Six Flags Entertainment Corporation
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Six Flags Fourth Quarter and Full Year 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will open the call for questions. It is now my pleasure to hand our program over to Steve Purtell, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

[Stephen Purtell:]

Good morning, and welcome to our fourth quarter call. With me are John Duffey, President and CEO of Six Flags; Marshall Barber, our Chief Financial Officer; and Nancy Krejsa. We will begin the call with prepared comments and then open the call to your questions. Our comments will include forward-looking statements within the meaning of the Federal Securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in such statements and the company undertakes no obligation to update or revise these statements. In addition, on the call we will discuss non-GAAP financial measures. Investors can find both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's Annual Reports, Quarterly Reports, or other forms filed and furnished with the SEC. At this time, I will turn the call over to John.

[John M. Duffey:]

Well, thank you, Steve, and good morning, everyone. I am pleased to share that we had a very strong finish to the year. We generated record attendance, revenue, adjusted EBITDA and modified EBITDA margin for both the fourth quarter and full year, making 2017 our seventh consecutive year of record financial performance. Full-year revenue of $1.3 billion was up 4%, and adjusted EBITDA was up 5% to a new all-time high of $507 million. I could not be more proud of our fantastic team members who helped us achieve these results. Our attendance for the current portfolio of parks surpassed 30 million guests for the first time in our history. The 5% increase in attendance was driven primarily by our continued focus on migrating one-day ticket users to season pass holders and members. Our incredible lineup of new rides, our continued investment in special events such as Fright Fest and Holiday in the Park, and our industry-leading innovations, including our successful introduction of Virtual Reality Coasters. We were able to leverage this attendance growth to increase in-park revenue for the year by 4%. We were also able to increase ticket prices throughout the year, as our pricing strategy continued to work extremely well. Pricing remains our biggest growth opportunity going forward. And in fact, our value for the money rating hit another all-time high in 2016 for the sixth year in a row. Our full year modified EBITDA margin grew to a company and industry record, 41.3%. I'm even more pleased that our full year modified EBITDA, less CapEx margin of 31.5% remains by far the highest in the theme park industry by several hundred basis points, even after the additional investment in our new water park in Mexico. We believe modified EBITDA, less CapEx is the best metric to evaluate cash generation in the theme park industry and demonstrates the strength of Six Flags' operations. Our Active Pass Base, which represents the total number of guests who have purchased the season pass or who are enrolled in the company's membership program, increased 15% at the end of the year. We are particularly encouraged that the number of members who have stayed with us after their initial 12-month commitment period continues to increase, creating a recurring and growing stream of monthly revenue. This significant growth in our base of season pass holders and members position us very well as we head into the 2017 operating season. Our strategy remains focused on being the premiere regional theme park operator in the industry, and our seven-year string of record financial results shows we have the right strategy in place. First, we are focused on delighting our guests and ensuring they have a fun, safe, and thrilling experience when they visit our parks. Second, we consistently lead the industry in innovation and have been the first mover on many products and services. Our product offering in 2016 was clearly the best in our company's history, and we have an even better lineup coming in 2017. Our 2016 rollout of 19 Virtual Reality Coaster experiences at 12 of our parks was highly successful, and our decision to include VR with the price of admission was one of the many reasons so many people came to our parks this year. We created four different virtual worlds in 2016, including VR offerings uniquely designed for our Fright Fest and Holiday in the Park events. And we gained many insights in our inaugural year that we will use to continue improving the VR experience for our guests. In 2017, we are taking our VR offerings to a new level. For example, we are introducing the world's first mixed-reality coaster, Galactic Attack, where you participate in a battle to save the planet from an impending alien drone invasion. For the first time ever, we are combining virtual reality, augmented reality and complex game play, allowing riders to make key decisions during the course of the ride that can affect their scores, all while experiencing the adrenaline rush of riding a roller coaster. We think that combining virtual reality technology with our existing roller coaster infrastructure is a game changer for our company because it allows us to enhance guest experiences at minimal cost. We have also innovated and invested more in special events, making Fright Fest bigger and scarier and making Holiday in the Park more merry and special. With the addition of Holiday in the Park at Six Flags America and Six Flags St. Louis in 2016, we now offer this event at nine of our 13 park locations. It is clear from guest feedback that Holiday in the Park has become a family tradition during the winter holidays and will continue to grow for years to come. The evidence of our success in these special events is seen in our fourth quarter financial performance. Third, we continue to drive operational efficiencies and are the only theme park operator to increase EBITDA margins every year for the past seven years. We continue to generate, by far, the highest EBITDA, less CapEx margin in the theme park industry. Fourth, we consistently deliver financial excellence. Our increasing cash flow and efficient capital spending allow Six Flags to return a high percentage of revenue to our shareholders every year in a form of a growing dividend and share repurchases. Over the last five years, we have consistently delivered cash flow growth and a dividend yield that is double the S&P 500, making us the ultimate growth and yield stock. Our international licensing revenue, membership strategy, and expansion of special events in our shoulder months have helped smooth our revenue and make our business less seasonal. Finally, we have, by far, the best team in the industry who continue to deliver year after year. I have never worked with a more dedicated group of people, and we have a deep pool of experienced talent to lead us forward. All of these areas contributed to our success in 2016 and we are extremely well positioned for the 2017 season and beyond. So, now Marshall is now going to share a few more details and our financial results. Marshall?

[Marshall Barber:]

Thank you, John, and good morning to everyone on the call. We are very pleased with our strong finish for the year given the robust attendance gains, revenue growth, and record profitability in the fourth quarter. I will start with a discussion of our fourth quarter performance and then provide details for the full-year 2016. Attendance in the quarter grew 22% due to an increase in both season pass visitation and single-day admissions. The attendance growth was a result of investments in our Fright Fest and Holiday in the Park events, both of which helped drive incremental attendance across all of our parks. These types of events are key drivers of our success in retaining and growing our active base of season passes and memberships, and the solid attendance growth in the quarter is a clear indication that our strategy is working well. Revenue for the quarter was a record $239 million, an increase of $22 million or 10%. This increase was driven by a 14% increase in both admissions and in-park revenue. Foreign currency exchange, particularly the further weakening of the Mexican peso, continued to negatively impact our results. Adjusting for foreign currency, guest spending revenues were up $32 million or 17%. The guest spending revenue growth was a direct result of the higher attendance, new culinary offerings for Holiday in the Park and our successful all-season dining program. The growth in guest spending revenues was partially offset by sponsorship and international licensing fees, which were down $5 million. This decline was due to a reversal of revenue that was previously recognized in connection with our Vietnamese partnership as a result of our partner's failure to fulfill their contractual obligations. We had delivered a Notice of Default to our partner and stopped all work on the project. We're currently working with our partner to remedy the situation, and believe this is merely a timing issue. Excluding this revenue reversal, sponsorship and international licensing revenue for the quarter would have been essentially flat versus prior year. The significant growth in the mix of season pass attendance and the negative effect of foreign exchange rates put downward pressure on guest spending per caps, which were down $2.48 or 7% for the quarter. On a constant currency basis, guest spending per caps was $1.56 or 4%. Cash operating and SG&A expenses increased $5 million or 4% in the quarter, primarily due to increased investments in our Fright Fest and Holiday in the Park events, including the incremental costs to operate Holiday in the Park at Six Flags St. Louis and Six Flags America for the first time ever this year. Strong revenue growth and disciplined spending lifted adjusted EBITDA to $76 million, a $13 million or 22% increase over 2005 (sic) [2015] (12

[John M. Duffey:]

Well, thank you, Marshall. 2016 was another incredible year, and our team is ready to deliver another record-breaking year in 2017. Our ride lineup for 2017 promises to be our best ever. We are taking advantage of previous investments we made in ride innovation to roll out two of our blockbuster rides to other markets. The Justice League

[Operator:]

Certainly. Our first question comes from the line of Barton Crockett with FBR Capital Markets.

[Barton E. Crockett:]

Okay. Great. Thank you for taking the question. And I guess one of the things that I was interested in is to drill down a little bit more on the situation in Vietnam. So, you described that as a timing issue. You don't expect – you expect that project to, I guess continue apace. I was wondering if you could give us some more detail around what happened. And what the timing – what you think the timing might be in terms of beginning to resume kind of license fees from there?

[John M. Duffey:]

Bart, good morning. Regarding Vietnam, we're not going to get into any – delve to specifics in terms of what has occurred there in terms of our partner going into default on the agreement. But what I would say is that we have all the – utmost confidence that we'll be able to remedy this situation. As Marshall have said, we have provided our partner with a Notice of Default. We're currently working with our partner to remedy that. And we believe this is a timing issue. Vietnam continues to be a great market for us and our hope is that we'll get this project back on track. But if we don't, we still view that as a great market and there are other partners that we could aggressively pursue.

[Barton E. Crockett:]

Okay. So you can't say at this point that you would expect to get fees this year from Vietnam. That's, at this point, unknown. Is that what you're saying? If you could correct me, if I'm wrong?

[John M. Duffey:]

Yeah. Our hope is that we can get this back on track relatively shortly, and then get back to the norm in terms of recognizing revenue.

[Barton E. Crockett:]

Okay. All right. Great. And then, in terms of the Virtual Reality Coaster, which your guys called out as a positive factor for the year. I think that there's a lot of skepticism in some quarters around that, partly, I think driven by Cedar Fair's more cautious kind of comments about the technology and the implementation in roller coasters. Could you give us more detail that would support your belief that this has been positive for your business?

[John M. Duffey:]

Well, Bart, nice to see you (30

[Barton E. Crockett:]

Okay. And then just one final thing on tax. Could you just update me on what your NOL balance was at the end of the year? And then as you go through this process of kind of evaluating whether or not to become a REIT, I think many of us would assume that because you made the application, you're probably more biased towards becoming a REIT than not. But I was wondering if you can kind of clarify whether you're leaning in one direction or another and what the puts and takes are as you evaluate this?

[Marshall Barber:]

Good morning, Barton. So, the actual – the balance of the NOL was about $226 million at the end of the year, plus some excess tax benefits that are not on the balance sheet. So again, we don't expect to pay any material taxes until 2019. In terms of the REIT, really, the first step in the process was to get comfortable that we can become a REIT. And now that we're comfortable that we can, the next step would be to complete the due diligence and we will move forward if we believe it's good for the shareholders. So, we don't have a bias, really one way or the other. We're just going to go through the due diligence and determine if we think it's best for the shareholders.

[John M. Duffey:]

Yeah. And I think, Barton, it's – now that I think we're in a position where we feel comfortable that we could create a REIT. Now we need to do the work necessary to see if that's a viable option, and it'll create shareholder value. So, we are beginning that process and we expect to make a decision within the next year.

[Barton E. Crockett:]

Okay. Would you – would it make sense to wait until we see what the tax law is before making a decision?

[John M. Duffey:]

Absolutely. I mean, that is one of the things that we will definitely have to factor into this.

[Barton E. Crockett:]

Okay. Great. Thank you very much.

[Operator:]

Our next question...

[John M. Duffey:]

Thank you.

[Operator:]

Our next question comes from Tim Conder with Wells Fargo.

[Timothy Andrew Conder:]

Thank you. And, John, Marshall, everybody, congrats on a great team and not a bad way for Nancy to go out either. So...

[John M. Duffey:]

Well, thank you.

[Timothy Andrew Conder:]

A couple of things here, gentlemen. And, Steve, also, congrats on the new duties.

[Stephen Purtell:]

Thanks, Tim.

[Timothy Andrew Conder:]

Just a couple. If you could just remind us here, the international fees in Q4 and for total 2016, net of Vietnam, along with the expenses, Marshall, if you have that number and the comparable number for 2015? And then, John, I know historically you haven't given too much on this, but will ask it anyhow. Any color on attachment rates of season, dining and beverage plans to either your traditional season passes or your membership guest?

[John M. Duffey:]

Well, Tim, let me take your second question. As I mentioned, we are very pleased with what we've seen on our All-Season Dining Program, and we're actually introducing even more, I'd say, related type of passes like All-Season Photo Pass, All-Season Retail Pass. As it relates to the All-Season Dining, we've talked before about how we think that really could be a big driver for us in terms of our future growth. Right now – and, again, we've seen great penetration but, right now, it's still relatively low. So, I think it still continues to be a big opportunity for us. Tim, we've talked in the past about the fact that we get more than twice the amount of revenue from a season pass holder than we do from a one-day ticket holder. If you factor on All-Season Dining, that's well above three times.

[Timothy Andrew Conder:]

Okay.

[John M. Duffey:]

So, and when you look at our growing season pass base, the more of those people that we can convert and add an All-Season Dining Pass to which has an average price through our system, about $85, that's a huge incremental growth driver for us. So, we're pleased with what we've seen to-date and we continue to believe this is a great growth opportunity for us. I'll let Marshall talk about international.

[Marshall Barber:]

Good morning, Tim. So, the international revenue for 2016 was $22.6 million, which was about $6.2 million higher than last year with $16.4 million. And EBITDA was $18.7 million in 2016 which is about $5.5 million higher than the $13.3 million we made in 2015.

[Timothy Andrew Conder:]

Okay. Okay.

[John M. Duffey:]

So, Tim, even though we said that if you factor out the Vietnam issue, it would have been flat for the quarter. We talked before about, it's going to be lumpy from quarter-to-quarter. So, really the focus is to look at it on a full year basis. And to the extent that even with excluding Vietnam, we were still up 37% at international, I think talks to our opportunity there.

[Timothy Andrew Conder:]

Okay. John, staying back on the and thank you for the color on the 3x versus 2x. Very helpful there. Any – as we've completed now another year, any change in spending levels on a per cap basis or per – here between traditional season pass and a member for 2016? How did that turn out versus historically?

[John M. Duffey:]

Yeah. I think in terms of the – I'll start by saying, we really don't see any difference between season pass holders and members in terms of the spending in the park. It's fairly consistent. We have seen incremental spending from both our season pass holders and members, if you look at it on a year-over-year basis. And one of the reasons – there's a number of reasons for that. One is, we continue to look at innovative ways within the park in terms of our overall products. So, we're adding new products every year. Things like our events, Fright Fest and Holiday in the Park. Bring more people to the park and they're spending more money at each one of these events. And I think that people have a little bit more money in their pocket. So, our overall guest spending across-the-board, whether it'd be season pass members or one day tickets have continued to increase.

[Timothy Andrew Conder:]

Okay. And then two more, if I may, one housekeeping. Marshall, just any update on CapEx, D&A expectations? And then, John, what would you term the probability that – excluding Vietnam, of additional announcements related to international here in 2017?

[Marshall Barber:]

Okay. So, your first question was on CapEx, Tim?

[Timothy Andrew Conder:]

Yeah. Yeah. And D&A margin.

[Marshall Barber:]

So, for 2017, our plan is to be at about 9%, maybe slightly less than 9%, plus the other half of the Mexico, the $18 million that we're spending in the Mexico water park. And then what was your other – I missed your other question.

[Timothy Andrew Conder:]

D&A.

[John M. Duffey:]

Yeah. The other question was on Vietnam. But, Tim, just to add on the CapEx side. We are, I would have to say, one of the most efficient in the industry in terms of our CapEx spending. And the beauty is, is that, as you look at our international business as we've talked before, it requires no capital on our part. So, as you think about going forward, as we continue to grow that international licensing revenue where there's no capital associated with that, over time, we're going to be able to bring that down below that 9%. And if you look at our capital spending, we believe it is the right amount of capital spending. Just look at what we've been able to accomplish over the last several years, but in particular, our attendance growth that we saw in 2016, our continued success around our season pass, and the fact that we can – our parks have never been in better shape than they are today. And I also want to point out that typically, when we go in with a new ride, we'll reinvent that whole area around the ride. So, as I said, our parks are in great shape. So, I think we'll have the ability to continue to take that balance and percentage of revenue as we grow international. On our ability to grow and get new deals in 2017, obviously, we were very pleased with our announcement that we had yesterday adding our second park in China outside of Chongqing. Now, that will deliver revenue for us in, and actually, two parks. There's a theme park and water park. That will mean incremental revenue in 2017. And even though I can't talk to you in terms of other deals that may be pending, I have to say, I've never felt better about the pipeline of deals that we have in place. So, I am highly confident that we'll be announcing more deals in 2017.

[Timothy Andrew Conder:]

Okay. Thank you, gentlemen.

[Operator:]

Our next question comes from Ian Zaffino with Oppenheimer.

[Mark Zhang:]

Hey, guys. This is Mark Zhang on for Ian. Thank you for taking my question. Just have a few quick questions. But in regards to the new China deal, is this sort of the same economics as the previous deals or is there anything that we should keep in mind for this one specifically?

[John M. Duffey:]

It is similar economics to the high-end deal that we announced.

[Mark Zhang:]

Okay. Got you. Got you. Thank you. And then in terms of, I guess, activity for off-season events this year, do you think this might be a, I guess, like a tougher comp for next year given favorable weather that we've had in the Northeast?

[John M. Duffey:]

Well, I have to say, Mark, that if you look at our success, particularly in the fourth quarter, I would say that the weather was fairly normal. And I think our success is due to the fact that we continue to – one, continue to invest in these events, more and more people reasons to come to the park. And then, our success around our season pass and particularly the success that we saw on our Fall Flash Sale. So, I think that's actually what has drove our great performance in the fourth quarter. I would have to say weather was fairly neutral.

[Mark Zhang:]

Got it. Got it. That's what I was kind of thinking. Just wanted to make sure. Thank you, guys.

[Marshall Barber:]

Thank you.

[Operator:]

Our next question comes from the line of James Hardiman with Wedbush Securities.

[James Hardiman:]

Hi. Good morning.

[John M. Duffey:]

Hi, James.

[James Hardiman:]

Congrats on a strong finish to a really good year. I had a couple of follow-ups that I think are fairly important. I guess first on the IRS thing, sounds really positive. Can you revisit what you said in your prepared remarks about what exactly the IRS had told you? You're basically talking about this as if the decision is now up to you in terms of becoming a REIT. Is that correct or are you still waiting to hear back from the IRS on incremental rulings?

[Marshall Barber:]

Yeah, James. That is correct. They basically came back to us and said that for the specific assets that we were talking about, they were covered in the final regulations that they had and that giving us any letter would be a comfort ruling, and so they don't give comfort rulings on the REIT. So, yeah, it's positive, we can do what we want, and so the next step will be deciding whether or not that's something we want to do.

[James Hardiman:]

Okay. And just so I'm clear, were you aware of this when you made your last dividend increase? And I guess put another way, as we look forward, would you be able to grow your dividends if you didn't get some relief on the tax front over the next couple of years? Do you think the trajectory is such that independent of that, you'd still be able to have the cash to fund an increasing dividend?

[Marshall Barber:]

So, your first question first. We did not know it was a recent event when we talked the IRS. So, when we increased our dividend we didn't know. And apart from that, we are very comfortable. We think the dividends are an important part of our value proposition. And so, we're committed to having a sustainable and growing dividend going into the future even after we become a tax payer. And once we become a tax payer, even in modest – using some modest estimates in growth, we will continue to be able to raise dividend. So, we're still committed, and we believe, no matter what happens with the REIT, we will be able to continue to raise it.

[James Hardiman:]

Thanks so much. And then...?

[John M. Duffey:]

James, just to add on to that. Marshall was absolutely right. As you think about our dividend, and we've talked all along how – our strategy is to have a dividend that has an attractive yield, that's sustainable and we can grow every single year, and we've done that. And we'll be able to do that even if at some point in the future, we were to become a tax payer at the current tax rate. So, the REIT actually played absolutely no basis into our recent increase to our dividend.

[James Hardiman:]

That's really helpful and really encouraging. And then just a real quick clarification, the $5 million in terms of reversal for Vietnam, if things go as you would expect, and you get that cleared up, is that a $5 million we'd be adding back at some point in 2017?

[John M. Duffey:]

Yeah, to the extent that we can get that whole project back on track, it would be an incremental $5 million that we would pick up in 2017.

[James Hardiman:]

Great. And then just lastly from me. The fourth quarter attendance growth of 22%, that's pretty astounding. But by my math, you're up 48% in the last two years, 70% in the last three years. Those are amazing numbers. I guess to the extent possible, can you talk about how much of that was, for lack of a better term, same-store sales growth rate (48

[John M. Duffey:]

Yeah, James, obviously, we were very pleased with the attendance growth that we saw in the quarter, and it was across all of our parks. So, we did see some attendance because of the two additional parks that we opened up, our Holiday in the Park St. Louis and our D.C. Park. But I would have to say, the majority of that growth, that $1.6 million increase in attendance came across-the-board at all of our parks. So, we're very pleased with that. And I think a lot has to do with the fact that we continue to invest in both those events and we will continue to do that going forward. The other is our success around season pass. And I think we have the ability to continue to drive season pass up. It was 60% of our attendance in 2016. But if you look at our Active Pass Base, represents roughly one-third of the unique guests visiting in our parks. And so, we have the ability to convert a large amount of those still single-day tickets over to season pass. And we have excess capacity in our parks. And every year, we're creating even more capacity by introducing new rides, by introducing new events, and things like the Mardi Gras.

[Marshall Barber:]

So, just to further on his comments. It was significantly more – growth was significantly driven more by existing parks this year and in prior years. So, while we did get growth from these Holiday in the Park events this year and last year and the year before, the growth has really come from the investments in Holiday in the Park at the existing parks, as well as the continued investment in Fright Fest.

[James Hardiman:]

Excellent. Thanks, guys.

[John M. Duffey:]

Thank you, James.

[Marshall Barber:]

Thank you, James.

[Operator:]

Our final question comes from Tyler Batory with Janney Capital.

[Tyler Batory:]

Thanks. Good morning, everyone.

[John M. Duffey:]

Good morning, Tyler (51

[Tyler Batory:]

Question for you on Holiday in the Park. Can you comment on the extent to which that event is driving pass sales? In other words, are you seeing more pass sales or better retention rates at the parks that have that events compared to those that don't have it?

[John M. Duffey:]

Yeah. Tyler, I think it's a clear driver of season pass sales. And we've talked about that. The more that we can do in terms of adding things like some Spring Break events and then Mardi Gras, and then we'd launch at the end of May, launched our new capital, we're looking at things in terms of what we can do in the summer, maybe some July Ford Fest (51

[Marshall Barber:]

Yeah. And I'd like to add to it that our membership retention for members that have been with us for longer than 12 months, we've been able to increase that because now the off-period, if you will, the time between closing and opening has been narrowed in most parks from – in early January to March or April. So, it's really only one month or two months that they can hang in and so it's helped our retention for memberships as well.

[Tyler Batory:]

Okay. That's great. And then just generally on costs. What are your expectations for minimum wage increases in 2017 compared to what you saw in 2016?

[Marshall Barber:]

So, the minimum wage for 2017 will be similar, about $5 million. It'll be driven again by California and particularly, LA County, which will be going up $1.50 in January, and another $1 in July. But our goal and plan is to continue to absorb those costs and continue to drive EBITDA like we have over the last several years.

[John M. Duffey:]

And Tyler, obviously, mandated minimum wage and some market pressures that we've seen in some of our parks obviously does impact the cost. But I have to say that if you look at some of our highest growth, from an attendance and a guest spending standpoint, have been in those parks where we've seen wage pressures. So, even though it impacts cost, I think there's actually a positive aspect as well.

[Tyler Batory:]

Okay. Great. That's very helpful. That's it from me. Thank you.

[Marshall Barber:]

Thanks, Tyler.

[Operator:]

And that does conclude the Q&A session for today's program. I will hand the program back over to Steve Purtell for any additional or closing remarks.

[John M. Duffey:]

Well, thank you for joining our call today, and I want to express my appreciation for all of your support. I look forward to building on the success we've achieved over the past seven years. This is a great industry and there is no better brand than Six Flags in the global regional theme park space. We are providing affordable family entertainment and we consistently deliver guest excellence, innovative products and attractions and remarkable financial results. Please do come out and visit one of our amazing parks in 2017. Thank you for joining our call and take care.

[Operator:]

Ladies and gentlemen, this does conclude the Six Flags fourth quarter and full year 2016 earnings conference call. Thank you for participating. You may now disconnect.