Six Flags Entertainment Corp SIX
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/22/2013

Operator: Good morning, ladies and gentlemen. Welcome to the Six Flags Second Quarter 2013 Earnings Conference Call. My name is Lindsey, and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

I will now turn the call over to Nancy Krejsa, Senior Vice President, Investor Relations and Corporate Communications for Six Flags.

Nancy A. Krejsa - SVP, IR and Corporate Communications: Good morning. Thank you for joining our call. With me today are Jim Reid-Anderson, Chairman, President and CEO of Six Flags and John Duffey, our Chief Financial Officer. We're going to begin our call today with prepared comments and then we’ll open our call to your questions.

Our comments will 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 our statements. 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 reports, quarterly reports or other forms filed or furnished with the SEC.

At this time, I’ll turn the call over to Jim for his prepared remarks.

Jim Reid-Anderson - Chairman, President and CEO: Thank you, Nancy. Good morning everyone on the call. We joined this call today with heavy heart. As you may already have heard, one of our guests died last Friday in an accident at our park in Arlington, Texas. We’re actually hosting the call today from the park, and we’ve been here throughout the weekend to support our team as we worked through this tragic event. Utilizing both internal and external experts, we’re investigating the cause of the accident and until that process is complete, we have no additional information to share with you about the incident.

The ride has been closed, and you can rest assured that it will remain closed until we are certain it is safe to ride. Our deepest sympathy goes out to the family, and we are providing them support as best as we can. We ask that you keep the guest family in your prayers.

Let me now turn to reporting our financial results. I’m extremely proud of our performance, both in the quarter and year-to-date, especially given the challenging weather conditions that we faced in May and June. Through the first six months of 2013, we delivered record financial results with 1% attendance growth, 3% revenue growth and 15% adjusted EBITDA growth on a comparable basis.

In addition, on an LTM basis, the Company generated $2.29 of cash earnings per share, and we achieved a new industry high modified EBITDA margin of 39.6%. Obviously, we would've preferred to deliver an even better Q2 performance. However, we had the timing impact of Easter/Spring Break attendance shifting into Q1 and we also experienced much cooler temperatures than average, a far higher precipitation in May and June than we had last year. This primarily affected our Eastern and Midwestern parks on our busiest weekend days. I can definitely state that for both those parks, we saw the worst Q2 weather in over a decade.

Historically, when there is inclement weather in the early part of the season, guests find alternative days to visit our parks later in the year. Given the changes in weather patterns from year to year and because operating days can shift from one calendar quarter to another, we've consistently said that the most appropriate way to measure our performance is over multiple quarters. To that point, our year-to-date financial and operating results are record all-time highs across every metric.

Our long-term success continues to be tied to consistent execution of our strategy and I remain very confident about our outlook. I believe, we will continue to strengthen the business through our focus on innovation in all of our parks and by continuing to delight our guests’ day in and day out.

We are thrilled with the innovation in use in every park that we’ve delivered in 2013. Guest reaction has been very positive across the board, including for our four world record breaking rides, Full Throttle and Magic Mountain, the Iran Rattler in Fiesta Texas, Texas SkyScreamer and Six Flags Over Texas, and our Safari Off Road Adventure and Great Adventure. Although, I’ve only mentioned a few, all of our new attractions are quite phenomenal and really unique experiences. Our guest satisfaction ratings continue to rise at the fastest rate since I have joined the Company nearly three years ago, and they have reached new record highs in the first half of the year, including value for the money and overall guest Satisfaction.

Our multiyear opportunity to improve ticket yields and further penetrate season pass sales remains intact. These will be the largest contributors to our revenue, profit and cash flow growth going forward.

We saw strong increases in pricing across all ticket types for the first six months of the year, and I believe that we are only in the fourth or fifth inning of our long-term price opportunity.

Season pass penetration continues to be one of our key initiatives. We know that season pass holders over the course of the season generate more revenue and cash flow than a single-day visitor. Our success in upsell in guests season pass is evidenced by a 22% increase in deferred revenue as compared to June 2012.

I'm especially excited about our innovative new annual membership pass program, a first for the regional theme park industry. This program allows guests to pay monthly on an ongoing basis by credit card and has several important benefits.

First, it increases affordability, a critical factor for cash-strapped families. Second, once a guest becomes a member, they only need to be processed for identification once, and can actually use the same ID in future years. Third, memberships are automatically renewed on a monthly basis after the first year, thereby improving guest retention and most critically further enhancing our recurring revenue base. I’m convinced that the membership program expands Six Flags’ addressable market.

Other in-park initiatives such as the old Season Dining Pass, have also been very successful and will provide growth opportunities for many years to come. Not only is in-park dining spending up nicely, but in addition, our dining satisfaction scores are at all-time highs.

In summary, whilst it was perhaps not the quarter we would all have wished for due to the weather, I’m extremely proud of the entire Six Flags team. We have once again demonstrated our ability to generate high recurring cash flow in an adverse environment, reinforcing the Company’s financial and operational strength.

At this time, I’m going to have John provide more detail on Q2. John?

John M. Duffey - CFO: Thank you, Jim and good morning to everyone on the call. As Jim mentioned, we’re pleased with our execution in the second quarter and year-to-date performance. Attendance declined by 400,000 guests in the quarter as we mentioned on our first quarter call, there was a shift in attendance into the fourth quarter, associated with the earlier Easter and related Spring breaks. This shift accounted for approximately three-quarters of the decline in the second quarter. As those listening on the East Coast and Midwest can attest, we had adverse weather in May and June that impacted our Eastern and Midwestern parks.

In fact, this year’s second quarter was the worst weather at our parks, east of the Mississippi in more than a decade. As an example, June rainfall exceeded 10 inches for New York, Boston, Washington, and Philadelphia versus a historical average of 3 to 4 inches. Chicago and Atlanta had similar issues, and unfortunately a lot of the rain came on weekends, our busiest time. Having said that, historical data shows that although there may be impacts on a quarterly basis weather tends to even itself out over the year. In addition, our continued success in increasing season pass sales brings stability to the business and should help contribute to a rebound in attendance as well. I should also note that we can still have approximately 60% of our average annual attendance still to come.

The second quarters attendance mix was heavily weighted towards season pass holders, although this put downward pressure on per capita revenue, we saw $0.61 increase in admission per caps in the quarter, a clear indication that a pricing strategy is working. You also note that from the press release that in-park revenue per capita decreased slightly. This was due to a higher season pass mix and lower parking revenue due to higher sales of our premium priced gold season pass that includes parking.

Year-to-date attendance grew 1.2%. Guest spending per capita grew $0.36 or 0.9% and revenue is up 2.3%. Adjusting for the $3 million of insurance proceeds related to hurricane Irene, which was recorded in the first quarter of 2012, year-to-date guest spending per capita grew $0.64 or 1.6% and revenue grew $13 million or 2.9%. As the result of strong season pass unit sales growth, deferred revenue at June 30, 2013 was $130 million, an increase of $23 million or 22%. You should note that a portion of this revenue will be recognized in 2014 as our successful new annual membership pass program runs 12 months from date of pass purchase.

Cash operating expenses decreased $13 million and $4 million in the quarter and year-to-date respectively. The decrease in the quarter was primarily the result of lower labor and marketing costs, the majority of which was due to effective cost management and a smaller portion to the spring break shift into the first quarter.

We have mentioned on several occasions our ability to scale back costs when we see softness in attendance and the second quarter is another perfect example of this execution. However, I do want to emphasis that we have not reduced cost relating to maintenance or safety. Overall maintenance and safety spending represents approximately one-half of our total park operating costs and 25% of capital spending. Year-on-year we have increased spending in this area.

The safety and security of our guest is our number one priority and we will never compromise that.

Adjusted EBITDA increased $1 million in the quarter after adjusting for the September 2012 sale of DCP despite the softness in attendance and revenue. We also improved our modified EBITDA margin 159 basis points to 43.3% in the quarter.

As we mentioned in the press release, for the 12 month period ending June 30, 2013, adjusted EBITDA was $388 million and our modified EBITDA margin improved to a new industry high of 39.6%. Cash earnings per share for the quarter was $0.97, an increase of $0.08 or 9% over prior year.

LTM cash EPS is now $2.29, an increase of $0.29 or 15% over prior year LTM. I do want to note that both the quarter and LTM cash EPS were favorably impacted by timing of interest as our bond interest payment is only made semiconductor-annually and the payment was made in June – in July.

The Company repurchased 0.8 million shares of stock in the quarter, all of which was purchased prior to and discussed on our first quarter call. Overall, I was pleased with our quarter and year-to-date performance, especially when you consider the weather-related factors.

And now I'd like to turn the call back over to Jim.

Jim Reid-Anderson - Chairman, President and CEO: Thanks very much, John. So, while this has been an extremely sad weekend, I must let you know that I am optimistic about our future. Our parks are in excellent condition. Our employees are very positive and our guests are giving us higher ratings than ever before. We have exciting new marketable capital.

We've successfully taken pricing and our strong season pass sales should provide good momentum into the second half of the year. The foundation of our success has been and will continue to be excellent execution of our strategy. Disciplined execution of the strategy enables us to continue delivering sustainable profit and cash flow performance, fund all appropriate business investment and return excess cash to our shareholders via dividends and share buyback.

And of course, with all of our initiatives, we continue to have our sights set on achieving our aspirational target of $500 million of modified EBITDA or approximately $3 per share of cash EPS by 2015.

Lindsey, at this point could you please open the call up for any questions.

Transcript Call Date 07/22/2013

Operator: Afua Ahwoi, Goldman Sachs.

Afua Ahwoi - Goldman Sachs: I had a couple of questions, just first maybe on the buyback. Can you address what you are thinking about in the long-term as you get to the end of this current authorization that you have? And then secondly, as we think about the weather impact, is there any way for you to get a sense of how much exactly was deferred into the third quarter from those who sort of didn't come because of the weather. Is that reflected in the deferred revenue balance or is that solely just a season pass. And then maybe the economics of that monthly plan that you were talking about, I mean how does it work? Is it the same marginal or cash flow as regular season pass customer or regular days etcetera?

Jim Reid-Anderson - Chairman, President and CEO: Let me start with your first two questions and then John will pick up on the third one. With regard to the buyback strategy, it's been very clear all along and we maintained the same approach, which is that any excess cash flow above and beyond what we need to operate the business will be utilized for dividends and share buybacks. So that has not changed and we will continue down that path not only for the rest of this year but into future years. With regard to the weather, we commented earlier that it was obviously a difficult quarter, the worst that we have seen in at least a decade. But we are not going to comment on what happens looking forward, we don't give as you know comments with regard to current quarter or future quarters, but I do believe that we had said and we would reinforce this, that historically what we've seen, where there is a weather impact that people simply buy their time and they come later in the season. The beauty of where we are right now is the first half is over and in the second half that represents approximately 60% of our annual attendance historically. So, there is opportunity for folks to come back, and we're optimistic that we'll see that in the third and fourth quarter.

John M. Duffey - CFO: Afua, was your question regarding the difference in margins between memberships and season pass?

Afua Ahwoi - Goldman Sachs: The membership and also maybe how you would book that on your balance sheet or income statement and how we should be thinking about that would impact attendance?

John M. Duffey - CFO: Sure. Well, the membership is recorded similar to a season pass. So when the membership is purchased we would recognize all of that as deferred income. As the individuals come to the park based upon historical trend, we would recognize a piece of that as they come to the park, so very similar to season pass. The only difference would be that a membership extends beyond the current calendar year, so there may be a portion of that gets deferred and recognized in 2014. As it relates to margins, the margins on the memberships are higher. The pricing on the membership runs 30% to 34% on average higher than a season pass. One other point that I'll make on the membership is that, another difference between memberships and season pass is that a membership is automatically renewed on a month-to-month basis on the 13th month.

Operator: Ian Zaffino, Oppenheimer.

Ian Zaffino - Oppenheimer: You guys did a great job on the cost front and I know you said you are able to kind of flex your spending and your cost. Can you give us kind of maybe specific examples of what you are doing to reduce the cost and to kind of keep in check the way you did this quarter?

Jim Reid-Anderson - Chairman, President and CEO: I think there's several examples both John and I would jump in. But in terms of the ability to scale back on marketing costs, we can do that when the weather is rough as it was, we can scale back the spending there, same with regard to our seasonal labor. As you know, bulk of the employee base is seasonal and so if we know the weather is bad, we're able to scale back the number of people at the parks or close down parks on days when that weather is bad. So those are the sort of examples, but also internally from a leadership perspective we can scale back travel within the Company and other expenses. So there are a series of things that we can do in these circumstances and I think we've shown couple of times now where the weather has impacted us that we are able to do that.

Ian Zaffino - Oppenheimer: Then can you just remind us about the partnership products how that works, what their stakes are in the Dallas or the Arlington Park that kind of have the (indiscernible) flow through? Thanks.

John M. Duffey - CFO: There are two parts in Arlington; there is the theme park and the waterpark. The theme park is in the partnership, the waterpark is not. We own approximately 53% of the Arlington Park with the remaining percentage owned by multiple limited partners. The way that – the financial works is that there is a minimum distribution that is made each year and that is made to all of the partners including Six Flags. Any cash that’s generated above that minimum distribution a 100% of that comes to Six Flags. In 2013 that minimum distribution for Six Flags over Texas is approximately $40 million of which approximately $19 million goes to the other limited partners and $21 million to Six Flags.

Ian Zaffino - Oppenheimer: And then I'll figure out I'll ask this, see if you can answer it, but if you look back at sort of historical maybe incidents that have happened, can you give us maybe an idea. I know you don't break it out on a park level so it's difficult for us to kind of get to it. But maybe a previous incidence what was the attendance impact following that incident or can you give us maybe a framework of how to think about it?

Jim Reid-Anderson - Chairman, President and CEO: Sure Ian, I think that’s a reasonable question, given the circumstances. I think, you know at this time, we can comment on any future financial impact as we would simply be speculating. However, given the exceptional circumstance we wanted to provide at least a quick update. I think you know the accident occurred last Friday and since then we've seen no significant impact on our attendance across the corporation. I do want to say though that history in this industry would suggest that there is a lag in reaction time after an accident, and there could be a short to medium-term attendance impact at the affected park. Obviously, we are going to take the opportunity to update everyone in more detail on the Q3 conference call as to any attendance or financial impact.

Operator: James Hardiman, Longbow.

James Hardiman - Longbow Research: Just a clarification on the last point, Six Flags Over Texas. Given that that ride is a major attraction for that park, and it's not at commission at least for the short-term, is there any sort of compensation or pricing impact concession given to people that are continuing to attend that park?

Jim Reid-Anderson - Chairman, President and CEO: There is no pricing concession that we give to people when rides are down. All theme parks at some point during a day and most of the parks there maybe one or two rides that are out of commission and I think people understand that.

James Hardiman - Longbow Research: Then couple questions on the per capita numbers. Not a kind of growth here in the first half. Obviously you guys continue to see some real nice growth in season's passes and that typically has a negative impact on per capita spending. I guess, if you think about where you were heading into the year, obviously you had a pretty good idea of where season's passes were going to be. How much of the lack of growth in per cap do you think is season's pass growth? What if, if any impact do you think weather has on per capita spending and I guess ultimately there seems to be a little bit of a divergence between, ticket spending and in-park spending and do you have any thoughts on why that might be the case?

Jim Reid-Anderson - Chairman, President and CEO: I think that you've outlined very clearly what we have said historically, which is that we had success in season pass. There is <16>