just -- they are sort of bailing on renewal or is it just they want a lower rate or what is it?

[Mark S. Shapiro:]

The ad market is down.

[Joe Stauff:]

No, understood.

[Mark S. Shapiro:]

Go look at any business trying to drive advertising from local TV stations to local radio to newspapers, I mean, just the overall ad business is down. I actually -- I think Lou has a pretty good shot to get to some meaningful numbers but it is catch-up at this point as things start to heat up.

[Joe Stauff:]

No, understood and I guess what I was just asking was -- I mean, are they still participating in general but obviously at a lower rate?

[Mark S. Shapiro:]

You just can’t generalize it -- I mean, nobody is pulling out because they are unhappy with their programs, put it that way. The business continues to grow and the response, that was my point, has just been phenomenal. When we walk into most advertisers, it’s -- they are a little skeptical and weary. Explain to me what you are doing here -- this out-of-home solution, I get it. Is it just ride signage? What is it? We take them through the program and that’s how we are able to generate the kind of numbers we do. We turn them on, impress them, score with the execution and get them back. But in this market it’s probably a combination of everything. You’ve got some marketers that are just cutting out-of-home out or cutting back on television and adding out-of-home. Some marketers are just cutting their overall budget completely. Some marketers just can’t experiment right now with the ad dollars. I mean, it’s a host of issues. The ad sector itself is down and we are just a small cog in that wheel.

[Joe Stauff:]

Got it. Now with respect to I guess your expense structure at least for the year, is it again sort of fair to assume that obviously given the kind of savings that you achieved last year, it’s going to be very hard to sort of for that cost structure to contract again at some level. Is that fair to say?

[Jeffrey R. Speed:]

Joe, I think we are going to stick with what we gave earlier in the year, which is, to your point, we took a significant amount of costs out of the system last year and so this year we are looking, because of minimum wage impact, it’s going to hit us again this year because of the pension costs, given the performance of the assets under the pension, notwithstanding the fact that we froze our pension two years ago, as well as some new utility contracts that we had to renew that were multi-year deals. Those three items are going to result in our costs being up in the sort of 2% to 3% range this year.

[Joe Stauff:]

Okay. Thanks, guys.

[Operator:]

Your next question comes from the line of Andrew Chen of Barclays.

[Andrew Chen:]

Good morning, guys. A quick question around the Time Warner loan -- is that a secured loan or an unsecured loan?

[Jeffrey R. Speed:]

It’s unsecured but the funding from it, the loan has been made to the companies that are subsidiaries that are required to honor the put obligations and they are so-called bankruptcy remote entities, and so the -- those entities also received the preferred return that we get on our partnership units that we own and those amounts are required to be utilized to repay the loan, so albeit the loan is not technically secured, those flows are designated to repay the loan.

[Andrew Chen:]

Thanks, and then my second question is let’s say for now the company is unsuccessful in executing out-of-court restructuring. If the company does go through an in-court restructuring, what do you think the impact will be in terms of attendance, public relations, et cetera?

[Mark S. Shapiro:]

We are not going to make any predictions on that right now. It is too early to say where we are going and at the same time, it’s anybody’s guess when something like that happens. You see what is happening with the car companies but we feel good about where we are right now. It’s not like this is a surprise to anybody with regard to an in-court or an out-of-court or some of the debt problems we have been facing. For three years, there’s been rumors out there about Six Flags and an overall restructuring and a cleaning up the balance sheet. The bottom line is consumers, or our consumers, our guests, our fans, are savvy and as you can see from the performance thus far, they realize this is a back-of-house issue. This is an inherited debt situation that the parent company is dealing with. Meanwhile, there parks in each market are coming off record years, guest satisfaction scores that are through the roof, terrific performance, strong attendance, strong word of mouth, are all profitable, some very, very profitable and the consumers in these markets understand it’s a parent company issue and that their park is going to keep growing. And I think that’s the word we are going to continue to get out there because the truth just happens to be on our side. I mean, at a time -- and I’m not just talking other theme parks, at a time where every really entertainment business locally is cutting back, scaling back, laying people off, looking to cut corners here or there, Six Flags is in a great position. We are hiring more than ever before. We’ve got more quality employees and trained employees than ever before. We are seeing a benefit from the unemployment rate because older people, more experienced people and better trained people are looking for work, so we’ve got better stats. We’re adding attractions. You heard me talk about the rides. Obviously the stage shows, obviously the concerts, and that word of mouth is out there. In fact, we’ve gotten a lot of feedback from guests who are confused -- they don’t get it. They hear all these great things happening about Six Flags and the big season ahead but then they also read about the restructuring. So we are just going to continue to pound the pavement through all of our communication tools and vehicles to let everybody know it’s a back-of-house issue. We are going to try to get it all done and cleared up once and for all in 2009 but they will not see -- the guest will not see any difference in the experience this summer at Six Flags and if they see any difference, it will only be an improvement.

[Andrew Chen:]

Great. Thank you.

[Operator:]

Our next question comes from the line of Kevin [Coyne] from Goldman Sachs.

[Kevin Coyne:]

Good morning. Thanks for taking my call. Just a quick question on the interest payment on the 9.75s -- I know you had mentioned you were going to exercise the 30-day grace period and -- can you just -- I’m assuming you haven’t paid it and with about seven days to go here -- do you plan on making that payment and if not -- in other words, do you think you can continue with the restructuring costs and not make the payment?

[Mark S. Shapiro:]

We are not going to -- thanks for the question, Kevin but as we’ve said publicly already, we’re taking advantage of the grace period. We are going to take advantage of every single day in that grace period and we will let everybody know what we are doing on May 14th.

[Kevin Coyne:]

Excellent. Thank you.

[Operator:]

Our next question comes from the line of John Drecker, [Lorne Acre].

[John Drecker:]

Thanks for taking my call. In the first quarter, your trends were slightly negative on both attendance and on per capita spending. In your experience, does that carry over to your high season or should we not really look this first quarter very much?

[Mark S. Shapiro:]

Yeah, I wouldn’t make too much out of it if it was positive or negative, and we say this every year. I mean, it’s 5% of our total annual revenues. You heard me say it’s less than 3 million of attendance on -- at least last year we did over 25 million in attendance. As I mentioned, Q1 is totally skewed because Easter shifted this year. I know that happens for not just other theme park businesses but other retail or consumer facing businesses, so it’s tough to look at that. That’s why really the clear view is through April 27th, and still to your point, revenues are down $4 million or 4%, split between guest spending and attendance. But no, I wouldn’t make much out of it. The bottom line is this business, it’s all about July.

[John Drecker:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from the line of [Vi Rind] from [Hillco Trading]

[Vi Rind:]

Good morning, guys.

[Mark S. Shapiro:]

Good morning, Svi.

[Vi Rind:]

Great pronunciation there, Mark. Given the $66 million in redemptions on the partnership park puts, what would have been the impact in ’08 on EBITDA and cash flow with your increased equity interest? And does it have an impact?

[Jeffrey R. Speed:]

Good question. Basically we pay out a preferred return that shows up as minority interest on our P&L and also on our cash flows that’s roundly 9% or so of the value of the units and that increases by CPI, so if you apply 9% to $66 million, although $7 million I noted is going to be bought by the third party, so really what we are buying is about $60 million working units, 9% or 9.5% is the preferred return, so we are -- it’s about $5 million to $6 million pick-up in terms of adjusted EBITDA.

[Vi Rind:]

Okay. Very good. And then I was noticing on the balance sheet --

[Jeffrey R. Speed:]

On that point, Svi, I just want to mention the cash flow attributable to that until March of 2011 will actually go to service the loan, so it won’t be incremental cash flow but we will pick up the EBITDA.

[Vi Rind:]

Correct. I got you. And then I noticed on the balance sheet there is a slight difference in what was reported for the end of the year ’08 on the 10-K versus what was reported in this press release. What is the discrepancy? Because from what I got, and maybe I am doing my math wrong and Excel is really messed up but I got $2.366 billion of debt versus the -- what is it now, $2.298 billion that you reported in the press release?

[Jeffrey R. Speed:]

Yeah, we’ll be filing our Q later today. What that reflects is a new accounting pronouncement for convertible debt where we had to carve out the equity component of our convertible debt so that you have a sort of true debt [imputed] interest rate applying and so that was the change from the prior year. We adopted that new accounting pronouncement as of 1/1/09.

[Vi Rind:]

Okay, sounds good. And then my last question, as you stated numerous times, the balance sheet will be restructured one way or another in the coming months and that will likely result in significant free cash flow, depending on the operations of the business, of course. But considering the company has never been in such a position and bond-holders now are going to be your primary equity holders down the road, what are going to be your priorities with that cash for the reorganized entity? Will you focus on continued debt reduction or perhaps deviate from your $100 million CapEx budget the last few years and invest in more rides and attractions?

[Jeffrey R. Speed:]

Well, I think that’s a basic capital allocation analysis that we will be going through on a regular basis to see what growth opportunities we have organically through our business, through acquisitions or extensions of our brands, or alternatively the safe route of further reducing debt. So that’s going to be something that is going to be a continuous analysis that we will be going through with that additional capital.

[Mark S. Shapiro:]

And Svi, at the same time, as we have said from the beginning when the new management team came on, we are going to build this business through the guest experience, through the in-park experience, through great guest service which will ultimately lead to longer stays, more in-park spending, good word of mouth, and repeat visitation. It’s a complete -- it’s not that people have been wrong or they have miscalculated or exaggerated to say it’s a cap-intensive business because just on the asset maintenance side or deferred maintenance side, it’s certainly cap-intensive but we don’t need to be spending, nor will we ever be spending, the kind of capital in a calendar year that this company historically spent before we got here. We are at a run-rate of $100 million and no matter what kind of restructuring we go through, we are going to stay just about right there. We have a huge 50th anniversary upon us in 2011 that we are in knee deep planning for at the moment. We are excited about it. It is going to be a big bang, a big coming out party and it’s going to require capital but we still plan to stay within our disciplined guidelines of approximately $100 million per year.

[Vi Rind:]

All right, sounds great. Thanks for the time, guys.

[Operator:]

Our next question comes from the line of Jane [Cadera] from [Clear Sights] Research.

[Jane Cadera:]

Good morning. I just have a question on the group sales business; apparently Cedar Fair had indicated that they were booking groups but the tickets were okay but the catering looked very soft. I am just wondering if you can comment on if you are seeing any kind of similar trend there with the group sales.

[Mark S. Shapiro:]

Yeah, as I mentioned, Jane, that’s really our biggest challenge right now. I mean, you know you are seeing that across the board, not just in theme parks but sports outings and games, obviously, and some of the corporate outings they are having there. I mean, you are running into double trouble. You are running one avenue takes you to a place where corporations are just obviously not in a position to be having any kind of employee outings. And then you walk down the other street and those companies that are in a position maybe don’t want to be seen as being in the position to have an off-site or a corporate outing or whatever it might be. And those that are booking are being very measured and prudent, as they should be. Nevertheless, in these trying times, employees kind of need to get out and get -- let out some steam in every way they can and have fun and be in a social environment and put a smile on their face and be reminded the sky isn’t falling, and that goes for families too. So there’s still plenty of companies out there that are signing up and obviously seeing us is a great solution because it’s a drive, it’s close to home. But as I said, we are down in group sales. I believe we will be down at the end of the year. We are not significantly off but it is our biggest challenge and I am spending some of my personal time on it as well.

[Jane Cadera:]

And then the other comment was that they were speculating that the food sales in the park, you know, people have to eat so they probably would continue to eat but other things like merchandise might be weak. Could you comment on that as well.

[Mark S. Shapiro:]

Yeah, we’re not seeing that just yet. I mean, as you see, we’re off -- revenues were off $2 million in guest spending but we are not seeing a lot of that. We’re pretty strong in food. I like where we stand on games and parking and rentals and even merchandise. I mean, I would tell you, the number of transactions are down in retail but the amount of money that is being spent on those retail merchandise transactions is up. So again, it’s very early. I don’t want to make too much out of it but we are feeling pretty good about our guest spending and as you know, that’s been core to our turnaround strategy since the day we arrived. It’s all about the in-park experience.

[Jane Cadera:]

Okay.

[Jeffrey R. Speed:]

And just one other comment to that, just to add to it, Jane -- as we touched on that the mix of our visitation will have some impact on the in-park spending, as well as the ticket per cap and we have seen, much like we saw in the fourth quarter, a higher proportion of season pass visits in terms of our mix of attendance and as we know, the season pass ticket per cap is below our normal promotional or daily ticket per cap, and the season pass holders tend to spend less per visit because they are coming more often.

[Jane Cadera:]

That makes sense. And then in terms of pricing, if I recall, you weren’t really modifying pricing significantly into this year. Is there a point at which you would modify pricing or -- like a point in the calendar where you might, if attendance just isn’t ramping up?

[Mark S. Shapiro:]

We believe we are well-positioned when it comes to delivering on the value proposition. When you say not modifying, I mean, we’re at our everyone pays kids price promotion. We are at that level. It worked for us last year. It’s clearly resonated in the marketplace. Most of our parks are $29.99 to get in for a full day online, print their tickets at home. Our season passes are -- a number of parks, we took it down, a couple of parks, we took it up. We are sitting pretty when it comes to value. Of course, we’ll respond and I believe have been responsive in this economic market but at the same time, we are already positioned and we beat people to the punch last year when we launched the everyone pays kids price promotion in the very early spring. So that is holding forth, it is carrying over and we are going to stick with it.

[Jane Cadera:]

Okay, that sounds great. Thank you very much.

[Jeffrey R. Speed:]

Hey, Jane -- an important point that Mark mentioned that I think people should note is our everyone pays kids price that we launched last year, we launched it in the early spring so our entire first quarter last year, we did not have that everyone pays kids price, which we did have this year. So from a comparative perspective, that’s I think a good sign in terms of where ended up on ticket per cap, notwithstanding that reduction being in place this year.

[Jane Cadera:]

Okay. Thank you for pointing that out. All right, thank you.

[Operator:]

Our next question comes from the line of David [Bonano], [Byrd Point].

[David Bonano:]

Good morning, fellas. A quick question just as it relates to the Time Warner loan, you guys said that that loan resides at the partnership parks and then I thought I heard you say that the loan would be serviced with cash flows at those parks. Should I think about that loan as being cash flow neutral then to how Six Flags Inc.’s reporting level would be?

[Jeffrey R. Speed:]

Basically the loan -- it doesn’t reside at the partnership parks. It resides at the entities within the subsidiaries that we own that hold the limited partnership units in those parks, and those entities are also the [inaudible] on the put obligations, so it’s not a loan down at the partnership park level but you are correct that the cash flows we get from our units in the partnership parks are designated to repay that loan. So from a free cash flow perspective, it is a push [when the load is paid off].

[David Bonano:]

Okay, great. And then, secondly, just on the sponsorship and partnership revenue this year being down 20%, should we be thinking about that revenue stream as being 100% EBITDA contribution margin or lower, or -- I mean, should I just be taking that 90% margin? How much?

[Jeffrey R. Speed:]

90.

[David Bonano:]

90? Okay. So that will be a pretty significant hit to EBITDA.

[Jeffrey R. Speed:]

Yes.

[David Bonano:]

Thank you.

[Operator:]

Thank you. I would now like to turn the call over to management for closing remarks.

[Mark S. Shapiro:]

In closing, as I mentioned in the press release, there are two things happening right now at Six Flags. You’ve got the restructuring process and of course the business with all of our parks opening full time Memorial Day weekend. For the benefit of the business and our stakeholders, including our 30,000 employees, we are committed to resolving the restructuring process this calendar year. In the meantime, the strength of our product and positive word of mouth circulating among our customers serves as a constant reminder that the guest experience is and will always be priority one at Six Flags. Six Flags is a strong brand with a resilient business. We are seeing that already this year. We have been responsive to the economic environment and our parks are well-positioned to deliver a high quality, close-to-home entertainment experience at a price families can afford this summer. While many of our competitors are scaling back, Six Flags is launching major new attractions in every park, including four coasters. As I mentioned, 120 concerts, 109 new stage shows, and we are hiring, or have hired, the best trained workforce in our history. And just to put this in perspective for you, keep this in mind -- if every seasonal employee walked out of Great Adventure tomorrow, we could backfill every single one of those 4,000 employees. That’s how deep we are and how successful we have been with our job fairs, which of course have generated a great deal of media attention these past couple of months. For the family, for the consumer, for the guests, Six Flags is a sure thing for a great and memorable family getaway this summer. Talk to you next quarter. Have a great summer. Thanks.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.