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Cedar Fair, L.P. (NYSE:FUN)

Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference Call

June 2, 2014 7:45 AM ET

Executives

Stacy L. Frole – Vice President-Investor Relations

Matthew A. Ouimet – President, Chief Executive Officer and Director

Analysts

Steven E. Kent – Goldman Sachs & Co.

Steven E. Kent – Goldman Sachs & Co.

Okay, good morning. I’m Steve Kent at Goldman Sachs. I want to welcome you to our 15th Annual Lodging, Gaming, Leisure Rental Car and Amusement Parks and Restaurant Conference.

We are required to make certain disclosures on public appearances about Goldman Sachs relationships company that we discuss the disclosures related to investment banking relationships compensation received are 1% of more ownership. Appear to read aloud the disclosures for any assured now or at end of the call, well actually at end of this conference if anyone would like me to. However, these disclosures are available on our most recent reports available to clients on our form portals. The addition updates of these disclosure available by ticker. In addition disclosures are applicable to research with respected to issuers of anyone mentioned herein although your investment representative also the view stated by non-Goldman Sachs personal do not necessarily reflect those at Goldman Sachs.

So with that it’s my pleasure to start two days of great presentations. We have a great mix of companies, great mix of CEOs, CFOs and other executives and I’m going to turn it over to – before I like to do a quick introduction for Cedar Fair and then we will move from there.

Stacy L. Frole

Thank you, Steve. So I would like to introduce Matt Ouimet who is the CEO of Cedar Fair for those of you who don’t know Cedar Fair is an owner and operator of roughly 12 parks predominantly in the Middle West and they saw attendance of 23.5 million visitors in 2013 and they grew revenues through a combination of both pricing increases and attendance increase. I will turn it over to Matt who will give a quick presentation, but beyond his experience at Cedar Fair, he has some great history with Disney which I think will be very informative and helpful for all of us. So Matt why don’t you come up?

Matthew A. Ouimet

Thank you, Frole. I’ll speak around this side. Good morning and thank you for being here for the first session. I’m going to go through a very brief slide presentation that will give you the background and then we’ll do the more important part of the question and answer. So as Frole said, Steve, thank you. We have a collection of 11 what we call world class amusement parks, we will talk about them in a second, but they’re basically spread across North America. We’ve done pretty well over the last several years if you think about it. If you look at the top chart we entertain about 23.5 million guests on an annual basis and successfully been able to grow our revenues primarily through growing pricing as compared to attendance in last year we grew revenue by 6% and grew EBITDA by 9% and grew our distribution by 12%.

The stock performance has done equally well, you will see it here. For 2012, we do think there is an opportunity here to continue to tell our story effectively and continue to grow the company. I think this was the company that was – where the investment thesis was primarily predicated on the distribution.

And today what our investors are telling us and these are long-term investors are telling us is that they see it as what we would call a growth plan the opportunity to have a distribution that’s north of 5%, well at the same time being able to grow our EBITDA and then with the intent of growing the distribution at a phase slightly faster than or at least as fast as our EBITDA growth. For those of you who are transplants to New York these are where our parks are across the country, all North America based, all owned – and owned land with the exception of Great America, which is in Northern California where we have a ground lease from the city. And one exception if you will include Canada internationally in Toronto, which is Canada’s wonderland.

The differentiators and I think important to Cedar Fair, but also relevant to the broader industry are these are high quality amusement parks, we think investing in each parks with a long-term perspective help us substantially. This is an audience that comes back on a repeat basis by 80% to 85% of the people who visit our parks had been there before and about that same ratio come within about a four hour drives. What’s important to continue to maintain these parks and keep them fresh? It is a healthy industry. I think this industry I was making some notes last night for different conference. In this industry adds healthy as I have ever seen it in my 20 plus years, both the destination parks and those of the universals in the Disney’s et cetera, as well as the regional amusement park industry.

There hasn’t been a successful new regional amusement park of scale built in this country in over years. It’s too expensive, the land is too hard to gather, the zoning is difficult, and then you have to build the scale in order to make it work and that today would probably be a $500 million to $600 million investment.

We at Cedar Fair are primarily industry veterans. A combination of people that I was fortunate enough to inhere when I took over the company about 2.5 years ago, as well as people we brought in from other spaces in the industry primarily as if who are touched on colleagues I had at a previous life at Disney. And what you have seen the industry do very successfully over the last several years as the management has been professionalized or modernized, it takes back best practices from adjacent spaces and the best reference I have would be revenue management as an example from the cruise lines or from the hotel industry and applied into this industry. We will talk a little bit more about that I suspect one or two ask some questions a little bit later.

On an apple-to-apples basis Cedar Fair has for decades and maintains today the best EBITDA margin, adjusted EBITDA margin in the industry. We don’t manage the business by margin and we can talk a little bit about that as well. We do however, as I said last year we grew revenues 6%, we grew adjusted EBITDA 9%, and at the same point in time we were able to grow our margin by about 90 basis points. We have a set of initiatives that we set forward about 2.5 years ago, we call those the Funforward growth initiative. I will show you those in a slide later.

The good news about those is they have gotten traction faster than we anticipated in most cases. The other good news about those as we still feel like there is a lot of work running around left with them. And then finally in the top left at 10 o’ clock if you run on the chart a balanced approach to the allocation of capital. This is an MLP investment; this is an investment thesis that’s primarily predicated in the distribution. We tell people lot’s of times that we think about a quality distribution which in our prevalence means that it is a relatively fair share of the cash flow goes out to the investors, but it is at a sustainable level that we can grow as EBITDA grows.

Growth initiatives I touched on briefly, when we put out about 2.5 years ago our Funforward strategy, we said we wanted to grow adjusted EBITDA to $450 million by 2016. When we gave guidance earlier this year at the end of the first quarter, we’ve said that we are on pace to get to that 451 if not two years earlier. And you can see what has driven those results and I would stop a little bit and just pause on enhanced guest experience which I think is fundamental that the product that we provide. This is a product that continuous to show demonstratable strong value in perception by the consumer. As long as we can continue to deliver against that perception, and against the alternatives they have for their entertainment dollars, we can continue to increase pricing. And that has been to I think the credit of my management team, the approach we have taken, let’s make the experience better, and then let’s charge for it, we will in this industry there is a couple of things you can get quickly if you want them, you can get attendance, you can get margin growth and you can start capital. You just wouldn’t want to own it two years from now.

So we can talk a little bit about that, but so far so good. Progress in the FUNforward initiative, I think we are all in the middle innings, everybody like to play baseball in New York I’ve learned, it’s the one question you always get. So I think we are in the middle innings, the one exception you’ll see here is strategic alliances and what we mean by that is the opportunity to sell marketing space for iBalls of the 23.5 million visitors that visit our park.

We do believe we are now back on track on that and what we learned over time, what we needed to put an infrastructure in the parks to deliver those messages and so as of this year we’ve installed what we call FUN TV and each of the major key line as well as the major gathering spaces in the park have the opportunity for programming. And it is primarily programming to entertain you while you are in the queue line, but obviously the opportunities to sell marketing space goes along with that infrastructure.

We talked about the balanced capital approach, sustainable in growth of the distribution as I said grow the distribution at least as fast as the EBITDA grows. At the current point in time we are – the annualized target for the distribution is $2.80. We also are taking a very, I think intelligent approach to investing in our existing parks. One of the things about this business, is you have a large installed asset base in terms of capital installation, you also have a very significant fixed cost in your operating base.

Anything you can do to grow your existing parks is extremely profitable and that’s our focus. We looked over the last several years by about couple of years specifically we’ve approached it is if we had acquired these 11 parks as an investor would and which park had the opportunity to continue to grow, which park should be shed et cetera. And I think we’ve done – we have a nice plan that goes not only to the sustaining our profitability, but growing our profitability for each of those parks.

And then unit buyback, we have not traditionally been someone who’s bought units back, it’s not something that happens routinely in the MLP space, but it is available to date to us we thought there was some sort of market dislocation where our units were under priced for some reason. Debt repayment touched on it just briefly some of you may have seen, we went to the market last week; we are successful at issuing some new ten-year bonds at five and three, eight.

They replace bonds that are nine and eight which were – it’s coming into that window where the prepayment penalty wasn’t affordable. And so I thought we hit the market pretty well, time will tell us, but we are able to replace those balanced effort last week. So with that, Frole I think I will stop there and questions. Thank you, Steven.

Stacy L. Frole

Okay, so Steven, we have some questions prepared at some point we can open it up to the audience. So if you have question I think you press the button by a (indiscernible) you can ask. So maybe Matt I will start actually with your experience from Disney, and what is the difference or what is different about coming from the destination business that regional what learning’s and you take we’ve seen all the initiatives at Disney’s doing with some of the Magic plus and some of the investments and do you think this can be rolled out and how do you think you can see the industry.

Matthew A. Ouimet

Yes, I think the biggest difference, so I had about 20 years with the Walt Disney Company, 17 years with the Walt Disney Company. The last time that you are running the Disneyland Resort and previously they are running five years at the Disney Cruise Line. And so hope I had learned a little bit along the way, but the fundamental difference in this business is that all except one of our parks have Knott's Berry Farm is only open for about a 130 or 140 days. Right, so there is an intensity to the operating fees and that requires you to be very both disciplined and assertive in the decision making you have. And so I think that’s one of the differences. One of the similarities is people just want to go away for day and feel like they got value, the day or two and have value. And that’s what we hope each of the parks do. Also I would point out well Disney has one uniform brand and you show up the Magic Kingdom and you expected to be the same at Disneyland. Although, you would be disappointed in the castle Disneyland if you expect that.

We have 11 brands, what most consumer companies we call house of brands. And the advantage of that is each of those parks has a very loyal audience they grew up with those parks. And Carowinds in Charlotte should be different than Knott's Berry Farm, but I think what’s important for us is to understand in our marketing messaging and in the product we put in those parks to respect the fact that it has those legacies. I’d say that’s probably the biggest differences.

Stacy L. Frole

And actually, yes, I think you touched on it little bit, but I wondered about running an operational multiple brand I think you are pretty much the only one Six Flags has just one brand and see will it has they be two dominant brand.

Matthew A. Ouimet

Right

Stacy L. Frole

How does that – doesn’t make you tougher versus your regional peers easier, is there – and how do you leverage economics of scale of marketing or some of those…

Matthew A. Ouimet

So I’ll start with the later part of your question first, it doesn’t stop us from applying best practices across the parks. I think as long as we are disciplined in identifying best practices and requiring each of the parks to execute against those best practices, we can get the economies of scale. For the most part, the regional amusement park business does not benefit from national advertising leverage. And that would be the one that if you have a single brand you might try, but I don’t think given the population for the attendance comes primarily from three or four hours within the park. The national marketing leverage helps that much.

But again I think what we have to do is playoff the legacy and the loyalty that comes from growing up with the individual park. So I think we get best practices and then we just have to be smart about messaging around what’s specific for that market.

Stacy L. Frole

Okay

Steven E. Kent – Goldman Sachs & Co.

Are there questions by the way just feel free to raise your hand or press the button to light up your microphone? I know it’s early, but this is going to be a long day, I hope you ask questions.

Stacy L. Frole

Okay, well you can continue…

Steven E. Kent – Goldman Sachs & Co.

I have one of the things that has been a little bit of a mantra for some of the amusement park companies as to stay in this 9% or so CapEx ratio, you are going up a little bit and then also you just mentioned in your opening presentation that you can’t – almost that you can’t lock in on anyone either you are going to increase volume, or increase CapEx, or we’re going to increase pricing. So how are you thinking about CapEx right now? Do you think that the 10% run rate is the appropriate rate? Is 9% appropriate and how are you thinking about it over the next couple years?

Matthew A. Ouimet

Yes, and it’s seems to be great questions, it’s a pretty dynamic process in our system. So we have a 11 parks that compete for capital. We’ve set a target of about 9% for what we call marketable cap and marketable capital there, they are new rides, attractions and shows and some of the new food and beverage offerings et cetera, but Banshee which is the new coaster at Kings Island this year is a good example of marketable capital.

I have been in the industry long enough to know that although you believe that you would like to reduce the capital investment, because its a high repeat audience, you have to continue to invest and around the 9% level to get that. We also think because of the work we’ve done around to sizing each of our parks versus market potential that there is the opportunity to invest incrementally in these parks to continue to grow. And the example –the best example I have for that is although we’ve done it within our 9% of capital so far is Carowinds, where our park in Charlotte is quite honestly a modestly sized park given the growth in that individual market. So you talked about a marketing plan there, a capital plan there over the next three or four years it’s $50 million investment to get a step function growth in that particular park.

Now on top of that we are refreshing our hotel inventory, which is primarily at Cedar Point where we are going in and quite honestly catching up a little bit and what the hotel needed to be for the current consumer and that work happens primarily this year and the next year. So we had a bubble of growth where we go from about a $110 million of capital to about a $145 million. And in that also our incremental growth initiatives, so one of the things we believe is that we can continue to do things and it’s a very simple example, but it helps.

We do campground camping it’s our highest RevPAR both in obviously occupancy and rate and it’s our longest length of stay, so people buy more tickets. And so we can continue to bring in cabins like you are seeing on the screen and continue to grow those inventories. We did it this year at Cedar Point, we’ve also done at Kings Dominion this year et cetera. But that’s incremental capital with a very clear ROI. So unlike a new rider attraction, where sometimes it gets lost in the macro numbers, we can measure these and if there is a tussle we will continue to do it, if they are not we won’t spend.

Steven E. Kent – Goldman Sachs & Co.

Just on Charlotte for example is it – that market is just grown so much, or is it that there is new competition. How do you decide because that one was to me an interesting one versus this, so where it’s a very obvious these cabins workout well, then you’ll add more of them and then when those revenues are to flatten out, you’ll stop. So why Charlotte versus some of others and how did – and then maybe just give us an insight into how this process works, every manager I assuming of every property things and amusement park things that they need more capital. They need the newest biggest best ride, so how do you as the CEO and your team think about that?

Matthew A. Ouimet

Yes, so I’ll give you Charlotte and then I’ll answer the other one. So and I’ll take a step back. So this company bought the Paramount Parks about five or six years ago, seven years ago now, and that’s a time what they believe and proof through was those parks were undersized relative to their markets and they went in and invested substantially and what we call big deal, new rides et cetera. And markets like Toronto, markets like Kings, or Cincinnati markets like Richmond, and in all cases got a dramatic growth in EBITDA. That same logic really applies directly to Charlotte because if you look at the size of that market today and the forecast for that market going forward. The prediction is that Charlotte will be the size of Houston in the next 20 years.

And so having a modestly sized park there versus that population along with the transient tourist that pass through there. So we – it was pretty obvious to us that there was a disconnect there in terms of growth opportunity and it’s also relatively a low risk investment, right. So I know the market, I know how much it cost to go in there and put in the coasters et cetera. We’ve run the play book before, so we feel pretty good about that.

As for the process there are two ways we approach it. One is we went back and looked at all of our parks for the last seven or eight years. Every new rider attraction or show we put into those parks and we graded them red, green and yellow. Right, so green being an obvious home run, yellow being not sure, but maybe the guest enjoyed it and red being something we wouldn’t repeat. And then as part of that, so that helps us to grow what type of ride optimizes the attendance and pricing impact. The only other thing we did is that identified the gaps. So do they need thrill, do they need family, or do they need water, our water park attraction. And so we built a five-year menu base to offset, that is iterative with the general mangers; debate is what they see in the markets each day. And so you are right every general manager thinks they need more capital. And then we try Richard Zimmerman my COO and Brian our CFO to spend a lot of time with our capital menu trying to which we optimizes it for this system right. And that’s one of the reason we sold two water parks, we had two standalone water parks in Southern California that we ended up selling because they never got to the priority from capital standpoint.

Stacy L. Frole

Next, we’ll move on I know in your prepared remarks you said you don’t manage the business for margins, but you do have…

Matthew A. Ouimet

The two I was asked anyway.

Stacy L. Frole

You are very high as it is already you are seeing expansion over the last few years, how much more do you think you can go on the marginal front. And maybe actually it would be interesting is there a difference between – what is the difference between your highest margin parks and the lowest, and is there a catch up opportunity for some of the portfolio parks.

Matthew A. Ouimet

Yes, there is a wide margin – they are wide, I need to say margin, there is a big difference between our best margin parks and our lowest margin parks. But all of our parks have very high margins or we couldn’t average up to almost 38% right. So the way we think about it is we want to continue to be able to push pricing, chasing attendance year-after-year you have to get it each year, if you get pricing and established at a certain level you can build on that and it becomes cumulative over time. In order to do that we think we have to continue to invest back in the guest experience both in terms of capital and then in some case operating costs like the show you are seeing on the screen which is Luminosity as an operating cost associated with it, but Luminosity runs at 9:30 at 9 which keeps you into the park the dinner period and so we get a meal period out of view which has a little bit less margin then a ticket for admissions et cetera.

So I would expect you have just continue to see our margin stay at the level they are or grow modestly, but not aggressively. I think we’re going to continue to reinvest in the park. The other thing we’re doing Frole is there are certain initiatives that if you’re not careful that pay off two or three years down the road and that if you’re not careful you don’t invest in because you’re protecting your margin. And I think our investors are asking us I know our investors are asking us today they continue to make those investments. And so that’s why I don’t think you’ll see a decline, but you’ll see it won’t grow aggressively.

Stacy L. Frole

But what are some of those examples of investment that…

Matthew A. Ouimet

Example would be Fun TV which we just put in place into the parks, so the installed asset base which are the TV screens in each of the queues as well as headquartered in Kings Island for all of our parks is the TV Studio. And so that has an operating cost associated with it to do programming doesn’t necessarily pay off at the same ROI the first year the same margin the first year as it will in the third year.

Steven E. Kent – Goldman Sachs & Co.

Some of those incremental revenue opportunities we’ve seen when we tour other amusement parks they have a lawn mower there which is the official lawn mower of I don’t know you remember which amusement park had it, but they were getting some fee to have that noted as the official lawn mower. I’m assuming that’s completely positive margin expense associated with it. How far can that go for you is that another opportunity beyond just the TV. And when does it – when is it overkill I mean as a person from Disney I got to believe that you were very hesitant about those kind of things.

Matthew A. Ouimet

Yes, I’m little more sensitive to it. So the priority so you can do those types of things and we do some of those. What I keep saying is we are not going to have the Beef Jerky. I think so – but the priority for the team when we put Fun TV in place was the primary objective is to deliver content inline that makes your wait feel less. The second objective was to sell things to sell up opportunities in the park whether that be food and beverage or it be our shows, letting you know what’s behind the door of the theatre, because to a great degree getting you in the theatre is more difficult than getting in the ride line. And the third is to give you a platform for commercialization. So it’s in that order, I think we have to be careful, because at some point you cross the line there. But that being said there are some opportunities particularly with those TV screens that are quite valuable.

Stacy L. Frole

You mentioned a little bit how you’re more focused on pricing and over the last few years you’ve seen a low-single digit CAGR increase, first what can we expect what lead you think we can expect for the next few years. And one of the things that we continue to find interest and I struggle with it, if you just go online and see amusement park prices it’s very different from what you should actually report, so is there still a dramatic level of discount that you think we can start to catch up, of course if that allow we are starting to actually see real price increases or some of it is still the less discount that we see?

Matthew A. Ouimet

I think which you’re going to see and you’re seeing across the system is yield management. We talk about pricing, but the reality is that’s yield management. And so the best example that I have for you are, we’ve done a lot of work around where the elasticity is available to us. And so the season passes is a great example where I think you’ve seen, I know you’ve seen us and I suspect the rest of the industry price pretty aggressively on season passes over the last several years and still been able to grow units at the same time. That tells us that value proposition is strong and quite honestly that’s the same playbook we’re running this year.

The other example for us is always where there is a new rider attraction. So, Kings Island this year has seen proportionately more price increase than we would at other parks. And I’ll come back to that because there is another reference point that’s valuable.

And then the third park area for us is how our Halloween Haunt program is extremely successful, so that weekends after Labor Day when we add the monsters if you will to the parks, and the mazes is a product that we feel we can continue to price aggressively behind as long as we continue to invest in the product. What is interesting, I think too is, I often get asked do you price differently at different parks, because they are different experiences or the markets are different. The reality is most of our pricing differences is a result of legacy. So I tell people if Cedar Point took $2 a year more for five years, and Kings Island only took a $1, by the time you get through the five years, you’ve got a $5 delta.

So we’re in the process of resolving those differences over time. And that’s again our capital program tends to play into that pretty significantly, but it’s still a very strong value proposition if you’re doing. But I will say, you’ve got to be careful in this industry, because the incremental consumer looks extraordinarily valuable. Right?

So that last guy who came with your fixed cost base looks extraordinarily valuable. As long as one of two things doesn’t happen, one is it erodes via pricing integrity for everybody else who’s willing to pay more and that’s the revenue management discipline that this industry has more recently adapted, or it changes the social mix in your parks. Right you have more on a company teenagers which aren’t a good model because they don’t have as well as with them.

But absent that, incremental attendance is very valuable, but as an industry we are addicted to attendance and you can go from the big guys down to the smallest guys. It’s the most visceral metric you can get. I can get it every 15 minutes, it’s pretty simple et cetera. But it’s not the right metric for the industry. The right metric for the industry continues to be revenue and margin.

Steven E. Kent – Goldman Sachs & Co.

Any other questions, last questions? Stacy have we missed any slides that you want us to review? No, so is this whatever this is what not is that a high margin is that a show or is that somebody just tell us.

Matthew A. Ouimet

Manage their target.

Steven E. Kent – Goldman Sachs & Co.

Yes, there you go.

Matthew A. Ouimet

And that’s Berry Farm. I will tell you what is been very gratifying to me particularly in that is a good reference you know of the park in Southern California, very unique as most of our parks had very little direct competition. But if you think about Southern California other than Orlando it’s probably the most competitive market in the amusement park industry and not that it’s best year ever in terms of attendance, profitability, and revenue last year. And again at reference point of it you can get a full year season pass that not for the price of one day admissions at Disneyland and I think that playing off that value proposition is helping us.

Steven E. Kent – Goldman Sachs & Co.

Okay, I think we’re going to end at there. We are going to have SeaWorld up in a moment. I think I have a feeling that Stacy’s is going to leave her slides up there for as long as possible.

Matthew A. Ouimet

She don’t mind, she don’t mind.

Steven E. Kent – Goldman Sachs & Co.

Yes, and we appreciate your coming in first thing in the morning.

Stacy L. Frole

Thank you very much.

Matthew A. Ouimet

Appreciate it. Thank you, Steve.

Question-and-Answer Session

[No Q&A session for this event]

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