Six Flags Entertainment Earnings Call Nuggets: Buyback Strategy and Cost Reduction Outlook

Six Flags Entertainment Corp (NYSE:SIX) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Buyback Strategy

Afua Ahwoi – Goldman Sachs: I had a couple of questions, just first maybe on the buyback. Can you address what you are thinking about in the long-term as you get to the end of this current authorization that you have? And then secondly, as we think about the weather impact, is there any way for you to get a sense of how much exactly was deferred into the third quarter from those who sort of didn’t come because of the weather. Is that reflected in the deferred revenue balance or is that solely just a season pass. And then maybe the economics of that monthly plan that you were talking about, I mean how does it work? Is it the same marginal or cash flow as regular season pass customer or regular days etcetera?

Jim Reid-Anderson – Chairman, President and CEO: Let me start with your first two questions and then John will pick up on the third one. With regard to the buyback strategy, it’s been very clear all along and we maintained the same approach, which is that any excess cash flow above and beyond what we need to operate the business will be utilized for dividends and share buybacks. So that has not changed and we will continue down that path not only for the rest of this year but into future years. With regard to the weather, we commented earlier that it was obviously a difficult quarter, the worst that we have seen in at least a decade. But we are not going to comment on what happens looking forward, we don’t give as you know comments with regard to current quarter or future quarters, but I do believe that we had said and we would reinforce this, that historically what we’ve seen, where there is a weather impact that people simply buy their time and they come later in the season. The beauty of where we are right now is the first half is over and in the second half that represents approximately 60% of our annual attendance historically. So, there is opportunity for folks to come back, and we’re optimistic that we’ll see that in the third and fourth quarter.

John M. Duffey – CFO: Afua, was your question regarding the difference in margins between memberships and season pass?

Afua Ahwoi – Goldman Sachs: The membership and also maybe how you would book that on your balance sheet or income statement and how we should be thinking about that would impact attendance?

John M. Duffey – CFO: Sure. Well, the membership is recorded similar to a season pass. So when the membership is purchased we would recognize all of that as deferred income. As the individuals come to the park based upon historical trend, we would recognize a piece of that as they come to the park, so very similar to season pass. The only difference would be that a membership extends beyond the current calendar year, so there may be a portion of that gets deferred and recognized in 2014. As it relates to margins, the margins on the memberships are higher. The pricing on the membership runs 30% to 34% on average higher than a season pass. One other point that I’ll make on the membership is that, another difference between memberships and season pass is that a membership is automatically renewed on a month-to-month basis on the 13th month.

 

Cost Reduction Outlook

Ian Zaffino – Oppenheimer: You guys did a great job on the cost front and I know you said you are able to kind of flex your spending and your cost. Can you give us kind of maybe specific examples of what you are doing to reduce the cost and to kind of keep in check the way you did this quarter?

Jim Reid-Anderson – Chairman, President and CEO: I think there’s several examples both John and I would jump in. But in terms of the ability to scale back on marketing costs, we can do that when the weather is rough as it was, we can scale back the spending there, same with regard to our seasonal labor. As you know, bulk of the employee base is seasonal and so if we know the weather is bad, we’re able to scale back the number of people at the parks or close down parks on days when that weather is bad. So those are the sort of examples, but also internally from a leadership perspective we can scale back travel within the Company and other expenses. So there are a series of things that we can do in these circumstances and I think we’ve shown couple of times now where the weather has impacted us that we are able to do that.

Ian Zaffino – Oppenheimer: Then can you just remind us about the partnership products how that works, what their stakes are in the Dallas or the Arlington Park that kind of have the (indiscernible) flow through? Thanks…

John M. Duffey – CFO: There are two parts in Arlington; there is the theme park and the waterpark. The theme park is in the partnership, the waterpark is not. We own approximately 53% of the Arlington Park with the remaining percentage owned by multiple limited partners. The way that – the financial works is that there is a minimum distribution that is made each year and that is made to all of the partners including Six Flags. Any cash that’s generated above that minimum distribution a 100% of that comes to Six Flags. In 2013 that minimum distribution for Six Flags over Texas is approximately $40 million of which approximately $19 million goes to the other limited partners and $21 million to Six Flags.

Ian Zaffino – Oppenheimer: And then I’ll figure out I’ll ask this, see if you can answer it, but if you look back at sort of historical maybe incidents that have happened, can you give us maybe an idea. I know you don’t break it out on a park level so it’s difficult for us to kind of get to it. But maybe a previous incidence what was the attendance impact following that incident or can you give us maybe a framework of how to think about it?

Jim Reid-Anderson – Chairman, President and CEO: Sure Ian, I think that’s a reasonable question, given the circumstances. I think, you know at this time, we can comment on any future financial impact as we would simply be speculating. However, given the exceptional circumstance we wanted to provide at least a quick update. I think you know the accident occurred last Friday and since then we’ve seen no significant impact on our attendance across the corporation. I do want to say though that history in this industry would suggest that there is a lag in reaction time after an accident, and there could be a short to medium-term attendance impact at the affected park. Obviously, we are going to take the opportunity to update everyone in more detail on the Q3 conference call as to any attendance or financial impact.

Afua Ahwoi – Goldman Sachs: I had a couple of questions, just first maybe on the buyback. Can you address what you are thinking about in the long-term as you get to the end of this current authorization that you have? And then secondly, as we think about the weather impact, is there any way for you to get a sense of how much exactly was deferred into the third quarter from those who sort of didn’t come because of the weather. Is that reflected in the deferred revenue balance or is that solely just a season pass. And then maybe the economics of that monthly plan that you were talking about, I mean how does it work? Is it the same marginal or cash flow as regular season pass customer or regular days etcetera?

Jim Reid-Anderson – Chairman, President and CEO: Let me start with your first two questions and then John will pick up on the third one. With regard to the buyback strategy, it’s been very clear all along and we maintained the same approach, which is that any excess cash flow above and beyond what we need to operate the business will be utilized for dividends and share buybacks. So that has not changed and we will continue down that path not only for the rest of this year but into future years. With regard to the weather, we commented earlier that it was obviously a difficult quarter, the worst that we have seen in at least a decade. But we are not going to comment on what happens looking forward, we don’t give as you know comments with regard to current quarter or future quarters, but I do believe that we had said and we would reinforce this, that historically what we’ve seen, where there is a weather impact that people simply buy their time and they come later in the season. The beauty of where we are right now is the first half is over and in the second half that represents approximately 60% of our annual attendance historically. So, there is opportunity for folks to come back, and we’re optimistic that we’ll see that in the third and fourth quarter.

John M. Duffey – CFO: Afua, was your question regarding the difference in margins between memberships and season pass?

Afua Ahwoi – Goldman Sachs: The membership and also maybe how you would book that on your balance sheet or income statement and how we should be thinking about that would impact attendance?

John M. Duffey – CFO: Sure. Well, the membership is recorded similar to a season pass. So when the membership is purchased we would recognize all of that as deferred income. As the individuals come to the park based upon historical trend, we would recognize a piece of that as they come to the park, so very similar to season pass. The only difference would be that a membership extends beyond the current calendar year, so there may be a portion of that gets deferred and recognized in 2014. As it relates to margins, the margins on the memberships are higher. The pricing on the membership runs 30% to 34% on average higher than a season pass. One other point that I’ll make on the membership is that, another difference between memberships and season pass is that a membership is automatically renewed on a month-to-month basis on the 13th month.

A Closer Look: Six Flags Entertainment Earnings Cheat Sheet>>