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Six Flags Inc. (NYSE:SIX)

Q4 2010 Earnings Call

February 22, 2011 9:00 am ET

Executives

Jim Reid-Anderson – Chairman, President, Chief Executive Officer

John Duffey – Chief Financial Officer

Al Weber – Chief Operating Officer

Nancy Krejsa – Senior Vice President, Investor Relations and Corporate Communications

Analysts

Ian Corydon – B. Riley & Company

Brian Bittner – Oppenheimer & Company

Operator

Good morning ladies and gentlemen and welcome to the Six Flags Fourth Quarter and Full Year 2010 Earnings conference call. My name is Steve and I will be your operator for today’s call. All lines have been placed on mute to prevent any background noise, and after the speakers’ remarks there will be a question and answer session. If you’d like to ask a question during that time, simply press star then the number one on your telephone keypad. If you’d like to withdraw your question, press the pound key.

I’ll now turn the call over to Nancy Krejsa, Senior Vice President, Investor Relations and Corporate Communications.

Nancy Krejsa

Good morning. Thank you for joining our fourth quarter and full year 2010 earnings call. A webcast of this call is available on the Investor Relations section of our Six Flags website. 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 our prepared comments, the Company would like to caution 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 the Company’s annual report on Form 10-K as filed with the SEC.

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 earnings release or other firms filed or furnished with the SEC. I would also like to remind you that as a policy, the Company will not be providing detailed financial guidance.

Now we would like to begin our prepared remarks, and I will turn the call over to Jim.

Jim Reid-Anderson

Thank you very much, Nancy, and hello to everyone. I appreciate you joining our call this morning. I think you’ll all agree that we had a fantastic ending to a great 2010. I look back with pride at all we accomplished at Six Flags in the past year.

First and foremost, we established a clear strategy focused on theme parks. In addition, we successfully emerged from Chapter 11, transitioned to a new senior leadership team, improved our credit ratings, refinanced our debt to secure lower interest rates, and used some of our excess cash flow to initiate a dividend.

From an operational perspective, we enhanced our safety and guest satisfaction metrics, increased attendance by 4% despite limited new rides in our parks, and eliminated costs to make our operations more efficient. All of these steps helped fuel comparable revenue growth of 7% and EBITDA growth of $98 million or 50% over prior year. This represents a whopping 870 basis point improvement in our modified EBITDA margin, which now stands at 33%. In addition, we generated $128 million in free cash flow for the year. The result and ultimate measure of the success of our accomplishments was an attractive return for our shareholders, an 85% appreciation in our stock price since the debt restructuring.

As it relates specifically to the fourth quarter, we generated excellent attendance revenue and record adjusted EBITDA of $22 million. Our operating performance benefited from modest price increases, improved in-park sales, and strong attendance at our signature Fright Fest events, which we host across all of our parks. Despite some rainy conditions on the west coast, we also registered solid attendance during December when we feature our Holiday in the Park attraction.

We took steps early in the quarter to further reduce overhead, and since we feel comfortable with our current headcount level our goal is to avoid further material restructuring costs going forward.

I’m going to have some more comments before we open the call to your questions, but now I’m going to hand over to John for more details on our fourth quarter and full-year financial results. John?

John Duffey

Thank you, Jim, and hello to everyone on the call. Our reported 20% growth in revenue in the fourth quarter was primarily driven by a 19% increase in attendance, which grew to 3.1 million guests. Adjusting for the Great Escape Lodge, which we were required to consolidate beginning January 1, 2010, revenue increased 18%.

As we mentioned in our press release, the strong attendance growth was the result of successful October Fright Fest and December Holiday in the Park offerings. We also continued to focus on improving our yields through enhanced pricing discipline and improved in-park sales.

On a comparable basis, per capita revenue for the quarter was flat as the high mix of season pass visitors offset front gate ticket pricing gains. Full year revenue increased $66 million or 7% on a comparable basis due to both a 4% increase in attendance and a 3% increase in per capita revenues. Total attendance for the year was 24.3 million, up 1 million guests from 2009, and per capita revenue was $40.18, up $1.55 from 2009 on a reported basis and up $1.10 on a comparable basis.

Cash operating expenses on a comparable basis declined approximately $13 million in the quarter versus prior year. Cash operating expenses decreased by $36 million for the full year on a comparable basis and represented 59.2% of revenue, down from 67.2% of revenue in 2009, an 800 basis point improvement.

The fourth quarter and full-year expense reductions resulted from reductions in marketing costs, headcount, and certain corporate-level expenses along with seasonal labor efficiencies. As many of these initiatives were not implemented until the second half of the year, we anticipate incremental year-over-year savings in 2011 as well.

Our EBITDA performance in the quarter was a record for the Company. Solid revenue growth and expense reductions contributed to a strong adjusted EBITDA of $22 million versus a $7 million EBITDA loss in the fourth quarter of 2009, representing an increase of $29 million over prior year. Full-year adjusted EBITDA was $295 million, a $98 million or 50% increase over 2009. The increase in full-year adjusted EBITDA was due to the following: $41 million from attendance gains, $25 million in per capita increases, and $36 million in operating cost reductions offset by a $2 million cost of sales increase from higher in-park sales and a $2 million higher minority interest adjustment.

As previously announced, during the fourth quarter we refinanced our debt. In this process, we paid off our high-cost second lien debt through an increase in first lien debt and available cash, and reduced our pricing on the first lien debt. The refinancing results in a reduction in our overall debt of $45 million and an annual cash interest savings of approximately $15 million.

The fourth quarter included the following one-time or non-cash items: an $18 million write-off of deferred financing fees associated with the December debt refinancing; $13 million of stock-based compensation expense; a $6 million net write-down of assets; $6 million of restructuring charges relating to de-branding and headcount reductions, and a 3 million charge for remaining reorganization costs.

Cash earnings per share, which we believe is a better reflection of our earnings versus reported GAAP EPS due to fresh start accounting and our sizeable tax operating loss carry forwards, was $4.64 for the year. Going forward, cash EPS will benefit from the reduced interest costs associated with the debt refinancing I mentioned earlier.

Our reported net debt as of December 31 was 784 million, which consisted of gross reported debt of $971 million less cash of $187 million. The Company is in a very good position with significant cash on hand, no outstanding borrowings on its revolver, and a leverage ratio at December 31, 2010 of 3.3 times.

This quarterly performance provides good momentum going into 2011 and we are very pleased to see our yield and cost initiatives taking hold and driving gains in profitability and cash flow. As I mentioned on the third quarter call, when you think about modeling 2011 I would point out that the Easter holiday weekend and related timing of spring break for many schools will fall in the second quarter of 2011, versus 2010 when Easter weekend straddled Q1 and Q2.

So now I’d like to turn the call back over to Jim.

Jim Reid-Anderson

Thanks very much, John. As I mentioned earlier on the call, I believe that we are well prepared as we enter the 2011 season. Our organization is in place and our employees understand our direction and strategy. We have an exciting year ahead of us as it relates to product innovations. The Company is introducing the best line-up of new rides, shows, and attractions in the past decade, including among other Daredevil Dive in Georgia, which includes a 90-degree vertical lift and a 95 degree beyond vertical drop; a stand-up Green Lantern coaster in New Jersey that includes five inversions; a Wild Mouse coaster in our New England park; a three-acre water park expansion in Chicago with freefall slides; a new Terminator laser attraction in Mexico; new giant SkyScreamer Tower swing rides in St. Louis and San Francisco; the new Texas Giant coaster in Dallas; a new laser show in San Antonio projected on the canyon wall where the park resides; and two new coasters in Los Angeles along with the reintroduction of Superman, which will launch you 400 feet in the air at 100 miles per hour.

We are very proud to say that in 2011 Magic Mountain, with its 18 coasters, will reclaim the title of Rollercoaster Capital of the World.

In addition to our product additions, we are in the midst of rolling out our new marketing campaign titled Go Big, Go Six Flags. We shared a sneak preview with those who attended our November investor meeting, and we’re in the midst of a full-blown rollout. You will soon see and hear our exciting new advertising on the radio, on TV, in cinemas and online channels; and the content features our parks and new attractions versus Mr. Six or Little Six. We will also have a much more direct approach to advertising and media, focusing squarely on the local markets around the parks versus national efforts. This allows us to simultaneously become more efficient and effective. We believe that our creative marketing campaign along with the new attractions in all our parks will help draw an increasing number of new and returning guests.

In the area of corporate sponsorships, we are developing successful relationships with numerous clients and have complemented Six Flags TV, one of the largest digital out-of-home networks in the nation, with a new Menu Board TV network. In addition to third party advertising, we use these networks to sell season passes and promote in-park retail and food services.

In addition, we will also continue focusing on improving the volume and yield of single-day tickets, season passes, in-park sales, and group sales where we have further opportunity for growth.

In summary, I am very proud of our 2010 performance and believe our fourth quarter results reflect the growing momentum we have in shaping our future. There are several steps we initiated last year to establish a solid foundation for our business, and they are focused around our strategy, communications, organizational leadership, reward structure, and execution. As I mentioned on the third quarter call, we have implemented a strategy solely focused on theme parks with five key imperatives and supporting metrics that employees can understand, support and be measured against. Employees really understand our direction because we are instilling a culture within the Company that includes proactive, honest and transparent communications. We have brought in new or elevated from within our most capable leaders to ensure we can maximize the potential of our employees who are without doubt our single greatest asset.

I feel quite honored to work with such a strong, experienced and really dedicated team. I am also really pleased with the support that we get from our Board to establish appropriate compensation plans that directly align the goals of our employees with the goals of our shareholders. And with all of that, our success really depends on our execution, and I really believe that this team is up to the task.

With that, I’m going to call on Steve, our operator, to open up the call so that Al, John and I can take any questions that you might have. Steve?

Question and Answer Session

Operator

At this time, I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad. And your first question comes from the line of Ian Corydon from B. Riley & Company. Your line is open.

Ian Corydon – B. Riley & Company

Thanks. It’s Ian Corydon. Could you provide the ticket and in-park per cap for the quarter and the comparable numbers?

Jim Reid-Anderson

John?

John Duffey

Sure, we can do that. For the quarter, 2010 fourth quarter, the admissions per cap was $19.57, and in-park was $15.54; and then the sponsorship and accommodations was $4.64. And that compares to 2009 fourth quarter admissions of $21.14, in-park of $14.44, and other sponsorships and accommodations of $3.59. That’s reported.

Ian Corydon – B. Riley & Company

Thanks. And you mentioned kind of an offset between higher gate prices offset by increased annual passes. Can you just kind of talk about the dynamics that played out there and how you think it plays out in 2011?

Jim Reid-Anderson

Al, would you like to take that one?

Al Weber

All right. Yes, Ian, if you’re talking about our comments relative to Q4, the season pass number as it ends up towards the end of the year is divided by the deferred revenue. So it does adjust per cap on a quarterly basis or a small term basis. But overall the per cap has continued to be improvement.

Jim Reid-Anderson

Adding, Ian, to build on Al’s point, the fact that we had such superb attendance in Q4, so much higher than last year, that affects per cap. But we’re very happy with the overall results.

Ian Corydon – B. Riley & Company

Great. And could you give us a sense for where the 13 million in cost cuts in Q4 came from?

John Duffey

They were from headcount reductions and a little bit of de-branding, but mostly headcount reductions.

Ian Corydon – B. Riley & Company

Okay. And it sounds like that flows through, at least through the first half of 2011?

Jim Reid-Anderson

There will certainly be an element of it that will come through in the first half of 2011, Ian, because we obviously hadn’t implemented these until we were halfway through the year.

Ian Corydon – B. Riley & Company

Okay. And then my last question is just on the use of cash. Obviously you’re generating a good amount of free cash flow and have a small dividend. Is increasing the dividend or doing a potential stock buyback on the table, or are you just going to use the cash to pay down the debt?

John Duffey

Yeah, Ian, as I mentioned, at December 31 we had $187 million of cash on hand. We will need some of that cash to fund Q1 when most of the parks are closed, and strategically, we are evaluating our overall capital structure to determine the best use of excess cash. The good news is that we believe we have several options available to us – investing in the business, repaying debt, increasing the dividend or repurchasing the stock. So we’ll continue to evaluate these options and discuss it regularly with the Board.

Ian Corydon – B. Riley & Company

Great. Thanks a lot.

Jim Reid-Anderson

Thanks, Ian.

Operator

Your next question comes from the line of Ian Zaffino from Oppenheimer & Company. Your line is open.

Brian Bittner – Oppenheimer & Company

Hey guys, it’s Brian Bittner in for Ian. Great quarter.

Jim Reid-Anderson

Hi, Brian.

Brian Bittner – Oppenheimer & Company

Hi. As far as the cost cuts, I know costs were down $36 million for the year; but obviously they’re higher kind of on a go-forward run rate. I know you talked about it with the last caller, but would you say that run rate now is over 50 million?

Jim Reid-Anderson

We’re not going to comment on the total amount, Brian. I think we’ve stated we don’t give guidance, but I think you can see from especially the Q3, Q4 results that we’re getting very positive momentum on the cost front, and it’s an intense focus for us.

Brian Bittner – Oppenheimer & Company

Okay. And as far as the attendance yield, you talked about higher season passes this quarter kind of causing a slight dilution; but as far as looking out through 2011, are we expecting to still see year-over-year growth in that admission per guest number despite maybe a little higher season passes?

Jim Reid-Anderson

Yeah, let me take it, and then Al’s going to jump in as well. We’re not giving a prediction on exactly what will happen to per cap, but I have said over and over that it is our goal to try to grow per cap and there are several ways that we are doing that, and just a couple of those are with regard to pricing of tickets and then yield from tickets – in essence, ensuring that we really try to drive discounts down over a period of time. And there are obviously other elements, as well, as John spoke to in-park spending. But let me give Al the chance just to open up a little bit more on that. Al?

Al Weber

Good, thank you, Jim. Yeah, Jim’s comments on yield are specifically—we talked about that over the last few months, and it really is focused on fencing in discounts, making the discounts work harder for us. That ultimately creates a better yield which translates into increased per cap. But it’s really more of a strategic approach that we’ve overlaid into 2010 and rolls forward.

Jim Reid-Anderson

Yeah, and Brian, I would be disappointed if we don’t succeed in growing per caps. This is a key focus area for us.

Brian Bittner – Oppenheimer & Company

Thank you. That’s very helpful, and congratulations again.

Jim Reid-Anderson

Thank you.

Operator

Again, if you’d like to ask a question, please press star then one on your telephone keypad.

And there appears to be no further questions at this time.

Jim Reid-Anderson

Okay, Steve. Well with that, let me make my closing comments, if that’s okay. For all of you listening in on this call, I really want to thank you for joining us, and also for those two questions, Ian and Brian; we appreciate it. And we really appreciate the ongoing support that we get from our shareholders; and I want to reinforce what I said earlier on the call – that it’s important that you all really understand how closely aligned this leadership team is, but not just the leadership team. All employees of this Company, we are ensuring that they are absolutely aligned with our shareholders and driving this business in the right direction.

Thank you for your support, and we look forward to seeing you soon. Take care.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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