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

All right. Welcome back, everyone. Next up in our most exciting and fun period of the morning we've got Cedar Fair, continuing with the amusement parks. We've got Richard Zimmerman, Chief Executive Officer, with us. Richard, thanks for joining us.

Stephen, great to be with you and great to be with everybody this morning.

Now clearly, the past year, we were having a very different conversation last year at this conference. I would love to just hear, as we've been asking a lot of the management teams, just what you've learned over the course of the past year as you think about positioning the business not only for reopening, but longer term?

Great question, Stephen. Let me jump in and say, what we're seeing now that we've got all of our U.S. properties open. We don't yet have our Canadian property, Canada's Wonderland, open. We hope to get that open in the second tier of Ontario's reopening, probably sometime in July, but we're monitoring and working closely with the government there. When we look at the U.S. properties, excited to get all of our properties open in May. As we've seen -- as others have said, we've seen strong demand. There is pent-up demand. Consumers are looking to get out and do things after a year being cooped -- a year or more being cooped up with the COVID pandemic. So we're seeing both strong demand in terms of visitation. What we saw last year in 2020 for the property, we got 10 of our 13 properties opened in some fashion. We saw once people got to the park, strong in-park demand and strong in-park spending. We continue to see that in spades. We're seeing strength that once people come to the park that they've got good share of wallet. There's money in people's pockets and they're looking to spend.

That's great. And I think that one of the other things that you walked us through last quarter was this optimization plan. Can you just walk us through some of the major buckets and the time line for that optimization plan, and perhaps touch on how that compares to some of your peers who have come out with similar plans of their own?

So when we think about the impact of the pandemic, we felt really good going into the pandemic. We've had strong momentum, record 2019 results, with over $500 million -- $505 million in EBITDA. We really were focused on events -- limited duration events driving urgency. We talked about the strength in our food and beverage channel. I've been investing in both culinary talent and facilities to drive more transactions. All those things going into the pandemic, when I think about the impact of that, we had the ability to look at our business, start to accelerate a lot of the plans we had on the drawing board for things to improve our business, make us more efficient and redesign the organization. So we -- the business optimization program, internally, we call it Project Accelerate, really accelerated a lot of the initiatives that we were thinking about that had we've been open might have taken us longer to get to. So to deep jump into that, we're looking to make ourselves more efficient. We're looking to drive top line revenue growth. We thought that if you look more broadly at the arc of our organization, the industry and certainly Cedar Fair has gone from being totally decentralized back in the '80s and '90s to now trying to figure out how to take advantage of the efficiencies, technology and strategically drive the business, while recognizing the importance of our individual properties, individual franchises in each market. There's a house of brands. Each park is unique. Regional brand is very important to us. So if you think about business optimization, we initially said we thought we can get 200 to 300 basis points of margin in February. That was our guidance then. We really supplanted that with looking at a $50 million or so number in terms of business optimization. We thought we could get about 1/3 of that out of fixed cost, 2/3 of that out of variable and revenue -- variable cost and revenue. I will tell you, as we dive deeper into and get deeper into the planning, deeper into the implementation of some of these initiatives, particularly procurement and workforce management, I am really confident that we can get to those numbers. And on top of that, I think we now have the tools we're going to need both to manage our labor more efficiently, but also dive into the pricing opportunity there. Dynamically priced both our tickets, but also our in-park spending, trying really dynamically price into demand so we can drive that top line revenue growth. So Stephen, I'm confident in our ability to deliver the $50 million. I can't comment on my peers. I know their starting point is -- they will frame up their starting points for you. Ours is on top of our record 2019 performance.

That's great color. I guess as a follow-up on the pricing, can you just dive into a little bit more? What -- how was pricing being done before? You're referencing dynamics. So how do you make it more dynamic? And what does that mean in terms of your approach to marketing?

So what we found -- let me go to marketing first. Then I'll get to pricing. What we found during the pandemic was we shut down -- because we've closed down, we really relied less on our traditional broadcast or traditional media channels. We, like everybody else, went quickly into digital and social media, saw great response, some great awareness of what was happening at the parks. The response from the market was really good. But from a marketing perspective, as we opened our parks, we're much heavier percentage digital and social media this year as we get into the season. And what we're seeing is it's working really well for us. So there's an efficiency play within our overall media spend. Back to dynamically price, and I'll go to tickets because that's important, the admission side of the street. We've gone in and eliminated most of our deep discount channels. So we've raised the floor in a lot of our pricing. We've also gone in and taken pricing where we see demand. So that reads that we would increase our front gate price. Increasingly, that's less and less a percentage of our ticket. We've gone and taken price increases at most of our sites, not all, because we can kind of calibrate to demand on our web price tickets, which more and more is the price that most people pay to get in. So we're both eliminating discounts and taking pricing. The combination of those 2 are pretty powerful. We built a business intelligent function. We built a revenue management function several years ago. We've gone leaned heavily. It's been really focused heavily on season passes. That's our primary channel, 53% of our tenants in 2019. But increasingly, now revenue management is focused on optimizing our 1-day tickets, and those different distribution channels. Much like we saw in '08, '09, we're going to drop some channels out. We're only going to put channels back in that we think are incremental, that can drive top line revenue growth. So we're going to yield manage, if I could put it that way, on the admission front, and really try and drive that healthy top line growth.

That's helpful. And then on the in-park, you alluded to the event strategy pre-pandemic. I guess what is the F&B and event strategy of the future look like? And also how you're leveraging technology to run this potentially different?

So what we saw last year in 2020 was we could open our parks in limited fashion. And if we couldn't run the rides, we could hold a food and wine festival, like a Knott's Berry Farm, the Taste of Knott's, Taste of Boysenberry Farm and get people to come out, buy a tasting card priced appropriately for the market, $30, $35, $40, $45, whatever the market will bear. But people were able to come out thousands in a daytime. We did that not only at Cedar Point, but at some of our other parks, saw strong response for things that weren't based in the rides. So as we think about events, I mentioned taste of because it's really important. Food and beverage is a big piece of our event approach. Several years -- for several years, we've put culinary -- enhanced culinary talent in our parks. We've got executive chefs everywhere, sous chefs. We've infused culinary talent so we can provide higher-quality offerings. And our view of events is they need to have a food and beverage component in order to broaden the appeal, in order to respond to what our guests are telling us through all our consumer surveys they want, which is better quality food, and they want a variety of food offerings to be part of their day at the park. Not just part of the event, but part of their day at the park. So we're going to continue to marry those 2. I think we've got an opportunity to think about our sites, our park portfolio differently. We've clearly shown ability to open up in shoulder times with events and limited duration events, food festivals and things and drive revenue. So we're deep in the planning of what that means for us and what that may mean market by market.

Now going back to your comments about the strength in demand and recovery, we've, certainly, seen in our offices as mask mandates have loosened, you're seeing in the city. What's with social distancing or other limitations that are still in effect at the parks now? And how do these vary across the country?

Each state and locality -- I'll stick to the U.S. because, again, we talked about Canada. They're not yet open. They've come out with a lockdown. They're opening up their economy. And again, I commented on that earlier. When I look state by state, the broad sense -- the broad comment I'd give you is that we are rapidly opening up. Most of those restrictions are peeling the cells back. I'll go to California, which has been stepped through its reopening process. We're still at 35% of capacity being the limitation right now for our 2 California parks, Knott's Berry Farm and Great America. But June 15, all restrictions come off. So what we're seeing across the sites is we're in the midst. And by the end of June, I think a lot of the restrictions in terms of capacity and what the states have mandated that we restrict our capacity to, will have peeled themselves back and gone away. What we are seeing is some things in the consumer research still sells us very important. It's important that we're clean. It's important the sanitization protocols make mom feel a lot better. So we're enhancing those, but our ability to entertain higher crowds. Last year, we loaded every other coaster row. This year, from the moment we opened up, we've loaded every coaster row. And we've upped our capacity so we can give the high-quality guest experience on the ride side that our guests have come to expect.

And on the -- I guess, moving towards the cost structure, are you seeing any differences in the labor across the different parks as you're reopening? Given we've heard about shortages, is that broad-based? Or are you seeing it more acute in certain markets versus others?

As we look at the labor, each of our -- we say this all the time. Each market is uniquely different. Broadly, I'd say we're seeing labor pressure, and this is the most challenging labor market I've seen in 20 years. I'll keep saying that it is, because this is not a typical economic slowdown. This is a pandemic-caused shutdown and now reopening the economy. That makes -- with an economic impact. That makes it uniquely different. In most of our regional markets, we've been able to go in, adjust our wage rates, and what I would tell you is we've gone from market competitive to market-leading. We want to get high quality -- we want to get the number of applicants we need to provide the quality guest experience. The guests have come to expect out of Cedar Fair. But we also are sourcing what we saw in the 2018, 2019 when we took market adjustments and raised our wages, we saw higher quality applicants, higher-quality employees, and that increased our productivity. We think that's important. So market-leading wages go to making sure we've got enough applicants that we can fill all the line schedules with the quality of employee we want. In terms of our portfolio, Cedar Point has always been uniquely -- has a unique profile. It's a very large-scale enterprise that exists in a midway between Toledo and Cleveland, the county that it's in 75,000 in population. We need several thousand workers in a year. So we've always had a out-of-market component, which is why we have a lot of dorms, a lot of dorm beds there for out of labor market. There's been a disruption in the international worker channel that Cedar Point has relied on most extensively out of all of our parks. And by the way, we have dormitories at 7 of our parks. Out of market labor is always part of our part of our playbook that we lean on. We think there's a value not just to accessing that labor, but the enrichment of our workforce and the diversity element that it represents is really important to us. At Cedar Point, we've had to go and adjust our wages more. We've seen great response over the last few weeks as we raised our wages. So you'll see us continue to expand their hours and continue to add back days as we get deeper into June. But we're really pleased with the response of that market. But that's a market where we needed to really go out and make sure we drove the application -- the applicant pool. And there, we've gone to $20 an hour, and we've seen a great response to that.

Going back to something that you referenced in terms of the social distancing measures and being at certain capacity limitations. Are there ways that you can adjust either the pricing or the marketing to reallocate traffic to off-peak periods, such as weekdays?

Again, I'll go back to our core program, season pass holders. What we've always found is season pass holders self-regulate, as we call it. They come when the park is always busy. They come out at 4:00, 5:00 in the afternoon. They have to get off of work, but come out for the evenings. So as we think about how we can best utilize the capacity we have in those different dayparts, we start to spread the attendance out. So we do, through social media, talk about when the best times are to visit the park. We see the guests respond to that. So as we get into the mid of the summer, open our traditional 10 to 10 at most of our parks, we'll spread people out. The other thing we've done, Stephen, is start to really program our elements. We're having event-driven things -- event-driven activities in the park. We'll stagger them through the day, put things in the nighttime to give more value to that nighttime visitor. The traditional day visitors coming out wants to get a lot of rides in, get in early to the park, maybe go to the water park. But increasingly, what we're trying to do is program all the dayparts, so we can spread out the attendance over the course of the day.

And maybe a related follow-up. Some of your peers have talked about extending the park operating days even further as they've had success in reopening at various periods. I realized it's still early in terms of looking at your reopening. But is there an opportunity? Is there a testing that you're thinking about to try to further extend the operating days and contributions that you could get from an EBITDA perspective on these normally off-peak or off-season periods?

If you go back to 2019, we had opened our Charlotte Park in November, which was new for us. So as you think about how we both access -- when you think about how we -- you look at the calendar, very successful traditional season, Halloween through the end of October, really strong WinterFest at 7 of our parks, which starts at Thanksgiving. It's a natural start to look at how do we tie those 2 things together. So again, I'll go to the limited duration events, maybe a peanuts festival, a food festival in November or maybe even earlier in the year in March and April for those that aren't opening until May. Depending on weather, depending on location, I think there's an opportunity to look at expanding the calendar in a very smart way to provide our guests more value, but also find a way to drive more top line growth out of our calendar. We're all looking for the same thing, which is how do we drive that top line revenue growth? And these are assets that sit idle -- or have sat idle over the course of many months that we want to make sure we get the most value out of.

That's helpful. And so as you reopen, I mean, I think that in-park spend has been a bright spot for some of the peers. I guess what are you seeing now or expecting for in-park spend? And how does that vary by geography as well?

So what we said -- let me go back to what we said last year. When we opened in 2020, we talked about being up mid-teens in terms of in-park spend versus 2019. I'll tell you, as I look at the numbers now, and again, limited sample size because we're just opening up, and our early visitation was all season pass holders, being at Knott's or being at some of our other parks because we want to satisfy them for a couple of weekends at the seasonal parks. As I look at that, we're getting comparable numbers or greater, so -- versus 2019. So we're seeing really healthy increases across our in-park spending, led by food and beverage. But the notable thing is we're seeing strength in merchant games and premium experiences like Fast Lane as well.

That's super helpful. I guess on the capital allocation side, do you anticipate any changes in your capital allocation priorities near term due to the pandemic outside of delevering the balance sheet? And at what point would you be comfortable beginning to look back at restarting distribution or consider even share repurchases?

When I think about capital allocation, clearly, we went out in under 2 bond offerings, generate about $1.3 billion in proceeds, which netted down to $700 million or $800 million after you spread the capital structure. Where we are now? You were focused on recovering the business, investing and making sure we're investing to grow the revenues going forward and then delevering. Actually pay down debt at certain point time as we generate our cash. We're going to restart the distribution when we're allowed to do so under the debt covenants and when it's most prudent to do so. So that's a constant conversation with the Board. We're constantly looking at our capital structure, but our priorities are investing in the business and driving that top line revenue growth, get back to where we want to be, but also paying down debt. We said we want to get down under 5x levered as quickly as possible. That's the near term. But we think, longer term, that 3 to 4x leverage still is kind of the sweet spot for a business like ours. And at that level gives us plenty of capital to think about how we return capital to shareholders, but also how we create value for them.

And I guess, can you just remind us how you're thinking about capital spending or CapEx over the next few years to both manage cash flow, while also adequately investing for the future?

So the only -- I'll lean back to what we said on our call about a month ago, the first quarter call. We see capital being somewhere around $100 million CapEx in the calendar year 2021. We haven't gone any further than that. We will provide more -- a better view of that in our August call when we get to the second quarter results. So we'll update our spend and talk about the spend for '22 at that time.

And in general, are there investments in technology that you're making now that we should be thinking about that could be more of like a capitalized software expenses that could be outsized? Or do you feel like you're in the right place currently?

No. I think consumer tech continues to change. So when we look at consumer technology, we're keeping up with everything that's going on. We're trying to make ourselves as efficient as possible. So we're looking at our mobile app, making that more user-friendly. We're looking at how do we generate more transactions per hour at each of our food stand. So that's everything from going in and making sure the number of key strokes is a lot less in doing that industrial engineering, if I could call it that. So we're trying to rework all our processes and engage with our customers. We do a lot of research with our customers post visitation. But before they visit, what they would find valuable. They continue to tell us they want to know what the wait times are on rides. That's high on their list. That's really high on their list. But they also want information that will let them navigate the park. So we are focused on making sure we eliminate the pain points. 20 years ago, a lot of people -- most people bought their tickets at the park. Now nobody does. People walk up with a ticket on their phone. That's really helpful. It helps get speed people through. But we're also making sure that we can get them in the park as quickly as possible. So we start that engagement in the consumer journey, our guest journey, all the way when they buy ticket. Our CRM system that we built and continue to build out. Continue to invest resources in CRM. Really starts engaging the customer the moment they buy a ticket. So we try and engage them on 1-day tickets and we're focused on that. But if we see a season pass holder hasn't come in a certain length of time, we're reaching out to them as well and sending them to come to me.

Perhaps as a follow-up there. I mean you alluded to moving to more digital marketing. Is there also an opportunity to just effectively, whether it's marketing or otherwise, find ways to stay engaged with the consumer even when they're not at the park?

There are -- listen, we've partnered with folks with different types of enterprises in different regions to offer value to our season pass holders, be they local businesses or other things. So we continue to try and source that. We've got a strategic alliance department and a marketing department that's really focused on that. So anything we can do to add value to the season pass beyond just visiting is added value. But as they rank what the value is that we're giving them, getting the park multiple times a year still, that unlimited -- the ability to visit on an unlimited basis over the course of the year is still the highest rated value by our guests and consumers.

I mean I guess as you look at the rapid growth of some of the destination parks, like Disney and Universal, are there things that you can learn from their successes? And where does content fit in as the strategy that you think about for increasing consumer engagement?

We've never -- Cedar Fair has had some level of engagement on intellectual property and some of the consumer-driven brands. To the extent that we can strike some strategic alliances and there are value on both sides, we constantly explore those. Our -- as a house of brands, we've built carefully crafted brands that really highlight the identity of our regional parks. Knott's has a very different identity than Cedar Point and is thought of very differently than Carowinds down here in Charlotte. So we try and respect those regional brands, take advantage of our scale, generate efficiencies, but anything that we can -- where we can work with people like Feld Entertainment and Monster Jam, the event -- some of the things that you touched on, you've asked question about, we -- what I'm disappointed by is COVID disrupted some of the testing that we were doing. We have rolled out Monster Jam and ran carnival to parks in 2019, and we're doing a further rollout in 2020. And we didn't get to test everything to the level that we wanted to. So as we get into 2021 and 2022, we're going to dip back into whether or not there aren't strategic alliances and IPs that makes sense for us to invest behind and cross-market with it.

I guess going back to, I guess, the capital structure, one of the things that we get questions fairly regularly is the MLP structure. Can you just remind us of the history of that partnership? And then how you think about the value of the MLP structure currently?

So if you go back to 1987 -- the partnership was formed in '87 and the reason it was structured as a partnership was they were looking the business, at that time, just Cedar Point and Valley Fair. We're spending off far more cash than they could invest back in the business. So they wanted a tax-efficient way to structure return capital to unitholders. So MLP is very tax efficient. It doesn't have the complication of an opco propco like a REIT that most people are familiar with. But we marry the capital investment and we distribute all available cash. Go back to pre-pandemic, we are paying $3.74 distribution, our version of a dividend, which was a tax-advantaged return of capital to the shareholders. So the structure leads to a very efficient REIT tax advantage, tax efficient return of capital back to the unitholders because it's a return of capital, not a return on capital. It's a return of capital, not a return on capital, so it's tax efficient. We think, as you look forward, it's disrupted now. Obviously, we're not paying a distribution. I've spoken our priority is to delever, stand the business back up and delever. We will reinstitute the distribution when we're allowed to do so on the covenant, and Board thinks it's a prudent time. But that tax advantage nature, in particular, if individual or corporate tax rates go back up, I think the benefit from the MLP will be greater in the future if those events happen. So we constantly monitor what's going on in the tax world, but we've got a lot of long-tenured unitholders who are comfortable with us being a partnership. It was written so that it takes a large percentage of the unitholders voting yes to convert. So there's a lot of challenges in converting out of an MLP. We think there's the -- right now, we're not getting full benefit of it. But as we write our capital structure to get back to generating significant amount of free cash flows, the underlying rationale for being an MLP is just as strong when we get to that part as it has been in the past.

So just to be clear, I guess, there's this -- there's 2 different things that are being debated and one may have already kind of gone away, but there's the corporate tax reform, traditional tax rate, which it sounds like you'd say that would widen the value or improve the value of the MLP structure. On the flip side, there was talk of capital gains changes, which maybe is an offset to that. One, is that a fair assessment of what's happening. And then, secondarily, while you need to have a very large percentage of people approve shift to a C-corp, can M&A alleviate some of the potential headwinds from transitioning to a C-corp, if you were to, for example, pursue a merger?

Under the -- so let me speak to the MLP first. Under the terms of our -- under terms of our partnership agreement, it takes 2/3 vote, yes, in a transaction to convert the partnership into a C-corp. Absent a transaction, it takes an 85% threshold voting, yes, which is just really, really high. So moving on from that, your question about consolidation. Listen, I think when you look at the course of Cedar Fair, the entity structure that's in place has always been really conducive to doing M&A. So MLP hasn't precluded us from doing M&A, and we've built the company through a series of M&A transactions, be they individual parks, Dorney Park, Worlds of Fun, Knott's Berry Farm back in the early days or the 5 park acquisition, Paramount Parks in 2006. I think as we showed in 2019, Stephen, we're still active in that market. We acquired the Schlitterbahn properties in Texas, very strong branded -- high-quality brands and high-quality markets, really excited about that and acquired the Sawmill Creek Resort property in Sandusky, achieved renovations on this year. So the entity structure is separate and apart from strategic rationale, hasn't stopped us from doing M&A. Our focus is internal. Our focus is on our portfolio and riding our capital structure, but I'm sure there will be opportunities on the M&A landscape as the industry continues to recover and as we each rebuild our capital structures.

That's helpful. And one last one as we wrap up. There have been some articles that I've seen talking about changes to the park hours and park operating days because of labor pressure. Can you just elaborate on that? I think you touched base on it a little bit. Any way to clarify what you're seeing? And how many days that might be impacting?

Yes. Most notably, I touched on it before. We've, for the moment, shut down Cedar Point on Tuesdays and Wednesdays, weekdays while we rebuild their workforce. We've seen great reaction, as I said, from the $20 an hour wage. So we are bringing lots of folks and lots of employees on, which will enable us to take a look at July and August differently. I don't think there will be impact at Cedar Point beyond June, but we're monitoring that and making sure that we get to where we need to be. Elsewhere, I don't -- I think we're at a point where we can manage the demand that we're seeing. And if we see the demand as such that we can more profitably operate in 5 or 6 days a week versus 7, we'll go in and do that. So it's all about free cash flow generation. But -- and that comment is really more about our smaller parks. I'll remind you as we wrap up the 4 largest park we have: Cedar Point, Knott's Berry Farm, Kings Island and Canada's Wonderland, generate 80% or so of our revenues and EBITDA. So we're trying to manage the top line revenue growth for all our sites, but those 4 are the 4 that really drive the lion's share of our results.

That's super helpful. And we are right at time. So Richard, thank you so much for joining us today. I hope that we can see you in person soon. Next up, we will have Royal Caribbean at 11:15. So I'll see everybody else then. Thank you.

Thanks, Stephen. Thanks, everybody, for joining us.