Cedar Fair reports "lower than anticipated" results for 2018 second quarter

Posted Wednesday, August 1, 2018 11:03 AM | Contributed by Jeff

From the press release:

Cedar Fair Entertainment Company (NYSE: FUN), a leader in regional amusement parks, water parks and immersive entertainment, today announced results for the second quarter ended June 24, 2018, along with revenue trends for the month of July and the declaration of a quarterly cash distribution for unitholders.

CEO Commentary

Commenting on the Company's second-quarter results and trends through July 29, 2018, Richard Zimmerman, Cedar Fair's president and CEO, said, "The investments we have made in our parks over the past several years have significantly enhanced the guest experience and, combined with our current and future investments, will provide meaningful economic returns for many years to come. As a result of our investments, the guest response to our new rides and attractions has been very positive, guests are increasing spending levels inside our parks, and the renewal rates of season passholders remain strong. We believe disruptive weather patterns have contributed negatively to our year-to-date attendance, however, we have launched incremental research efforts to better understand market-specific results."

"In response to the lower-than-anticipated first half results, we have implemented a number of initiatives designed to drive attendance and maximize profits over the balance of the season," added Zimmerman. "These initiatives, combined with our very popular Halloween events, WinterFest celebrations at five parks, including the recent addition of Kings Dominion, and the continued strength of long-lead demand indicators, such as group bookings and resort reservations, give us confidence that we are well positioned heading into the second half of 2018."

Zimmerman continued by stating that despite some recent areas of strength in the business, the lack of meaningful momentum or attendance pickup in July could have results fall below the low end of the Company's full-year guidance of net revenues between $1.34 billion and $1.38 billion and Adjusted EBITDA1 between $475 million and $495 million. Because full-year results will be heavily influenced by the parks' performance over the next month, the Company will update its guidance in early September.

"We remain confident in the resiliency of our business model, the experience of our management team, the strength of our balance sheet and the outlook for growth in the business long term. As a result, we remain committed to delivering a steady 4% annual increase in the cash distribution to unitholders while continuing to invest in our business at a responsible level," concluded Zimmerman.

Six-Month Results

Net revenues were $435 million for the six months ended June 24, 2018, a decrease of $6 million, or 1%, compared with the six-month period ended June 25, 2017. The decrease was attributable to a 2%, or 211,000-visit, decrease in attendance to 8.7 million guests. This was partially offset by a 1%, or $0.27, increase in average in-park per capita spending to $45.42, and a 2%, or $1 million, increase in out-of-park revenues to $56 million when compared with the prior-year period.

Short-term factors, such as inclement weather in the Mid-Atlantic region and a delayed ride opening at California's Great America, combined with a decrease in the number of season passes sold at Kings Island, negatively impacted early-season attendance at the Company's seasonal amusement parks. This was somewhat offset by increased attendance at Knott's Berry Farm, the Company's only year-round park. The increase in average in-park per capita spending through the first half of the year was driven by increased spending on food and beverage, merchandise and extra charge attractions. These increases were partially offset by a small decrease in admissions revenue per capita attributable to a higher season pass mix, the introduction of a free pre-K season pass at three more parks in 2018 and the recognition of season pass revenue over a longer period of time at a fifth park that will be hosting a new WinterFest celebration in November and December this year.

The increase in out-of-park revenues is the result of higher occupancy rates and average daily room rates at the Company's resort hotels, including the new 158-room tower at Cedar Point's historic beachfront Hotel Breakers.

The operating loss for the six-month period was $7 million compared with operating income of $19 million for the six-month period in 2017. The decline in operating income is the result of the 1% decrease in net revenues noted above, combined with a 4%, or $16 million, increase in operating costs and expenses, which totaled $380 million for the first half of 2018. The increase in operating costs and expenses was in-line with the Company's expectations and reflects higher labor costs due to market/minimum-wage rate increases, higher operating and maintenance supplies, and additional expenses as the Company continues to invest in technology and the overall guest experience. Depreciation and amortization was up $2 million due to growth in capital improvements over the past several years. Loss on impairment/retirement of fixed assets was up $3 million, reflecting the retirement of assets in the normal course of business at several of the Company's properties.

Interest expense for the first six months of 2018 was comparable to the same period in the prior year. We recognized a $1 million loss on early debt extinguishment during the first quarter of 2018 in connection with amending our 2017 Credit Agreement, as compared to a $23 million loss on early debt extinguishment related to our refinancing in the first half of 2017. The net effect of our swaps resulted in a benefit to earnings of $5 million for the first six months of 2018 compared with a $5 million charge to earnings for the comparable period in 2017. The difference reflects the change in fair market value movements in our swap portfolio offset by the amortization of amounts in OCI for our de-designated swaps. During the current period, we also recognized a $25 million net charge to earnings for foreign currency gains and losses compared with a $6 million net benefit to earnings for the comparable period in 2017. Both amounts primarily represent re-measurement of the U.S.-dollar denominated debt held at our Canadian property from the applicable currency to the legal entity's functional currency.

A benefit for taxes of $5 million was recorded during the first half of 2018 to account for the tax attributes of the Company's corporate subsidiaries and publicly traded partnership taxes, compared with a benefit of $10 million in the same period a year ago.

The net loss through June 24, 2018, totaled $64 million, or $1.14 per diluted LP unit. This compares with a net loss of $33 million, or $0.60 per diluted LP unit, for the same period a year ago. The increase in net loss is primarily a result of the 1% decrease in net revenues, combined with planned increases in operating costs and expenses.

Adjusted EBITDA, which management believes is a meaningful measure of the Company's park-level operating results, for the six months ended June 24, 2018, was $62 million, down $23 million when compared with the six months ended June 25, 2017. This is the result of the attendance shortfall through the first six months of 2018, combined with planned increases in operating costs and expenses. See the attached table for a reconciliation of net income to Adjusted EBITDA.

July Operations

Based on preliminary July results, net revenues through the seven-month period ended July 29, 2018, were approximately $752 million, down $15 million, or 2%, when compared with the similar period last year. The decrease in revenues is attributable to a 3%, or 480,000-visit, decrease in attendance to 14.6 million guests. This was somewhat offset by a 1% increase in average in-park guest per capita spending and a 4%, or $3 million, increase in out-of-park revenues compared with the similar period last year.

Distribution Declaration

The Company also announced the declaration of a cash distribution of $0.89 per LP unit, which is consistent with its targeted annualized distribution rate of $3.56 per LP unit. The distribution will be paid on Sept. 17, 2018, to unitholders of record as of Sept. 5, 2018.

Read the entire press release from Cedar Fair.

Wednesday, August 1, 2018 1:29 PM

Interesting that they have "launched incremental research efforts to better understand market-specific results." We think its weather but are looking at other things which could indicate more long term issues.

Also indicates that July hasn't gotten better (if at all). No meaningful momentum or attendance pick up in July. Leaves them with August for majority of parks in terms of prime time season. Though Halloweekends has become a prime time season of its own.

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Wednesday, August 1, 2018 2:54 PM

Not seeing results based on expected return from big cap ex programs I get, but when we're talking about 1% dips in a business that frankly can't sustain continuous growth indefinitely (unless your markets keep growing in population in a significant way), is it not OK to just chalk this up to being cyclical? I realize growth-obsessed Wall Street doesn't find that acceptable.

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Wednesday, August 1, 2018 5:08 PM

Yea I tend to agree with you. 1-2% seems like not that big of a deal. My gut tells me there's something a bit more substantial going on at Cedar Point in particular because it has seemed pretty empty the past two years aside from Halloweekends (when they're ill prepared to deal with big crowds) so I made some armchair CEO commentary over on Pointbuzz.

I do honestly think weather is a factor this year. It started off cold and wet and got to hotter than Hades in a heartbeat. Let's face it - CP is kind of miserable when it's 95 degrees out. Everyone has been there at this point enough to know that so they avoid it. I bet the water park is doing fine. Staffing was horrible at the beginning of the season and was pretty bad during Halloweekends the past few years too. Maybe it's finally catching up to them. I don't think ticket pricing or passes are out of line. Food and drink is kind of a rip, but not really out of line for the industry. I don't even have a huge problem with Fastlane because they price it pretty high, but when everyone wants to marathon the same ride (Steel Vengeance) and that ride is running at less than full capacity, that becomes a problem. Maybe put a cap on number of rides you can do on the new attraction or make you wait an hour in between rides on the same thing. They have the scanners in place to implement that now at a lot of rides if they want to.

I've continued to have passes and bring my family through each and every year with small kids, but I do wonder if they "lose" people for some years when they have small kids. CP is unmatched for coasters and thrills and they also have a pretty decent quantity of rides for little kids. But they don't have all that much aside from transportation rides that everyone from a barely walking kid to an adult can do together and find enjoyable. Hell I can barely get my (somewhat, but not really) fat ass into the seatbelt on Woodstock and look like an ass riding on the back of one of those trucks in Planet Snoopy. The kids like it, but I really don't find it all that amazing. Give us something like Firechaser or a working flume with a 39" or 40" height requirement that the whole family can do together and enjoy. They've done an amazing job with Breakers and the beach and just general cleanup and making certain areas of the park nicer. Same with things like Brew and BBQ and CP Nights. These are great to entice me to come back and stay longer, but they need FAMILIES to come fill those expensive rooms because teens and twenty somethings that just moved out of their parents' house don't have the money to stay there.So I feel their creation of a great destination resort and who they're catering to with ride additions of late have been a bit at odds with eachother.

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Thursday, August 2, 2018 4:51 AM

The lack of M&A in Cedar Fair is interesting, particularly given how the company of today came to be.

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Thursday, August 2, 2018 8:04 AM

M&A?

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Thursday, August 2, 2018 8:49 AM

Answer: Mergers & Acquisitions.

I've spent 8 days at Kings Island so far this season. It hasn't been very busy at all, even on days that I would expect them to be. Best Example: Bring a friend for $15.99 on a Sunday in July, weather was great, park wasn't busy at all. I think the hangover from last season is the main reason. Operations were pretty bad due to the staffing issues that plagued them nearly all of last season. Combine that with record breaking attendance and you have...... The Haunt was particularly awful because of staffing. I would be willing to bet the crowds for that event will be much lighter this year.

Last edited by Blackie, Thursday, August 2, 2018 8:50 AM
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Thursday, August 2, 2018 8:55 AM

Mergers & Acquisitions. They could seek to grow by acquiring additional parks. Not sure how many options they have in terms of what parks could be available and for how much. Cedar Fair takes a lot of grief for paying too much for the Paramount Parks. In the general M&A market, its a great time to be a seller because prices/multiples are very high (at least in part because there is a ton of money out there chasing deals pushing the prices up -- that presumably is less an issue with amusement parks because there are fewer potential buyers). Public companies often times reference that they are looking at acquisitions in general that make sense to grow the company. I cannot recall if Cedar Fair has done that but I haven't read their public filings very closely.

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Thursday, August 2, 2018 11:55 AM

As for M&A, what options are there at all?

At this point you're looking at only the 2 Busch Gardens parks, Hersheypark, the Herschend group, Kentucky Kingdom, Holiday World, and the Kennywood bundle, as major independent groups of the size/quality park that would be meaningful pickups. I don't see any of those being viable sellers in the short term, Hershey is realistically a 'never'.

The current situation with the Busch group could result in a sale, but not sure that CF would want the animals at BGT (though another year-round operation would be good), and there will be a big battle for those assets if they hit the market (which I hope they don't).

One could argue that of the independents out there, many of them overlap with a very near CF park. Whether that's a plus or a minus in the buyer's mind is unknown.

You're not going to pry anything out of Merlin's hands, in fact they would appear to be buyers of any significant asset. Six Flags just bought up some smaller things earlier this year. I don't think either of them would sit idly by if a big independent somehow hit the market. Herschend could actually be a buyer also. All of which means that there could be too many people chasing too few potential assets and thus prices (at the current point in a long bull market) could be too high for a publicly traded company like CF to pull off.

Last edited by CreditWh0re, Thursday, August 2, 2018 12:02 PM
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Thursday, August 2, 2018 1:32 PM

Why do you think that SeaWorld would want to sell the Busch parks? They're the two that aren't suffering from major brand damage.

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Thursday, August 2, 2018 1:41 PM

Didn't Merlin as good as say on their Q1 call that they had been in talks to buy the Busch parks but the price was unacceptable to them?

Last edited by Rick_UK, Thursday, August 2, 2018 1:44 PM
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Thursday, August 2, 2018 2:10 PM

My God, it even has a watermark.

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Thursday, August 2, 2018 4:22 PM

Jeff said:

Why do you think that SeaWorld would want to sell the Busch parks? They're the two that aren't suffering from major brand damage.

I don't. I was laying out a potential scenario from the CF point of view. I don't think Busch would sell the non-sea parks currently, but it's feasible that "someone" may try to "unlock value" and parcel out the various parts of Busch. As a group they are struggling, and at some point radical ideas are going to be floated. As we discussed some time back the most logical cleaving is to split the SeaWorld and Busch parks, thus keeping the orca/fish problem contained while maximizing the value of the non-fish parts. While it would make sense to keep the good and get rid of the damaged brand parks, I could see the reverse being proposed. Sell off the other parks, use that money to implement massive changes/overhaul on the SEA side. I'm not saying it's the best idea, or one that I would propose, but I can imagine a scenario where Private Equity money convinces them that it's a good thing.

Again, unlikely but given the context of the original question ("why isn't CF doing any M&A"), it was a potential scenario.

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Thursday, August 2, 2018 5:18 PM

Another factor in attendance is the cost of fuel. Any business that relies on people traveling to get there tends to suffer when Republican (lack of) energy policy once again allows fuel prices to jump up. We are at $3.00/gallon again now for the first time in many years.

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Thursday, August 2, 2018 5:55 PM

I don't think that many years, I still vividly remember the signs at the end of my street at $4.04 per gallon at one point during the former administration. I'm not saying it was the fault of that administration, just that is hasn't been that horribly long ago and Republicans were not in charge at the time.

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Thursday, August 2, 2018 6:04 PM

super7* said:

Another factor in attendance is the cost of fuel. Any business that relies on people traveling to get there tends to suffer when Republican (lack of) energy policy once again allows fuel prices to jump up. We are at $3.00/gallon again now for the first time in many years.

I don't think that has anything to do with anything, otherwise they wouldn't have had regularly increasing attendance from 2011-2017.

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Thursday, August 2, 2018 7:10 PM

CreditWh0re said:
I don't think Busch would sell the non-sea parks currently...

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Thursday, August 2, 2018 7:30 PM

$3.00/gallon sounds like a bargain to me!

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Thursday, August 2, 2018 7:38 PM

12 cents per kWh is even better!

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Friday, August 3, 2018 12:41 AM

Automakers are running SUV and truck plants at full capacity (sometimes looking to increase production) and reducing production at car plants (many of which are already running well below full capacity). Doesn't seem to me the cost of gasoline is an issue.

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