Six Flags Entertainment Corporation/NEW Q4 FY2022 Earnings Call

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cedar Fair Entertainment Company Fourth Quarter 2022 Earnings Conference Call. Thank you. I will now turn the call over to Cedar Fair.

Thank you, Rob, and good morning to everyone. My name is Michael Russell, Corporate Director of Investor Relations for Cedar Fair. Welcome to today's earnings call to review our 2022 Fourth Quarter and Full Year Results ended December 31. Earlier this morning, we distributed via wire service our earnings press release, a copy of which is available under the News tab of our investor's website at ir.cedarfair.com. On the call with me this morning are Richard Zimmerman, Cedar Fair, President and CEO; and Brian Witherow, our Executive Vice President and CFO. Before we begin, I need to remind you that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties that could cause actual results to differ from those described in such statements. For a more detailed discussion of these risks, you may refer to the company's filings with the SEC. In compliance with the SEC's Regulation FD, this webcast is being made available to the media and general public as well as analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all content on this call will be considered fully disclosed. With that, I'd like to introduce our CEO, Richard Zimmerman. Richard?

Thanks, Michael. Good morning, and thanks to everybody for joining us. Earlier this morning, we announced record performance for fiscal 2022, which reflects the significant progress we are making on our strategic initiatives and the incredible work of our team to continue to deliver exceptional experiences for our guests. These record operating results allowed us to return approximately $220 million of capital to unitholders through the reinstatement of our quarterly cash distributions and the implementation of a new unit buyback program. These results also demonstrate that the strong performance trends that we provided updates on during our quarterly and interim reports throughout the 2022 season came to fruition in the second half of the year. The result was the second highest attendance year in the company's history, near historical highs for in-park per capita spending and record out-of-park revenues, driven in large part by the outstanding performance of our resort properties. We produced record revenues and adjusted EBITDA for the year despite continued headwinds, including labor availability, the impact of inflation and a group business channel that was still recovering. We also delivered over 30% margins, a marked improvement over last year with achievable upside as we work back to pre-pandemic demand levels. Much of the credit goes to our park GMs and their team's disciplined cost management practices, including efficiently managing seasonal labor to align with demand, while also actively managing down other variable operating costs to offset general inflationary pressure. The improvements they are making will ensure the long-term vitality of our parks and the growth of our business for years to come. Before I ask Brian to review our financial results in more detail, I want to take just a couple of minutes to walk through some key elements of our strategy and business that led to our success in 2022 and the strong momentum we have heading into 2023. First, reinvesting in our properties is essential to driving long-term growth. At the heart of attracting millions of guests to our parks and resort properties each year has been the company's commitment to consistently reinvest in the business to improve the guest experience. While M&A activity has certainly played a major role in our historical growth, the limited number of opportunities to acquire strategic high-quality properties emphasizes the central importance of investing in our own assets to produce steady organic growth. Second, prioritizing top line growth was the right recovery strategy. Our strong revenue growth in 2022 was a direct result of our ability to attract more guests to our parks, provide guests with more exciting and engaging options to drive in-park spending and keep guests coming back time and again. Given the uncertainty of the macro environment at the start of the year, we believe strongly that focusing on the guest experience and top line revenue growth would be the most effective way to create the operating leverage necessary to propel our business over the long term and through whatever economic challenges were ahead. I believe our strong 2022 results show this was the right strategy. Third, our business is underpinned by reliable, recurring and growing revenue streams. More than two-thirds of our annual attendance comes through ticketing channels with pre-purchase commitments that are well in advance of the guest visit, including season passes, group bookings, and tickets associated with overnight stays at our resort properties. These long-lead recurring revenue streams also produce predictable levels of cash flow that allow us to fine-tune our capital allocation priorities and make informed decisions about our future direction. We view the consistent growth of recurring revenues to be a valuable cornerstone of our business model and believe it remains the most unrecognized and underappreciated strength of our company. Fourth, we are a second half company, generating two-thirds of our attendance and revenues and 80% of our adjusted EBITDA over the third and fourth quarters. As with most seasonally weighted businesses, we enjoy peak demand in very narrow windows of the calendar, in our case from July through October when we fully leverage our cost structure and maximize flow-through on incremental revenues. Finally, our balance sheet is strong and getting stronger. To date, we have reduced total net leverage back to pre-pandemic levels, while progressing with purpose towards our net debt target of $2 billion. Our rapid recovery and strong results have positioned us well to move quickly towards achieving our goals while pursuing opportunities to add flexibility and capacity to our capital structure for the longer term. I'll pause here so that Brian can review our results in more detail before I provide some more color on our outlook going forward.

Thanks, Richard, and good morning. I'll start off with a review of our fourth quarter performance compared to last year before providing a more detailed recap of our full-year results compared to 2019, our last full season of operations. During the fourth quarter, our parks had 376 total operating days or eight fewer days compared with the fourth quarter of 2021. The decrease was related to planned changes to park operating calendars in 2022 as well as weather-related closures at several parks during the period. For the quarter, we generated record net revenues of $366 million, up $15 million or 4% compared to the fourth quarter of 2021. On a per operating day basis, our fourth quarter revenue performance was even stronger, up more than 6% year-over-year. Our improved performance was driven by a 3% increase in in-park per capita spending, an 18% increase in out-of-park revenues, and a 2% increase in the average daily attendance during the period. To compare our performance to pre-pandemic levels, average daily attendance was up 1% compared to the fourth quarter of 2019. The increase in out-of-park revenues was primarily driven by higher ADRs across most of our resort portfolio, reflecting our ability to price into strong consumer demand. Results also benefited from the inclusion of the newly renovated Castaway Bay Indoor Water Park and the Sawmill Creek Resort, two Cedar Point properties that were closed for renovations during the fourth quarter of 2021. Meanwhile, in-park per capita spending in the quarter totaled a record $63.33, fueled by higher levels of guest spending on food and beverage and merchandise along with higher ticket pricing particularly during our high-demand Halloween events in October. For the quarter, the improvement in guest spending was within the food and beverage channel, up 10% over the prior year, reflecting the success of the meaningful capital investments we have made in that area for the 2022 season. Moving to the cost front; operating costs and expenses in the fourth quarter totaled $286 million, up $5 million compared to the fourth quarter of 2021. The increase was the result of a $4 million increase in the cost of goods sold and a $15 million increase in SG&A expense, offset in large part by a $14 million decrease in operating costs. The increase in cost of goods sold reflects higher sales in the quarter as well as the impact of rising product costs. Despite these cost pressures, the cost of goods sold as a percentage of food, merchandise, and games revenue only increased 140 basis points from the fourth quarter of 2021. The increase in fourth quarter SG&A expense reflects higher full-time wages and related benefit and incentive plan costs, ongoing investments in technology upgrades, higher spending on park advertising in the period, and increased transaction and credit card fees. The latter was driven by this year's conversion of all our parks to cashless, which helped reduce labor costs by eliminating the need for cash handling positions at the properties. During the period, we reduced our operating costs by 7% compared to the fourth quarter of 2021 by tightly managing operating and maintenance supplies as well as moderating spending on entertainment and amusement fees. These savings were somewhat offset by planned increases in headcount at select parks, higher maintenance wages, and the incremental land lease and property tax costs associated with the sale-leaseback of the land at California's Great America. Excluding the impact of the sale-leaseback transaction, operating costs in the quarter would have been down 9% compared to the fourth quarter of 2021 or 7% on a per operating day basis, a key performance metric we are closely monitoring as we continue to better manage costs and improve operating margins going forward. Adjusted EBITDA, which management believes is a meaningful measure of the company's park-level operating results, increased $15 million year-over-year to a record $88 million in the fourth quarter. Meanwhile, our fourth quarter margin improved to 24%, up from 20.9% for the fourth quarter in 2021 and up from 21.2% for the fourth quarter of 2019. Operating margin improvement during the period reflects the leverage that comes with a return to more historical attendance levels as well as the impact of our successful efforts during the quarter to moderate cost growth. Shifting our focus to full-year 2022 results compared with 2019. Operating days in 2022 totaled 2,302 compared with 2,224 operating days in 2019. The 78 incremental days were the result of 85 additional operating days at our two water parks acquired in July of 2019, offset by a net seven fewer days due to normal year-over-year operating calendar differences at the parks. For the full year, net revenues were a record $1.82 billion, up 23% or $342 million compared to 2019. Our revenue growth was driven by a 28% increase in in-park per capita spending, a 26% increase in out-of-park revenues to a record $230 million. Meanwhile, attendance totaled 26.9 million visits in 2022, down 4% compared to 2019. As we've previously noted, the anticipated slower recovery of our group channel which was down roughly 1.4 million visits compared to pre-pandemic levels accounted for the entirety of the attendance gap. Helping to somewhat offset the shortfall in group attendance was the performance of our season pass channel. With a record 3.2 million season passes sold for the 2022 season, season pass attendance was up 10% over 2019 levels and comprised 59% of our total 2022 attendance mix. By comparison, season pass visitation represented 52% of the attendance mix back in 2019. Moving on to the cost front; for the full year, operating costs and expenses this past year totaled $1.29 billion, up $298 million compared to 2019, including increases in cost of goods sold, operating costs and SG&A expense. The increases in operating costs and SG&A were primarily due to the impact of general cost inflation over the 3-year period particularly around labor costs as well as the full-year inclusion of the Schlitterbahn parks, which weren't acquired until mid-year 2019. Looking a little more deeply at labor costs; although the labor markets in 2022 remained challenging, we are very pleased with the progress made around improving staffing levels and controlling costs. With better line of sight into operating calendars and less uncertainty around operating protocols, we were able to more proactively plan for our staffing needs. This helped our recruiting efforts and allowed us to return to a more traditional tiered seasonal pay rate model, only paying up for harder-to-fill positions and associates in supervisory roles. The changes we made to our seasonal pay structure helped flatten the growth curve around seasonal labor rates, which is particularly important given that seasonal labor represents our single largest operating cost. For the year, our average seasonal labor rate was down 1% from 2021 with trends continuing to improve in the second half of the year when rates were down 2% year-over-year. Based on the success of our strategies this past year, we are optimistic that we can again maintain our average seasonal wage rate to within 1% to 2% of 2022 levels although we will continue to manage rates as needed in order to ensure we have adequate staffing levels throughout the season. Adjusted EBITDA for 2022 was a record $552 million, an increase of 9% or $47 million compared to $505 million for 2019. Meanwhile, our full-year margin this past year improved to 30.4% compared to 24.3% in 2021, reflecting the benefit of a recovering attendance base and the strong performance of in-park per capita spending and out-of-park revenues. Due to the remaining gap to historical tenancy levels and general inflationary cost pressure, margins still trail pre-pandemic levels, something we believe can be addressed as we look to better optimize park operating structures and as our parks return to historical attendance levels over time. Now turning to the balance sheet; as Richard noted earlier, we are pleased to say we have built a robust balance sheet, which we intend to strengthen even further as we deliver on our strategic initiatives and seek to optimize our capital structure. We ended the year with $101 million in cash on hand, no outstanding borrowings under our revolving credit facility and total net leverage of 4x adjusted EBITDA, back in line with pre-pandemic levels. During the year, we used $264 million to fully repay the company's term loan, we used $33 million to pay cash distributions to unitholders, and we used $185 million to repurchase units under our new unit repurchase program. By the end of January, we had repurchased roughly five million units at a total cost of approximately $208 million. As Richard noted, the reintroduction of our quarterly cash distributions and the implementation of a unit repurchase plan were significant milestones in our recovery this past year. Going forward, we will continue to focus on unitholder returns as one of the pillars of our capital allocation strategy. This will include in the third quarter determining what level of increase in the distribution is appropriate as we get better visibility into our 2023 performance. We also intend to continue to be active in our unit repurchases, anticipating completing our existing buyback program early in the second quarter, at which time we will assess the appropriateness of implementing a follow-up program. Looking at long lead business indicators for a moment, the early trends in sales of season pass products, group bookings, and reservations at our resort properties are solid and in line with expectations. Our total deferred revenue balance at the end of the year was $173 million, representing a decrease of $25 million when compared to deferred revenues at the end of 2021. It's important to note that included in the 2021 year-end balance was approximately $30 million of COVID-related product extensions at Knott's Berry Farm and Canada's Wonderland into the 2022 season. Excluding these extensions, deferred revenues would have been up approximately $5 million or 3% year-over-year, including results from early sales of 2023 season passes and related all-season products. Through this past weekend, sales of new 2023 season passes were up 5% or approximately $8 million, driven by a 9% increase in the average pass price, which is in line with plan. Somewhat offsetting the higher pricing is a 4% shortfall in season pass units sold compared with the same time last year. The year-over-year unit decrease reflects a slow start to the sales program due to poor fall weather as well as a return to normal purchasing patterns coming out of the pandemic, with more than half of our season pass sales cycle remaining, including the spring window that accounts for more than 40% of total sales, we remain focused on maintaining pricing, driving increased unit sales and matching or exceeding the record sales performance of our 2022 season pass program. Regarding CapEx. This past year, we spent $183 million on CapEx, including investments in new rides and attractions, upgraded and expanded food and beverage facilities and renovations to several of our resort properties. By comparison, we project investing approximately $185 million to $200 million in capital projects in 2023. Lastly, for modeling purposes, for full year 2023, we are projecting cash interest payments of $130 million to $140 million and cash taxes of $50 million to $60 million. Finally, I want to provide an update on how we will be reporting operating results in the coming year. Given the strength of our 2022 performance and the stage of our recovery, we believe there is no longer a need to offer the number of interim update reports we provided last year. As such, we will be returning to our normal cadence of providing results on a quarterly basis moving forward. While we will continue to provide updates on our performance through July with second quarter earnings and our performance through October with our third quarter earnings, we will no longer provide interim updates relative to Memorial Day, the Fourth of July, or Labor Day.

Thanks, Brian. We are extremely pleased with our performance this past year and equally excited about the opportunities we see to build on that momentum in 2023. One important area that has more room to grow is our season pass channel. Its recurring strength reflects two things about our customer base. One, the universe of our most loyal guests continue to grow propelled in part by the benefits offered through our season pass programs, including our Pass Perks loyalty program as well as the continuous improvements we have made to the overall guest experience. And two, more of our most loyal guests are purchasing our highest-priced ticket, in many cases, buying up to obtain the perks and benefits of season pass ownership. Improvements to our food and beverage program continue to resonate well with our guests, helping to drive in-park per capita spending higher. While pricing is part of that equation, most of our food and beverage per capita growth can be traced to investments made over multiple years to elevate the quality of our culinary offerings, including the opening last year of new high-throughput upscale dining facilities at Knott's Berry Farm, Cedar Point, Kings Dominion, and Canada's Wonderland. Consumer response in our guest satisfaction ratings has been overwhelmingly positive for our higher quality, more diverse culinary choices, faster turnaround times and comfortable, climate-controlled dining facilities. We will continue to upgrade and expand upon our menu offerings and food facilities as we look to drive incremental growth in guest spending. We have seen a similar guest response to our premium experiences, an evolving program that we think is in its early innings and that we believe has considerable potential to drive incremental guest spending even higher. In addition to continuing to market premium offerings such as Fast Lane, Water Park Cabanas, and exclusive VIP areas to our daily guests, we are actively testing a new prestige pass at select parks in 2023, a product aimed at our season pass guests who are looking for premium experiences throughout the season. As we take stock of our progress, we believe there is room for improvement and more work to be done in several areas of our business, including within our cost structure. Initiatives are well underway for the current year to again manage seasonal labor rates, keep seasonal labor hours consistent with demand and ensure the effectiveness of other variable operating costs. These are important initiatives as we work to restore attendance back to our previous highs and dynamically price into demand, particularly at our smaller parks that lack the same level of operating leverage as our larger parks. A return to pre-pandemic attendance levels, along with our ability to optimize operations and maintain cost increases inside our targeted revenue growth rate will be critical to achieving our margin goals. Along the same lines, we are actively working to further improve our parks' digital infrastructure, connecting guests with applications that speed up e-commerce transactions, reduce the need for labor and improve our dynamic pricing and analytical capabilities. We are also working on an improved mobile app for the 2024 season to provide our guests with improved visibility of in-park entertainment and dining options and enhanced transaction control through their smartphones when purchasing goods and services. Much like the cost-saving benefits we have realized through cashless operations, measures to improve technology that also improve the guest experience will make park operations more efficient, reduce our operating costs over the long term and help increase margin performance and flow-through. Going into 2023, we will continue to prioritize revenue growth, which will be driven by demand from marketable capital and continued investment in food and beverage highlighted by big new anchor restaurants at our two largest parks, Cedar Point and Knott's Berry Farm, recovery of the group channel, which will be led by youth and school bookings in the spring and corporate business throughout the balance of the year and expanded park operating calendars over the first half of the year. While operating calendars may need to be adjusted for macro factors such as weather, for the full year, we project adding as many as 70 to 80 operating days this year compared to 2022. We are focusing the lion's share of our investable capital on the areas of the business that produced the highest return. We do so with the full appreciation that more than 80% of our adjusted EBITDA is produced by our five largest parks that also have the highest operating leverage. With that in mind, for the 2023 season, we are making investments of scale at each of these parks, investments that transform whole sections of the parks, where increases in demand and guest spending should be imminent and remain sticky. We are also planning to invest in new marketable attractions at two of our mid-tier parks, namely Worlds of Fun and California's Great America in 2023. History shows that adding major new rides and attractions at our smaller market parks has an immediate impact with increases in attendance, guest spending, and season pass sales. Our investment strategy for the foreseeable future should look much the same, keeping the high-capacity engines of our larger parks running at peak performance while rotating investments in major marketable attractions among our smaller market parks for immediate impact and incremental long-term growth and improved profitability. We are fortunate to have a business model that has demonstrated resiliency and strength in varying economic and market conditions. I am encouraged with how effectively our strategic initiatives drove performance throughout the pandemic and more importantly, through the recovery this past year. While we continue to exercise a degree of caution given the current uncertainty of the macroeconomic environment, we believe we are well positioned to deliver another year of record results in 2023, and we remain laser-focused on delivering solid returns for our investors.

Your first question comes from the line of Chris Woronka from Deutsche Bank.

Congratulations on a strong quarter. I wanted to dive a bit deeper into the margins. I know you've shared a lot already, but could you elaborate on how to consider the impact from Schlitterbahn when comparing to 2019? What are your long-term targets, and what is the expected timeline to achieve them? Is there a specific strategy in place, and how much does attendance factor into this compared to the operational changes you are implementing?

Chris, I appreciate you being with us. Let me just say, to start by saying, once again, 2022 was a remarkable year. And I've got to thank everybody in the organization, all the teams out there. They did a tremendous job managing through the pandemic. So hats off to them. In terms of margins, margin is really something we pay a lot of attention to. As we said, a return to historical demand levels really will help drive pushing further and getting margins back to those pre-pandemic levels. But in addition, we continue to price into demand particularly in the fourth quarter. The big attendance month of October really showed what we could do in terms of demand, pricing, and driving high-margin incremental revenue. We spent the pandemic, Chris, implementing and building technologies that really allowed us to optimize the recovery. Our business intelligence function is really doing a great job on two fronts: first, revenue management and really pricing dynamically into demand, but also working with our operators in the field on workforce management, getting a lot more disciplined on that side. We built a centralized procurement to really make sure that we were doing everything we could to take cost out of the system and be as efficient as possible on all the things that we buy. So when I look back over the arc of where we've been, I think you're now starting to see the impact of a lot of the decisions that we made over the last two or three years regarding strategic initiatives and how they can deliver as you look at our results. Brian, anything you would add?

No. I think just to emphasize, Richard, what you said, which is getting there, Chris, hinges on both our ability to continue to drive top-line revenue as well as manage costs. I think as Richard said in the call, coming into this year, the focus was on driving revenue and returning to historical demand levels as quickly as possible. I think we saw the benefit of that in the fourth quarter when we did get back to historical levels. And so as we think about our business, we are certainly a second-half business. As we note, two-thirds of the attendance and revenues come in the second half, but 80% of the EBITDA. That speaks to the amount of leverage that exists in Q3 and Q4. I think as we work towards getting back to those 2019 levels, it will be critical not only to manage costs better, but to continue to drive top-line revenue.

Very helpful. And a quick follow-up, if I could. On capital allocation, you guys had a pretty significant buyback in Q4. In this year, no matter where we think EBITDA may fall, you're still going to generate a lot of free cash flow, you've got leverage back to where you want it. How do you prioritize getting that distribution back closer to historical levels versus potentially more buyback at this level?

Yes, Chris, it's Brian. As we said when we implemented the buyback program, the Board felt that it was an excellent tool to add to the tool belt in terms of another means of returning capital to our investors that was a little bit more discretionary and flexible than the distribution. That said, the distribution remains at the forefront of our capital allocation strategies and priorities. As I said in the call, we'll wait until the third quarter and get a better line of sight into how the 2023 season is developing. We certainly expect to have an outstanding 2023, as Richard noted, and that will give us a lot of options as it relates to capital allocation, both reinvesting in the business as well as returning capital to the investors through distributions and potentially future buybacks. The size of the distribution increase will depend not only on performance, but also on what are we getting rewarded for from the market. Is the market seeing value in the distribution? Is that reflected in the stock price? So I think there's a lot of factors that will go into that decision, but we're in a really good place based on all the efforts that we've undertaken over the last 12 to 18 months coming out of the pandemic.

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

I have a question. I'm not sure if you'll respond, but I’ll ask it anyway. I understand that you don’t provide annual guidance. However, considering the $550 million in EBITDA that you achieved this year, would you be disappointed if you didn't surpass that amount by this time next year? If you don't exceed that level, what factors should we be monitoring? I realize there could be macro headwinds, but are there other considerations we should keep an eye on to ensure you exceed that level?

Steve, it's Richard. I appreciate the question. While I won't answer hypothetical and we don't give guidance, what I would tell you is I'll take you back to how we look at our business, and we've said this forever. We're an easy business to model. There are three things that we look at for leading indicators. Season passes, we've laid out where those are. We feel good about where they are, and we think we likely are now far enough past the pandemic that we're going to probably revert back to what I call a more normal historical purchasing pattern, which means springs are our biggest sales period. So we're stepping into the spring sales period, we have lots of excitement around our new capital with a much higher season pass base to look at. So I'll be watching retention really closely. How many renewals are there within our season pass program? That's a number that's very meaningful to us. The other couple of leading indicators, resort bookings still look very positive at this point. I'm encouraged by that. But the big thing, and we touched on it, the gap between our tenants now and 2019 really rests in the group channel. I have to tell you, over the last several weeks, I've had really encouraging meetings with the leadership of our sales teams. We're seeing really strong responses to everything that we're doing. We're out in the market sourcing leads, we've got everybody out there talking to our old businesses, and there's going to be a real focus on new business. We'll have more to say as we get through this year, but I think our year this year will always come back to driving demand with new marketable product, we invest to do that, enhancing the guest experience, making sure we're capturing that demand through the season pass in the group and the resort channel. And then once we get them in the park, having the ability to drive that in-park per capita spending once they get inside the front gate. I'm really pleased and proud of what our food and beverage operation has done. We keep driving that with higher average transaction values and we keep doing more transactions per hour. So we're building capacity to drive that sustainable in-park per capita spending. Those are the things that I'm going to be watching as to look at 2023. And right now, those are all encouraging.

Okay. That's great color. And then the second question, I don't know if I misunderstood, Brian, but Brian, I think you sounded like you got a little bit aggressive with marketing in the fourth quarter. And just wondering, a, if I heard you correctly, and then b, maybe how we should be thinking about your marketing spend heading into this year, given the potential for the additional 70 to 80 operating days that you guys might be layering in?

Yes, Steve. Regarding marketing, what we observed in 2022 was essentially a recovery towards more historical levels. It’s unlikely we’ll return completely to pre-pandemic figures, as the marketing methods and tools we’re using today are much more efficient. In 2020 and 2021, spending was significantly disrupted due to the pandemic, which led us to reduce marketing expenses as operations were affected. Moving into 2022, getting back to a more typical operating calendar required us to reinvest more into marketing. Looking ahead to 2023, as Richard mentioned, there is considerable marketable capital being injected across the system. It’s crucial for us to fully leverage this potential by adequately funding our marketing efforts. However, this doesn’t mean we will revert to the marketing spend levels of 2019, as I believe there are still efficiencies to gain. Nevertheless, increasing our spending to boost top-line revenue is an essential aspect of acquiring guests.

Your next question comes from the line of James Hardiman from Citi.

So wanted to connect the dots or not? Maybe I shouldn't be connecting the dots between some of the trends that we saw in the fourth quarter and how we should think about the setup for 2023. Maybe let's just start with attendance. Obviously, the last we spoke, October was a gangbusters month, right, from a revenues overall, but attendance in particular. It doesn't seem like November and December were nearly as good. Maybe walk us through sort of the dichotomy within the quarter based on the implied results there? And what, if anything, we should roll forward into 2023.

Yes, James, this is Brian. I think you summarized it well. We already disclosed during our third quarter earnings call that October was strong. The Halloween events are very popular across our properties, with only a few locations, specifically two Schlitterbahn parks and Michigan's Adventure, not offering these events. There is significant demand and scale for these events. As Richard mentioned, we raised prices, but that did not impact demand, which was encouraging. Moving into November and December, more than half of our properties close for the season, and we only have WinterFest events at six locations, limiting our opportunities. Weather becomes a bigger factor during this time. If I were to sum up the quarter, we had outstanding performance in October, but November was slow and affected by the weather. December started strong, especially on the West and East Coasts, but during the week of Christmas, extreme cold impacted attendance in the East and Midwest, and rain affected the Coastal region in the fourth week. Overall, it was a great October, a challenging middle with the weather, and a mixed conclusion to the quarter.

Got it. I have a similar question regarding per caps. Looking at the numbers, it appears that your per cap has increased significantly. By my calculations, it's up 36% now compared to 2019, after being down year-over-year in Q3, but it showed improvement again year-over-year in the fourth quarter. I understand that the fourth quarter is relatively small, and property mix is a significant factor. However, do you see this level of growth in per cap as sustainable as we approach 2023?

Yes, regarding per caps, we feel optimistic about our interactions with guests and their readiness to invest in a quality experience and product. This is why we are committed to enhancing the guest experience, even if it puts some pressure on margins since this initiative does come at an additional cost. In the quarter, we noted a few significant points. It was a smaller quarter, which can sometimes skew percentages. Additionally, some of the smaller parks, which typically have lower per caps, were not operational. Nevertheless, what we observed in the fourth quarter aligned with trends from 2022. When guests visit, they are spending, especially in areas where we expect strong spending, such as food and beverage and improving merchandise. We've adjusted our pricing for the fourth quarter due to high demand, particularly on busy days like Saturdays and Friday nights during Halloween events. Looking ahead to 2023, we remain confident in our ability to increase per caps. While we will adjust pricing in response to inflation when necessary, our focus is also on increasing throughput and average transaction value. It's crucial to offer guests high-quality products they are willing to pay for, delivered efficiently to avoid long waits.

That's great. Lastly, on the margin front, this seems to be the best margin quarter I've seen from you in a while, especially regarding operating expenses. You achieved significant leverage from operating expenses. On an operating day basis, operating expenses decreased significantly after having increased in the third quarter. Can you replicate that success in 2023? With the 70 to 80-day increase in your calendar, is the aim to increase operating costs at a rate slower than the growth in operating days? How should we approach this?

I'll take that question, James. I'll go back to my prepared remarks. Our plans are to try and keep that expense increase inside our targeted revenue growth rate. We've talked at length about how we can drive the revenue. We have also talked about, and I'll say from a qualitative perspective, James, I thought this was the first quarter. It takes a while to build things and then roll them out. We really put tools in the hands of the operators that they're now starting to use. So we're getting far more fluent in workforce management. We continue to focus on how we can best utilize the labor. That takes time to train and domino through the system. But our challenge is to continue to give every member of our management team, the tools they need so they can help us drive this business forward. At some levels, that's about focusing on revenue and on a lot of levels, that's about focusing on how efficient we can be on the cost side. The more tools we give them, the better we're going to perform.

Your next question comes from the line of Ben Chaiken from Credit Suisse.

Your flow-through was particularly noteworthy regarding margins, so let’s get to the point. There seemed to be a renewed focus on costs that became evident during the quarter. You highlighted several cost-saving initiatives, which are impressive. I'm trying to understand the significant difference between the results this year and last quarter, as well as comparing this quarter to 4Q '22 and 4Q '19. I'm curious about what changed. Was it something that was already in progress and took some time to materialize? It seemed like that was indicated in the previous answer, but I would like to explore this further.

Yes, Brian. Regarding your last point and Richard's comments on James' final observation, some of this appears to be the result of certain initiatives taking longer to yield results, especially in relation to labor. Labor represents our largest expense, nearly 60% of our overall cost structure, with seasonal labor accounting for about half of that. Often, these initiatives do not provide immediate benefits. However, I want to emphasize that optimizing costs involves two aspects: restructuring costs in some instances. We saw this somewhat in the first and second quarters where we chose to invest a bit more to ensure we deliver the best guest experience possible because underinvesting could jeopardize per caps and demand. Conversely, we recognize the need to adjust our cost structure around labor and other variable costs to align those expenses with demand levels. This is where Richard's mentioned tools come into play—our workforce management software and staffing tools enable our field teams to adjust staffing levels in real time as demand fluctuates due to factors like weather. We must continue to focus on these areas, with the BI team playing a critical role alongside the procurement team for other variable costs. Reflecting on 2022, I believe the opportunity for margin expansion is strongest in the third and fourth quarters. This is particularly pronounced this year due to being underrepresented in Q2, attributed to the slower recovery of the group channel. The group segment is more significant in Q2 compared to Q3 and Q4, and the absence of group business added more margin pressure in the first half of the year than it did in the latter half.

That's really helpful. And just to be clear, were some of the workforce management processes not in place earlier in the year?

We started rolling out those tools during the pandemic in 2021. As we implement these tools, we need to establish best practices since our business varies each month and quarter. It takes a full cycle to fully understand these changes. The insights from 2021 and 2022 help us learn what works best, and we can then disseminate those best practices throughout the organization. In looking back at 2022, we've identified several parks in our system that have improved their staffing efficiency. We are applying those lessons learned to enhance our operations. As time goes on, we become more effective with these tools as our teams gain more experience working together.

My understanding is that a lot of the group bookings, and please correct me if I'm off on this, occur in the first couple of months of the year. Is there any way you can kind of directionally tell us how you're pacing if that's an appropriate kind of vernacular versus 2019?

Yes, Ben, it's Richard. I have been consistently meeting with our sales team, and I'm very encouraged by the pacing I'm observing. During the pandemic, there was a change; our corporate bookings are coming in later than usual. Typically, we finalize the youth and school group bookings in the first quarter, with many occurring in the second quarter. However, corporate bookings are currently very strong. I would say the booking cycle has become more compressed compared to a decade ago when it was longer and people booked earlier. We are securing buyouts and managing both large and small groups, but I believe the booking window has significantly shortened since the pandemic.

Your next question comes from the line of Mike Schwartz from Truist Securities.

Just maybe wanted to touch quickly on the additional operating days, I think the additional operating days, you said 70 to 80 days for the full year. I guess, one, how do we think about the cadence of those days more heavily weighted into the first half of the year, the second half of the year? And maybe just how accretive or additive are those days that you are putting in the calendar?

Yes, Mike, it's Brian. I would say that a significant portion of those days, around 80 to 90%, will occur in the first half of the year, specifically in Q1 and Q2. As we announced late in the fourth quarter of the previous year, we are adding days in markets like Richmond with our Kings Dominion Park and Charlotte in January and February. Those days are already included in the numbers we mentioned on the call. So, it’s more focused on Q1 and Q2. Q3 should remain similar with a slight calendar shift, but overall, the operating days will be quite comparable. Q4 may see a few extra days, but we anticipate that close to 90% of the additional days will be in the first half of the year. Regarding their contribution, the days we plan to add are expected to enhance cash flow. We always conduct tests, and what we are currently doing in Richmond and Charlotte will undergo evaluation over the next couple of years to assess the results. However, we are consistently looking to increase operating days. Our goal is to boost top-line revenue and attendance, similar to past years when we started adding days in late September and October for Halloween events, as well as November and December for WinterFest. Ultimately, it’s about creating more opportunities for guests to visit and for us to promote season passes and related products. We fully expect the days we’re adding will be beneficial. Some of the days in Q2, as Richard mentioned earlier, will be linked to our expectations for returning youth and school group bookings, which are typically strong in the spring. We removed days in 2022 due to the absence of that business, so this effort is also about reinstating those days.

Okay. That's helpful. And then just a second question. I think Richard, you referenced to admissions product, the prestige pass, I think is what you called it. Maybe just give us a general overview of what maybe some of the benefits of that pass entail? And how should we think about the pricing of that? I know it's in the test phase, but just generally speaking, is it a 20% premium to your highest pass right now? Or how should we think about that?

From a value perspective, we have conducted extensive research and incorporated features that our research indicates consumers highly value, such as access to VIP lounges, special benefits, and limited FastLane products on a daily basis. Pricing varies by park due to different demand levels, but we are exploring whether a price around $200 for the platinum pass is appropriate, while our new prestige pass is priced in the low $300s. This product represents a premium offering with a premium set of experiences, and we are testing various concepts regarding both the benefits and customer preferences. Initial feedback has been very positive. As we work to better segment our audience, we recognize that this appeals to benefit-oriented customers. We believe we are only at the beginning of this exploration. As we continue to innovate and develop new benefits, we see a receptive market for these offerings.

Your next question comes from the line of Eric Wold from B. Riley Securities.

The question has been asked. Just kind of 2 hopefully quick ones. I guess, one, just back on the prior question around operating days. I understand that some of that is adding back days that we're going to remove from the system last year. Are there any parks that will actually have days removed this year? Or will every park either be flat or up in terms of operating days from last year?

Eric, it's Brian. I would say, as I look at it, for the most part, it will be flat to up in terms of operating days, but let me caveat that with that's planned. To the extent that weather plays into it, we could see some parks go back. Great example, right? When it rains in California, if it's open every day to save costs, we'll shut the park down. We may end up where a park might have several fewer days in '23 than '22 but for the most part, that would be an unplanned change and more responsive to macro events.

Got it. And then just last question on margins. I know you talked about really watching pricing and taking pricing where you need to where you're hitting inflationary pressures. Are there any cases where you actually willing to eat margin maybe in the short run or longer to maybe keep pricing from going up too fast in front of consumers? Or will you always look to price above the inflationary pressure?

Good question, Eric. I think I'll answer it this way, see if it helps. I think the scenario that you just laid out is exactly one of the challenges that we've had when we look at the portfolio of parks. From the standpoint of being able to price into this level of inflation is very difficult. Our bigger parks are able to absorb that because they've got such high demand levels or attendance levels. When you're entertaining three million people or four million people, or even in the case of Knott's, over 60 million people. You don't have to take as much price because you've got the leverage of that attendance base. It's been hard. We have eaten a lot of the inflation, particularly at the mid-tier parks because we couldn't take the kind of price increases we would need to fully offset it without eroding our attendance base. I think we've already done that. That's why I think we've said on previous calls that these mid-tier parks, it might take two years or three years of price increase in order to push through the kind of inflation that we've seen. We don't want to underscore the importance of margin. It's a critical metric for us. Hopefully, that's come across on this call and the efforts that we've been undertaking to improve it are very real. With that said, the scenario you just outlined, we have to be careful to not do everything just about margin at the detriment of ultimately that attendance number and top-line revenue.

Your next question comes from Paul Golding from Macquarie Capital.

Congrats on the quarter and the year. I wanted to ask about just in parsing where we can go with per cap growth here. I wanted to ask about extra charge. I noticed in the press release, you noted lower levels throughout the year of extra charge impacting per caps are offsetting to some extent. But we're now talking about some higher-tier products. Is it a matter of bundling? Should we continue to expect that some extra charge will actually reflect and help per caps going forward? And how should we think about the language used for the full-year basis versus what you're testing right now? And then I have a follow-up.

Yes, certainly, Paul, it's Brian. So the comment about the shortfall in extra charge is really focused probably on one core premium experience that is Fastlane. Fastlane has been negatively impacted this past year by a couple of factors. The most notable is just the fact that attendance is still down, right? We're down about 4%. Fastlane, as you can appreciate, is sold most on the busiest days. When we've got 35,000 people in the park, there is a higher demand for Fastlane because the lines are longer and people want to avoid those lines. With group being disrupted in some situations, more so at certain parks, those lines in those 35,000 days might have only been 29,000. So the demand was a little bit impacted there. We were able to still price into Fastlane, which was encouraging. So we would fully expect that as we get back to historical attendance levels, those that demand for Fastlane will continue to increase and return to its historical levels as well. The other piece that impacted it a little bit, and this is more part specific. We had a couple of parks in the system that had key Fastlane driver-type attractions out of service. It takes some capacity out, and it also takes some demand out. Maybe most notably, was it to your point, not having total drag for operation in '22. That's a lot of capacity, and it's a lot of demand. It's one of our highest demand rides in that park. A couple of things are working against us there. But broadly speaking, I don't think that, that is reflective of the fact, as Richard noted, guests want premium experiences. We continue to find different ways to introduce those, whether they are front of the line experience, whether they're VIP tour, whether they're cabanas in the water parks or VIP lounges in the parks. Those continue to be in high demand and some of the fastest-growing revenue sources for in-park spending.

Got it. So all else equal from a product offering perspective, maybe qualitatively, so we're not guiding. You would say that you would expect Fast Lane and extra charge of the category to improve in '23 versus '22 as a function of just attendance and congestion?

I would say that's a fair statement, yes.

Your next question comes from the line of Eric Wold from B. Riley Securities.

I wanted to clarify a question on the operating days. I understand the guidance around 70 to 80 additional days in '23 and much of that is going to be in the first half of the year. Just wanted to clarify, are there any parks that are actually going to see reduced operating days?

No, I would say that for the most part, it will be flat to up in terms of operating days. That's planned. If the weather plays into it, we could see some parks go back. For example, if it rains in California, if it's open every day to save costs, we'll shut the park down. However, we may see a park with several fewer days in '23 than '22 but for the most part, that would be an unplanned change and more responsive to macro events.

That concludes today's conference call. Thank you for your participation. You may now disconnect.