Edited Transcript of SIX earnings conference call or presentation 20-Feb-20 2:00pm GMT

Since joining Six Flags in mid-November, I’ve been listening and learning from our people, visiting all 26 parks, examining the financial statements and capital structure and studying our processes. I believe it is important to understand the business from the front line perspective, and I’ve done this by meeting with team members and witnessing guest interactions firsthand.

This experience has confirmed my initial belief that the fundamentals of this business are sound. We have a strong brand, passionate team members, an impressive history and a healthy industry. However, organic growth has slowed over the last few years. And this means we need to reinvigorate our company with new ideas and fresh perspectives that address evolving consumer expectations. We need to focus on our base business and deal with 2 primary issues. First, although we have grown attendance from our Active Pass Base, where organic attendance has declined primarily due to a reduction in single-day visitors. We need to grow both our Active Pass Base and our single day visitation, and I believe that this is something we can move quickly to address. Second, our operating costs have been increased at an average rate of nearly 2% over the same period faster than our base revenue growth of less than 1%, causing operating deleverage and margin compression in our base business. Our park teams have worked hard to offset cost headwinds from minimum and competitive wage increases through other cost savings. However, this has had an adverse effect on the guest experience and created downward pressure in certain areas of our guest satisfaction scores.

In addition, we have reduced our marketing spend as a percentage of revenue, which offset some of the cost pressures we faced, but negatively impacted our ability to reach new consumers.

The net result has been a contraction in modified EBITDA margin and a decline in total modified and adjusted EBITDA due to base cost growing faster than base revenue. This margin erosion is also something, I believe, we can begin to address quickly and make further progress on over the long term.

In order to deliver exceptional long-term shareholder returns, we need to reverse these revenue and cost trends, driving both attendance and revenue growth, while improving productivity to increase profit margins. Doing this requires us to adapt our strategy to today’s dynamic consumer environment and to evolve our operating model to both counter the higher wage environment and deliver a better guest experience. This is not the first time I’ve navigated through this type of situation. After graduating from the U.S. Naval Academy and spending 6 years in the Marine Corps, I spent 26 years at PepsiCo. During that time, I led a number of business transformations in both domestic and international markets. I have a successful track record of reinvigorating profitable growth.

The results I delivered for PepsiCo give me great confidence that I can achieve the same success at Six Flags. I am eager to lead our committed teams to reestablish Six Flags as a strong and sustainable total shareholder return success story.

I strive to be a developer of people as well as a coach and motivator for our teams. I bring both a disciplined approach and results orientation and driving change. I believe that leadership is a privilege that is constantly reearned and never to be taken for granted based on position or title.

As the new leader of Six Flags, I have 4 commitments to you: first, I will be deliberate, strategic and long-term focused in my decision-making; second, I will instill a strong sense of urgency amongst our teams to address the issues we are facing; third, I will communicate our progress along the way in a complete and transparent manner; and fourth, I will hold the team and myself accountable for delivering strong results.

I fully understand the magnitude of these disappointing results to our shareholders, and I am committed to reinvigorating sustained, healthy and profitable growth that delivers long-term shareholder value.

Before I share some additional thoughts on the company, I will turn the call over to Lenny to provide details of our 2019 financial results and 2020 outlook. Lenny?

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [4]

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Thank you, Mike. And good morning to everyone on the call. I’ve been with Six Flags for over 30 years, working in both our parks and headquarters. I started as a frontline employee in games during high school and held many different management positions in our in-park services division until graduating college. Since then, I’ve had the opportunity to work in many financial roles over the last 20-plus years, including creating the company’s internal audit function, serving as the Chief Accounting Officer, and fulfilling my current role as the Senior Vice President of Strategic Planning and Analysis.

I appreciate the opportunity to fill the interim CFO role and to participate on today’s call. I will start with the discussion of our fourth quarter and full year 2019 performance and then address our 2020 financial outlook and first quarter dividend.

Our total revenue in the fourth quarter declined by $9 million, or 3%, to $261 million. Attendance declined 202,000, or 3%, to 6.1 million guests. Our 6 recently acquired parks, which include the 5 parks we began operating in June 2018, and Magic Waters, which we began operating in April 2019, had a negligible impact on revenue and attendance comparisons to the prior year quarter. Most of our attendance decline was due to softness at our 2 parks in Mexico and at Six Flags’ Magic Mountain in Los Angeles. The majority of this decline occurred late in the fourth quarter.

Our parks in Mexico experienced 2 issues. The first was austerity measures put in place by the new President, which significantly reduced government sanctioned school group visits to our parks. The second was an unfortunate accident at a nearby theme park, which has negatively affected people’s desire to visit any theme park in the area.

At Magic Mountain, we experienced poor weather, nearby fires and a delay in introducing our major new ride, West Coast Racers, which did not open until after Christmas. Collectively, these items had a significant impact on our fourth quarter and full year attendance. Since the opening of West Coast Racers, we have seen an improvement in attendance trends.

Guest spending per capita in the quarter decreased slightly. Admission per capita decreased $0.48 due to a reduction in single day paid attendance, which accounted for all of our attendance loss in the quarter. In-park spending per capita increased $0.45 due to higher spending from members, new culinary and retail offerings for Holiday in the Park and our all-season dining program. On the cost side, cash operating and SG&A expenses increased by $14 million, or 9%, primarily due to $10 million of charges related to our China development agreements and certain unrelated litigation matters. Without these impacts, costs were up about 3%.

Modified and adjusted EBITDA for the quarter were both $72 million, a $24 million decline from the prior year quarter.

Moving to full year 2019 performance, total revenue for the year increased $24 million or 2% to approximately $1.5 billion. This was driven by 2% attendance growth, partially offset by a $3 million decrease in sponsorship, international agreements and accommodations revenue. Admissions revenue increased $6 million or less than 1%, and in-park revenue was up $21 million or 4%. Attendance grew by 788,000 to 32.8 million guests, an increase of 2%.

Our 6 acquired parks contributed over 90% of the increase, and their attendance for the year totaled 2.8 million guests. Our legacy parks grew attendance by 65,000 or less than 1% to 30 million guests.

For the year, guest spending per capita decreased $0.21 or less than 1%. At both our legacy parks and our recently acquired parks, guest spending per capita was virtually flat. A higher mix of attendance from the recently acquired parks drove the overall decrease due to the lower per capita spending at these parks. At the legacy parks, early season membership promotions and an elevated level of discounted bring-a-friend tickets from our membership and season pass programs negatively impacted per cap growth, offsetting the positive impact of price increases and higher-priced memberships. Full year cash operating costs, which includes cost of goods sold, cash operating expenses and cash SG&A expenses, were up 6% or $50 million in 2019 due to the following items: incremental costs of $25 million in our 5 domestic parks acquired in 2018, primarily in the first 5 months of the year, including lease expense and cost to operate and rebrand the parks; incremental costs to lease and operate our sixth acquired park, Magic Waters; increased cost from mandated minimum wage increases and competitive wage rate adjustments in several labor markets; a $9 million or 7% increase in cost of goods sold due to our higher volume of food sold through our all-season dining program; and the costs related to China and certain unrelated litigation matters recorded in the fourth quarter that we previously disclosed in the 8-K on January 10.

Excluding expenses associated with the acquired parks, and the China and litigation expenses recorded in the fourth quarter, our costs for the year were virtually flat. We were able to offset the cost pressures mentioned above by reducing labor costs, primarily through contingency labor-saving measures and the reduction of incentive compensation earned due to our financial results.

Full year diluted GAAP earnings per share decreased $2.11 from $3.23 in 2018, primarily due to higher stock-based compensation expenses related to the reversal of the accrual for the unearned Project 600 performance award in the prior year. The higher operating expenses previously mentioned, and the recording of a valuation allowance related to our foreign tax credits due to the termination of our China contracts. We generated $527 million of adjusted EBITDA in 2019, a decrease of $27 million, or 5%, compared to 2018; and our modified EBITDA margin was 38%, a decrease of 238 basis points.

As Mike mentioned, our base business growth has been slowing over the past few years. I will now break out the performance of our legacy business for 2019, which excludes our 6 recently acquired parks and international development.

Revenue grew $1 million versus 2018. Cash operating costs, including cost of goods sold, increased $15 million or 2%. Full year adjusted EBITDA was $483 million, a decrease of $15 million or 3%. The modified EBITDA margin at our legacy parks was 39%, a 107 basis point decrease from 2018.

Turning to our 6 new parks, they have outperformed the expectations we had prior to operating them. In 2019, they generated 2.8 million of attendance and $95 million of revenue, with total guest spending per capita of $31.58, and a modified EBITDA margin of 14%. They generated over $13 million of adjusted EBITDA in 2019, net of $16 million in rent, and we expect to further improve the parks’ profitability over time. On a comparable period basis, the 5 parks we began operating in 2018 had attendance growth of 8%, revenue growth of 11% and EBITDA growth of 28%.

Moving back to total company performance. The Active Pass Base, which represents the total number of guests enrolled in the company’s membership program, or that have a season pass, was down 3% compared to prior year-end. Within our Active Pass Base, we increased our active member base by 18% to 2.6 million members, but this was not enough to offset the decline in season pass sales we experienced during the year-end holiday sales period.

Attendance from the Active Pass Base remained at 63% in 2019 for the total company, with our legacy parks increasing slightly to 64%, and our newly acquired parts growing from 45% to 55%.

Deferred revenue was $144 million, representing a $2 million or 1% decrease over prior year. The decrease was due to an increasing proportion of members who have been with us for more than 12 months, who no longer contribute to the deferred revenue balance as well as lower season pass sales in the fall, partially offset by higher average membership and season pass prices.

Adjusted free cash flow for 2019 was $246 million, a decline of $47 million relative to 2018. The company invested $140 million in capital expenditures and paid $279 million in dividends. Our ratio of dividend payments to adjusted free cash flow and net income in 2019 was 114% and 156%, respectively. Our net leverage ratio at year-end was 4.0x, at the high end of our target range of 3 to 4x net leverage.

Before turning to our 2020 financial guidance, I’d like to provide additional details on the challenges we are facing related to our international development projects. In China, our partner was unable to meet the financial terms of our contract. Last month, we issued default notices for a lack of payment. Since that time, they did not clear their defaults, and we terminated our agreements with them this month. Therefore, we are planning with the assumption that there will be no revenue in 2020 from our activities in China.

Going forward, we still see a future opportunity to leverage our brand with a rapidly growing middle class in emerging markets. But we will be very cautious as we consider potential international projects and progress is likely to be slow.

As we execute our 2020 plan, we have issued 2020 EBITDA guidance of $435 million to $465 million, which incorporates the following assumptions. The loss of approximately $30 million of EBITDA from our international development agreements. Increased OpEx of nearly $20 million due to wage increases, including higher minimum wages, competitive labor rates and full-time merit salary increases. Additional OpEx investments of $20 million for park maintenance projects and operational improvements that are relevant to our guests and team member experiences, along with additional marketing investments focused on growing single day attendance programs and improving our share of wallets in key markets. Restoring a bonus of approximately $20 million to support employee retention and recruitment, and organic revenue growth of approximately 1%, which is consistent with the current trend.

Given the significant drop in expected free cash flow versus 2019, our elevated dividend payout ratio in our projected leverage ratio above our target range in 2020, the Board carefully considered what is in the best long-term interest of the company and all of its stakeholders. As a result, we reduced the first quarter dividend to $0.25 per share, which equates to an annualized dividend of $1. This level will target a payout ratio of approximately 50% to 60% of adjusted free cash flow based on our guidance range and current level of capital spending, and therefore, maintain a consistent and sustainable dividend income for our shareholders. This dividend level will also help to effectively manage our balance sheet and leverage ratio and free up available cash to make targeted investments in our business with strong returns to enhance the guest experience.

Now I will turn the call back over to Mike.

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [5]

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Thank you, Lenny. I would like to share some forward-looking thoughts about 3 topics: our foundation for future success, our strategic plan approach, and our leadership and governance. The first topic is our foundation for future success. Six Flags is the industry’s leading innovator with a beloved 58-year-old brand, dedicated employees and loyal guests. We operate in highly attractive markets, including the top 10 DMAs in U.S., and our unique assets provide a truly differentiated experience in themed entertainment. In addition, regional theme parks are a stable industry that benefit from high barriers to entry. With limited direct competition, the industry has exhibited pricing power and consistent profit growth over a multi-decade period, including the last few years.

The industry is currently on trend as experiences are the fastest-growing category of all consumer expenditures, and theme parks offer an affordable form of thrilling entertainment for guests of all ages. While these foundations are favorable, we, as a company, have underperformed. I believe there are significant opportunities to improve our performance.

This brings me to my second topic, our strategic plan approach. I’m working very hard with the team to reassess the business in a thoughtful and methodical manner and to develop a comprehensive strategic plan that addresses our revenue growth, margin improvement and capital deployment opportunities for the next 3 to 5 years. To accomplish this, we are obtaining valuable support from Boston Consulting Group to ensure an external perspective on our plan. We expect to share a comprehensive and exciting strategic path forward at an Investor Day on May 28.

In the very near term, we have already identified several areas that offer opportunities for improvement. First, over the past few years, the number of single day visitors has declined, particularly during the heart of our summer season. While we have partially offset this decline through an increased visitation from our Active Pass Base, we have an opportunity to grow our attendance by recapturing lost single day guests with focused offers that do not erode our Active Pass Base visitation. Second, we are quickly moving to simplify our membership and season pass offerings and registration process, which will help us attract and retain consumers into our Active Pass Base.

Finally, within our parks, there is an opportunity to incorporate technology to streamline the end-to-end guest experience, improve culinary and improve operating efficiency and productivity. These are just a few immediate examples that we have chosen to highlight, and there are many more we will share with you soon.

The third topic I would like to speak about is our leadership and governance. This is something I’ve always found to be the critical foundation for success. In order to achieve our full potential, we must have the best leadership team in place with the right individual and collective capabilities to meet the high standards of our guests, team members and shareholders. The team needs to be motivated with the right incentive programs that deliver long-term shareholder value. Project 750 is not realistically attainable, so we will move away from project-based long-term incentives and replace them with restricted stock and performance stock units that more closely align with current market practice and shareholder expectations.

Performance criteria will consist of adjusted EBITDA, revenue growth and adjusted EBITDA minus CapEx. We will maintain our current short-term incentives that tied completely the company financial and operational performance. Given the challenged state of the business, I suggested, and the Board agreed, that I will not participate in the bonus plan for 2020.

Finally, as we rebuild our company delivered strong and sustainable earnings growth, we will continue our process of augmenting and evolving the Board with skills and experiences that provide the leadership team with strategic guidance as we meet the needs of our guests. We welcome H Partners, a large and long-standing shareholder, back to our Board of Directors. We value H Partners as a collaborative and strategic partner of Six Flags as we move forward.

In addition, we are currently interviewing additional highly-qualified and diverse candidates that bring strong operating CO backgrounds with digital, culinary and commercial experience. We expect to announce new directors in the near future. As I said at the beginning of the call, urgency, transparency and accountability are priorities for me. Our recent performance has not met our expectations, and we will act quickly and decisively with a focus on our base business to improve results. We will openly communicate both good and bad news to ensure that we provide an accurate depiction of our performance during this transitional phase, and we will hold ourselves accountable for delivering on our commitments.

We look forward to updating you on our progress during the first quarter earnings call and during our Investor Day, once our full strategy is developed. Before I open the call to questions, I want to emphasize that I’ve been with the company about 3 months, and I’m still formulating our strategy and plans. For that reason, my comments have been focused on 2019 and 2020. And I’ve not gone into any detail about our long-term strategy, our future capital allocation plans, any strategic alternatives or any period beyond 2020.

Regina, at this point, could you please open the call for any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of James Hardiman with Wedbush Securities.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division – MD of Equity Research [2]

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So Mike, you seem like a straight shooter. So I’ll keep that in mind here. Obviously, based on the fourth quarter results, the news out of China and the 2020 guidance, it seems like you’re now — this is now a turnaround story pretty evidently. I guess the first question is, when you came on board, do you realize that, that’s what you were getting yourself into? It seems like things really snowballed here over the last couple of months, in particular, with regards to China. But certainly, the domestic story, it seems like stuff that was maybe building for a while, really, from our perspective, just came to light. So maybe talk about the last few months and what really stood out to you as you collected all the data at the new company?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [3]

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James, thanks for your question. And let me start with — my first 90 days have only reinforced we got a very healthy industry, we got a great brand, we got great people, and we got really strong cash flow. And I’m excited to be here, and I was excited to join. So I’ll start there. And let me break down your other 2 parts, it was China and domestic.

On China, we are very disappointed with the termination of our agreements with Riverside Group. Once we knew Riverside Group had invested hundreds of millions of dollars into the projects, was unable to make payments, we delivered notices of default and notified investors. As a perspective, I’ve lived there, I’ve led businesses there. It’s an extremely fluid environment in China and as well as with partners. So as we said, we’re not planning revenue growth there, and that gets me the second part, which is our focus needs to be on our base business, which you raised. And here, we have a good business. As I said, I just think there’s 2 fundamental things we got to focus on, on our base business. As we’ve done well with active passes, we need to ensure we’re growing our single day tickets, which is very important to our total attendance and to our total revenue. And in addition, as I said, we’ve got to really make sure that OpEx is not growing faster than our revenue line. That just doesn’t bode well. So as we move forward, I think we got a really good foundation. And we’re going to be very focused, by the way, on the investments that we make in our base business to ensure they deliver strong returns.

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Operator [4]

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Your next question will come from the line of Brett Andress with KeyBanc Capital Markets.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division – Associate VP [5]

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So Mike, I know it’s early, but just from a high level, how are you thinking about the capital expenditures in this business going forward? I mean the argument has been out there for a while that 9% CapEx as a percent of sales may have just been too low over a long period of time. So how do you view the current capital pipeline for the business?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [6]

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Yes. So first, on capital allocation, good question. As I said, it is my intent to provide detailed feedback on all the capital allocation May 28 at our Investor Day as part of the holistic strategy. Now having said that, we’ve got really good cash flow, and I like the resiliency we have versus potential recessions given our business. What we will do, and what I’ve done in the short term, what the Board agreed to is, to focus on long-term shareholder interest. As Lenny said, targeting between a 3 to 4 net leverage ratio. We’re in the high range now. So I think it’s very important we maintain a healthy balance sheet and be thoughtful in that regard. Therefore, we did reduce the dividend in an [asset] but I think that’s part of it, but we did reduce the dividend to target a payout ratio of approximately 50% to 60% of adjusted free cash flow based on the guidance range. So — and as we move forward, again, I want to come back to — I just think, again, we need to focus on our base business as we develop our strategy, leverage the great brands, people who drive it, and we’ve got a good industry that, I think, provides some good tailwind, and we just need to be very thoughtful and responsible in the way we allocate that capital. And we’ll be very transparent as we make those decisions, Brett.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division – Associate VP [7]

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Understood. And just one last one for me. If you could just help me with the incremental operating expense that you’re going to spend for 2020. Is it simply more labor that you need to invest in to improve the guest experience? I mean, I guess, what did you find in the guest satisfaction surveys that made you kind of come to this conclusion?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [8]

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Yes. Got it. Just again, Lenny mentioned it, but you got about $20 million in wages, Brett, minimum wages, some competitive pressures. And then you’ve got as well, as we discussed, 2 other things. The second is ideally instilling a bonus back for our team. Our team is going to receive a 0 bonus for 2019 results. So ideally, we’d like to deliver because it’s important to recruit and retain the right talent to drive the strategy long term. So that’s potentially another $20 million, as you mentioned. Now specific to the marketing and the OpEx, which was the other $20 million that Lenny referenced, we’re going to be very thoughtful and methodical here, and we’re going to target that money into what we think are the right parks, with the right investments, with the right returns based on what the guests are telling us. And so we do look at the guest data. It’s done well. We also are looking at third-party data as well to see how we’re trending. So we will continue to look at things around clean, fast, friendly and food as we look at these types of investments.

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Operator [9]

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Your next question comes from the line of Steve Wieczynski with Stifel.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division – MD of Equity Research and Gaming & Leisure Research Analyst [10]

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Mike, so you talked about how core growth has slowed, and I know you don’t want to go into too many of your kind of ideas in terms of how you can turn that around. You’re going to probably highlight that in May. But I guess, a bigger question is, it seems your core attendance commentary is somewhat, I guess, different than some of your peers. I understand there’s, obviously, differences between different companies, but it’s still somewhat confusing as to why the differences in attendance metrics between you guys and, like I said, your peers, do you have any like high-level thoughts in terms of what some of those differences could be? Or how you can go about trying to combat those?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [11]

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I can, and thanks, Steve, for the question. First as Lenny said, if you look at 2019, we have real pronounced headwinds on attendance, predominantly driven by Mexico and Magic Mountain in California. That was roughly probably at least half the problem. So we saw some significant acute issues there, as Lenny mentioned. Second, on the positive side, we had some really strong performance that came out of the recently acquired parks that was very positive from a momentum standpoint.

Now when you look at the rest of the area, it brings me back to, again, that we — although we grew our Active Pass Base in the past, we need to grow our single day visitation. That, to me, is the key. And that will require us to be thoughtful in terms of our consumer value, and how we grow our single day tickets for folks that have out-of-pocket, absolute spending limitations, called the value consumers, while we also grow our Active Pass Base, where those are folks that tend to be willing to trade up on what I would call the consumer value incentive curve, where they’ll pay a little more and continue to pay more for benefits. We’re going to need to grow both. And I think we did a really good job of growing Active Pass, especially on the membership, but we have to do both. And again, as I said, with the right pivot in our brands and our people, given the industry and our cash flow, I think we — hopefully, we’ll be able to see pretty good momentum as we make these decisions.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division – MD of Equity Research and Gaming & Leisure Research Analyst [12]

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Okay. And then, again, a bigger question — bigger picture question. Again, I don’t think you’re going to answer this, but because you kind of addressed it towards the end of your remarks. But Mike, do you — is basically what I’m trying to get here is anything on the table at this point? And what I mean by that is, whether that could be strategic alternatives, that could be selling assets, that could be looking at monetizing real estate of the company, but is basically anything on the table right now?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [13]

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Yes. So another good question, Steve. First of all, it’s my fiduciary responsibility to shareholders, always look at all options, right? Having said that, I believe that we have a great ability to grow the business organically focusing on the base business, and I also believe that will build the best long-term shareholder value. And what I would say, maybe the other part of your question, if you — maybe you’re starting to lead into potential M&A or deals like that. To me, the decision tree has always been very simple on this. The first is what is strategically relevant? Second, does it deliver shareholder value? And third is, do we have the right to succeed in that direction or someone else? And I’ve always been very disciplined on that. But bottom line is, I think we have a good base organic business and growing that is going to deliver the best long-term shareholder value, and that’s where we should focus.

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Operator [14]

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Your next question comes from the line of David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division – MD and Senior Equity Analyst of Gaming, Lodging & Leisure [15]

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Two questions, please. Number one, if you could just talk about your degree of confidence around the guidance that we have for 2020 and, obviously, that’s connected to where the dividend is set. Obviously, people on our side are always looking to make sure that there isn’t another shoe to drop?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [16]

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Okay. You want me take the first question first, David, you said you had two. I just wanted to…

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David Brian Katz, Jefferies LLC, Research Division – MD and Senior Equity Analyst of Gaming, Lodging & Leisure [17]

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Well, yes, I’ll give you both and then you can do whatever order you’d like. My second question is, with respect to — and given your background is globally oriented, is it your assessment thus far that Six Flags has the kinds of assets, the brand and the operating model that lends itself to developing a global pipeline of growth for the parks? Those are my 2 questions.

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [18]

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Sorry about the pause there. Let me — David, let me start with a degree of confidence on guidance. We made — we felt it was important to be transparent. And I know that gets back to some of the other questions about not having a comprehensive story that includes capital allocation. But we felt it was to be — we should be transparent and give shareholders our best assessment of what the business would deliver for 2020. As we move through the year, we will absolutely update everyone, communicate where we’re going, how we’re doing, and what I know, shareholders will know. And that’s what I would tell you. We spent a lot of time on this, and we feel this is appropriate as we make the right investments in the base business and also deliver long-term shareholder value.

To your second question — first, actually, the majority of my time, I did spend 7 years internationally in my career as a civilian, so to speak. But the rest of that was running domestic businesses, predominantly, by the way, on the bottling side, very asset-heavy, very people-heavy tight margins, grinded out, blocking and tackling, executional game. So I do — that is my kind of muscle memory, so to speak.

Now — so I would say that it feels — that experience feels right to leading Six Flags, specifically to global or international right to succeed. I typically look at 3 things, David, when I think about international businesses based on my experience living and working there. The first is, what’s our right to succeed? That can get into the country, foreign direct investment, is there developing emerging middle class? Just is it a place that loves Western brands, okay? That’s one. The second thing is, it’s about capabilities. Somebody is going to run our parks. The system capability has got to be great to uphold the Six Flags brand and quality standards. And then the third is a partner. You have to have a good viable partner. If any of those 3 break down, you struggle. And in the middle of that is your business model. So we’ll be cautious. We’ll be very disciplined on international programs. We are excited about our Qiddiya park that’ll open up in 2023 in Saudi, but at this point, we’ll be very thoughtful and methodical as we focus on our base business.

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Operator [19]

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Your next question comes from the line of Michael Swartz with SunTrust Robinson Humphrey.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division – Senior Analyst [20]

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Mike, maybe more of a philosophical question now that you’ve had some time to look under the hood and talked to various park — various members of your parks. I mean, I guess, how do you think — or what is — what do you think is the right long-term growth profile for a, let’s call it, a healthy, well-run park operator?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [21]

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The first is what I would say, to your point, the best part, the job I’ve had so far is getting out to our parks. I mean the stories are they’re phenomenal. We have great people out there. They’ve given their lives to this business. They’re incredibly committed, passionate, and it’s a fun business. It really is a neat business. What I would say is — the first thing is, as I look at the industry, Michael, it’s — the industry broadly, whether I look at location-based entertainment, tourism, theme parks, out-of-home spending, feels good in a really good way, meaning you got decent, sustained, steady growth. As far as our long-term growth range, that would be something that we will be much more complete, and I would have

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giving you at the Investor Day, May 28, as we work through that. But what I would say is, I do believe the industry is good, I like our brand, I like our people, I like our business, I do think we will deliver sustained long-term shareholder earnings growth.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division – Senior Analyst [22]

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Okay. And then just with your — I guess, your focus on rebuilding the single day visitation base, is there anything as you look at the business today and maybe benchmark it, where do you want to get that front? There is always a balance between season pass and/or the Active Pass Base and single day visitors. And how much of growing that is really being more active or aggressive on the pricing front? There’s always been this strategy of low- to mid-single-digit pricing. So is that going to change as part of that strategy?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [23]

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Yes. I don’t think it’s a change, Mike. I think it’s more evolution. Meaning, the way I look at it is, there’s consumer demand spaces in every industry. And we need to be thoughtful in our base business offers that meet that cohorts need, whether they just want to come to our park for a single day. And like I said, that could be a value consumer that has a very fixed out-of-pocket spend, and they’re going to make that day trip for that day. Ideally, when we recruit them like that, I want them to become recurring and bring them into the Active Pass Base, but not all may do that. I also have other cohorts that they just love our parks, and they want a high frequency of use and they’re willing to up spend for more benefits. And they have more elasticity in their personal income to do that. That is ideal for the Active Pass Base. We want both. And the revenue management finesse is having the right consumer value between price and benefits that recruits and retains both. And that is an art and a science. And by the way, I think it’s got to be very focused, very local to our local consumers around our parks, and we’ve got to be very databased in assessing it because you got to make sure that the rate or inflationary and the mix impacts of these move bode well in terms of total margin dollars, total revenue and how it translates into the per capita lines of the P&L.

But again, I think — looking at our base business, I think we can do both.

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Operator [24]

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Your next question comes from the line of Tyler Batory with Janney Capital Markets.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division – Director of Travel, Lodging and Leisure [25]

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So I just wanted to follow-up on the attendance topic here. I have a few questions on the Active Pass Base specifically. Can you just talk generally high level, what you think about the membership program? And what you think about membership tiers? And then the Active Pass Base, I think, was down 3%, and it sounds like you’re growing membership, but the pass is down. So can you just talk a little bit more about what’s going on with this season pass being down? And kind of what’s the last question here. I mean do you have preference. I mean I know you want to grow the overall Active Pass Base. But I mean, would you rather grow membership? Or would you rather grow — or focus on growing the season pass specifically side of things?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [26]

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So I’ll take a crack at this and see if Lenny wants to jump in. I — again, I think that we want to grow both, and I’m specifically breaking apart Active and season pass. Because again, if I split that, season pass, again, is a different cohort demand space that is different than potentially a member who wants a full year program with us. Again, ideally, we want them to keep moving them up. Second to your point, I think our membership program is very good. As I said, the team, we’re looking at it. Do we need to simplify it based on park feedback and make things cleaner on the website and a little cleaner in the sales centers? I believe the answer is yes to that question specifically. I think we need to simplify it. But to me, we need to be looking at both in terms of growing both, and again, being very thoughtful on the offering that we have.

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [27]

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Yes. On membership, specifically, the goal would still be to continue to really drive people through the membership program. They do stay with us longer, they visit more frequently, they spend more when they’re in the parks, and their memberships are sold at a higher average price. So long term, it’s still the right strategy to continue to focus on membership, and we’ll continue to find ways to make people upgrade to that program. But again, as Mike said, all facets of the business are critical for growth long term.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division – Director of Travel, Lodging and Leisure [28]

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Okay. Great. And then my second question, I just wanted to ask a little bit more about the guest experience. And Mike, I know you spent a lot of time in the parks for the past couple of months. I know Six Flags does a lot of guest surveys and whatnot. Just can you talk a little bit about guest satisfaction? And what sorts of things are customers telling you that they want to see improved in the parks?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [29]

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Very good question. And Tyler, maybe I’ll elevate to this level. What I’m seeing is, in our business, we’re going to have to be really thoughtful, both with the consumer and the guests, and I would actually separate them. For both, there is a share of mind challenge as well as a share of wallet. The share of wallet, I find, tends to be more what is going on in the park, which you’re trying to get out of the guest’s pocket. And the share of mind is how you get their attention. And what we’re specifically hearing in terms of the guests to that point is, as we deal with that, they want differentiated experiences, they want digital expression, they want authenticity in brands, and they’re very aspirational.

And what they want is very — they want more bang for the buck per minute and per hour in the parks, which pushes us to deal with the evolving experience they want and really think end-to-end guest, which I think becomes very important for us to be sharp on that in terms of how we are very sharp on what they want from when they’re on the website to when they drive out of the parking lot.

Now specifically, the 2 areas that I’ve seen really create both opportunity and challenges is time and technology. What we’re seeing with our guests and consumers, they are much more time stressed. So as I said, they want more bang for the buck when they’re in the park. And technology, it’s a great enabler to create a great memorable guest experience, but it also causes fragmentation. And so again, as we think about our base business, invest with our people, invest in the brand, we’ve got to evolve with consumer and invest in the end-to-end guest experience.

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Operator [30]

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Your next question comes from the line of Tim Conder with Wells Fargo Securities.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division – MD and Senior Leisure Analyst [31]

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And Mike, welcome aboard and jumping in the deep end here from the get-go and for the color so far. So we appreciate that. Just wanted to revisit maybe just a couple of housekeeping items first. The Active Pass percentage of attendance total all-in, is that the 63%, 64%? Just wanted to confirm that. And then any comment on how the unique guest trended in ’19 versus ’18? I suspect it’s down given sort of the color commentary you’ve given so far, but just any color on that, if you could?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [32]

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Yes. The — yes, the Active Pass, to answer that question, is at approximately 63% as a housekeeping note. And yes, the unique visitors were down in 2019 versus 2018 on the base business. And that’s why I said, our problem to solve is focusing on that base business, investing back in the brands in the right parts and the right experience to get that back up.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division – MD and Senior Leisure Analyst [33]

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Okay. And then one other, I guess, just metric kind of on an annualized basis. I know you guys can provide that, I think. The visitation frequency from your Active Pass Base, how did that go on a year-over-year basis? And just any absolute point as to where that is?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [34]

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Yes. Tim, good question. It was slightly up in terms of frequency of visitation. It did increase slightly.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division – MD and Senior Leisure Analyst [35]

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Okay. Okay. And then to the single day focus with the value consumer. Yes, it seems like others in the industry, over the last year or so, have said, hey, we don’t want to leave that consumer behind and maybe target some of the shoulder periods with, specifically, as you mentioned, park targeted, database targeted approach, while still preserving the Active Pass Base. How — I don’t know if that’s built quite a bit, I guess, how do you balance the value that, that consumer is getting versus the Active Pass Base, who demands a higher value, more experiences and is willing to pay for it? How do you balance that trade off, I guess, as far as what you’re looking to do in the parks with the experiences and other things that I know are, again, still evolving and more details to come on that.

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [36]

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It’s a really good question, Tim. And a lot of this also, I think, we’ll get deeper in the strategy. But to me, it really — ultimately, you’ve got to look at the park. Are you seeing an improvement in the margin dollars, the margin per caps, visitation frequencies attempts, et cetera, those metrics are pretty clear. Now specifically, what we’re doing is we’re being very focused in testing single day ticket offers. And what we’re doing is we’re testing what is the incrementality of them, what is the right consumer value, what it takes to deliver that right value for that more value-based consumer. So we’re being very, very thoughtful and focused and disciplined in how we’re doing that.

But to me, I think we’re going to, ultimately, be looking at the revenue lines, per capital lines and the attendance lines by park to see how that’s playing out for us as we invest back into the base business.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division – MD and Senior Leisure Analyst [37]

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Okay. And then lastly, sir, if I may? On the OpEx, you gave the sort of the 3 buckets going on there. How should we — again, I know it’s early, it’s preliminary, lots of volume here, so maybe a hard question, but how should we maybe think about that spend here over the next 2, 3 years, maybe as a percentage? Should we kind of expect it to kind of stay at this elevated level for a few years and then see where we go from there? Is that sort of the best way to think about that here on a very early basis?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [38]

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Yes, Tim, I mean, labor is roughly half the cost base. And I think that’s a reality we’re going to have to deal with as we move forward. And obviously, we’ll have these headwinds, we’ve seen, these minimum wage increases coming about 7 states so far. We do have some more headwind there that we know is coming. As far as the specific rate of OpEx, that is one — again, I’m going to want to come back to you at the Investor Day, May 28, where we have a real good feel of how we can drive technology to leverage productivity. Because I think, fundamentally, what’s going to happen here, Tim, is the technology should be an enabler for the end-to-end guest experience, but should also be an enabler to drive productivity. And that is the work we’re going to have to take on, and once we do that, we’re going to have a better sense of how we deal with the headwinds and create some tailwinds.

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Operator [39]

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Your next question will come from the line of Alex Maroccia with Berenberg.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [40]

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Welcome Mike and Lenny. So can you first just give us the revenue recognized from international licensing in ’19?

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [41]

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Sure. And thank you for welcoming us. Revenue for the year was $41.2 million, and EBITDA contribution for the year was $30 million.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [42]

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Got it. Okay. So based off of that, it looks like revenues from the sponsorship part of that line item are starting to become a growth driver a bit. I think I got 30.3% growth in there. How are you viewing this opportunity? And can you discuss the margin profile?

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [43]

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Sure. I mean we’re very lucky to have our sponsorship group. We do over $37 million of revenue annually. Also embedded in that category is our accommodations line item. And if you recall, last year, we acquired Darien Lake, and they have a big accommodation business because they have a camp ground as well as a hotel. So the majority of that growth outside of international came in the accommodations line item.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [44]

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Got you. Okay. That’s helpful. And then holding long-term debt steady and considering your adjusted EBITDA guidance for the year, it looks like you’d be on track to finish 2020 around 4.5x leverage. Can you discuss this year’s debt priorities?

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [45]

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Go ahead.

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [46]

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Yes, Alex, it’s Mike. Yes, that’s — you’re about right on the net leverage ratio. In our — that’s why I said. We’ve got good cash flow, very strong cash flow. The — look, we want to make sure we stay. The ratings are important to us. We’re very focused on keeping a very healthy balance sheet. I think that’s in the best interest of our shareholders, especially our long-term shareholders. So that will be the top priority with any extra cash that comes our way. We think that’s the right thing to do to get back between that 3 and 4.

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Operator [47]

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Your next question comes from the line of Ryan Sundby with William Blair.

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Ryan Ingemar Sundby, William Blair & Company L.L.C., Research Division – Research Analyst [48]

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Welcome. Mike, I guess, I just wanted to follow-up on your comments on improving the in-park experience. You touched on time and tech and the role that needs to play. Just wondering if you could maybe then also talk about Warner and the DC comics IP you have and the role that can play? And again, I appreciate it’s still very early days here for you, but any thoughts on them as a partner? Is it creating the right kind of immersive experience that you want? Can you lead into it harder? Any thoughts on that would be great.

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [49]

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Yes. Thanks, Ryan, and I appreciate it. As you know, we have a partnership with Warner Bros. And it’s been something we’ve had historically, and we’ll continue to have. And yes, I do think we can leverage that. We’ve also found that we have great leverage in our base brands, our own brands and our people. And I would say it’s central to our park experience or with the guest or there consumers coming for. I think it’s more of a complement to what we offer. And I would like to work with them to see if we can get more out of that relationship that’s beneficial to our guests and to Six Flags.

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Ryan Ingemar Sundby, William Blair & Company L.L.C., Research Division – Research Analyst [50]

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Okay. Great. And then just a quick follow-up there on Alex’s question. I think that in your remarks, you said international would be $30 million and the EBITDA decrease, which is what it contributed this year. Is there still EBITDA going to be coming from the Saudi park in 2020? Or are you kind of excluding that now from your guidance?

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [51]

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No. You’re exactly right. Based on where we are today in our international development group, the margins are going to be significantly lower in 2020. So we will have the EBITDA that generates from the Saudi agreement, but we are going to have some extra costs associated with China until we determine what’s ultimately going to happen with the development of those parks as well as the cost of our international development group, which we’re looking to kind of reallocate those resources into other areas of the business that’ll actually help spur base business growth for the long term.

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Operator [52]

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Your next question comes from the line of Brett Andress with KeyBanc Capital Markets.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division – Associate VP [53]

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I’m sorry if I missed this, but you guide capital expenditures for 2020. I think you gave us some moving pieces around free cash. But did you give a CapEx number?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [54]

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Yes, there’s — Brett, it’s Mike again. It’s consistent with what we’ve done previously. There’s no change at this point. We did not call out specifically

(technical difficulty)

at this point, there’s no change. And again, as I said, as we develop the capital allocation portion of our strategy, we’ll share all that on May 28.

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Operator [55]

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Our next question will come from the line of James Hardiman with Wedbush Securities.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division – MD of Equity Research [56]

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A couple of quick follow-ups here. I guess first, you talked a couple of times about sort of being an open book here. The guidance in the disclosure were great, love the fact that you guys actually gave us a 2020 guide and, in particular, sort of broke out the organic versus inorganic for 2019. I think the lack of both was a source of a lot of frustration for investors over the last couple of years. Can we expect these types of metrics going forward, I guess, is the question? And I think, certainly, if you continue to acquire parks, it’s sort of a different animal, what your organic parks are doing, particularly as you talk about the strategy going forward versus what you’ve acquired? Are you going to continue to provide these types of metrics?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [57]

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James, it’s Mike again. My intent will always be to be as transparent as possible unless it creates a competitive disadvantage. If I think there’s information that I’m sharing that puts us in harms way from disclosing information that is not proper for the long-term interest of shareholders, or from a competitive standpoint, then we’ll do what we have to do, and we’ll obviously be completely proper on that. And what you’ll see at the Investors Day is we’ll share — and that’s the whole reason I want to do an Investors Day, is it will just give us an opportunity to have an interactive session where we can transparently talk about our business, have an engagement discussion on the business, so you know where we’re going. And that will be the real inflection point every year, where we’re able to give you a lot, if that answers your questions.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division – MD of Equity Research [58]

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It does. And then lastly for me, and you’ve kind of touched on the membership program, cleaning it up, but I wanted to ask you directly. Membership 2.0, the various tiers, do you ultimately think that, that was the right strategy? And do you think that in any way that contributed to some of the weakness the last couple of years?

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [59]

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So absolutely the right strategy, James, absolutely. Reoccurring revenue, driving increased frequency of loyal consumers, guests, customer, always, always the right thing to do because you’re retaining a loyal, you’re getting more share of wallet. In every business, you just get such a lifetime value of that guest. I found that in every business. So right thing to do. And specific — what we’re talking to our guests at every park is we test what they like and don’t like about the membership, what do they want? Are there other things they want out of it as we rethink our base business investments? At the same time, as I said, people have a lot of choices. So I still — we still want those single day visits coming where somebody wants that experience. And ideally once we get them to set up that first visit to Six Flags, if we give them that great guest experience, then we retain them. And that’s exactly why you love membership because it gives them a vehicle to get more great experiences from Six Flags, given the many things we can do in themed entertainment.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division – MD of Equity Research [60]

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But just to clarify, the membership on steroids is what I’m asking about, right, the Platinum, the Diamond and the Diamond Elite that’s more recent within the last 1.5 years. Do you think that was the right strategy?

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Leonard A. Russ, Six Flags Entertainment Corporation – Interim CFO and Senior VP of Strategic Planning & Analysis [61]

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Yes. Just looking at it from a base business standpoint. Our membership per caps are up 40% more than our season pass per cap. So it’s absolutely the right long-term strategy because it drives the prices up, and it, ultimately, brings more revenue in for all the people that are willing to upgrade to those levels. So the question is, is there a way to simplify the message and make it more attractable to get the people that want that product? And that’s what the research we’re going have to do going forward before — to finalize our strategic plan.

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Operator [62]

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I will now turn the conference back over to management for any further remarks.

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Michael Spanos, Six Flags Entertainment Corporation – President, CEO & Director [63]

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Thanks, Regina. I am thrilled to be part of the Six Flags’ team, and I’m looking forward to our next phase of growth. I look forward to seeing you out in 1 of our 26 parks in 2020 and at our Investor Day on May 28. Thank you for joining our call, and more importantly, for your continued support. Take care, everyone, and thank you very much.

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Operator [64]

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Ladies and gentlemen, this concludes today’s call. Thank you all for joining. And you may now disconnect.