Beverage pricing: They're still not listening

Jeff said:

Kyle2154 said:
@ Evil: You don't know what you're talking about. EBITDA is the most important measure for operational (what we are talking about) performance.

Please. It's a bull**** metric used to cover up deeper problems, and it's one that the market has responded to in terms of unit price. It has zero to do with how much cash is on hand, how serviceable the debt is or the company's ability to make capital expenditures.

We haven't had an example of this much fanboyism in a long time.

Jeff, when it comes to computers I will defer to your opinion. But in this matter you are wrong.

EBITDA is THE way of measuring "how serviceable the debt is or the company's ability to make capital expenditures."

Yes, you are right if they have $1.5b in cash on hand they can easily handle $1b in debt. Of course, if they had $1.5b in cash on hand they wouldn't need to borrow. And if they had $100m in cash on hand they could cover a $90m debt payment--this year. To determine if they could make next year's debt payment you need to look at. . . EBITDA. That is why cash on hand is only useful in the short term. In the longer term you need to know how much cash is coming in vs debt payments due. If you had enough cash on hand right now to pay off the debt completely you would never borrow--you'd pay cash.

If a company has EBITDA of $300m they can pay $125m in interest and have $175m to use for dividends, capex & debt payments. If they have $340m in EBITDA they can pay $125m in interest and have $215m for dividends, capex & debt reduction. In short, it is THE WAY to measure a company's ability to service the debt and make capex over the medium and/or longer term.

(If CF had $250m cash on hand that would tell us nothing about their ability to service $1.7b in debt over the medium and/or longer term. Only that they could pay $125m in interest for this year & next. To determine those things over the longer term we would need to know how much cash is coming in over how much is going out.)

I could be misunderstanding your position. EBITDA does not tell us how they are meeting their debt covenants--only their ability to pay interest, debt, dividends and capex.

BTW, no one points out that CF's cash flow had been steadily increasing until last year. Looking at their 2009 10K we find
EBITDA as follows:

2005: $194m
2006: $310m (looks like they make an acquisition ;))
2007: $340m
2008: $355m
2009: $299m

Looking at DATA we see that EBITDA had been rising even with the PP acquisition until 2009. The question, was 2009 an aberration (possibly caused by the worst recession since the Great Depression) and CF's EBITDA will resume its pattern of increases or will EBITDA continue to decline this year?

What we do know is that if EBITDA holds steady at $300m (actually $299.9m ;)) CF can pay $125m in interest and have $175m available for capex, dividends, and debt reduction. I have no idea what this means in terms of compliance with their debt covenants or ability to refinance debt (and neither does anyone else here either), but they are not in danger of not being able to pay interest or make $75m per year in capex.

And before anyone accuses me of being a fanboy, I am not the one who owns CF units :). I have no vested interest in CF's finncials, I merely researched the numbers from their 10K and quote them.

As to whether it is better to have lower percaps & higher attendance or vice versa, I defer to Gonch's opinion (whatsoever it may be). I do note that, until 2009, CF's ability to pay interest, reduce debt, make capital expendiatures, and pay dividends was steadily increasing. You can praise or despise CF management, but until 2009 they were strengthening the company. Possibly different decisions would have strengthened the company MORE, but the decisions made did improve the company's financial position from after the PP acquisition until the Great Recession hit.

To me, the key question (as noted above) was not what caused the decline in 2009 (I'd note EVERYONE took a hit from the Great Recession) but will EBITDA improve in 2010? If no, then CF has serious problems. If yes, then we can argue that management's decisions are not MAXIMIZING financial performance, but you cannot claim that management is running CF into the ground.

BTW, Kyle, I agree with most of what you have written--especially Twins > Tigers. :)

Jeff said:

Kyle2154 said:
@ Evil: You don't know what you're talking about. EBITDA is the most important measure for operational (what we are talking about) performance.

Please. It's a bull**** metric used to cover up deeper problems, and it's one that the market has responded to in terms of unit price. It has zero to do with how much cash is on hand, how serviceable the debt is or the company's ability to make capital expenditures.

We haven't had an example of this much fanboyism in a long time.

If you want to know cash on hand, you look at the balance sheet. There will be a line item for cash and cash equivalents which will give you the answer.

EBITDA is used in the credit markets to determine how much cash flow a business generates to service its debt. Fixed charge and debt coverage covenants are based on EBITDA.

Ability to pay for capex is a function of cash on hand, ability to generate cash and ability to borrow. Ability to service any debt incurred for capex is calculated with EBITDA.

Multiples of EBITDA are also used in valuation of a business/enterprise.

You can say EBITDA is not the only thing you need to consider and its not perfect. But to say its a bull**** metric is bull****.

crazy horse said:
So let's just turn a blind eye to the problem.

Not sure what you mean. A little more detail would be helpful in terms of being able to respond.

I'd love to have more information, information that I am not sure the park even has.

How many people who visited the park last season won't come back this season because they think the add-ons are too expensive?

What is the average length of stay for a customer in the park? How has that number changed over the years? This number *should* be getting longer, but is it? If it isn't, then why?

Kinzel says people have to eat. That is true. But they don't have to eat what he is selling. When it's the occasional cheapskate having a picnic in the parking lot, or running down the Causeway to go to $RESTAURANT that's one thing. But when people start canceling trips, or shortening their stays, it becomes more worrisome.

In my one visit so far this season it seems that they are making some steps in the right direction. They are adding some premium food and novelty items, and I think there may have been some pricing adjustments. Heck, they even brought back the Beef Stew at the Chuck Wagon Inn. If they do it right, they can increase per-caps on food. But the drink pricing alone is a great way to un-do all of that very quickly. Because after all, if you break down what people buy in the park, I am guessing that a drink is the most popular item.

--Dave Althoff, Jr.

Obviously people are still paying the high prices, other wise they would have lowered them by now. What we need to do is start a Cedar Point food/beverage boycott. ;)

The issue is this. How many guests per day are buying soft drinks? If the price was say $3 for 20 or 22 oz... how many would buy them then? I buy one now and share it with my friend. If it was $3, we would each buy one. I would still rather pay a $10 higher admission cost and get free unlimited drinks and free parking.

RideMan said:

the occasional cheapskate having a picnic in the parking lot

I am that guy every time.

Interesting Article:

http://www.cleveland.com/datacentral/index.ssf/2010/05/theme_park_r..._isla.html

Key excerpt: 3: Cedar Point's rank for attendance among North American theme parks outside of California and Florida, new estimates from the Themed Entertainment Association show. Cedar Point's attendance of 2,942,000 for 2009 ranked behind only Canada's Wonderland outside Toronto (3.2 million) and Kings Island near Cincinnati (3 million). All three parks are owned by Cedar Fair.

Additional Excerpt: 21,474: Average daily attendance at Cedar Point in 2009 when the park was open for 137 dates. For comparison, the fifth-busiest North American park for yearly attendance, Disney World's Animal Kingdom, was open every day and averaged 26,575 a day. No. 6, Disney's California Adventure, also is open year-round and averaged 16,699 a day.

^Kings Island's new ride help them reach 3 million and Canada's Wonderland is the only big amusement park in Ontario.

Why is Cedar Point attendance declining? Attendance peaked at 3.5 million some years ago and has been declining. Cedar Point and Kings Island used to trade the top slot back and forth. What happened that Cedar Point has gone from #1 to #3?

--Dave Althoff, Jr.

Economy?

I don't have the answer. But if I were running Cedar Point, that's one of the questions I would be asking very seriously, and looking real hard for every possible answer.

And in fairness to CP, I assume they are doing exactly that. Because quite frankly if they aren't then they ARE in trouble.

--Dave Althoff, Jr.

KYJoe said:

RideMan said:

the occasional cheapskate having a picnic in the parking lot

I am that guy every time.

This has become as much a tradition for me as a final night ride on MF.

RideMan said:
Why is Cedar Point attendance declining?
--Dave Althoff, Jr.

The city of Detroit used to have over 1.2m people, now it's about 900,000. Having your #2 draw lose 25% of its population probably had an impact.

Cedar Fair's approach unfortunately does not leave me with much confidence. Last year many people were visiting regional parks instead of national parks because of the economy. That boosted them for the short term, but I think this year a lot of people are going to be cutting out the regional parks too (at the very least, I know that could well be the case in my family and we always go to Cedar Point).

I think Cedar Fair has a big decision to make. They need to decide if they are going to be parks for a large number of people or a much smaller group than they currently serve, but which pays even larger prices. If they choose the former, they have got to lower prices on some things, most notably pop. Over the short run it will cost them as I doubt people will immediately start buying enough to make up for the price difference, but it's key over the long term. It feels insulting to pay those prices and it definitely effects guests opinions. In some ways, it's almost worse when the guest reluctantly pays than when they find an alternative. If a parent has a thirsty kid, they'll buy a pop, but they'll be angry about it and that does effect their opinion of the park. How many guests does it really take to cut their visits from 2 a year to 1 or from 1 to 0 to make up for the pricing difference?

That doesn't even take into account the people who do keep coming, but who change their patterns. Their policies have ingrained people to plan on cooking out, eating out, sneaking in pop, using water fountains, etc. The longer it goes on the harder this behavior will be to change (I know cooking out went from a necessity to a tradition in my family).

Cedar Fair's other alternative is just to run with the higher prices even more. If that's the plan, they could raise gate significantly too and try to make a lot on a smaller group. I don't think it will work, but it's an alternative.

KYJoe said:

RideMan said:

the occasional cheapskate having a picnic in the parking lot

I am that guy every time.

LOL me too! Why pay all that money just to eat in the park when you can bring your own! As funny as it sounds, it's becoming more and more common. I've never seen that many people last year in the parking lot eating lunch.

I also agree with Bryansworld8 about how I would rather pay $10 more for admission so we all could get free parking and free drinks throughout the park.

Fountain drinks traditionally have one of the the highest markup ratios of any concession item, second only probably to popcorn.When I was working at the Point back in the mid 1970's one year my room mate was a manager at the Skyride stand. At that time it was under the control of Interstate United. He told me that the mark up on a Coke (which was the official beverage at that time) was three hundred percent. The most expensive componet of the the drink was the cup.

What CP is charging for a fountain drink today is in line what the theaters in my area (Southern California) are charging for a 32 ounce drink. I don't recall what the price of a similar Pepsi at Knotts is at the moment . We're going there next weekend and we'll probably share a large at least once that day.

GoBucks89 said:
The differences are nonsense only if you don't understand basic principles of economics. But hey, you get free soda at work so you must be an economics expert. :)

The next post you make with this kind of ad hominem crap will be your last. That's a promise.

There are a lot of products/services on the market in which I find no value relative to the asking price. I don't complain and whine about them. I just don't buy them.

Well gosh, that's probably why a service business like Cedar Fair should care about such things, right?

But for some reason, people here like to complain and whine. There are three threads on the first page about drinks and hotel prices.

And yet you keep posting here. This is an unofficial site for people who care about Cedar Point. Should people who care about the park but are unhappy about the pricing (and seem to make it clear that they are not buying product) just stand up and say, "Yes sir may I have another over-priced soda?"

I think the prices of some things at CP are too high for me to find value. I could complain to management about them or start a thread on this board about them. But I don't. I just don't buy them.

Good for you. Now perhaps you can stop participating in the thread you find no value in.

CP certainly understands the concept of demand as a function of price.

No, clearly they don't, and we can cite the empty hotel rooms last season, the decrease in per cap spending of 1% and the 7% drop in out-of-park revenue or 7% drop in attendance.

Captain Hawkeye said:
EBITDA is THE way of measuring "how serviceable the debt is or the company's ability to make capital expenditures."

OK, so let me rephrase what I said earlier. EBITDA is not a useful measure for the long term health of the company, which is something derived from all of those things I mentioned. I've worked for a number of companies that championed EBITDA the way Cedar Fair does, and those companies failed. Cedar Fair has been raving about it since the Paramount acquisition, and has since cut its distribution, tried to sell parks and tried to outright sell itself. I stand by my statement that looking at EBITDA in a vacuum is not useful.

^ it depends on the company.

If you have a company that has fairly minimal up-front expenses but large ongoing expenses (say a furnace repair firm) EBITDA is probably not meaningfully different from net income.

A company like CF has massive up-front expenses. Once they put in a Maverick and pay their $22m the operating costs pale in comparison. (10 employees X $10,000 = $100,000 per year.) Depreciation would be cost divided by the number of years the coaster is expected to have major economic impact--in this case assume $22m/25 years = $880,000 per year)

The difference is this: the $880,000 per year depreciation has already been paid. The $100,000 (or whatever the real cost is) has to be paid out every year.

So in the case of CF depreciation is a past expense--they've already paid Intamin, whereas our furnace repair company has little, if anything t depreciate, so it doesn't matter.

You make an interesting point about how CF "has since cut its distribution, tried to sell parks and tried to outright sell itself." ALL of those things started in 2009, which was the first year that cash flow decreased. Whould CF have done any of those things if EBITDA had held steady at $355m instead of dropping to $299.9m?

I would argue that your arguement is evidence in support of my position: When EBITDA declined in 2009 that caused CF to take action. If EBITDA had held steady at $355m, CF could have paid $125m in interest, $75M in capex and had $155m to split between debt reduction and a distribution. If their loan covenants permit CF to repay at $55m per year for 30 years, CF could have maintained a $100m distribution if EBITDA did not decrease. But EBITDA did decrease, hence the courses of action you cite above. And note, DK is saying that if they have a good year (i.e. EBITDA goes up) they could restart the distribution.

You are right--EBITDA by itself isn't enough--you have to know what their interest and debt reduction requirements are. But if you know those, EBITDA can tell you how much would be "left over" for capex & a distribution.

While it's true that those things occurred in 2009, it's not like there weren't countless actions prior to last year that led up to it, not the least of which were the acquisitions of Paramount Parks and Geauga Lake. That's why I have a problem with the emphasis on it as a measure of company health, because it offers no long-term context. You can indefinitely have a nice EBITDA in your press releases, but the moment market conditions take a crap on you, the way they did in the last two years, you're in trouble.

A certain media company I worked for did the same thing, only with more aggressive (and inherently stupid) acquisitions. That stock price just kept going up on every report of growing EBITDA... until 2001 when everyone stopped buying advertising. That company has since been delisted and barely exists anymore. To judge the company on that metric proved a bad choice in the long run, because it ignores how the business would be able to perform going forward. It's little more than a snapshot that excludes everything the "B" in EBITDA stands for.

Perhaps it goes back to my bigger complaint about the value of public companies, that there's far too much emphasis on quarterly results and no regard for the long-term. That was what I was really keying into in response to the fanboy's claim that everything at Cedar Fair is superawesome.