SeaWorld Entertainment, Inc. (NYSE:SEAS) Q3 2023 Earnings Call Transcript November 8, 2023
SeaWorld Entertainment, Inc. beats earnings expectations. Reported EPS is $1.92, expectations were $1.91.
Operator: Good morning, and welcome to the SeaWorld Parks and Entertainment Q3 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matthew Stroud, Investor Relations. Please go ahead.
Matthew Stroud: Thank you, Chad, and good morning, everyone. Welcome to SeaWorld’s Third 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 Jim Forrester, Interim Chief Financial Officer and Treasurer. This morning, we will review our third quarter financial results, and then we will open 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 and free cash flow. 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?
Marc Swanson: Thank you, Matthew. Good morning, everyone, and thank you for joining us. We are pleased to report another quarter of solid financial results despite the impact of unusual and significantly adverse weather in our peak operating season across most of our markets. Our results during the third quarter continued to demonstrate the resilience of our business, the effectiveness of our strategy and the tireless efforts of our outstanding team. We are particularly pleased to continue to see strong results from our focus, efforts and investment in our in-park offerings as we grew in-park per capita spending for the 14th consecutive quarter to a record level during the quarter. We are excited to see the continued results of our ongoing work in this area and in the coming quarters into 2024.
Our relentless focus on cost management also continued to deliver as we improved adjusted EBITDA margin on a year-over-year basis for the quarter. We are continuing to execute against our previously discussed cost initiatives and expect to continue to see the results of these efforts in the coming quarters into 2024. I want to thank our ambassadors across our parks for their dedicated efforts to welcome and serve our guests during the busy summer season. We just completed another successful Halloween season at our parks, featuring our award-winning Halloween events. We are pleased to have grown per capita spending in October. And after adjusting for the calendar shift that resulted in one less Saturday compared to prior year, we estimate attendance and revenue would have grown as well.
We are proud of the continued strength of our Halloween events and the popularity that they continue to build with our guests. We’re also proud of the recognition these events are receiving as SeaWorld Howl-O-Scream was voted the best Halloween Theme Park event by USA TODAY’s 10 Best Readers’ Choice Awards. As we enter the holiday season, we will begin our award-winning Christmas events at most of our SeaWorld, Busch Gardens and Sesame Parks later this week. Our Christmas events feature exciting live entertainment, delicious and unique food and beverage offerings and holiday shopping for guests of all ages. Looking beyond the holiday season into 2024, we are pleased to see 2024 revenue bookings trending up double-digit percentage ahead of prior year for both 2024 groups and our Discovery Cove property.
In addition, we recently launched our best pass benefits program ever, which we expect will help drive increases in pass sales and a strong pass base for next year. We continue to make progress on our strategic growth initiatives related to hotels, international expansion and our digital activities. We also have made meaningful incremental investments across our parks this year that we expect to fully benefit from in the coming quarters. We look forward to sharing more on these exciting, value-creating initiatives and investments in the coming quarters into 2024. We have proven quarter after quarter that we have a strong and resilient business model, and we still have significant opportunities to improve and grow our revenue and profitability.
We operate in an industry and in markets with growing demand trends over the long-term, and we have significant available guest capacity across our park portfolio. Our attendance levels are still below the total attendance levels we achieved in 2019, and well below our historical high attendance of approximately 25 million guests recorded in 2008. We have made significant investments in our business this year, and we’ll continue to make investments to improve the guests experience allowing us to generate more revenue and make us a more efficient and profitable business. We expect these investments to yield highly attractive returns, and we are planning new initiatives for next year that will make us an even stronger and more profitable and more resilient business that we expect will ultimately lead to meaningful increases in shareholder value.
We recently announced our partial line up of new rides, attractions, events and upgrades for 2024. This line up includes, among others, Penguin Truck, an unforgettable family launch coaster adventure at SeaWorld Orlando; Phoenix Rising, a suspended roller coaster at Busch Gardens Tampa Bay; a fully restored Loch Ness Monster coaster with all-new thematic and experiential elements at Busch Gardens Williamsburg; Jewels of the Sea, the jelly fits — the Jellyfish Experience, an all-new immersive aquarium at SeaWorld San Diego; Catapult Falls, the world’s first launch flume coaster at SeaWorld San Antonio. Now let me update you on the progress of some of our strategic initiatives. First, we are making good progress on our cost and efficiency related work and continue to implement these cost reduction opportunities, as evidenced by the third quarter adjusted EBITDA margin of 48.6%, which exceeded the prior year despite lower revenue.
The team continues to find ways for us to source and organize more efficiently, better utilize capital and technology, along with scheduling improvements to drive labor efficiencies, and eliminate unnecessary and/or redundant expenses. We expect and are confident that these cost savings initiatives, along with our revenue enhancements, will lead to increased margins over time. Second, on the digital transformation front, we continue to build out our CRM capabilities, which are still in their infancy and roll out and improve our mobile app. In regards to the mobile app, we are pleased it is being used by an increasing number of guests in our parks to improve their in-park experience. The app has now been downloaded by more than — the app has now been downloaded more than 7.5 million times, up from 6.3 million at the end of Q2.
Total revenue generated on the app is up 136% compared to prior year, and we are now seeing a 26% increase in average transaction value for food and beverage purchases made through the app compared to point-of-sale orders. Mobile ordering is operating at approximately 75% of our target restaurants. We are excited about the potential of the app and its ability to improve in-park guest experience, drive increases in revenue and decreases in cost. We are continuing to refine current capabilities and develop additional capabilities to further increase engagement and optimize the experience. Third, as you know, we strategically increased our park-specific ROI investments this year with the goal of driving incremental revenue and/or decreasing costs through expanding, enhancing and improving our food and beverage and retail offering, park infrastructure and aesthetics and generally improving the guest experience and journey around our parks and facilities.
As we said last quarter, some of these refurbishments and upgrades took longer than planned, which negatively affected in-park per caps in the third quarter. However, these venues are now open, and we are realizing the benefit of these investments. We have additional projects planned in 2024 that will further enhance the guest experience and are expected to yield attractive ROI. As we speak to some of our investors, we have learned that there may be some confusion about this incremental capital spend. As a reminder, we break our capital spending into two categories: core CapEx and expansion/ROI CapEx. Core CapEx is the amount of CapEx that we believe we need to — we need to spend to maintain our current assets and to execute on our annual ride and attraction strategy, for example, opening new rides and attractions across our parks each year.
The average amount we estimate we need to spend on core CapEx is approximately $150 million to $180 million annually. We believe this amount of spend is sufficient to allow us to grow our business at a normalized growth rate over time. Expansion/ROI CapEx is CapEx related to specific projects that we have high confidence will generate attractive ROI, typically 20% plus cash on cash returns. This is capital spending that we believe will allow us, over time, to grow adjusted EBITDA in excess of normalized growth rates. Historically, we have allocated approximately $25 million to $50 million each year to this type of capital spending. Based on our incremental — I’m sorry, based on our increased cash flow generation in recent years, this year, our Board challenged the management team to identify and present a comprehensive list of the high-confidence ROI projects across the enterprise.
Based on discussions with our Board, we aligned on spending an additional roughly $80 million this year on such high confidence projects. We hope this clarifies for people how we think about capital spending, ROI and uses of excess cash flow. Fourth, on the international front, attendance at SeaWorld Abu Dhabi continues to exceed original expectations. We continue to make progress on discussions related to other international opportunities and expect to have more to share in coming quarters. Fifth, on the hotel front, we also continue to make progress on our plans. As we mentioned last quarter, we are refining our design planning on our first hotels, and we expect to begin opening in 2026. We identified the locations of the first two hotels, and we’ll be offering more details about these properties soon.
We continue to make progress on projects in other markets. And subsequent to opening our first two hotels, we are planning to continue to open additional hotels in the years following. We have also received questions from some of our investors about our hotel strategy. As you all know, we have significant excess land across most of our parks that is currently underutilized. We have a unique opportunity to build highly compelling hotels that will integrate with our parks, allow us to capture profits from our guests that are currently staying at other properties, increased length of stay at our properties, offer more compelling vacation packages, upsell and cross-sell guests, increase loyalty and generate an attractive ROI. Some investors have asked how we might finance these hotels.
While cash is fungible, we have several options given the nature of these projects. We expect to finance these hotels with a combination of debt and cash from our balance sheet. Given our expected cost of capital and the expected returns on these hotel projects, we expect to generate north of 20% returns on equity for these projects. These are highly compelling projects that are long overdue. Many of you are fully aware of the value these types of hotels provide to our peers in our various markets, including in Orlando. I’m very excited about the significant investments we are making and the many initiatives we have underway across our business that we expect will improve the guest experience, allow us to generate more revenue and make us a more efficient and more profitable enterprise.
We are building an even stronger and more resilient business that we are confident will deliver substantially improved operational and financial results and meaningful increases in shareholder value. Let me briefly comment on our balance sheet, which continues to be strong. Our September 30, 2023, net total leverage ratio is 2.56 times, and we had approximately $586.8 million of total available liquidity, including over $215 million of cash on the balance sheet. This strong balance sheet gives us flexibility to continue to invest in and grow our business and to opportunistically allocate capital with the goal to maximize long-term value for shareholders. We have also received questions from some of our investors about our expected use of our free cash flow.
As you know, we have the benefit of generating significant free cash flow at our current adjusted EBITDA generation. We have options on how to use this excess cash flow, including investing in the business, buying back stock, paying the dividend, paying down debt and making acquisitions. Our Board is highly experienced and knowledgeable and very focused on allocating capital to the highest available return opportunities. In recent history, our Board has determined that buybacks and investing in our business has been the highest and best use of our excess cash. More recently, we have devoted more capital to investing in the business. You should assume that the Board is very focused on allocating capital to the best available opportunities and is working to ensure this outcome.
As we have more to share on this, we will communicate this clearly. Looking ahead, we are excited about our award-winning holiday events, which start this week. We expect this year to be our best holiday event yet and expect to finish 2023 strong. Following our holiday events, we will kick off 2024 by returning with many of our popular events, including Inside Look, Mardi Gras, our Seven Seas Food Festival and our Food and Wine Festival, among others. With that, Jim will discuss our financial results in more detail. Jim?
James Forrester: Thank you, Marc. Good morning, and thank you for all your interest in our company. It’s good to be able to join you to report out on our quarterly performance. During the third quarter, we generated total revenue of $548.2 million, a decrease of $17.0 million or 3.0% when compared to the third quarter of 2022. The decrease in revenue was due to a decrease in attendance of 2.8% and a decrease in total revenue per capita of 0.2%. The decrease in attendance was primarily due to significantly adverse weather, including some combination of unusual heat and/or rain across most of our markets, including during peak visitation periods. Total revenue per capita in the quarter decreased slightly to $76.90 compared to $77.05 in the third quarter of 2022.
Admission per capita decreased 1.6% to $42.05, while in-park per capita spending increased by 1.6% to a record $34.85 in the third quarter of 2023 compared to the third quarter of 2022. Admission per capita decreased primarily due to the net impact of the admissions product mix, partially offset by the realization of higher prices in our admissions products resulting from our strategic pricing efforts when compared to the prior year quarter. In-park per capita spending improved primarily due to pricing initiatives, partially offset by factors including weather, the emissions product mix, closures and disruptions related to construction delays at certain in-park locations when compared to the third quarter of 2022. Operating expenses decreased $10.1 million or 4.7% when compared to the third quarter of 2022.
The decrease in operating expenses is primarily due to decreased labor-related costs and a decrease in nonrecurring legal costs and contractual liabilities resulting from the previously disclosed temporary COVID-19 park closures, along with the impact of implemented structural cost savings initiatives when compared to the third quarter of 2022. Selling, general and administrative expenses increased $6.6 billion or 12.5% compared to the third quarter of 2022. The increase in selling, general and administrative expenses is primarily due to a $5.6 million increase in third-party consulting costs and legal fees, including approximately $2.7 million of nonrecurring costs primarily related to an opportunistic loan repricing and strategic initiatives, partially offset by the impact of implemented cost savings and efficiency initiatives when compared to the third quarter of 2022.
We generated net income of $123.6 million for the third quarter compared to net income of $134.6 million in the third quarter of 2022. The decline in net income is primarily related to the decrease in total revenue when compared to prior year. We generated adjusted EBITDA of $266.4 million, a decrease of $7.8 million when compared to the third quarter of 2022. The decline in adjusted EBITDA for the third quarter of 2023 was primarily driven by a decrease in revenue when compared to the third quarter of 2022. Looking at our results for the first nine months of 2023 compared to 2022. Total revenue was $1.34 billion, a decrease of $3.1 million or 0.2%. Total attendance was 16.6 million guests, a decrease of 356,000 guests or 2.1%. Net income for the period was $194.1 million, a decline of $48 million, and adjusted EBITDA was $563.1 million, a decrease of $11.5 million or 2.0%.
Now turning to our balance sheet. Our current deferred revenue balance as of the end of the third quarter was $161.1 million. Excluding certain onetime items, deferred revenue decreased approximately 5.4% when compared to September of 2022. At the end of October 2023, our pass base, including all pass products, was down slightly compared to October 2022. We’re pleased that we are seeing high-single-digit percentage price increases on our pass products compared to prior year. As Marc said, we just recently launched our best pass benefits program ever, which we expect will drive additional increases in pass sales and a strong pass base for next year. We’re excited about our key pass selling periods coming up, including during our Black Friday promotion and the spring and early summer periods.
As a reminder, our deferred revenue balance contains a number of products to include ticketing, vacation packages, annual and seasonal passes and ancillary products. Some of those 2022 ticketing product balances were onetime items, as mentioned last year. We also encouragingly continue to see an increase in the number of pass holders who have been with us for at least a year who transitioned to month-to-month payments at a higher rate at the completion of their initial pass commitment. This month-to-month revenue does not show up as deferred revenue. As noted, we have a very strong balance sheet position. As of September 30, 2023, our total available liquidity was $586.8 million, including $215.2 million of cash and cash equivalents on our balance sheet and $371.6 million available on our revolving credit facility.
We spent $88.6 million on CapEx in the third quarter of 2023, of which approximately $50.6 million was on core CapEx and approximately $38.1 million was on expansion and our ROI projects. For 2023, we expect to spend approximately $285 million to $295 million of CapEx, of which $160 million to $175 million will be spent on core CapEx. We’re excited about our ability to make these high confidence ROI investments and sincerely look forward to the benefits and returns from these investments flowing through to our financial results next year. Now let me turn the call back over to Marc, who will share some final thoughts. Marc?
Marc Swanson: Thank you, Jim. Before we open the call to your questions, I have some closing comments. In the third quarter of 2023, we came to the aid of 56 animals in need. Over our history, we have now helped over 40,000 animals, including bottlenose dolphins, manatees, sea lions, seals, sea turtles, sharks, birds and more. I’m really proud of the team’s hard work and their continued dedication to these important rescue efforts. I want to thank them and all our ambassadors for all that they do to operate our parks. We are excited about the remainder of 2023 as we start our holiday events. As a reminder, SeaWorld Orlando’s Christmas celebration was voted number one Best Theme Park Holiday Event by USA TODAY’s 10 Best Readers’ Choice Awards.
We’re proud of these events and the recognition we have received from our guests, and we expect this year to be our most exciting events yet. We continue to strongly believe there are significant additional opportunities to improve our execution, take advantage of clear growth opportunities and continue to drive meaningful long-term growth in both revenue and adjusted EBITDA. We continue to have confidence in our long-term strategy and our ability to deliver significantly improved operating and financial results that we expect will lead to meaningfully increase value for stakeholders. Now let’s open it up for your questions.
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