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Jim Reid-Anderson - Chairman, President and CEO

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

Analysts

Six Flags Entertainment Corp. (SIX) Six Flags Entertainment Corporation at Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference June 5, 2012 3:30 PM ET

Next up is, Six Flags Entertainment. Nancy Krejsa is in charge of Investor Relations, Jim Reid-Anderson is the Chairman, President and CEO of Six Flags. I am going to let Jim go through some of the basics of the story and then we will go to Q&A.

Jim Reid-Anderson

Steve suggested that what we should do is do a five-minute summary of the company and then spend most of our time on Q&A, and so that's what we are going to do. For those of you that are online, there is no formal presentation that I am going to run through right now. So, Six Flags is an interesting story.

The company has been around for 60 years, but really I think now is hitting its stride and I guess I would summarize by saying that Six Flags is really back to what it does best which is running regional theme parks.

I think if you try to put the company's context, we are about $1 billion in revenue, we have 19 parks across North America and we generate about $350 million in EBITDA that was last year's number and we also generate on a pro forma basis about $3.80 per share in cash EPS, so one of the questions you get asked is why Six Flags? Why invest in this company?

For those of you that have tracked the company it's had somewhat of a turbulent last decade and in fact two years ago went through and emerged from a bankruptcy, but I would tell you that there are several reasons why you should invest in Six Flags.

First of all, from an industry perspective this is a tremendous industry. It is stable in turbulent economic times. The company and the industry itself has very high recurring revenue and I think ultimately there are tremendous barriers to entry for someone thinking about getting in and competing directly would have a very difficult time being able to break into this market, so the industry itself is a very solid industry.

The company is also extremely strong. I think from a regional theme park perspective, there is no better brand. I think when you look at the line up of product, of animals, of shows that we have across our 19 parks, it really is unparalleled, and so the real opportunity is to take what we have and make it even stronger and deliver even stronger financial performance.

As you look forward, what are the things that are really going to drive this company? I know it would be very easy for me to give you a list of a 100 items, and we do have long list of opportunities, but I would really try to bring them down into three major areas that I think will drive the long-term success of our company Six Flags.

I think first and foremost there has been a lack of discipline on the pricing front at the company for at least a decade and this discipline is driven by competitors, it was driven internally, so focusing on pricing by market and being targeted in pricing increases and also being very targeted around discounts reducing discounts and made in periods when guests are going to come anyway is part of the key and that's been number one item on our list. Pricing and discount. In other words, yield management. We started that process and we have seen great success.

The second big element will be attendance growth, and I think this will come really through a series of actions that we have taken. First and foremost, we have a laser-like focus on season pass growth and season pass growth we believe will drive our attendance, our revenue and our profitability for multiple years.

I would couple with that a new approach to innovation around arrived shows that we have to offer and this is radically different from the company's history. We have in place for the last 18 months a strategy that has used in every park, every single one of our 19 parks has to have something new for our guest every year and we combine that with our season pass launch last year, so that we are telling guests buy your season pass, we have got exciting new news for you and by the way we had a new marketing campaign which actually on the screen here Go Big, Go Six Flags, which focuses on each local park what's new at the park level.

Most of our guests come within 100 or 150 miles of their local park, so they don't think on a national basis. They think on a local basis, so that's second big item, attendance growth driven primarily by our season pass strategy.

The third item that I would talk to is in-park sales. We have been very successful at growing our in-park sales and we think we can continue to do that. There are many aspects to this. Pricing is one element, but we are being cautious around pricing, but there are initiatives or new programs that we are bringing in that will drive in-park sales. A good example would be our Flash Pass program, which is an electronic queuing system and we have seen tremendous demand for this program and its growing and we are adding new product as we go.

The combination of all those three items, we think, will drive not only attendance, revenue, profitability on a multiple-year basis.

When you look at how we have done with the strategy that we put into place almost two years ago, we had seen tremendous success. Our EBITDA in 2009 was $197 million. We finished last year 2011, at $350 million. We have seen very strong improvements in profitability across all areas.

Our margins are now industry leading, but I would tell you we don't think we are done yet. We have an opportunity for margin expansion, revenue and profit expansion in foreseeable future, so I have invested in Six Flags and I would strongly invest going forward.

I would advise you to look firstly at the company, because we have tremendous product, a great industry, and strong success combined with 2,000 full-time employees who are all shareholders or investors in the company and are very closely aligned with all of you.

So with that, Steve, five minutes, I wanted to open up for you to ask any questions that you might.

Question-and-Answer Session

Unidentified Analyst

We have some questions from the audience.

Unidentified Analyst

Maybe you could start on the season pass penetration. It's gone from 20% range to I think it's roughly now 40%. How much further can that go? Can you talk about the profit margin improvement between in making that shift?

Jim Reid-Anderson

Sure. I think it's a very good question. Actually, pretty much every investor session that we have, it comes up. I think I would start by saying that there are a couple of elements to your question.

First is, is there a capacity issue? That will leave you to say that you shouldn't be pushing penetration of season passes and I would say that there is no capacity issue to put it into perspective for you, Six Flags on a total basis annualized is operating about 40% capacity, so there is tremendous room for increase in attendance. We can handle that and the variable contribution is extremely high on every extra person that comes through the door.

The second part of your question is, does it make sense financially. It does, partly for the reason that I just gave you, which is that we have a fairly low breakeven point now. Our high variable contribution and combined with the fact that on average we generate about $40 per cap every person today that comes through our door.

When you look at season pass guest, you generate in the region of $60 just upfront for the ticket sale and when they come every single time they spend money, so you can end up generating in the region of let's say $40 just as an example incremental in park, so if every guest instead of $40 you are getting $100 most of that is coming upfront.

It is very powerful driver of revenue, and EBITDA, and cash flow, but as a minor offset can have somewhat of a dampening effect on per cap.

Unidentified Analyst

When you say the per caps, you mean the in terms of tickets coming through but not necessarily the spend?

Jim Reid-Anderson

…more money.

Unidentified Analyst

They spend more money than the average guest, they spend more money in total in the year, you generate more revenue and more profit at a very low cost, but for every average visits you might see a slightly lower number. There might be a slight dampening effect.

Unidentified Analyst

Okay. In total…

Nancy Krejsa

They are spending more over the season, because they come back multiple times. If you look at the value of a guest who comes back two, three, four, five times, it's a lot more cash profit for the company versus if you have someone who just comes in and visits the park one time during the season.

Jim Reid-Anderson

It's interesting versus other industries we have looked at, where the customer comes in at a low price or they are not (Inaudible) much to get in than they feel like they have got in for free, so they spend even more in the park and we see that effect and it's very powerful effect.

Unidentified Analyst

Hi. I was just wondering if you could review the impact on operating days of sort of all the weather last year in the comparison, so what percentage of operating days were impacted by those events?

Jim Reid-Anderson

Mark is asking because we had several negative weather effects last year including Hurricane Irene, which in the third quarter went through several of our Northeast parks, so I would say rather than give to a number, Mark, and this is the actual percentage what I would say is that without hesitation most of the folks or all the folks the company many of them have been there for 40 years, say that last year was the worst year in memory for weather in terms of negative weather, so we are very hopeful that 2012 will be a great year.

I have to tell you that I personally I am not concerned, because even with what's been described as a tough year in 2011, we increased our profitability by 20% our EBITDA, we took our cash generated up to $200 million in a year when most people thought it would be a rough year, so we generated $350 million of EBITDA, $200 million of cash.

As I look forward, weather tends to even out over a year and hopefully it will be even better, but I don't look at it and say this is a negative. I see it simply as a positive on an ongoing basis.

Unidentified Analyst

When you talk about recurring revenue, can you describe what exactly is the recurring about it? Then secondly, you used cash EPS, is that because you have NOLs or something out of bankruptcy? Thanks.

Jim Reid-Anderson

Yes. There are two questions. I think, when we survey a lot of our guests tens of thousands of our guests, and 96% of them say that they are going to come back to the park within four or five months. The recurring revenue element comes because there is large groups that come back naturally and keep spending but on top of that by pursuing the season pass strategy and Steve spoke earlier about the fact that we have increased the season pass percentage fairly dramatically. People feel compelled to come back once they've spent the money on season pass. That's the recurring revenue element.

Nancy Krejsa

There is a second question that you had was about the cash earnings per share, and we do recommend that investors for their cash earnings versus GAAP earnings for two reasons. The company came out of the Chapter 11 bankruptcy two years ago, and so we as a part of that exit, we implement fresh start accounting which requires you to step up your assets to fair market value and create intangible assets.

Our D&A last year was about $80 million higher than our CapEx and that's going to start to taper off over the next couple of years starting in 2012, the other reason is we do have a $1.1 billion NOL carry forward that we can utilize for the foreseeable future, and we will only pay about $10 million to $15 million of cash taxes for multiple years, and because of that we recommend that investors should really look at cash earnings per share versus GAAP earnings per share.

Unidentified Analyst

That's piece of 1.1, is that limited under Section 3A2 or is it can you utilize it fully?

Nancy Krejsa

There are some limitations under that, but there are other provisions that will allow us to fully utilize that.

Jim Reid-Anderson

We have no real restrictions on what we could use, and I think it's important to talk about that this, because most people don't really look at bankrupt companies and I think unfortunately when you go through a bankruptcy, there is this fresh start accounting that Nancy referred to, but we have the benefit of coming out as a public company with the fresh start account, with NOL and we will only see improvements in our pure EPS and we believe improvements in our cash EPS over a period of time given that.

Unidentified Analyst

We have question in the back and then we'll go to (Inaudible).

Unidentified Analyst

You guys have quite high levels of stock comp and I know there are some big stock awards it's coming over the next year, but then on the other side, you are buying shares back. Can you give us a sense of what will happen to the share count maybe over the next 12 months?

Jim Reid-Anderson

I think that, the company itself put into place a program when it exited bankruptcy to be able to ensure long-term success and to tie management very closely with shareholders, so there's a goal to put into place a program called Project 350 to achieve $350 million of EBITDA, and that goal was achieved in 2011, but the full vesting of those shares happens at the end of 2012, so that program there it's been very powerful for shareholders.

Midway through last year, we put another program into place called Project 500 to try and achieve a goal of $500 million in modified EBITDA by 2015, and that's the secondary program that's in place.

I am not going to predict to you what effect there is of those programs, because they depend on whether we achieve the programs and also what year we achieve them, but under any circumstance if we get to $500 million of EBITDA and we do it quickly, let's say, it's again very powerful for our shareholders and should continue to drive share price which was troubled in less than two years.

Unidentified Analyst

Got it, but now we today have the guest and whether the buybacks would offset the awards or something along those lines?

Jim Reid-Anderson

I am not going to predict what the buyback will do, but what I will say to you is that in terms of the capital structure, we have articulated clearly that we have more than enough cash to be able to fund all of the operations of the company and that any excess cash that we have we will use to for dividends and we have said $0.60 per quarter dividend which is just over 5% dividend yield and anything else that's left that will allow to distribute under our financing arrangements we will use to buy back shares.

The board considered both, the dividend and the buyback every quarter. Now it would take extreme circumstances for us to reverse the dividend, so we would look closely at least to maintain or increase that over a period of time, but under any circumstance everything that success would be use to buy back shares.

Unidentified Analyst

If you can just answer my question, but stock was up a fair bit today on speculation that you might raise the dividend and so the question really was what is your capacity in that to do so and tell us how do you think about that? Sounds like you are more biased toward share repurchasing.

Jim Reid-Anderson

Well, who knows what drive share prices on any one day? I try to predict them, but they never seem to work out exactly as I thought they would, but there are several factors that have been very positive in the last few months.

I think just in the last day one of the analysts is covering us has reaffirmed his view on the company, but also has articulated that in terms of the cash that we generate, if you look at the numbers, it would suggest that the company is an extremely strong position to not only generate cash, but to use that cash for dividends and buyback and that the potential is very strong.

I think because of that, more and more people are starting to read, learn about the story and believe, and unfortunately when you have gone through a bankruptcy, it takes people a while to believe. I believe right from the start and continue to think that we have a lot of opportunities.

Unidentified Analyst

Okay. Jim maybe focus is on the operations. Since we are now in year two of your something new in every park, every year, can you share some learnings you've had from year one? Three (Inaudible) makes the model for year two?

Jim Reid-Anderson

I think it's a great question (Inaudible). What I would do, I'll reinforce again what I said in case people maybe haven't fully realized what we have done. The history of this company and really in each one of the last 15 years has been interesting and there have been very few purchases made of capital items across parks.

There is a basic maintenance spending and then a few handful of parks got very big items once in every five years or so, so most park didn't get any new innovative capital, so our approach was to say people like something new. I like new things. I love innovation, I love toys, I love being able to go somewhere and see something different, so the view was give every single park something, and it could be something big, medium, small, you know the story. I know.

We introduced this last year and our guests reacted very positively, but it was really a part year exercise, because I joined the company in 2010, and it takes a while to get the new capital in, so this year we really did first full year of the strategy and what I would say to you is quite honestly in terms of learning, there's nothing that I have learned that would leave you to say change the strategy. In fact it's reaffirming that it's very powerful. It's a driver of attendance. It's a driver of loyalty at the company and so every single park has a new product. I'll give you example.

Chicago which is one of our top four parks has not had any rollercoaster in eight years. Washington, and we have put one and opened, very positive. Washington has not had a new rollercoaster in 11 years and we have put one in this year and I can go through the list.

Magic Mountain is rollercoaster and thrill capital of the world. No other park has as many. We are putting in right now the largest, highest fastest top drives in the world, 400 feet going in will be opened in next few weeks.

San Francisco, same thing and new Superman Ride. In New England, we have got Goliath, the boomerang coaster 200 feet high. I could go through the list endlessly. Those sort of take, but it's not just you've got to have the biggest baddest rollercoasters. We are doing that, we are doing it within the 9% of revenue spend, but we are also targeting the demographic locally.

As an example, in New Jersey, New Jersey have fantastic rollercoasters, but guests were telling us they wanted family ride and kids ride, so putting this year five new family or kids-friendly coasters have gone into New Jersey Great Adventure.

In the case of Atlanta and Texas, they wanted new shows, so we got the show that was on iLuminate, which was on America's Got Talent came second, we've got add into those two parks, so what we are trying to do is target what demographic needs are, build that way, so the learning is very successful, highest year season pass strategy and then execute and they shall come and they are coming.

Unidentified Analyst

I'm glad you started to go down on path that I never wanted to hear from Six Flags, which was how many more rollercoasters and I thought you are going to go through all 19 that you are adding new rollercoasters which would not be the strategy which you have explained to us a couple of times, but doesn't the customer sort of get it like big rollercoaster. That's really exciting. I'll go this year, some new show by the America's Got Talent, the person came in second, not first.

Is that as exciting? I literally, I struggle, even for myself I'm sitting in front of the TV, I saw the Great Adventure ad and they weren't as exciting as last year when I think was it ask the Superman.

Nancy Krejsa

Green Lantern.

Jim Reid-Anderson

Green Lantern.

Unidentified Analyst

I don't know. That's why we are asking you about what you've learned can show a relatively low cost amenity or some kind of change can that create the same level of excitement?

Jim Reid-Anderson

Steve, I would say absolutely it can, and I would tell you in the case of Great Adventure, without giving numbers away, the fact absolutely support what I am describing here, that family rides can be just powerful if not more powerful than a pure rollercoaster.

In the case of the shows, the responses that we are getting from audiences are phenomenal to the iLuminate show.

Unidentified Analyst

Just again, how it's turned the [fees] on America's Got Talent.

Jim Reid-Anderson

Right. It's just free Harvard, I should say.

Unidentified Analyst

Okay.

Jim Reid-Anderson

But what I would tell you is, in every case they have coupled with other innovation, so in the example of Texas where we have got iLuminate, we're also taking rollercoaster and we are making go backwards, so in every case we are changing something and we are telling people about that, so what you might not be acquainted about the advertise is that you need to go visit the park sometime and I think the you will be excited.

Unidentified Analyst

Other questions perhaps?

Unidentified Analyst

One follow-up on the season pass holders, what percentage of your revenue do they represent?

Jim Reid-Anderson

What we do is, if you look at our annual breakdown of numbers, we actually show what our percentage of attendants is. It's about 35% the season pass roughly.

Unidentified Analyst

That's attendants, but then you said their spend is lower per capita, so where would it come out in terms of?

Jim Reid-Anderson

We are not breaking out the spend in total for confidential reasons, but in essence it's not so much, but they are lower. On individual basis, they spend a lot more. It's per visit, and it ends up being slightly lower on a per capita basis, so you are far better off selling every incremental season pass, so we get a revenue, you get a higher profitability in season.

Unidentified Analyst

How many visits does your average season pass holder make to the park?

Jim Reid-Anderson

It varies. It could be one, it could be 12. On average it's two, three and four.

Unidentified Analyst

Jim, maybe just a final question. Yesterday we had the regional casino panel here, and they also saw (Inaudible) as you do and they talked about some choppiness in 2Q current trends versus Q1. Maybe can you speak generally what you are hearing from your customers without giving away any forward numbers?

Jim Reid-Anderson

I should say that we don't and you know that we don't give guidance of any sort, but what I would say to you is that certainly from a Six Flags' perspective, I did see some of the notes. They have seemed to put out notes instantly as soon as the presentation.

Unidentified Analyst

Yes. That was all me.

Jim Reid-Anderson

I am impressed by that.

Unidentified Analyst

…do with these people.

Jim Reid-Anderson

But, I would say that we have not seen choppiness. We are very comfortable with the approach that we have taken, and I would say that we are trying very hard to ensure that we can control what happens in terms of our performance so with regard to pricing, as I mentioned before that our value perception has just actually gone up even while we are taking pricing up, we are managing the yield very effectively. The season pass sales through the first quarter were up as you know 18%, so I think they are seeing a different trend to the trend that we have seen.

Unidentified Analyst

Just going quickly (Inaudible).

Unidentified Analyst

What's the average visitor for the non-season pass attendee, the visits per year, sorry?

Jim Reid-Anderson

For how many times do they visit?

Unidentified Analyst

For the non-season pass person the average visits per year is what?

Jim Reid-Anderson

It can be all over the place. Some can visit once and pay full price. Some can visit five times. It just depends. Most people who will visit more than once will automatically convert to a season pass, because it just make sense and we try to up-sell that, but there is no one average for people are non-season pass.

Unidentified Analyst

Effective I know on the way out don't you try to do that?

Jim Reid-Anderson

We do. Yes.

Unidentified Analyst

Walking out?

Jim Reid-Anderson

We have surveys, but we have actually changed that now. We use to do live surveys as people walking out and we do perhaps 15,000 in a year, very good but now we are doing everything online and we are doing about 200,000 a year where we can get even more data. We have a tremendous amount of data. We don't disclose and that's one of the items we don't.

Unidentified Analyst

You up-sell people.

Jim Reid-Anderson

On the way out, I said we do like to. You took a one day pass on the way out if you like to convert into to, we do it three times a year.

Jim Reid-Anderson

We kind of ask people come into the park. We try to up-sell them. There are birds in the parks to up-sell and then as you leave. You are absolutely correct, but maybe now add as an option online to do that too.

Unidentified Analyst

All right. Thanks very much. next up is [Avis].

Jim Reid-Anderson

Thank you.

Nancy Krejsa

Thanks.

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