John Duffey - Chief Financial Officer
James Reid-Anderson - Chairman, Chief Executive Officer and President
Alexander Weber - Chief Operating Officer
Nancy Krejsa - Senior Vice President of Investor Relations & Corporate Communications
Ian Corydon - B. Riley & Co., LLC
Ian Zaffino - Oppenheimer & Co. Inc.
Six Flags Entertainment (SIX) Q3 2010 Earnings Call November 3, 2010 9:00 AM ET
Good morning. My name is Danny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Six Flags' Third Quarter 2010 Earnings Conference Call. [Operator Instructions] Nancy Krejsa, Senior Vice President, Investor and Corporate Communications, you may begin your conference.
Thank you. Good morning, and thank you for joining our third quarter 2010 earnings call. With me today are Jim Reid-Anderson, Chairman, President and CEO of Six Flags; Al Weber, our Chief Operating Officer; and John Duffey, our Chief Financial Officer.
Before we begin with our prepared comments, I would like to remind people that the executive management team of Six Flags will be hosting an investor meeting tomorrow morning, November 4, from 9 to 11 a.m. Eastern time at the Waldorf Astoria in New York City. We hope many of you can join us. If not, the meeting will be webcast live and be archived on the Investor Relations page of the Six Flags website. Tomorrow morning, in advance of the meeting, we will also post a copy of the meeting presentation on our website.
A webcast of this call is also being made available on the Investor Relations page of the Six Flags website. The company cautions you that comments made during this call will include forward-looking statements within the meaning 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. And the company undertakes no obligation to update or revise them. For a detailed discussion of these risks, you may refer to company's 2009 annual report on Form 10-K.
In addition, statements made on our call today include non-GAAP financial measures. These financial measures have been reconciled to the most directly comparable GAAP measure and included in our third quarter earnings release or other forms filed or furnished with the SEC. I would also like to share that as a policy, the company will not be providing detailed financial guidance.
Now we'd like to begin our prepared remarks, and I will turn the call over to Jim Reid-Anderson.
Thank you, Nancy, and greetings to everyone on the call. I do appreciate you joining us this morning, and thank you very much for your interest in our company. I want to start today by saying that my first few months with Six Flags have been excellent. Today, I'm even more excited about our future than I was when I joined the company in August.
First and foremost, I have found the parks to be in excellent condition. The grounds and attractions are clean, well maintained and up-to-date. Through the last few years, the company made smart investments to retain and enhance the appearance of the parks, and so we are in a position today where we can continue growing without the need to make significant investments above and beyond a normal run rate.
In addition, we have excellent safety records at all of our parks. The safety of our guests and employees is our top priority. That is why approximately 20% of all of our park operating expenses, 25% of our capital and approximately half of our full-time headcount is dedicated to maintenance and safety at our parks. I would also say that the corporate staff and park level leadership are very strong with deep expertise in the theme park industry. In combination with other recent personnel changes I've made since arriving at Six Flags, I feel quite honored to work with such a strong, experienced and capable team.
Our management team has gelled quite nicely, and we are moving forward rapidly. Consequently, you'll be pleased to know that no major management or organizational changes are anticipated going forward. In addition, those of you who know me realize that I do not like restructuring expenses. Our current plans do not anticipate any material restructuring charges in 2011 and beyond.
One of my several priorities when I joined the company was to develop a business strategy that would allow us to consistently deliver top results for our three primary constituents: our shareholders, our guests and our employees. The strategy that we have defined and implemented is straightforward, easy-to-understand and an effective way to ensure all our employees are working towards the same goal, day in and day out. We are a theme park company, and our strategy is based on delivering excellence in all that we do. And it includes five key imperatives. The imperatives provide focus for our employees and will help us ensure that we increase shareholder value over the long term. The five imperatives are one, enhancing our guest experiences. This ensures we retain existing guests and attract new ones. Two, developing guest focus products and programs, including adding exciting new attractions every year and appropriate theme park-based marketing at every park. Three, improving operational efficiencies both with more rational pricing and by improving the efficiency of our cost base. Four, delivering financial excellence by consistently improving our financial results. And finally, five, building a high-performance theme culture because I personally believe our employees are our greatest asset in ensuring we achieve our long-term goals.
We have multiple objectives and several metrics behind each of these imperatives in order to track our performance. It is a simple yet powerful tool to ensure our entire Six Flag (sic) [Six Flags] team stays aligned and on track in executing our corporate goals. I might also add that I've been extremely impressed with the quality of the systems and tools the company has in place to measure important metrics such as per capita sales, guest satisfaction and others.
As it relates to our financial performance, I'm really pleased to share that third quarter was another solid quarter of Six Flags. Q3 revenue reached $467 million, representing a 5% growth over prior year on a comparable basis despite attendance levels being flat to prior year. Our revenue growth came primarily from higher ticket pricing, fewer discounts and improved in-park sales, and really is an indication of our ability to successfully enhance the yield and profit margin of our business, long term.
Our attendance was flat with prior year due primarily to three factors. One, we reduced the number of discounted and complimentary tickets we gave away versus last year. Two, we have limited new capital introductions to market in 2010, and three, we were comparing against a solid Q3 2009.
Although growing attendance is an important long-term goal for us, our primary focus is to drive profitable revenue growth. And this, of course, is a bit of a change in approach from the past. In addition, you may remember from our Q2 call that I spoke of our focus on the cost base and our multi-pronged approach to address efficiencies inside our company. As you can see, we have already made tremendous progress in this area, driven primarily by lower marketing costs and headcount reductions. The net of this is that going forward, we will be structured as a regional theme park company, not as a Global Entertainment business.
The 5% revenue growth and significant cost reductions provided good lift in our profitability and cash flow. Adjusted EBITDA and free cash flow both grew 15% in the quarter and cash earnings per share were $7.83 a share. LTM cash earnings per share were $3.69, assuming pro forma interest, an indication of a strong cash-generating capacity of the business. One final point before I hand it over to John, I want to ensure that everybody understands the difference between adjusted EBITDA and modified EBITDA, and why modified EBITDA margin is a better yardstick to measure our profitability versus others in the industry.
Adjusted EBITDA measures earnings attributable to Six Flags' shareholders and excludes the EBITDA due to our partners in two parks. Modified EBITDA margins reflects the true profitability of our business when comparing us to others in the industry. So in Q3 and Q3 year-to-date, our modified EBITDA margin was 54% and 36%, up four and seven percentage points, respectively. We are extremely proud of our performance in this area.
Now I'd like John to walk you through more details on our third quarter and year-to-date financial performance. John?
Thanks, Jim, and hello to everyone on the call. I would also like to share that I'm excited to be a member of the Six Flags team and have been extremely impressed with the dedication of people here, who are making Six Flags a great and successful company. There is no better evidence of this team's ability than a strong financial performance for the quarter. As Jim indicated, we reported a solid 5% growth in revenue in the third quarter, driven by an increase in per capita revenue for both ticket and in-park sales. The company's focus on improving yields through focused-pricing discipline and increasing depth in-park sales has delivered results. Year-to-date revenue is up 6% on a comparable basis due to both a solid increase in attendance and per capita sale.
On a comparable basis, cash operating expenses declined approximately $9 million in the quarter versus prior year and represented 38.6% of revenue, down from 42.3% of revenue in Q3 of 2009. Our year-to-date, the company has reduced cash operating expenses by $22 million on a comparable basis. The quarter and year-to-date expense reductions are results of reductions in marketing costs, headcount and certain corporate level expenses, along with seasonal labor efficiencies. Management remains committed to reducing operating expenses through sustainable and focused initiatives, while continuing to enhance our guest experience.
The solid revenue growth and expense reductions contributed to a strong adjusted EBITDA for the quarter of $239 million and $273 million year-to-date. This represents an increase of $31 million and $69 million over prior-year for the quarter and year-to-date, respectively.
Our Q3 diluted earnings per share was $4.85. Now beginning with this quarter, we will report cash earnings per share, which we believe is a better reflection of our earnings versus reported GAAP EPS. But first, as a result of fresh start accounting, the company was required to increase tangible and intangible assets, which increases go-forward depreciation and amortization expense well above the company's capital spending level. Second, the company was able to maintain over $1 billion of tax operating loss carryforwards, which will result in materially lower cash taxes versus the tax expense reflected in the GAAP financial. In the near term, we expect to pay in the range of $10 million to $15 million in cash taxes each year.
Adjusting earnings for these two differences, cash earnings per share was $7.83 and $5.47 for the quarter and year-to-date, respectively. Reported net debt as of September 30 was $763 million, which consisted of gross reported debt of $1,018,000,000 plus cash of $255 million. The company did not have outstanding borrowings on its revolver. As it relates to liquidity, the company's available cash and revolving facility are sufficient to meet operating and capital requirement.
Overall, an outstanding quarter and year-to-date performance provides us good momentum as we head into the fourth quarter. I do want to remind everyone that this is a seasonal business, and you should look at historical quarterly trends to better understand the impact of this seasonality on our quarterly financial result. In addition, when you think about modeling 2011, I would point out that the Easter holiday weekend and spring break for many schools will fall in the second quarter of 2011 versus first quarter 2010, causing operating days to shift from Q1 to Q2. This happens every few years.
So now I'd like to turn the call back over to Jim.
Thanks, very much, John. Before we ask Danny to start taking questions, I wanted to spend a few moments to share why I believe Six Flags is well positioned for the future. In the last few months, we have narrowed the focus of the company so we are now solely focused on theme parks. And the theme park industry is a very solid industry. There are high barriers to entry, and it's relatively resistant to economic downturn. The task of optimizing Six Flags is a multi-year exercise with a lot of growth opportunity. The population within 100-mile radius of all of our parks is approximately 175 million people. A similar metric for our largest competitor is approximately 115 million people.
Since we have parks in nine of the top 10 VMAs, the per capita income of Six Flags target audience is approximately 10% higher than the opportunity for this competitor, while our attendance levels and revenue are essentially leveled. So you could argue that our opportunity for growth is almost double. Now clearly, we can't double our attendance. However, I do believe that with the right new attractions and enhanced marketing approach and consistent leadership, we can register solid attendance gains longer term as we implement our strategy.
We've nearly completed our 2011 operating plan, and we are well along the way in implementing our new rides and attractions for the upcoming season. Although the 2010 season has been very solid, we are even more excited about 2011, since we will be introducing more rides and attractions in a single season than we have in the last decade. Our focus will be to have new news in every single park to help draw new guests into our parks and to entice existing guests to return more frequently.
As an aside, the reason we have a limited number of new attractions in our parks in 2010 was due to several factors, including the financial restructuring. We also continued to refine our pricing strategy, both ticket pricing and in-park sales, to ensure that we are generating appropriate returns on our investments. We are carefully reducing our dependence on high discounts to drive attendance. It is like a drug.
We also have some new creative advertising ready for the 2011 season. It will be park-and-ride focused and spread across TV, radio, cinema and online channels. In addition, while we know many of our guests have developed a fondness for Mr. Six, he will play a less prominent role in our advertising going forward as he did in the second half of 2010.
We believe the Six Flags brand has tremendous value, and we intend to leverage it with corporate sponsorships and other initiatives in and outside North America. This will help us grow both revenue and profitability. We are very cost conscious, and we will focus relentlessly on eliminating any excess costs across our operations. We also have several items that can potentially further improve cash flow such as our excess land, our high-cost debt structure and other investments, and these will be assessed over time.
In summary, we are well positioned to increase shareholder value. Our success, improving revenue growth, guest satisfaction and efficiency of our operation will depend on our execution. As I mentioned at the beginning of the call, I am convinced that we have the right leadership in place a talented, dedicated team of employees, who are eager to take our business to the next level, and we have the right strategy to succeed.
With that, I'm going to ask the operator to open up the call so that Al, John and I can take any questions that you might have. Danny?
[Operator Instructions] Your first question comes from the line of Ian Zaffino from Oppenheimer & Co.
Ian Zaffino - Oppenheimer & Co. Inc.
Question would really be more on the revenue side and how we should think about the business going forward. Is this something where we should just think about overall revenue growth as opposed to kind of disaggregating it between pricing and attendance? Would it be reasonable to see declining attendance so long as you could raise the yields? Or is it better just to look at this from an EBITDA or just in cash earnings standpoint?
As Nancy had mentioned earlier, we don't and cannot provide guidance. However, I wouldn't look at this and say, I'm going to assume attendance is going to go down as long as we're driving higher revenue. Our focus is on ensuring that we are homing in on all metrics including attendance as I described. We're changing the makeup of parks in terms of new rides, new attractions. And also have the pricing initiatives. So our goal is to increase attendance and revenue by a per cap so that we get the maximum possible benefit. I would say that as we plan for the future, we are not assuming huge increases in attendance. I think in this economic climate, it would be unwise to do so. So I hope that helps you. I can't tell you how you should model it. But we're not saying something like attendance is going to decline and other things are going to increase. We're looking to increase everything.
Ian Zaffino - Oppenheimer & Co. Inc.
And on the attendance side again, is this something where we should see kind of a steady growth in attendance? Or could we expect maybe slower attendance for the first as you wean people off the discounts? Again, I'm not asking specific guidance but more on how you think about it.
Again, Ian, I can't tell you how to model attendance. Our objective is to ensure that we achieve long-term growth in attendance revenue and profitability and, obviously, cash flow for our shareholders.
Your next question comes from the line of Ken Smalley from Seaport Group.
Couple of capital structuring questions, first, I would have expected your net debt to be slightly lower given the strong cash flow generation and the dividend from the Dick Clark. Were there any working capital adjustments that happened after the quarter? Or any changes you could point to there?
Ken, I would not say there were any material adjustments to working capital. There were some payments that were made out in the pre-restructuring claims, but nothing that I would say would be significant. So I think, overall, we were pleased with the cash flow that we generated for the quarter and as I mentioned, we've got $255 million of cash on hand.
I would just reinforce that, Ken, as you look at net debt as it went from April to June to September, the three quarter ends, it's a substantial reduction overall. If you go back to December, net debt was $2.2 billion. March, net debt was $2.4 billion. April, $1 billion. June, just over $900,000. And now we're sitting at $760,000. So substantial reductions consistently ongoing. And, obviously, we have no idea what you may have assumed or not assumed in the numbers, but we feel very good about where we are.
Looking at the capital structure though, the cash on hand, the low leverage, what are your plans in terms of your debt? Clearly, your securities could be refinanced at lower rates I believe in this environment. Also now you have a substantial amount of cash on your balance sheet, what are your plans in terms of potentially returning some of that cash to shareholders?
Ken, first of all, we will need a portion of that cash to fund operations in the first quarter when the majority of our parks are closed. And we are currently evaluating our overall capital structure to determine the best use of our excess cash. And we will look at things like debt, distribution and shareholders as part of that.
Finally, one of your competitors reported that trends into October were strong in terms of attendance. Are you seeing those same types of trends in your businesses?
We're not going to comment on October or the fourth quarter.
Your next question comes from the line of Ian Corydon from B. Riley & Co.
Ian Corydon - B. Riley & Co., LLC
I wonder if you can speak to the Easter shift and historically, what kind of revenue and EBITDA shift between the first and second quarter occurs there?
This is Al. Every few years, you see the Easter shift and spring break go between Q1 and Q2. We're really not in a position to give you how that works financially or from revenue standpoint, but it does dance over that quarter line every few years or so as it will in 2011.
Ian Corydon - B. Riley & Co., LLC
And I wonder if you can provide the ticket per cap and the in-park and other per cap?
Is the question regarding the quarter?
Ian Corydon - B. Riley & Co., LLC
Yes, for the quarter.
The ticket per cap for the quarter 2010 is sitting at $22.13, and the in-park is a $16.77 over the last year.
Ian Corydon - B. Riley & Co., LLC
And I'm not sure if you can answer this one, but the last one is just on stock-based compensation. Do you have kind of an annual target there?
Yes. We incurred some stock-based compensation expense in the quarter, and we expect that to continue going forward. We do not have a specific target though, Ian.
Your next question comes from the line of Ross Haberman [ph] from Habberman Management Corp.
Two quick questions, historically, could you refresh our memory, I don't recall, how much did you lose in the fourth quarter last year?
In the fourth quarter of last year, our EBITDA was approximately a negative $7.5 million.
When did the options come up to buy out their partners on the two parks, which you're a minority shareholder in?
At 2026 and 2027.
And what are your thoughts -- are there any thoughts about possibly buying them out earlier? Or is that even an option based on your existing contracts?
Well, obviously, we are not going to comment on what we may or may not do in the future. Ross, sorry, we're not in a position to do that. And let me clarify what I said earlier, 2027 and 2028, I got the orders slightly wrong.
Your final question comes from the line Barrett Inon [ph] of Brownstone Assets.
You mentioned some new rides and attractions for next year, have you outlined what those are yet and how much those will cost?
We have, and if you join us tomorrow, we will take you through that detail.
Then on the DCP dividends, do you guys still own 39%, you just got a cash dividend during the quarter?
And then one other question about -- I'm not sure Dubai was [ph] tomorrow or not, but on the corporate sponsorships, inside and outside of North America, so that can be -- I mean, obviously, you have the growth strategy and some of it you will continue to do, is that sort of you hear me focusing kind of like to do by will the comp thing, is that we're being focused on prior to the recession?
Yes. And we will talk a little bit more detail tomorrow. It's not our primary focus, obviously. Right now our focus is making sure that we operate as the best managed regional theme park company in the world. But there are opportunities such as Dubai that you just mentioned that could provide a long-term revenue gains for us. And we will cover that in a little bit more detail tomorrow.
There are no further questions at this time. I turn the call back over to the presenters.
Well, thank you very much, all of you, for joining us today. We really appreciate your support and look forward to seeing you at our investor meeting tomorrow or talking with you very soon. Take care.
This concludes today's conference call. You may now disconnect.