SeaWorld Entertainment, Inc.

Good day and welcome to the United Parks and Resorts Q4 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Matthew Stroud with Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to United Parks and Resorts' fourth quarter and fiscal 2023 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.unitedparksinvestors.com. Replay information for this call can be found in the press release and will be available on our website following the call. Also, we have posted a slide presentation on our investor website along with our earnings press release that we will discuss during our prepared remarks. Joining me this morning are Mark Swanson, Chief Executive Officer, and Jim Forrester, Interim Chief Financial Officer and Treasurer. This morning, we will review our fourth quarter and fiscal 2023 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, Mark Swanson. Mark?

Thank you, Matthew. Good morning, everyone, and thank you for joining us. I want to welcome you to our first quarterly earnings report under our new company name, United Parks and Resorts, Inc. We believe this name change better reflects what we have been and will continue to be a diverse collection of park brands and experiences. The name change affects only the name of the parent company, SeaWorld Entertainment Inc. Our award-winning portfolio of parks, SeaWorld, Busch Gardens, Discovery Cove, Sesame Place, Water Country USA, Adventure Island, and Aquatica, retain their respective park names. What also remains unchanged is our deep commitment to creating experiences that matter for our guests and inspiring them to help protect animals and the wild wonders of the world. Before we turn to the quarterly and annual results, I want to point out that we uploaded a presentation to our investor relations site that includes some supplemental information that covers topics we have heard from our investors that they would like covered as well, as well as some other important points that we want to get across. I will refer to these slides later in my remarks. Now let me turn to the quarterly and annual results. We are pleased to report another quarter and fiscal year of strong financial results. In the fourth quarter, we delivered record attendance and record in-park per capita spending, despite significant adverse weather impacts, in particular across our Florida markets during peak visitation periods, and an unfavorable calendar shift in the quarter. For the full year, we delivered near record results and grew our total revenue per capita for the sixth year in a row. despite significant adverse weather impacts throughout the year. We estimate that weather-related and calendar shift impacts reduced attendance by approximately 75,000 visits in the fourth quarter, and that weather-related impacts reduced attendance by over 370,000 visits for the full year. Weather aside, we continue to drive growth in total revenue per capita, including growth in admissions per capita, and in in-park per capita, which has increased for 15 consecutive quarters, demonstrating the effectiveness of our revenue strategies, our pricing power, and the strength of consumer spending in our parks. Also in 2023, along with our partners, we successfully opened our first SeaWorld Park outside of the United States in Abu Dhabi, which has been extremely well received and is performing ahead of expectations. In addition, we made meaningful investments across our parks and business that we are confident will deliver strong returns and will be a source of growth and profitability this year and into the future. I want to thank our ambassadors for all their dedicated efforts in 2023. Our attendance levels for fiscal 2023 were still below levels achieved in 2019, primarily due to a decline in international and group attendance, which we are confident will eventually recover to and surpass pre-COVID levels. We are also still more than 3 million visitors below our historical high attendance of approximately 25 million guests achieved in 2008. Our clear opportunity to drive meaningfully more attendance to our parks, combined with our demonstrated ability to continue to grow total per capita spending, manage and reduce costs, and achieve strong returns on our investments, gives us high confidence in our ability to continue to deliver operational and financial improvements that will lead to meaningful increases in shareholder value. We are excited about our plans for 2024, including the prospect for more normalized weather and an incredible lineup of new, one-of-a-kind rides, attractions, and events, and new and improved in-park venues and offerings across our parks. We're also really excited about celebrating SeaWorld Park's 60th anniversary this year, which kicks off across our SeaWorld parks on March 21st and will run through the whole year. There will be even more reasons to visit our SeaWorld parks this year with special events, shows, attractions, and a whole lot more. We are happy to report that our new rides and attractions are all currently scheduled to open before the peak summer season. We are also encouraged to see 2024 bookings trending ahead of prior year for both group sales and our Discovery Cove property. We expect meaningful growth and new records in revenue and adjusted EBITDA for 2024. As I mentioned, for 2024, we have an exciting lineup of new rides, attractions, events, and new and improved in-park venues and offerings with something new and meaningful in our parks. We've outlined each of our new rides and attractions in our parks in our press release, and we encourage you to visit them this year. I will highlight just a few of them here. The first one is Penguin Trek at SeaWorld Orlando, an unforgettable multi-launch family coaster adventure where guests will navigate the harsh Antarctic environment in search of a colony of penguins Penguin Trek will be an indoor-outdoor coaster experience, as well as the eighth and most immersive addition to the coaster capital of Orlando. The next one is Jewels of the Sea in SeaWorld San Diego. A first of its kind at SeaWorld parks, the all-new Jewels of the Sea, the jellyfish experience, offers an immersive and interactive view into the mysterious underwater world of fascinating and graceful jellyfish. This aquarium features three unique galleries, including one of the largest jelly cylinders in the country, as well as an immersive multimedia experience. The next one is Catapult Falls at SeaWorld San Antonio. Riders will experience the rush of the world's first launched flume coaster featuring the world's steepest flume drop. This family thrill experience will also feature the tallest flume drop in Texas. The next one is Loch Ness Monster, The Legend Lives On at Busch Gardens Williamsburg. The legendary Loch Ness Monster will resurface as a fully restored experience loaded with all new thrills, dramatic storytelling, and innovative effects as it takes riders on Nessie's newly refurbished signature trek. Finally, Phoenix Rising at Busch Gardens Tampa Bay. Riders will experience a fiery blaze of immersive, family-friendly excitement as they soar above the Serengeti Plain and drop into a ray of fun-filled twists and turns on the new Phoenix Rising. This family suspended coaster includes an onboard audio soundtrack and speeds up to 44 miles an hour. As I mentioned, I would encourage you to go back to our press release and you'll see there's other rides we are adding at other parks across our company that you can read more about. I've just hit the highlights. Now, turning our attention to the slides that we posted, we mentioned we created a presentation that addressed certain topics that we have heard from stakeholders and shareholders that they would like to be covered and some important points that we would like to get across. Slide four is titled Discipline Capital Allocation Strategy. And on this page, we've outlined our capital allocation strategy. We have a thoughtful and clear capital allocation philosophy where we consider the highest and best use for our excess capital across four buckets. Number one, investing in the business. Number two, debt pay down. Number three, M&A. And number four, return capital to shareholders. Investing in the business is focused on three areas. continuing our ongoing maintenance spend to ensure our parks are well maintained, continuing our cadence of new rides, attractions, shows, and events in our parks, creating new reasons to visit, and identifying and executing on high conviction, high ROI initiatives. As you'll see on the next page, we typically spend approximately $150 million to $175 million per year on core capex, and up to $50 million per year on expansion ROI CapEx. Looking at debt pay down, we are comfortable with current leverage levels and expect further deleveraging from future EBITDA growth. Given our low leverage levels and the current cost of debt, paying down debt is not a current priority. Regarding M&A, we will opportunistically pursue M&A when attractive opportunities present themselves, but at present, no M&A opportunities are currently contemplated. The company has and will continue to aggressively return capital to shareholders when it makes sense to do so in the form that makes the most sense. We have repurchased over $1 billion in shares since January of 2019, which is 23 million shares or approximately 27% of shares outstanding. And yesterday, the Board of Directors voted to recommend a new $500 million share buyback authorization subject to approval by non-Hillpath shareholders. Needless to say, the Board and the company believe our shares are materially undervalued. Going forward, the Board and the company will consider buybacks and or dividends, regular or special, as appropriate, based on market conditions and other relevant factors. Finally, if somehow it's not already clear and obvious, you should know that the Board is highly aligned with shareholder interest. Turning to the next slide, disciplined capital spend strategy, we have a clear and disciplined capital spend philosophy. We think about capital spending in two buckets. Number one, core capex, and number two, expansion slash ROI capex. We estimate that our core capex will typically run between approximately $150 million and $175 million on an annual basis. This is the spend that we estimate supports growth in revenue and adjusted EBITDA in line with long-term base business expected growth rates. This amount includes maintenance capex, and new rides and attractions capex. We estimate that our expansion slash ROI capex will run between approximately zero and $50 million on an annual basis. This is spend that supports growth in excess of normalized levels and includes high conviction projects with 20% plus ROI unlevered cash on cash returns, including revenue generating and cost savings projects park expansions, new properties, et cetera. So in total, we expect total normalized CapEx of approximately $150 million to $225 million on an annual basis. Turning to slide six, capital spend update. This slide provides more color on our 2023 capital spend and on our expected 2024 capital spend. As discussed in prior calls, given our significant excess cash flow generation in recent years, our board challenged us to pursue more than our normal cadence of ROI projects in 2023. As such, we spent approximately $80 million more on ROI CapEx in 2023 than we would normally spend, and we took on more projects than we would typically take on. Many of these projects completed on schedule. and delivered the expected ROI. Many others were delayed due to some combination of weather and us taking on more projects than we probably should have. As discussed on previous calls, this led to certain operational disruptions in peak periods in some of our parks and was a headwinds to performance in certain parks at certain times. The good news is we learned a lot from our experience in 2023 and we expect the headwinds that we experienced in 2023 will be tailwinds going forward. In 2024, we currently expect to spend approximately $225 million of capex split between $175 million of core capex and $50 million of expansion slash ROI capex. We feel good about these ROI projects and have high conviction on their impact in 2024. Turning to slide seven, capital spend case studies We show you some examples of projects completed in 2023, delayed in 2023, and what we have in store for 2024. On the next slide, capital spend significant free cash flow generation, we simply lay out the significant discretionary free cash flow generation of our business. The slide speaks for itself and shows the high free cash flow conversion of our business and the $400 million of normalized levered free cash flow that the business should be expected to generate on an annual basis. Turning to slide nine, hotel update. We've gotten a lot of questions on hotels from investors. First, let me be clear that we believe there's a great opportunity for hotels in our parks. We own approximately 400 acres of developable land adjacent to our parks. We know there is significant vacation hotel demand from guests in our markets, and we see an obvious opportunity to generate significant incremental EBITDA and value from hotels in our parks. Second, we have not decided to spend any capital actually constructing hotels, and in any event, we will not spend any capital to construct a hotel without high confidence in achieving 20% plus ROI, unlevered cash on cash returns. Third, we have targeted the first hotels in the Orlando area, which is the largest tourist destination in the United States. Market research makes it clear that there is significant demand for hotels in this market. We are evaluating the opportunity for hotels in other park markets as well. Fourth, we expect hotels to be a meaningful contributor to EBITDA over time, but the contribution will depend on the business structure ultimately chosen. We are currently evaluating options with respect to who will build and manage these hotels, and we are in discussion with various development, management, and brand partners. The ultimate decision will be in the best interest of the company and its stakeholders, taking the risk-reward, timing, capital requirements, and expected ROI into consideration. Moving on to the next slide, significant international and group attendance opportunity. As we have discussed, we strongly believe we have a meaningful opportunity to grow attendance across our parks, including by just simply returning to historical levels we once achieved. This next slide shows on the left that in 2023, our attendance from group and international guests was still down approximately 1.3 million guests, or 30% from 2019 levels. On the right side of the slide, you can see that excluding group and international visitation Our attendance was up in 2023 versus 2019, despite the severe weather headwinds we experienced in the year. In other words, there is a 1.3 million visit upside to our attendance just by recovering group and international attendance. We are confident in our ability to recover these guests in the near to medium term. Turning to slide 11, meaningful opportunity to grow attendance by returning to historical levels. This is a slide we have shown before. If we return total attendance to 2019 levels, that would be approximately 5% growth in attendance compared to 2023. If we return attendance to 2008 levels, our historical high, that would represent approximately 18% growth in attendance compared to 2023. If we achieve attendance levels where each park returns to its historical high level of attendance, that would represent a 25% increase in attendance compared to 2023. We have clear and ample opportunity to grow attendance just by returning to levels we have previously achieved, ignoring population growth, sector share gains, et cetera. On the next slide, drivers of future attendance growth, we lay out a roadmap of how we think about attendance growth beyond returning to historical levels. We plan to grow attendance over time by Number one, benefiting from population growth with our addressable markets growing in excess of U.S. national average. Number two, creating new reasons for people to visit, such as new and expanded rides, attractions, events, and shows. Number three, growing our season pass base and visitation per member. Number four, continuing the recovery in international visitation, as well as increasing our focus on partnerships and marketing. Number five, growing awareness, increasing conversion, optimizing our media spend. Number six, continuing our CRM build-out and optimize the strategy around that. Number seven, increase our focus on group sales across youth, corporate, and other large buyouts. And number eight, developing and growing a loyalty program. We have confidence in the near, medium, and long-term strategy with respect to each of these drivers. Turning to the next slide, admissions per cap. Really, it's the next two slides where we show bridges for admissions and in-park per caps. You can all study these slides on your own as they are self-explanatory. The punchline is that we are confident and believe our current per caps are sustainable and have clear further upside. We think about growing our per caps in line with inflation and then beyond inflation through our inherent pricing power and the various initiatives we lay out on these pages. Slide 15, cost efficiency and cost reductions, outlines our current cost efficiency and reduction initiatives. As you can see on the page, we have currently identified approximately $85 million of cost efficiency and reduction initiatives and expect $50 million of realized cost savings in 2024, with the remaining cost savings being achieved in 2025, along with other cost initiatives we develop over the course of this year. As you all know, cost discipline and management has been and is a relentless focus of our management team, and we have a track record of delivering on these margin-enhancing activities. Turning to slide 16, United Parks and Resorts Illustrative Adjusted EBITDA. This is a slide that we have previously discussed in past years. And as a reminder, this presentation, this Illustrative Adjusted Event Potential is not meant to be guidance. It is just meant as a simple illustration to show what we believe the earnings power of this business would be at 2019 attendance levels and if we return to 2008 historical peak attendance levels while growing our total per capita revenue along with the cost savings opportunities we have identified. As you can see from the illustration, this business has the potential to do between $1 billion and $1.2 billion of adjusted EBITDA under these scenarios, excluding any cost inflation or pressure. Just as a reminder, this is not guidance, but rather a simple illustration. As we've said before, Our business model is simple and not complicated. If we get a little attendance growth, a little per cap growth, and we remain disciplined and focused on cost management, the EBITDA potential of this business is substantially higher than what we achieved in 2023. Turning to slide 17, United Parks Valuation Overview. This slide outlines the current public market valuation of our shares. As you can imagine, this page makes us quite frustrated. The public market is valuing our company as seven times forward EBITDA and 9.4 times forward unlevered free cash flow and at around a mid-teens levered free cash flow yield. We operate in an industry that historically was valued at over 11 times EBITDA, and we strongly believe deserves to trade at a much higher multiple than seven times EBITDA. Slide 18, trading at a significant discount despite outperformance. Even more frustratingly, this next slide shows our performance compared with leisure, hospitality, and entertainment company peers. As you can clearly see, we have outperformed, in many cases significantly so, our peer groups, and yet we trade at the lowest multiple of any of our peers. This is really incredible to us and hard to understand. The next slide, slide 19, implied future stock price. On the next slide, we show what our implied share price would be if we traded in line with our peer groups or at discount to our peer groups. Any reasonable way you look at it, we feel we are materially undervalued and that there's significant upside opportunity in our current share price. Finally, let me turn to slide 20, which is the key takeaways. And there are six key takeaways. Number one, our capital allocation strategy is focused on maximizing returns for shareholders with a highly aligned board. Number two, we have a disciplined capital spend strategy with approximately $150 million to $225 million in normalized annual capex spend. Number three, we have significant discretionary free cash flow generation. Number four, we have a thoughtful approach to hotels and will not spend any capital to actually construct hotels without high conviction in 20% plus unlevered returns. Number five, we see a path to $1 billion in adjusted EBITDA with multiple levers to drive value and further upside. And finally, number six, we believe the company is extremely undervalued despite significant outperformance relative to Pierce. Thank you for letting me take you through that presentation, hopefully to address the number of questions that people have had. So with that, I will turn it over to Jim to discuss our financial results in more detail.