Six Flags Entertainment Corporation (NYSE:SIX)
Barclays Capital Global Technology, Media and Telecommunications Conference Call
May 23, 2012 11:15 ET
Jim Reid-Anderson – Chief Executive Officer
Al Weber – President
Tanner Howe – Treasurer and Vice President, Strategic Development
Good morning. I’d like to thank Six Flags for joining us this morning and everybody else that’s here. Let me introduce Jim Reid-Anderson, CEO of Six Flags; Al Weber, President; and Tanner Howe, who is handing out the presentations now. Again, thank you for joining and let me with that hand it over to Jim.
Thanks very much, (indiscernible). It’s really a pleasure to be here. I’m sorry we are starting a touch late. The last presentation ran over a little bit. But we are going to make up time with our presentation. I’m very happy to be here to tell you a little bit about our company, Six Flags, and I think really overall, this is a superb company in a tremendous industry, very stable industry and not only have – we really turned the company around over the last couple of years. But I feel like we are literally going to keep this going in a very, very positive way over the next several years. So first, for those of you that are online – there are online, there is a chart at the beginning that just summarizes what the company is all about.
We have got 19 parks in North America. Most of them are in the United States. We had one in Canada and one in Mexico. We have 24 million people that come through our park every single year. The company is solid from a financial perspective, very strong about $1 billion in revenue. Our market cap has grown very nicely. We generate about $3.80 pro forma in terms of cash earnings per share and we have about a 5% dividend yield. If you look at the company’s history, and this is laid out on page five. You will note that in 2010, the company went through a bankruptcy process. But since then, we really have not looked back.
We have gone from strength-to-strength every single quarter and in fact, we have had eight quarters of very strong growth culminating in the last quarter, the first quarter of 2012. We have a very strong management team and (indiscernible) mentioned, Al who has joined me, he is sitting up here on the podium. Al is the Chief Operating Officer of the company and when you look at the lineup of management, you have got this incredible mix of folks from within the industry, both within Six Flags and from other companies within the industry and Al, he has got 45 years of experience.
We have got several people with 30 years and 40 years and then we have got others such as myself, who have been with the company for a couple of years that bring experience from other industries and I think that this matches very well and really has led to this great success that we have had. We have very simple strategy that is supported by five key imperatives. The strategy is literally to deliver excellence and to be the leading regional theme park company. And it is very important that I outline this because historically, the company has not been clear as to what its strategy is and has tried to become a broad based entertainment company. We are the leading regional theme park company and that is where our focus is. If you look at the financials, there is a chart that shows strong profit and cash EPS. And you can see where we have come from.
If you literally just state the EBITDA as one example two years ago, we were generating about $197 million of EBITDA in – as we ended 2011, we generated $350 million of EBITDA. And we set a new aspirational goal to the company that by 2015, we are targeting about $500 million of EBITDA, which would put us well in excess of $5 a share of cash EPS and given the fact that the company went through a bankruptcy, there is a step-up of assets. And so especially in the early years, it is really important to look at cash EPS versus traditional EPS. So why this industry, why should you think about not just Six Flags with the industry, and there are several factors that would lead me to say this is a great company and actually a great industry to invest in.
First and foremost, I think that over time, this company and the industry have really been overlooked. And I think that when you look at the situation here, I came out of healthcare, it was a very high recurring revenue base and in many cases, companies that were misunderstood very similar to Six Flags. This is high recurring revenue undervalued. When you look at the number of guests who visit our park, 94% of guests say they are going to comeback within the next year, very loyal. Secondly, there is a very high barrier to entry. If someone tries to create another Six Flags, it would cost in the region of $5 billion to $6 billion to do so.
If they could approve, get approval from local government and if they had that money and were able to actually execute and get the land. So, we are actually in the top 10 DMA’s. We have got literally within a 100 miles of our parks about 175 million people and currently we serve 24 million. So, I think that there is an opportunity there.
If you look at the business itself, what a fantastic business, I mentioned that we have 19 parks in total, they are all over North America and they are in prime locations. Furthermore, we are in a position where we have tremendous lineup of products and that the chart that is showing here really outlined, it’s on page 14 for those of you online – really outlines that we have great coasters. And in 2011, one of our coasters was voted the best new roller coaster in the world. And we have several that are world record holding coasters and you see some of them on the page
If you go to page 15, you will see that we are not just about coasters. We’re actually – best way to describe the company is that we provide thrills and entertainment for all ages. So, we have very high margin water parks. We have lots of fun for families. We actually have the largest drive-through safari outside of Africa. We have a lot of shows that we put on. So, it’s not just about roller coaster. It’s about creating memories for your family and for your friends. That’s what this company is about. The foundation for everything we do is our guests and really driving guest satisfaction.
The starting point for that is safety. We do thousands of surveys of all our guests as they leave the park. And you will see we get extremely high marks whether it be safety, which is the foundation, cleanliness. I will put any of our parks up against any Disney or Universal park in terms of cleanliness and our guests show that they believe we have extremely clean well kept parks, and ultimately if you just look at overall guest satisfaction, we hit an all-time record in 2011, and our objective is to trying to build on that going forward, all about taking care of our guests. So great industry, great line-up of products, great company, misunderstood because of the history of perhaps not delivering on commitment, why is it different now?
I think it’s different because the company has gone through a transition and is in a great place now. We have new leadership. Two years now, eight quarters in a row we delivered, and we set ourselves up for more growth in the future. The foundation for that is really all about innovation, and innovation is a term that’s thrown out there a lot, and you think well how you can innovate in a theme park. You can do it in many ways, many ways. You can innovate in the way that you provide entertainment to your guests and you can innovate in the way you communicate with your guests.
There are various ways of doing it. The fundamental change we have made is that we have decided we are going to have news in every park every year and this is 180 degree different to the way the company used to handle it. The company with 19 parks historically would have one or two parks whether it be a huge investment. Great example would be Kingda Ka, here at Great Adventure which costs $55 million, $60 million to put in, meant that nowhere else were we able to spend any money.
Instead what we are doing now, we have done literally over the last 18 months, every single park gets something every year. It might be a small ride. It might be a mid-sized ride. It could be something very big. But we manage that all within a set budget. So in 2011, we had our best year in a decade in terms of new capital, new rides, new shows and 2012, we think we are headed for a better year. We have got X Flight, which is literally one of a handful of like rides in the world.
We are putting that in to our Gurnee Park, Six Flags Great America near Chicago, and the reception it’s opened up in the last couple of weeks. Reception has been tremendous with its ride. You are literally on a wing coaster. You’ve got nothing above you, nothing below you, fantastic feeling trust me. Lex Luthor: Drop of Doom, our park Magic Mountain it is literally the thrill capital of the world. There is no park anywhere else that has as many tremendous roller coasters as this park.
And we are putting in the highest, fastest drop ride in the world here, opening up in the next couple of weeks. And you ask yourself now, some of you are saying, how you are doing this. Isn’t this going to cost you $50 million, $60 million? It doesn’t, we are doing it within a 9% of revenue budget and the reason we are able to do this, is again we are innovating, we are attaching this to an existing ride and building on infrastructure we already have rather than having to create something completely new. But in that process, we make this is an even more exciting park to go to. In New England, we have got Goliath that just opened literally a week ago. It is a huge literally the biggest boomerang coaster. If you go to Great Adventure, we learn from looking back at years of data that we have that are guests understood that at Great Adventure, we have tremendous very exciting roller coasters, but they fault that some of the family coasters were missing. So, we are putting into five family rides, and this is having a tremendous effect as well.
We see our park, Six Flags America has not had any new capital in 11 years and there are several of our parks like this. We have got Apocalypse going in. And this again is another very exciting coaster that is getting tremendous reception. The point I am trying to make to you is that wherever you are, you can create excitement, and that is what we are doing, same at Discovery Kingdom. It’s all about going to our guests understanding what they want and then providing that innovation for them.
When you look at the chart that is up here at page number 27, you will see this breakdown of that 9% of revenue. We are able to do this because historically the company had never had anything beyond a plan for one-year. We have laid out a five-year plan, developed it with our park, and each one of them has put forward what they are going to spend their capital on every year. We have set ROI targets for those plans and now we are executing.
I talked about innovation coming in many forms. Refocused marketing is one of those forms. I think many of you will remember the Mr. Six campaign that involved a dancing bald guy who is now officially one of our characters along with Batman, Superman, and various other characters, but he is not the centerpiece of our advertising strategy anymore. The centerpiece is all of our parks, 19 of them. The people who come to our park primarily come as I said earlier within 100 or 150 miles, 90% of them. And so what we want to do is to target those people directly with our campaign and those campaigns need to tell the story of that local park, whether it’s Great Adventure, where we have a safari, we have a water park, and we have the theme park itself. Telling those families that we have got those rides or at Gurnee, where we have got this new one of a kind coaster that’s come in.
We are telling the story and we are targeting through email, through billboards, through cinema, through internet, and through TV, getting to our consumers, and telling them why they need to comeback to Six Flags. One of the other areas that I think is a tremendous upside for us over the long-term and we have already generated some of this, is pricing.
If you go to page 29, on the left hand side, you will see that we have in this environment – tough economic environment, taken our per caps up from about $20 just over $20.74 is the actually number. We’ve taken them up $20 to $30 in less than two years. So, we have taken pricing. We continue to take pricing. We do it in a very cautious way so that we don’t upset our guests or make them feel like they are being gouged that’s not our intent. But Six Flags provides tremendous value for money and we need to be able to be paid appropriately for that. On the other side of the chart, you will note that we are actually taking discounts down, and this is an example you would all have seen, you would all have seen the Coke can. It was a point in time where the Coke can might have offered a buy one get one free forever. We then actually had it for a whole year and now what we are doing is we are sensing it carefully so that the discounts apply at the times when we want people to visit the parks not at peak time.
And by doing that and also reducing the discounts, we are in essence taking pricing. That strategy is working. Obviously in a challenging environment, you have got to keep a very close eye on that. But I feel that we can continue to execute on this basis for the next few years, and let me give you an example of why this is important for you. If you can get $1 on your per cap, this number on the left hand side. If you can pick up $1 and you have 24 million or 25 million people visiting your park that is $24 million or $25 million to the bottom-line.
It’s literally a pure calculation so, if you can generate the increased price that’s the result. We have in-park sales as well. You can imagine many of you have been to Six Flags. You know that we sell everything that we can sell and we are continuing to build on that and it comes in many different forms. It could be retail. It could be food. It could be Flash Pass. And Flash Pass is where we have a system that in essence has virtual feeling and we sell that at different price points.
We have VIPs that allow people to pay a price point of, let’s say, $299 a person, and go to the front of the line and all of these premium options are growing and growing very nicely and obviously they generate very good margins for us. If you look at the brand itself, I think a lot of people are amazed when we show these numbers. You can see the companies that are active supporters of Six Flags. Coca-Cola, Discover, Kraft, M&M Mars, some of the top companies in the world and you ask yourself, why is it that this has been a very good area, not only for Six Flags, but for those companies.
And I think the next chart, which is page 32 for those of you online, really says it all, you look at Six Flags and you put us up against some of the big sporting events. And we have more guests coming through our park than many of those – those names that you recognize so, big companies are saying, wait a minute. We know that there are a lot of people in Six Flag parks. This is exactly the demographic we are looking to try to target. So, we want to line-up with Six Flags and that’s something we’ve been building on. In addition, we get 30 calls to 44 calls per week from people mostly outside of the U.S. who are saying, I would like to open up a Six Flags park in whatever country.
Many of them are not real. But there are a fair number that are real. These are people who studied in the U.S., gone back to their countries and think there is a business opportunity. So over time, we will carefully access those options and we think there is an opportunity to be able to license the brand and build revenue and profitability that way.
The final piece that I want to reference is just excellence around financials and I hope you are seeing we are very disciplined as a team and that’s part of the success that we have seen and I think that will be success for the future. So a few financial charts, first from a revenue perspective, we have seen a very nice growth in per cap and a consistent growth in revenue. Cost management has been strength for us. We have cut out excess days that the parks were open that didn’t make sense. We have taken our cost base down and thereby significantly improved our breakeven point and our EBITDA reflects that.
I think the chart on page 37 really says it all, very nice quarter-on-quarter growth ever since we emerged from bankruptcy. This has absolutely not been the case for the company historically, but I think I want to show you this that you can see not only is the recurring revenue, but there is strong and consistent ongoing cash earnings at this company.
Little bit more technical as you get to this next page, page 38. If you have any experience of companies that have gone through bankruptcy, you will know that there is a process that those companies go through and the process forces company to step up their assets. Therefore, D&A is far higher than CapEx. So, you cannot look at traditional EPS as a measure and that’s why some of the automated analyses of our company are just inaccurate.
You need to look at cash EPS. D&A is almost double CapEx. As time goes by, that D&A will fall and it will fall into line with CapEx. It will take a few years. But that’s what’s going to happen. Meanwhile, we are also sitting on over $1 billion of net operating losses and those give us a tremendous break in terms of cash taxes. So when you look at the bottom of this chart and you look at cash EPS, you will see not only did we generate $3.50 last year in cash EPS.
If you believe in our aspirational goal of $500 million of EBITDA, then we will be at around $5.50 per share cash EPS at this company and we believe we can generate that consistently. We have a very strong capital structure. If you look at our numbers, the way they were before the restructuring and where they are now – there is no comparison, we are up at about 12 times debt to EBITDA. We are down at just over two now.
Our cash interest has gone from closed to $200 million down to $40 million in that range. It’s a different position completely. And that allows us to be in the position where we can really study capital allocation. It doesn’t mean that we won’t stop looking at our capital structure per se are the financing side, we will, but right now, we generate on a pro forma basis about $3.80 a share and we have through the board agreed to a $0.60 per quarter dividend. And any excess over in terms of cash that we have we will distribute to our shareholders either through dividends or through share buyback. And this chart I think outlines the split currently between dividends and share buyback.
So, page 41, just tries to outline in a scenario where nothing changes. We don’t change our capital structure. We keep everything simple. We know that’s not realistic. We are probably going to refinance or there will be actions that we take. But if you weren’t to do that, you look at the company and we achieve that $500 million target. You are in a position where you are generating cash – just cash that is so strong that it puts us at the point we are not only are we paying these dividends, we are doing stock buybacks that our net debt to EBITDA would be at about 1.5 ratio, which is extremely low. It’s already low, but would be even lower. This is a very strong company, generating a tremendous amount of cash with a brand that is the best in the regional theme park industry.
And I think with a strong management team focused on taking care of our guests and by the way, we have 2,000 full-time employees. All 2,000 of whom now have stock or option in the company and are 100% aligned with shareholders, that’s why I feel that this is a, not only a great company, but a great company to invest in for the long-term.
So, with that, I’m going to close the presentation and I believe actually that we have got Q&A next door. But we have two minutes – two and half minutes, I told you I’d catch up time wise. We have two and half minutes for any questions in the room and those of you online can hear these questions. I think we will go offline when we go next door.
Can you talk a little bit about the NOL, is it fully utilizable or when would you expect it to run out, and you will become a full tax payer and would that have any implication obviously for the dividend?
Right, I think if I give you a timeline in terms of utilization on the NOL, in essence, I’m giving guidance on what I think our earnings would be. And I’m – we only give one number and that’s the $500 million as our aspirational target. What I would say is that it’s a lot of money $1.1 billion of NOL. And so, we have several years of runway in which to be able to use that. And obviously, we’re going to be working very hard to generate as much profit as we can to use that as quickly as we can, but its good use. It’s there for a number of years. Any other questions?
Okay, well in closing, I would just say that for those of you in the room, we have a break out next door if you would like to come. Some of you saw our Q1 numbers. As I said, we had a very nice growth, feeling very positive about the season. We had an 18% increase in our deferred revenue, which suggests that season pass sales are very strong. And so we are looking forward to the summer very much. Thank you all for joining us today.
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