Leland Wykoff

Cedar Fair today reported record numbers for 2012 including net revenues of $1.068 billion, up 3.9% year over year, net income of $101.2 million up $30.5 million, and EBITDA up 4.4%. Average guest per capita spending increased 4.8%, gate receipts increased, total debt leverage ratio was reduced to 3.9, and the company reaffirmed it is on pace to achieve $450 million in adjusted EBITDA by 2016. The company did not achieve record in attendance in 2012. Attendance fell slightly and was attributed in part to poor weather, primarily in the fall. The fourth quarter was down 11%. CEO Matt Ouimet stated, “We do not believe we suppressed attendance with pricing.” Ouimet further noted "you do not change pricing strategy due to rainy [October] weather." Meaningful opportunities to build upon the rather late advertising agency change and Fast Lane pass sales were seen for 2013. Cedar Fair continues to study the Fast Lane pass and make refinements to maximize revenues and customer adoption. Traction gained by installment sales of season passes, introduced late in the year last season, was above expectations. New refinements to installment sales, including six payment installments rather than four payments, and an earlier introduction of the installment plan to coincide with ride and park improvement announcements, has improved the productivity in this sales channel. Installment purchase plans for hotel, parking, and meal programs are also seeing favorable adoption by customers. This provides a buffer for poor weather and commits guests to FUN summer plans far in advance thus reducing marketing costs and capturing revenues early. Improvements to sales forces, season pass sales, and a new incentive program for sales staff has lead to record migration to season pass sales, now representing about 40% of park admissions. Season pass sales are up 6%, corporate group business sales were also reported up last year, trends expected to continue. Tighter relationships and management of promotional partnerships was also credited with increasing sales gains. Capital projects are on time, and on budget, with the major projects expected to open as scheduled including Gatekeeper, and the new wooden coaster in California. Four additional parks will receive Point of Sale (POS) systems including the recent completion of the POS system at Knott's Berry Farm. POS will be operating on all parks with the exception of Michigan's Adventure which is expected to be completed by the 2014 season. March and April will see the full implementation of a CMR program. This is expected to allow management to identify additional revenue opportunities and seek incremental sales and revenues. Management expects returns on capital from this system to be "North of 15 percent." High interest bonds are not callable until August 2014 and thus opportunities to reduce those expenses are limited at this time. The additional capital program of $15 to $20 million per year to address hotel refreshment, employee dorms, POS system upgrades, and CRM, announced as a three year plan, was suggested may expand to a fourth year. Hotel refreshment and employee dorm 2014 expenditures are expected to come in the second half of the year. Canada's Wonderland was the leader in sales gains for 2013, primarily attributed to the new coaster introduced last year. The $3 million increase in cost of goods sold was attributed primarily to quality improvements particularly in the food sold on parks. Matt Ouimet was "Very confident headed into 2013." The company reaffirmed the intention to achieve the $2.50 per unit payout announced for 2013. The company attributed the record performance to successful implementation of the FUNForward initiative. Capital plans for 2014 were pegged in the $100 million range. Several areas were left unaddressed in the fourth quarter and year end report and analyst conference call. The status of WindSeeker rides was not addressed much less clarified. It was most disappointing management did not update on that situation. The silence on this topic was stunning. One may infer the WindSeeker news must not be good. An analysis of the food and beverage improvements, particularly at Knott's, was not provided. F&B improvements at other parks was not addressed leaving one to ponder both the success of the Knott's program and future roll-out plans. Specific pricing strategies for premium parking, Fast Lane, and other products were not addressed. No significant new revenue streams were announced. To view the Cedar Fair 2012 financial results press release please see: http://www.cedarfair.com/ir/press_releases/index.cfm?current_root=15&mode=story&story_id=371 Conference Call transcript here: http://seekingalpha.com/article/1203551-cedar-fair-s-ceo-discusses-q4-2012-results-earnings-call-transcript?source=yahoo

The myth of the luxury convention center host hotel rears it's ugly head once again (see link in the Interpreter's comment above). This is a silly expensive myth well studied and disclaimed by Heywood Sanders in this article based upon his study published (behind a pay wall) finding no economic gain from host hotels: http://www.oregonlive.com/opinion/index.ssf/2012/10/does_a_convention_hotel_make_s.html Professor Sanders is the foremost expert on convention centers and host hotels in the United States. Here is his extensive study and conclusions about the publicly funded convention center business: http://www.brookings.edu/research/reports/2005/01/01cities-sanders For the Fair Board to claim no government money will be spent on this project whilst doling out tax breaks and credits is not honest. If you forgive an otherwise due tax it is the same as spending tax funds.

Spoke with a former high up manager who served at SeaWorld and Dollywood among other theme park industry postings. Asked him what he thought of Hart's attempt to reopen Kentucky Kingdom. He expressed extreme skepticism. It was his belief the economy in general, and that area in particular, simply can not support another theme park. Echos Matt Ouimet's conclusion the theme park business is fully built out in the United States. He also does not expect Six Flags to acquire SeaWorld and Bush Gardens parks. Seems to think Six Flags has its hands full managing the parks it already owns. Had positive observations on the current leadership and management at Six Flags and felt they were doing a good job. All this from a veteran of the industry who now works outside the industry and thus has a clear vision of the market and players. Things to think about.

Remember, Cedar Fair has recently been in close talks with Blackstone. Cedar Fair sold Blackstone a California Soak City water park. SeaWorld intends to massively rebuild and theme this location. Cedar Fair's Matt Ouimet had an extensive tour at Disney having developed Disney Cruise Line, timeshares, overhauled Disneyland for the 50th Anniversary, and other projects. Ouimet understands developing and carrying out comprehensive themes. Look at the attention he has already directed to Knott's Berry Farm theme integrity. Ouimet repeatedly states the US market for theme/thrill parks has reached saturation. Growth, he says, must be driven primarily by wringing more profitability out of existing properties and acquisitions. Things to keep in mind.

Oh, my. This has me recalling how, some many years ago now, when the beer industry began consolidating on a global scale, Cedar Fair management was asked to begin preparing to consider acquiring the Busch Gardens Parks. They could not see the future which was, at least to some, clearly on the horizon. Cedar Fair management had rebuffed earlier requests to consider acquisitions of properties such as Madame Tussauds wax museums, aquariums, and other leisure brands to develop a stable of properties operating year round which could be placed outside existing gates to enhance revenues and capture a larger share of the guest revenues, thus leveraging marketing expenditures. InBev purchased Anheuser-Busch and began looking for a buyer for the Busch Gardens Parks. Cedar Fair did not respond to the opportunity. By that time Cedar Fair had paid a hefty price for the Paramount Parks acquisition and was stretched to thin financially to seriously compete for Busch Gardens without a partner. Kinzel and crew apparently couldn't stomach the thought of sharing control by partnering with another party. Thus Blackstone acquired the Busch parks. Now we have the report Apollo may wish to acquire part of SeaWorld. Apollo earlier acquired Great Wolf Resorts for a song. Apollo also attempted to acquire Cedar Fair for less than a song. Reports at that time suggested Apollo was possibly interested in combining Cedar Fair with Six Flags. Apollo acquired a fifty percent stake in Norwegian Cruise Lines and has recently launched a successful IPO selling the shares above the original suggested price range. Apollo has demonstrated quite an interest in the leisure sector. Smart money recognizes Great Wolf Resorts are, essentially, cruise ships stranded at a permanent docking. The business models can be quite similar; captive audiences, receiving food, beverage, entertainment, for extended stays, utilizing relatively low cost labor, sharing brand name resort style amenities, booked and paid for in advance. Sounds remarkably like the amusement park business, no? Disney saw the connections and developed its cruise line. Disney has been growing resort hotels adjacent to parks for decades to consolidate revenues and further leverage marketing expenses. Where will the safe harbor be for Apollo? Where will Cedar Fair find safe harbor in a possibly further consolidating industry? Will lack of scale and intellectual properties--read "entertainment brands"--retard Cedar Fair's future potential? It may well come down to "Any port in a storm."

Norwegian Cruise Lines IPO prices at $19.00 per share a dollar above expected top range: http://dealbook.nytimes.com/2013/01/17/norwegian-cruise-line-prices-i-p-o-at-19-a-share/

Apollo plans to sell 23.5 million shares priced between $16 to $18 per share and raising about $400 million. This would represent, it appears, about 12 percent of the voting shares. Apollo, TPG Funds, and Hong Kong based Genting would control 88% of voting shares. More details: http://dealbook.nytimes.com/2013/01/08/norwegian-cruise-sets-price-range-for-i-p-o/

The New York Times reports Disney Parks will introduce new technology allowing guests to wear a bracelet which will expedite payments, track guests and mine information about behaviors, called MyMagic+ the system will be introduced this spring. The rubber Magic Bands will function as room key, park ticket, FastPass, credit card, and schedule or reserve parade seats, character visits (and tell the character the visitors name so they can be greeted personally), and like a frequent flier loyalty program card. Collectable charms and Magic Band accessories will be developed to generate additional sales and speed guest adoption of the technology. Disney expects MyMagic+ to cost between $800 million and one billion dollars. Enhancing the guest experience is paramount to the project. Read more: http://www.nytimes.com/2013/01/07/business/media/at-disney-parks-a-bracelet-meant-to-build-loyalty-and-sales.html?nl=todaysheadlines&emc=edit_th_20130107&_r=0

For more thoughts on the coming SeaWorld IPO please see: http://dealbook.nytimes.com/2013/01/03/can-seaworld-make-a-splash-in-its-i-p-o/ The returns Blackstone has achieved as well as the likely returns to future shareholders is considered. Hum.

More: http://www.fool.com/investing/general/2013/01/02/seaworld-gets-ready-for-its-ipo.aspx

Here is an interesting article: http://calapp.blogspot.com/2012/12/nalwa-v-cedar-fair-cal-supreme-ct-dec.html Explores the majority and minority positions.

For a fresh link to the story, and comments, please try: http://seekingalpha.com/article/1081231-cedar-fair-growth-hits-a-snag

SeaWorld files $100 million IPO. Six Flags and Cedar Fair on watch. http://www.streetinsider.com/Trader+Talk/Six+Flags+%28SIX%29,+Cedar+Fair+%28FUN%29+On+Watch+Following+SeaWorld+IPO+Filing/7971146.html More detailed report from the DealBook at the New York Times: http://dealbook.nytimes.com/2012/12/27/seaworld-files-to-go-public/ Leland Wykoff

Two days after appearing on KICentral.com the Orlando Sentinel stumbles upon the SeaWorld plans to go public. A few more details are provided along with the "declined comment" from Blackstone: http://articles.orlandosentinel.com/2012-12-17/business/os-seaworld-exploring-ipo-20121217_1_seaworld-orlando-seaworld-parks-entertainment-tampa-and-williamsburg Enjoy! Leland Wykoff

Reuters reports the Blackstone Group LP is planning an initial public offering of SeaWorld Parks and Entertainment in the $500 to $600 million range, likely in early 2013. Blackstones use of cash and debt at SeaWorld has been characterized as "aggressive" as $600 million has been paid out in dividends to Blackstone. Management fees and consultant fees likely have been hefty as well. For the Reuters story please see: http://www.reuters.com/article/2012/12/15/us-seaworld-ipo-idUSBRE8BD1CJ20121215

Imagination Cinema to reopen in 2013 as new venue featuring a show about Dolly's family, former Adventure Mountain will be an active construction zone when the park opens next season, Dollywood promises a new, never seen before, attraction which will take both the area occupied by Adventure Mountain and the adjacent hillside across from River Battle: http://www.knoxnews.com/news/2012/dec/13/dollywood-tours-new-ride-shows-in-2013-14/

Cedar Fair adopted new ticketing and mobile interfaces last season outsourcing much to Accesso Ticketing of Lake Mary Florida. Now Accesso has been purchase for $22+ million in stock and cash by British industry player Lo-Q. Most large amusement park operators now will find themselves dealing with a common supplier. For more details on the deal and product offerings please see: http://www.orlandosentinel.com/business/os-lake-mary-ticketing-firm-sold-20121206,0,7885126.story

Knott's Berry Farm featured a Scare Zone Maze requiring reservations and an up-charge fee. This first time trial was successful and Ouimet reported it more than payed for itself in the first year. The CEO stated "So we think there [are] other opportunities around the Halloween program, as [an] example." This fits within the model of providing services and product tailored to the benefit oriented consumer. The requirement of holding a reservation to access the up-charge Maze is in essence a Fast Lane Pass to Haunt. It allows customers seeking a premium experience to better manage time on park. These revelations further drive home the point: managements realization people standing in line are not spending money. It will be interesting to see if Cedar Fair will adopt some more extreme adult versions of haunts. Read a review of such an activity in New York here: http://www.blackouthh.com/reviews

Cedar Fair presented for the first time on December 3rd at the 40th UBS Global Media and Communications Conference. Matt Ouimet with 18 total months service, and near his first anniversary as CEO, expressed his firm belief Cedar Fair would close the year with a third strong record setting season. Revenue guidance up 4% was confirmed, as was average guest per capita spending up 4%. Attendance flat, inline with previous year record attendance. Caution was suggested against focusing on simple attendance figures, rather the revenue generation per turn-style click was emphasized as the key metric. Revenue management practices from the cruise line, hotel, and broader amusement industry were identified and evaluated as valuable management tools. More season pass sales can result in less per capita income as incremental admissions are essentially discounted. However, season pass revenues are captured up front and are resilient to downward pressures affecting daily admissions, such as adverse weather conditions. Essentially strong revenue gains are being somewhat masked by the downward pressure of season pass sales which have the effect of discounting some marginal admissions. Given this reality, it is better news than it may appear at first glance, per capita spending was up a healthy 4%. The staycation was identified as a permanent fixture rather than a short term trend limited by the recent economic downturn. Ouimet spoke again of the "genetic vacation behavior" where by what you did as a youth on vacation will have influence over those activities you enjoy with your children on vacation. Ouimet identified positive amusement park visits as an experience worth repeating as an adult. The pipeline feeding such legacy family visits was judged superior. The importance of the Dinosaurs Alive attractions were explained as having the education component necessary to justify and capture the school market. The capital investment is low as it is a partnership in which the DA folks split the up-charge gate fees with Cedar Fair. The defining nature of large rides, such as the new Gatekeeper Coaster and Gold Striker Coaster, were highlighted along with the superior returns they earn both at the turn-style and in promotional value. The YouTube Gatekeeper video was reported to have generated over two million hits to date. Strategic investments in new rides, and corresponding editing out of old rides, was demonstrated by Gatekeeper at flagship park Cedar Point. The operating costs saved by removing two older rides provides 75% of the cost of operating the new coaster. Those rides had low ridership and high maintenance costs. Costs are thus limited, and controlled by new rides, while reducing the fixed base costs. Evening lighting and music will continue to receive management attention and expansion as they have the power to retain guests on park longer resulting in lucrative dinner sales while simultaneously improving the value perception by guests. Promotional activities will rely upon less discounting and more relationship building. Price integrity will be practiced and new pricing models, such as installment season pass purchases, will continue to be developed and nurtured. Dynamic pricing and advance purchase commitments will be the watchwords. Incremental customer acquisition will be guarded to assure pricing and revenue opportunities are maximized. "Late to party" revenue opportunities such as sponsorships, marketing partnerships (such as the recently announced Coke deal), front of line passes, dinosaurs, premium parking, premium Halloweekends mazes and haunts, and improved e-commerce options, are and will be expanded and exploited. Cedar Fair is committed to spending approximately 9% annually of revenues on marketable capital projects going forward. These investments are viewed as absolutely necessary to promote the value and desirability of the properties to guests. Wise deployment of this 9% capex budget will also have the benefit of trimming, containing, and/or reducing operating and fixed costs as new rides replace older rides. The projected 4% annual growth in revenues was identified as coming three quarters from pricing and new products, and one fourth from new attendance. Hotel refreshment is primarily driven by the desire to extend the stay by guests and capture the second and subsequent daily admissions as well as increased room revenues. Cedar Fair has little interest in developing additional resort hotel rooms at this time. Campgrounds and other niche products may see growth. Ouimet supports the development of outside hotel rooms around or adjacent to Cedar Fair properties but is not interested, at this time, in expanding Cedar Fair hotel room inventories. The sale of Soak City in San Diego was disclosed to have sold for "around $15 million." Proceeds will be devoted primarily to fund the hotel refreshment program. Soak City SD was not a primary growth asset and it made sense to redeploy the capital to the hotel refreshment program. Ouimet indicated the company did not have many other assets ripe for sale. Cedar Fair will continue to be managed to provide significant returns to unit-holders via a sustainable dividend. Management and the Board of Directors is committed to increasing the dividend as the earnings of the company increase. See this Conference Transcript for details and sourcing of information and brief quotes: http://seekingalpha.com/article/1042371-cedar-fair-l-p-s-ceo-presents-at-40th-annual-ubs-global-media-and-communications-conference-transcript Leland Wykoff

Toledo Blade has an article rich with details of the planned hotel refreshment and refurbishment at Cedar Point: http://www.toledoblade.com/State/2012/12/02/Firm-to-invest-60M-to-restore-old-hotels-and-beach-properties.html Worth the read.

Good points all. Great discussion. Let us consider other issues from the CFO.com article: the realization people standing in line are not spending money. This has driven the Point of Sale (POS) conversion at Cedar Point. Recall, the newly announced capital program focused on "hotel refreshment" includes installing several park POS systems. Improved customer experience, increased revenues, decreased shrinkage, all lead to more profitable operations. The growth of e-commerce revenues, up 35% following outsourcing of platform design, and pre-purchase expansion of product offerings (food vouchers, parking, accommodations, and admissions), resulted in significant returns. Look for ever larger percentages of revenues being generated from e-commerce in the foreseeable future as plenty of room exists for organic growth. Updated POS systems make the acceptance of vouchers/smart phone cash much more efficient and effective. Clues as to other CF properties which may be on the block might be found by looking at parks which have not been identified for new POS systems. Disposition of non-core assets such as the San Diego Soak City allows for the redeployment of additional capital to fund projects such as hotel refreshments. The "concentrated use of capital" on fewer projects resulting in greater returns can be seen in the Gatekeeper Coaster announced for Cedar Point. This is an expensive ride, concentrating capital expenditure (while reducing operating and maintenance costs associated with two older rides which it replaces), whilst integrating the new ride into the park entrance and parking lot thus enshrining and defining the park as a high energy park with the promise of connecting thrills. This capital strategy would seem to be an acknowledgement of the role of big coasters/attractions as generators of significant revenues and earnings. Reviewing the recent impact of Harry Potter at Universal Park(s) reinforces the concept concentrated capital investments have the biggest potential payoffs. Harry Potter drove attendance in excess of twenty percent. Cedar Fair now seems committed to funding capital projects which have the ability to "drive incremental attendance." No longer can FUN afford to add rides which simply satisfy current customers. Rides must now draw significant additional attendance and the corresponding increased revenues and earnings. CFO Witherow observes in relation to capital projects since 2007 "Was the ride’s appeal too narrowly focused? Did it twist people upside down too much, or something like that? Let’s not make that mistake again. The capital budget has to go across 11 properties.” Following the sale of SDSC the capital budget now will be spread across just 10 parks. Witherow's mention of Pepsi in the article also gives us clues as to the interview being conducted at least three months ago. One wonders if WindSeeker additions would have passed muster under the new capital allocation process. The conspicuous absence, as pointed out by The Interpreter, of consideration of out of park revenues is, well, puzzling. Again, recall, the recently announced hotel refreshment project at Cedar Point. That announcement included the news of removal of employee dormitories from the Point. However, the announcement did not indicate what portion, if any, of the refreshment funds would be utilized to accomplish this task. The announcement did include POS funding as part of the refreshment project. Those POS systems were slated for parks other than Cedar Point. Some wiggle room exists for the use of the announced refreshment funds. Other off park projects may also be addressed with these funds. As previously discussed on these forums, the refreshment funds seem excessive at a cost of between $56,250.00 to $75,600.00 per room, considering building costs per new hotel room, excluding land costs, are currently estimated at $56,100.00 for the budget/economy segment. Hotel refreshment and price segmentation will likely spread system wide in the near future. Hotel improvements may include additional or enhanced restaurant and food venues which may also do double duty and serve on park guests. Food improvements at Knott's Berry Farm this past year will continue to be refined and rolled out system wide. Dinning is arriving on parks and will supplant eating on park. Higher quality foods may result in increased food costs as a percentage of sales. The trick will be to increase incremental food sales to offset loss of profitability achieved by lower food cost items. Leland Wykoff

Cedar Fair CFO Brian Witherow is featured in a major professional publication. Witherow discusses the challenges of working for a company which generates the lions share of its revenues in just 130 days, how no two revenue months share close resemblance to each other, and the challenges of allocating capital expenditures. The article delves into the study and analysis behind looking at historical capital expenditures to determine what worked and why as well as how to best proceed with future capital allocations. Very interesting. Enjoy the read: http://www3.cfo.com/article/2012/11/people_cedar-fair-point-brian-witherow-pos-amusement-parks

The rule requiring at least one occupant to be 21 is also common practice in the cruise line industry. Hotels can make reasonable rules and requiring guests making the reservation to be of an age of responsibility (mentally and financially) has been accepted in many jurisdictions. It promotes the safety of the property, hotel, and other guests. Going back to ancient common law practices of hospitality one would not find such an age prohibition. Actually custom in biblical times would require one to welcome a stranger into the home and hearth upon request. An actual duty was imposed upon the host to protect and quarter a traveler. Much of modern hospitality law stems from these early practices. Ohio law most likely offers some protection to inn keepers who have reasonable age requirements and/or restrictions. State statutes likely impose affirmative duties upon inn keepers requiring them to maintain orderly houses, specifically not to rent to or quarter underage drinkers. No doubt the Ohio Department of Tourism could provide up to date information and a regulatory frame work.

Don't forget--Carowinds has a WindSeeker!

Great Wolf Resorts was the worlds largest operator of indoor water park hotels. Great Wolf was primarily a development company, then the economy went south, they were transitioning into an operating company. They achieved long strides and were about to turn the profitability corner. The wolf arrived at the door. In the guises of a little enterprise called Apollo. The hammered out a tender offer merger agreement calling for the payment of $5.00 per share. They also needed the holders of rather exotic mortgage debt instruments to agree to change in control provisions to debt covenants. Like the deal agreed to by former management at Cedar Fair, Great Wolf's management and board lapped up the milk and licked their chops at the prospect of lucrative management contracts and golden parachutes. Shareholders, much like Little Red Riding Hood, recognizing a great wolf when the saw one, balked at the deal. The shareholders demanded more. Mortgage debt holders wisely refused to surrender protective covenants. The deal day approached to find hardly any shares had been tendered, and frighteningly, zero mortgage debt had agreed to drop change in control restrictions. Mean while Little Red Riding Hood--the shareholders in our tale--agitated for the deal to be aborted if adequate consideration was not offered for shares. A competitive bidding of sorts broke out with Apollo consistently raising the consideration to best the new suitor. The shares took off and Apollo finally won the company with a cash price of $7.85 per share. One of the largest price increases ever in a tender offer merger. Little Red Riding Hood was left to ponder if it was all just silly coincidence two of Richard Kinzel's children had played significant roles at Great Wolf Resorts. So yes, Great Wolf Resorts is on the market, one way or another, as the Interpreter has alluded. It is simply a question of price. Would the new Cedar Fair board, which from all observation takes it's oversight role very seriously, and new FUN management team pay an extravagant premium for the Great Wolf Resort at Kings Island? Not likely given current debt loads, this quarters unexpected revenue miss, and a healthy increase announced to the dividend. Purchase the property at a fire-sale price? No doubt FUN would like to, but less likely Apollo would consider a distress asset sale. However, never say never. The CEO hinted at the possibility of acquisitions in the not to distant future (think two to three years after the balance sheet is cleaned up a bit and the debt due in 2014 has been restructured at lower rates) of attractive assets offering good returns on investment. One clear lesson from our little morality tale; the Wolves (investment firms) are having a harder time leading the Sheep (shareholders) to slaughter. Leland Wykoff