Six Flags Entertainment Corporation (FUN) Earnings Call Transcript & Summary

Good afternoon. This is Stephen Grambling with Goldman Sachs. I lead our Gaming, Lodging and Leisure Research team, and I'm very excited to host our latest buy rating, Cedar Fair, which we think has protected the downside of its liquidity measures and cost control, but should still participate in any upside that we see in a ramp-up that we've been discussing throughout the Travel & Leisure Conference. With us to help understand that positioning, both in the near term and the long term, we have Richard Zimmerman, Chief Executive Officer; Brian Witherow, Chief Financial Officer; and Michael Russell SVP of IR on the line from Cedar Fair. Thanks, everyone, for joining us.

Thanks, Stephen.

Thank you, Stephen.

To kick things off, we've been asking a similar question for a lot of folks just to try to reframe the -- beyond the pandemic. Remind us of the long-term growth algorithm for the parks industry and then Cedar Fair specifically? And what are some of the biggest areas of opportunity for FUN to drive outsized growth and/or profitability?

Yes, Stephen, this is Richard. Good afternoon. And first of all, let me say that I hope everybody out there is staying safe and doing well. Relative to your question, prior to COVID-19 and the disruption, our latest long-range plan reflected a long-term organic growth rate in revenues of somewhere around 3% to 4%. In our world, top line revenue growth is typically fueled by a balanced approach to driving growth in attendance and per capita spending. In the case of FUN, one of our differentiators are our investments in hotels, camp grounds and other adjacent resort offerings has really afforded us another channel over the last few years. It's been proven to be very lucrative and driven growth. Over the past 2, 3 years and coming into 2020, based on our strategic plans and initiatives, we felt we had the ability and the opportunity to drive more aggressive growth in attendance, while maintaining our disciplined approach to pricing and producing modest growth in per capita spending. So while we feel still very good about our strategies for growth, the disruption from COVID-19 will require us to make sure we're keeping our fingers on the pulse of what the consumer is doing, how they're reacting, what consumer behavior will be and be prepared to adjust those strategies we put in place for the new normal, whatever that may look like.

Great. And I guess, if you could help frame COVID's impact on amusement parks versus history, how do you think about the current situation, economic and behavioral impact on consumers relative to prior downturns? And how do you think about the parks industry being uniquely positioned to manage through this environment?

It's a great question, Stephen. It's Richard again. And first, let me say, COVID-19 is unlike anything that we've seen in our history. We've had similar disruptions, but nothing to this scale and certainly, nothing where we had all of our operations closed at any one time. So comparing what's -- what we're going through now to past situations is a little difficult. But we have seen similar events, whether it was the Great Recession of '08,'09, the SARS virus impact on our Toronto marketplace, or Canada's Wonderland, our [indiscernible] park is in 2003. When we've seen that we've had a disruption, we've always seen meaningful demand on the back side of the disruption when we came out of the disruption. So we talk about our industry and our company being recession-resilient. We've really seen that, and what we came into vogue after '08, '09 was the term staycation and it was really true. We're close to home. We're less complicated. We're a drive experience, so between consumers continuing to prioritize experiences over possessions, one of the dominant themes that we're working with or the fact that we do 90% of our attendance from within 150 miles. Those things, I think, position us well on the back side of this pandemic as we get our parks reopened.

So perhaps a question for Brian here, but can you just remind us of the levers you have to pull to cut costs and improve liquidity -- or that you have pulled, I should say, plus bringing to focus the company's cash burn, monthly liquidity and how to think through break-even attendance?

Yes, sure, Stephen. As we noted on our first quarter earnings call and while the parks have remained closed and operations have been disrupted, we've been very focused on trying to minimize cash burn rate. And with our focus largely being centered around and those efforts being centered around minimizing operating expenses while the parks are not in operation. We've been very effective at minimizing or reducing that average cash burn rate to a level that would fall somewhere in the $30 million to $40 million per month and that's where we would forecast it staying through the balance of 2020 under a scenario where we don't get our parks back up in operation. Included in that is some level -- base level of operating costs while operations are suspended, some level of wrap-up spend related to CapEx projects that are in process and then debt facility payments. The OpEx spend, I would tell you, there are some more steps and initiatives that we can take if -- and this will be evaluated on a park-by-park basis, if it doesn't look like operations will be able to resume soon or potentially, in some cases, at all in 2020. But to this point, we've tried to maintain our products on what we're calling a state of readiness to open, which does put a little bit of pressure on OpEx during this period of disruption. But what it allows is for us to shorten that average ramp-up time for when the restrictions do get lifted in a market and our ability to reopen. We want that window to be as short as possible so we can get our parks back up and operating. And some of those decisions to maybe furlough more full-time employees or cut costs deeper could extend that ramp-up time. And that's been something we've been trying to avoid at least in the near term. Based on where we've gotten our burn rate to, when we think about the liquidity position we're in now on the heels of the financing we completed several weeks back, we have ample liquidity to get through the balance of 2020 and, quite frankly, all the way through 2021, even if we remain in a minimal revenue environment that we find ourselves in. Now we don't believe that's going to be the case, but we wanted to position sort of for the worst-case scenario and then manage our way back to the better pace. In terms of breakeven and profitability at the park level, a big chunk, 2/3 to maybe as much as 70% of our operating costs are variable in nature. And so we've got the ability to flex the operating structure up and down based on demand, volume of attendance. And so we can still remain in a -- in short periods of time in a positive cash flow position on a -- at a park level with attendance levels that may be as low as mid-teens or well inside of 25% of theoretical capacity. Now, that's not a model that we want to see or operate under long term by any means, but it does reflect our ability to be very flexible with our cost structure in these times of disruption and uncertainty.

And as we think about this period of states reopening, can you just talk through who's ultimately deciding when you're able to reopen the parks and any kind of specific restrictions that you have? And can you just talk through how you're planning on social distancing in your parks or mandating social distancing? And how investors should be thinking about the financial impacts from those actions?

Yes, Stephen. It's Richard again. None of our parks currently are open. We're not in operation, but we're working closely with all the local and state jurisdictions, the officials in those areas to establish specific time lines and safety protocols and guidelines for reopening. What I would term it is a very collaborative process, really good dialogue between us and the jurisdictions about the guidelines. We've helped author -- we and our industry have helped author many of the guidelines and really started to put out what we think the right time line was, as we commented on our call, 2 -- we're going to need 2 to 3 weeks once we get the green light from any particular jurisdiction. Right now, we feel like we've got a lot of good momentum in Texas and Missouri, and we'll likely be announcing some specifics on dates of those and other parks early next week. With regard to social distancing, we've run sophisticated modeling of all of our parks, which sit on hundreds of acres. And what we've come to the conclusion working with the jurisdictions, everybody is gravitating towards a percentage of theoretical capacity. So we'll have a reservation system to come to the park once we open. You'll need to make a reservation, go online or go into our mobile app. That will be one of the steps we take -- limiting capacity within our parks will be one of the steps we take. Once you get to the park, we will make sure that we've appropriately marked everything like you see in the consumer environment these days to make sure that everybody maintains a proper distance. But when you talk about us being an outdoor business over 100 acres, when you start to talk about the capacities that we'll have in park, the limitation for social distancing isn't the acreage we have. It's really just the flow of our guests. So we certainly will do space in queue lines, as you would expect. We'll do all the things you've seen in restaurants and others do in the consumer space of limiting the number of tables. We'll also likely have designated traffic going one way and half of a midway and the other on the other part of the midway. So we'll do lots of things that will ensure that we can adhere to the social distancing guidelines that we keep talking with these states about.

That's interesting. And on the pricing side, how are you thinking about ticket pricing across your park portfolio upon reopening? And specifically, does forcing lower attendance enable higher ticket price or in-park pricing? And is there any other thoughts that you can give on pricing maybe longer term?

Yes, sure, Stephen. This is Brian again. Decisions around pricing, I think it’s fair to say, will most likely be very different here in the near term as we start to bring parks back online versus where we may sort to longer term, with a lot of that ultimately being driven by capacity limitations that may continue. Upon reopening, we have no immediate plans to deviate dramatically in terms of single-day ticket pricing from where we were positioned coming into 2020. As -- in particular because much of the attendance, we believe at least out of chute is going to be driven by season pass holders. Over the balance of 2020, we'll assess pricing as parks come back online and see how consumer demand develops. Longer term, I think headed into 2021 and beyond, should we see attendance levels limited by capacity restrictions, I think that will give us the opportunity to take some of our dynamic pricing practices and principles and apply them accordingly.

That's helpful. And you referenced the social distancing measures. Maybe if we can tie that back to just the margin outlook for the business. There's obviously -- you’ve cut costs from a liquidity standpoint. There's some investments that have to happen from a social distancing basis. Where do you think margins should shake out in the near term, but then also as we think longer term relative to 2019 levels?

Yes. I think initially, Stephen, this is Brian again, there's going to be probably pulls and pushes in both direction. Some of the new protocols and procedures that we're looking at to add as part of reopening, will definitely introduce new costs to the system. The fact that we're going to be reopening under some amount of limited operations and certainly, some of the entertainment that we would normally have been offering in 2020, whether that be parades as part of some of our events or some of the live shows and the theater shows that we put on in our parks, given those things are right now not practical under the social distancing guidelines, we see a lot of costs coming out of the system as well. And so I think as it relates to 2020, we're looking largely at this season as really being highly transitional and, quite frankly, maybe not indicative of where things go longer term. But we can easily see, based on where we're at today, more costs actually here in 2020 coming out of the system than maybe potentially going into the system for the new protocols. And then we're going to need to reassess as we work our way through what are going to be those protocols that stay in place longer term and what are those costs that get reintroduced back into the system as we head into 2021.

And perhaps to follow-up on that, even as we were ramping up the space, we noticed that Cedar Fair tends to invest a little bit more in expenses in the in-park experience, resulting in a bit lower margin than peers, but perhaps also more stable over time. What, if any, are some of the structural differences in margins versus your primary peers? And you started talking about this a little bit, but are there things that you're learning from the park shutdown that could change how you think about this cost structure on reopening longer term?

Yes, it's Brian again. Spending a little bit more on CapEx and OpEx, I think has always been part of our DNA and something that we believe has differentiated not only our parks, but the guest experience from others in the space. We believe this higher level of investment provides greater value for the guests, which, in turn, has translated over the years into -- in more pricing power. It's also helped contribute in our analysis to longer length of stay for guests and higher per capita spending levels than some of our peers. While we could make different decisions or could have made different decisions over the years to drive higher margins in the near term, we believe -- we've always believed that those decisions would have eroded the guest experience and hurt the business over the long term. With that said, we're trying to find the silver lining in the disruption caused by COVID-19 and really, we're looking at this as a reset opportunity to go back and reevaluate not only some of our park level operating procedures, but also some of our corporate or back-of-house administrative functions in an effort to identify and mine some cost efficiencies, whether that be centralizing some functionality, automating some other things, but using this window of disruption as a time to get to some things that maybe historically it was difficult to do while you're trying to ramp up and then run operations during a normal year. Through all of that, we remain committed, though, to delivering a guest experience that is at the same level or higher than what we've delivered in the past, and that's really unmatched by other regional park operators.

That's super helpful color. Over the past few years at this conference, we've also asked about your events strategy. How had that been trending over the past year? And what does that program/strategy look like at maturity, as we think about how many parks have events and events per park? And then what, if anything, has the impact been of COVID on this element of the business?

Stephen, it's Richard. Great question. Broadening our guest experience using time -- limited time duration, limited-duration events to drive urgency has been one of the key planks of our LRP. I will tell you that one of the disappointing parts about the COVID-19 disruption to our business was we had great traction coming out of 2019, a strong last few months of 2018, record results and great traction on our long-term strategies coming out of '19, strong season pass sales headed into 2020. And we think one of the things that was really helping fuel that was our event strategy. You've heard us talk about seasons of FUN programming each of the 4 seasons of the year with reasons to come out and visit. It's really helped fuel our season pass sales. I think it's still far too early to tell how COVID-19 is -- what the long-term impact’s going to be. But clearly, in the short term, we've had to unplug most of the events that would happen typically at our parks in the summer. Very specifically, we've unplugged the 150th anniversary celebration at Cedar Point, the 100th anniversary celebration at Knott's Berry Farm. We've also pulled the plug on Grand Carnivale and some of our events that would have happened during the summer. Most of them will move to -- almost all of them will move to 2021. We like them. But with the uncertainty around the operating calendar, we couldn't keep them scheduled. Longer term, what our research tells us is the consumer is still looking for far more experiential entertainment and increasingly important in these times, they're looking for places to gather with friends and family. We think our parks remain ideal destinations for these types of experiences. We're going to have to see how the consumer behavior addressed on the other side to see if we need to make any adjustments to the strategy.

Great. And then as we think about in-park spending in general, that has also been a bright spot for the company over the past few years. Are there things that you can do to try to limit the downside from in-park spending during this environment? And you started talking about this a little bit, but what are the social distancing efforts that you can make to try to, again, mitigate any of the impact?

Steve, Richard, again, I'll jump in here and then ask Brian if he's got anything to add. When you look over the past several years, we've successfully been able to drive growth in guest spending by enhancing our park service and our service model and the park offerings, particularly within F&B. We've built a number of facilities that have upgraded our ability and our capability to do more transactions per hour. We've upgraded and enhanced our park commissaries and the ability to produce higher-quality food offerings. We've upgraded, put executive chefs and culinary talent in all of our parks. So food and beverage, in particular, has been a huge focus for us. As we do our research, it's increasingly important to our guests. It's not just something they want when they want -- when they come, and want a high-quality experience. Increasingly, it's part of the decision factor about where they can -- whether or not they come. So our guests are telling us, it's a key part of the experience that they want. Dining out is just part of the lifestyle of millennials and Gen Z and everybody coming up through the ranks? In-park spend, on our case, is also influenced significantly by length of stay. So we do a number of things that focus on the operating calendar, and we sequence the events we're talking about. Grand Carnivale happens at night to produce a length -- longer length of stay. So we think about creating a lot of value in that price value equation, but giving folks a reason to come out later in the day, but stay longer through the day. Before the COVID-19 disruption, we were testing mobile ordering at 4 of our parks. That was going extremely well. We're looking at things that we could do to drive more efficiency in food and beverage and elsewhere through the use of our mobile app. So you'll see us really lean into those efforts and tack on ways that we can really tap into the guest experience via our mobile app. Brian, anything else you want to add?

I would just follow-up, and you touched on a little bit, Richard, which is the length of stay is a big driver of where per caps go. We see it throughout the course of any given year. The longer length of stays tend to happen in the peak attendance months of July, August, October, and those by no coincidence also happen to be the highest per cap days as well. And so when we think about potentially limited hours or limited duration operations out of the chute, we would expect that there will be some pressure on per caps early. But as we get up closer to more normalized operations, we hope that some of the technology offsets that Richard mentioned will help offset some of those pressures.

And turning to another element of the strategy, you have been rolling out a loyalty program. There's also been some changes or at least, I should say, a focus on season pass sales. The initiative on the loyalty program fell by the wayside a little bit during the park closures, and it's probably still unclear on season passes. But can you just talk to what you were seeing in the beginning of the year? Any step-function changes one way or another? What's driving that? And also, if you can just walk through kind of the financial impact behind extending season passes for 2020 to 2021 season.

Steve, it's Brian. The loyalty program, I think Richard mentioned before, one of the things that we're disappointed with was some of the disconnect from some of the celebrations and events that we had planned for this year because of COVID-19 disrupting the year. I would say it’s sort of the same around loyalty. We've gotten a really good pilot program around loyalty run last year with the intent of rolling that new program out, PassPerks, to our parks this year. Given the disruption and all the parameters or protocols and limitations we're going to have to operate under, we basically are going to continue that pilot program again in '20 at the few parks that it was run at and look at the broader rollout in 2021. And so I would put that in the disappointment category as well. But there was a lot that we learned, and there was a lot of good that came out of it. I think we'll be able to use PassPerks, we’ll be able, along with our CRM and our social media platforms, to continue to stay engaged with our guests and communicate with that important channel, season pass, representing more than 50% of our attendance. The insights that we learned, we'll continue to build off of those this year and see where -- what more we can gather from another year of piloting the program at a handful of parks with a broad rollout, as I said, for '21. In terms of the economics, the changes, 2 big changes we made around season pass with the onset of COVID-19. One was pausing billings for pass holders that had bought their passes under our Easy Pay program. We will reinstitute or restart those billing cycles as soon as the respective parks come back online or the window and announcement of those parks coming back online is made. And then the second was extending the privilege -- the use privilege, not only through what was already paid for as part of the 2020 pass but through the 2021 season. So the key point there was to drive value, right, provide the value around the pass that the consumer was expecting upon the time of purchase because we weren't going to be able to fully deliver on that in 2020, given the disruption. The economics of that, there's a couple of sides to it. There's the revenue recognition. So to the extent that we get parks open here in '20, we'll be recognizing revenue out of that deferred revenue bucket over an 18-month period, if you will. Let's just assume sort of the second half of 2020 and then all of '21. And so there could be a little bit of pressure on deferred revenue next year just based on the base of season pass that we have right now. On the cash side, however, and also benefiting the deferred revenue side is the fact that we were only about halfway through our sales cycle at the time that the disruption happened in mid-March. And so while we had -- we were well ahead at record pace, as we said at the end of the first quarter, we were up more than $30 million or 20% in terms of deferred revenue, we still had half of our sales cycle to go. And so we still have a big group of folks that are in our CRM database that I haven't had a chance to renew, that we can go back and communicate with and look to get them to move later this fall as our parks come back online. And we also have, as I said, those payment plan, season pass holders who are still going to be making payments on passes that are outstanding. So it is a little bit of going both ways. We'll manage it as aggressively and as best we can. But in the moment, we made the decision that we felt was most appropriate to extend the value and to show good faith to our -- some of our most loyal guests and customers, our season pass holders.

Fair enough. And maybe moving to capital allocation, should we anticipate a change in your capital allocation priorities outside of deleveraging the balance sheet? And what point would you be comfortable beginning to look into restarting the distribution, consider share repurchases or think about any other kind of reinvestment?

Really good -- Stephen, Richard, really good question. First, on the leverage standpoint, prior to COVID-19, as everybody is aware, we -- our stated goal was get total leverage back down inside of 4.0 as quickly as efficiently as possible. With the onset of the COVID-19 pandemic, our long-term goal still remains that. That is our financial posit, get back down under 4.0 as soon as possible. On the heels of our latest financing, our near-term priorities actually now get back down total leverage back inside of 5.0 as quickly and as efficiently as possible. We're going to take a balanced approach to capital allocation. We're going to continue to reinvest to the degree we need to in our properties, but we're recognizing that one of the big levers that we have is capital -- is CapEx. To date, as we noted on our Q1 earnings call, we identified an activated CapEx savings of roughly $75 million to $100 million for calendar year 2020 compared to what we originally intended to spend, which was somewhere between $180 million and $190 million. As we bring the parks back online, we're going to see how demand builds for the balance of 2020, and then we'll make a decision on the size and scope of the 2021 program. But we think, going back to my event strategy point I made a few moments ago, we think there'll be lots of pent-up demand as we get into 2021 in particular. And with the events coming on back line, lots of reasons for people to come out in 2021. So we'll evaluate what the right level of capital spending is at that time. The last piece of the capital allocation is always the distribution, which has been and continues to be a priority for us and our Board. Our Board remains committed to reinstituting the distribution, and we'll do that as soon as operating visibility improves, and we're permitted to do so under the debt covenants of our financings.

Well, maybe that's a good point to stop as we come up on our time here. Next up, we will have Extended Stay America at 2:55 p.m. So I want to thank everybody for joining, and thank you, Richard, Brian and Michael for all the time today. Thanks so much.

Thank you.