Cedar Fair Q3 2024 Earnings Call Highlights and Insights

Cedar Fair (FUN 7.26%)
Q3 2024 Earnings Call
Nov 06, 2024, 10:00 a.m. ET

Key Highlights of the Earnings Call:

• Prepared Remarks from Management
• In-Depth Questions and Answers
• Meet the Call Participants

Management’s Key Insights and Prepared Remarks:

Operator

Welcome, everyone. My name is Krista, and I will be your conference operator today. It’s my pleasure to guide you through this earnings call for Six Flags Entertainment Corporation for the third quarter of 2024. [Operator instructions] Thank you for your attention.

Now, I would like to hand over the call to the management team of Six Flags. Please proceed.

Michael Russell — Corporate Director, Investor Relations

Thank you, Krista, and good morning to all of you. I’m Michael Russell, the corporate director of investor relations for Six Flags. I appreciate your attendance today as we delve into our financial results for the third quarter of 2024 for Six Flags Entertainment Corporation. Earlier today, we released our earnings press release, which can be accessed through the News tab on our Investor Relations website at investors.sixflags.com.

Additionally, we have made available a concise slide presentation that you can view on the webcast page of today’s call or on our Investor Relations website. This presentation offers more insights regarding Six Flags’ strategic roadmap and key performance metrics that will be discussed during this call. Before we proceed, I must remind you that remarks made in this call may include forward-looking statements as defined under federal securities laws. Please note that such statements involve risks and uncertainties that could lead to actual results differing from those anticipated.

For a more comprehensive discussion of these risks, please refer to our filings with the SEC. In compliance with the SEC’s Regulation FD, this webcast is being made accessible to the media, general public, analysts, and investors. As this call is open to all parties and the notification was broadly disseminated, all content discussed will be considered fully disclosed. Joining me on the call this morning are Six Flags’ CEO, Richard Zimmerman, and CFO, Brian Witherow. With that, I’ll turn the call over to Brian.

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

Thank you, Michael. Good morning, everyone, and thank you for being here today. I welcome you to this important call where we will discuss our consolidated financial results following the merger for the new Six Flags Entertainment Corporation. I will start with a recap of our third-quarter results ending September 29, 2024, and provide additional context on our performance over the past five weeks, particularly highlighting the remarkable demand for our highly successful Halloween events.

I’ll then conclude with an update on key indicators, including the current status of season pass sales, before passing the floor back to Richard. In the third quarter of 2024, our total operating days reached 2,585, which is a notable increase from the 1,091 operating days recorded in the same quarter last year. Out of the additional 1,494 operating days, 1,591 were related to operations at the legacy Six Flags Parks. On the other hand, legacy Cedar Fair parks experienced 97 fewer operating days compared to the previous year due to a fiscal calendar shift and planned adjustments in park operating schedules, along with the effects of extreme weather and operational disruptions.

In terms of our financial performance, we achieved net revenues of $1.35 billion, driven by an impressive total attendance of 21 million visits. This figure includes $558 million in net revenues and 9.2 million visits from legacy Six Flags operations. Meanwhile, revenues from legacy Cedar Fair parks saw a decrease of $52 million compared to the prior year, primarily due to 660,000 fewer visits, 460,000 of which were attributed to the fiscal calendar shift.

The remaining decline in attendance can be linked to extreme weather conditions that affected park operations during the quarter. As mentioned in our previous earnings call, extreme weather, including Hurricane Beryl in early July, Hurricane Debby in early August, and Hurricane Helene at the end of September, posed significant challenges. However, excluding the weeks impacted by these weather events, attendance across our entire portfolio during the remainder of the third quarter showed a slight increase compared to the same three-month period last year, reinforcing our belief in the robust health of our consumer base and the strong demand for our offerings.

Turning to guest spending trends in the third quarter, out-of-park revenues totaled $102 million, which included $21 million from legacy Six Flags operations. Out-of-park revenues from legacy Cedar Fair operations decreased by $5 million, influenced by the fiscal calendar shift. In-park capital spending was recorded at $61.27 per guest, reflecting a 2% decline compared to the previous year. Approximately half of this decrease can be attributed to the merger, while the other half is due to a strategic reduction in average season pass pricing, resulting in a higher proportion of season pass visitors at legacy Cedar Fair parks.

Despite these challenges, there was a positive trend in guest spending on food and beverage, which increased by 2% during the quarter, along with a 4% rise in spending on extra charge products. This indicates our guests’ willingness to spend during their visits and highlights the dedication of our park teams in delivering exceptional products and high-quality guest service. On the cost front, our operating costs and expenses for the third quarter amounted to $894 million, inclusive of $368 million from legacy Six Flags operations.

The overall costs comprised $575 million in operating expenses, $209 million in SG&A expenditures, and $110 million in cost of goods sold. The operating expenses included $245 million from legacy Six Flags and an $18 million adjustment to self-insurance reserves at legacy Cedar Fair. These costs were partially offset by a $10 million decrease in operating expenses at legacy Cedar Fair parks, attributed to the calendar shift. Excluding these factors, operating expenses at legacy Cedar Fair parks decreased by $11 million, reflecting our ongoing initiatives to reduce standalone operating expenses as part of the first phase of our merger-related cost synergies.

SG&A expenses for the third quarter included $81 million from legacy Six Flags operations and $55 million in merger and integration costs. Excluding these items, SG&A expenses at legacy Cedar Fair increased by $9 million, primarily due to higher full-time wages, including bonuses. The $110 million in cost of goods sold during the quarter included $42 million related to legacy Six Flags operations. As a percentage of food, merchandise, and games revenue, cost of goods sold increased by 30 basis points, with 10 basis points of this increase attributable to legacy Six Flags parks, while the remainder was driven by rising food and beverage costs at legacy Cedar Fair parks.

As previously mentioned, we remain focused on enhancing operating efficiencies and improving margins. We are diligently working towards realizing $120 million in merger-related cost synergies by the end of 2025. Our current cost-saving initiatives at both legacy Cedar Fair and Six Flags are aimed at achieving $50 million in run-rate cost synergies by the end of 2024. Adjusted EBITDA, which we consider a crucial measure of park-level operating performance, totaled $558 million for the third quarter, including $206 million from legacy Six Flags operations.

This figure was partially offset by a $21 million decline resulting from the fiscal calendar shift at legacy Cedar Fair, as well as a $15 million decrease linked to extreme weather impacts on attendance and revenues during the quarter at legacy Cedar Fair parks. To maintain transparency around our operating results, let’s shift our focus to the performance since the end of the third quarter, which has showcased the excellent success of our increasingly popular Halloween events. Over the past five weeks, we have welcomed 6.5 million guests across our combined portfolio, marking a remarkable increase of over 20% or more than 1 million visits compared to the same five-week period last year.

This sustained demand momentum across both legacy Cedar Fair and Six Flags parks has also contributed to a significant uptick in season pass and membership sales. Over this five-week period, sales of 2025 season pass units rose by 8%, with the average pass price increasing by 3%. Consequently, early sales of season pass units across the combined portfolio are now up 2% compared to the same time last year. Given the strong season pass base and the robust performance in October, historically representing about 60% of our fourth-quarter attendance, we are optimistic about achieving fourth-quarter adjusted EBITDA in the range of $205 million to $215 million, with actual results contingent on operating conditions and macro factors such as weather in the latter part of the year.

Now, let’s briefly discuss the company’s balance sheet status. Our balance sheet remains in excellent condition as of the end of the third quarter, with $90 million in cash and cash equivalents and approximately $4.8 billion in gross debt. Of our outstanding debt, roughly 80% is fixed through long-term notes, and aside from $200 million in senior notes maturing in July of next year, we have no significant maturities before 2027. As of September 29, 2024, our liquidity totaled $743 million, encompassing cash on hand and available capacity under our revolving credit facility, providing us with significant financial flexibility moving forward.

The deferred revenues on September 29, 2024, amounted to $359 million, compared to $208 million on September 24, 2023. This $151 million increase includes $144 million of deferred revenues at legacy Cedar Fair parks, while the remaining increase reflects strong sales of advanced purchase products at legacy Cedar Fair parks. By the end of the third quarter of 2024, deferred revenues at legacy Cedar Fair had risen by $7 million or 3%. Additionally, during the quarter, we invested $110 million in capital expenditures.

Looking ahead, we anticipate capital expenditures to range between $100 million and $110 million for the fourth quarter. For 2025 and 2026, we expect to invest between $500 million and $525 million in capital expenditures. These investments are essential to expedite the integration process and unlock the growth potential of our combined portfolio. Our investments will primarily target projects aimed at boosting demand and enhancing guest spending, while also addressing any deferred infrastructure needs across the portfolio.

While we are finalizing capital programs beyond 2026, we aim for annual capital expenditures to be approximately 12% to 13% of net revenues in the long term. Lastly, from a cash flow perspective, we project annualized cash interest payments of $305 million to $315 million and annualized cash taxes of $130 million to $140 million in 2025. With that, I’d like to pass the call to Richard.

Richard A. Zimmerman — President and Chief Executive Officer

Thank you, Brian, and thanks to everyone for being here today. I want to take a moment to reflect on our third-quarter performance, share updates on our progress toward long-term value creation, and discuss the key strategic initiatives that will ensure sustained profitable growth for the new Six Flags. I’m excited to highlight the early advancements we’ve made since completing our transformative merger on July 1st.

I’m proud of how our team has collaborated with urgency to seize early wins while establishing a solid foundation for realizing the long-term potential of the combined company. We have made significant strides in our integration process while ensuring that all 42 parks maximize performance during the peak months of the year. Despite the challenges posed by three hurricanes, we achieved strong results. As Brian noted, when excluding the three weeks most affected by the hurricanes, attendance across our portfolio showed a slight increase compared to the same period last year, and this positive momentum continued into October, with demand for our Halloween events driving attendance up by 20% over the past five weeks.

In addition to the impressive attendance trends, I am particularly delighted with the robust early demand for season passes, which serves as one of our key indicators for the upcoming season. Alongside a strong second half of the year, we have been dedicated to enhancing the guest experience at all our parks, building momentum heading into 2025. As we’ve emphasized in previous earnings calls, delivering unparalleled entertainment and exceptional guest service is crucial to our long-term success, as guest satisfaction is vital for sustainable growth.

With this in mind, our team promptly implemented noticeable improvements at the legacy Six Flags parks, leading to our highest guest satisfaction scores in the last four years. The positive outcomes from our actions clearly indicate that investing in the guest experience drives higher attendance and positions us for future growth. Our early achievements reinforce our confidence in our ability to continue promoting meaningful attendance growth as we approach the 2025 season. I’m also pleased to report that the integration process is progressing smoothly.

Through Project Accelerate, our internal initiative aimed at unlocking the full potential of the new Six Flags, we are witnessing the early positive results we anticipated. Taking swift action on our core objectives has positioned us to capitalize on the revenue upside and cost synergies resulting from the merger. As Brian previously mentioned, we are on track to achieve $50 million in cost synergies by the end of this year, and we remain confident in our ability to deliver the full projected $120 million of cost synergies on a run-rate basis by the end of 2025. With our efforts to capture cost synergies well underway, we are now focusing on pursuing what we consider the greatest opportunity from the merger: driving substantial attendance growth across the new combined portfolio.

In a demand-driven industry, attendance growth catalyzes improvements across all key performance indicators, including extended length of stay, increased pricing power, greater guest spending, and ultimately, enhanced margins and increased free cash flow. Therefore, prioritizing attendance growth is essential to ensure that our parks remain comfortably crowded while delivering quality experiences that keep guests returning year after year. When evaluating the legacy Six Flags parks, the potential for attendance growth is compelling. Restoring attendance to 2019 levels would represent a 48% increase over the 22 million guests entertained in 2023, a goal we believe is both achievable and realistic, particularly considering the market penetration rates of the legacy Six Flags parks, which are roughly half of those of the legacy Cedar Fair parks in 2023.

Given this upside potential and the strong momentum in season pass sales exiting October, we believe we are well-positioned to exceed our historical attendance growth rate of 1% to 2% across the combined portfolio in 2025. Our success in growing attendance and improving guest spending levels next year will largely depend on our compelling capital program. As we outlined last quarter, one of our guiding principles is strategically investing capital to drive growth. Consistent reinvestment in our parks and underlying infrastructure is vital for creating long-term value.

We are executing a disciplined approach to capital allocation that balances our investments in marketable new attractions and expanded in-park offerings with essential infrastructure improvements that are often overlooked but crucial for efficient park operations. This approach ensures we maintain the integrity of our parks while enhancing the overall guest experience. As Brian indicated, we plan to invest $500 million to $525 million annually in capital expenditures across the portfolio over the next two years. This will involve investing approximately $325 million to $350 million each year in marketable new attractions and revenue centers, alongside another $175 million each year dedicated to infrastructure improvements.

Our capital projects will be strategically focused on the parks that generate the highest potential cash flow, ensuring our investments yield the greatest returns. Before concluding with a review of our long-term targets, I want to clarify a few points to ensure our investors fully understand our strategic approach moving forward. First, increasing attendance does not require and will not involve aggressive discounting. Our strategic approach hinges on delivering a high-quality experience that guests value and are willing to pay for, rather than resorting to lowering prices to drive attendance.

Our pricing strategy is time-tested and has proven successful in establishing consistent market expectations, building long-term trust with consumers, and sustainably growing both attendance and per capita spending. We have successfully implemented dynamic pricing tools and practices over the past decade and expanded their use across the combined portfolio, expecting them to be equally effective moving forward.

Second, we maintain confidence in the capital investments we have planned for the upcoming seasons and how these investments align with our capital allocation priorities. The legacy Six Flags parks are fundamentally strong with solid infrastructure, allowing us to enhance them without necessitating outsized capital investments. Consequently, most of our planned investments in the parks will be judiciously directed towards high-return opportunities that enhance the guest experience and drive growth. Third, we are committed to realizing and retaining the cost synergies outlined upon announcing the merger.

As mentioned, we have a clear path to deliver the entire $120 million in cost synergies on a run-rate basis by the end of 2025, with $50 million expected to be achieved by the end of this year. Much of the remaining cost synergies will come from eliminating redundant overhead costs, optimizing shared services, and rationalizing our supplier base. While we are prepared to reinvest operating costs back into our parks to foster growth, we will seek additional cost savings to offset these initiatives. Lastly, we are focused on managing short-term debt levels and reducing net leverage through growth in free cash flow.

We are moving with urgency to implement the necessary initiatives to achieve our goals. Alongside driving organic growth, we have initiated a comprehensive review of our portfolio, including any excess or undeveloped land. This exercise aims to optimize our asset base and narrow our focus, facilitating an accelerated reduction in leverage. While we undertake steps to optimize short-term results, we are diligently working to unlock the full potential of the merger.

Looking ahead, we have set ambitious yet achievable targets to measure our progress as we advance our strategic objectives. Ultimately, we are targeting annual unlevered pre-tax cash flow of $800 million or more by 2027, which implies an average growth rate of over 10% over the next three years. This sustained growth can be achieved by increasing annual attendance to over 55 million guests and expanding modified EBITDA margins to 35% or higher. Such free cash flow growth would enable us to reduce net total leverage to below three and a half times adjusted EBITDA by the end of 2027.

We plan to host an Analyst Day toward the end of the first quarter next year, at which time we will provide further details on the core strategies of our long-term plan as well as additional insights into our growth outlook. Further information regarding our Analyst Day will be shared soon. Before we open the floor for questions, I want to express my confidence in the tremendous long-term value creation potential of the new Six Flags. Our resilient business model, solid foundation, and clear roadmap for success will drive sustained growth and profitability for the foreseeable future.

By concentrating on guest satisfaction, making disciplined capital investments, and emphasizing operational cost efficiencies, we are positioning Six Flags for long-term success in any market environment. I am genuinely excited about our future. We have the right strategy, the right team, and the right assets to deliver exceptional experiences for our guests and strong returns for our shareholders. Thank you for your ongoing support, and I look forward to updating you on our progress in the coming quarters.

That concludes our prepared remarks. Krista, please open the line for questions.

Engaging Q&A Session:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Steve Wieczynski with Stifel. Please go ahead.

Steven Wieczynski — Analyst

Good morning, everyone. I hope you are all doing well. Richard or Brian, regarding the target of 55 million in attendance by 2027, could you provide insights on the anticipated growth trajectory as we approach this goal? I assume it won’t be a steady increase given the significant investments required in certain legacy Six Flags parks in 2025 and 2026. Any additional context you could share would be appreciated, especially in relation to your expectations for 2025 being above the historical growth rate of 1% to 2%.

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

Yes, Steve, it’s Brian. To begin, I want to emphasize what Richard mentioned regarding 2025. We believe there are significant opportunities across the portfolio to position ourselves for long-term growth. However, we recognize that growth is rarely linear. We anticipate an inflection point where growth will ramp up. As we look ahead, we are genuinely excited about our plans for 2025, but we are even more enthusiastic about the capital programs and initiatives we are developing for 2026 and beyond. While specific discussions are ongoing, we foresee that 2025 will be a year of growth, with the potential for a significant uptick in attendance thereafter.

Richard A. Zimmerman — President and Chief Executive Officer

Good morning, Steve. I want to add that there are two primary factors driving demand in our business: guest satisfaction and our compelling capital program. We are currently achieving record-high satisfaction scores on both sides of our portfolio, which is encouraging. Additionally, our capital program for 2026 is shaping up to be the best I’ve seen in my nearly four decades in this industry. While external factors such as weather will undoubtedly influence attendance, we are committed to taking the necessary steps to drive demand.

Steven Wieczynski — Analyst

Thank you for that insight, guys. Moving on to my second question, considering the target of $800 million in unlevered free cash flow by 2027, we estimate this would correlate to around $1.28 billion to $1.3 billion in adjusted EBITDA. Can you provide clarity on your expectations for per capita spending in the coming years and whether the $80 million in original revenue synergies is included in this target?

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

Yes, Steve, it’s Brian again. Regarding revenue synergies, we previously indicated that the true potential of the merger lies in significantly driving attendance growth rather than merely focusing on expense synergies. Over the coming years, we anticipate that much of the growth in revenue will stem from this increased attendance. While we remain confident in our ability to grow per capita spending, our primary focus in the near term will