Cedar Fair, L.P.(NYSE:FUN)
Investor Presentation Call
January 19, 2012 09:00 am
Stacy Frole - Director, IR
Matt Ouimet - President & CEO
Richard Zimmerman - COO
Brian Witherow - EVP & CFO
Tim Conder - Wells Fargo
Sri Rajagopalan - Deutsche Bank
James Hardiman - Longbow Research
Neal Shah - Royal Capital
Ross Haberman - Haberman Management Corp
Good morning and thank you for joining us today. Before we get started, I just want to speak to you real quick. I am Stacy Frole, the Director of Investor Relations and before we begin I need to caution you that comments made during the meeting today will include forward-looking statements within the meaning of the Federal Securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. While we believe that the expectation reflected in such forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of unknown factors. And it is important for us to anticipate all in factors that could affect our actual results. Important factors including those listed under Item 1A in the company’s Form 10-K could adversely affect our future financial performance and cause actual results to differ materially from our expectations.
You may refer to our SEC filings for a more detailed discussion of these risks. Also in compliance with SEC Regulation FD this meeting is being webcast and made available to the media and the general public as well as analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all content of this meeting will be considered fully disclosed.
Now, I’d like to introduce you to our New President and CEO Matt Ouimet.
Thanks, Stacy. I’ll give you time to get your clicker. So first of all, good morning and welcome. Over the next 60 minutes or so, I would like to take you through what I consider a combination of basic understanding of Cedar Fair and the Cedar Fair business model as well as what we call FUNforward, which is how we think about this company over the next several years. But before I do that, I would like to introduce the management team I have with me today. And so a couple of them, you’ll hear from very directly. To my right here Richard Zimmerman, our Chief Operating Officer and Brain Witherow, our Chief Financial Officer.
Also here today if you will just raise your hands, are Philip Bender, our EVP of Operations; David Hoffman, our Chief Accounting Officer. In the back there, Roger Allen, our Corporate Treasurer; Duff Milkie our General Counsel and Bob Wagner, our Corporate VP of Strategic Alliances.
So starting first with the company overview. We are one of the largest amusement park companies in the world entertaining more than 23 million guests annually and generating roughly a billion dollars in revenue. Our key assets are as you saw in the video, 11 best-in-class amusement parks and six separately gated water parks, five hotels, marinas and 120 roller coasters along with countless shows and attractions.
And I hope the introductory video gave you some sense for the high quality and large scale of these parks. I have been familiar with Cedar Fair for more than two decades as I worked for the Walt Disney company for most of the time and continuously studied, as long ago as two decades I studied two things about Cedar Fair. The quality of their parks, how they were able to do it and then importantly you will see later and I never cracked this code for Disney, how they could generate the high operating margin on a consistent basis.
And for those of you who track us particularly closely, you will note some updated guidance in revenue and EBITDA numbers, favorable updated guidance and Brian is going to address these more in a little depth.
So our approach to running the company is centered on the fact that people have choices. And we believe this perspective provides greater discipline in our decision-making process and generates an appropriate restlessness. The consumer makes choices on a daily basis as to where to spend their entertainment dollars. Keeping our cash motivated translates directly into how well they treat our guests. And although we run our parks for our guests, we manage the company for our unit holders. The last two years have been particularly good to us and the changes that have occurred over the time have created a solid platform for future performance. I have been personally extremely pleased with the seamless leadership transition and take particularly pride in seeing a second year of records accomplished during this transition.
As Brian will discuss later, the refinancing has given us the financial flexibility we need to drive value to our unit holders and we’re back on track for what investors expect from Cedar Fair, meaningful unit distributions.
So as backdrop, there are really four key investing considerations when you look at FUN. First, we operate in an industry with favorable dynamics that apply not only to us, but to the industry as a whole. There are real and structural barriers to entry and I’ll go through some details in a moment. We provide a compelling value compared to any other form of entertainment. The industry has proven to be particularly recession-resilient as tested over the last few years. There is a great base of repeat attendees that we can talk to very directly. Not easy to replicate this experience and hasn’t proven possible to replicate, a 420-foot roller coaster yet digitally. And we’re substantially insulated from global economic changes.
You know, as a side note here, one of the things I believe is that since we have very little market overlap, the successful performance of other companies in the space support a positive brand reputation of the industry and we all benefit from discipline decision-making that ensure that we deliver a strong bright value to our consumers, but also ensures that we deliver strong returns to our investors.
The second investment consideration is our proven ability to deliver results. As the new CEO, I am particularly proud to stand here to say that we have back-to-back record years. We have a strong record of delivering industry-leading margins as I touched on briefly earlier and stable cash flows and all this is made possible by our deeply experienced management team.
We believe there are a number of attractive strategic growth opportunities and we are focused on building of a significant momentum that we have at this time. At the very highest level, they can be categorized as outlined on this slide. And I am going to touch on them just briefly here and then in more detail later in the presentation.
So certainly enhancing the guest experience helps us drive new and repeat visitation as well as extend both the length and time people spend in our parks and the number of days they visit. Improved consumer messaging, changing the message as well as delivering through mediums that are more contemporary is clearly part of our plan. One of the things that I feel particularly strong about is the dynamic pricing and advanced purchase commitment initiatives I will take you through later.
We are stepping up our game with a new e-commerce platform and more focused revenue management practices. Strategic alliances from a fee basis and promotional leverage, we are extracting value from that out-of-home marketing impression that our large audience represents and we are going to remain very disciplined about how we spend our capital and how we manage our expenses. We are a total return investment and you will hear that phrase repeated throughout the presentation.
So this key consideration I would like to highlight is that this is anchored. The return is anchored if you will by a strong distribution yield and the other important component of our total return is the significant potential for unit price appreciation driven by earnings growth. And finally as you would expect, we will continue to have a balanced approach to allocation our excess capital.
I mentioned barriers to entry earlier. They are real and evidenced by decades in this case. There hasn't been a successful new theme park, regional theme park built in this country in the last three decades. The one attempt in Myrtle Beach, I believe its Hard Rock Park that closed before the first season ended. Its simply too costly, it takes too much land, hard to get it entitled, too long and the markets that are available are just a peripheral markets at best.
Industry leading margins; that’s my predecessor Dick Kinzel who is standing here, he particularly smiled at this board. He was particularly good at this. This chart shows you that we delivered industry leading margins for the prior five years and when we get to the next five, you will see its been true for decades.
On the cost side we've been able to maintain strict cost controls, particularly to discipline management of labor and G&A cost and on the pricing front we worked hard to protect the integrity of our pricing. As you can see here, our EBITDA margin has been consistent for a very long time, which steeps to the strength of our business model and the disciplined execution against our business plan.
Another point to note is that our margins were slightly higher before the first dotted line here. This was before the acquisition of Knotts, which is our only year-around park, which has a higher fixed cost base. Now I know this chart maybe difficult to read from your seats but the point I would like to make is how stable our cash flows have been historically and we've broken the chart into three colors to distinguish three time periods in the company's history.
In yellow you see the period before the acquisition, that's in 1997. In green you see 1998 through 2005 before the Paramount Parks acquisition and in blue you see the period from 2006 to today, which reflects the company's performance with the existing asset base. Whichever you look at, the key takeaway is that FUN has delivered consistent revenue and cash flow over long periods of time.
This is another chart that shows the stability of our cash flow for the last 25 years. The key point here is the resilience of our performance during the three recessions in that timeframe. If you look at the shaded area in the far right, it depicts the severed recession during the 2008, 2009 financial crisis. As you can see in fact our EBITDA did drop in 2009 by 11% but rebounded by more than 13% in 2010.
Looking at this map you’ll see that we have a meaningful presence on the East Coast, in the mid-west and on the West Coast, and this national footprint mitigates regional economic and weather risk and serves to further diversify our cash flow.
Another way to look at it, this pie chart here shows revenue and EBITDA contributions by Park and again demonstrates that we have a well diversified asset portfolio and they are not dependent upon any one Park or a region.
Before I turn it over to Richard for a review of our Park’s I would like to spend just a minute talking about the deeply experience management team we have. It’s because this management team we are able to deliver the consistent financial results I’ve mentioned earlier. The senior management team has on average 22 years in the industry and 18 years with Cedar Fair. And I believe this is one characteristic that sets us apart in the industry. Richard?
Thanks, Matt. Good morning everybody. While I go through a review of our Park portfolio, I would like to take a couple of minutes and talk about some of the unique attributes of our operations.
We as management think about Cedar Fair, what we do, everything starts with our guest. We want our guests to have fun or fun intent. Our management is committed to providing our guest with a visit of unquestioned value. We strive to make their visit with us the very best day of the year. As I said where it all starts for us is with the guest.
Now, let me only touch on core strengths. First and foremost, we are the leading operator of high quality, well maintained parks. Our operating strength has been the foundation of our success literally for decades. Another one of our core strengths is we provide a balanced mix of entertainment that appeals to both families and to visitors. When someone visits our park there is literally something for every member of the family to do when they visit each one of our parks.
Though we have been innovational leader throughout a long history, Cedar Fair has always been known for its signature ride. As we often say our rides are our stars and they are one of the primary reason our guest comeback year after year. And finally we have a seasoned management team running our park operations. As Matt emphasized our experienced team is the reason we can deliver for our guest and for our investors.
On a tie approach starts with what we call our cornerstones; safety, service, courtesy, cleanliness all held together by integrity. We emphasize it during all of our training and we use them to guide our decision making. It may sound simple but when you hire over 35,000 seasoned employees every year, I can assure it’s also very effective.
As Matt mentioned earlier, delivering a superior guest experience is critical to our success. We are able to deliver this experience because we maintain a high quality environment for our guest and our associates. An environment filled with industry leading rides and attractions.
Our signature thrill rides drive attendance for years because we create them internally, there are minimal ongoing IP payments. We spend approximately 9% of our net revenues on growth capital to add unique new rides and attractions to drive attendance every year. In addition, annual maintenance expenses also average about 9% of the net revenue. So in total we spent approximately 18% of our net revenues to maintain and enhance the quality of our facilities.
Cedar Fair has over 25 years of history as an innovation leader, and we have successfully created and dominated entire categories of new rides and attractions. We introduced the world’s first 200-foot, the world’s first 300-foot and world’s first 400-foot coaster. They are all in this picture and it is good as that picture looks. I have to tell you it’s impressive on the picture. It’s stunning in person when you see Magnum, Millennium Force in top throughout all seating in the beautiful setting that look at the shores of Lake Erie, next to the beach in our resorts.
We also introduced in our history the world’s first corkscrew element in a coaster and debut the world’s first magnetic launched coasters. So we have always been an innovative leader. Our innovation has extended well beyond thrill rides. We were the first to create a Halloween Haunt event, an event that has been tremendously successful across our portfolio and extended our season.
This is a category that we dominate today. Given our collection of regional parks, we can use a single park as a low-cost laboratory to test new rides and concepts and then tweak them and then roll them out across our entire portfolio. This is a great risk management tool for us. Recent examples of successful new attractions concepts we’ve developed include Dinosaurs Alive, which debut at King’s Island in 2011 as the world’s largest animatronics, dinosaur exhibit and well received.
The 300 foot tall swing-drive which debut in our four largest parks. Each of our parks has a strong regional identity and we use this identity to provide the best family value entertainment in each park we operate in, we are known it. Our parks are well known, respected and we are great leaders in our community who give back to communities.
Our parks have multi generation appeal. You walk our midways you’ll see grandparents, parents and children all walking in together. We cultivate customers who spend time with us throughout all phases of their lives. Guest come with their parents as children, they come back with their friends as teens and young adults and then they bring their own children back to our parks and the cycle starts all over again.
As you probably know you can see from the picture here our brand is synonymous with the classic and timeless PEANUTS characters. SNOOPY, Charlie Brown and friends walk the midways and greet our guests everyday we are open. In 2012 we will add [Franklin and Wood-saw] to our cast of characters.
Our high guest satisfaction repeat visitation is proof of FUNS favorable brand perception across all customer demographics. Our customers know us and they love us and come back often. Matt touched earlier on how our experienced corporate management team sets us apart within the industry. Similarly from an operations standpoint Phil Bender and I have been fortunate to work with the most talented group of general managers in the industry. With an average of 25 years of experience within Cedar Fair and over 27 years of experience within the industry. They are passionate about the business and are committed to delivering a high quality guest experience on every operating day. They are also critical in maintaining or understanding of the knowledge of the markets we operate in.
When we think about our parks, we really break them into three groups. First, Cedar Point, Knott’s Berry Farm, Canada’s Wonderland and Kings Island are the largest parks which each entertain over 3 million guests annually.
Next, Carowinds, Kings Dominion, Dorney Park and California’s Great America each annually entertain over 1.5 million guests.
The third group includes Valleyfair and Worlds of Fun which entertain approximately 1 million guests annually. Michigan’s Adventure does somewhat less than that, but it’s highly profitable and has a high profit margin comparable to our larger parks.
We maintain our quality standards at all of our parks, but let me touch on the four biggest parks. First; Cedar Point our flagship park located in Sandusky, Ohio. It’s always been a super regional draw. It serves six Mid-Western states that are home to approximately 26 million people and is the largest seasonal amusement park in United States.
The quality and broad appeal of this park is probably best captured by the fact that it has been named Best Amusement Park in the World for 14 consecutive years by Amusement Today. And it has won the award every year it’s been given. Cedar Point features five of the top 25 steel roller coasters in the world, plus four hotels, two marinas and an upscale campsite.
Knott’s Berry Farm in Southern California is our only year-round park and so is the market of approximately 20 million people. Knott’s is well known for its seasonal event including its Halloween Haunt event. In 2012, Knott’s Halloween Haunt will celebrate its 40th anniversary. We also have three separately gated water parks and an adjacent 320 room full service hotel.
Kings Island located in Cincinnati, Ohio serves the Mid-Western market of approximately 15 million people. Kings Island is one of the largest seasonal amusement parks in the U.S. and has been named -- features a particular area and has been named the Best Kids Area in the World by Amusement Today for 11 straight years.
Canada’s Wonderland serves the rapidly growing Toronto metropolitan area that’s home to approximately 9 million people and is the largest amusement park in Canada. As an example of how we customize our guest experience to the markets we operate in, we host more than 20 cultural festivals per year in Canada’s Wonderland to target the diverse ethnic population there. It is one of the most attended regional amusement parks in North America and we anticipate it will beat out once again in 2012.
And speaking of 2012, let’s talk about the New Fun in 2012. We had a great year in 2011 as Matt has referenced and Brain will tell you more about, we’re even more excited about 2012; we’ve got a great line up coming 2012. We’re planning to invest approximately $90 million across all our properties to maintain our industry leading reputation for new rides and attractions.
Let me take a moment and talk about how we think about capital. When we think about it, capital investing in our parks, we always start with a comprehensive master plan. We look at many factors at each park, such as how our guest spend their time, what the product mix looks like, ridership, customer demographics and competitive set within each region, among other items. We balance our investment across the system to keep all of our parks fresh and keep the guest coming back year-after-year.
Thrill rides have been extremely important to our success and in 2012 we will add the latest in the long-line of signature coaster across our system. Leviathan will debut at Canada’s Wonderland, 306 feet tall, 92 miles an hour; it will be one of the tallest and fastest coasters in the world and will solidify Canada’s Wonderland reputation as one of the top three coaster destinations in the world.
Stinger, featured on the top right picture there. It’s a 138 foot tall inverted shuttle coaster which will debut at Dorney Park in Pennsylvania. WindSeeker featured on the bottom right, with an excellent light package, WindSeeker 5 and WindSeeker 6 will debut at Carowinds and Kings Dominion this year; again, a great example of how we take a concept and roll it out across our entire portfolio.
As we have said a couple of times today, we are focused on balancing thrill rides and family attractions to maintain our broad consumer appeal. I want to touch briefly on three of the new initiatives we plan for 2012 to further this objective.
As we saw at Kings Island in 2011, Dinosaurs Alive! broadened our appeals to families and in particularly brought up lots of grandparents and grandchildren. Dinosaurs Alive! will be introduced this year at Cedar Point, Canada’s Wonderland, Dorney Park and Kings Dominion and we anticipate a similar positive response from all these markets.
In our product mix, the water parks provide compelling value along with great appeal to our core market customers particularly when the summer heats up. At Kings Island, our water park would be rebranded at Soak City in a major expansion which will increase both the size of the water park and the number of attraction, including second wave pool along with additional guest amenities.
Cedar Point will be introducing “Luminosity - Ignite the Night!, a new night time, over the top night time spectacular which will light up the skies over Cedar Point throughout the summer. It will help extend average length of stay and drive incremental revenue.
In addition to these three initiatives, we have 25 new live entertainment shows; we’ll be adding resort refreshment, new point-of-sale systems and adding premium guest experience that Matt will touch on a little later.
Now let me show you Leviathan.
There you have it; and I have to say on a personal note, one of the great things about my job is I get to ride all our rides and I do; and I usually get to ride them first and I can’t wait to get up to Toronto and ride Leviathan.
So with that, let me turn it over to Brian Witherow, our Chief Financial Officer.
Thanks Richard, and good morning. I think as Richard said, we are all very excited about 2012 and think that video gives you just a small glimpse as to why we are so excited about the upcoming season. It’s going to be a great ride for Canada’s Wonderland and it’s going to be a great summer for fun.
But we’re also very pleased with our results this past year. So along those lines, I would like to start by providing you updated guidance for 2011, after which I will review some of the highlights that drove the record performance of this past year.
For 2011, our preliminary results projected net revenues of $1.028 billion and adjusted EBITDA of approximately $375 million. Both of these were at the high point of our previous guidance and they represent year-over-year growth of 5%.
For those of you who haven’t followed us regularly, we consider adjusted EBITDA a good proxy of our operating cash flow and it’s a metric that mirrors define terms within our credit agreement. You can find reconciliations of adjusted EBITDA to net income in all of our SEC filings.
During 2011, we entertained a record 23.4 million guests representing an increase of 3% over the 22.8 million guests we entertained in 2010. Average in-park guest per capita spending in 2011 also improved increasing 2% over the 2010 level and we hit total level for 2011 of $40.03 per guest. Meanwhile, our operating costs in 2011 were inline with our full year expectations.
As I mentioned, we achieved another attendance record in 2011 on top of the record previously set in 2010. Our attendance in 2011 was split evenly between front gate or advanced sales, season pass visits and group business with each segment making up essentially one-third of our total attendance.
We went into the year with an increased focus on converting front gate sales into season passes at a number of our properties; not only the season pass are highest priced ticket, but to perceive value among our guest is extremely high within our season pass base.
In addition, season pass holders represent some of our parks best goodwill ambassadors making a strong influence factors for other incremental attendance. Our efforts in season pass initiatives proved highly successful in both season pass sales and season pass visits were up significantly between years.
Another key trend I would like to point out is the continued improvement in attendance from our group business at many of the properties. While this segment has been the slowest to recover from the depressed levels of 2009, we've begun to see improvement over the past few years as regional economies have recovered slowly. This will continue to be an area of focus at our parks going forward.
I would now like to take a couple of minutes to walk you through our cash flow outlook. In 2011, we spent approximately $75 million on capital investments and approximately $150 million in cash interest costs. As Richard previously mentioned, we expect capital investments to total roughly $90 million in 2012 and going forward we are targeting closer to 9% of net revenues on capital investments aimed at driving organic growth. The actual amount of CapEx spent may shift from year-to-year somewhat.
However we believe the average of 9% of revenues over the long-term will prevail. Meanwhile cash interest costs are expected to decrease from the $150 million this past year to approximately $100 million in 2012 and beyond. As many of you know, we pay minimal entity level taxes due to our MLP structure as well as the tax effective nature of our corporate entities. In 2011 we paid approximately $10 million in cash taxes and we expect modest increases in cash taxes through 2014 as revenues and income increase over the next several years.
Assuming no new tax planning strategies are implemented, cash taxes will approach roughly $35 million in 2015 as NOLs are exhausted over the next several years. There are a couple of one-time cash flow items we expect to incur in 2012 that I would also like to point out. We will make a $50 million payment for the termination of our Canadian swap liability in February.
Essentially that amount is said to be paid in the next several weeks. In addition, an $11 million payment for retirement costs associated with the CEO succession are on tap for mid-year of 2012. Here you see a summary of our debt profile as of December 31st. Total long-term debt at year-end total approximately $1.56 billion consisting of $1.6 billion in terms loans and $400 million of senior unsecured notes.
We had no debt outstanding on our revolving credit facility at the end of the year. This level of total debt translates into a total leverage ratio of approximately 4.2 times and a senior secured leverage ratio of approximately 3.1 times based on the preliminary 2011 adjusted EBITDA of 375 that I mentioned earlier.
It also important to note that we ended the year with approximately $35 million in cash on hand which compares with 2010 when we were already $23 million into our revolver by year end. Taking a closer note at the debt profile, a couple of items I’d like to highlight. First with $800 million of our term debt currently swapped to fix rates and our fixed rate bonds in place, we have fixed approximately 80% of our total long-term debt providing us with very predictable financing cost for the next several years.
Our 2010 refinancing provide us with efficiently staggered debt maturities, the earliest maturities is our $260 million revolving credit facility which matures in 2015. After that our term debt matures in 2017 and the bonds in 2018. One key point I’d like to leave you with on this slide is that we expect our cost of debt to decrease by more than 300 basis points in 2012, down from roughly 9.5% in 2011 to approximately 6.3% this coming year. This is primarily due to the expiration of several interest rate swaps.
There are two key financial considerations when you think about FUN financial profile. One, we generate a significant amount of free cash flow. As I discussed we delivered record attendance and financial results in 2011. Following of then record 2010 this has established a base for us to build from.
And as you will continue to hear from Matt today, we are confident that there are additional revenue and cash flow growth opportunities in 2012 and beyond. Lastly, we are projecting that free cash flow will additionally increase by approximately $50 million, beginning in 2013 as the result of the reduction in our debt service cost.
The second key consideration is that our capital structure provides a substantial operating and financial flexibility for several reasons. First, we are no longer constrained by our credit agreement. In fact after two straight years of record operating results, we have essentially outgrown all of our key covenants.
And as I previously mentioned, our debt maturities are appropriately staggered with the earliest maturity being in 2015. And lastly our finance cost are predictable due to the fixed nature of the majority of our long-term debt. With that, I would like to wrap up by telling you that we will provide more detail regarding the 2011 financial results as well as providing guidance for 2012 on our February 21st earnings call and with that I will turn things back to Matt for a review of strategic growth opportunities going forward.
Thank you, Brian. Thanks nice job. So let me get us through the last third of the deck and open it up for Q&A. But as I mentioned earlier, we believe there are substantial growth opportunities available to us. And I am going to address each of these individually over the next few pages. A couple of macro points. You will note that I haven’t addressed anything beyond organic growth.
In fact there may be opportunistic tuck-in as we call them of existing parks such we have done before Knott's, Dorney, Worlds of Fun and Michigan’s adventure. But those are not required to hit the growth targets I am going to talk about. It is also worth addressing here that most everything I am going to talk about are essentially best practices already applied at another amusement parks or another consumer-driven businesses.
We will like the term New Fun and we have identified a number of opportunities to enhance the guest experience for our visitors and drive growth. As I said before, we deliver a compelling price value for the price paid at every park, every day and New Fun is a big part of that. Our ability to offer new rides, attraction and events is how we sustain our large repeat audience.
As Richard had touched on, in our case it’s particularly important to continue to balance family friendly with thrill offerings to protect the quality audience mix we have today. We’re also directly addressing the quality of our food offerings to ensure that there is real value for price paid. And this one small example, our major burger locations will serve fresh, never-frozen burgers next season.
Richard touched on it as well. We’re giving our resorts extra attention over the next few years, making sure that we protect and grow our RevPAR. Resort guests are some of our most profitable guests and protecting and growing this audience is very important to us.
In particular, we’re going to focus on extending the length of stay in the park which is also highly profitable and while we touched on this opportunity over the past year in Canada and at Carowinds, we’re taking it to a new level with Luminosity - Ignite the Night.
It will provide a highly marketable broad audience appeal event. It will be reprogrammable to drive written visitation both throughout the season and annually and it will support our ongoing park maintenance upgrades by modernizing our light and sound infrastructure systems. I have great hopes with this experiment and I hope we see it at all of our parks overtime.
Improved consumer messaging and relationship management, we have a number of initiatives underway in this area that will help strengthen our connection with our consumers and create a sense of urgency driving visitation within our operating season. What we have decided is we simply must become as good at marketing, sales and revenue management as we are at operations. So we are adding the necessary resources to accomplish this objective.
We have hired a new ad agency of record that brings a true combination of strategy, creativity and effective media placement. We are selectively adding internal resources to support best practice transfer and rapid response to the consumer insights we identify. And we are in the process of implementing an incentive compensation system for our sales force rewarding truly incremental behavior.
The headline on this [fuller] point should be Emotion over Promotion. Our new messaging and I will show you examples in just a minute, leverages off the existing strong emotional attachment and multi-generational memories that exist in our large audience. What we are calling the Thrills Connect campaign created by Cramer-Krasselt combines the excitement of thrills with the fun of creating new memories together.
We believe this particular campaign will be very successful and will also encourage larger party sizes. As I mentioned CK is also continuing to help us to migrate our media mix to those channels that are most effective today.
Here are three concept boards. Sometimes finding common ground happen ten stories above. This one is a little too close to home for me. They may not hug you anymore, but they will squeeze your hand for dear life. And Stacy reminds of her son here. At a 120 miles per hour, they can’t roll their eyes at you. I think we have an opportunity to remind guest to come now and not put off a visit and promotion is particularly effective at driving urgency, but I also think we have an opportunity to reinforce the price-value equation by reminding them that the total value that they get to come as a family.
Another big initiative for us is dynamic pricing and advanced purchase commitments. Our objective as it should be is to offer the consumer the right price and nothing less to drive truly incremental behavior. And one of the foundations for this growth is the new e-commerce platform and the capabilities it adds. You see it “accesso” up there; they are our e-commerce vendor platform.
By choosing a platform shared by others in the industry we get the leverage of scale and new functionality that will be costly to develop on our own. With 23.4 million ticket transactions, having real time data and the ability to adjust our prices on a daily basis creates real value. It will also allow us to offer new programs such as installment sales for seasonal passes, which we introduced just this week.
As a side bar and I believe this could happen over time or should happen over time, one of the most impactful changes the industry could make to help the consumers embed entertainment into their routine and budget for it more easily is a subscription base model, essentially paying one-twelfth every month like you do with your cable bill. For us such a model would improve cash flow, reduce annual insurance, reduce our marketing costs for seasonal passes particularly where we spend a good chunk of our marketing money and most probably increase the seasonal pass holders spending when they do visit.
And one other point I would like to make before we leave this slide is that the accesso platform let's us reduce our reliance on ticket intermediaries who are not aligned with our objectives. We want to train the consumer to know the best ticket value is on our website.
Continuing on the accesso platform; the data capture from accesso allows us to improve the effectiveness of our customer relationship management. We will have access to data we simply have not had before.
Advance purchase commitments. It’s also where we are focusing for a moment on the impact that advance purchase commitments have and again it’s reported directly by this platform. Two very intangible impacts; the first is what we call visitation, disruption, protection. I am sure we will have an acronym before we are done. But once you buy the ticket, once you told your family and once you buy the ticket, you are committed to visit even if the weather looks iffy or if you get a better option.
And second and I’ve learned this from my experience in the cruise industry. Anything you pay for ahead of time increases the spending that will last on your visit. And the simplest example I give people is if you don’t have to give your first $13, you can buy parking ahead of time, you don’t have to give your first $13 to the parking attendant, you still spend that $13. And we believe that we have a real opportunity to continue to increase the volume of advance purchase commitments, which protect us again visitation disruption and increases spending that will last just in our park.
The other thing we are going to do is introduce premium product offerings. We tested some of these this year and I will reference them. Benefit oriented consumers will buy premium products. Here I listed just a few, Fast Lane and our Halloween offering Freight Lane. Fast Lane was tested at just one park for half of the season and it now will be rolled out to all of our parks.
Another good example here is early entry. The early entry program in our resorts is very effective at driving RevPAR premiums.
On the other end of the spectrum are value oriented consumers and as an example there, on our new website, e-commerce platform but it’s not about the website it’s about the commerce that is done on it and so I refer it as e-commerce platform. If you come in and you look like a value oriented customer by what you are purchasing, examples are you will be offered advanced purchase for lunch and dinner tickets, which are value meals for your children.
Continuing strategic alliances and this is I think some of you have asked me about this overtime. So industry benchmarking along with conversations with potential partners lead us to believe that we can expand beyond the limited relationships we have today. Simply put market executives want to talk to our 23 million attendees.
And as you know these relationships generate fees as well as promotional leverage to stretch our marketing dollars. It is important that we do this in a manner, which doesn’t negatively impact the guest perception of our parks and it is an economic positive after considering activation cost and product purchase commitments. Overtime, we hope to build a solid portfolio of strategic relationships.
Richard touched on this but we have a very disciplined approach to capital and expense management. We have used this approach to develop a multi-year strategic plan for capital that protects the base and supports new reasons to visit. I would also callout here that we are working aggressively with manufacturers to encourage innovations at lower cost. As Parks has reached critical mass and many of ours are there already, you have to be disciplined in terms of exiting underutilized capacity. Absent this, you will see fixed cost creep into cost base. We are continuing to invest in IT systems that help us to manage our largest cost and support the analytics that help us increase revenue.
Finally, people are always curious as to what we’re going to do with the undeveloped land that surrounds our parks. To be very clear, the role of these parcels is to generate additional ticket sales that accrue to the benefit of our large installed asset base. Today, these things include such as sports competition like the Triathlon that we do at Cedar Point, or firefighter competitions that we do in many other parks today, in relatively low investments like luxury camp grounds, which have our longest length of stay. But to be clear, we have no plans at this point to build new hotels. There is plenty of hotels capacity in our markets and we’re happy to partner with those hotels to drive ticket sales.
I know you’ve read the book already but let me tell you the story. So, FUN is a total return investment. Our primary goal is to deliver an attractive total return to our unit holder. There are two components to the return. A quality unit distribution and a unit price appreciation. And our objective is to deliver a reliable and growing unit distribution as well as sustainable earnings growth that will drive unit price appreciation. We will achieve this objective by disciplined execution of our business plan and prudent management of our balance sheet.
We are confident that we can continue to deliver an attractive distribution yield in today’s low yield environment and are on course for a record distribution in 2013. Driven by our current momentum and the growth initiatives I discussed earlier, we’re targeting adjusted EBITDA of over 450 million in 2016. This represents a 4% CAGR from 2011 and is roughly double what we’ve seen over the last five years.
Along the way, it’s our intent to sustain our margin discipline. In many cases, the new additions are high margin delivering off our fixed cost base and our targeted leverage ratio is below four times. We are planning on repaying $25 million of term debts in 2012 and we will continue to make opportunistic prepayments in future years helping to protect the distribution, the quality of the distribution against the unanticipated rainy day.
This slide just shows graphically you the targeted growth and summarizes the key growth drivers that I touched on previously. Distribution outlook; as many of you know we previously provided guidance on our expected distribution for 2012 and 2013 and I will like to provide you with an update today.
For 2012 we anticipate a $1.60 unit distribution paid in four equal quarterly installments of $0.40 beginning in the middle of March of this year. This is at the high end of our prior guidance. Also this implies a 7% distribution yield based upon a $23 unit price, I didn’t have the chance to update this for the last couple of days, which is clearly attractive in this yield start of the market.
As for 2013 we are targeting a record distribution in excess of $2 a unit and as you would expect future distributions will depend on growth of free cash flow, investment opportunities, capital structure opportunities and the relationship between our distribution and the unit price. Essentially it’s a market is giving us credit in the distribution.
Here is a long term look at our unit distribution trajectory and as you can see we are well in on our way to restoring our historical commitment to distributions and are on course for a record distribution of more than $2 in 2013.
Okay, as I wrap it up and before we do the Q&A, I would like to just summarize the key investment considerations. We benefit from favorable industry dynamics. The company has a proven track record of delivering results against disciplined plans. We are actively pursuing a number of what I would call industry validated attractive strategic growth opportunities. And FUN is a total return investment. Returns to unit holders are anchored by an attractive distribution yield. We will drive unit price appreciation through earnings growth and we will maintain a balanced approach to the allocation of excess cash. Thanks for your time this morning and we’ll now open it up for questions and this is my favorite slide.
Yeah okay, so I get to ask the first question right. So many of you have asked me overtime why we’re not more precise on our 2013 distribution, okay. So, what I want to do is just give you the framework for this, right; so Cedar Fair as we said today is a total return investment. I know that people in this room understand this and in this context, our objective is to offer unit holders sustainable and growing distributions over the long-term, right.
And so the key drivers are what I touched on just five minutes ago right in terms of our distribution policy. The rate of cash flow growth and we’re in an unusual window because we paid $1 this year, we are saying we are paying a $1.60 next year and then we’re going to record distribution after that. But at some point that flattens out and you basically grow the distribution at the rate that you grow cash flow.
Investment opportunities is the ability for us to have financial flexibility to take advantage of attractive investment opportunities; capital structure opportunities when the market present those to us and obviously the relationship of the dividend yield to the unit price. And so what I would expect the Board to do is to continue as we get closer to 2013, as we get deep into our operating season and even in the fourth quarter of next year, we’ll have much better visibility to those considerations and be able to talk more precisely about 2013.
So with that, I’ll open it up for questions.
Before we begin, I’ll also ask, when you ask your questions please just state your name as well as the company that you are representing for the benefit of others in the room.
Tim Conder - Wells Fargo
Tim Conder, Wells Fargo. A couple of things; thank you all for the good detail that you provided, but a couple of things regarding, lets talk acquisitions; you alluded that you look for tuck-in for an acquisition. What are your criteria as far as dilution as far as return hurdles, can you give any color there?
Yeah Tim what I would tell you in board strokes, right, and we have nothing on the radar specific at this point. But it has been a successful part of our strategy overtime. If I would tell you that they have to be purely accretive, clearly accretive for us you know aggressively accretive might be a better way to say that. And you know we are looking for returns in access of 15% when we’re looking at these under a pro-forma that I would call a rational pro-forma.
Tim Conder - Wells Fargo
That being a cash-on-cash type of...
Well, I don’t know, I would say.
Tim Conder - Wells Fargo
Okay. And then Geauga Lake, I mean any update there on plans, thoughts, specifically with that property?
The short answer is no; I have been to all of our parks except one; I haven’t been to Michigan’s Adventure, so my apologies to our GM who is listing at Michigan’s Adventure today. But I think that there is one of those assets that we’ll continue to invest modestly overtime; it’s a nice little market, but I don’t see us returning to that market in a big way.
Tim Conder - Wells Fargo
Okay. And then can you give us any color; you talked about marketing partnerships, alliances; any color specific companies you are talking to or looking at?
I won’t give you specific companies, although I would say our co-partner is in the room. But we have a long list of people who have expressed interest in us, because of the 23.4 million turn cycle, right. And as I said early, you have to be carefully with strategic alliances because if you are not careful, some of the downside may upset the upside. So we’re going to be a little more patient on it than may be others are. And the other thing is it’s a multi, it’s a portfolio developed over multiple years. So admire it, they are multiple year agreements, so this year we will do some, next year we will do more and ultimately you’ll have a nice staggered portfolio. Mark?
Hi, good morning Mark Patrick with (inaudible). I have a two part question. The first is, just going through the guidance, if we look at 2013, and we take a 4% CAGR from 375, I guess it’s about 405 million in EBITDA and CapEx would go to that 95 million at 9% of revenue. Cash interest is 100 million and taxes might drift up to 12 million or so. So let’s say it’s about $200 million free cash flow or about $3.50 or so a share. And so that math is more or less consistent with what you have been putting out on the slides, alright. Okay.
So the second part of the question is, one of the complexities with this company, I guess is the intricacies of the covenants regarding your ability to payout the free cash flows to way ward looking element etcetera. Could you explain those dynamics and how would it impact 2013 assuming those levels for EBITDA?
Yeah. And I’ll ask my CFO to correct me if I say anything wrong; you might want to do it outside the room, but we could do that. We are not growing the covenants. There should not be any restrictions from those covenants that impact us in 2013 if the math plays out like you just described, simply said.
Sri Rajagopalan - Deutsche Bank
Sri Rajagopalan, Deutsche Bank. First of all, thank you for the wonderful presentation. So if you could give us some clarity Matt regarding what happened with the Great America sale and then…..
Sure. The Giant span and let me know who they are before I have this conversation.
Sri Rajagopalan - Deutsche Bank
You are in New York, you know, you go with the Giants, lets say.
Yeah, the way I characterize it is, that ultimately I’ll give enormous credit to Duff, our General Counsel and to Brian to do this, which was, this was an asset that was performing very well for us and at a $70 million purchase price, which was the original contract with JMA, I was a little bit indifferent about doing it, but I always believed and I got, came late the party, I always believed there was an opportunity if enough smart people sat in a room and figure it out outside.
So what hasn’t been called out too directly on it yet is we basically ended up -- it’s the only property where we have least land under our asset. It’s a very good asset and a very good market that had a record, it had a good year. And so I can’t tell you it’s a record because I don’t think it was, but what happened was we end up with a lead. Because of our sitting down, rationale people judge your work, the owner etcetera. We ended up with basically a 35-year lease extension at nominal costs and we ended up with a significant cash payment that compensates us not only for disruption that will happen on a few days, but also for a part of the season we weren’t open for before. So, we’re very happy to continue with that asset quite honestly.
Sri Rajagopalan - Deutsche Bank
And if I may ask one more; given your experience with Disney for a couple of decades and now, are you going to try put end some of those Disney touches to the Cedar Parks?
I think, you know, the good news is Cedar Parks have a lot of them. We may have to remind us ourselves other than quite honestly, but we have to put them in there because I think it’s the unexpected that makes the big difference on your visit. And it always comes because the guest, not a guest, okay, customer, not a customer, an employee takes the next step and so you will see that will be an emphasis of mine and Richard’s particularly. We love them to make it the best day of the year for them and ask me quite honestly it’s a little bit of Disney so, unapologetically I hope we can do it.
James Hardiman - Longbow Research
Hi, James Hardiman, Longbow Research; thanks for the increased level of visibility as we look out forward. I was hoping Matt may be you can give us a little bit of color on how we should think about that 4% CAGR through 2015 in the context of some of the other things that you talked about today. It doesn’t sound like you guys are really looking to expand margins meaningfully, not sure what sort of attendance growth you have built into there; but clearly, it looks like you are hoping to increase that per capita spend based on a lot of your initiatives that you have underway; so how do you think about….
So two things I would say about that, one is keep in mind we operate in 11 different markets, so the mix of attendance growth versus per cap growth may be different by market; but basically I think you’ll see a balance of that overtime and my experience has always been that pricing growth is probably easier to get or per cap growth, per cap growth yield is easier to get than sustainable attendance growth, but our initiative is to accomplish both of those.
Now what I also would tell you about the pace, right; some of these will come on line and be pretty effective pretty quickly. I would expect to have [gasoline] to have a meaningful impact this coming year whereas perhaps the strategic alliances take us a couple of years to layer into. But all of them that are our biggest area of focus are relatively high margin. They just may have a few start-up costs that offset it; you know may be perhaps in 2013 a little bit and then you grow out of that in 2014.
James Hardiman - Longbow Research
For the theme Black Diamond, just curious on your investments because that's a big dollar amount and I am trying to understand and get a feel of how you look at what will drive customers to the park with new rides. Do you leverage it across a number of the parks and what kind of return aspects are you looking at as you spend on a couple of big rides and what does the portfolio look like in terms of how many do you evaluate.
Yeah several pieces to that right and in the industry, this is one of the most interesting things we do, right, so let's say a 9% revenue for a second is appropriate. Then the question becomes for us how do we allocate it across 11 different parks. You know who has had what win. Richard gave a couple of examples I think are really good this year right.
Though water parks are particularly effective investments for us and to be able to upgrade and expand to water park is relatively inexpensive versus a new coaster. So what we are doing in Cincinnati dramatically enhances the price value for an annual pass holder or a day visitor in Cincinnati by expanding the water park. So you will continue to see us leverage investments like that.
At the high end, new coasters have had a feeling for what you can afford to pay and so I talked earlier about innovation with ride manufacturers, that's what we are working very directly with to make sure those costs stay under control. Would you make a trade off on a park-by-park basis, you make a trade-off for whether it’s a thrill audience or a family ride or event, right and then we do it over a five-year plan and so we have a five-year plan right now for how we will plan to spend our capital.
It stays pretty dynamic, right so the unexpected stuff but in each case we will shift that within that $90 million in order to get excited about something like Great America which we didn’t plan on owning again, right and so we’ve got some plans directly for Great America as an example. It’s a dynamic process. We are out five years on it right now. But it’s a market-by-market consideration. How long has it been, so a part what you are investing protects the base. Right, so I think that’s the way you need to think about it. I hope we can be as productive with our $90 million of capital as we’ve ever been, but you need to do that with a larger paid audience, you got to continue to invest.
It’s [Jeremy Herrs] of MSD Capital. Could we just touch on your 4% CAGR guidance once again. And if you look back to 2007, which was presumably a very good year for the US economy. Since then, you guys have about 1.5% annual attendance growth, 1% per year revenue growth and 2.5% EBITDA growth. You guys are trailing population growth, GDP growth. What give you guys confidence that you’ll be able to grow at 4% from here which is different than what you have done here.
I will say this and the reason I look at it is, if you look at these initiatives as I said earlier. They either industry validated or best practices at other consumer-focused companies. You know this industry has not, what I like about the industry today look, the industry is well capitalized today which it hasn’t been in a while. Right, you’ve got different managers coming from different spaces, AB Parks now have Blackstone’s influence as an example where you can apply best practices and the best example for me is you know coming out of the theme park and hotel industries, revenue management yield management, it has not been a scientific discipline or arithmetic discipline within most of these companies overtime and that’s one example.
And I think you know particularly in our case I will never be the operator Dick Kinzel was. I mean he really ran that business and thankfully Richard will be. But as it relates to marketing and revenue management, the new initiatives that are validated throughout the places of the industry, I have a high degree of confidence in these initiatives. We don’t have to invent the iPhone to get this growth.
Neal Shah - Royal Capital
Just wondering, given the company’s financial difficulties over the last couple of years, is there are a chance, you know, that your predecessor had under-spent on CapEx recently and have you been able to quantify any potential cash or CapEx that you needed?
In our five year reference, a good question, a fair question. There are a couple of places where my eyes are a little bit different than Dicks. And so you will see refreshment of our resorts is probably the best single example because I want to protect that quality audience and it’s a good demographic for us on long length of stay and all those other things. But no, this is, you saw our numbers here that I don’t think you will see in other organizations, 9% of capital going into new and another 9% going into maintenance of these attractions. We don’t have very much. We always have something that we want to do in Fair. And if you walk through our parks, let me know we will do it. But no, this is a very well maintained asset base.
I know that you’ve waited a long enough.
Hi, I am [Stuart Wilson of Avalanche]. I have a couple of questions on your new initiatives. Firstly, on the Fast Lane you mentioned. I wonder if you could give us a sense of what sort of uptake you got on the task last year and how you are thinking about the potential benefit in 2012, especially given the high incremental margins.
And then, second question is on this Luminosity night show. I wonder from your experience at Disney whether you can help us understand perhaps what percentage of gas end up staying later, what sort of incremental per cap they spend, when they stay for the night show so we can get a better sense of. Do not hope this will be this year but when it’s only rolled out. Thanks.
Okay. Let me take your second one first and I will be lest precise then you would like me to be for your models. Two things in the industry, keep people, through dinner, which is what you’re trying to do, right? You are trying to keep them through the dinner or keep them late enough. They stay in a resort and come the next day. Two things it is, lights and fireworks. Right? We’ve tried everything our throughout the industry forever and the only thing is, lights and fireworks and the reason that works because you can’t do it till after dark. Right? It’s just structural.
So, I think you’ll see, particularly since we are targeting this towards multi-generations. So it will be good for the grandmother as well as the grandson. It’s very interactive. I think we will see a good length of stay extension at Cedar Point, which already has our longest length of stay. So, quite honestly, if we see it there, the transplant to other parks will probably see a bigger impact. So, no map for you but that’s how we think about it. Right?
And on fast lane, what I should tell you is, Greg Scheid and [Matt Shaper] who are the two outstanding guys, who help us run Kings Island, just study the industry and all the different variations that are out there for Fast Lane today. We settled on our model ultimately for a couple of reasons. One is we don’t want to share revenue. I’ll be honest with you and the second is when you don’t share revenue, you can be more disciplined about how much you don’t sell. Right? Because for this product to work, it has to be a very good experience for the people who paid $45 or $50 to get it. But it also cannot be disruptive of the people who choose not to buy it, our annual pass holders, right?
So, we ran it for about a half a season, last year at Kings Island without any marketing and saw, close to $1 million in that, so I’ll just leave it at that. Now every park is different right, so it not just open you around; doesn’t have the same capacity pressures that may be Kings Island does in peak season, so you can’t extrapolate it, it’s actually a very hard math to do but we’ve done it for each park and we have goals for each park.
Ross Haberman - Haberman Management Corp
Ross Haberman, Haberman Management Corp. Could you talk about what kind of return you are expecting on your capital expenditures which will go there and then what kind of price increases are you planning for 2012 overall?
Okay. So the return we look for is 15% ROIC, it makes that hard if some of that protecting it gets erosion at the base, right did you follow it. So that’s what makes that and when we say that math that way you have to be very disciplined about how much is required absent, you know you can’t keep these parks for capital for very long. Price increases for next year, we haven’t come out with that publically; it varies by park, but it is you know, I would say on average approaching the rate of inflation. Now what I would think differently beyond price increase which is yield increase, right which obviously what we’re hoping for the dynamic pricing opportunities is that we yield more than that price increase. Okay, just a couple more, Tim?
Tim Conder - Wells Fargo
Just a thought from the disclosure perspective have you thought, looked at potentially giving disclosure you mentioned yields and metrics of the cruise industry, riding industry, giving disclosures on a go forward basis, ticket yield, in park spending yield?
I haven’t thought about it, so let me think about it. I didn’t see you write up on carnival yet, did you write it?
Tim Conder - Wells Fargo
Okay; I’ll read that later; that’s a lesson and do the right thing. Okay, anything else, good. So let me, look its hard when we’re doing this and trying to get as much information communicated as we can to give you the impression of how committed we are to the company and what we are trying to do as a leadership team. You know we’re in this industry for two reasons and one of us candidly, we like the business. You know there are probably easier ways to make a living, but there are few that are as enjoyable over the couple of decades that I have been doing it, Richard, Brian, etcetera.
We will continue to evolve and we will continue to be as transparent as we think as responsible. The number one ask I have for you is if you do want to pursue the investment get to one of our parks next summer, there is a difference, and I knew this when I was at Disney, its one of the reasons I followed Cedar Fair so closely. We’re somewhere between the normal amusement park, regional amusement park and Disney and that gives us a quality audience mix particularly families, adults, accompanied teens as well as young children that drives favorable economics for us. But until you get to our parks you won’t feel the difference and understand the difference well enough to make the investment.
So with that thank, you very much for your time today and then you feel free to follow-up with Stacy, Brian or any of us. Take care.