Cedar Fair, L.P. (NYSE:FUN)
JP Morgan TMT Conference
May 15, 2013 9:20 a.m. ET
Matthew Ouimet – President & CEO
Hi, I am pleased to welcome Cedar Fair to the JP Morgan TMT conference. With us today is President and CEO Matt Ouimet. Mr. Ouimet has served as Cedar Fair’s President since June 2011 and was named CEO in January 2012. He has over 20 years of experience in the Amusement Part and Entertainment Industry including positions at the Walt Disney Company and Starwood Hotels and Resorts, thank you for joining us today.
The only a small portion of your business your First Quarter results were pretty strong. What were the major drivers for this strong results?
Great place to start. First of all, welcome everyone in the room and those who are listening in webcast. So, our First Quarter generally represents less than 5% of our revenue for the year. We only have because we are primarily seasonal parks, only year-round park we have is Knott’s Berry Farm in Southern California that I hope some of you are familiar with. And do we feel very good about our First Quarter. We reported results last week and we are up on the revenue basis about $14 million for the quarter.
But I caution you that it is only 5% to start with usually revenue for the year. But we also have Easter timing shift which was important to acknowledge. So the first quarter contained the Easter and Spring Break session which normally falls in the April and so we were also reported that our revenue through April which normalizes for the extra operating days and for the holidays we are up about 12.5 million.
I will tell you that the catalyst for their growth in that quarter was the performance in that Berry Farm obviously because it was open. But the other catalyst that is more reflect out for revenue is our growth in our Season Pass Program which has been a very successful program over the last couple of years and I can give you a little color on that.
So what seems to be playing out and I think its playing out for the whole industry is Season Pass Programs across the industry are viewed as great value by the consumer. They’ve always been a value purchase for the consumer because they pay themselves back in about two and half visits but what we are also seeing is they are aligning with what we call the over committed consumer from the time standpoint where the time property at issue which we identify which is I was explained to people when I played the league I played six or eight games then we withdrawn and we went on family vacation.
If you have a son or daughter that plays sports these days I suspect they are in the traveling team and they are (inaudible) that I gonna to see you know the drill right and so what we see is lot of people are choosing to buy the Season Pass because they can come in time and commence the match up with that schedule.
The other question that always is the question of Season Pass Program is when is enough, when is the ceiling hit, right for 40% of our attendants last year shared our parts came through the Season Pass Program. That’s up from about 33% as much as two years ago as soon as two years ago and if you think about it, the Season Pass guys are also the ones who are brining either their neighbor or their sister along so if it’s 40% on a direct basis there is some other factor on top of that, so I would like to separate where attendants is directly or indirectly related to the Season Pass Program and I think that will continue to grow.
Because the other thing that happens is just when you think the market is fully penetrated you see that there is a social influenza and neighboring influenza you have to buy and see kids come with your neighbors. So the Season Pass Program they feel really good about. Deferred revenue was up 30% as in the First Quarter and is not all Season Pass revenue but it is a good indication where we are this year.
Okay, you also mentioned on your recent call that pre-booking for Hotel stays and group business grew up nicely during the quarter, can you give us a little color what’s driving the trend?
I think, the Hotel booking where we primarily have Hotels, we have camp across in most of our Resorts but the Hotel base for the most parts Cedar points as industrial higher and I am hopeful that most of the people in this room and on the call are where that we built the newest, biggest, and baddest as they like to stay in the industry we like superlatives in the industry obviously for marketing best in the world. Longest wing coaster in the world is called Gatekeeper and based upon the strength of Gatekeeper I think it is what helping the booking and I will talk about another device in a minute but we had – Cedar Point have been open for 144 years, not many amusement parks can say that.
But last weekend was the opening weekend for Cedar Point and we had the most successful opening we’ve had in 144-year history. It’s not because the manage – the one thing we did is we had great success on the Season Pass Program with an Installment Purchase Program. So you can buy our Season Passes over six payments for most cases and that addresses this issue with the consumer. I think one it is an affordability issue for consumers because there are some consumers where $400, $100 for Season Pass for four people is something that they need the budget strictly.
The other is there is some consumer that doesn’t’ needed from affordability standpoint but they like to pre-pay their purchases. In that regard, not only do we sell passes that way but for the first time this year we opened up our Hotel bookings and let you book like you want to cruise. You get to pay over three payments. The third one you book and third about 60 days out and another third before you check in and that was about 20% of our booking so far here to date at our Hotels and I think it is an another program that will continue.
With the economy continuing to improve what are your expectations for the Staycation which been benefitted in Cedar Fair over the last couple of years.
I think we all are, I was originally little suspicious of the term Staycation, you kind of see here, hear these new buzz words but I will tell you that phenomenon clearly played out through the economy as we thing about it – it was an economic disincentive to take a longer trip. It didn’t have overtime which in the middle-class America is a very important device for the extras if you will or you didn’t’ feel secure about your jobs so people stayed closer to home and is certainly must applied out in the Regional Amusement Park business because everybody had record years.
I think what we are seeing now is Staycations are going to migrate to what we are calling Funcations which is during this time period we re-trained America that road trips were fun and lot less easy than going through an airport with bunch of kids and it is not easy to go through an airport with a bunch of colleagues so I think what you are going to see is that actually the ritual visit for the two or three hour four hour drive to Regional Amusement Part will survive very well as the economy recovers. I don’t think we will lose people because of that and will actually pick up those people who we have lost because of economic situation as the economy improves.
Okay, I mean kind of changing gears here. How do you think about your capital expenditure strategy over time?
So I’ve been in the industry for about little over 20 years may be it’s a little over 25 years at this point. And you always want to believe when you look at the economic model that you can spend less capital. But the reality is the consumer gives you that reality check and so we spend on average we target 9% of revenue from marketable capital. New rides of attractions that would appeal for a repeat visit and the important aspect of that is the aspect duly recaps so much of repeat customers coming within couple of miles.
They need a new catalyst for reason for visit and so we spent 9% of revenue. We were very diligent about where we spend that, what we invest in, which type of rides etcetera and so that we get the most at the each of our parks and it is combination of -- we did a -- we are back in all our parks, 11 major parks. We are back in each of parks for the last seven years and looked at every ride, every attraction if you will entertainment offering that we put in to the parks we graded them, we said okay they are green we love to use ten more of those, yellow kind of in between and red lets somebody else do it next time.
And then we identified the GAAP analysis for each of our parks and we look at it on a lot of basis but generally okay doesn’t need and a new thrill ride, doesn’t need family rides, or doesn’t need water or doesn’t need new shows so this is the basic pockets and based upon the GAAP analysis, we have a plan now for the next three years of how we will spend our capital across our parks and not surprisingly there will be major investments the largest investments will be made in our largest parks because that’s where you can do the deal, but also every park will have something new to advertise a market each year and so that’s how we think about our capital spending.
Okay and you mentioned earlier Gatekeeper which recently opened, can you talk a little bit about the size of that investment and what your typical expectations are for an investments of that size?
Sure, so the Gatekeeper investment was about $30 million but $25 million roller coaster steel trains -- roller coaster trains and about $5 million for the Hardscape and the reinvention of the gate if you were the finance to Cedar point so what i like to say is about coaster flies directly over the front gate – was at brave if you will so -- but $25 million is very significant investment and certainly $5 million more to reinvent the front gate was also an important aspect for gate that hadn’t been reinvented in about 50 years.
So one of the things we are careful because they are capital investment is that some times you think you have taken risk by spending less money you got to be careful that you got to get – maneuvers of fighter pilot ride and so each of the maneuvers in the G4 stresses are study based upon that – the longest wing coaster – we are to make them maneuvers more comfortable. They are less thrilling but they are more comfortable and therefore more repeatable. Because, the idea is that we have some roller coasters for your ride once you get off to go okay I will do that next year may be, right but you want a people get right back in line and they don’t want to get back in line right away because it’s probably an hour or half or two hour wait so that means there is other visit right but you want a comfortable and after that they want to re ride a and the fortunate thing about this coaster and I have written it more than a dozen times at this point is it does deliver the exactly that its very thrilling but it’s very smooth and this is one reason why this coaster is longer than most coasters.
Okay, heading into 2013 and following the first full year of your front fought initiatives while you are using this excited about?
It continued to be most excited about the value of proposition that the consumer recognizes, I will explain that a little bit, right, so for doing record we in the industry are doing record with a – and some record profitability for the last three years and heading into our fourth year with the same – they are making this choice versus other choices and so I think I feel really good about that which means that we have an opportunity to continue to deliver value but also drive revenue management in a way that would be more familiar to the Hotel industry but more familiar with the Cruise industry etcetera and those systems are now going to place to allow us to do that.
This was an industry that for the longest time lived off heavy discounting and trained the consumer to expect a certain price for each of markets. Somebody asked me the other day whether the demographics would definitely love the different parks ride so the demographics were different enough in those markets to drive different pricing. The reality is it’s not the demographic differences that drive the pricing differences, it’s the legacy pricing we trained the consumers in each of the markets to expect certain price.
So Season Pass and Kings Dominion may be $20 more than a Season Pass of Kings Island it is nothing to do with demographic market, it just the legacy. And so overtime, I think we got to be very disciplined about keeping the value of proposition because that’s where you get the privilege of pricing up and so we will continue to invest in that but getting the value extracted if you will given the consumer great value but also given the Unit holders great value we will continue to push pricing.
And Season Passes which I said earlier may represent 50% of our attendance this year. We are up so far this year substantially in units but we are also up substantially in price.
Now what you need to be careful of this the consumer is pretty smart. So if you go too fast, they will tell you and then you got to step backwards and step backward on pricing are more clumpsy that would like to believe. I think I’m most excited consumer still says that its great value proposition we are going to continue to push it. The other is that the new rides attractions besides Gatekeeper because I have added -- we have added a new roller coaster in Santa Clara California. With roller coaster that we think it would be very successful in our park out there in California’s great adventure,
We doubled the size of the water parking Kansas city and consolidated water park with our amusement parking in Kansas city on one ticket and the number of other initiatives around that are like that and then I got to give credit to our marketing team, I think they have done extraordinary job in our marking program and so take those assets I just talked about new marketing program and our pricing strategy and we feel pretty good about this year.
Your introduction of Fast Lane last year appeared to be very successful, what are your expectations for the second year of the concept?
So Fast Lane for those who are familiar it is front of the line pass you can buy as you enter the park. Fast Lane came from the realization that we have the economies is bifurcated to these days and if you have a consumer discretionary product that you track you can see that very clearly and so you got these benefit oriented consumers who don’t really aren’t really price sensitive, they buy the front ticket, they take it with the park at the front gate, they walk in and they immediately turn around and pay $50, $60 or $70 more for front of the line pass and so the industry we probably relate to the party and those front line passes and so we have very good success for the last year but we didn’t find the pricing ceiling so we took the pricing up this year as good business people do and we also introduced a second tier products.
So each of our parks today you can walk in and buy a Fast Lane or a Fast Lane Plus. Fast Lane Plus is the premium product that gives all the new rides and attractions including Gatekeeper. Fast Lane gives you all the rides interaction except for the two most popular in the park. So somebody else who is willing to wait in line for Gatekeeper -- excuse me but once you get in front line and the other buys the lesser pass but the vast majority of people are still buying Fast Lane passes we would expect.
And one of the new benefits of the new attraction is it increases the capacity of your ability to sell Fast Lanes and some Gatekeeper gave us x thousand more season passes we could earn Fast Lane passes we could sell over the course of the year because it expanded the capacity. We do sell out of Fast Lane. We do that intentionally because you have to make sure that product is worthy of the price you are charging and that it doesn’t negatively impact the other people but it has been very successful and I think we are going to continue program.
Can you talk a little bit about integration of CRM and point of sale and doing a testing of our IT technology and where you see the most opportunity in the near term and as longer term?
Yeah, so we have a CRM database up and running for the first time in a more sophisticated way what we have traditionally done and when we talk about CRM, I think it’s important for the audience to understand that CRM is the ability to take a transaction and attach it to an individual or household. Fewer systems always like you measure transactions and compare transactions between parks but the ability to attach the transaction to a household is where you fundamentally convince an increment of the acre right and so that I am very excited about and it’s up and running and we are able to see a lot more on an individual by individual basis what’s happening.
And the reason that’s important I think ultimately the industry needs to get to the point and we will get to the point the industry can decide what they want to do that they have almost two different P&Ls. We have a Season Pass holders P&L because it represents 50% of year business and we have a other P&L for other ticket types and the reason that’s important as I tell people the answers are in the end of the curves and if you take 50% and merge it with 50% you just get average and so I think the CRM system will allow us to figure out that will be able to encourage incremental behavior.
The other thing we learnt last year in the catalyst for the (inaudible) were that in the warm summer guys spend more time in the water parks than they do in the amusement park and if they spend more time in the water park they spend less and I will ask people why – (inaudible) and you don’t go back to the locker so we came up with this system (inaudible) bracelets pre-loaded cash so now when you check in to (inaudible) you can over to booth you can buy $30 and put it as wrist band on your son daughter needs or nephew. One of the idea came was in the Cruise industry and this all inclusive thing has psychic value that poses well at out ones. Here is your 20 bucks don’t ask me again. Do you want, and then whether is an amusement park or the water park they can spend that money and what we’ve done to the bracelets are designed two different types one is just a basic classic plastic bracelet that you would through away and dispose the other is more of collectible that you wear back to stores and it stores the cash on a season basis, so you can come back and if you go home with $4 left and you’re coming back.
If you go to high school and somebody says what’s happening and you say went to (inaudible) this weekend, right and so I would logged to believe that in the industry we were testing and (inaudible) this year with every anticipation would be successful and then we would roll out that to the parts, I do think we’re going to need train the consumer to understand the benefit of this bracelet.
You’ll see us not only discount them the cash value for a while, get$10 for $8 worth etcetera so that we can train the consumer how to do this, but I wouldn’t be surprised if alternatively the amusement park industry mixes fundamental like Fast Lane.
You shop at the front gate, you buy 10 or 20 bucks put it on your kids and you have a great day and obviously the spending is less just improves with that so that’s the nature of the your funding.
And as it relates to the cost structure and with the addition of high margin revenue what are your expectations for margin expansion gone for it?
So, when you get an ample staff as comparison which I know it’s difficult if you are not looking at our books like we have, we have the best margins in the industry and have 36%-37% in operating margins and what I like to say is we can grow that margin and/or we can grown margin dollars and I think we got to be careful. I have no doubt we’ll sustain our operating margin, I think that overtime we will be able to grow there, but we want to make sure is that we are not doing at the expense of margin dollars, right and so we will continue to invest and the experience of gaskets we are experienced and we can continue to drive pricing and that means it may be extended park hours and may be other things that consumer values to make sure that we can continue to push pricing so I think you’ll see our margin percentage grow, I know you’ll see a margin dollars grow, but I don’t know that the industry has earned the right to be more than 40%. So, I think you’ll creep up at the some point the consumer checks you on that little bit, we will continue to invest in the product.
Okay. Given your strong free cash flow how do you think about uses of cash?
Okay. I tell people and there’s no secret, there are two different aspects of our role as a senior manager one is to generate the cash, the other is to decide to what to do with it under the capital allocation and Cedar Fair to great degree the investments at Cedar Fair predicated on our strong yield that we pay our distribution so, this year we’ll pay $2.50 which is roughly a couple of days ago anyways was a 6% yield ruled us in that today and so that’s everything we make a decision and bounce up against the distribution and what we said about the distribution is we’ll continue to what we call a quality distribution we said at a level that is clearly sustainable we’ve also said that we’ll grow that distribution as EBITDA gross, to the extent that we generate more cash than we need to reinvest in the business then we’ll go through the classic analysis of what else to do with the cash, do we pay down debt, do we buy back stock , do we make other investments that we hadn’t contemplated or do we increase the distribution.
But a little difference in some of the other situations had been associated with before we always bump that up against the distribution and so instead gone in some linear format if you will we tend to bump that up against the distribution, by all indications if we have a record year again we will be in good shape from cash standpoint, we do have about $405 million dollars I have answered it out there in 9 and 8th they really aren’t affordably callable until the Fall of next year -- Summer Fall of next year and at that point in time it would be good time to take another step back and look at our capital allocation.
Okay and with Cedar now public and sets as a strong player in the industry, how do you think about the competitive landscape?.
So what’s great about the history you’ll not see another major regional amusement park business country in our lifetime they just -- it's too expensive to take too much land and entitlement issues etc, the only one that was attempted was in (inaudible) beach several a few years ago and close before the season is over. So, the way we think about it is a couple of ways one is we don’t consider those names competitors with considering comparables and I think from a management standpoint it gives me an opportunity to see some information and now the Cedar is public and success is doing what they are doing to be able to encourage ourselves to take advantage of best practices and benchmark.
We don’t overlap in almost any markets at all which is a nice thing and I think the other thing that from investor’s standpoint is now that we no longer have to defend while six flags you know went through bankruptcy, we validated the business model across the industry. So the business models helps the there’s I would be a little self indulgent to say there is quality management in each of those organizations and our results are speaking for that so I feel really good about our business particularly, but I feel good about the industry.
Okay. Let’s open it up for questions from the audience.
So, the measurement is right for cap or (inaudible) length of stand the park etcetera and so we know it’s certain band that right per cap as long as we can deliver that then our net promoters score stays within in a very high band. One of the questions because in this industry there’s always the risk of chasing attendance versus profitability when you chase the attendance it roads the guest experience and so when I fast got to the Disney reserve we were having lot of very cheap Season Pass attendance and impacting the overall guest experience, when we fix up we just very surprised, but that’s how we think about it and I’ve got a protected value proposition and that promote our score what really helps is a season pass order because they don’t try to do everything and they are much more comfortable on the experience and they don’t come on your peak days and so the fact is they wanted the strategic benefits of greater Season Pass base is what I just described in some of the capacity utilization.
The other phenomenon I’ll just touch on it is Halloween period, so if you -- the bigger stage is yours are in the Halloween period and the reason is because we basically double our capacity because the entertainment is on the midway not just on the rides and lot of people they are amazes they are not doing the rise in attractions, so actually that helps us a lot and that’s one of those things were if the (inaudible) it is the actually the better the experience, I would guess to a certain level, but that’s how we think about it’s very important for us I want to continue to drive (inaudible) and only do if they go home feel particularly about the value they got.
Can you talk about the season pass holders, with the season pass holders what percent of go to other parks not just one park and does that have an effect on the way you target season ticketing and then the other question is with the expenditure that’s outside of the attendance ticket or for season pass holders they’re not paying to get into the park, but I’m wondering about the per capital spend for the season ticket or the non-season ticket holders that’s not a entrance state?
Sure, so first question we do sell a Platinum Pass, it is good at all of our parks, vast majority of our guests because of the regional nature of the business do not crossover between parks or higher might be the exception we’ve a park in parks in Kings Cincinnati and King Island and we have Cedar Point, so you get a lot of traffic from Columbia Symbol directions about two hours, but generally the Platinum Passes has other benefits that people buy it for they don’t crossover greatly between parks.
The Season Pass holder performance as you might expect them to perform so they come they visit about four – four and half times on average, but be careful averages are not what the answers are and so they do a classic they come opening day, they come in the first week, they’re excited about they want to use it, in some cases they started for it in September last year. On their first visit they do you’d expect they come in, they excited they stayed long, they buy food and beverage, they buy merchandise when they go home they look very much like you are average customer, this is in between the middle for the most parks their food and beverage spend and their merchandize spent is less than average visitor, they’ve already done that or they’re averaging out there entertainment dollar, so they’re going home, they’re reading and only coming for three hours like the length of the stay is shorter so they eat less right and then by the time they get Halloween they repack up again and they do the whole thing by the Halloween merchandize by the (inaudible).
They are the most profitable customer we have on an annual basis. There was a period of time in the industry, when the industry didn’t like Season Pass holder (inaudible) promotional and intellectual because it’s the declining per cap as I just described, but the reality is that you make a lot more money often from possibility factor and the influence factor the sister-in-law, the brother-in-law they’re bringing so, but that’s expand their pattern and so what’s important about that is our CRM system being able to identify how allow them performed will allow you to get that incremental purchase of some sort in the middle, we’ve always known whether they were coming or not (inaudible) the odds are going to renew the pass right so other things we can do is send them to come back and lot of times we drop them you know two tickets to $10 to bring new costs etcetera like that and everybody and that’s the most successful promotion we give Season Pass holders, because they really you know the kids have friends you’ve got cousins, you got other people can’t afford to come whatever it is so we will continue to work with Season Pass holders on that basis, hope you understand.
You said next summer or next fall might be a good time to think about rethinking your capital allocation policies could that also include rethinking where your run your balance sheet in terms of leverage.
I think the balance sheet actually so we’ve announced our guidance for this next year if we cannot guidance we’ll be about 3.7 times total average in the fall, I think that’s the level I’m comfortable with, the level with board is comfortable with, we’ll continue to be -- to play attention that where were I think relatively conservative on that basis, but if the cost of debt today and that 3.7 times with their EBITDA grown it is I don’t see a rushed up to pay down debt below that level.
And the covenants have been invited to the point where they’re not relevant anymore with this latest refinancing or shouldn’t be relevant I guess there will be accurate statement.
Okay, looks like there are no more questions from the audience I guess we’ll ramp up with that. Thank you so much for your presence.
Thank you everybody.
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