Six Flags Entertainment Corporation
Q1 2012 Earnings Call Transcript

Published: 25 Apr 2012

[Operator:]

Good morning, ladies and gentlemen. Welcome to Six Flags’ First Quarter 2012 Earnings Conference call. My name is Sherry, and I will be your operator for today’s call. At this time, all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Nancy Krejsa, Senior Vice President, Investor Relations and Corporate Communications for Six Flags.

[Nancy A. Krejsa:]

Good morning and thank you for joining our call. With me today are Jim Reid-Anderson, Chairman, President, and CEO of Six Flags; Al Weber, Chief Operating Officer; and John Duffey, Chief Financial Officer. We will begin our call with prepared comments, and then open the call to your questions. Our comments include forward-looking statements within the meanings 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 the detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company’s Annual Report, Quarterly Reports or other forms filed and furnished with the SEC. At this time, I’ll turn the call over to Jim.

[Jim Reid-Anderson:]

Thank you, Nancy, and good morning to everyone on the call. Q1 was a very solid quarter for the company. Revenue was up 10% over prior year on a constant currency basis, driven by a 4% increase in constant currency per capita GAAP spending. A 1.5% increase in attendance and a $3 million benefit from settling the third quarter 2011 business interruption insurance claim from Hurricane Irene. Our trailing 12 month modified EBITDA margin has grown to 37.6% as we continue to effectively manage costs and make our operations even more efficient. In addition to funding a record $33 million of dividends in the quarter, we also used some of our excess cash to repurchase $44 million of our shares. John will share more details about our financial results in a few moments. While only a few parks were open during the quarter, we continue to prepare for the heart of our 2012 season, aligning all our activities with our long-term strategy and our aspirational goal to generate $500 million of modified EBITDA by 2015. For example, our ticket yields were up 6% constant currency in the quarter, reflecting our ongoing success in increasing pricing and reducing discounts. This quarter you will note several constant currency references. We do that because Mexico represents a much larger percentage of our attendance this quarter than any other. We continue to further penetrate season pass sales with 2012 units growing in the double-digit, on top of our double-digit growth last year. Deferred revenue increased to $65 million at the end of the first quarter, a gain of 18% compared with the prior year. Season pass sales growth is accelerating which is a very positive indicator for our future. Our Go Big marketing campaign continues to build consumer interest by providing relevant targeted messaging to our key local audiences and showcasing our stars our beautiful parks. In the area of innovation, our new capital for 2012 is tremendously exciting and receiving huge publicity in our local markets. Our guests are eagerly anticipating new attraction in each park including ride such as X Flight, a ground-breaking wing coaster opening in Chicago, LEX LUTHOR

[John M. Duffey:]

Yeah, thank you, Jim, and hello to everyone on the call. As Jim indicated, we had another solid quarter with attendance, revenue and EBITDA gain. Our strong season pass performance drove an increase in attendance of 1.5% to 1.3 million guests. As you read in the press release, we received $3 million of business interruption insurance proceeds in the first quarter associated with Hurricane Irene, which impacted the number of our parks in the third quarter of 2011. $1.6 million and $1.4 million of those proceeds are included in ticket revenue and in-park revenue respectively. Also I’d like to note that, normally we do not reference the impact of foreign currency fluctuations, as it tends to be immaterial to each of our reported line item. However, although the impact is immaterial to EBITDA in Q1, due to our Mexico Park being at large percentage of our operations in the first quarter and the year-over-year change in the peso, we think it is important to discuss the impact of foreign currency as we review the quarter’s financial performance. Guest per capita spending in the quarter increased $3.14 or 8.1%. Excluding the business interruption insurance proceeds and the impact of changes in foreign exchange rates, guest per capita spending increased $1.56 or 4.1%. The increase is a result of pricing gains offset by an increase in season pass mix. We have previously stated that our strategy is to convert one-day ticket buyers to season pass holders. The shift to season pass holders is accretive to revenue and profits because season pass prices are higher than single daily prices. And season pass guests spend more in total dollars at our parks over several visits within the year. I’m pleased to share that we are seeing success in this area with double-digit growth in season pass unit sales through the first quarter. Continued success in season pass sales could dampen per cap gains. However, we also remain extremely focus on managing our ticket yields and we expect both strategies to enhance the absolute revenue and profitability of Six Flags. As Jim noted on a constant currency basis, ticket yield was up 6% in the quarter, a very strong performance. Total revenue in the quarter increased $5 million or 8.2% excluding the BI insurance proceeds. On a constant currency basis, revenue increased $3 million or 4.9%. Moving to the expense side, cash operating and SG&A expenses increased $1.0 million or 1.6% on a constant currency basis. Adjusted EBITDA improved $3.0 million in the quarter adjusting for the BI insurance and foreign exchange, adjusted EBITDA improved by $0.7 million. As it relates to our capital structure, reported net debt as of March 31 was $887 million as compared to $726 million at December 31, 2011, an increase of $161 million. Our free cash flow in the quarter was negative $92 million. We have always seen an outflow of cash from operations in the first quarter as most of our parks are closed and we have spent in a new capital projects. So as part of the $92 million outflow, we spent an incremental $30 million on capital in Q1 versus the same quarter last year, which is primarily timing. Our more strategic approach to capital planning has resulted in an earlier and more efficient installation of our new rides. There are mainly $69 million cash outflow what’s comprised of $33 million of dividends, and $44 million of stock repurchases offset by a positive $8 million of other favorability. The company is in an excellent liquidity position with $69 million of cash on hand and no outstanding downtimes for revolving credit facility. As of this morning, there has been less than $2 million of Limited Partnership Park put obligations exercised, which the company is required to pay in May, and next exercise period is April of 2013. Given our new capital introductions, our focus on season pass sales and the Go Big marketing campaign, I think we are very well positioned for our 2012 season. So now, I’ll turn it back over to Jim.

[Jim Reid-Anderson:]

Thank you, John. We’re off to a really nice start in 2012. Our employees are energized about the upcoming season and we remain laser focused on executing on our business strategy and long term aspirational goal to achieve $500 million of modified EBITDA by 2015. Now, given that this is a relatively smaller quarter for our operations, I’m not going to spend anymore time with prepared comments, and I’m going to open the call up for any questions that you may have. Sherry, at this point, could you please open the call for any questions?

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from Ian Zaffino from Oppenheimer.

[Ian Zaffino:]

Great, thank you very much. Two questions, I don’t know if you – did you mention deferred revenues or what they were as far as how much season passes were up year-over-year?

[John M. Duffey:]

Yeah.

[Jim Reid-Anderson:]

Yeah, we didn’t. John go ahead.

[John M. Duffey:]

Ian, let me talk, you’ll see when we report in our Q, you’ll see the deferred revenue. I don’t think it’s fair to give you some numbers. Our deferred number at the end of March 2012 is $64.9 million, at the end of December ’11; it was $38.2 million, so it’s an increase of $26.7 million in the quarter. And if you actually compare the end of March ’12 versus the end of March in 2011, it’s actually up $10 million or 18.2%.

[Jim Reid-Anderson:]

So just very briefly, Ian, this is a very strong performance on a record year last year, in terms of season pass growth. And Al, would you like to comment on the impact of season pass, I think we’re all very excited about this.

[Alexander Weber:]

Definitely, it’s really great to see double digit growth this year, after last year’s double digit growth. Season pass really is the cornerstone of our revenue maximization strategy. One thing we found, even this early in the year that season pass is probably the indicator of a market overall, we’ll respond to the parks and the new products. So the indication of season pass sales really supports, we feel the year may unfold in a very positive way.

[Jim Reid-Anderson:]

Ian, I hope that answers your question. What’s your second question?

[Ian Zaffino:]

The other one would be, and I think it clearly answers (inaudible) given form, but I know lot of this is all about raising the admission per cap. But again as you mentioned, you acknowledged that, that so much diluted by the season pass effort. Is there a way you could kind of give us an idea each quarter maybe how much of your sales were at the gate versus season pass versus kind of group, and other in that way we can kind of track it a little bit better, your progress?

[Jim Reid-Anderson:]

Well, I think, we gave as much details as we gave in terms of our filings, yeah, and we are not looking to expand that further but what I will say as you know we’ve talked in the past about the fact that season pass historically had been in the sort of 25%, 26% range in terms of our overall attendance. And in the last couple of years, we had told that up to about a third. And in this last quarter, we’re looking at numbers that are heading towards the 40% type range in terms of attendance. So to give you a high-level view there is a much higher major shift towards season pass. And whilst John talked a little bit about the dilution effect and you referenced it there, we are not concerned about per cap dilution. As you’ve seen even with the growth in season pass and the strong performance that we’ve seen, we have actually grown per cap and the yield was up 6% in the quarter, phenomenal yield gain. And with this season pass growth, we will see revenue growth and we believe we’ll see very strong profit growth. So right now we’re firing on all cylinders and even if per cap were to diminish slightly in this process, our overall revenue and profitability would still power ahead.

[Ian Zaffino:]

Okay, great. Thank you very much.

[Jim Reid-Anderson:]

Thanks, Ian.

[Operator:]

Our next question comes from Ian Corydon from B. Riley & Co.

[Ian Corydon:]

Thank you. Just a quick follow-up on season pass sales. Can you just talk about what you’ve done in order to grow that part of the business and how that strategy evolves for the year?

[Alexander Weber:]

So I am going to take this one Ann. And yes, a couple of thoughts on this, first up is John Duffey mentioned earlier season pass is really an up sell strategy from single day admission. So as we up sell we actually increase the revenue days. But what we’ve done overall is really create a consistent program offered to the market that actually creates a high value for people who want to stay closure to home and this is one of our parks multiple times in the course of the year. In addition to that, the marketing big campaign is really well suited to communicate the message of season pass. And the third thing we’ve done especially is here we have to reevaluate some of our price points in a few markets to generate what we believe is a higher penetration, higher season pass count on certain markets. All those things together have generated incremental fees day sales, and incremental revenue.

[Jim Reid-Anderson:]

Two points to add to what Al is saying, the first and most important is that we really did do a strategic review of every park, every demographic and try to assess not only who was visiting our parks from where but also what the price points is appropriate to each park where. So in certain cases, we took price points up on season pass and in some cases we took some down in order to be able to drive the revenue and that is really succeeding overall. And we put into play a strategic framework that allows us to push pricing up, step by step by up selling, in different circumstances. So we literally have a step process that we go through to try and sell people up. I think the only other thing I’d add and this is really I think helping to propel season pass is that we’re launching as you know our news in every park campaign consistently and trying to ensure that there is something at every single park. And so the first time ever, last year we announced our capital campaign, basically at the same time, that we started to sell our season pass, that has never been done before. So we found that we got people buying even earlier and excited about the potential to buy.

[Ian Corydon:]

Got it. That makes sense. And last year, you tweaked the number of planned operating days a bit, are there any tweaks this year that would be material to the result?

[Jim Reid-Anderson:]

No. For the year, there is no material change. We’re roughly on the same set of program.

[Ian Corydon:]

Great, thank you.

[Jim Reid-Anderson:]

Thanks, Ian.

[Operator:]

(Operator Instructions) We do have a question coming through. Michael Broudo from Miller Tabak. You may ask your question.

[Michael Broudo:]

Yes, can you remind us, how much is left on the potential stock buyback for fiscal year 2012, and how you might think about buying back stock, we just stopped training here in the mid 40s, it seems like you’ve been pretty aggressive throughout Q1, I’m wondering how you might scratch that out over the remaining three quarters?

[Jim Reid-Anderson:]

So just as a background, we had an original $60 million program, which we had initiated last year and we went through the full program and spend that $60 million, and then this year, we have spent $44 million.

[John M. Duffey:]

Yeah, $44 million of the $250 million that’s been approved.

[Jim Reid-Anderson:]

So in total throughout the two programs, $310 million, and we have spent $104 million, so you got the remaining amount there.

[John M. Duffey:]

About $206 million.

[Jim Reid-Anderson:]

$206 million remaining.

[Michael Broudo:]

And so just how you think about that with your stock here at in the mid 40s, I mean again you’ve spent $44 million in Q1, do you see that progressing evenly throughout the quarter, or do you think you might be more aggressive at with your stock prices at these levels?

[Jim Reid-Anderson:]

Well, Michael, we obviously are very positive. I am hoping you’re hearing very clearly that we’re extremely positive about the company and the outlook. We feel very good about where we are, how we’re positioned, but we’re not going to outline right now how we’re going to foresee the stock buyback. We will do that on a case by case basis as we go forward and we will publicly announce purchases that we’ve made in every quarterly call.

[Michael Broudo:]

Okay, thank you, Jim.

[Jim Reid-Anderson:]

Thank you.

[Operator:]

(Operator Instructions) At this time I have no questions in queue.

[Jim Reid-Anderson:]

Okay, well thank you, Sherry. And for those of you on this call, thank you so much for joining our call today. I hope you hear the excitement in all of our voices who are sitting in the room here, Nancy, John and myself, and we had the chance yesterday to be the first people on testing X Flight in Chicago and we’re all blown away by what we feel, what we felt. I visited almost all of our parks now in the last couple of weeks and I am finishing off the rest of them in the next couple and I can tell you that they look spectacular. So I really hope you take the opportunity to visit one or more of our parks this season. I think you’re going to really enjoy the experience and see first hand how our outstanding portfolio of the park. And even more importantly, our dedicated employees can drive incremental shareholder value in the coming quarters and years. So take care and I hope to see all of you very soon. Shery, that’s the end of the call.

[Operator:]

Thank you. This concludes today’s conference, and thank you for participating. You may disconnect at this time.