Six Flags Entertainment Corporation
Q1 2011 Earnings Call Transcript

Published: 3 May 2011

[Operator:]

Good morning ladies and gentlemen and welcome to the Six Flags First Quarter 2011 Earnings Conference Call. My name is Tracy and I will be your operator for today’s call. I will now turn the call over to Nancy Krejsa, Senior Vice President, Investor Relations and Corporate Communications.

[Nancy A. Krejsa:]

Good morning and welcome to our first quarter earnings call. A live webcast of this call is available on the Investor Relations page of Six Flags website. With me today are Jim Reid-Anderson, Chairman, President and CEO of Six Flags; Al Weber, our Chief Operating Officer; and John Duffey, our Chief Financial Officer. Before we begin our prepared comments, the company would like to caution you that comments made during this call 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 them. For a detailed discussion of these risks, you may refer to the company’s Annual Report on Form 10-K that’s filed with the SEC. In addition, statements made on our call today include non-GAAP financial measures. These financial measures have been reconciled to the most directly comparable GAAP measure and included in our earnings release or other forms filed or furnished with the SEC. You should be aware that the company emerged from Chapter 11 bankruptcy in April, 2010. And during this call, we will share certain financial results such as revenue and adjusted EBITDA and compare those results to similar periods last year, without distinguishing between the predecessor and successor periods since we believe this is an appropriate and useful comparison. I’d also like to remind you that as a policy, the company will not be providing detailed financial guidance. And now we’d like to begin our prepared remarks, and I’ll turn the call over to Jim.

[Jim Reid-Anderson:]

Thank you very much, Nancy, and good morning to everyone on the call. Our 2011 season is off to a great start with 7% revenue growth and an 18% improvement in adjusted EBITDA loss for the first quarter. Only a handful of our parts were opened during the first three months of the year, making it a typical low-revenue and negative earnings quarter. But we were really pleased with our results as we gained traction around several initiatives we’ve been focused on during the fall and winter months. Our attendance and revenue growth are even more impressive when you take into account the fact that we had 19% fewer operating days versus last year, about half of which related to a shift in the Easter holiday and related spring breaks, and the other half related to planned closures in order to return our operating calendar to a more traditional schedule, which in turn improves the efficiency of our operation. In the area of pricing we successfully implemented modest increases in ticket prices going into the season and reduce the level of discounting, both without negatively impacting attendance levels. We also benefited from solid growth in in-park revenue. All of our new capital programs for the 2011 season are right on track. In addition, we officially launched our Go Big marketing campaign in Q1 and we think the messaging is right on target for three reasons. First, our impressive parks are now the heroes of the commercials instead of Mr. Six. Second, our marketing is more localized and highlights the character of individual parks and our investments in new rights. And third, the campaign appeals to both teams and families. We are introducing a campaign in the respective local markets approximately one to two weeks ahead of each parks’ opening day. Some of you may have begun to see our advertising in March and April as more of our parks open. We are running ads on TV, online, on the radio, in cinema, with billboards and in several other places. Our corporate sponsorships also continue to gain momentum and we are pleased with our progress in developing these partnership at this stage of the year. I am also pleased with our progress in managing costs. In addition to the annualized benefit of restructuring charges we took last year, we are focused on further improving the efficiency of our operations. We have done this successfully while investing some of our savings back into the business, primarily in our people. The result of implementing our strategy was an $11 million improvement in EBITDA, about two-thirds of which came from more effective cost management and the balance from improved ticket yield and in-park sales. We also generated a 2,500 basis point improvement in our modified EBITDA margin. Overall, a great start to the year. Now I’m going to ask John Duffey, our CFO, to provide you with more details on the quarter’s financial results. John?

[John M. Duffey:]

Thank you Jim. And hello to everyone on the call. Our first quarter revenue increased $4 million or 7%, driven by an 11% increase in ticket revenue and a 10% increase in in-park sales. We continue to see positive results in our season pass sales some of which maybe due to timing. Sponsorship revenue also grew in the quarter, but was more than offset by declines in licensing and management fees given we no longer receive management fees from DCP. Attendance for the quarter was 1.3 million, an increase of 1%. For Q1, total revenue per cap was $48.02, as compared to $45.43 in the first quarter of 2010, an increase of $2.59 or 6%. This is a clear indication that our strategy focused on more effective management of pricing and discounts continues to drive favorable results. You should note that since we have lower attendance in Q1, as compared to our peak season, the total revenue per cap number in the first quarter tends to be higher than average for the year. We continue to see the benefits from our cost reduction initiatives and operating calendar efficiencies with cash operating and SG&A expenses at a comparable basis declining approximately $6.5 million or 6% in the quarter versus prior year. Adjusted EBITDA was a loss of $49 million in the quarter, an improvement of $11 million or 18%, as compared to the first quarter of 2010. The increase in Q1 adjusted EBITDA was due to $1 million from attendance gains, $4 million from increases in per capita spending, and $6.5 million from operating cost reductions offset by slightly lower sponsorship license and accommodation revenue. We have reached the settlements with our former Chief Financial Officer in our pending arbitration. The terms of the settlement are confidential, however we incurred a restructuring charge of $27 million in Q1 to reflect the settlement and related costs. Moving on to our capital structure, reported net debt as of March 31st was $896 million, as compared to $784 million at December 31st, 2010, an increase of $112 million. Our free cash flow in the quarter was negative $82 million. The 30 million [delta] is comprised of $20 million of stock repurchases, $2 million of dividends, $2 million of non-cash EBITDA interest at DCP, and $6 million related to working capital which included $20 million of payments associated with pre-petition client and bankruptcy fees. We have approximately $8 million of pre-petition clients and bankruptcy fees remaining to be paid. The company is in an excellent liquidity position with $75 million of cash on hand and no outstanding balance on its revolving credit facility. In April, approximately $1 million of limited Partnership Parks obligations were exercised, which the company is required to pay in May. The net exercise period is April of 2012. On February 24, the company announced $60 million three-year share repurchase plan. Management and the Board routinely evaluate our capital structure to determine the appropriate leverage ratio and appropriate uses of excess cash. Given the views on the future potential of the business and the company’s stock price, the conclusion was to continue the quarterly dividend and implement its stock repurchase plan. During Q1, the company repurchased approximately 296,000 shares at an average price of $66.03 at a total cash outlay of $19.5 million. As Jim said, we are very pleased with our Q1 performance and believe it provides good momentum going into the 2011 season. Our focused business strategy is clearly taking hold. So, now I’d like to turn the call back over to Jim.

[Jim Reid-Anderson:]

Thanks very much, John. We’re really looking forward to a continued successful execution of our strategy as we enter our peak season during the second and third quarters of the year. As you’re aware most of our parks are open for weekends in May and daily operations primarily begin Memorial Day weekend. I believe that we are well prepared operationally and also from a marketing and new capital perspective. I shared our exciting 2011 lineup of innovation on last quarter’s call, all are in good shape and some have already opened. For example, we have already opened Gotham City Gauntlet, a wild-mouse coaster in Six Flag New England. SUPERMAN

[Operator:]

(Operator Instructions) Your first question comes from the line of Ian Zaffino, Oppenheimer & Company. Your line is now open.

[Ian Zaffino:]

Great, thank you. Question was the – this might be a little bit difficult to answer, but can you give us an idea of between how much you’ve reduced to discount versus raise the actual ticket price and/or is it, you know can you give us maybe an idea of how many people are actually paying full price this year versus last year or really some type of metric that would give us an idea of why are you just reducing the discounts or are you raising ticket prices? Thanks.

[Jim Reid-Anderson:]

Ian, thank you for the question. And in very simple terms, we’re not going to be able to break down the exact detail that you want. But I think that the real sort of result shows up when you look at our total revenue per cap at $48.02 versus $45.43 last year and in essence what we’re doing is we’re moving on every front. We’re taking up ticket prices a little bit. We’re managing the yields and the fencing around discounts. We’re really looking at in-park sales and managing those up, tweaking them. So it’s actually coming across all areas, not just one. It really is across every single area.

[Ian Zaffino:]

Okay. And then the other question is on the season half sales. Can you give us a break out between what’s your state volume and pricing or is that just difficult?

[Jim Reid-Anderson:]

Yes. We’re not going to breakout volume versus pricing. What you should know is that we feel very good and we’re seeing good results on both.

[Ian Zaffino:]

Okay, great. Thank you very much.

[Jim Reid-Anderson:]

Thanks, Ian.

[Operator:]

Your next question comes from Ian Corydon with B. Riley & Company. Your line is now open.

[Ian Corydon:]

Thank you. Absent fee, calendar shift and the closure days, the attendance was obviously quite strong. Do you have a sense for how much of that was driven by the economy versus some of the steps you guys have taken in terms of advertising marketing?

[Jim Reid-Anderson:]

Well, I think we are cautiously optimistic about the economy and we are certainly feeling that things are looking up. But I have to say that in our opinion, and we are buyers, that the single greatest factor here is the significant steps that we’ve taken over the last several quarters to shift the strategy of the company to focus on the parks and really do two things. One is to create innovation in the shows, the rides, the attractions that we have and also to get our news in a much more targeted way to our guests. Al, would you add anything to that?

[Alexander “Al” Weber:]

No. Addition to that, Jim, would be keep in mind, Ian, that while we have a great line of new attractions for 2011, only one park had a new ride in the first quarter, which was Magic Mountain. So the new attraction dropped in Q2, will come into play now as we go through the second quarter.

[Ian Corydon:]

Okay, great. And then you mentioned season pass sales being strong in the first quarter. Can you provide any detail around the magnitude of that? And you also mentioned potentially a timing issue around that.

[John M. Duffey:]

Ian, we did see a very nice growth in the season pass revenue and you’ll see when we file our Q that deferred revenue more than doubled from the end of last year to the end of March which is normal in the first quarter as we start to sell the season passes, so we continued to see a nice bump up in the season pass.

[Ian Corydon:]

Okay. And did you mention that there might be a timing issues impacting season pass sales?

[John M. Duffey:]

Yes. There maybe some of that which is timing related, so people buy earlier because we’ve been out there aggressively marketing the season pass, and our goal is to get people to lock up in the season pass as earlier, so some of this could be timing.

[Ian Corydon:]

Okay. And then just a housekeeping issue. Do have the ticket per cap dollar number for the quarter?

[John M. Duffey:]

We do. The ticket per cap, our total per capital is $48.02, of which the ticket per cap is $20.52 in part with $17.95, and then the difference is the other revenue.

[Ian Corydon:]

Got it. Thank you.

[Jim Reid-Anderson:]

Thanks Ian.

[Operator:]

(Operator Instructions) Your next question comes from (Eric Weld) with Millennium Capital. Your line is open.

[Unidentified Analyst:]

Thank you and good morning.

[Jim Reid-Anderson:]

Hi Eric.

[Unidentified Analyst:]

Quick follow-up question on the part of the economic question from the previous person. Can you with a sense of across the park for final is not many open now, but in terms of one kind of what you saw sort of a attendance there, but too more important I think as you look into the season pass sale I know you can’t tell everything by where are those repurchase communication of certain areas of strength and the country in the areas of weakness by park.

[Jim Reid-Anderson:]

Yes. We are not going to break it down by park, but what I can tell you is across our system we are seeing very strong season pass interest in purchases and we’ve also have been very pleased as I said with the attendance at all of our parks.

[Unidentified Analyst:]

And on the selective price increase that were taken, may be a sense of the range by you’re going to buy region by terms what would be range that I am going to assume that prices even have been increased across the board by the same level around the country, there sort of the range for the low level and high level?

[Jim Reid-Anderson:]

Pricing is very specific to the local park and the local market, and we’re not going to breakdown, we’ve done this in this market that with another, what you need to know is that we have gone pretty much across the board and make sure that we are taking the rights for the pricing for that market.

[Unidentified Analyst:]

Perfect. Understood. Thank you very much.

[Jim Reid-Anderson:]

Thank you, Eric.

[Operator:]

Your next question comes from the line of a participant who has not left any information, if you could please state your name and your company. Your line is open.

[Jim Reid-Anderson:]

Tracy, that sounds like there is actually no one on the line, so we may want to cut that off.

[Operator:]

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

[Jim Reid-Anderson:]

Okay, thank you Tracy. Ladies and gentlemen on the call we really appreciate you joining our call this morning. And mostly we hope that all of you have the chance and the opportunity to visit one of our parks in the near future. Thank you very much for your ongoing support. We look forward to seeing many of you at the numerous conferences and meetings that we will be attending in the coming months. Take care.

[Operator:]

This now concludes today’s conference call. You may now disconnect.