United Parks & Resorts Inc. Q1 FY2021 Earnings Call

Good day and welcome to the SeaWorld First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. (Operator provided instructions regarding muting and the question-and-answer procedure.) After today's presentation, there will be an opportunity to ask questions. (Operator provided instructions regarding muting and the question-and-answer procedure.) Please note this event is being recorded. I'd like to now turn the conference over to Matthew Stroud, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to SeaWorld's first quarter earnings conference call. Today's call is being webcast and recorded. A press release was issued this morning and is available on our Investor Relations website at www.seaworldinvestors.com. Replay information for this call can be found in the press release and will be available on our website following the call. Joining me this morning are Marc Swanson, Chief Executive Officer; and Elizabeth Gulacsy, Chief Financial Officer and Treasurer. This morning, we will review our first quarter financial results. And then we will open up the call to your questions. Before we begin, I would like to remind everyone that our comments today will contain forward-looking statements within the meaning of the federal securities laws. These statements are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward-looking statements, including those identified in the Risk Factors section of our Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. These Risk Factors may be updated from time to time and will be included in our filings with the SEC that are available on our website. We undertake no obligation to update any forward-looking statements. In addition, on the call, we may reference non-GAAP financial measures and other financial metrics, such as adjusted EBITDA, free cash flow, adjusted free cash flow, net cash burn and adjusted net cash flow which are non-GAAP financial measures and metrics. More information regarding our forward-looking statements and reconciliations of non-GAAP measures to the most comparable GAAP measure is included in our earnings release available on our website and can also be found in our filings with the SEC. Now I'd like to turn the call over to our Chief Executive Officer, Marc Swanson. Marc?

Thank you, Matthew. Good morning, everyone, and thank you for joining us. This morning prior to our earnings release, we announced that I have been appointed as CEO of the company, and Elizabeth will serve as CFO effective immediately. We're thrilled to take on these new roles on a permanent basis. Over the past several years, together with our board, management team and our dedicated ambassadors, we have worked tirelessly to execute on the strategic initiatives we have been working on and implementing. We're proud of these accomplishments and are excited about what the future holds for this dynamic company. With that, let me turn to our earnings release. I'm pleased to report that we saw continued improvement in our top-line in both attendance trends and total revenue per capita and in our bottom line in adjusted EBITDA in the first quarter. And I'm extremely proud that we not only generated positive adjusted net cash flow during the quarter, but we achieved higher adjusted EBITDA in the first quarter compared to the first quarter of 2019. The success of the strategic pricing, marketing, cost and capital investment initiatives that we developed and had been refining prior to the onset of the COVID-19 pandemic, combined with the strategies we developed and actions we have taken during the COVID-19 pandemic period helped us deliver these results. We're excited to have experienced a robust Spring Break season across our parks, including several days where our parks reached capacity limitations for the current operating environment. Had it not been for capacity limitations and our forced closures, we believe our attendance would have been notably higher in the quarter. We're encouraged by our guests' desire to visit and spend at our parks and believe this is a good indicator for expected demand for our peak summer season. We began the first quarter with seven of our 12 parks open, all with capacity limitations and modified and/or limited operations, which compares to eight of the 12 parks opened in the prior year. The one park that was closed at the beginning of this year that was opened in the prior year was our SeaWorld Park in California. We finished the quarter with 10 of our 12 parks open which is consistent with the same period in 2019. As a reminder, we temporarily closed all of our parks on March 16, 2020, in response to the COVID-19 pandemic. We expect all of our parks will be open for the peak 2021 summer season, subject to local, state, and federal guidelines related to COVID-19. While attendance in the first quarter was significantly impacted by COVID-19 factors, recent monthly attendance improved compared to the same period in 2019. Relative to 2019, monthly attendance excluding the company's parks in Virginia, California, and Pennsylvania, which each were subject to significant capacity and/or operating restrictions during the quarter, was down 37% in January, down 39% in February, and down 18% in March. The improving trend continued into the second quarter, with monthly attendance down 15% in April on the same basis. Let me provide you with a quick update on capacity limitations for Virginia and California. On April 1, we were able to increase capacity for our Busch Gardens Williamsburg Park to approximately 13,000 guests, based on revised guidance for the State of Virginia. And on April 12, SeaWorld San Diego resumed theme park operations with limited capacity in accordance with the State of California guidelines for theme parks. As mentioned last quarter, we have also implemented new operating calendars across several of our parks in 2021 based on learnings over the past 12 months. In particular, we began year-round operations at SeaWorld San Antonio, Busch Gardens Williamsburg, and at Sesame Place. These parks were open primarily on weekends and holidays, weather permitting, in advance of their traditional operating seasons. We're pleased with this strategic decision and our ability to profitably add operating days and operate more of our parks year-round. With this change, we now have year-round operations at eight of our 12 parks. Only our water parks in San Diego, San Antonio, Tampa, and Williamsburg are not open year-round. Turning to our financial performance, we saw continued strong total revenue per capita growth in the first quarter relative to the prior year in both admissions and in-park spending. Our pricing and product strategies are clearly working, and our guests are spending more when they visit our parks. We've seen good success with our dynamic pricing initiatives and our first quarter events, including new or expanded food, beverage, and music event days at some of our parks, as well as several new or reimagined venues we launched during the quarter, helping contribute to the increased guest spending. On the merchandise side, we have refreshed our retail offerings by adding new products and improving the product mix, which added to the increased guest spending. While this continues to be an unprecedented and challenging time for our company and industry, it's been encouraging to see our performance improve and assuring to see our guests visiting our parks over the last few months. With a sharp increase in visitation, we have been adding staff as quickly as possible. But like other companies, we have experienced challenges in hiring seasonal personnel, especially during the Spring Break period in late March and April. With the widespread distribution of COVID-19 vaccines and increasing immunization rates of the public, we believe guests are more willing to get outside, travel and visit our parks again. We're starting the peak summer season in a few short weeks where we're planning to have even more events and open all our parks including our water parks in Williamsburg and in San Diego, which were both closed all of 2020. We're optimistic about the upcoming summer season and we expect that our parks will return to a more normalized operating environment as the year progresses. Our teams have worked hard to better position this company for revenue growth and increased profitability. As we have demonstrated in the first quarter, we believe the strategies we've been working on and refining over the past few years, along with the actions we have taken throughout the past year will continue to lead to significantly improved financial results for the company. With that, I'd like to turn the call over to Elizabeth to discuss our financial results in more detail. Elizabeth?

Thank you, Marc, and good morning, everyone. Before we review our financial results, I just wanted to take a moment to express my excitement about becoming the permanent CFO; I look forward to continuing to work with Marc, our management team and our board to fully capitalize on the significant opportunities ahead. Now let's review our financial results for the quarter. As you know, we normally discuss our results for each quarter in comparison to the prior year's quarter. Given the disruption we experienced in 2020, when we temporarily closed all of our parks on March 16th, we believe a comparison of our results to the first quarter of 2019 provides a more meaningful insight on our performance and operating trajectory. As such, I'll provide commentary around our financial results compared to the first quarter of 2019. For those interested, we provide a comparison versus both 2019 and 2020 in our earnings release, and will do so as well in our Form 10-Q which we plan to file tomorrow. Our business continues to be impacted by the COVID-19 pandemic. However, we have seen continued improvement in our results during the first quarter of 2021. During the quarter, we generated revenue of $171.9 million, a decline of $48.7 million, or 22.1%, when compared to the first quarter of 2019. The decrease in revenue is primarily due to a decline in attendance of 33.7%, partially offset by an increase in total revenue per capita of 17.6%. When compared to the first quarter of 2019, attendance declined primarily due to COVID-19 related impacts, including capacity limitations and modified and/or limited operations at all of our open parks. First quarter total revenue per capita was $77.63 compared to $66.04 in the first quarter of 2019, an increase of 17.6% driven by improvements in both admissions per capita and in-park per capita spending. Admissions per capita increased by 12% to $43.25 and in-park per capita spending increased by 25.3% to $34.38 in the first quarter of 2021 compared to the first quarter of 2019. The increase in admissions per capita primarily relates to the realization of higher prices in our admission products, resulting from our strategic pricing efforts. In-park per capita spending increased primarily due to increased guest spending, improved product mix, and higher realized prices and fees during the quarter. We generated a net loss of $44.9 million, compared to a net loss of $37 million in the first quarter of 2019. We generated positive adjusted EBITDA for the first quarter of 2021 of $25.2 million, an increase of $8.8 million, or 53.4%, when compared to the first quarter of 2019. The improvement in adjusted EBITDA resulted primarily from the combination of increased total revenue per capita, as well as a successful execution of our expense reduction efforts, which together offset the decline in attendance that occurred as a result of the impact of COVID-19. Our expense reductions primarily related to a reduction in labor costs, marketing-related costs, and other operating costs, resulting from structural cost savings initiatives and the impact of COVID-19 modified and/or limited operations. Now turning to our balance sheet, our current deferred revenue balance as of the end of the first quarter was $193.4 million, an increase of approximately 27.8% from March of 2019, and an increase of 60.6% from March of 2020. We're very encouraged with what we're seeing in our pass base. Our pass base grew approximately 21% between the fourth quarter and April, in part due to strong sales over the Spring Break period. At the end of April 2021, our pass base was only down approximately 3% compared to April of 2019 and is at approximately 82% of the peak pass base we had in 2019 with our biggest selling season yet to come. We're also seeing a higher mix of premium passes in our pass base, as our pass holders continue to recognize the value and benefits of our higher tiered products. Additionally, we continue to see the impact of our pricing strategy taking hold, with stronger realized prices on our pass sales versus 2019 and 2020. As of March 31, 2021, our cash and cash equivalents balance was approximately $431 million, which brings our total liquidity including our available revolver capacity to approximately $743 million as of March 31, 2021. We generated a monthly average of approximately $5.1 million of adjusted net cash flow, which excludes certain vendor payments we previously deferred in order to manage liquidity. Including these deferred vendor payments, we estimate the average monthly net cash burn during the first quarter was approximately $1.1 million per month. We expect to be comfortably cash positive over the remainder of the year. We spent $15.3 million on CapEx in the first quarter of 2021, of which approximately $10.9 million was on core CapEx, and approximately $4.4 million was on expansion and ROI-type projects. As we have previously discussed, we'll spend opportunistically on non-core expansions and ROI CapEx when we find opportunities that meet our return hurdles, including on new parks and expansions, like our Sesame Place Park in California, incremental revenue-enhancing projects, cost-reducing projects, and other similar opportunities. For 2021, depending on the pace of the recovery from the COVID-19 impact, we plan on spending between $120 million and $150 million on capital expenditures. Now, let me turn the call back over to Marc who will share some final thoughts. Marc?

Thank you, Elizabeth. Before we open the call to your questions, I have some closing comments. In the first quarter, we participated in over 530 rescues and have exceeded 38,600 animal rescues over the company's history. We're very proud to be one of the world's leading animal rescue organizations. And we're proud of our efforts to protect and save wildlife. I want to thank our employee ambassadors for their continued dedication and effort to welcome our guests, while operating in our parks in accordance with the latest health and safety protocols. We have an outstanding line-up of summer events, including the return of guest favorites, such as Electric Ocean at our SeaWorld Parks and Summer Nights at our Busch Gardens Parks. There will also be the Craft Beer and cultural festivals, as well as Sesame Street kids' weekend at several of our parks. We believe there's something for everyone to enjoy the summer in our parks. As before, we're focused on providing a safe and fun guest experience while continuing to offer innovative special events and creating new events for our guests to enjoy our parks, while still complying with established health and safety guidelines. We're successfully navigating through this extraordinary environment and we're confident we're emerging an even stronger and more profitable enterprise. We continue to have high confidence in our long-term strategy and in our ability to deliver significantly improved operating and financial results that will lead to meaningfully increased value for stakeholders. Now let's open it up to take your questions.

We will now begin the question-and-answer session. (Operator provided instructions regarding the question queue.) The first question comes from Steve Wieczynski from Stifel.

Hey guys, good morning. Congratulations, first of all, to you both on your new titles today. But when I go back to your presentation that you put out last quarter around the EBITDA potential for this company down the road—first of all, I want to make sure that what you put out there last quarter is still fair. But my real question is around the attendance metrics that you were incorporating at that point in those assumptions. I understand that the per caps can move around, and you don't have certain costs embedded in there. But when we look at, assuming a flattish attendance versus 2019, given what you're seeing right now, plus with more operating days and events, is it fair to assume that that assumption around the attendance component there is conservative? I mean, it's probably going to be very low when it's all said and done.

Yes, hey, Steve. Thanks for the comment and the question. So, look, what I'll tell you is that the illustration we put out last quarter, we still obviously feel good about. We still think it makes sense for where the business is headed. And clearly you can see, for example, on the total revenue per caps, we're doing well there; our margin expansion clearly shows the efforts on cost. As far as attendance, yes—we showed the 2019 attendance level. Certainly our goal is to do better than that. And I think with the things you've mentioned—events, being open year-round at more of our parks—those things are going to be positive for us. So I do think we can do better. But for the purposes of illustration, we just showed what it would look like in our mind or the earning potential of the business based on reaching 2019 levels. But obviously, we would look to overachieve on the attendance.

Okay, got you. And the second question would be around the labor side of things; we've seen a lot of your peers talk about the labor pool at this point, and how tight it is and how expensive it's certainly getting. So I guess the question is, what are you seeing out there on the labor front and how are you trying to balance the amount of labor you're putting in the parks these days versus not impacting the customer experience?

So look, Steve, a couple of things. One is we have certainly seen inflationary pressures and wage pressures over the history of the company, and just like everybody else, I think we are seeing that now. Having said that, we have a lot of confidence in our ability to drive the other cost savings we've talked about. We have efforts around automation, technology improvements, things like that. Our goal is to get wage and cost pressures to a more normalized inflationary level, and then look for other savings as well. If we can do that and grow our attendance and revenue, that's a good recipe. I think the other thing we're seeing is we are getting pricing power, and we feel good about that. So to the extent there are outsized pressures on costs, we feel good about our ability to offset some of that with price. Regarding impacting guest experience, our goal is to provide a very good guest experience. We know certainly at times around spring break it wasn't up to what we would expect, and we're working hard to improve that. In fact, just last week we had our best three-day hiring event in the history of our company. So I'm optimistic we're headed in the right direction and we'll be in much better shape, especially as we approach the summer. Finally, when the parks get near capacity, there's some friction with some of the COVID protocols around stadium capacity and things like that; those protocols are changing and we expect some of those changes to create a more positive guest experience. We need to continue to do better forecasting and staffing, but I'm optimistic we're headed in the right direction.

The next question comes from Michael Swartz of SunTrust Robinson Humphrey.

Hey everyone, good morning and congrats, Marc and Elizabeth, both great news. Just wanted to touch on some of the capacity comments and limitations that you faced during the quarter. Could you maybe give us a little more context on what attendance would have looked like or how much attendance you lost due to parks where you had those capacity limitations?

Yes, Michael. If you look at weekends, like Saturdays, we were hitting capacity on a number of days. For a specific example, a park in California might have done 21,000 to 23,000 in attendance on a weekend in March in a normal year, but could only do maybe 10,000 this year. Multiply that over multiple weekends and there is a pretty big delta. That applies to Williamsburg as well, where there's a hard cap on attendance; some Saturdays would normally be well into the 20,000 range and now their cap is much lower. We also saw a similar dynamic at some of our parks in Florida where demand was high enough that we hit capacity. So it's a notable limitation for us. One of the things that gets us excited is that as those limitations moderate over time, that will be a tailwind for us.

Okay, great. Thanks for that color. And then just a second question here—typically in your EBITDA breakout in your press release, you have an add-back for anticipated cost savings, and I noticed that's zero this time. I know you've talked about $50 million in fixed cost savings over the next 12 months for that EBITDA bridge you gave us last quarter, so maybe help reconcile those two?

Let me start and then Elizabeth can give you the technical credit agreement detail. The key takeaway is that we have a lot of confidence in our cost savings plan. We laid out last quarter an illustration of the earning power of this business with the cost efficiencies we've identified and we still stand by that and are making progress. Point you to margin improvements in Q1: we did a margin of about 14.66% versus Q1 2019 around 7.43%, so we more than doubled the margin. A lot of that is due to per capita growth and expense efficiencies we've implemented. Elizabeth, do you want to discuss the credit agreement limitations?

Yes, that's a great question—thank you for asking. Our adjusted EBITDA is reported in accordance with the definitions within our credit agreement. If you look at the footnote in our press release next to that line item, it explains that we have a limitation on how much we can add back for estimated cost savings—up to 25% of LTM adjusted EBITDA. Because our LTM adjusted EBITDA is still a negative number per the credit agreement, we really can't add anything back into that line at this time. Once we start going into positive territory, you'll see that line item come back.

The next question comes from Paul Golding of Macquarie.

Great, thanks so much. Congrats to both of you on the new titles and congrats on the quarter. I wanted to ask around per caps here—we saw the 17% jump in total per caps. Is there any commentary you can give around where you think this can go? The jumps have been substantial; your revenue management has obviously come through in a great way. Just looking to see what we can expect as far as any tapering or how you see that evolving?

Look, we've been doing a lot of work around pricing, communications, promotional effectiveness, our event lineup and capital projects. We're clearly benefiting from the work we've done over the last few years and we've ramped up the revenue management group. We have people every day looking at pricing, tickets, what's selling and what's not, and being smart about our dynamic pricing. I have a lot of confidence that in the long term we can grow our per caps at least on an inflationary basis, and there will be quarters where we can do better than that—those are driven by better events, new venues, product mix improvements. We're doing this without the full benefit of a CRM; we're in the early stages of that process and I think that could be meaningful to per caps down the road. We're also starting beta testing a new in-park mobile app, which could be another driver of higher-than-inflation per-cap growth. So we're excited about the execution on pricing, admissions and in-park per caps.

That's great. And then a follow-up around the capped park dynamic—could you give some color around how you manage turning people away? Presumably you hit the cap and you don't perfectly hit the cap—there's some overflow. How are you managing that process with the customer, and whether there's any pricing incentive that maybe has to be factored in future periods? Generally, how that's being managed?

There's a couple of things and I give a lot of credit to our park operators. We have a reservation system that gives us visibility into what days will look like, but people sometimes show up not realizing they need a reservation. If we have room, we try to accommodate them. Capacity limits can occur at different points in the day, with peaks generally midafternoon. If we have to temporarily close entry, we try to communicate that via social media or signage, and often enough early arrivals will exit and we can let others in. The key is clear communication; when people understand what's happening they generally appreciate it. Our goal is for guests to have a fun day—we don't want them disappointed by not being able to get in, but we must balance that with capacity limitations.

The next question comes from Tyler Batory of Janney Capital Markets.

Good morning. This is Jonathan on for Tyler. Thank you for taking my questions and congrats on the quarter. I wanted to reiterate congratulations to you as well. You highlighted in the prepared remarks the pass sales—could you provide more color on that and how the spring selling season has been compared to expectations and whether there's been any noticeable pick-up as attendance has ramped?

Well, you've heard us say we strongly believe in our pass program and I think it's a very good indicator. As Elizabeth said, we're down only about 3% compared to this time in 2019 in pass base. That is a very good indicator of demand for our parks given our events, rides and shows. We offer tremendous value with our pass program and we'll continue to focus on it, especially with the key summer selling season ahead. We're optimistic.

I would add that pass sales accelerated throughout the quarter, especially into the Spring Break period. Pass sales in March and April exceeded sales volumes in March and April of 2019, which is a strong metric and gives us a lot of encouragement heading into the busy summer season. Also note that our pricing is outpacing prior years' levels, so it's a positive combination of volume and price.

Okay, great. I appreciate all that color. Just a clarification—CapEx for the year was $120 million to $150 million? When we spoke last February, I believe it was $100 million to $150 million. Is the delta due to the strength seen over the quarter?

We're trying to refine the guidance a bit for you. With the results in the quarter, we're able to provide a slightly tighter range of $120 million to $150 million for 2021. That range will still depend on the pace of the recovery and the opportunities we choose to pursue, but it should be a tighter range for modeling purposes.

The next question comes from James Hardiman from Wedbush.

Hi, this is Sean Wagner on for James. Given current travel trends favoring domestic versus international travel, what can you tell us about the composition of attendance from local, short-range domestic, long-range domestic and international visitors compared to 2019 or a typical year?

When we look across the company in total, local attendance is up slightly compared to Q1 2019. International attendance is very, very small right now. Our other three U.S. categories—same day, driving overnight and domestic travelers—are up. Those are offsetting some of the decline in international and local in aggregate and that's a healthy mix. International historically represents about 10% of our attendance; when that returns it will be a tailwind because those guests generally spend more in-park. We're encouraged by the domestic travel trends and the mix we're seeing.

Okay, thank you. It seems like the growth in domestic travelers is largely offsetting international declines and in markets like Orlando there may be capacity constraints. Do you think attendance potential at those parks is capped until international picks up?

Let me clarify—local is up just a little, and the other U.S. categories are up and offset much of the international decline. We feel good about people choosing to drive to our parks. As international resumes over time, that will be an additional tailwind. We're positive about our lineup and offerings and expect demand to continue to recover.

The next question comes from Ben Chaiken of Credit Suisse.

Hey, how's it going? Just on the labor side—how much is the J-1 Visa program typically part of your seasonal labor? I ask because that program was recently reinstated. And then second, thoughts on future unit growth leveraging the Sesame Place brand—it seems pretty unique?

On the J-1 Visa, we don't rely heavily on the program. We have one East Coast location that uses it partially. We feel we're in a good spot and don't have high reliance—maybe a couple of hundred students, give or take. On Sesame Place, we're excited—we're building the second Sesame Place Park in San Diego and opening that in 2022. We think Sesame is a great brand and we use it across our parks. We'll evaluate opportunities for more parks down the road but right now we're most focused on getting the San Diego opening executed well.

Got you. Not to go too far down that path, but do you think conversions like you're doing in California make more sense, or might acquisitions of water parks and conversions be a path? How do you think about that?

We're open to multiple scenarios—conversions of our own assets can sometimes be quicker, but we're not excluding Greenfield or acquired opportunities. We're focused on the right location and the right venue, whether that's buying and converting or building new.

This concludes our question-and-answer session. I'd like to turn the conference back over to Marc Swanson, CEO, for any closing remarks.

Hey, thank you, Jared, and thanks everybody for joining. On behalf of Elizabeth and the rest of the management team here at SeaWorld Parks Entertainment, we want to again thank you for joining this morning. As you've heard today, we're confident in our business and strategy and sincerely look forward to resuming more normalized operations which will drive improved operating financial results and long-term value for stakeholders. So thank you again, and we look forward to speaking with you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.