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Executives

Nancy Krejsa - SVP, IR

Jim Reid-Anderson - Chairman, President & CEO

John Duffey – CFO

Analysts

Afua Ahwoi - Goldman Sachs

Ian Zaffino - Oppenheimer & Co

James Hardiman - Longbow Research

Ian Corydon - B. Riley & Co

Kevin Coyne - Goldman Sachs

Tim Conder - Wells Fargo

Joel Simkins - Credit Suisse

Six Flags Entertainment CEO Discusses (SIX) Q1 2013 Earnings Conference Call April 22, 2013 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Six Flags First Quarter 2013 Conference Call. My name is Marian, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). This conference is being recorded. If you have any objections, you may disconnect at this time.

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

Nancy Krejsa

Thank you Marian. Good morning and welcome for joining our call. With me today are Jim Reid-Anderson, Chairman, President and CEO of Six Flags and John Duffey, Chief Financial Officer. We will begin our call with prepared comments and then open the 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 such 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 our 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 will turn the call over to Jim.

Jim Reid-Anderson

Thank you Nancy and good morning to everyone on the call. We have kicked off our 2013 season with a superb quarter executing in all key areas of our strategy and registering on a comparable basis 38% revenue growth and 25% adjusted EBITDA growth. Our strong performance even after adjusting for the calendar shift relating to spring breaks was driven by guest focused investments in our parks, relevant marketing initiative, penetration of season pass sales and our continued drive for operational efficiencies. On the back of another strong quarter, our last 12 month cash earnings per share now stands at $4.50 an increase of $1.16 from one year ago and we’re keenly focused on achieving our aspirational target of $500 million of modified EBITDA by 2015 which equates to almost $6 of cash earnings per share. During the quarter we were also very active in repurchasing our own stock and as of today have fully utilized the entire $450 million that we raised in December for share repurchases. We believe both share repurchases and dividends which currently are in excess of 5% yield represent tremendous value for our shareholders.

As it relates to our operations we are really well positioned as we had into the heart of our operating season. We have successfully executed price increases across our parks and are still seeing very strong season pass sales growth coming into the season. To further drive attendance we’re currently introducing a number of demographically targeted guest attractions including some world record breakers. In Mexico I personally witnessed the diabolical pair of our new Joker fun-house and coaster. Guest of all ages love this attraction and the park is reaping the benefits on what was a modest investment in moving a ride from another park. This is an excellent example of asset utilization that also is driving gas excellence as we enhance the ride experienced and double rider throughput per hour in the process.

At Six Flags Magic Mountain in Los Angeles, we have full throttle, the world’s tallest looping coaster where for the first time ever you can ride up and over the outside of the loop. We maintained the final section of the track a few weeks ago and the coaster looks phenomenal. The Texas SkyScreamer at Six Flags over Texas is the world’s tallest swing ride at over 400 feet or twice the height of the Statue of Liberty. When you stand next to it, it really does look like it reaches into the sky and I cannot wait to see the breath taking views of both the Dallas and the Fort Worth skylines from this record breaking ride. Iron Rattler at Fiesta, Texas in San Antonio also looks fabulous. The ride itself is pure adrenaline as smooth as silk. It is the second hybrid wooden coaster of its kind, the first being the New Texas Giant which was introduced at Six Flags over Texas two years ago.

You may recall that the Giant won the industry’s Best New Ride of the Year Award in 2011. The Iron Rattler uses similar technology and is the first hybrid coaster that takes riders through a barrel roll. You really have to be ready to show your fangs when you ride this beast. With the introduction of Wild Adventure Safari, Six Flags Great Adventure has become the largest theme park in the world. The safari will be a unique and accelerating experience for our guests as they encounter up to 1200 animals from six continents while visiting the largest drive through safari outside of Africa.

In addition to these four world record breaking attractions and in alignment with our strategy, we’re introducing something new at every single park this year. The new attractions range from water slides to smaller coasters, water rides, night time events and a water based surf show. Without a doubt we believe 2013 is the best line-up of new rides and attractions in our company’s history. Why is this important? It’s important because our guests are just like you and me, they love (inaudible) and they love something fun and different to try. This is what pulls guest back into our parks. Our innovation strategy is definitely working. Now onto the real entertainment that we have lined up for you on this call. John would you like to share a few more details on our first quarter financial results?

John Duffey

Sure. Thank you Jim and hello to everyone on the call. As Jim indicated we had another solid quarter with attendance revenue and EBITDA gains. Attendance very strong up 525,000 guests or 41%. The growth was the result of one a shift forward of the Easter Holiday and related school spring breaks which accounted for approximately half of the increase and will negatively impact the second quarter. Second, strong season pass sales and third impact for marketing programs which continues to highlight the outstanding value and offering of our parks.

Reported guest per capital spending decreased $0.88. However as you may recall we received $3 million of business interruption insurance proceeds in the first quarter of 2012 associated with Hurricane Irene which as we reported last year favorably impacted guest per capita spending. If you adjust prior year numbers for the business interruption insurance proceeds, total guest spending actually increased $1.41 or 4% driven by a ticket revenue per capita increase of a $1.32 or 6% and in park revenue per capita increase of $0.09. This increase was the direct result of our strategy to increase pricing and attendance and enhance our in park offerings.

Partially offset by lower per capita spending normally associated with a stronger season pass attendance mix. We continue to see success in driving season pass sales and largely due to that success our differed revenue at the end of the quarter was $92 million an increase of $27 million or 41.3% over prior year. Continued success in season pass sales could deepen per capita gains, however we remain extremely focused on managing our ticket yields and we expect both strategies to enhance the absolute revenue, profitability and cash flow at Six Flags.

Total revenue in the quarter increased $21 million or 31.9%, adjustment prior year revenue for the BI Insurance proceeds, revenue increased 38.1% with ticket and in-park revenue up 49.2% and 41.2% respectively. Moving to the cost side, cost of sales increased $2 million as a result of strong in-park revenue. Our focus on cost efficiencies and promoting higher margin products reduced cost of sales as a percentage of revenue to 24.1% versus 24.6% in Q1, 2012. Cash operating and SG&A expenses increased $9 million or 8.4%. This increase was due to operating and marketing cost associated with the earlier spring breaks as well as merits and inflation.

Adjusted EBITDA improved $7.5 million in the quarter and adjusted prior year numbers for the BI insurance and the $1.9 million from DCP which was sold in the third quarter of last year, adjusted EBITDA improved by $12.4 million or 24.6%. LTM adjusted EBITDA grew to $390 million and modified EBITDA margin grew to an industry leading 39.1% both records for the company. As it relates to our capital structure, reported net debt as of March 31st was $1.267 million as compared to $776 million at December 31, 2012 an increase of $491 million.

Our net leverage ratio of 3.2 times remains the lowest in the industry. Pre-cash flow in the quarter was negative $87 million and we always see an outflow of cash from operations in the first quarter as most of our parks are closed and we have spending on new capital projects. In addition we paid $45 million in dividends and purchased 375 million of stock in the quarter. Through April 19th of this year we have spent $404 million to purchase 6.1 million shares of our stock for an average cost of $66.17 per share. When you combine this with the $46 million spent in December of last year we have now fully utilized the $450 million of proceeds from the December bond offering and have further capacity under our credit agreement for additional share repurchases in the balance of the year.

The outstanding share count as of April 19th was 47.8 million shares down from 53.8 million shares at December 31. Our LTM cash EPS at the end of the quarter was $4.50 per share. The company is in an excellent liquidity position with a $137 million of cash on hand and no outstanding balance on our $200 million revolving credit facility. As of this morning there have been no partnership put obligations exercised. Although we may receive some prior to the April 30 deadline.

Given our new capital introductions which will be launched in the second quarter are focused on and continued strength of season pass sales, our park centric marketing campaign and our relentless focus on managing cost I think we’re very well positioned for the 2013 season. So now I will turn the call back over to Jim.

Jim Reid-Anderson

Thanks very much John, as I mentioned at the beginning of the call. We’re off to a really nice start for 2013 season, our team is energized and laser focused on executing on our business plans for this year and beyond. Our focus is on the basics, we’re committed to taking care of our guests in an excellent way so that they want to comeback over and over again. We’re similarly committed to taking care of our shareholders by building on our track record of consistent earnings growth and returning excess cash to shareholders. At this point Marian, could you please open the call up for any questions?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Afua Ahwoi of Goldman Sachs.

Afua Ahwoi - Goldman Sachs

Thank you. Two questions, first, on the buyback, giving you have run through the authorization you have outstanding, how should we think about on the go forward, should we expect a formal announcement or are you just going to continue to buy back, given your credit facilities give you that ability? And then second, on pricing, should we actually think about the difference with the split between reduction of discounts and actually raising ticket prices whether it's on season pass side or even at the gate prices. Thank you.

John Duffey

In terms of the buyback we have approximately as of today 140 million remaining on our board authorization for buyback and we can do incremental amount in addition to that through the credit agreement but we’re not going to disclose exactly what our plans are in terms of the remainder of the year.

Jim Reid-Anderson

To your question once we at a point where we have utilized all 114 but remains the board authorization we would then come back and make some sort of announcement but right now we will buy at our own pace. With regards to pricing we don’t give guidance as to what exactly what has led to increases in price rather all will do and say that it has come in both areas and so we did take our main-gate pricing up and we also had reduced our discounts so both will be contributing bot only happen to this but we will continue to contribute going forward as well.

Operator

Our next question is from Ian Zaffino of Oppenheimer & Co.

Ian Zaffino - Oppenheimer & Co

As far as looking at your project 500 goal, how do you get -- and maybe I was just -- plenty of times before, but give me an idea of as you look between the admissions per cap and then also in-park spend, which is going to be the bigger driver? Is it going to be the pricing side? Is it going to be the in-park spend? Where do you think you have more room to go?

Jim Reid-Anderson

I think it's a really good question Ian and much like a forward question. I can’t give you, this is the breakdown here it is but I can give you a general view as to what we believe. I think we have opportunities across many fronts and I really do believe that we’re going to see growth driven by our season pass strategy. We’re already seeing that and we anticipate continuing to see that improvement in attendance I think concurrently we will see increases because of pure pricing and reductions of discounts and that will be a major contributor for us and then I think that incrementally because we will have more people in the park whilst we might say it's a little bit pressure on the in-park spending per cap total revenue will grow and so I see all three of those areas as being huge opportunities for us going forward and I will give you an example why I think that in-park spending is a growth opportunity as well not only will we see more people in the park throughout these entire strategy but in addition as we have said we have introduced an all season dining pass which we think is a great value in a tough economy and we think that’s going to help drive our revenue forward. So I would say there are numerous opportunities but those three would be the biggest from a pure financial perspective and of course there are others that were targeting maybe at a slightly lower level.

Ian Zaffino - Oppenheimer & Co

So as you look at all your in-park spend initiatives, is it really this dining pass that's going to be the biggest driver? Or are there other opportunities? How do you rank, if you could, your initiatives? Where would let's just say dining be on that list? Where would some of the other initiatives that you have in the hopper rank on that list?

Jim Reid-Anderson

I think that they really are multiple initiatives that are ongoing, our team across the company, across parks are coming up with innovative new ideas but I think you have to remember that food represents about 50% of our in-park revenue and this program is in a place where people who may not traditionally spend were targeting those to be able to spend in our park. So I would say to you that our single biggest opportunity right now is in-park, is this all season dining but I would add that there are others including our flash pass program that we think will give us incremental revenue as well.

Operator

Our next question is from James Hardiman of Longbow Research

James Hardiman - Longbow Research

Couple of quick questions here, just want to make sure I understand the puts and takes of the calendar shift here. I realize you don't give much in the way of guidance but any guide points that you could give us with respect to the second quarter of the rest of the year would be great. I think you mentioned that half of the attendance gain, half of that $525,000 was a function of the calendar. Do you expect that to be a zero-sum shift? In other words, should I just take half of that $525,000 and back that out of my second-quarter number and basically use that as a baseline? Are there any other calendar shifts that we should be aware of over the course of the rest of the year?

Jim Reid-Anderson

Yeah in terms of the remainder of the year, there really are no significant calendar shifts for the remainder of the year. Obviously the significant impact was in the first quarter and approximately we set half of that increase that we saw was due to opening our parks earlier because of the shift in the spring break. So yes you should assume that will be a negative impact in the second quarter.

James Hardiman - Longbow Research

Great and then the second quarter last year appear to be the biggest beneficiary certainly on the attendance side from the new rides and attractions in 2012. It sounds like you guys are really bullish on the CapEx program this year. Do you expect a similar program, just given that the people that are most excited to participate in these new rides are most likely to come in the second quarter? Do we expect a similar pattern to play out this year versus last?

Jim Reid-Anderson

We don’t provide guidance on what’s going to happen in anyone quarter and we referenced on numerous calls that we try to track how we’re doing on an LTM basis because that gives you the best sense of how the business is doing. So I won't predict what will happen in the second quarter what I will say is that we continue to see very nice momentum, LTM on attendance, on revenue, on profitability and the capital line-up that we have. I really believe that 212 was the best line-up but I’m being told now and I do also believe that 2013 is going to be very better and I have to believe that our guests are now getting more and more aware of what we’re doing, we will see that as a big positive. So I won't predict for you what will happen but I will tell you that I feel pretty good about the direction we’re headed in.

James Hardiman - Longbow Research

Got it. And then last question, I don't know how much of this you can give us. Obviously you are not going to quantify the price increases, season passes versus front gate. I think you have commented in the past about how in 2012 sort of that breakeven point, right, the point at which the rational customer would go toward season passes versus the daily passes, was skewed a little bit towards season passes last year, from a relative pricing perspective. How should I think about that? If you could give us any color for 2013 -- if I know I am coming to the park a certain number of times in 2013, is it going to be more or less attractive to buy season's passes or is it pretty comparable to what was in 2012? Thanks.

Jim Reid-Anderson

Well we continue to believe that it's highly attractive to buy a season pass and I think given the numbers that John threw out earlier about what we’re seeing on the seasons pass run it would suggest that our guest believe that as well. So I think it's always a better value to be able to utilize the season pass. I think that the percentage of guest to visit who are season pass holders will increase. I hope that answers your question.

Operator

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

Ian Corydon - B. Riley & Co

A lot of questions have been answered but I just wanted to drill down on sponsorship licensing. You saw that tick up year over year for the first time in quite a while. I'm just wondering if we can expect that to grow and maybe if we can get an update on your initiatives to try to build on that.

Jim Reid-Anderson

It's an excellent question Ian and yeah we’re very pleased to see the trend on the corporate sponsorship side improving and I really believe that the last couple of years have all been about eliminating sponsorship deals that might have given us revenue but very little in the way of profit or cash flow and we’re now through that process. So we do anticipate some modest increases with regard to this line-item and our team, we have an excellent team that’s laser focused on this.

Operator

Our next question comes from Kevin Coyne of Goldman Sachs.

Kevin Coyne - Goldman Sachs

I just had one on season ticket sales. I was just wondering, is the strength broad-based like across most of the parks? Or, I guess, related to some of the disruption in New Jersey related to Hurricane Sandy, are you seeing perhaps more strength in your season ticket sales there because of some other amusement options being off-line?

Jim Reid-Anderson

It's a great question actually Kevin and you’re right there was some impact on some amusement options but those really were not major competitors for us. I think the really good news that I tell you is that we’re seeing growth in every single park, there is nowhere that we have not seen tremendous improvement. So it is broad-based across the board.

Operator

Our next question comes from Tim Conder of Wells Fargo

Tim Conder - Wells Fargo

Thank you. I apologize, joined the call late, we were on another overlapping call but a couple of questions, everyone. You talked about the in-park spend opportunities. Can you update us on where you are as that relates to the Water Parks themselves? Any new initiatives there this year, Jim? And then also just give us a little bit of an update as to your ability now, taking the data from your CRM and the point of sale, where you stand with that in being able to really mind that for additional in-park spending opportunities.

Jim Reid-Anderson

Very good set of questions there, Tim, I think the water-parks themselves I believe are in very good shape, you may remember that park way through the year last year we rolled out the low-queue option, our flash pass in the water parks and this will be the first year where we have a full year in the water parks and I think that is going to be very powerful for us. I would also add that in pretty much every water-park not only have we got brand new attractions to pull people in so we have got new water-slides new attractions in every single water-park. But we have also changed several of the retailing and food options so we have got new dining menus and we also have several new restaurants. So we’re targeting several opportunities in our water-parks and I think my belief is that given that plus pricing increases we have taken, we should be in pretty good shape for this year. The second question was around CRM and I know this has come up on other calls but that we have listened to and I have to tell you that we’re in really incredible shape and have been for a while. I think I mentioned that one of the beauties of Six Flags is abundance of data that existed. We’re right up-to-date in terms of IT. So we know exactly what we’re selling pretty much in every park at every retail outlet or dining operation on an ongoing basis and so we’re already mining that and we will continue to do so going forward. John do you want to add to that?

John Duffey

I would just add on Jim’s comment that I think we’re in great shape as it relates to our systems and particularly around CRM and we are investing dollars every year to enhance our CRM. The good news is that we don’t have any significant investments that need to be made.

Jim Reid-Anderson

We made big investments over the last few years. I think the other piece that comes up a lot Tim and I want to reference is dynamic pricing. Again on that front we’re in a very good place, we have actually utilized dynamic pricing at various points and we continue to a really good example of that would be price set at last year. We were able to utilize that on certain days that are more popular than others to be able to spread attendance. Overall from an IT, CRM perspective I feel like we’re in good shape but we will always keep an eye to see if there is anything else that we can do to make us stronger.

Tim Conder - Wells Fargo

John, I apologize. Again, I joined the call late. Can you just give me a quote on your season passes at this point year over year?

John Duffey

In terms of the season passes we don’t disclose the actual dollar amount of the sales or the attendance mix. But I always refer back to the differed revenue which was up 41%.

Jim Reid-Anderson

So it's in the press release Tim and it shows the increase of $27 million or 41% compared to March of 2012.

Tim Conder - Wells Fargo

Okay, and then last year on the season passes roughly 44% of your attendance was season pass. Correct?

John Duffey

That’s correct for the entire year.

Tim Conder - Wells Fargo

And you obviously expect that to go up this year?

Jim Reid-Anderson

We do.

Operator

(Operator Instructions). Our next question comes from Joel Simkins from Credit Suisse.

Joel Simkins - Credit Suisse

A couple of quick questions here. The first one is, you did recently announced this weather guarantee for the New England Park. I would like to get some more color on that. Obviously, you guys were pretty pleased with the pass. The progress on season pass sales year to date. Can you give us a sense of what your advertising mix has been this year versus last year and how you plan to shift that, perhaps, as we head into the heart of the season?

Jim Reid-Anderson

With regard to the weather guarantee, we have been testing this option in New England and I think that the real benefit is guest perception and what we have found is that people really appreciate the fact that you would offer to allow them to come back on another day if the weather is bad for a couple of hours or more and so we’re testing it in New England and obviously the park hasn’t been opened that long but the initial reaction is very positive and as I said it has very little negative financial impact but huge guest perception upside and I would rather give you more of a flavor for this at the end of the year once we have had a full year task but my view would be that this is something we would probably roll-out across all of our parks.

Joel Simkins - Credit Suisse

Okay, and again the question following up on your advertising?

Jim Reid-Anderson

The advertising mix, can I just clarify the question is it timing, the timing of the spend or the type of spend?

Joel Simkins - Credit Suisse

Really more of the type of spend.

Jim Reid-Anderson

The type of spend, it mimics very closely what we did last year so successfully. So you may remember Joel that historically the company would have spent the bulk of its money on TV advertising and that would be national TV advertising and the spend shift that has taken place in the last 1.5, 2 years has really been to ensure that we not only have TV advertising but that TV advertising is more local in nature, the local channels but then we have also radically increased our spending online but we have gone back to utilizing billboards, we have really pushed up our spend on radio and then finally with our relationship with one of our partners Coca Cola, we have Cinema advertising and the combination of all of those really has resulted in a much higher impact spend than we had previously and I think that’s part of the reason that we’re such success with regard to our capital story because historically people may not have been aware of what we’re doing now they know because we’re telling local people within 300 miles of our parks what’s going on at their local park.

Operator

At this time there are no other questions.

Jim Reid-Anderson

Okay thanks Marian. We really appreciate all of you joining our call today and I want to say that I hope you can take the time to visit at least one of our beautiful parks to season in order to experience all that we have to offer. Meanwhile I do want to make sure that you know that you can rest assured that our team is focused on delighting our guests and driving incremental shareholder value in the coming quarters and years ahead. Take care and I hope to see you soon.

Operator

This does conclude today’s conference call. You may disconnect your phones at this time.

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