Six Flags Entertainment Corporation's CEO Presents at UBS Global Media and Communications Conference (Transcript)

| About: Six Flags (SIX)

Six Flags Entertainment Corporation (NYSE:SIX)

Presentation at UBS Global Media and Communications Conference

December 5, 2012 1:30 p.m. ET


Jim Reid-Anderson - Chairman, President, and CEO



Unidentified UBS Representative

Good afternoon everyone. Welcome to the Six Flags Entertainment presentation. Today we have Chairman, President, and CEO Jim Reid-Anderson here to present the company. It’s going to be a presentation of about 20-30 minutes, and we’ll have time for Q&A after that. Jim, do you want to take it away?

Jim Reid-Anderson

Thank you very much, Chris, and it’s great to be here at the conference again. For those of you that know the company, I’m going to go over the investor presentation that we have, and we’ll have plenty of time, as Chris said, for any questions that you might have.

For those of you online, I’ll call out page numbers as we go along. We’re on page three. First and foremost, why invest in Six Flags? And I would tell you that this is not the company of old, the Six Flags of old, where there was significant disappointment with regard to investors. This is a new company. The company went through a bankruptcy process in 2009-2010, emerged, and since then, this company has gone from strength to strength. It really is just an amazing brand and exceptional business.

And I think fundamentally one of the most beautiful things about this company is how not only is the industry misunderstood, but the company has been as well. And I think we’re in a position where not only do we generate now strong recurring cash flow, but I think looking forward we have tremendous opportunities.

And if you look on the right hand side of this chart, page number three, you’ll see the improvements in profitability. And we anticipate that they will continue to grow. And we’ve set ourselves a long term target of delivering about $500 million of modified EBITDA, and we’re well on track to get there, we targeted by 2015.

So let’s go through each of the topics that really define why this is such a good business, and a great place to invest money. First and foremost, it really is a good industry. And I think it’s an industry that hasn’t publicized itself very well. On page four, I talk to the fact that this industry is really stable in a tough economy. And much like healthcare, where I worked before, you see this high recurring revenue base.

And so when you put money in here, if the business is well-run, you will see stability going forward, even in a tough economic environment. Trying to recapture or rebuild Six Flags would be very difficult to do, if not impossible. There are very high barriers to entry, whether they might be governmental or just dollar-based. To try to create Six Flags would cost somewhere between $5 billion and $6 billion, and each park in the range of $300-500 million. We serve all of the key markets, the top 10 DMAs. We are very, very well-positioned.

If you move on and go to page seven, there’s a chart there that really defines the single greatest change that took place at the company two and a half years ago. And it’s very easy to critique the past, but there really was no straightforward strategy. And I would say that our strategy, not just for the last two and a half years, but going forward, is fairly simple. It’s all about being the leading regional theme park company.

And, underneath that strategy, we have a handful of imperatives against which we have metrics that we closely track. And you can see them here. I’ll go through each of these in a little bit of detail so you can get a little bit more flavor for what I’m getting at.

I’ll start first by looking at what we have. We have 18 parks, strategically located across not just the U.S., but we have a park in Canada, we have a park in Mexico. And all of these parks are doing very well. But in essence, what they do is they give us economic and weather diversity and protect us.

If you look at what we offer our guests, people tend to think of the coasters that we offer, and we have literally the best, the fastest, the tallest, the most exciting coasters in the world. But what many people miss really shows up on page 10, which is that we offer more than just thrills and roller coasters. We offer water parks - just some of the best water parks in the world - concerts and shows, animals - we have the largest safari outside of Africa right here in this area. And so it’s a broad-based offering for families, for teens, for kids, you name it. Everybody can have fun at Six Flags.

And talking about fun, on page 11 I’m very proud of this chart, because what it signifies is just the progress that has been made at this company over the last few years. And you can see even in this tough environment, we have dramatically improved our overall guest satisfaction scores, literally year by year. And, the beauty of it is they’re still room to go. We know we can do better.

On page 13, I begin the process of talking through the growth opportunities. Because even though we’ve seen a really nice expansion, not just in our profitability and our cash flow, but also in our share price, I feel we’re only partway through this process. And this company is well-positioned for future growth. And I’ve outlined, on the left-hand side of page 13, the four key areas of growth. Again, I will drill down into each of these.

But you can see the progress that we’ve made with revenue and attendance. The company really was pretty much at an all-time low in 2009, 23 million folks attending the parks. We’re now LTM-ing at 25.6 million. Our revenue, at just under $1.1 billion, has grown really nicely. And, we expect to keep that going.

So on page 14, innovation. Innovation is fundamental to our drive for success. It has helped us grow, and it will help us to grow more as we go forward. And innovation isn’t just about having a new roller coaster. It is about creating news in every single park, every year. Whether it might be a new roller coaster or simply a new show or a new attraction, every single park will have something new for our guests every year. And this is a change in strategy. We didn’t do that before. But what we’re trying to do is appeal to local guests who will travel to our parks to experience our offering.

So on page 15, it outlines some of the new attractions that we shared with our guests in 2012. And I can tell you that we had great success. These attractions were very well-received. I know there’s a lot of information on this page. But this is really the past. And what I want to do is focus on what’s coming.

So very briefly, I’m going to fly through these charts now. In 2013, park by park, Six Flags Over Texas will have the tallest, scariest swing ride in the world, twice the height of… Think about all these buildings that are out there. There are numerous opportunities to get scared. Go on this swing ride 400 feet high and you will be screaming like a baby, I can assure you. It’s a world record holder.

Magic Mountain, this will be another record holder. There is no thrill ride in the world that will do what this looping coaster can do. It will be the tallest, the fastest, and it will propel you forward twice, launch you forward and then launch you backwards once. Nowhere else in the world will you be able to do this. Magic Mountain is the thrill capital of the world.

Great Adventure, right here, we have converted the safari and made it one new ride for our guests, and included it in the price of admission. And you may ask yourself, why would you do that? Well, we didn’t have very many guests going through our safari. But now every single guest will be able to experience the safari on a truck, and it will allow them to go very very close to animals in a way that they couldn’t when they were driving their own car. Because they’ll be able to go off-road.

And furthermore, there will be places to stop, inside the park and outside the park, where, of course, for the first time ever, we’ll be able to help them spend some money. Because we’ve never had any sort of in-park spending opportunity at the safari. So this will be a revenue generator for us, and I actually believe, with the 1,200 animals that we have there, our guests will just love it.

Discovery Kingdom, in San Francisco, will have a new show, which is Cirque Dreams Splashtastic, which will combine dolphins with just a phenomenal show. Acrobats, music. It’s going to be wonderful. And I think our team there, where we have, again, like we have at Great Adventure here, a lot of animals, are very excited about putting on a new show.

Great America Chicago will have a new show as well, Ignite, which will be a state of the art multimedia event, late at night. And you, again, might say to yourself, why is a show a good thing? A show is a great thing, especially at night. Because guests tend to go home earlier, and if there’s a new show, they’ll stay and they’ll spend money. So it’s very good to have shows as well as thrill rides.

In New England, we’ve got some new water slides, which are going to be very exciting. They’re going to be racing slides, so kids will be going up there to see who can get down fastest. And Fiesta Texas, we’re going to introduce Iron Rattler, which will be the first wooden coaster in the world that will have an inverted barrel roll. And it’s using a technology that we first introduced. There’s only one other wooden coaster in the world that has this technology, but it doesn’t have a barrel roll, and that’s our park in Arlington, Texas. And when we introduced this new ride in 2011, it won the most innovative ride in the world in that year, and we think we’re going to have the same sort of effect in Fiesta, Texas.

So you’ve just got a flavor for some of what’s coming in 2013. And I’ll take a minute now and tell you, look, there’s a lot on those charts. You’re not going to remember most of them. But the point that I would make to you is that we are giving our guests numerous reasons to want to come back to Six Flags.

And we’re doing it on a local basis. Because regional theme park visitors are local guests, mostly. There are some people who travel in from outside, but most people drive. And so we’re going to advertise directly to them. We’re going to communicate to them through email. We’re going to show them what’s coming at the parks, and that these are the cleanest, most family-friendly parks in the world, and that’s how we think we will drive our attendance.

We’ve also changed our marketing campaign in the last couple of years to focus on the local element, and instead of an all-singing, all-dancing Mr. Six, who is now one of our honorable characters, we now have a media campaign that really celebrates our parks and is local in nature. So it might be an advert that shows the new Iron Rattler in our park in San Antonio, or it might show the local show in Great America. But we think that’s much more effective than a broad-based campaign.

We’re going to continue our pricing discipline. Every year for the last two and a half years, we have increased our main gate prices and we have reduced our discounts. On the right hand side of page 24, you’ll see a Coke can and you’ll see the progression that’s taken place. We are going to continue to do that. This is very powerful in terms of a profit enhancer for the company, and I see nothing on the horizon, even in this tough economy, to suggest that we need to slow down on the pricing opportunity. I think we have a yield management approach that is working, and we will continue to push that.

Now, concurrently, in the last year or year and a half, you’ve heard us talk about season passes and why these are so powerful. Page 25 lists out all the reasons that season passes are good. And let me very simplistically tell you why, at a high level, they’re very good.

A lot of people come to the park just once, and then they may not come back the following year. But if you can lock them in with a season pass, they come multiple times. So instead of just once, they justify buying the season pass and they want to come, on average, between three or four times. Every single time they come, they spend money.

Even if they only spend $2-3, we have such a high variable contribution rate that we make money on every single visit. So at the end of a season, we generate about double the revenue, double the profitability, on a season pass guest, than we do on a single-day guest. Plus, we end up with all their details, and we now have a campaign to aggressively target renewal of season pass holders, so they become part of our recurring revenue base.

So, if you look at our season pass strategy and what’s happened over the last few years, we’ve seen very nice increases in season pass attendance and the trend is continuing in a very positive direction. As of the third quarter, when we look out on our deferred revenue, on the balance sheet, we’re seeing double digit increases in season pass sales. That’s the single biggest item on there.

In park sales, on page 27, more very positive momentum. We’ve got 2,000 locations. We’re adding to them with opportunities such as the off-road Safari at Great Adventure, and we’re also innovating in this area in many ways. Let me give you one example. We use different methods. We might use technology. Lo-Q wrist bands, that’s our Flash Pass offering, in water parks - not just in the theme parks, so people can get to the front of a slide line if they want to by paying more. We make incremental revenue and profit that way.

We also tested, in 2012, all-season dining at two of our parks. One small park, one large park. And it was a huge success. So we’re now going to offer that in all of our parks in 2013, and in essence, we see that as a revenue driving opportunity as well.

Page 28 talks to corporate alliances. Some of you may not know that our attendance - which is on an LTM basis, just over 25 million people - is greater than most of the sports leagues’ attendance. So we have a captive audience. And there are many great companies, some of which are shown on the bottom of this chart, that pay us to have a presence in our parks. Now, some of the deals that we had in the past were actually loss-making at the bottom line. Over the last two years, we’ve gone through a process of eliminating those loss-making deals. And I believe that we’re now at a point where we will see very nice growth on the corporate line side going forward.

So, if you move to page 30, and the financial performance of the company, you can see the increases in attendance, the increases in revenue. You’ve seen these before. Page 31, what we’ve done on the cost front. Not only have we taken huge chunks of cost out, but as a percent of revenue we’ve seen very nice improvements, and you have the commitment, not only of me but of the whole team, to continue to really try to leverage our cost base to enhance our overall operating performance.

And here, quarter by quarter, on page 32, you see the net result of the combined effort there. We were generating $197 million of EBITDA as of quarter one 2010, just before we exited the bankruptcy process. And you can see what’s happened since then. And our goal is to continue to drive improvements in our financial performance at the company.

If you look at one of the twists in a business that’s been through a bankruptcy process is that you go through something called fresh start accounting. I think many of you are fully aware of what that means. But for those of you that aren’t, let me take a minute and explain that fresh start accounting causes normal comparisons, of looking at pure EPS, it just makes it incomparable. It’s very difficult to look at normal EPS and judge appropriate multiples, etc.

What you really need to do is you need to look at cash EPS, which is why on this page, page 33, I actually show the buildup of cash EPS over the last two and a half to three years. And I also set a goal - assuming that we achieve our aspirational project 500 target - that we would be, I believe, in excess of $5.50, headed toward $6 per share of cash EPS.

And you can see on the right hand side of page 33, the elements that make up our cash EPS and how we get there via cash flow. I think another point to note is that we have $1.1 billion of NOLs sitting on our books. And that provides an incredible cash benefit to us going through at least the next five years.

If you look at our debt, on page 34, you’ll see what’s happened since we first came out of bankruptcy. Huge reductions. And we’ve continued to improve our overall debt performance. And if you note, on page 34, that our overall net debt leverage, 1.7x, is at, without a doubt, an industry low. And I think it’s pretty low compared to most companies.

And we’d announced a few weeks ago via an 8-K that we were looking at our overall financing situation. And today we released another 8-K, for those of you that hadn’t seen it, just a short while ago, that announced that we are very confident that we will be able to reduce our overall interest rates on the bank facilities by about 25 basis points, and that we are going to gain flexibility on our covenants and on our baskets.

And furthermore, that we believe we’re going to get approval to be able to increase our debt overall through a bond offering. And we’re targeting in the region of $600 million of bonds. And those bonds, if we are successful in getting them at some point in the near term, we would use to really be in a position to reduce our bank debt by about $250 million and over a period of time buy back shares to the tune of about $350 million. So that is something that has literally just happened in the last hour.

I think when you look at page 35, it reinforces what I’ve just said. This is evidence of what we’ve done, just over the last couple of years. The company pre-2010 never generated any cash. And it’s very easy to pick holes in what happened in the past, but the reality is that I look forward and I say this is a cash-generating machine.

And we have the ability to fund all operations of the company very successfully, improve our guest satisfaction, put in new rides, make sure that our employees are taken care of, make sure that our guest are taken care of, and then we’re in the position to give shareholders back excess cash. And this page, I think, demonstrates very effectively, on page 35, just in this year, between dividends and share repurchases, over $300 million of cash returned, and close to $400 million just since we exited bankruptcy.

And what I described with regard to what we’ve announced today, you can see that our focus is laser-focused on taking care of shareholders. That is our goal. So I would take you to page 36, and say I fundamentally believe that this company is only partway through the process of greatness that we’ve been on, this momentum that we’ve had.

I think that there’s tremendous opportunity left. Not only have we got strong and recurring cash flow. You’ve seen the detail here. We’ve got a phenomenal dividend at $3.60 a share. On just LTM cash EPS of $4.13 it is sustainable and we believe over a period of time we can grow that. And, we have a healthy balance sheet. And we will continue actively to look at ways to further enhance not only our overall position, but the position of our shareholders. That’s the goal of our company.

And so with that, I think Chris it’s probably an appropriate time, on page 37, which is the wrap up, just to hand it back to you and see if there are any questions.

Question-and-Answer Session

Unidentified UBS Representative

If you have questions, please raise your hand. We’ll have a mic come around to you. While we wait, Jim, in the context of this new bond that you may issue, it sounds like your net debt will move up to around a billion, post these activities. What is your view on optimal leverage going forward? Is that the right amount, where you think the company’s headed? Or do you think there’s capacity to add more?

Jim Reid-Anderson

I think at present, if we were to do everything that I described, our net debt leverage would go from about 1.7x to about 2.7x. Still a very healthy position to be in. But you have to remember, the company, having gone through a bankruptcy, we’re very careful about the way we move forward. And I think this is a great first step. We’re very hopeful that we can execute a good bond offering. The markets are in a really great place right now. It’s kind of pretty much close to or at all-time lows on interest rates, especially as it relates to bonds. So we’ll see how this goes, and then over a period of time we’ll assess whether there are any other steps we’d want to take.

Unidentified Audience Member

Could you share with us your experience with the attendance in terms of consumer over the last 18-24 months? And what are some of the top three aspects of what people do that you’re focusing on in terms of the growth over the next two years or so?

Jim Reid-Anderson

I think it’s a great question. The question is really around attendance, and what people do, right? So I would say, first of all, when folks come to our parks, they really want to escape. And we provide a magical opportunity for folks to escape, whether it’s for a day or just for a few hours. And so what we’re trying to do is make sure that we can lock folks in.

So you said what are the three things you do. We’re really working very hard to make sure that we can lock them in to get recurring revenue. So the earlier that we can sell, whether it’s a season pass holder or a group event with companies, the better. So that’s step number one.

Step number two is we’re trying to give them the reason. For those folks that hadn’t been back to the park in a number of years, get directly to them and provide them the reason to come back. So they need to know that this is a great atmosphere, and that there’s something new for them.

So we put into place a program called News in Every Park, which I describe briefly there. We might put a new ride in. We might put a new show in. But we’re trying to give them an innovative reason to come back. And we’re using direct advertising, billboards, cinema, internet, to get to them rather than just broad-based media, which is what we were doing before. So the goal is get them into the park.

Once they’re in the park, even if they just come in on a single-day ticket, we upsell them on season passes and we sell them every single thing we can in the park, including what I described earlier, which is Flash Pass, which allows people to virtually queue, in essence, and get to the front of a line. And then we find other ways to sell in the park. And we’ve seen very nice trends on in-park spending. I showed a chart earlier that shows the increases in tens of millions of dollars of revenue, in-park.

So I would come back to say that although it’s a very tough economy, and it has been -everybody knows that - in this process, to get that magical escape, people are willing to come in and spend money. Not only on the ticket, but in the park. And that trend has not diminished.

Unidentified Audience Member

One follow up. When you were discussing and sharing with us the $5.50 or $6, that is not fully taxed? That is the cash EPS, is that correct?

Jim Reid-Anderson

That is the cash EPS, but it does have tax in it. That shows cash taxes paid. We have cash taxes paid in there. It’s about $10-15 million a year of cash taxes in that number.

Unidentified Audience Member

When do you think the NOL will run out?

Jim Reid-Anderson

We feel very good about the NOL. It’s a function of what happens with profitability. But our current view is that, at earliest, we’d be at the point in 2017 before we would be looking at paying taxes. And of course we’ve got tax strategies in place that we look at on an ongoing basis.

Unidentified Audience Member

With the recent bond offering, can you just talk about the pace of returning cash to shareholders?

Jim Reid-Anderson

That’s a really good question. First of all, we have to execute a bond offering. We haven’t done that yet. We’re just initiating the process now. Once we initiate the process, we want to make sure that the timing is right. So we’re watching the market very closely. And assuming that we can, let’s say for the sake of argument, close at the end of this month or sometime in the first quarter, we would look to pay down the bank debt that I described, the $250 million, pretty much immediately, and then use the $350 million to buy back shares opportunistically. And there’s no set timing, but I think my view is that this company, as we’ve shown over the last few years, the increase in the share price has been pretty consistent, and I personally believe we’re going to continue to see improvement. So the sooner the better in terms of buybacks, in my opinion.

Unidentified Audience Member

What is the real estate situation around your parks? And is there any development potential there?

Jim Reid-Anderson

It’s a phenomenal question, and one that I ask the team every week. What are we doing? But really, it’s a good question, because we sit on in excess of 2,000 acres at many of our parks that are unused. And of those, about 1,100 could be developable. The issue that we’ve had is really that, as you know, the environment has not been great for property. But to me that’s a phenomenal asset. Tremendous amount of developable acreage that we could sell over a period of time, and has value. And as soon as we can, we will begin that process, if we really feel the value is appropriate.

Unidentified UBS Representative

Jim, maybe I can interject with one other. You’ve talked a lot about your season passes, and how they’re economically the right step from a long term value perspective. But help us understand how that changes your short term financials as you take in revenue at a different timing pattern than you would with normal passes.

Jim Reid-Anderson

I think it’s a great question, Chris. And I think that Chris is focused on maybe the change in the pattern of revenue. And what I would say is that in general a season pass is very powerful. And I know you know this already, but to describe again, a season pass holder, on average, will generate double the revenue, double the profit, double the cash flow, of a single day holder in any one season. Double.

So if a single day holder generates between $40 and $50 per visit, we’ll make $100 from a season pass holder. If they pay cash, then the bulk of that comes up front, because they’ve paid in full for their season pass.

Many people now are taking us up on our offer of three, six, nine, and 12 month payment plans. And what we’ve found is that they’ve been very powerful, very positive. And that has the effect of beginning to smooth out our revenue, in essence, or our cash receipts, over a period of a year. Rather than everything coming in in one period or another, it smooths it out a little bit.

So I think the effect is going to be very positive for the company in that we lock in guests. It’s recurring revenue. Once they’ve decided to come, they come multiple times. And I think that’s very positive. If there’s an offset to that, it’s that it puts a little bit of pressure on the average ticket per guest, which we call per cap. But to me, that’s more than offset by the higher revenue and higher profit.

Unidentified Female Speaker

I just wanted to clarify. So the cash flow stream gets smoothed out. The revenue recognition is identical, so we record the revenue when the guests come through the park, and that doesn’t change based upon when we sell the ticket or under what type of payment plan, whether they pay the cash up front or if they pay it over three, six, nine, or 12 months.

Jim Reid-Anderson

Great point.

Unidentified Audience Member

Can you tell us how you think about the cash balance and how much you’d like to maintain there?

Jim Reid-Anderson

The cash balance, I think, as of the end of the third quarter, was very close to $300 million. And I think we’re in a very good position from a cash perspective. Part of the adjustment that I talked about with regard to our current financing is to allow more flexibility with regard to what we do with cash. But I’m not going to give a number and say this is the goal that we’re going after. We definitely have the ability to go lower in cash than we are currently, in terms of what we hold. But we always need some, especially as you get toward the end of the year, and you get into the quiet season, post-Christmas, to be able to handle that sort of process. But certainly we’re sitting on more cash today than we need to be.

Unidentified Audience Member

Two questions. One is the guidance you gave us, does that factor in any of the buyback activity that you contemplate on a cash EPS basis?

Jim Reid-Anderson

We have not assumed this buyback that we’ve just described today, because it hasn’t happened yet. The bonds are not counted in that, correct.

Unidentified Female Speaker

The $5.50 and the calculations in the presentation, it’s assuming 54.2 million shares outstanding.

Jim Reid-Anderson

That’s basically where we are today.

Unidentified Female Speaker

Where we were as of the end of September.

Unidentified Audience Member

The next question is, is there a level at which you wouldn’t want to sell more season passes? Is there a season pass penetration beyond which it has impacts to the park, or has impacts to the business?

Jim Reid-Anderson

It’s a really good question to ask, because in most businesses, it would be an issue because you’d be hitting capacity, and saying this is a bad thing, you shouldn’t be selling any more. But for us, we operate around 45% of capacity on the days that we’re open. And we are nowhere near the ceiling on season passes. We have tremendous runway left to sell more season passes.

And to put it into perspective for you, on a like-for-like park basis, in 2001 we had 29 million guests, and as of the third quarter, LTM, we’re at 25.6. There is tremendous amount of room still to go. So, no, I see no cap on season pass. At some point, there will be maybe a natural cap that takes place, where we say we want to slow it down a little bit, but I think when we’re at that point, we’ll all be celebrating with a very nice share price.

Unidentified UBS Representative

Great. Any more questions? Jim, I’ve got one last one for you. The strategy of having something new in the park every year is a great strategy. It’s one that the old management team didn’t really follow. And I think you’ve seen that really benefit your attendance numbers. The question I think that may be running through people’s head is can you do that every year? Do you run into limitations on space within the parks? How do you continue to make something new happen every year at every park?

Jim Reid-Anderson

Again, Chris, it’s a great question, because theoretically there could be limitations that could exist. But I can tell you definitively, there is no limitation at this company with regard to news in every park. We have the ability to have something new in every year.

The company previously had never had a five-year plan. You’ve heard the story before. No financial plan, no capital plan. We have a five-year plan. Every park is jostling with its great ideas, and at the same time as jostling with the idea is they’re coming in with the financial justification to say this is why this should be the idea. And we force rank all of the projects, and we create a five-year plan that gives news every year in every park. And with our approach to putting 9% of our revenue into capital, it puts us in the position where our investors know exactly what we’re going to be spending and we can support that into the future.

Now, if revenue continues to grow very, very nicely, it may be a question as to whether 9% is the right number. If we’re really growing aggressively we might be able to scale that back a little bit. But for the foreseeable future, I see no issue on that front at all.

Unidentified UBS Representative

All right, Jim. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!