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Cedar Fair, LP (NYSE:FUN)

Q4 2011 Earnings Call

February 21, 2012 10:00 am ET

Executives

Matt Ouimet – President and Chief Executive Officer

Brian Witherow – Executive Vice President and Chief Financial Officer

Stacy Frole – Director, Investor Relations

Analysts

Tim Conder – Wells Fargo Securities

Sri Rajagopalan – Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cedar Fair quarter- and year-end earnings conference call. (Operator instructions) Following the presentation the conference will be open for questions. This conference is being recorded today, Tuesday, February 21, 2012.

Now I would like to turn the conference over to Ms. Stacy Frole. Please go ahead, ma’am.

Stacy Frole

Thank you, Barbara. Good morning and welcome to our year-end earnings conference call. I am Stacy Frole, Cedar Fair's Director of Investor Relations. This morning we issued our 2011 fourth quarter and year-end earnings release. A copy of that release can be obtained on our corporate website at www.cedarfair.com or by contacting our Investor Relations offices at (419)-627-2233.

On the call this morning are Matt Ouimet, our President and Chief Executive Officer, and Brian Witherow, our Executive Vice President and Chief Financial Officer, who will walk you through the particulars of our financial results.

Before we begin, I need to caution you that comments made during this call 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. You may refer to filings by the company with the SEC for a more detailed discussion of these risks.

In addition, in accordance with Regulation G, non-GAAP financial measures used on the conference call today are required to be reconciled to the most directly comparable GAAP measures. During today's call we will make reference to adjusted EBITDA as defined in our earnings release. The required reconciliation of adjusted EBITDA is in the earnings release and is also available to investors on our web site via the conference call access page.

In compliance with SEC Regulation FD, this webcast is being 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 the call will be considered fully disclosed.

Now I will turn the call over to Matt Ouimet.

Matt Ouimet

Thank you, Stacy. I’m pleased to report 2011 was another record year for Cedar Fair. We achieved record revenues of $1.028 billion and record adjusted EBITDA of $375 million. As mentioned in our last call, we firmly believe our continued investment in creating a compelling entertainment experience for the whole family and our disciplined management of both costs and revenue drivers was a catalyst for the solid increases we achieved in attendance and per capita spending this year. During the year we had the pleasure of entertaining a record 23.4 million guests at our parks, an approximately 3% increase from our then-record 2010 performance.

As we’ve mentioned in the past, our attendance is divided between season pass customers, group business, and advance and front gate purchases. This year we experienced solid increases in both our season pass and group business while seeing a slight decrease in our front gate business as we successfully transitioned some of these customers to season passes. I will note here that season passes provide the best value to the guests, allow guests to enjoy our parks at a more relaxed pace, and season pass holders tend to be some of our best goodwill ambassadors.

Despite the fact that season pass guests typically spend less per visit than other guests, we were quite pleased to see our average in-park guest per capita spending increased 2% during the year as well. The strong increase in attendance and the in-park guest spending combined with an 8% improvement in out-of-park revenues were responsible for our overall increase in revenues. Total revenue per attendee, which I know is tracked by some of you on the call today, increased approximately 3% to $43.98 per guest.

Our record results this past year were in large part the direct result of another solid fourth quarter. In the quarter we generated strong top line growth on the strength of our Halloween events that complement our peak summer season. This organic growth opportunity will remain a strategic priority for us going forward and we are challenging ourselves to identify new ways to recreate this event-driven attendance at other times of the year.

Our performance over the past two years clearly reflects the inherent strength and stability of our distinctive parks and attractions. This could not happen without our dedicated and hard-working employees at all levels of the organization. I continue to be impressed with the teamwork that takes place throughout the company and the continued focus everyone has on providing the best possible experience for every guest at every park every day.

I’m extremely proud of the collective efforts our employees have put forth to make this another record-setting year for Cedar Fair.

Now I’d like to turn the call over to Brian to discuss our financial results in more detail. Brian?

Brian Witherow

Thanks, Matt. From a financial perspective, we continue to strengthen our position within the marketplace. Through the past year, we’ve achieved record levels of attendance, revenues and adjusted EBITDA, we’ve amended our debt providing additional financial and operational flexibility, we’ve reduced our average cost of debt by more than 3%, increasing free cash flow by approximately $50 million per year going forward, we’ve reduced our total leverage ratio to 4.2 times compared with 4.9 times as recently as two years ago, and lastly, we have no borrowings outstanding under our revolving credit facility at year end.

These successes have allowed us to return to a regular quarterly cash distribution, making 2012 our 26th consecutive year of paying a distribution to unit holders.

Now, on to the financials. For the year, we reported revenue growth of $50.9 million, or 5.2%, to $1.028 billion. This was primarily driven by a 2.6%, or 592,000 visit increase in attendance, a 2.1%, or $0.82 increase in average in-park guest per capita spending, and an 8.1%, or $8.8 million increase in out-of-park revenues.

It’s important to note that in-park guest per capita spending represents the amount spent per attendee to gain admission to our parks, plus all amounts spent while inside the park gates. Our park revenues primarily represent the sale of hotel rooms, food, merchandise and other complementary activities outside the park gates. On a total revenue basis, net revenue per attendee increased $1.09, or 2.5%, to $43.98 per guest compared with $42.89 last year.

As we’ve mentioned on previous calls, we’ve placed a particular emphasis over the past two years on restoring and developing our season pass business after a somewhat down year in 2009 when many of our customers were managing through the macroeconomic turmoil. To this end, we’ve launched targeted season pass initiatives at several of our parks this year, including California’s Great America, Knott’s Berry Farm and Valley Fair. This strategy proved to be successful as evidenced by our notable uptick in attendance this year and the increased number of season passes sold for the 2011 season.

Operating costs for the full year 2011 increased $31.3 million, or 5%. The year-over-year increase in costs was largely anticipated and was the result of the increase in attendance and higher wage cost, as well as several one-time items. The increase in wage costs, which are reported through the operating line, was primarily due to increased seasonal labor hours during 2011. This was the result of expanded operating hours at several parks, the addition of new attractions and guest services, and the overall effect of the higher attendance and improved occupancy at our hotels.

The onetime items, which are components of SG&A costs, principally reflect the impact of legal and professional costs incurred during the year, including litigation expenses and costs for SEC compliance matters related to special meeting requests, as well as costs associated with the relocation of future rides and costs associated with our transition to a new advertising agency. Excluding these non-recurring items, cash operating costs per attendee were up approximately 1% between years.

Adjusted EBITDA, which we believe is a meaningful measure of our park level operating results, increased $15.3 million, or 4.3%, to $374.6 million for 2011. This increase is a direct result of the strong revenue and attendance trends produced by our parks this year. The gains were partially offset by the higher park level operating cost during the year. For 2011, our adjusted EBITDA margin remains strong at 36.4% and in line with the prior year.

Looking at our fourth quarter results for a moment, we achieved record revenues of $144.8 million for the period, a $15.2 million, more than 10%, increase from the fourth quarter last year.

During the quarter we saw revenues increase across all of our properties as our award-winning Halloween events continue to drive increased attendance as well as guest per capita spending and out-of-park revenues. Knott’s Berry Farm, our only year-round property, also continued to perform well through November and December.

Operating costs in the fourth quarter increased $12.4 million, or 11%, to $121.7 million. Included within these costs are approximately $3.6 million of non-recurring items that I discussed earlier. Our core operating costs, including cost of goods sold, were up only 5%, or $8.8 million when compared with the fourth quarter of 2010, this, the direct result of a 250,000 increase in attendance in the quarter.

Excluding the non-recurring items, our cash operating costs per attendee were actually down 3% versus the fourth quarter of 2010. On an adjusted EBITDA basis, the fourth quarter was also a record performance for us. For the period, adjusted EBITDA was $28.1 million, up $8.2 million when compared with a year ago.

Now let me highlight a few items on our balance sheet. As stated in our news release this morning, we’re very satisfied with our liquidity and our cash flow. We ended the year with no outstanding borrowings under our revolving credit facility and with approximately $35 million in cash on hand. Our improved year-over-year performance on 2010’s then-record results has allowed us to further reduce our leverage in 2011 through debt prepayments and we anticipate additional measure debt reduction in the future.

At the end of 2011, our consolidated leverage ratio was 4.2 times, which is down from 4.9 times as recently as two years ago. By prudently managing our cash flows, we’re able to maximize our financial flexibility and our ability to create value for unit holders in both the short term and long term through a combination of debt reduction, capital investments and cash distributions.

In October of this past year, $1 billion of our fixed rate swap agreements matured, and as a result, our cash interest costs should be lower by approximately $50 million per year going forward. In order to maintain fixed interest cost on a portion of our term debt, we previously entered into additional swap agreements that effectively conferred a total of $800 million of our variable rate debt to fixed rates.

These swaps, which became effective in October of 2011, have been designated as cash flow hedges and fixed LIBOR at a weighted average rate of approximately 2.5%. These swaps mature in December of 2015. For 2012 we expect our average cost of debt to be just over 6%, a decline of more than 300 basis points from last year.

In 2011, we paid $153.3 million in cash interest costs while in 2012 we expect those cash interest costs to decrease to approximately $100 million, primarily due to the improved interest rate swap arrangements. Offsetting the $50 million in cash interest savings in 2012 is a one-time termination payment we just made last week on the two cross currency swap agreements. This cash settlement will not impact our 2012 adjusted EBITDA or our plans to increase our distribution rate going forward.

In conclusion, we finished 2011 in sound financial condition. We continue to generate a significant amount of free cash flow and our capital structure provides us with substantial operating flexibility. We are well positioned for 2012 and beyond and we will continue to prudently manage our cash flows to maximize value for our unit holders.

Now, I’ll turn the call back over to Matt.

Matt Ouimet

Thank you, Brian. As I mentioned on our last call, I am confident in the fundamentals of our business model and the related growth opportunities. Consumers continue to choose to spend their discretionary entertainment dollars in our parks. Given the ongoing budgetary strains all consumers are experiencing, this is a particularly strong endorsement of the price value we provide.

Last month we hosted an investor meeting in New York City where we introduced our executive management team and rolled out our long-term strategy, which we refer to as FUNforward. As I mentioned at this meeting, there are six key growth drivers in our business. The first, an enhanced guest experience; second, improved consumer messaging; third, dynamic pricing and advanced purchase commitments; fourth, premium product offerings; fifth, strategic alliances and promotional leverage; and finally, capital and expense productivity.

I’m not going to spend time speaking to each individual item today, but I would like to provide you with an update on a few areas. The first is opportunities with dynamic pricing and advanced purchase commitments. Over the last few weeks, we have successfully rolled out our new e-commerce platform, introducing new season pass installment programs and new ticket pricing options.

Our value-oriented customers are now able to take advantage of advanced purchase discounts on tickets ordered through our sites, while our benefit-oriented consumers are able to take advantage of premium offerings such as Fast Lane and premium parking. While it is too early to determine the success of this new platform, initial response from our guests have been positive.

This past month we also announced the addition of Kelley Semmelroth, our Executive Vice President and Chief Marketing Officer. This is a new executive-level position for Cedar Fair and I’m confident Kelley’s experience in customer relationship management, brand management, advertising and strategic planning will benefit us as we continue to shift the balance of our consumer messaging from promotion to emotion. She has already spent considerable time with members of our marketing teams and our new ad agency as we begin to enhance our consumer messaging.

Our capital investments for the 2012 operating season are in place and are scheduled to be completed on time and on budget. Our HR teams are recruiting highly qualified seasonal employees with many returning from last year. Our maintenance department continues with our annual refurbishments of our rides and refreshment of the parks.

In a little more than one month, our parks will begin welcoming customers through their gates offering our guests what Cedar Fair is known for, the best day of the year experience with families and friends, and we’re prepared to meet this demand.

It is too early to speak to season pass and group business trends, but we remain optimistic that we will continue to build on the momentum we established over the past two years. We continue to target adjusted EBITDA of $450 million or more by 2016, which reflects a 4% cumulative average growth rate. We plan on providing our annual revenue and adjusted EBITDA guidance in May with our first quarter earnings.

Finally, I’m pleased to report that our board of directors has declared a $0.40 per limited partner unit cash distribution to be paid on March 15th, 2012 to unit holders of record as of March 5th, 2012. As Brian mentioned earlier, this is our 26th consecutive year of paying a distribution to our unit holders.

We continue to target a record distribution in excess of $2.00 per limited partner unit in 2013. As we discussed in January, when considering future distributions, we’ll look at free cash flow growth, investment opportunities, both internal and external, capital structure opportunities, and the distribution yield to unit price relationship.

We are continuing our investor outreach program and I expect to see many of you as we take our FUNforward presentation on the road over the next couple months.

Finally, we’re optimistic heading into the 2012 operating season and I encourage all of you to plan a trip to our parks this summer to experience your investment in FUN firsthand.

Now we will open up the call for any questions or comments. Stacy?

Stacy Frole

Okay, Barbara, I think we are okay to open up the lines.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator instructions) Our first question comes from the line of Tim Conder with Wells Fargo Securities. Please go ahead.

Tim Conder – Wells Fargo Securities

Thank you. Gentlemen, just a couple of quick ones here. Brian, if you could just clarify again, I just want to make sure we’re clear with the swap payments, that was a cash payment you said was made here in the first quarter, however, the expense is accrued in the fourth quarter or back in 2011. Is that correct?

Brian Witherow

That’s correct, Tim. The cash payment, approximately $50 million, went out this past Friday, but the P&L impact of those swaps was booked over the life of the swaps, so it’s in prior years.

Tim Conder – Wells Fargo Securities

Okay, and then, again, the other swaps are already in play so we should see more of a normalized timing flow going forward?

Brian Witherow

Correct.

Tim Conder – Wells Fargo Securities

Okay, great. Thank you. And then, Matt, you had said that it’s extremely early, obviously, with season passes and that, but could you talk to, in any form of relevance given that you’re only going to be selling so many of the Fast Lane passes, but could you talk to, on an early basis or a targeted type of percentage attachment rate that you have up to -- I guess as a percent of the total park?

Granted, whatever the number is, maybe it’s 5%, I don’t know what it would be if the park was at maximum attendance and you sold every Fast Lane pass, but as you’re going along, how is that early attachment rate relative to season passes or what other metric you may be looking at? How is that going, I guess, on a very, very early basis?

Matt Ouimet

Yes, Tim, I think you touched on it. Good morning. It’s just way too early to do that with any level of precision that I’d be comfortable on this call. What we’ve said in the past is that we want to sell a number of passes that protect both the integrity of the experience for those guests who do not purchase a pass, but also protect the value for those that do pay the extra amount for the Fast Lane pass, so I can’t give you any metrics that I’m comfortable with at this point, Tim. We’ll just have to get into the year.

Tim Conder – Wells Fargo Securities

Okay, and final question, gentlemen, I know you were talking to some potential -- expanding some sponsorships when you had the investor meeting in New York. Any update on how that’s looking for this year? And again, you’d, given the caveat that that is a process over a couple of years ramping that up, but any updates you can talk about as to how you’re looking at a potential signing new sponsorships over the next few months here?

Matt Ouimet

What I can tell you, Tim, is what I said in New York, which is you’ve got to think about this like a portfolio that builds over time. I will tell you we have several active conversations, so I feel good about the activity level, and hopefully, we’ll have some announcements as the year goes along.

Tim Conder – Wells Fargo Securities

Great. Thank you both.

Operator

Thank you. Our next question comes from the line of Sri Rajagopalan with Deutsche Bank. Please go ahead.

Sri Rajagopalan – Deutsche Bank

Hi guys. How are you? This is Sri from Deutsche. Good seeing you guys in January. Great results to end the year.

Matt Ouimet

Thank you.

Sri Rajagopalan – Deutsche Bank

And, very quickly, with gas prices going up, potentially, to $5 by summer, what are your thoughts on how that’s going to impact your parks?

Matt Ouimet

Yes, it’s interesting because I anticipated this question this morning given that the media seems to have this as their most popular headline over the last several days.

I look at it in a very balanced way, which is I think we have to be realistic that for those consumers, that impact where this is at a point where it would affect their discretionary income, there will be some moderation of their ability to spend on entertainment offerings. What seems to have benefitted us in the past is that when that happens, they still elect to come to our parks and pass up the movie experience, as an example.

The other is, as you know, we get the vast majority of our attendants within 150 to 200 miles and that’s not an expensive tank of gas to come to this experience, so given the price value in our parks, I don’t expect gas prices particularly to have an impact on us.

Sri Rajagopalan – Deutsche Bank

Fair enough, and in terms of the distribution, I guess you guys are set for $1.60 for the year, and is there any covenant or anything that restricts you from increasing that?

Matt Ouimet

Sri, where the ability to pay beyond $1.60 is governed by the excess cash flow calculations, so there is capacity, potentially, beyond the $1.60, but it will all be based on results in 2012.

Sri Rajagopalan – Deutsche Bank

Fair enough. I know you guys have no debt maturities until maybe 2015 when the revolver comes due, and with the capital markets willing at this point, are you guys constantly looking at ways to push our your maturities further?

Matt Ouimet

I would say it a little more broadly, which is that we’re constantly monitoring the market to see if there’s an opportunity there to restructure in any way that’s favorable, so we’ve got an eye on that including extending maturities out if that opportunity presented itself economically.

Sri Rajagopalan – Deutsche Bank

Alright, thank you guys.

Operator

Thank you. (Operator instructions) There are no further questions in the queue at this time.

Matt Ouimet

Great, and I certainly respect the fact that given our January presentation, we had a lot of this information out pretty early, so I want to thank you, everyone for your time this morning and your continued interest in Cedar Fair.

There’s no question 2011 was a solid year for the company. We look forward to building on this positive momentum in creating steadily increasing and sustained value for our unit holders as we move forward.

Stacy Frole

Thank you, everyone for joining us on the call today. Should you have any follow-up questions, please feel free to contact me directly at 419-627-2227, and we look forward to speaking with you again in early May to discuss our first quarter results.

Operator

Ladies and gentlemen, this does conclude our conference call for today. If you would like to listen to the replay of today’s conference, please dial 1-877-870-5176 or 1-858-384-5517 with the access code of 4509777. Thank you for your participation and you may now disconnect.

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