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Six Flags Entertainment Corporation (NYSE:SIX)

JPMorgan TMT Conference Call

May 14, 2013 10:40 am ET

Executives

John Duffey – Chief Financial Officer

Nancy Krejsa – Senior Vice President, Investor Relations

Analysts

Unidentified Analyst

Hi, good morning. I’m (inaudible), a member of the JPMorgan, Equity Research India team and I’m pleased to welcome Six Flags Entertainment to the JPMorgan TMT Conference. Six Flags is the largest regional theme park company with 18 parks across the United States, Mexico and Canada which drew nearly 26 million guests last year and terminated over $1.1 billion of revenue.

With us today from the company are John Duffey, CFO and Nancy Krejsa, Senior Vice President of Investor Relations. Thank you for joining us today.

I will ask some few questions and then open it up for the audience. As mentioned great results in 2012, what were the drivers of your business as you work to achieving your goal of $500 million of EBITDA by 2015?

John Duffey

Well, I’ll start off with in terms of the growth drivers of this business and it really starts with innovation and the marketable capital that we introduced in our park. So I think if you look at the history of the company there really was a lack of marketable capital at many of our park, so our strategy is to have new news in every park, every year.

And that can be a new thrill ride like a rollercoaster it can be family rides, it can be investments in water park, it can be shows that some type of attraction, something exciting that we can then go out their market to people to get them interested in coming back to the park. And so that’s been number one in terms of innovation in helping driving attendance.

Next would be our strategy around marketing, which is a very focused marketing campaign. We’ve moved away from a national base campaign where the prior strategy announcement was to build this global entertainment company to focusing on what we do best, which is regional theme parks.

And it’s all about, when you think about what drives attendance, its all about the local parks. More than 80% of our attendance comes from within 150 miles of our park. So our marketing strategy today centers around what’s new and existing at the park. So you’ve see billboards, radio advertising, some TV advertising but the sole focus is around the local park nearest to you.

So for example here in Boston, you will hear a lot about our park that’s located right outside of Boston here. So the combination of having something innovation, having something new and exiting in every single park every year is focused marketing and then our focus around growing season pass. We’ve been very successful with the last couple of years, double-digit increase in season pass sales.

Season pass holder, why is it make sense to drive season pass, because a season pass holder typically spends more than two times what a one-day ticket holder would spend. So that is in incremental ticket revenue, but also every time they come to the park, they’re spending money.

So, last year we had for 2012, we talked about now our season pass in terms of overall attendance is now up to 44% of our overall attendance. So those are the kind of drivers of attendance gains.

But then there is also a great opportunity as it relates to pricing. And as we looked at this business, we found that our pricing was way below it needed to be, or should be, we compare that to other options that people have for entertainment, whether it would be sporting events, movie theaters, going to aquarium, zoo et cetera.

But, also as you look at others within the industry, we were much lower than they were in terms of overall ticker per guest. And when you think about the markets that we’re in and the top 10 DMAs, we should actually command higher ticket prices than most other regional theme park within the space.

But we’re doing it in a strategic way where we’re saying we’re going to take $1, $2 front gate price increases each year and then we’re going to rein in all these discount programs that were out here. The buy one, get one frees all year around. We’ve been moving away from that, moving more towards starting off with $25 off and $20 off and $15 off. The interesting thing is as we continue to drive, the ticket yields up. Our survey data around value for the money has actually increased.

So I think the combination of having something new and exciting at the parks giving people a reason to come to the parks better offerings well they are in the park has increased our value perception even though we’re increasing our pricing. And when you think about the pricing power within these business 26 million visitors if you can get one extra incremental dollar from everyone that comes to the park has $26 million that drops to the bottom line.

So we think we’ve got great growth opportunities as it relates to from a ticket yield standpoint and then we’re continuing to expand our in-park offerings, by giving people more in the park, so they spend more money. We recently tested in All-Season Dining program that’s offered to season pass holders, we found that a lot of season pass holders were leaving the park to go out to car, local fast-food operation.

And so it’s all about how do we keep these people in the park? This all season dining program, which allows every time they come to the park, they get a lunch and a dinner, was very successful on our test-markets last year we’ve rolled it out across all of our parks this year.

And so far we’re seeing tremendous success in that area as well. So we have a number of, I think, growth opportunities ahead of us, people ask us all time, what inning are you in as it relates to things like your ticket yields. We’re still in the early innings, we recognize we can’t do this all in terms of increasing our pricing all at once; it’s going to take multiple years. But good growth I think, opportunities for us several years ago.

Unidentified Analyst

Great thank you. You did talk about the emphasis on season pass and I assume this in relationship with the deferred revenue balance on the balance sheet, how do we think about how that rolls on to the P&L over time?

John Duffey

Yeah and one of the indicators that was if we talk about season pass, as you know, we don’t provide short-term guidance. We do disclose what our percentage of season pass is as it relates to in terms of the tenants as it relates to total of tenants and we disclosed after 2012 that is 44%.

We also on the first quarter call talked about our increase in our deferred revenue, which I think is the best indicator in terms of how well we’re doing season pass. So in our deferred revenue year-over-year, as you compared it to the, end of the first quarter in 2012 was up 41% year-over-year.

So think that is a great indicator that we continue to really see great penetration around our season pass. How that rolls out throughout the year, it’s all on we have historical data that shows us typically how often a season pass ticket holder would come to the park. We then use that data as the holder would actually come to the park, we would recognize a certain percentage of that revenue. In terms of – but again season pass I think it is – it’s a great strategy, we get more than twice in terms of overall revenue in cash flow from season pass holder than we do from a one day ticket holder.

Unidentified Analyst

Thank you. And you talked about having something year-over-year in each park, and I know that your target in CapEx is revenue of 49%, how can you maintain that having this group initiative to having something new of the (inaudible)?

John Duffey

So that’s a great question, we get that question a lot which is, we are very disciplined, our capital will be 9% of revenue. We’re very disciplined on that. If you look at this company historically there were wild swings in capital where you may see if $150 million one year down to $67 million in next. For us it’s been – its all about being discipline. We do get the question a lot in terms of can you get this new and exciting news in every single park at 9% of revenue, and the answer is absolutely.

And as you think about historically the company was investing in mega coasters. So we have one coaster that was put in place years back across $55 million. When you spend $55 million on one rollercoaster it’s a great run. But you spend $55 million on one rollercoaster, number one; you’ll never get the return that you need of that; number two, you’re starving all the rest of your parks in terms of capital.

We can get great coasters in our parks for a fraction of that cost. In addition we are being very creative in terms of how we spend that capital. And I’ll give you a couple of examples. Last year, we launched the world’s tallest drop ride in Magic Mountain, LA.

What we did was we put that on the side of our existing Superman ride, which is 400 feet tall. So by using that existing infrastructure that ride was a fraction of the cost of what, a ride if you set up a brand new infrastructure with cost. A couple of years ago, we launched The Texas Giant in our Arlington, Texas Park.

We took an existing wood rollercoaster, reformed it, put brand new track system on it and created an – a brand new ride experience. It was rated the number one new ride that year. That was at a fraction of cost of what a new ride would cost. And we’re doing that same thing in San Antonio this year.

In addition, as we take out rides, all the rides that have been in a park for a number of years to make room for new rides. We’re able to refurnish and re-brand those and put them at another park, which is in those markets a brand new ride. So, by having a five-year strategic plan which by the way this company had never had in the past, looking at what our capital needs are for, over the next five years.

Getting ahead of the game, getting better purchasing decisions and then being creative, we can get new news in every park every year and it doesn’t have to be a big ride. Last year, we looked at the demographic information and historical information around our park in, our very large park in New Jersey and the data that show that we had enough large thrill rides.

That’s what people were looking for new thrill ride. We have lost some of the family market. So, we put in a number of family rides, bumper cars things like that, flat rides for a very small dollar amount and we saw great attendance improvements in our New Jersey Park last year as we think we won some of that family business back. So it’s all about look at the demographics, what do we need within that market and then being creative in terms of how we spend that money.

Unidentified Analyst

Just to follow-up on that, what are some of the key new attraction that we should expect to see in 2013?

John Duffey

We have a great lineup of new attractions. We are actually launching the world’s tallest SkyScreamer ride in the world. It will be in Arlington, Texas its 400 feet tall and if you can think about a ride that swings you around chain link kind of cable if you will, similar to what you would see in like in the backyard of a home but taking it up 400 feet and swinging around a 35 miles to 40 miles per hour, up in the year, 400 feet up is pretty thrilling experience.

We’ve got the Full Throttle Ride, which is a fantastic coaster that we’re launching out in LA. We’ve got a new evening show that we’re launching in our Great America Park in Chicago and then we have a show that we’re utilizing our dolphins in San Francisco.

So that’s just kind of a sample of some of the things that we’re launching in 2013 but it’s a great line up and it does really talk to the fact that it’s just not about thrill rides but it’s thrills, it’s shows, it’s family experiences.

Unidentified Analyst

Just to shift gears slightly to your corporate allocation strategy as you try to (inaudible) of $500 million EBITDA by 2015, how do we think about that in terms of dividends versus share buybacks? And also, should we expect that the dividends would grow in line with EBITDA?

John Duffey

Well, what we have said in the past is that, we believe that we should use our excess cash to return that to shareholders. So we’ve increased our dividend over the last 12 to 18 months. But we believe that we need to maintain a nice balance between dividends and share buyback, so we’ll continue to going forward utilize all of our excess free cash flow to return that to shareholders in the form of both dividends and share buybacks. As it relates to dividends, I won’t give you a specific in terms of what we envision our dividends growing at, but as you know we have a fairly attractive dividend today with a nice yield.

Nancy Krejsa

I was just curious the people who are less familiar with the company. So on an LTM basis, we generated $4.50 of cash earnings per share and we’re paying about $3.60 annually on dividends, which as John said it’s a very attractive yield. So the good news is that the company generates a lot of cash and we, as John said have committed to return that cash back to shareholders through dividends and share repurchases.

Unidentified Analyst

Okay. I have more questions but I’ll open it up.

Question-and-Answer Session

Unidentified Analyst

Okay. Can you talk about ticket holders spending double is that on (inaudible) things or is that taking to account the amount of time that holder goes to park, ticket for ticket, so if you have an $80 season pass there or four times to $20 per ticket. Do they still spend two times or is that other items in addition to ticket?

John Duffey

That’s combined, I think if you look at what they had paid for ticket, admission as well as what they’re spending in the park, it’s more than two times what a one day ticket person would spend.

Unidentified Analyst

Every time they go?

John Duffey

No, over the season.

Unidentified Analyst

Yeah.

John Duffey

Over the season.

Unidentified Analyst

Follow-up on that what kind of research maybe to determine whether the ticket holders are not stabilizing the entire cost (inaudible)?

John Duffey

Well, I mean there is ultimately some convergent of one-day ticket holders over to the season pass. But as we look at that, that’s good, because again we get twice the amount of revenue, twice the amount of cash flow from that individual. So there is also some of conversion at the one-day ticker holder to season pass, but it’s all about also getting incremental, people that maybe not to be an one-day ticket holder to come see what we’re offering to parks and buy a season pass.

Unidentified Analyst

In fact in part of our strategy to convert this single day ticket holders into season pass holders because of the incremental (inaudible) supply to us, so we do a lot of upside and trying to convert to this people, even if they never come back again, you’ve already (inaudible) to get price from that, but we know that they do come back and they’ll come back, they spend money in the park. So, there’s no downside whatsoever to convert people from a single day pass into a even pass holder, because if they purchase a single day pass, it’s been that money figure they come back again seasonally.

John Duffey

And, why this frankly works is then as you look at the capacity within our park, we are far from capacity at each one of our parks. And it’s a matter of fact today we have attendance of 26 million, 10 years ago, same portfolio of parks, the attendance was in excess of 29 million.

The attendance have rolled in over a number of years around the park 23, because of what I talked about earlier which is lack of marketable capital, lack of right marketing campaigns and so we began to rebuild that. It’s still a lot of capacity is in parks, so we can take that continue to take that season pass and continue to grow that without seeing any capacity constraints or large amount of costs that we had to add to the park.

Unidentified Analyst

Do you have data to show that for season pass attendee, they spend more on a daily basis vis-à-vis a day ticket holder and also what is the marginal cost for a visitor let’s say either a pay ticket holder or a seasonal pass holder.

John Duffey

Yeah in terms of the season pass holder, typically what you’ll see on season pass holder is they will spend pretty similar to what one day ticket holder would spend at first visit.

Unidentified Analyst

Okay.

John Duffey

But that every visit after that, they will spend less.

Unidentified Analyst

Okay.

John Duffey

And because they still spend maybe an amount on food or snacks, but less than games, less than retail. But again overall you get a more permanent individual over the season. In terms of your question on the marginal, it is very high margin associated with incremental attendance because when you think about it, the park is already thoroughly staffed.

And we already have staff on the rise for the most part we’ve got full stand et cetera staff. So as you think about incremental attendance, there is some staffing that you would have to have, may be in some of the proved locations. For the second trend, you may have to add some on the rise, but it’s extremely, extremely high margin for every incremental visitor that we got.

Unidentified Analyst

They try to control the 40%, what is the optimal percentage you are shooting for?

John Duffey

In terms of overall margin?

Unidentified Analyst

No, the 40%.

John Duffey

Oh that season pass.

Unidentified Analyst

Season pass. Yeah. So what was it let’s say five, ten years ago and what is your roll in the next five years?

John Duffey

If you look at the five plus years ago, it was in the 20s.

Unidentified Analyst

Okay.

John Duffey

So we’ve been continuing to grow that. And growth of 35% in 2011. So we took it up to 44%. We have not disclosed what we say the optimal season pass number is, when I get back to you what I mentioned earlier, which is we have a lot of room to continue to drive that season pass before we would see any capacity issues.

Unidentified Analyst

Can you talk about some of the security and safety initiatives that are in place and/or maybe implementing and how you hold on the park and ride how you go forward with those now affecting the customer’s experience (inaudible)?

John Duffey

Yeah, safety is number one for us. And so we invest lot of money whether it would be safety, it rise interest, people wanted to make sure they feel safer when they are in the park.

And I’ll tell you that that is one of the things that (inaudible) seem extremely well, is the investor lot around amazed within the park and safe, if you look at our capital, I’ve talked about this 9% of revenue on capital, 25% of that goes to maintenance, which is in the big chunk of that is around ride maintenance so making sure that all of our rides are safety.

In addition to that we have got a large percentage of our over (inaudible) that goes around maintenance and particularly around safety. But we’ve done a number of things; I’ll give you one example, which is in our L.A. Park, as you walk into the park and walk to the main gate, you’ll now see a share substation, right next to the main gate and with the large presence of police officers located either just outside who are within the overall park.

So we have invested a lot and again a park management team did as well, a lot around continuing to make sure that happens.

Nancy Krejsa

And one thing I would say, the impact around the safest places you would ever visit is Calgary one out of 750 million guests. So you were 100,000 right now, I think human fatality occurred and we would end so we did up safety and right themselves with people say my children and grandchildren right on the rise. So it is utmost of importance to us and is one of the safest environment I think people go after and hit back for the day or for the month.

John Duffey

Protecting your IP.

Unidentified Analyst

Yeah I just want to get a little bit more detail on pricing; you said it’s still below where it should be. Can you talk about where you comp yourself to what is the pricing should be at or other things or other entertainment there.

John Duffey

Yeah, when you think about competition...

Unidentified Analyst

Yeah as your thought fiscal quarter gain on revenues, guide for revenues is good, but EPS only in line with what you had guided and you’ve discussed on the conference call a lawsuit...

John Duffey

In that lawsuit, I didn’t know about that. I think it is probably certain (inaudible) and so I’ll turn it to talk a lot. But in terms of pricing, the competition, as we view our competition, it’s really not other theme parks. There were a couple of markets. We have a competitor, particularly like it’s called LA for example, somewhat San Francisco.

But if you look at the markets that we were in the earliest and another theme park that we compete in events. So all the – our competition in all the other phase like I mentioned is sport events, movie, theaters, other entertainment options. So we take a look at the pricing, when you think about pricing is just going to support the event for few hours versus our average ticket. Now this is combining with the season pass, but our average ticket is almost $22, so for an entire day’s experience.

But then we also look at what are others within the industry, and I’ll you give you a perfect example, two years ago when we look at our ticket yields compared to (inaudible) for example, ours were $5 less than (inaudible) and we look at that we said why is that. We are in the top 10 DMAs, we are not the large cities. We should actually come in higher ticket yield than they do.

So now we close on that gap over the last couple of years, I think at the end of the last year was roughly around $3, but by the way they’re continuing to take their prices up as well as it is always getting universal and others. So we still think there is a lot of room in terms of being able to take person out. As you think about it just hold that gap at $3 then on a total is excess of $75 million and we basically drive to the bottom line.

Unidentified Analyst

So is the goal can you just match on the theme park or what is the ultimate goal?

John Duffey

The ultimate goal is to make sure that we can get the best pricing possible. If there is some elasticity that you pricing for the tenants, and so we’ll continue to take price up, and if do it nothing smart way and maximum just $1 or $2 a year, we think that will have zero impact on the tenants.

Unidentified Analyst

Do you have any programs you up sell to the daily ticket holder to the season pass say they legal park and you realize for $20 incremental I can comeback and use the park again or is it all pre-buys as people go to website or you’re having.

John Duffey

You can see the pre-buys are what we do is we try to convince people in the park. So the park at one day ticket to we try to up sell them to (inaudible). And it’s a great value when you think about it, they spend $35 to get things into the park or $40. Just I’m going to think about a few more dollars, they can convert to season pass.

Unidentified Analyst

And you go back to New England, I mean you have to walk around or...?

John Duffey

People walk on. We have a lot of signage. We’ll talk to people whereas they’re coming into the park with some people as (inaudible) in the park.

Unidentified Analyst

And what is your experience have been and how much up sell happened versus obviously if I growth is season pass, what’s been up sell versus people go to the website (inaudible).

John Duffey

Well, I would say that predominately people that are going to the website were honestly (inaudible).

John Duffey

And one other thing that we’ve done is in past in terms of the capital campaigns, there was – there wasn’t any really marketing around the new capital to right before it was launched, which typically is in your kind of May timeframe. What we did last year is we fulfilled 2013 capital, we have big launch of our west new assignments coming in 2013 launched in August. Beginning in September, we started selling season passes for 2013.

And I think such benefits that you are seeing in that incremental preferred revenue that I talked about earlier is because we’re getting out there earlier we’re getting people excited about what’s coming, giving them a reason to come to the park.

Unidentified Analyst

Can you just talk a little bit about how weather impacts your business and give us an update on your weather guarantee program that you launched in New England and we should affect that rollout at the park?

John Duffey

Yeah whether we have a lot of historical data, so it’s amazing when I came to the company, one of the things that I was really surprised that was the extent of data that we have available, it creates and I can go back and I can take – I can look at what was whether at 130 in this part – this day in August in 2002.

So we’ve done a lot of trending analysis around weather and (inaudible) the weather has some impact with lot of significant impact because typically what you’ll see is, if you have some adverse weather on one weekend, you can get that attendants back later on in the season.

The only time that weather really might impact you on a full-year basis, so it might impact you from quarter-to-quarter but typically on full-year basis minimal impact. Where you might see some impact is you have some adverse weather right at towards the tail end of the season. So for example, in 2011 we saw Hurricane Irene and last week into the summer that did have an impact on our tenants not only in the quarter, but for the year. And so, but overall if you look at is whether really doesn’t on a full season basis have a significant (inaudible) on the business.

In terms of the weather guarantee, we are testing that in our New England Park and we are hopeful that is successful and really what that intended to do is, if you can provide some type of weather guarantee to folks and more likely to lock in earlier in terms of their volume of that ticket. And by the way they are going to come to the park it’s not on that day, on another day and well they come, they are going to spend money. So we are testing at New England and our hope is we will roll that up to the rest of the part, so next year.

Unidentified Analyst

Which is obviously positive, can you just give announced a version of thought process as a result of it, but even you look like we could assume but just can you just give us your thought over the long-term what you think about the rate structure basically in the park...

John Duffey

Well there’s been a lot of discussion; we’ve got a lot of questions over the last couple of months around the rate estimates and hot topic for a number of companies and industries. As you think about this company, we are sitting at $1 billion of cash flows. Now we were able to maintain through our company’s papers and filings.

But those NOLs will shelter our income for at least the next five years. So we don’t expect to be a significant pass payer for the next five years and if you look at some of the data that we’ve supplied around our free cash flow it was minimal in passes about $10 million of some state and mostly for taxes that we would pay within the next five years.

We were constantly looking at tax planning ideas to either extend the royalty further or maybe some structural type things that we can do when we get to the point where these NOLs are exhausted that was reduced the amount of taxes that we would pay.

Some companies have none within the theme park industry, but some companies have take a look and moved over to reach and we’ll continue to look at very soft including that maybe a restructure. But right now the amount of intervals that we have in place, it just doesn’t make sense to do that same time.

Unidentified Analyst

We have a minute left, last question, so you recently announced that split, can you talk a little bit of color on the efficient markets around that?

Nancy Krejsa

We did just briefly announce that people were impacted and will take effectively end of June. And I think in addition to see the confidence that we actually have in the future of the company. One of the active actual benefits were out point sector just planned your employees have certain amount of money to help from your (inaudible) they can use that purchase shares and prevent the capacity of the purchase more holds here versus fractional shares of the company.

And in addition if, let me speak about on a long-term growth plan, all of our 1,900 full time employees our stock shareholders remain at that action for the company and we’ve also contracted we won’t be issuing 100 action versus 50 action, really a way for us to further send our employees all of which are aligned with our shareholders and driving shareholder value.

Unidentified Analyst

Great. Thank you so much.

John Duffey

Thank you.

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