Mar 10, 2008
Six Flags, Inc. (NYSE:SIX) Q4 2007 Earnings Call March 10, 2008 8:00 am ET
Executives
Lisa Brown - Corporate Director of Communications Mark Shapiro - President and CEO Jeff Speed - Executive Vice President and Chief Financial Officer
Analysts
David Miller – SMH Capital Lee Ryan - Boone Capital Howard Bryerman – Evergreen Investments Barrett Naylor – Brownstone Asset Management
Operator
Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Six Flags Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Ms.
Lisa Brown.
Lisa Brown
Good morning, I’m Lisa Brown, Six Flags Corporate Director of Communications. This morning the company released its financial and operating results for the fourth quarter and 12 months ending December 31, 2007.
A copy of the earnings release is available on the company’s website at www.SixFlags.com under the heading investors. Here with me today are President and CEO, Mark Shapiro and our Executive Vice President and Chief Financial Officer, Jeff Speed.
Before I turn the call over to them they have asked me to remind you that in compliance with SEC regulation SD a webcast of this call is being made available to the media and the general public as well as analysts and investors. The company cautions you that comments made during the call will include forward looking statements within the meaning of the Federal Securities laws.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in such statements. You may refer to the company’s 2006 annual report on Form 10-K which is also posted on its website for a detailed discussion of these risks.
Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated all contents of the call will be considered fully disclosed. In accordance with SEC regulation G, non-GAAP financial measures used in earnings release and the company’s oral presentation today are required to be reconciled to the most directly comparable GAAP measures.
These reconciliations are available to investors in the earnings release. Now I’d like to turn the call over to Mark Shapiro, President and CEO.
Mark Shapiro
Good morning everyone. I’ll turn it to Jeff Speed in just a minute and Jeff will outline for you our fourth quarter performance and our 2007 full year performance and spend much of the time detailing the 2008 financial plan.
Before I do that I want to set the stage more or less for 2008 and what the financial plan is, what the strategy is and where we are in terms of executing on that strategy. First and foremost you saw last week we announced international expansion into Dubai.
I wanted to give you some color on that deal. That deal pays us in three different ways.
We are capitalizing on this new revenue stream that we’ve talked about on the last two phone calls. This will be the first of several announcements.
Dubai is the first and it will pay us in three different ways beginning immediately. First, we will get an annual payment for design and development fees from now, the actual moment we signed the deal through December 2011 when the park is scheduled to open.
Second, we’ll have recurring fees that will pay us for our exclusivity. What I mean by that is with the exception of the country of Qatar which we have a carve out in our deal for Qatar; we will get recurring fees so that Six Flags does not open another park in all of the UAE.
Although Cutter, of course, isn’t in the UAE, it’s close enough. We do have a cut out for Qatar.
Third, when the park opens in December 2011 or there about, we will have a recurring annual licensing fee, a royalty fee that we will be paid for the next 25 years. I’m not going to get into any specifics financially of the Dubai deal in terms of what they are actually paying us in each of those three buckets but I will lay out for you our licensing and sponsorship bucket, as we refer to it, the corporate alliance bucket.
This includes all sponsorship fees and licensing fees that the company is paid. We will in fact give you guidance today specifically on what that number will be.
Before closing the door on the country I will just mention that we are in discussion with several countries for multiple deals, nothing to speak to at this time but in laying out the sponsorship and licensing guidance I will tell you anything going forward that you hear about or read about in the newspapers will be included in the number I am giving you today. In three weeks you hear about another deal, or we announced another deal or five weeks from now, that number is already included in the guidance we are giving you today.
If the guidance is to change throughout the year we will update you at that time. At this time we are assuming things we already have in the bag or deals that we believe will come to fruition within the year to get us to our number that we are guiding you today.
Moving specifically to our sponsorship and licensing let’s backtrack a little bit. Last year, as you know, we finished the season hitting our guidance goal of $38 million.
Including all of our corporate alliance sponsorship and any licensing we had as a brand primarily at that point it was just consumer products. A lot of questions the last few months about what’s falling out, how long are your deals.
All of our deals are completely differ in range of scope, scale, size and of course term. Some are one year some are two years, some are five years.
We ultimately go out there trying to find three to five year deals but if there are some brands or advertisers that we want to test the waters with we’ll do one year deals. Essentially every year deal or another is going to fall out.
The one that’s mostly generated much of the question on the last few calls has been the Home Depot giving some of the retail problems they are facing in their business. As we told you we would be dropping out of the Home Depot deal with regard to exclusivity.
We might do a deal in some form that allows us to retain some of the money and some of the partnership but we are opening up the category to several other department stores or outdoor furniture stores that might give us an opportunity that in the whole we could garner more than the Home Depot was paying us. Of that $38 million what fell out including the Home Depot, a bunch of deals ranging to the tune of $7 million.
We came into the year at $31 million and we are going to give you guidance today that has us hitting $51 million for our guidance in sponsorship and licensing. What I would tell you is that we are seeing a lot of traction in the market place.
We are generating a lot of heat. I’m sure as you’ve read from a lot of the reports the up front and the television market place are looking strong and so is our advertising business.
As I mentioned we are looking at jumping from $38 million to $51 million. For us, internally it’s a $20 million jump because we had $7 million fall out.
I want to address the economic climate and how that impacts our business, before getting into quantitative specifics on just how our business is doing thus far, although early. Remember the first quarter accounts for only 5% of our overall attendance on the year.
As you can see from our release we have strong fourth quarter and I would mention that the fourth quarter was in the midst of the same economic climate we are in now. From October 15 through the end of 2007 the stock market was down 15% driven by the credit crunch, driven by the housing bubble, driven by oil prices, driven by a retail sector that was down across the board from a Christmas shopping standpoint.
Overall it’s the same climate we are experiencing right now. Yet, we had a strong fourth quarter.
Secondly, overall I wish to tell you that we have continued cautionary optimism but we are cautiously optimistic about our year. The reason why is that fourth quarter.
Secondly the company has been stable in other recessionary periods both in 1991 and in 2001. What ends up happening historically is the long distance vacation, the big ticket items are what get sacrificed.
The short, close to home, convenient, affordable, those vacations usually, historically, ramp up. We believe that people are not going to stay in their house every single day until they can’t afford the air conditioning to stay in their house every single day these days.
They will not stay there every single day just twiddling their thumbs; they are going to do something. While it may not be a big trip to Disney or it may not be a long vacation that you get on a plane and has them jetted somewhere and having a Mai Tai by the pool in Hawaii, its going to be something outside their house.
We believe with strong pricing plan, a strong marketing plan, we’ve put ourselves in a unique position to be high on that local list of things to do. Our capital plan of course with eight roller coasters and eight parks and unprecedented capital program which has us putting a new ride in every single park also positions us well.
It’s no coincidence that most of the airlines, eight out of ten airlines are predicting and forecasting that demand for travel this summer is going to be down in the skies. That bodes well for us locally.
Recent results from VJ’s and Costco indicate the consumers are essentially trading down from specialty stores. They are trading down from department stores.
They are looking for lower price alternatives and we believe Six Flags is such that. It is exactly a low price alternative and that also values us and positions us well.
We have a strong value message and season pass and soon to be our daily ticket announcements. Essentially it costs a family of four less than $175 for a full day at six flags, that’s everything.
That’s retail, food, flash pass, tickets to get in, you name it. When you are getting a rebate check that comes out toward the end of May, right now the prediction is anywhere from May 20 to June 1, those rebate checks are anywhere from $600 to $1,200 for a family, it put us in a good position and makes for a good proposition.
Our season pass sales are incredibly strong right now. We are only in the first quarter but up to this point we generally see sales of 20% of our overall season passes.
Of the $2.2, $2.3 million in season passes we sell every year, generally by this time, mid March, we’ve sold 20% of those season passes. Today I will tell you we are experiencing double digit increases; double digit percentage increases on our season pass sales versus the same date last year.
For all those reasons, we had a good fourth quarter with the same economic climate. The company has done well in recessionary periods.
Long distance vacations are what get sacrificed; airline travel is predicted to be down this summer which goes in line with the long distance vacations getting sacrificed. Recent results of VJ’s and Costco indicating consumers are trading down.
A strong value message promotion for us, rebate checks coming in the mail. We are already seeing season pass sales being strong and an unprecedented capital program which I would add is unveiled on May 31st when most of these rides are launched.
We think we are uniquely positioned to capitalize. Further, on a group sales front our business is very stable.
It’s still early but we are not seeing corporations drop employee outings. We haven’t seen any of that whatsoever.
Given what we are seeing with job growth or lack thereof, given what you are seeing with wage increases or lack thereof. It’s no coincidence that morale is very volatile right now in many companies across the country in dropping the employee outing probably wouldn’t be received too well.
Therefore, it goes hand in hand, we are not seeing that happening and we are not seeing our schools and our school business makes up a lot of our group sales we are not seeing them cancel field trips either. Turning to other ancillary business, I would mention that Dick Clark Productions is going along well.
We had the cancellation of the Golden Globe Awards for the first time in 65 years. That’s included in our guidance and our numbers that we’ve already given and Jeff will be updating today.
I would add that recently we’ve announced we are going to take an active management role in the company. To tell you the truth, there’s really nothing different than we are already doing or we’ve been doing.
We are going to manage the company on a day to day basis. We’ve named a new president, Orly Adelson and will be out in Los Angeles running the business day to day, she will report to me.
Effectively from a marketing standpoint, from a synergy standpoint, from an attendance standpoint, using a lot of the Dick Clark assets for promotions we have effectively been managing this company already. The difference here is we are now going to be paid a management fee.
In other business fronts with Dick Clark we’ve just renewed our Academy of Country Music Awards deal with CBS for three more years and we will be getting an annual increase on the rights fee. We are moving along rather well on the synergy front, it’s really working out from a content standpoint for our Six Flags TV.
From a marketing standpoint, we are using the American Music Awards promotion to drive season pass sales and we are about to announce another promotion for the Academy of Country Music Awards where we are looking for the greatest country music fan in the United States. We are using that promotion also to drive attendance.
That’s going very well for us. On the sponsorship front where we are able to leverage scale that’s going well.
I’m very pleased with the partnerships so far and bullish on what will become of that partnership. Finally, as far as first quarter attendance goes for the company, I would reiterate, it’s early, we are 5% of our overall attendance in this quarter.
We do have very good momentum. We have not seen a slow down whatsoever from the fourth quarter and from a staffing standpoint, which generally is my greatest concern for this company we are doing particularly well in the three seasons I’ve been here.
This is the best we’ve ever done; we are actually turning people away at the door. Whether that’s a function of people looking for jobs or Six Flags is a better place to work and a better incentive that we’ve ever had or better recruiting, policies that we’ve ever had, better retention, standards than we’ve ever had.
Maybe it’s a combination of all this but our staffing is strong in every single park and we are bullish on that front that we are turning people away and getting the best of the best. Taping into more of the senior groups has certainly helped us and staffing soccer moms and some of the teacher programs, that has also helped us.
In summation I would say we feel good about our attendance growth for many of the reasons we’ve outlined. Whether it’s the improvement in the parks or the brand, the good publicity that we are generating, our guest satisfaction scores, the capital program that’s generating a lot of buzz, although those rides really won’t come online until the end of May, or whether folks are just trading down in the current economic climate.
We are not 100% sure which one of those reasons is driving our business right now. We will know in a couple of months and we’ll be able to give you a little more clarity.
Either way it gives us reason to have optimism about our business. Lastly, Jeff, on the last call outlined a bridge that had ups needing to close the gap on $50 million to achieve free cash flow, neutral.
It put us in a position to be free cash flow neutral for the first time in the company’s history. Jeff outlined a plan that had us $50 million short, needing to generate $50 million from one of three ways.
Either new international deals, corporate sponsorship business ramping up or attendance growth. As I turn it over to Jeff, the headline here is that we’ve already closed that gap to $25 million in an effort to be free cash flow positive.
Jeff Speed Good morning everybody. Let me start by recapping our quarterly and full year results for 2007 and then also take a moment to explain the adoption of the new accounting announcement described in our release today.
Finally, I’ll conclude with a discussion of the financial elements of our outlet for 2008. As a reminder the results that I’m going to be discussing exclude the ten parks that we sold over the last 21 months.
Starting with the fourth quarter our fourth quarter saw revenues increase $8 million or 7% which reflects $1.43 increase in total revenue per capita and a 4% increase in attendance. The growth in our total revenue per capita included $1.17 increase in per capita guest spending which is comprised of ticket and in park spending and increased sponsorship revenues of $2 million.
Spending on admissions, food and beverage and rentals drove the guest spending per capita increase. Attendance for the quarter increased approximately 100,000 with both season pass and online promotional attendance contributing to the growth.
For the quarter season pass attendance increased 5% and season pass revenues increased approximately $3 million or 19% to $17 million. Our total operating costs and expenses for the quarter excluding non cash items and loss on fixed assets decreased $1 million to $114 million reflecting reduced corporate and marketing costs partially offset by increased park labor and repairs and maintenance as we continue our focus on improving the quality of the guest experience in our parks.
Adjusted EBITDA for the quarter was approximately $2 million compared to a loss of $6 million in the fourth quarter of 2006. This $8 million improvement reflects the quarters increased revenues and stable expenses.
For the full year our revenues increased 3% to $973 million driven by a total revenue per capita increase of $0.99 or 3%. The per cap increase was attributable to a $0.52 increase in per capita guest spending on food and beverage, parking, rentals and games.
A $12 million increase to $38 million of sponsorship revenues. Our attendance for the year reflects increased season pass and promotional attendance partially offset by reduced group attendance.
Season pass attendance increased 5% to 6.9 million and season pass revenues increased 10% to $134 million. We closed out the year on the weather front roughly in line with the prior year at approximately 15% weather days.
Unfortunately with July as the single highest volume month of our operating season adverse weather in July had a disproportionate impact on our overall operating results. As we indicated on our third quarter call, in July over 24% of our operating days were adversely affected by weather compared to 15% in 2006 a 60% increase.
This, coupled with a tragic accident in one of our parks in late June contributed to a loss of over half a million in attendance for the month of July compared to 2006. Total operating costs and expenses for the year excluding non cash items and loss on fixed assets increased $25 million to $745 million.
The higher expense levels were attributable to increased marketing of $25 million and $14 million of additional park wide labor. These were partially offset by prior year costs related to the change in management of $14 million.
Among non cash costs, stock based compensation decreased $3 million while depreciation increased $6 million due to the company’s ongoing capital investments. Our loss on fixed assets grew by $16 million for the year due to a largely non cash charge in the fourth quarter of approximately $30 million related to the removal of certain inefficient rides and attractions.
Other expense increased nearly $9 million in 2007 reflecting the cost of settling a California Class Action Lawsuit that was filed back in 2005. As well as a $4 million charge for severance and benefits costs associated with the early retirement program we implemented in the fourth quarter.
For the full year, adjusted EBITDA improved by $9 million or 5% to $190 million reflecting the 3% revenue growth, the prior year management change costs and reduced minority interest in adjusted EBITDA due to our Discovery Kingdom acquisition and Dick Clark Productions investment. Partially offset by increased marking and labor costs.
With respect to our cash and liquidity position we ended the fourth quarter with over $28 million in unrestricted cash and $5 million drawn on our $275 million credit line. With the successful completion of our new credit facility in the second quarter our next debt maturity isn’t until 2010 and we are benefiting from reduced interest costs and substantially less restrictive covenants.
We also repurchased the total of $92 million of debt during the year. As you know, we have preferred stock outstanding that’s mandatory redeemable in August of 2009 for $288 million.
In addition, $280 million of senior notes mature in February 2010. Our intention is to address these financial obligations through one, or a combination of refinancing, exchanges and/or asset sales.
Before discussing our outlook for 2008 I’d like to take a few moments to discuss the change in accounting that we adopted and that will be reflected in our 2007 financials on Form 10-K. First, and most importantly, the change does not have any economic impact to the company, its cash flows or its earnings.
Its merely a new accounting convention for presenting the company’s potential, I underline potential, obligation to purchase limited partnership units related to Six Flags over Georgia and Six Flags over Texas. In the even those units are put to us by the limited partners.
These potential obligations aren’t new to anybody; they’ve been in existence since 1998 and have been clearly disclosed in our financials. The new accounting creates a redeemable minority interest obligation on our balance sheet in between debt and equity, so called mezzanine equity, to highlight potential put obligation.
The off setting entry is a temporary charge to stockholders equity, which gives rise in our case to a deficit in our stockholders equity. The charged equity is temporary because either the limited partners are going to put their interest to the company before the end of the respective put option term or they won’t.
In either event the charge to equity will eventually be reversed as an asset will be recorded for the eventual purchase or the put rights will lapse unexercised and the equity charge and the mezzanine equity will be reversed. We adopted this accounting change pursuant to EITF Topic D98 to address the concern of the Securities and Exchange Commission that obligations related to redeemable interests be recorded on the face of a company’s balance sheet.
Once again, it’s important everyone understands this change in accounting does not have any impact on the company from an economic, earnings or cash flow perspective. My guess is that’s probably enough technical accounting discussion for a Monday morning so let’s move on to the 2008 financial outlook.
Back in November we provided preliminary 2008 guidance on guest spending, cash costs and CapEx. At that time we weren’t in a position to provide a view on growth in our sponsorship and international business and we said we’d come back to you on our year end call.
Also at that time, with the targets we laid out, and assuming flat sponsorship revenue, we indicated we would require a 6% or $1.5 million increase in attendance to reach positive free cash flow in 2008. Today, assuming 2008 attendance is flat to 2007 at 24.9 million and conservatively assuming roughly 1% guest spending growth, $51 million revenue target for our sponsorship and international business, the full year benefit from our investments in Dick Clark Productions and Six Flags Discovery Kingdom of $7 million and the low end of our cost savings range or $50 million.
The result is $270 million of adjusted EBITDA compared to $190 million in 2007. To complete the free cash flow picture our CapEx is still projected to be $100 million and our cash interest, dividends and taxes are expected to come in at $195 million, $30 million less than the roughly $225 million we incurred in 2007.
As we will benefit from our new credit facility, the debt repurchases during 2007 and a recent three year swap that we entered into in February 2008 to lock in an all in rate of 5.34% on $600 million of our $850 million floating rate term loan. Taking all of this into account and again assuming for this purpose no attendance growth, we’d be within $25 million of positive free cash flow.
To close this gap with only attendance we’d need to grow attendance a bit less than 3% to 25.6 million to be free cash flow positive for the first time in the company’s history. Although early, with our season pass sales pacing well, our group stable and exciting new ride and attraction programs set to launch we feel like we put ourselves in a position to realistically reach that free cash flow milestone.
Before turning the call back to Mark I want to remind folks that when we report our first quarter results we’ll be benefiting from the Easter shift into March this year. However, that’s going to normalize in April when we’ll have less operating days.
Speaking of April, another reminder, that we’ll be hosting an investor day at our Six Flags Great Adventure Park in Jackson, New Jersey on April 29th. Any interested investors and analysts can sign up to receive further information at www.SixFlags.com/Investors.
Mark Shapiro
The only added notes I would make to what Jeff just said, an addendum if you will. When I speak about the first quarter attendance being very solid as was fourth quarter, following on the fourth quarter.
We haven’t seen any slow down. It’s not forecasting that Easter attendance.
While Jeff talked about us benefiting from the Easter attendance moving into the first quarter, what we are seeing now in terms of nice attendance has nothing to do with Easter, obviously we haven’t hit Easter yet. We only expect that it will get better for this quarter in particular.
Secondly, I would mention with regard to groups, when we say stable, that’s not a mask or anything like that, it’s too early right now. We do a ton of business in the summer, of course, and we do huge September business for our groups.
We’re just not far enough along yet to give you any kind of prediction or any kind of number like we did with season pass sales where we are saying we are seeing double digit growth. It’s stable because nothing has fallen out and we are optimistic about that line item as well.
It’s still too early to give you any specific numbers. With those caveats or those clarifications I will open it up to questions.
Operator
(Operator Instructions) Our first question comes from the line of David Miller with SMH Capital.
David Miller – SMH Capital
A couple questions, Mark, I’m not exactly clear on what happened with the Home Depot situation. It seems like $7 million is a rounding error to these guys.
Mark Shapiro
The $7 million is not the Home Depot. I want to be very clear about anybody that heard that.
I wasn’t saying specifically what the Home Depot was paying us. I’m saying that every year we are going to have a range of deals, a bucket of deals that come in and come out.
Some renew, some don’t. Some you chase, some you get increases, some you get decreases, some fall out all together.
The Home Depot was one of many deals that fell out for this coming year. I’m not also putting the blame on them.
We really wanted to open up the category because we believe with the series of the world, the Macy’s of the world and all the folks out there, department stores that are looking increases in their business in what are trying times we believe we can be an advertising solution. That’s why we opened up the category.
David Miller – SMH Capital
At the end of the day it sounds like Home Depot fell out too late in the season for you to replace the revenues, would that be fair?
Mark Shapiro
No, they were in last year and as I mentioned on the last call they weren’t going to be coming back exclusively. They still may come back at a certain level; I’m not sure what that will be right now.
We’ve already been negotiating with many of their competitors to take their place for this season. We made that decision for them to fall out early on so that we would be able to open up that category and capitalize on that category.
David Miller – SMH Capital
I think it might have been three earnings calls ago we were talking about gas prices a little bit. I remember your reaction was that the cat is out of the bag, sticker shock is already out there.
Yes, gas prices keep going higher. I’m wondering, maybe Jeff if you want to chime in on this as well.
What is your market research say in terms of what’s the ceiling out there on gas prices where people finally throw up their hands and say, “Hey, I’m not going to drive that 50 miles to a Six Flags Park.” Do you guys care to comment that would be great?
Mark Shapiro
Here’s my take on that, don’t get me wrong, having oil up with what many are predicting today to be $110 a barrel. I don’t think that’s good for any kind of retail business.
We don’t have any evidence or research to show that we’ve been greatly hit or impacted by gas prices. We are not, and I don’t mean to slam them in any way, we are not like Cedar Point, whereby Detroit, so much of the business is coming from Detroit where they have to make that long drive.
Seventy five to eighty percent of our visitors are traveling 50 miles or less to come to Six Flags. We don’t rely on a major metropolitan area that’s 100, 200, 300 miles away for the bulk of our business.
I think that when the gas prices first started going haywire back in 2006 I think there was sticker shock. I’m not saying people are immune to it, especially as it goes up to $4.00, which many are predicting this year.
I think folks have already discounted that $4.00 into their thinking thus far. We just don’t think people are going to stay home and play stick ball all day.
It’s not going to happen; they are going to be looking for entertainment options. Whether that’s a movie, or a bowling alley or Six Flags we are on that list.
With a value message program and all of our pricing and all of our marketing is geared toward value, value, value. A strong capital program, eight coaster and eight parks and strong buzz about the company.
Our renewed and reenergized guest service I think we go to the top of that list or near the top of that list. I also don’t think it hurts us that the movies this summer, you can pick up today’s USA Today are not predicted to be what they were last year when you had Spiderman and you had Pirates of the Caribbean.
Outside Indiana Jones there aren’t a lot of big titles coming out this summer and historically this company does very well on the years where the movie business is static or down and it gets hurt, as it did the last couple of years, when the movie business is strong. Last year, of course, was the most successful movie summer ever.
David Miller – SMH Capital
One last one, in terms of the international expansion and the licensing opportunities there. Can you detail, Mark, other than the Middle East, what regions of the world you might be interested in?
Which governments you might be negotiating with in terms of doing similar deals?
Mark Shapiro
I can’t get into specifics on the negotiations because in many territories we’ve got two or three people that we are bidding against each other. I will tell you that the structure of the Dubai deal will essentially mimic future deals, where we are looking for money now, not when the park opens.
We are looking for a fee for our know how and expertise, our design development capabilities which we do in house. We are looking for exclusivity to lock us out or hold us up in a region.
Of course, we are looking for that ongoing revenue stream in the form of licensing and royalties. What I will tell you is we are very aggressive in this area and anywhere from Malaysia to Korea we are in the market, either marketing ourselves or we have folks chasing us.
I’m not trying to hike that up, Dubai may be the only deal you hear about this year. We could conceivably cut deals for exclusivity only.
What I mean by that is we have a number of different developers in certain countries that aren’t sure, necessarily, they are ready to launch a theme park, but they don’t want Six Flags being on the market. They will pay us an exclusivity fee just to hold up our rights to warehouse our rights for a certain period of time until they make that decision.
For us that’s a one time hit, don’t get me wrong, but if it leads to an actual development of a park thereby it becomes an ongoing revenue stream for us. International growth we are not only bullish about but it’s clearly been, for the last eighteen months to two years, a primary growth driver for us and we are now beginning to see the realization of that growth.
Operator
Our next question comes from the line of Lee Ryan with Boone Capital.
Lee Ryan - Boone Capital
How would you attribute your success in seasons past to date? Has this growth been more driven by the sweepstakes and promotions via your Dick Clark acquisition or by guests who enjoyed their experience last year?
Mark Shapiro
First and foremost I would tell you we didn’t raise prices whatsoever on the season passes. Only San Antonio saw an increase but other than that everybody else stayed flat.
In this trying economy you see the same price you are for last year I think is a good sign for us. Especially when you are combining that message with the fact that our guest service is better than ever, the parks look better than ever and each of the parks have great new capital coming online.
That was our marketing message. Most of the research we are showing is essentially in line with what I was talking about today.
Parents are saying we are not going to be traveling. I know a number of different parents that Winter Break is usually a time for their kids where people take a trip in February that stayed home.
Many of these folks make those decisions in January, February what they are going to do in the summer. Some of the research coming back to us is they are not going to travel.
Having said that, they still need to entertain their kids. Whether that’s a movie or buying pool pass or buying a season pass for Six Flags we are on that list.
We are in that dialogue, we are creating those discussions and the positive press we are generating about our offering, about our product is putting us front and center. I think driving it more than anything else is new capital programs, getting buzz, flat pricing, value messaging and the affordable close to home opportunity that we provide.
Lee Ryan - Boone Capital
Have you guys firmed up your operating days in ’08 versus ’07 excluding the two parks you decided to keep open later during the fall? Can you break that down between the second and third quarters?
Mark Shapiro
Overall, the operating days are generally flat to where we were last year. We still have some moves we are making on the calendar but we posted most of our calendar dates online.
Our third quarter and second quarter were the same because we are open all the time at that point.
Jeff Speed
With the one exception, we mentioned about we will lose some operating days in April in our second quarter because of the shift of Easter in March.
Mark Shapiro
Overall you can expect it to come out about flat.
Lee Ryan - Boone Capital
Last, in regards to $150 million insurance claim you filed for the New Orleans Park. What is the timeframe for the litigation and any proceeds if you are successful?
If you are successful are those proceeds required to be spent on rebuilding the park or can you use them to address the preferred maturity.
Jeff Speed
The litigation is ongoing, we were hopeful to get a favorable summary judgment that did not occur so the litigation is ongoing and hard to say when that will come to fruition and what levels of appeal ultimately this thing may need to go. To answer your second question, the proceeds under the insurance were entitled to the replacement value of the damage.
Provided we reinvest the proceeds in any attraction throughout any of our parks. Under the lease agreement with the City we are obligated to rebuild to the extent of the insurance proceeds, rebuild in New Orleans.
We’ve obviously indicated that we don’t view that in our best interest or necessarily in their best interest. Under the lease agreement we do have an obligation to rebuild there but that’s not our intention.
Mark Shapiro
We’ve already started pulling rides out of there, as you know, and we’ll continue to do. There are still some rides, specifically a tower ride in New Orleans that we will probably move somewhere else next year.
New Orleans has no plans on us coming back, by the way. They are developing and looking at opportunities, they are running P&L’s so we have a long term lease there but ultimately it’s a discussion that we will continue to have the elected officials there in determining how we best get out of that lease and when.
Operator
Our next question comes from the line of Howard Bryerman with Evergreen Investments.
Howard Bryerman – Evergreen Investments
Could you tell us what the amount of the obligation related to the limited partnership is going to be on the balance sheet? What the put terms are, when does it become puttable or how does it become puttable to Six Flags?
Jeff Speed
It’s all described in our 10-K. What happens is ultimately the maximum amount when all the puts are actually able to be exercised; the maximum amount under the formulaic foot price is a little over $400 million.
We currently have a little over $30 million on the balance sheet as minority interest so the net charge, if you will; to shareholders equity is $383 million. What’s exercisable, as of 2008 when we have our next put period is roughly $300 million.
Again, it’s the formulaic foot price that is the greater of a single digit multiple of earnings between eight and eight and a half times depending on which partnership you are using for a fixed stated price for each partnership. To put this in perspective, although cumulatively, about $300 million worth of partnership units could be put to us.
Since 1998 a grand total of $18 million has been put to us. Again, these limited partnerships pay a nice preferred return and we really don’t expect that situation to change in the near future in terms of the magnitude of the puts.
Howard Bryerman – Evergreen Investments
My understanding was that the limited partnerships yield a certain percentage and the reason they haven’t been put back to you is because that yield is still attractive to those limited partners. Do you know what that yield is on those limited partnerships?
Jeff Speed
Yes, they have a preferred return that’s upwards of 9% to 9.5% and it increases by CPI each year. Plus they have all the residual value because the assets get distributed when the partnerships come to fruition in 2027 and 2028.
They are getting a current return and they have residual values.
Mark Shapiro
You’ve hit it on the head. They get incredible return and that’s why they don’t put to us.
Jeff Speed
That return by the say is guaranteed by us as well as two entities of Time Warner going back to the original ownership by Time Warner.
Howard Bryerman – Evergreen Investments
Does Time Warner guarantee the payment to the limited partners? That $300 million was put to you would Time Warner be on the hook for that obligation?
Jeff Speed
If we did not honor obligation, we are the primary guarantor.
Mark Shapiro
It’s what $18 million?
Jeff Speed
Yes, since 1998.
Mark Shapiro
With that kind of return you’re not going to be seeing that put out.
Howard Bryerman – Evergreen Investments
Shifting gears to the preferred and the notes that come due in ’09. You said they are obviously several different options for refinancing, sales of assets or renegotiation of one or both of those obligations.
If you had to rely strictly on asset sales would you be able to raise enough cash to pay down both obligations, which the back of the envelope is about $560 million.
Mark Shapiro
Absolutely, but we are not in a liquidating mode right now, we don’t need to liquidate, we have cash on hand, we are cautiously optimistic about the season. We put this company in a good place to grow into the capital structure and to achieve the long term health and benefit that we believe are at our fingertips.
To answer your question, we absolutely could and there isn’t a week that goes by we don’t have a phone call about a certain cluster of parks. We are not marketing any parks right now; we are not going to sell anything because we don’t have a gun to head.
We don’t expect that that gun will ever be pulled out of the holster given the season that is in front of us.
Howard Bryerman – Evergreen Investments
Hopefully credit markets will become more vibrant by then.
Jeff Speed
I certainly can’t imagine them getting much worse.
Mark Shapiro
Plus, you’ve got a number of things, Howard that could play out. You’ve got New Orleans that’s going to play out.
You could always pursue assets sales if you needed to. You’ve got a credit market that hopefully wakes back up.
Jeff Speed
You’ve got an optional term loan.
Mark Shapiro
You’ve got an optional term loan, we’ve got operating performance and where we think that’s going to be and you’ve also got new partnerships that we are building every single day. You never know who might come to the table to bail you out.
Jeff Speed
Bottom line is we feel like we’ve got a lot of options in terms of the ways in which we can deal with those obligations as well as improved business performance and improved markets.
Howard Bryerman – Evergreen Investments
Can you clarify one thing, two last questions? I haven’t been able to do a good job explaining it, obviously you guys are doing a great job and the family theme is one that significant but we keep reading in the papers about the return to the teenager and it almost sounds to the lay person, a little bit contradictory.
Can you firm up the strategy and why we keep talking about teenagers?
Mark Shapiro
Absolutely, all I would tell you Howard, it’s on two fronts. As we said from day one, we are first choice when it comes to teenagers.
We have more coasters combined at Six Flags than the entire industry combined. We are known, if a thrill seeker is looking for entertainment, Six Flags is the priority; it’s first on the list.
All our research shows that teens see us as a hit, they see us as relevant. Today in USA Today, in the Money section the cover story is about Tony Hawk where he is essentially this year he has been announced that he is the number one known and recognized athlete in the entire world.
Number one in front of Shaquille O’Neal, in front of Lebron James. Coincidentally we have a roller coaster deal where we brand new coasters under Tony Hawk’s name and certainly with his creative know how.
We are out there, we are relevant, we are a hit and we are first choice for any teenagers. We don’t want to lose our teenager base.
Our whole strategy is founded upon bringing the families back to Six Flags without alienating or losing the teenagers. We want to keep the teenager base, we want to grow the teenager base.
We want the families to understand we’ve now cleaned up the parks, we now put training in, we’ve now made guest service a priority so that there is a code of conduct that we enforce in terms of behavior and dress code and language. There is a code of conduct that we enforce with regard to no smoking so that we created a clean, safe, family friendly environment.
It doesn’t turn away the teenagers but it more inviting to the families the way it used to be when Time Warner had this company ten years ago. That’s what the strategy is based on, bring the families, bring in the packs, three, four, five people, families that spend money and spend time and hours, the families that are advertisers or chasing the moms that are advertisers are chasing to make their products number one on Mom’s shopping list.
At the same time keep the quotient of teens up there high so that by the way; they can ride these big coasters the company has spent so much money putting in.
Howard Bryerman – Evergreen Investments
I get it now but its kind of a delicate balance isn’t it. If I am going to be spending, I walked Jackson with your Park president and the day I was there had a really nice family theme to it but if I’m going to be waiting in a line and there’s going to be a pack of six teenagers in front of me, even though they are your good teens, if you will, for lack of a better way to describe them.
They are being teens and making a ruckus and noise it may detract from my experience. I hear what you are saying now but it is somewhat of a delicate balance.
Mark Shapiro
That’s in the entire entertainment sector. That’s the balance everybody walks.
I went to a movie on Saturday, I sat in the crowd and I must have heard three cell phones going off. They tell you 20 times before the movie to turn your cell phones off.
I hear the talking, you hear the cell phones and you look at these teens like they are the problem. The teens aren’t the problem; it’s the company that doesn’t enforce their policy.
All we’ve done at Six Flags is establishing a code of conduct standard and we enforce it. That’s why there’s a no tolerance policy, you smoke in an area you aren’t supposed to smoke in you will be thrown out of the park.
You cut lines when you’re not supposed to cut lines you will be thrown out of the park. We doubled the number of security officers we have in our parks.
The number of rejections at our parks from 2006 have tripled. What we’ve done is we’ve retrained, we’ve reconditioned behavior.
When you are in that line and you see family friendly like you said in the midway you’ll also see it in our lines. That balance is really what it comes down to when it comes to winning the game.
We are seeing that. By the way, the teens aren’t put off; our research is showing that teens aren’t put off by the code of conduct.
The teens aren’t put off by the increased security measures. The teens aren’t put off by the no smoking and the teens aren’t put off by the family friendly capital attractions or improvements we’ve made in the sense of bringing in the Wiggles and bringing in Thomas The Tank Engine.
They just want us to keep investing in thrill rides. I can tell you we are going to continue to do that.
Howard Bryerman – Evergreen Investments
I get it, that’s a good point. Last final question, I think you guys do have a phenomenal opportunity in terms of capitalizing on the increased cost of everything.
Maybe people don’t want to or have to cut back on their trip to Disney or whatever destination resort they are going to take the kids to. Have you built that concept into your advertising copy?
Am I going to turn the TV on and see you pound away at, you don’t need to spend that much money. Get in the car and come to Six Flags and it’s only going to cost you a small amount for a good day.
You don’t need to go to Disney this time.
Mark Shapiro
First of all, where are you Howard, New York?
Howard Bryerman – Evergreen Investments
I’m in Philadelphia, but my heart is still in New York.
Mark Shapiro
You’re not seeing a lot of advertising right now in New York. That’s a good point to make by the way folks.
We are seeing this increase in our season pass sales and we haven’t even started advertising for the most part yet. Remember we shrunk our marketing budget so we’ve compressed it so essentially it really gets going at the end of this month.
We are seeing increases in our season pass sales to the tune of double digit percentage before our advertising has really taken hold. At the end of this month is when it gets going and it ramps up heavily and conveniently just at the right time in May when people are getting their rebate checks.
In answer to Howard’s question, absolutely, our whole season pass advertising campaign is based on all that you get with the season pass. For one price, and generally it’s about $59.99 you can come to Six Flags from March through November as many times as you want.
It pays for itself in less than two visits. Plus, that season pass gets you into every other Six Flags park across the country including Mexico, Canada and soon to be Dubai free of charge.
Its one of the benefits of getting a season pass. Plus, you get five free tickets for friends, one day single admission tickets if you buy a season pass.
Plus you get a coupon book that gets you $300 in savings on buying merchandise and food related items in the park. The whole season pass advertising campaign is built on a value message.
When we get to selling one day passes we have an entire advertising campaign that just pushes, beginning in May, single day admission, single day admission, single day admission. You’ll see a promotion that specifically based on the fact that we are more convenient and closer to home and much more affordable for families.
Long answer to your short question but the short answer is yes.
Howard Bryerman – Evergreen Investments
Have you been able to partner with Costco and VJ’s being that you’ve singled them out as targeting your customer base?
Mark Shapiro
All of our corporate alliance deals, you can’t be a corporate alliance partner, just a sponsorship partner, and all of our corporate alliance partners all come with some form of co-marketing agreement, some form of co-marketing benefits. Whether it’s on pack, in store, on the website, part of their media, you name it there’s always a co-marketing tie.
Operator
Our next question comes from the line of Barrett Naylor with Brownstone Asset Management.
Barrett Naylor – Brownstone Asset Management
Can you provide any sort of numbers around the fees you expect from Dubai? I thought you said you might provide some guidance around some of them later in the call and I didn’t hear it if you did.
Mark Shapiro
Specifically I said that we’re not going to break out, just like we don’t with our corporate alliance, we are not going to break out specifically who is paying what. There are two reasons for that, one is we are negotiating with other markets at the current time, other developers and we don’t want there to be any sort of transparency on what one group is paying us versus another, that would hurt our negotiating position.
Secondly, what the case was last year is related to our advertising deals. We don’t want to be specific about what we are getting because often you guys will ask us, “On that $51 million, where are you right now, currently, what do you have in house.”
When we are specific when we answer that it leads a delta that other advertisers, or in this case, other international developers know we have to hit our guidance and it hurts our negotiating position. We are not going to be transparent with regard to how much each of our partners are paying us.
Barrett Naylor – Brownstone Asset Management
When will we start to see it in the numbers from Dubai? Obviously you have to track some of that when you start seeing it in your quarterly numbers right?
Jeff Speed
You’ll start seeing it this year, what we are also looking to do starting this year is on our revenue breakout in our Q and K is create a separate line item of revenue that would be sponsorship and licensing. We’d be reporting that revenue on a separate line item so you can track it.
Barrett Naylor – Brownstone Asset Management
I’m assuming its going to be material contribution from Dubai?
Jeff Speed
No, we are going from $38 million to $51 million that includes Dubai; we are not saying what portion of that is Dubai and what portion is sponsorship.
Barrett Naylor – Brownstone Asset Management
I don’t know if I caught this earlier, you mentioned season pass sales are double digits, what percent are in so far this year?
Mark Shapiro
Generally at this time we sell 20%. We’ve sold 20% of what we expect our full bogie to be.
We sell around 2.2 to 2.3 million season passes every year and at this point we generally sell about 20% of that 2.2 to 2.3 million. In closing summary, we are focused on the consumer and renewing the health of our brand.
The momentum we have with the brand, the value message we have out there, the capital program we have out there, the guest service marks we are getting should continue to put us relatively high on the local list of options and that local list of options takes on even greater importance this summer as families look and seek out the best option for them with regard to being close, being affordable, being convenient and getting the value for their money. We think we are well positioned, so far the numbers back us up and we’ll be back in May to let you know how first quarter went.
Thank you for joining us today.
Operator
This concludes the presentation you may now disconnect. Have a great day.