Cedar Fair (FUN) Q2 2024 Earnings Call Transcript

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Cedar Fair (FUN 3.15%)
Q2 2024 Earnings Call
Aug 08, 2024, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. At this time, I would like to welcome everyone to today’s Six Flags Entertainment Corporation second-quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator instructions] Thank you. I would now like to turn the call over to Six Flags management. Management, please go ahead.

Michael Russell — Corporate Director, Investor Relations

Thanks, Greg, and good morning, everyone. My name is Michael Russell, corporate director of investor relations for Six Flags. Welcome to today’s earnings call to review our 2024 second-quarter pre-merger financial results for our legacy companies, the former Cedar Fair, L.P. and the former Six Flags Entertainment Corporation.

Earlier this morning, we distributed via wire service our earnings press release, a copy of which is also available under the news tab of our new investor relations website at investors.sixflags.com. Specific to Cedar Fair, our prior-year reported quarter ended June 25th, 2023 to provide investors with more informative comparisons due to the fiscal calendar shift, our release this morning offers an alternate set of results comparing Cedar Fair’s current-year quarter ended June 30th, 2024 with results for the three months ended July 2nd, 2023. Before we begin, I need to remind you that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties that could cause actual results to differ from those described in such statements.

For a more detailed discussion of these risks, you may refer to the company’s filings with the SEC. In compliance with the SEC’s Regulation FD, this webcast is being made available to the media and the general public as well as analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all content on this call will be considered fully disclosed. On the call with me this morning are Six Flag’s chief executive officer, Richard Zimmerman; and chief financial officer, Brian Witherow.

With that, I’ll now turn the call over to Brian.

Brian C. Witherow — Executive Vice President, Chief Financial Officer

Thank you, Michael. Good morning, and thanks to everyone for joining us today. We’re excited to welcome you to the very first earnings call for the new Six Flags Entertainment Corporation. In actuality, it’s the final earnings call for our legacy companies, Cedar Fair and the former Six Flags, as we begin our journey together as a merged company.

I’ll start my review by discussing the legacy Cedar Fair second-quarter results before providing some color around second-quarter results for legacy Six Flags. I’ll wrap up with an update on more recent performance in the state of the long-lead indicators for the combined portfolio. Before I dig into the details, I’d like to say how pleased we are to reporting record-setting second-quarter performance for legacy Cedar Fair, a quarter in which thanks to our top-line revenue growth and effective cost-savings measures, we achieved record adjusted EBITDA for the period and meaningful margin expansion. The strong second-quarter performance capped off a trailing 12-month period that saw us produce $585 million of adjusted EBITDA, ending Cedar Fair’s legacy on a high note and setting a great foundation for our new journey together as the new Six Flags.

As Michael mentioned at the beginning of the call, due to a fiscal calendar shift in the current year, Cedar Fair’s second quarter of 2024 included 53 net incremental operating days compared to the second quarter last year. Because of the impact of the fiscal calendar shift, I’ll focus my comments this morning on comparing Cedar Fair’s second quarter with the three months ended July 2nd, 2023. For the quarter, Cedar Fair generated a record $572 million in net revenues on record attendance of 8.6 million guests. This compares with net revenues of 557 million and attendance of 8.3 million guests for the comparable three-month period last year.

In addition to the 368,000 visit increase in attendance, the higher net revenues during the period reflect a $4 million increase in out-of-park revenues to a second-quarter record $73 million. The increases in attendance and out-of-park revenues were partially offset by a 3% decrease in in-park per capita spending. The increase in attendance was the direct result of several factors, including a larger season pass base, the continued recovery of the group channel, including our school and youth business which has now recovered back to pre-pandemic levels, and lastly, stronger general demand in the markets where we introduced impactful new rides and attractions for the 2024 season. We are particularly pleased that we were able to drive increased attendance over 33 fewer operating days than the comparable period last year, reflecting the positive impact of many of the initiatives we’ve put in place in the last year to drive demand.

On a comparable week basis, average attendance per operating day in the second quarter was up 9%, primarily the result of eliminating smaller attendance days during the period at several seasonal parks as well as increased demand from the season pass channel. The increase in out-of-park revenues reflects the improved performance of the Knott’s Hotel, which was under renovation at this time last year, as well as higher ADRs at the other resort properties across the system. Meanwhile, the decrease in per capita spending is due to a planned reduction in season pass pricing at several parks and a higher mix of season pass visitation, somewhat offset by improved guest spending on food and beverage and extra-charge products. Food and beverage spending during the quarter was up 3% versus the comparable three month period last year.

The improved F&B spending was driven by an increase in average transactions per guest and an increase in the average transaction value, reflecting the guest willingness to buy up for higher quality offerings. Guest spending on extra-charge products during the period was up 1%, driven in large part by increased Fast Lane sales, which benefited from the broad rollout of our new single ride Fast Lane product and overall stronger demand as a result of higher attendance levels. Moving to the cost front, legacy Cedar Fair’s operating costs and expenses in the second quarter totaled 387 million, up 15 million compared with three months ended July 2nd, 2023. The period-over-period increase reflects a $23 million increase in SG&A expense, offset by a $9 million decrease in operating expenses.

The increase in SG&A expense included $11 million of merger-related costs and $8 million of higher equity-based compensation expense. The balance of the increase was attributable to higher spending on technology initiatives and advertising during the period. The decrease in same-week operating expenses, which was accomplished while our parks entertained 368,000 more guests during the period, is the result of planned reductions in entertainment expenses and labor costs, including the use of fewer seasonal labor hours and lower full-time headcount. Adjusted EBITDA for the quarter increased to a record 205 million, while adjusted EBITDA margin for the period improved to nearly 36%, up 230 basis points versus the comparable three-month period last year.

The higher-margin reflects the value and leverage that comes with driving higher levels of demand while tightly managing operating costs. As we’ve noted on prior earnings calls, we remain laser-focused on improving margins by increasing demand and driving operating efficiencies across the portfolio, particularly around variable operating costs such as seasonal labor. Through the first six months of the year, we’ve reduced our seasonal labor hours by 5%, or more than 340,000 total hours, while not eroding the guest experience or our ability to drive demand as evidenced by the meaningful lift in attendance. Through these key initiatives, we’ve made considerable progress strengthening margins closer to pre-pandemic levels.

We have now improved legacy Cedar Fair adjusted EBITDA margin by 300 basis points through the first six months of the year compared with the same six-month period in 2023. Now, turning to second-quarter results for legacy Six Flags. As noted in this morning’s earnings release, Six Flags second quarter of 2024 included 58 fewer operating days compared to the second quarter last year. For the quarter, Six Flags generated $438 million in total revenues on attendance of 6.9 million guests.

This compares with total revenues of 444 million and attendance of 7.1 million guests during the second quarter of 2023. In addition to the 2% decrease in attendance, the decline in total revenues in the quarter reflects a $9 million decrease in revenue from memberships beyond the initial 12-month commitment period, what we call 13 Plus. The decrease in second-quarter attendance and membership revenues was partially offset by a 1% increase in total guest spending per capita. The decrease in second-quarter attendance was largely the result of the strategic decision to remove operating days at certain parks and the earlier Easter holiday, which occurred in the first quarter of 2024 compared to the second quarter of 2023.

We estimate that the Easter timing shift represented a headwind of approximately 90,000 visits in the second quarter, while the elimination of operating days accounted for the majority of the remaining attendance difference. The increase in total guest spending per capita during the quarter reflects an admissions revenue per capita decrease of 2% and an in-park spending per capita increase of 5%. Excluding the impact of membership revenue from both periods, which we believe better reflects the park’s higher average ticket pricing and in-park monetization efforts, total guest spending per capita for the quarter would be 3% higher than prior year second quarter, reflecting an increase in admissions revenue per capita of less than 1% and an increase in in-park spending per capita of 6%. We expect revenue headwinds from memberships to be negligible in the second half of the year.

Moving to the cost front, legacy Six Flags operating costs and expenses in the second quarter totaled $281 million, down 18 million compared to the second quarter of 2023. The decrease in operating costs and expenses was the result of a $12 million increase in operating expenses, offset by a $30 million decrease in SG&A expense. The decrease in SG&A expense reflects the impact of a $38 million self-insurance reserve adjustment made in the second quarter last year, offset slightly by higher spending on advertising in the second quarter this year. The increase in operating costs was driven by increased seasonal labor costs resulting from higher average seasonal wage rates and an increase in seasonal labor hours.

Through the first six months of the year, the average seasonal wage rate at legacy Six Flags parks was up 3% over the same period last year and seasonal labor per hours were up 3% or approximately 150,000 hours. Six Flags adjusted EBITDA for the quarter decreased $23 million to 138 million driven primarily by the decline in attendance, lower membership revenue, and higher operating expenses, offset in part by higher total guest spending per capita. Due to the increase in operating costs and lower total revenues, legacy Six Flags modified EBITDA margin for the second quarter, which excludes the impact of non-controlling interest in partnership parks, decreased to 36.9% from 41.6% in the second quarter last year. Taking a closer look at more recent results and the long-lead business indicators for a moment.

During the month of July, difficult weather conditions, including the impacts of Hurricane Beryl and record heat and rain across much of North America have impacted demand at several parts in the combined portfolio. Over the five-week period ended August 4th, 2024, attendance across the combined portfolio totaled 10.9 million visits, down 3% or approximately 350,000 visits compared to the same five-week period last year. A meaningful portion of this attendance decline can be attributed to four parks where operations were either partially or entirely disrupted by macro events, including a utility disruption at Michigan’s Adventure, excessive flooding at Valleyfair, and the effects of Hurricane Beryl on our Galveston and Houston water parks. Excluding these four parks, attendance within the balance of the combined portfolio was down 1% or approximately 150,000 visits during the fiscal month of July.

Meanwhile, when compared to the same five-week period last year, July guest spending trends were essentially flat year over year across the combined portfolio. Despite the pressure from attendance mix on admission spending, in-park guest spending in July continued to benefit from higher levels of demand for food and beverage and premium experience products. Despite recent demand disruptions in certain markets caused by weather events, we remain encouraged by the overall attendance trends as we approach the end of the summer. This validates the strength we saw earlier this year in our long-lead indicators, including strong season past unit sales and solid booking trends within our group sales channel and our resort properties.

As of June 30th, 2024, the legacy Cedar Fair season pass base totaled 3 million units, a 9% increase versus the prior-year second quarter, while the Six Flags active pass base comprised 4.3 million pass holders, a 6% decrease versus the prior year, which still included the Six Flags discontinued annual pass product. Excluding discontinued annual passes, the balance of the Six Flags active pass base at the end of the second quarter would have been higher than the prior-year second quarter by 5%. Driven in large part by the solid momentum in the season pass programs, legacy Cedar Fair deferred revenues as of June 30th, 2024 totaled 282 million, up 3% compared to the same time last year, while deferred revenues at legacy Six Flags totaled 191 million, an increase of 8% versus the prior year. On the capital allocation front, during the quarter, legacy Cedar Fair spent $61 million on capex, bringing total investment through the first half of the year to 118 million.

For the full year 2024, we expect capital investments in the legacy Cedar Fair parks will be 200 million to 220 million. Meanwhile, during the second quarter, legacy Six Flags spent $77 million on capex, bringing total investment over the first six months of the year to 114 million. We expect full-year capex spend in the legacy Six Flags parks will also be in the $200 million to $220 million range. As we are in the early days of our combined company, we are still conducting the analysis for our long-term capex outlook.

With that said, we are very encouraged by what we see in terms of both our combined company’s existing infrastructure as well as the opportunities to drive growth in the combined portfolio. While there will be some level of capex necessary to address deferred infrastructure needs within the portfolio, the majority of our investments will be on initiatives and new attractions that can achieve a minimum ROI and that are meant to increase demand, drive higher levels of guest spending, and make us a more profitable business over the long term. We plan to provide more details around the scale and scope of future capital programs by spring of next year. Lastly, for cash flow modeling purposes, on a go-forward basis, we are projecting annualized cash interest payments of 300 million to 310 million and annualized cash tax payments of 140 million to 150 million before further tax planning efforts.

With that, I’d like to turn the call over to Richard.

Richard A. Zimmerman — President and Chief Executive Officer

Thanks, Brian. First, let me congratulate our collective team for a job well done to complete our transformational merger. This achievement wouldn’t have been possible without the support of both legacy boards and our leadership teams, as well as our associates’ commitment to embracing positive change and building upon the rich heritage of our two companies. I want to personally thank Selim for his partnership throughout this process.

We share a strong belief in the full potential and value creation that this merger represents, and we are excited for the future ahead. That value creation includes the continued growth and margin expansion within the legacy Cedar Fair portfolio, the opportunity to improve legacy Six Flags performance through attendance and revenue growth, and the realization of the meaningful synergies available to us through the merger. Because today represents our first opportunity in many months to address the market broadly about the merger, I think it’s worthwhile revisiting why we are so excited to have brought together two of the most iconic players in the amusement park industry. First off, the deal’s equity structure.

The merger between these two companies presented a unique opportunity to offer legacy Cedar Fair unitholders and legacy Six Flags shareholders with a tax-efficient means to each participate in the significant value-creation available as a combined company with even more growth opportunities. Second, the benefits of scale. The new Six Flags has a highly diversified footprint with geographic scale never before seen regional amusement park industry. This helps mitigate weather-related and seasonal earnings volatility, ensuring that no single park contributes more than 17% of park-level adjusted EBITDA and no single region contributes more than 30%.

While only a small sample size, we saw the value of a more geographically diverse portfolio playout during the month of July when weather was very challenging in several key markets, yet combined attendance was down only 1% at our parks that weren’t forced to close due to disrupted operations. The expanded scale also provides a larger portfolio of properties to efficiently allocate capital and pursue more high-ROI initiatives for growth, including innovative new attractions and high-quality, high-throughput dining facilities, just to name two. Additionally, our larger geographic footprint sets us up with an opportunity to offer season pass holders with access to an expanded portfolio, enhancing our strength and appeal versus other entertainment options. Broader access to our family of parks has the potential to not only boost guest loyalty but also drive higher season pass sales and park visitation.

Third, the operational efficiencies created by consolidation. Combining organizations gives us a unique opportunity to select the best strategies and practices from both companies, making us smarter and more efficient overall. We can centralize many of our core administrative functions and deploy shared services to reduce redundancies and improve efficiencies that drive operational savings. To that end, where we aren’t at risk of disrupting operations or the guest experience, we’ve already begun to eliminate duplicative cost and services and renegotiate third-party contracts where appropriate.

While there is much more work to be done, some of which we’ll have to wait until after the season, we fully expect to capture our stated cost synergy goal over the next 12 to 18 months. Fourth, combining resources enhances our financial strength and flexibility. We believe that using our proven playbook to significantly increase attendance across a larger customer base, particularly in underperforming markets, will allow us to drive a consistent long-term growth in revenue and free cash flow. Higher levels of free cash flow generation will provide flexibility in our capital allocation and investment decisions and enable us to improve our capital structure.

Finally, and perhaps most importantly is the unique opportunity to refresh and renew the guest experience, unifying both companies intellectual and practical know-how obtained over decades of market leadership presents the new Six Flags with an opportunity to create an experience so compelling that our guests will view our parks as an indispensable choice in entertainment. We are tapping the skills and imagination of a deeper talent pool to develop a richer guest experience seeking to position our parks as essential destinations for out-of-home family fun. Since completing the merger less than six weeks ago, we have made considerable progress with our integration efforts as we work to realize the full potential of the merger and deliver value to our shareholders and customers. Our integration team is working diligently to fully analyze and evaluate both legacy companies data to gain a thorough understanding of our combined portfolio, including guest perceptions, market potential, and the competitive landscape.

The conclusions we draw from this comprehensive review of our collective strengths and opportunities for improvement will be the basis for establishing the company’s long-range plan to offer the guests the best possible experience and generate profitable, sustainable growth. As we proceed through the early innings of this work, our operational focus will be on quickly capturing the synergies available to us and implementing the parts of our playbook that will have an immediate beneficial impact. Case in point, we recently announced two park-level changes. First, like a number of legacy Cedar Fair parks, we implemented a chaperone policy at selected Six Flags parks to ensure we maintain a family friendly environment while increasing the deal with parents who are the decision-makers and who have the deeper share of wallet.

And second, we removed the surcharge on in-park purchases at all legacy Six Flags parks, which was very unpopular with our guests. We believe the incremental revenue lost in the near term will be more than offset by an increase in transactions and higher levels of guest spending over the long term. Over time, we will make additional changes to the business that will be based on consumer research and our decades of experience and success in the industry. Our time-tested approach to the business remains grounded in the basic principle of creating fun and memorable experiences for our guests.

A high-quality experience drives long-term success and makes everything else we do as a business easier to accomplish. Getting there, however, requires a steadfast cultural commitment to the long-term success of the business. I’m confident we have the perfect leadership team to strike a balance between creating long-term fiscal stability and generating sustainable, profitable returns for our shareholders. Our consolidated team recognizes the extraordinary opportunity in front of us to achieve something remarkable, a prospect that has fueled excitement and dedication for perpetuating the legendary status of our expanded family of parks.

The merger’s most attractive and important growth opportunity, however, is returning legacy Six Flags parks to their historical levels of attendance. With the data now available to us, we have focused our initial efforts on three key performance indicators, all of which are currently trending at roughly half that of legacy Cedar Fair. They include season pass renewal rates, season pass average visitation rates, and market penetration rates. Closing the gap on season pass renewal rates and average visitation rates alone would add more than 10 million visits annually at the legacy Six Flags parks, implying a return to pre-pandemic attendance levels is very achievable over time and something we will be laser-focused on achieving.

At the same time, we remain committed to improving renewal rates and driving higher levels of season pass visitation at the legacy Cedar Fair parks as we work to also increase the penetration rates at those parks. Our initial assessment is that many of the near-term improvements needed to drive higher demand levels are largely opex versus capex related, achieved by refining pricing, increasing marketing, and adjusting programming strategies, including park operating calendars. We will, however, also invest what is necessary in new rides and attractions to reenergize demand and achieve our attendance growth objectives as the upside in doing so is significant. Promoting a better guest experience and improving guest satisfaction ratings at the legacy Six Flags parks is crucial.

Ensuring rides are available to guests from open to close can be accomplished cost-effectively through better utilization of seasonal labor hours by deploying enhanced workforce management systems and methodologies. We also believe there is a tremendous opportunity in upgrading the food and beverage offerings at the legacy Six Flags parks. Taking a page from legacy Cedar Fair’s playbook that is driving our successful food and beverage expansion, we can drive higher per capita spending and cost-efficient growth by adding high-throughput commercial kitchens, efficiently designed air-conditioned food locations, and expanded menu choices with higher-quality food options. Over the long haul, we have seen the strength and resilience of our business model not only carry us through varying economic cycles, but also push results beyond expectations when market conditions are strong.

Even in the depths of the financial crisis of 2009, our parks displayed the resiliency that comes with being the closer to home, less expensive, and less complicated choice for out-of-home entertainment. During that period, capita spending was only down 1%. And while attendance was briefly disrupted at a number of our properties, two parks in the portfolio introduced major new coasters and delivered record years in 2009 despite the economic headwinds. In all instances, our business approach has remained consistent comprised of the following eight core principles.

One, guest satisfaction is vital to our long-term success. Two, strategically invest marketable capital into the business drives growth and ensures the long-term sustainability of our business even in challenging economic periods. Three, we are a volume-driven business where strong attendance drives longer length of stay, higher per caps, and better pricing power. Keeping our parks comfortably crowded is a must.

Four, the season pass programs have always been and will continue to be the financial engine of our business and provide us with a recurring and reliable revenue stream. Five, guests today view the availability of unique, high-quality food and beverage as an essential and increasingly valuable part of the guest experience. Six, safety, park cleanliness, attractive landscaping, and family entertainment are essential core elements that resonate with mom and dad who maintain share of wallet and represent our primary target. Seven, we staff our parks to operate fully yet efficiently without sacrificing excellent customer service.

And finally, leveraging the power of scalable technologies today is fundamental to enhancing the guest experience. These core principles form the foundation that has helped produce Cedar Fair’s long-tenured steady performance and record results over the past 12 months. They will also form the business foundation from which the new Six Flags will grow over the long term. We are confident we have the right team and strategies to implement these core principles across our entire portfolio of properties as we drive compelling value for all our stakeholders.

Some of our parks have already announced the start of their 2025 season pass sales program with many more to follow in the next few weeks. We believe that compelling introductory pricing and targeted advertising campaigns will drive strong early cycle demand. You will also be hearing news about our exciting line-up of new rides and attractions being added for 2025, which promises to contribute to another outstanding season. We are as confident as ever in the potential of our combined company, strengthened by the ongoing encouragement and enthusiasm shared by our investors and business partners.

We are extremely optimistic about the opportunities ahead and as always, remain committed to dreaming big, planning smart, and executing with precision. Finally, over the next six months, we will be continuing our integration work and filling out our new long-range plan. By spring of next year, we expect to be in better position to share more details around the strategic initiatives and investments that will drive the future growth of the business, deliver the full value creation for our shareholders as soon as possible. Greg, that concludes our prepared remarks.

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