Six Flags profit down slightly on sliding per capita spending

Jeff said:

The change in product mix may kind of explain it, but if that's the driver, then it's definitely a failure if profit is down 1.2%. That's the strategy that they followed in the Burke days, and we know how that turned out. There's some cost associated with having a body in the park, and if the cost of their pass and their spending doesn't keep you at the margin you want, I think you need to make some corrections. That is, don't go back to giving away the gate.

You're looking at the wrong metric. So many variables go into "profit" or net income that is not operationally related at all. For example, Cedar Fair's net income decreased 3.8% last year due to things outside of park-level operating performance.

That's why the industry and many others look at EBITDA. Six Flags EBITDA for 2Q actually increased 3%, and it increased 4% on a constant currency basis when you take out forex.... and for the first 6 months, EBITDA increased 9% and 11% removing forex.

Revenue is up 5-6% and adjusted EBITDA is up 9-11% with attendance up 9% and season pass base up 32%..... it's pretty obvious the per-cap drop is due to the attendance shift. I think any organization would take a 9-11% jump in EBITDA in a heartbeat.

Welcome to Coasterbuzz. (You're not James Reid-Anderson are you?)

Haha no- I've actually only stepped into a Six Flags park once in my life.

Have just been reading for a while and saw this thread. I just wanted to respond to the comment of going back to the Burke days at Six Flags by using a non-park level operating metric wasn't right.

EBITDA is a great way to show that you're paying your bills, especially for a seasonal business, but if the dotcom bubble taught us anything, it was that "earnings before..." is a pretty crappy way to evaluate a company. Profit matters.

And per caps absolutely matter in this particular industry. There's a big push to get more bodies in the park, and they temporarily offset the lower spending. As soon as they fall off of that curve, they're stuck. They dilute the value of what they offer in the minds of their customers, who then become intolerant of an adjustment back up. We've seen this movie before, and we know how it ends.

EBITDA is actually a terrible way to determine if you can pay your bills. That would be a statement of cash flow. Reason is EBITDA doesn't include a lot of very significant cash costs such as interest expense and taxes.

Yea, net income is important but there is a reason everyone uses EBITDA when analyzing an operating unit's performance- in this industry park-level performance. And that's the context of this discussion in terms of attendance mix, per cap and season pass startegy.

Loss on an impairment of an asset, depreciation and amortization, interest expense, loss on early debt extinguishment... while all very important and roll up into net income, don't really speak at all to park-level performance. Pricing, season pass, per caps, attendance is all park-level performance, hence everyone's use of EBITDA.

Yeah, I still disagree with you, as someone who worked for a number of startups with stellar EBITDA. Those companies no longer exist. This idea that "performance" matters more than eventual outcome is total nonsense to me. "Everybody uses it" isn't a justification. Their balance sheet has been on a gradual slide now for three or four years. While they haven't taken on any new long-term debt, they haven't reduced it either, and they have less money in the bank.

• 2008: EBITDA up 45% over prior year
• 2009, March: Risk of bankruptcy
• 2009, June: Chapter 11

I'm not saying it's the end of the world. In 2009, the economy was in the crapper and no one wanted to loan any money. Still, like I said, I've seen this movie before, and I think they need to make some course corrections. Stop giving away the gate... it never ends well.

This is kind of Accounting 101.

Have you looked at Six Flags 2Q financials? EBITDA is up 9% through June 30. However, their net income is down 1.8%.

Do you know why that is?

It's because they had a $10M gain they recognized from the sale of an investment as of 6/30/14 and $0 gain as of 6/30/15, as well as a $6.5M expense for early extinguishment of debt in 2015 they didn't have in 2014. That's a $16.5M swing of net income on items that have absolutely no relation to operating performance of the parks.

That's why in this type of conversation when you're talking about pricing, season pass strategy, per caps, attendance mix, etc., you use EBITDA, not net income. EBITDA shows how Six Flags' parks performed through June 30, and it was 9% up from the prior year. The net income is down 1.8% due to items totally unrelated to park operations.

Look at Cedar Fair last year. Cedar Fair has an outstanding CEO and a great strategy, yet their net income was down 3.8% in 2014. That isn't reflective of their park-level operating performance and strategy.

Jeff said:

There's a big push to get more bodies in the park, and they temporarily offset the lower spending. As soon as they fall off of that curve, they're stuck. They dilute the value of what they offer in the minds of their customers, who then become intolerant of an adjustment back up. We've seen this movie before, and we know how it ends.

This is all that matters to me. I don't care if we use EBITDA, per caps, income, profit, or moon cycles.

You're diluting the perceived value of the experience in the name of attendance. If you're looking to make the latest reports look good (attendance is up and that EBITDA!) then great. If you're looking for a long-term success strategy, this ain't it.

You either have to continue that insane attendance growth or convince those new low-paying customers to pay more...and, based on how they secured them and their spending, you have to figure they're price sensitive for the most part.

Since this is going there anyway...

The "quarterly numbers game" lends itself spectacularly to figuring out ways to improve the reports without actually doing anything about your core business. Sure, you can show the BoD something magnificent now, and get yourself a big raise, but it's not sustainable. Not that you'd care, you'll be out of there and on to a new company while the guy who comes in behind you is stuck with a business model that isn't great and no real long-term plans for growth.

The short-term thinking model has just about run its course, IMO. Eventually, the house-of-cards does fall - we proved it in 2008, and since we've learned nothing (think: hedge funds), we'll likely get to do it again....soon.

The best use of EBITDA is to determine how much cash you should pay for a new project/acquisition.

Depriciation & Amortization, not only don't cost you cash, they are tax deductible. Interest expense is very much a cash outflow, but is also tax deductible. Taxes only occur if the new project is profitable.

Example: Gonch, Inc decides to acquire POP Media. POP media generates EBITDA of $100,000 and DA of $20,000. It has interest expenses of $50,000. POP would give Gonch $100,000 in cash and cost them $50,000 in interest.

If Gonch, Inc is profitable that $50,000 is tax deductable, and taxes would be calculated at Gonch, Inc's tax rate--not POP's. If Gonch Inc is making exactly $75,000 in pre-tax profit prior to the acquisition, acquiring POP Media gives Gonch an extra $100,000 in cash flow, less $50,000 in interest, or $50,000, bringing Gonch, Inc's pretax cash flow to $125,000. They can deduct the $20,000 in noncash D & A expense and the $50,000 of interest expense leaving them with $55,000 in taxable income.

With this data they can decide how much to pay for POP Media, knowing that any interest they incur to acquire is tax deductable. Taxes only matter if there is an accounting profit. If Gonch added $55,000 in interest expense to acquire POP income would be $0 and there would be no taxes, but he would have an extra $20,000 in cash flow from D & A.

CF uses EBITDA to determine how much to spend on new coasters, although they could decide to buy Jeff out. :)

Chicago07 said:

This is kind of Accounting 101... EBITDA shows how Six Flags' parks performed...

I don't know if you're trying to be snarky or whatever, but yeah, I get the accounting. I think I've made the point at least twice now that EBITDA and "performance" are not indicative of long-term success, and then I explained exactly why, both with my own anecdotes and specifically with Six Flags. I agree with Bill, too, that the quarterly numbers game has run its course. Without the greater context around the business, that game doesn't have a lot of meaning.

No, I was just surprised to read that you thought they needed a course correction when operating profitability is up 9%. You pointed to their drop in net income by 1.8% year to date, and I took 30 seconds to look at the financials and the $16.5M swing was due to a gain on sale of investment in 2014 and debt extinguishment costs in 2015. Nothing to do with park-level operations or strategy.

No, my original point was the decline in per cap spending is bad. Then I added that the profit was down. Your argument reminds me of the people who defend a company because, "Well, if you don't count that big write down, business is awesome!" At the end of the day, a company has obligations that it has to meet, and while I get that these come in many forms, you can't just look at them in isolation during a three-month window.

One of the dotcom flameouts I worked for had fantastic year-over-year EBITDA, solid growth in net income and rising margins. We felt pretty validated that our business model was going to work, we would go public, and a few people would be millionaires. Then it turned out that our product mix was wrong, and the parts that contributed the most to our cash flow went away. All of a sudden those one-offs like big cap ex, hiring bonuses and a real estate purchase put us in the crapper. In 18 months, the company was gone, sold for little more than its domain name and data.

It's cool if you disagree, but I do not buy that strategy has nothing to do with the one-offs. If I implied causation, that was not my intent, but to suggest one doesn't eventually affect the other is pretty short sighted.