Six Flags Entertainment (SIX) John M. Duffey on Q2 2016 Results - Earnings Call Transcript

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Six Flags Entertainment Corp. (NYSE:SIX)

Q2 2016 Earnings Call

July 27, 2016 9:00 am ET

Executives

Nancy A. Krejsa - Senior Vice President, Investor Relations and Corporate Communications

John M. Duffey - President, Chief Executive Officer & Director

Marshall Barber - Chief Financial Officer

Analysts

Ian Zaffino - Oppenheimer & Co., Inc. (Broker)

Tim A. Conder - Wells Fargo Securities LLC

Barton Crockett - FBR Capital Markets & Co.

Benjamin Chaiken - Credit Suisse

James Hardiman - Wedbush Securities, Inc.

Joe Edelstein - Stephens Inc.

Operator

Good morning, ladies and gentlemen, welcome to the Six Flags Second Quarter 2016 Earnings Conference Call. My name is Terese and I will be your conference operator for today's call. During the presentation, all lines will be in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session.

Thank you. I will now turn the call over to Nancy Krejsa, Senior Vice President of Investor Relations.

Nancy A. Krejsa - Senior Vice President, Investor Relations and Corporate Communications

Good morning, and welcome to our second quarter call. With me today are John Duffey, our President and CEO of Six Flags, and Marshall Barber, our Chief Financial Officer. We will begin the call with prepared comments and then open the call to your questions.

Our comments 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 these statements.

In addition, on the call, we will discuss non-GAAP financial measures. Investors can find both the detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's annual reports, quarterly reports, or other forms filed or furnished with the SEC.

At this time, I'll turn the call over to John.

John M. Duffey - President, Chief Executive Officer & Director

Well, thank you, Nancy. Good morning to everyone on the call. We appreciate you joining us today.

Our 2016 season is off to a great start with June year-to-date revenue up 11% and adjusted EBITDA up 19%. This record performance was driven by a 7% increase in attendance, higher pricing across all of our ticket types, higher guest spending inside of our parks and excellent growth in our international licensing fees.

We are particularly pleased with our growth in both admissions and in-park per caps, given the higher mix of season pass and member visitations, which dampens per caps. The second quarter was another record for the company, despite the shift in business from Q2 into Q1 this year due to the timing of the Easter. In fact, we have set new quarterly financial records for 24 of the last 25 quarters.

On an LTM basis, our revenue was up $118 million or 10%. Modified EBITDA was up $54 million or 12%, and modified margin was 41.1%, the highest in the theme park industry.

We believe our ongoing performance remains strong due to our laser focus on delighting our guests each and every time they visit our parks. Part of that delight is experiencing something new and different and we are the undisputed innovation leader in the industry.

We are very excited about the new coasters, rides and experiences we introduced earlier this year. All of our new capital has been well received by our guests, and will continue to draw people to our parks. In 2016 in addition to our incredible lineup of new rides and attractions, we were very excited to be the first theme park company in North America to integrate virtual reality technology into our roller coasters.

After guests board our VR coasters, they strap on the Samsung Gear VR headset, which transports them into one of two incredibly detailed virtual worlds. In one, the rider is a fighter pilot battling to save earth from an alien invasion. And in the second, the rider flies along Superman soaring through metropolis to defeat Lex Luthor. I have ridden our VR coasters multiple times and they are in exhilarating experience.

We have introduced VR coasters in nine of our parks and guest feedback has been outstanding. We plan to introduce it at Six Flags Great America, our 10th park later this summer and are evaluating the optimal time to introduce it at our other three theme parks.

We have also initiated plans to introduce new virtual worlds for our two key special events Fright Fest and Holiday in the Park. So stay tuned in that regard.

We anticipate introducing more exciting content and enhanced VR features over time to ensure Six Flags remains the innovation leader in both traditional theme park rides and also in VR coaster technology. Overall, we feel our capital strategy and the related marketing are a key driver of our strong momentum.

On the innovation front, we have been recently testing another new concept for the industry. And All-Season FLASH Pass. As you may know, THE FLASH Pass guests to pay an additional fee to avoid waiting in lines to rider coasters. It is a very popular add-on in the concept that we've been offering for more than 15 years.

Recently our guests have told us that they would like to be able to purchase THE FLASH Pass to use over the entire season. We tested the All-Season FLASH Pass concept at a few parks earlier this year and it was very well received by our guests and we are rolling it out to all of our parks over the 2016 and 2017 seasons. As we look to growth opportunities outside the United States our momentum continues to build.

Our Dubai partner recently completed the funding process for the second phase of Dubai Parks and Resorts and broke ground for the Six Flags Park. And last week we announced that we and Riverside, our partner in China, plan to build two additional Six Flags branded parks in China, a theme park and a Water Park that will be collocated in Bishan, a district of Chongqing. With a local population of approximately 120 million people, this park will be among the largest Six Flags Park in the world.

I visited the site and attended the media event last week that was hosted by Riverside to commemorate this new site. The strong local interest in the signing ceremony reflects the growing demand for entertainment options in China and the strong recognition of the Six Flags brand. While in China, I also visited our site in Haiyan, which is near Shanghai. Both sites are excellent locations that will support us in bringing world-class Six Flags Parks to China. China is a huge market with a population four times that of the United States. Theme parks and other forms of entertainment are relatively new but growing in demand and we intend to participate in that growth opportunity in partnership with Riverside.

We now have licensing agreements to develop six Six Flags branded parks one in Dubai, two in Vietnam, and three in China. These deals are high margin for Six Flags and require no capital investment on our part. We believe there is strong and growing interest to license and build more Six Flags branded parks around the world.

This leg of our strategy is already generating solid revenue for us and we believe it will prove to be a fantastic long-term growth opportunity for our shareholders. We are also making very good progress on our new water park in after Oaxtepec, Mexico that we anticipate opening in early 2017. This will be our 19th park and we have already begun hiring staff. There is tremendous buzz in the local market about the upcoming opening and our team at Six Flags Mexico City is excited to leverage the close proximity of the new water park to sell even more season passes.

In summary, it is a tremendous start to the year and I believe we have great momentum to deliver another record year in 2016. I believe this because our new capital is working well for us. Our Active Pass Base is up 11%. Guests are spending more money in our parks than they ever have before and we continue to gain more international partners.

I have never seen our team more excited and I can assure you that our team is highly focused on delivering another record year in 2016 and making sure we are well positioned for the long-term. Currently our sights are set on achieving our aspirational target of $600 million of modified EBITDA by 2017.

So, at this time, I would like to turn the call over to Marshall who will share a few more details on our second quarter financial results. Marshall?

Marshall Barber - Chief Financial Officer

Thank you, John, and good morning to everyone on the call. As John mentioned, our 2016 season is off to another record start with 12% constant currency revenue growth and 21% constant currency adjusted EBITDA growth for the first six months of the year.

We believe it is important to look at the first and second quarters on a combined basis, particularly in a year such as this, when there are attendance shifts between quarters due to the timing of the Easter Holiday and the related spring break periods.

Our revenue growth in the first half of the year was driven by a 7% growth in attendance, 4% growth in guest spending per capita after adjusting for foreign currency translations, and excellent progress in our international licensing business. We believe our strong attendance growth was driven by the consistent quality of our entertainment offerings and the great value we offer our guests.

In addition, we've recently opened what we believe is our best lineup of new rides and attractions ever and that has helped drive a new record high Active Pass Base of season pass holders and members. Our Active Pass Base was up a healthy 11% over June 2015. The continued strength in sales of our multi-use passes is a testament to our ability to offer our guests tremendous value when they become a season pass holder or member.

Guest spending per cap for the first six months of the year increased 3% with admissions per capita up 3% and in-park per caps up 2%. If you exclude the impact of Forex, the per capita growth rates were 4% in guest spending, 4% admissions and 3% in-park spending. The growth in guest spending per caps primarily reflects both effective implementation of our ticket pricing strategy and higher culinary sales.

The culinary revenue gains were driven primarily by our All-Season Dining Program, which is growing for several reasons. First and foremost is that the program is viewed as very high value by our guests. Second is our improved culinary offerings. We are opening new venues, enhancing existing ones, expanding the breadth of our menus and improving quality of our food. The third factor is that our marketing efforts are much more strategic and targeted, helping us to gain a higher conversion rate of our season pass holders and members. And finally, our Active Pass Base continues to grow which expands the number of guests who might be interested in purchasing the pass. While the growth in our All-Season Dining Program has been excellent, the penetration level remains low and we have ample opportunity to generate future revenue with this offering.

On the licensing side of our business, the $14 million of revenue in the first six months of the year was generated by our agreements in Dubai, China and Vietnam. The addition of two more parks in China will provide additional revenue for us in the near future once we've completed a few more steps in the process including signing more definitive agreements.

Because of the strength in season pass sales and our All-Season Dining Program, our deferred revenue is at an all-time high of $175 million, which is up $26 million or 17% over Q2 2015. In the second quarter, revenue was up 5% driven by 2% attendance growth, 2% growth in guest spending per capita and $6 million of growth in sponsorship and international licensing. Adjusting for the Easter shift, attendance was up 4% for the quarter.

On the cost side, we experienced increases in the quarter due to three main reasons. First, we incurred higher costs associated with both minimum wage increases and market-driven wage increases at several parks. Second, we added seasonal staff to support the amazing momentum we've seen in our All-Season Dining Program. And finally, we've invested incrementally to successfully drive our international business plan.

On an LTM basis, our modified EBITDA margin remained an industry high at 41.1%. Our June year-to-date diluted earnings per share was $0.15, an increase of $0.20 over prior year. During the first six months of the year, we repurchased $44 million of our stock. We were also pleased to complete the private sale of $300 million of 8-year senior notes at 4.875%. We used half the proceeds to pay down our Term Loan B and after paying related refinancing fees, plan to use the balance to repurchase shares.

To that end, our board approved an additional $500 million of our shares for repurchase. Combined with the remaining amount, the total authorized for repurchase was $510 million at the end of June. Concurrent with the term loan pay down, we were able to successfully lower our borrowing rate to LIBOR plus 250 basis points and eliminate any required amortization payments on the term loan until its maturity in 2022.

In summary, we are very pleased with our 2016 performance to-date and continue to make good progress towards our aspirational target of $600 million of modified EBITDA by 2017.

And now I'll turn the call back over to John.

John M. Duffey - President, Chief Executive Officer & Director

Well, thank you, Marshall. As you can tell, we are very pleased with our performance through the first half of 2016. This continues to be an exciting time at Six Flags. Our strategy is simple and clear, and our team is focused on delivering exceptional value to our guests and shareholders. It is worth noting that on a trailing 12-month basis, we have achieved 29.3 million guests, touching our all-time high level of attendance for the company. We have plenty of capacity in our parks and our momentum is strong.

Our future growth will continue to come from the following four key areas. First is higher attendance, as we continue to drive season pass and membership penetration as well as expand our Fright Fest and Holiday in the Park events. Secondly, higher pricing also continues to be a significant growth opportunity for us as our ticket prices sit well below our regional and destination competitors, leaving us room for growth. We continue to believe we are in the middle innings of a long-term pricing opportunity and we feel confident that we can continue raising ticket prices in the low-to-mid single digit each year while at the same time growing our attendance for many years to come.

Third, is our All-Season Dining Program, which is in its infancy and penetration of our Active Pass Base of pass holders will drive long-term very profitable margin growth.

And finally, our international opportunity is massive. We are at six parks already with more to come, all with no capital investment, high margins and high cash flow.

One of the many benefits of our strategy is that we offer tremendous value to our guests and our revenue growth opportunities earn very high margins for our shareholders. Additionally, our large and growing membership base provides a highly recurring revenue stream and helps spread revenue and cash flow more evenly throughout the year. Our focused strategy has been the backbone of our success over the last six years and it will continue to guide us into the future as we build our brand both in and outside of North America.

We expect to continue to be the ultimate growth and yield stock. We have consistently delivered the highest industry growth rates in attendance, revenue and EBITDA and have the highest EBITDA and EBITDA less CapEx margins in the industry. We have significant high-margin future growth opportunities and a very attractive dividend yield of 4%, which remains among the highest in the U.S. market. The 2016 season is off to a great start and we are laser focused on delivering our seventh record year in a row.

So, at this time, I'm going to ask Terese, our operator, to open the call for questions. Terese?

Question-and-Answer Session

Operator

Your first question comes from Ian Zaffino with Oppenheimer.

Ian Zaffino - Oppenheimer & Co., Inc. (Broker)

Hi, (19:50). Thank you very much. The question being, you talked about this Project 600 being laser focused on it, when do you have to start accruing for the awards or remind us kind of your thoughts as the probability of that actually happening? And then, I have a follow-up. Thanks.

John M. Duffey - President, Chief Executive Officer & Director

Yeah. Ian good to hear from you. As it relates to the Project 600 similar to what has occurred in the past the rules states that you begin accruing when it becomes probable that you would attain that target. So at some point of time in the future obviously when we get to that point we would start accruing for the Project 600 costs. What you end up doing is you take a charge that reflects kind of the period to date at that time and then you accrue it ratably from that date until you actually issue the shares.

Ian Zaffino - Oppenheimer & Co., Inc. (Broker)

And is there a particular litmus test you use for that or what are the metrics that you look at to determine the probability of it?

John M. Duffey - President, Chief Executive Officer & Director

Well, there is a number of things that we use in terms of looking at the probability. We factor in where we stand in terms of our historical performance and then our ultimate belief in terms of where we would get to in terms of getting to that target level in the future and the timing associated with that. So there is quite a number of factors that gets put in place.

Ian Zaffino - Oppenheimer & Co., Inc. (Broker)

Okay, good. And then any updates or updated thoughts on your tax structure just given that I know you filed that for the private letter ruling. What are sort of your updated thoughts there as it relates to kind of tax planning?

John M. Duffey - President, Chief Executive Officer & Director

Well, we continue to look at various tax planning opportunities. As you know, we did file for a private letter ruling on a REIT. We have not heard back from the IRS on that so we continue to wait a ruling from them. As you know, it's a very long process so it's not unusual for that to take this amount of time. And then we continue to look at other tax planning opportunities even beyond that.

Marshall Barber - Chief Financial Officer

And as a reminder we do have $400 million of NOLs so we will be paying – that will shelter us through 2018 at least.

Ian Zaffino - Oppenheimer & Co., Inc. (Broker)

Right. And just one other follow-up, is there a potential to may be extend the NOL if it would be maybe through maybe this international growth or maybe consolidation in the industry. I mean, are those sort of things you're thinking about as you look at time of the expiration of the NOL and maybe your ability to extend it?

John M. Duffey - President, Chief Executive Officer & Director

Ian, we are looking at several different tax planning ideas and obviously it's difficult to get into each one of those on a public call, but I can assure you that we are looking at opportunities to not only extend our NOLs but to the point that we can delay the amount of tax that we would pay going forward.

Ian Zaffino - Oppenheimer & Co., Inc. (Broker)

Okay, great. Perfect. Thank you very much. Good quarter.

Operator

Thank you. Your next question comes from Tim Conder with Wells Fargo Securities.

Tim A. Conder - Wells Fargo Securities LLC

Thank you. A couple of questions here John and Marshall. As it relates to the new plan that you are testing with THE FLASH Pass season pass, how are you thinking about balancing a usage on a given day versus capacity so consumer gets in line saying wait a minute why did I buy this? This line is just as long or longer, if I hadn't it? How are you working through that?

And, I guess, similarly on VR, the buzz and reception of that has been very good from what we hear. But the throughput seems to be – and I guess that's the negative we're also hearing the throughput here is maybe a quarter roughly of what a normal coaster without VR would be. How are you guys addressing this and then how will the VR in the international mix impact your 9% revenue CapEx Outlook going forward?

John M. Duffey - President, Chief Executive Officer & Director

Thanks, Tim. Great question. On THE FLASH Pass, as you know, we have FLASH Pass today, we do not have an All Season FLASH Pass but we've had that in place for years. And as part of that, we obviously monitor how many passes that we are selling and at certain times on very busy days we may cap that. That whole process will continue. So we'll make sure that we aren't really offering too many FLASH Passes on any given day so that it might impact the ultimate ride line. But we feel very good about what we've seen to-date in our tests around this and we think this could be a nice driver of some incremental in-park growth going forward.

As it relates to the VR throughput, it was a little bit of a learning curve when we launched VR we knew that would happen. And I can tell you that the throughput over time has continued to improve on all of our roller coasters and our ultimate goal is that we would see no really decrease in throughput once we get everything up and running. We get a little bit of time behind us in terms of being able to run VR on our coasters. So we're actually at the point now where we are pleased with our throughput, and it continues to improve.

Tim A. Conder - Wells Fargo Securities LLC

Okay.

John M. Duffey - President, Chief Executive Officer & Director

So I would say that we haven't seen any really big issues there. As it relates to VR and international and the relationship to our CapEx, as we mentioned before the international doesn't require any CapEx from us. So as I think we continue to build the international revenue, I think that would allow us the opportunity to start seeing our overall CapEx spending start to fall below that 9%.

VR is still a little bit early in the process in terms of – to determine how that might impact our capital spending going forward. We're obviously extremely pleased with what we have seen on VR, guest reaction has been phenomenal. I believe it has brought people into the park based upon our survey data, and we think that it will continue to be successful in bringing people to the park for the rest of this year.

And as we talked about VR is, we continue to look at ways to enhance that even further and particularly as it relates to having that to be part of our special events in the future. But it's still probably a little bit too early to tell how it would impact our overall capital spending. The good news is that it's a relatively low cost.

Tim A. Conder - Wells Fargo Securities LLC

That's what I was going at with the international with the VR, you would think your CapEx as a percent of revenues could come down even potentially faster. So okay. And then one other question here being based in St. Louis with the Six Flags Park here, we saw in May where we went up to buy single day pass for a friend of one of our kids and the person at the booth said we are not selling single day passes, well, we are, but it's the same price as the season pass. Would you want to buy season pass, and I was like well, sure. Then makes no sense to just get a single day and that was at a $13 premium. How pervasive was this across the parks, one. And, I would think if that was pervasive that could have depressed Q2 revenues but it would have been improved your season pass Active Pass numbers, and then maybe benefit visitation frequency over the balance of the year. So, any color that you can give around that would be helpful?

John M. Duffey - President, Chief Executive Officer & Director

Well, as you know, our strategy Tim is to migrate as many people as possible from one-day ticket to a season pass. And we do that in a number of ways. We begin marketing that really in August of the prior year. And we've been very successful at getting people to buy those season passes early.

The other leg is to get people to buy season passes when they do walk up either when they're buying a ticket online or particularly when they walk up to the gate to buy a one-day ticket. And we've seen pretty good success in that as well.

And, so I think you are right. I think that obviously, as you think about the revenue being recognized when we're able to convert that one-day ticket person to a season pass that day we're going to recognize less revenue on that day. But ultimately, they're going to come back to the park three times or four times, and we'll recognize that higher revenue over the season and every time they come to the park, they're going to spend money. So, ultimately, it's a win-win. We've talked before about the fact that typically, we see season pass holders spending more than twice the amount of – over the season, twice the amount of revenue.

Tim A. Conder - Wells Fargo Securities LLC

I guess, John...

John M. Duffey - President, Chief Executive Officer & Director

And we do offer discounts from time-to-time to get people to buy season passes, but again, at the end of the day, it's a nice incremental revenue driver for us.

Tim A. Conder - Wells Fargo Securities LLC

I guess, the other part then John of that, how given the customer, a rational customer that's not a choice even, they just were up-sold because this just doesn't make sense to getting the same thing. How much is that in driving your pricing increase I guess? And again, how pervasive was that across all the parks?

John M. Duffey - President, Chief Executive Officer & Director

So is that in terms of the season pass upgrades?

Tim A. Conder - Wells Fargo Securities LLC

Yeah. Yeah. I mean, again, if you walk up and the person at the booth says, hey well your season pass is X, which is the same price your single day pass on this day. The rational consumer is just going to pick the season pass. So that I would think you are effectively increasing your tickets on your single day but you're ideally getting them into the season pass. I get that logic. But how much is that of driving your pricing increase and then how pervasive was that across all the parks?

John M. Duffey - President, Chief Executive Officer & Director

Yeah, it's – Tim, it's not a big number in terms of people that were converting to a one-day ticket to a season pass when they actually come to the park. We do see some nice pickup on that, but I wouldn't say it's a huge amount. Typically, what we will see is when people are buying online and we're marketing the season passes to them for an incremental X amount of money you can buy a season pass, typically that's where we see the bigger migration.

Tim A. Conder - Wells Fargo Securities LLC

Okay, great. Thank you.

Marshall Barber - Chief Financial Officer

And really there is a very low percentage of people come to the gate to buy a main gate ticket, so...

John M. Duffey - President, Chief Executive Officer & Director

To begin with.

Marshall Barber - Chief Financial Officer

To begin with, so most people are buying, the overwhelming, majority of people are buying online and using promotional discounts. So we are upgrading those to a season pass.

Tim A. Conder - Wells Fargo Securities LLC

Okay. Thank you, gentlemen.

Operator

Thank you. Your next question comes from Barton Crockett with FBR Capital Markets.

Barton Crockett - FBR Capital Markets & Co.

Okay. Thanks for taking the question. I was interested in the trend in Active Pass, so year-over-year you reported an 11% growth in the Active Pass Base and that had been in the 24% range in the first quarter and the mid-20s and higher for basically every quarter in 2015. So I was wondering why there was that slowdown in the year-over-year growth trend.

Marshall Barber - Chief Financial Officer

Well, there's a natural – as the base gets bigger, the growth over prior year – you could have the same number and the percentage gets less. We have sold more season passes than prior year. So the base is going up and as the base gets bigger, it's bigger this year than it was last year than it was in 2014. You can still have the same number growth and have a lower percentage.

Barton Crockett - FBR Capital Markets & Co.

Okay. I was – it was interesting because to what degree does the number of Active Passes inflect in the second quarter from the first quarter? I'm sure there is some natural seasonality, but how much bigger is the Active Pass Base in the second quarter than it is in the first quarter?

Marshall Barber - Chief Financial Officer

We sell the majority of our passes as the parks are opening, so March through June. So it's significantly bigger. And really at the end of the second quarter it is as big as it gets, in terms of numbers. It does grow a little bit in the third quarter, but the overwhelming growth comes in Q2.

Barton Crockett - FBR Capital Markets & Co.

Okay. One of the things that I think many of us are curious about is to what extent are you seeing any fallout from all of the terrible news globally, which is just such a new part of this environment. Is that having any impact on people's interest in going to theme parks that you can detect?

John M. Duffey - President, Chief Executive Officer & Director

No, Bart, we have not seen any impact whatsoever on attendance to our parks associated with that.

Barton Crockett - FBR Capital Markets & Co.

Okay.

John M. Duffey - President, Chief Executive Officer & Director

I mean, I think as you know safety is our number one priority and I think that people believe that we have a very safe environment. As a matter of fact, as you know, we do many surveys every year and the survey data that we've gotten back to-date on all of our attendance has shown that our scores for safety in terms of the perception that they feel safe when they're at a park has actually increased. So we don't believe that that has any impact at all.

Barton Crockett - FBR Capital Markets & Co.

Okay. All right and then a final thing is, I know you guys don't like to dive into too much detail about weather but I was wondering if you could have at least some level of color since last year there was this historic level of rain in Texas and this year there seemed to be rain but maybe not historic flooding. The summer, since July 4th, has gotten excruciatingly hot in parts of the middle of the country. How would you describe the weather environment versus norms and kind of year-over-year?

John M. Duffey - President, Chief Executive Officer & Director

Yeah. We track weather all the time. And as we've looked both in the quarter and kind of in year-to-date the weather has been – there's been I think some shifts within the quarter, but I think overall our data shows that the weather is fairly consistent with what we saw last year.

Barton Crockett - FBR Capital Markets & Co.

Okay. All right. I'll leave it there. Thank you.

Operator

Your next question comes from Ben Chaiken with Credit Suisse.

Benjamin Chaiken - Credit Suisse

Hey, guys. I was wondering if we could take a closer look at the cost side. You mentioned three buckets. Were those in rank order in terms of incremental cost? And then also any more color on the All-Season Dining and international cost increase that you referenced and kind of what goes into that inflation would be helpful.

Marshall Barber - Chief Financial Officer

Good morning, Ben. The cost increases primarily came from salaries and wages, driven really by a few items. Minimum wage rate was a growth driver. Market wage rate increases also was a growth driver. In a couple of markets we were not seeing the quality of applicants that we wanted to see, so we increased the rates a bit.

We had growth in All-Season Dining, as you mentioned. We're selling a lot more meals, so we're opening up new venues and expanding the ones we have and the margin there is still very good. But we do have growth in costs. And then the normal merits that we give to full-time employees, that also is a cost increase year-over-year. In addition to that, we had some insurance costs increases over prior year for about $3 million relating to some prior year claims and some unfavorable litigation outcomes.

And then. finally, the growth in the international business, we're very excited about how the business has grown and the fact that we've got four new parks joining us this year but there are costs associated with that and so that is another driver of the cost increase.

John M. Duffey - President, Chief Executive Officer & Director

But if you think of the level of the cost that would be the ranking in terms of the size of that impact.

Marshall Barber - Chief Financial Officer

Right.

Benjamin Chaiken - Credit Suisse

Got it. And with the quality of the applicants, was that – can you identify market-specific issues or is that something – is that kind of representative of something that's going on across the country that could flow into other locations?

Marshall Barber - Chief Financial Officer

Those were market-specific issues in the State of Texas. We had – it's a very tight labor market. And so, that was one and then we also had some targeted increases in New Jersey as well.

Benjamin Chaiken - Credit Suisse

Got it. That's helpful. And then the increase in All-Seasons Dining expenses there, is this something that you kind of seen coming or is it – was there some kind of inflection this quarter? Just curious on what the ramp has looked like.

Marshall Barber - Chief Financial Officer

It is something we expected as we began to have this tremendous growth in the sales. So when you look at it as a percent of the All-Season Dining revenue and the food revenue, it's in line with our expectations. It's just been a very successful program.

John M. Duffey - President, Chief Executive Officer & Director

And remember that that business is extremely high margin business, so even with having to add a little bit of infrastructure around that, it's still very high margin.

Benjamin Chaiken - Credit Suisse

I guess not to belabor the point, could you just dive into that a little more, I guess, is it people are just eating more food, so you need more employees and need more locations or is it the timing of when they are eating and what? I guess I don't necessarily...

John M. Duffey - President, Chief Executive Officer & Director

Yeah, it's basically volume, increase in volume. So we talked before about our strategy on the All-Season Dining and really it's targeted around our season pass holders and our members. So basically keep them in the park to spend more money and it's a great deal for them because it provides two meals while they are in the park and in some cases two meals and a snack. It's a very nice price point for us and because it's high margin, there is a pretty huge flow-through to the bottom line. So we've been successful in terms of – getting more and more of our pass holders to buy the all-seasons dining pass. We've had tremendous – last year was really our first year, full year of this after some testing and we saw really, really good growth year-over-year and people buying this pass.

Now as Marshall said earlier, it's a relatively low penetration, so I think the opportunity going forward is pretty significant for us. But when they – these are people that generally have not – season pass holders generally have not spent money in the park, maybe over their three or four visits they might buy a couple meals. Well, now all of a sudden they are buying through the All-Season Dining Pass, a couple meals every time they visit. And so that's increased the overall volume of our meals that we've to produce. So with that obviously we had to add additional labor around that.

Benjamin Chaiken - Credit Suisse

Got it that's helpful. And then switching gears with international, do these inquiries tend to be inbound and then any color on what your vetting process looks like with regard to either the city or the partner or whatever color you can provide will be very helpful? Thank you.

John M. Duffey - President, Chief Executive Officer & Director

Ben, they typically are inbound calls and I will tell you that we get multiple calls, multiple calls a month from people. Now what we do is, we have a very detailed process where we start by looking at the market, and whether we believe that the market would be a good market too and it's got the features that we're looking for, right, the existing population base, growing population, growing middle class, growing disposable incomes. So we do a lot of analysis and vetting upfront to see if that's even a target market that would be attractive for us. And then we go through the process of making sure that we in those markets do have the right partner. So it's a fairly lengthy process even before you start getting to the point where you start negotiating letters of intent with these parties.

Benjamin Chaiken - Credit Suisse

Got it. Then one more, if I may, just the last one, when you guys think about the different markets that you could go into would you rather it be a market that already has an existing kind of theme park dynamic there and so you have an educated customer or would you rather be entering a new penetration market where you could have 100% share. I guess, how do you guys think about that internally?

Marshall Barber - Chief Financial Officer

Actually, it can be both. There are markets that we look at where there are very, very few entertainment options. So, in that case, obviously, it's a great opportunity for us but there may be other markets where there are some existing theme parks. The way we look at it, Ben is – let's say, if you take China for example, where we think this opportunity is huge for multiple Six Flags parks. But there are other parks that are being built in China. But the population base is so huge. When you think about the fact that it's four times the United States and there are hundreds of theme parks in the United States. And so, we think this is a market that actually has ample room for a lot of players to come in and build theme parks. And we actually believe that the more people that can come in build theme parks, obviously theme parks that are very safe environment can raise the entire profile of the industry and be helpful in generating even more interest and attendance. But that is a huge market. So we actually look at both.

Benjamin Chaiken - Credit Suisse

Got it. Thank you.

Operator

Thank you. Your next question comes from James Hardiman with Wedbush Securities.

James Hardiman - Wedbush Securities, Inc.

Hi. Good morning. Thanks for taking my call. I wanted to dig a little bit more on the cost side because I think that's generally where the street was mismodeling the quarter and I really appreciate all the color you guys have given thus far. But just so we're clear, as we sort of tease out the various reasons why costs increased year-over-year, is it safe to say that pretty much all of the wage stuff, the wage increases are sort of an ongoing increase that we're going to see over the course of the next year but that the insurance cost increase which I think you said was about $3 million if that was more of a one-time item, is that generally how to think about this?

Marshall Barber - Chief Financial Officer

Good morning, James. Yes, that is correct. That's how to think about it. We talked about the minimum wage being $5 million to $7 million over the course of the year with the markets driven wages as well we're thinking more about $8 million to $10 million right now.

James Hardiman - Wedbush Securities, Inc.

Okay. And the insurance increase that was just a one quarter item that we don't have to worry about for the upcoming quarters?

Marshall Barber - Chief Financial Officer

Generally that's the case. I mean, we always have – we have a lot of litigation going on every year, but generally, yes, that is the case.

James Hardiman - Wedbush Securities, Inc.

And that was presumably an OpEx line item?

Marshall Barber - Chief Financial Officer

That is correct.

James Hardiman - Wedbush Securities, Inc.

Okay. And just generally, I guess, where I'm getting at here revenues were up 5% and margins were down, adjusted EBITDA margins were down about 50 basis points and I guess I'm trying to figure out is is that going to remain upside down sort of until we lap some of the wage increases, or does that look a little better as we work our way through the year?

Marshall Barber - Chief Financial Officer

Well, we're not going to provide guidance on that. What I will say is that we're still over 41% on an LTM basis and we do believe we can continue to improve that margin over the course of the year.

James Hardiman - Wedbush Securities, Inc.

Okay. Fair enough. Yes, go ahead.

John M. Duffey - President, Chief Executive Officer & Director

And, Jim, I think the right way to look at it is because there are shifts from quarter-to-quarter as it relates to cost. And so, I think the right way to look at it is either on a year-to-date or an LTM basis. And if you look at on a year-to-date basis, our revenue growth is higher than our operating cost growth and that's same on an LTM basis as well.

James Hardiman - Wedbush Securities, Inc.

Okay. And that's a great point. I guess at the end of the day it sounds like that the best way to look at this is year-to-date, but it sounds like you may be saying that even beyond sort of the Easter shift that there were some other shifting items. Is there anything worth calling out there?

John M. Duffey - President, Chief Executive Officer & Director

Well, no, I was referring to – yeah, shifting items just from quarter-to-quarter, and absolutely Easter was one of those. But you always see shifts from quarter-to-quarter. We may spread our maintenance a little bit differently throughout the year and that's why I think it's important to look at it more on a year-to-date or really in this case an LTM basis.

James Hardiman - Wedbush Securities, Inc.

Very helpful. And then, I guess, just lastly for me and maybe the answer is same, but on the top line you guys have talked about the new rides and attractions being among the best, if not the best you've ever had, for a given year, particularly on the VR front, and yet the attendance growth in the second quarter at least was lower than we've seen for six or seven quarters here. Now, again, the first half growth is really impressive. The second half growth in attendance may be less so. Help me think about why that would be the case and how I should think about this going forward?

Marshall Barber - Chief Financial Officer

But, Jim, it's hard to look at one quarter on its own as it relates to attendance because there are visitation shifts from quarter-to-quarter, even beyond things like Easter shifts. Our attendance is up 7% on a year-to-date basis. Our Active Pass Base is up 11%. So we know that the season pass holders and the members will visit our parks. And so our strategy is to grow revenue year-over-year and as you know, season passes and memberships are big component of that overall strategy.

So, we also want our guests to buy passes early. And so we've had a lot of nice marketing programs and particularly talking about the capital earlier in the year. And so we've been successful in making that happen and I think you saw that as you look at the pass base growth not only at the end of 2015, but at the end of the first quarter that showed that we were successful on that.

Now we may have seen some of these pass holders visiting because they have the pass earlier, visiting earlier in the year than we did last year. But, again, we know that throughout the year that they're going to visit three or four times and will generate a really nice stable revenue stream going forward.

James Hardiman - Wedbush Securities, Inc.

Very helpful. Thanks, guys.

Operator

Your next question comes from Joe Edelstein with Stephens, Inc.

Joe Edelstein - Stephens Inc.

Hi. Good morning, everyone.

Marshall Barber - Chief Financial Officer

Good morning.

Joe Edelstein - Stephens Inc.

Just to kind of follow-up here a little bit on the attendance growth, I was hoping you could just help us better understand how the growth in that deferred revenue line is really going to tie into your attendance gains? We saw some big ramp in deferred revs in the first quarter. We frankly thought we'd see a little more attendance coming in off of those memberships, the season pass sales and as you just mentioned the deferred revs up 7%, Active Passes up 11%. Why were we wrong to have assumed and translated that into a double-digit increase in visits in the quarter or perhaps you are suggesting that we could still see some of those visits coming more so in the second half of this year?

Marshall Barber - Chief Financial Officer

Yeah, Joe, I think again looking at what I just mentioned in terms of you see visitation shifts amongst the quarter. So that's why our focus is to look more on a year-to-date basis up 7% and we probably – because of the fact that we may have some people that had bought their season passes earlier, and that's part of our overall strategy, is we may have seen some of those people shift in terms of having more of the season pass visits in the first quarter. But again we know that they are going to come three to four times over the year. So we know that we still have some good attendance from those season pass holders in the balance of the year.

Joe Edelstein - Stephens Inc.

Okay. And then also to the international side, how much are those international deals contributing to the gains in that deferred revenue line, and maybe as a mix, just of that total $175 million figure that you called out?

Marshall Barber - Chief Financial Officer

It is very, very minimal. We are generally tracking the cash and recording revenue as we receive cash generally so...

Joe Edelstein - Stephens Inc.

More so for those pass sales you're saying?

Marshall Barber - Chief Financial Officer

So you're asking about international as a piece of it? Yeah, the overwhelming majority is season pass sales and All-Season Dining and the revenue will be recognized over the course of the season or at least a large, large percentage of it will be recognized in 2016.

Joe Edelstein - Stephens Inc.

Okay.

Marshall Barber - Chief Financial Officer

That answer your question?

Joe Edelstein - Stephens Inc.

Yeah. That is helpful and just to stay on the international piece then, how many different international theme park development projects are going on globally today and do you feel like the landscape could get more competitive here and, I don't think you have, but would you even be willing to provide any rough guidelines around the number of licensing deals that you're trying to target annually as we look forward?

John M. Duffey - President, Chief Executive Officer & Director

Well, I'm not going to give you a precise number in terms of the number of deals that – further deals that we're out there having discussions on. What I can tell you is that there are multiple additional deals. We're very pleased with what we've not only seen to-date in terms of what we've signed up, but the number of deals that we have in the pipeline. And all of those deals are in very good markets, with potentially very good partners. So, we're excited about that.

Joe Edelstein - Stephens Inc.

And just competitively – internationally, do you feel like that's starting to ramp up?

John M. Duffey - President, Chief Executive Officer & Director

Yes, I think competitively, as I mentioned before, some of these markets are so big like a China that there is ample room for many players to come in. However, I think that as you look at it, one of the things that makes Six Flags so attractive is not only the expertise that we have in being able to design, build and ultimately assist in the running of the parks, but it's our brand. And people love of our brand. Our brand is actually well recognized outside the United States. So I think that gives us a competitive advantage over some other players that may not have that typical type of brand, number one.

And we're a regional theme park player. So we don't necessarily compete against here in the United States nor outside of the United States with the destination players because we have a different offering. And what we have found is as we look and in our discussions with the partners and what kind of parks we're looking at, that not only is there great demographics in terms of population and growing disposable income, but it's a population that is anxious for thrills and that's what we offer. And so, it's all about – we'll have many rides in these parks. It's all about the thrills and record-breaking roller coasters. So it's a little bit different offering some of these other destination players. So, we believe that we have a very good competitive advantage in a lot of these markets.

Marshall Barber - Chief Financial Officer

And in China specifically our partner there is aggressive and he really wants to get into these markets. So, we're moving quicker than others in China at the moment. So we're very pleased with that particular partner.

Joe Edelstein - Stephens Inc.

Yeah. John, Marshall, I appreciate the extra detail there. And if I could just ask one last question related to the new China park deal, in the past you said kind of a $5 million to $10 million range related to kind of the initial agreements. I mean, is there any qualitative direction here at the high end or low end of that range or maybe it looks different in this case?

Marshall Barber - Chief Financial Officer

Well, it's a theme park and a water park so it'll be similar, at least prior to opening the parks to what we talked about in Vietnam in terms of the high end of the range.

Joe Edelstein - Stephens Inc.

Okay. That's very helpful. I appreciate the time for the call.

John M. Duffey - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. And your final question comes from Tim Conder. It's a follow-up question and is with Wells Fargo Securities.

Tim A. Conder - Wells Fargo Securities LLC

...ask the question ourselves and we hear from clients all the time, if you can we would appreciate any breakout of the components of the Active Pass Base between season and members either just as it stands now or any historical context? And then, just on the international part, you said in your preamble that there were some additional milestones to be hit on a few items. How should we think about that as we model out the balance of the year and in particular the cadence year-over-year of that incremental revenue flowing in? And before you've given some guidance about prior to park opening you expect this per park and after it's open, this range per park. But, I guess, the more difficult component is that prior to park opening which all the parks are currently in. So those milestones, how would you think about the cadence, especially in the back half of the year here? Thank you.

Marshall Barber - Chief Financial Officer

So I think for the full year you can use what we talked about, the $5 million to $10 million per park per year. And so you could – if you do the full year math, you can get to the back half by subtracting the first half.

And in terms of the Active Pass Base, we're just – for competitive reasons we're not going to break out at that mix. We will say that traditional season pass holders is still the majority and they're both growing although because the membership is a smaller base that percentage growth is higher.

John M. Duffey - President, Chief Executive Officer & Director

So, Tim, on the international just to follow-up on what Marshall said, the four deals that we had announced prior to this recent China announcement, I think we're in a position where we're generating that $5 million to $10 million of EBITDA every each year.

On the recently announced China deal in Bishan, we have and LOI signed. We're working on definitive agreement. So there really will not be any revenue that will be recognized until we get to the point where we have definitive agreements but we would obviously – you will be even know when that happens.

Tim A. Conder - Wells Fargo Securities LLC

Okay. Okay. Thank you.

Operator

Thank you. And that was your final question.

John M. Duffey - President, Chief Executive Officer & Director

Great. Well, thank you for your time today and your ongoing support of me and our team at Six Flags. We are proud of our accomplishments and excited about our future. Our 2016 season is off to a great start and we look forward to delivering another record year as we continue to build long-term shareholder value.

So, take care, and I hope you can come visit one of our parks soon. Goodbye.

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