Cedar Fair, L.P. (NYSE:FUN) Q4 2023 Earnings Call Transcript
Cedar Fair, L.P. (NYSE:FUN) Q4 2023 Earnings Call Transcript February 15, 2024
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Operator: Thank you for standing by. My name is Danica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cedar Fair Entertainment Company 2023 Fourth Quarter Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Michael Russell. Please go ahead.
Michael Russell: Thanks, Danica. Good morning to everyone. Welcome to today's earnings call to review our 2023 fourth quarter and full year results for the period 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 investors website at ir.cedarfair.com. On the call with me this morning are Cedar Fair's CEO, Richard Zimmerman; and Brian Witherow, our Chief Financial Officer. 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 those 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 the 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. Before I begin, I want to reiterate that the purpose of today's call is to discuss 2023 fourth quarter and full year results and answer related questions. During Q&A today, management will not be taking questions about the proposed merger with Six Flags. With that, I'd like to introduce our CEO, Richard Zimmerman. Richard?
Richard Zimmerman: Thank you, Michael. Good morning, and thanks to everyone for joining us today. We're excited to be here today to discuss another very solid performance by Cedar Fair in 2023, including a record performance over the second half of the year. But before we review our results, let me briefly bring everyone up to speed regarding where we stand in terms of the proposed merger with Six Flags. I am pleased to say that we passed a key milestone at the end of January when the S-4 was declared effective and the related definitive documents were subsequently filed, including the Six Flags proxy statement and prospectus. Meanwhile, we continue to work through the antitrust approval process after receiving a second request from the Department of Justice on January 22.
This was an anticipated part of the process that our respective teams have prepared for. And we continue to expect the transaction to close within the first half of the year as originally contemplated. Since announcing the proposed merger in early November, we have engaged in many conversations with Cedar Fair unitholders as well as the broader investment community. And we are encouraged by the strong support we've heard from many investors. We look forward to closing the transaction in the coming months and unlocking the compelling value creation opportunities ahead for our combined company, which we are confident are greater than either company could have achieved independently. Naturally, as this process moves forward, we will keep the market apprised of other material events.
Now let's move on to 2023 results and our outlook for the year ahead. I am pleased to report that Cedar Fair capped off an outstanding second half of the year with a record fourth quarter performance, including new fourth quarter highs in attendance, net revenues and adjusted EBITDA. As we have seen before, the 2023 operating season was a tale of two halves. By mid-season, the effects created by anomalous macro factors, namely unprecedented rainfall in California and uncontrolled wildfires in Canada, resulted in shortfalls in early season attendance and spring season pass sales, which posed a challenge to our potential full year results. Consequently, we modestly adjusted ticket pricing at several key parts while also investing more in our advertising and promotional campaigns.
Along with return to more normal weather conditions, these mid-season adjustments were successful in generating incremental demand and led to a 3% increase in attendance over the balance of the season, recouping a meaningful portion of our early season deficit. In an effort to drive greater flow-through from the revenues we generated, we also remain laser-focused on identifying new cost efficiencies. While there is still more work to be done in this area, we were pleased that we achieved our goal of reducing second half operating costs and expenses from 2022 levels and improving adjusted EBITDA margins over the last six months of the year. As we have previously stated, our best opportunity to streamline cost and drive margin expansion resides in each year's second half, when operating costs are the most variable and attendance and revenues are at their peak.
Before I ask Brian to review our financial results in more detail, I want to take just a few minutes to elaborate on the value of several intangibles of our business model that are often overlooked yet extremely important to our ongoing success. First is resiliency. Our historical track record of quickly recovering from macro disruptions is a testament to the resiliency of our business model. Cedar Fair's resiliency is grounded in our ability to dynamically manage resources, market our unique brand of entertainment and deliver a diversity of engaging experiences that drive demand through market cycles. This has allowed us to navigate downturns in our industry as evidenced by our recoveries from the Great Recession and the recent pandemic. This past season is just the most recent example of how our resiliency played a key role in driving record second half performance after macro factors weighed on first half results and our plans to produce another record year.
Second is our ability to sustain performance. For more than a century and a half, Cedar Fair and its iconic collection of parks have delivered sustained performance. This resides in the irresistible consumer appeal created by our unique outdoor attractions that draw millions of guests to our parks each year as they have for decades. We leverage our expertise and the economic value produced by the resilient demand for our parks to generate exceptional amounts of free cash flow, much of which is invested back into our properties to drive future growth. Executed well, this time-tested approach is at the heart of Cedar Fair's sustained durability. The appeal of our parks and all they have to offer has withstood the test of time. Since the founding of our flagship park, Cedar Point, in 1870, our company has built upon a rich history of delivering happiness and excitement to multiple generations of families.
Our parks are woven into the fabric of their local communities, providing tens of thousands of good-paying jobs as well as economic prosperity for neighboring businesses and local governments. Therefore, we take seriously our role as custodians of a unique collection of historic parks and our obligation to preserve their integrity for the generations to come. And third is stability. Our culture is rooted in stability, supported by the most experienced senior leadership team among the regional amusement park players. Industry experience also runs deep among our regional VPs and general managers, responsible for overseeing and managing the day-to-day operations at our park. Fundamentally, we also have a healthy, stable business. Our balance sheet is solid.
We can fund the company's capital needs. And if we see attractive opportunities, we have the capacity and financial flexibility to pursue them. Helping to drive that economic stability is the growth of our recurring, predictable revenue streams, the existence of which instills confidence in our long-term strategic plan and capital allocation strategies. With that, I'll turn the call over to Brian, after which I'll return with a few closing thoughts around our outlook for the business. Brian?
Brian Witherow: Thanks, Richard, and good morning. I'll start off with a review of our record fourth quarter performance before providing a more detailed recap of our full year results. During the quarter, our parks had 377 total operating days with one additional day compared with the fourth quarter of 2022. During the period, we generated record net revenues of $371 million, up $5 million or 1% compared to the fourth quarter of 2022. Our improved performance was driven by a 9% increase in attendance to 5.8 million guest visits and a 7% increase in out-of-park revenues. The increase in out-of-park revenues was the result of the continued strong performance of our resort properties, incremental sponsorship business and higher revenues at the Knott's Marketplace.
The increase in attendance reflects the robust demand for our extremely popular events, including Haunts and WinterFest as well as increased season pass visitation tied to the strong early sales of 2024 passes. Partially offsetting the growth in attendance and out-of-park revenues was a 7% decrease in, in-park per capita spending during the quarter. The decline in per capita spending was attributable to a decrease in admission spending, reflecting the mid-year pricing adjustments we made as well as the recovery of lower-priced attendance channels in the quarter and a shift in attendance mix. Moving to the fourth quarter cost front. Operating costs and expenses in the period totaled $307 million, up $21 million compared to the fourth quarter of 2022.
The period-over-period increase was primarily attributable to $17 million of transaction costs related to the proposed merger with Six Flags. These costs have been classified as SG&A expenses. Excluding the merger-related costs, total operating costs and expenses for the quarter increased $4 million or 1% due entirely to higher SG&A expense. The increase in SG&A expense reflects higher full-time wages as well as higher planned spending on advertising during the period. Adjusted EBITDA, which management believes is a meaningful measure of the company's park-level operating results, increased $1 million to a record $89 million in the fourth quarter while fourth quarter margin remained essentially flat to prior year at 24%. Shifting our focus to full year results.
Operating days in 2023 totaled 2,365 compared with 2,302 operating days in 2022. The 63 incremental days were the result of 80 net planned days added to our park operating calendars in 2023, largely in the first half of the year. These planned incremental days were partially offset by 17 operating days that were canceled during the year due to inclement weather. For the full year, net revenues totaled $1.8 billion on attendance of 26.7 million guests compared with net revenues of $1.82 billion on attendance of 26.9 million guests in 2022. The decrease in net revenues reflects the impact of a 1% or 247,000 visit decline in attendance and a 1% or $0.60 decrease in, in-park per capita spending. These declines in attendance and per capita spending were offset in part by a 5% or $10 million increase in out-of-park revenues.
The year-over-year decline in attendance reflects the impact of a decrease in season pass sales and lower demand during the first half of the year due to the extreme weather, particularly at our California parks. The decline in per capita spending was largely attributable to the previously discussed decrease in admission spending, which was partially offset by higher levels of guest spending on food and beverage. The improvement in guest spending on F&B was driven by increases in both the number of transactions per guests and the average transaction value, reflecting the impact of continued investments in our food and beverage offerings. Moving on to the cost front for the full year. In 2023, operating costs and expenses totaled $1.32 billion compared with $1.29 billion in 2022.
The year-over-year increase was primarily attributable to $22 million of transaction costs related to the proposed merger with Six Flags. Excluding these merger-related costs, total operating costs and expenses for the year increased $5 million, up less than 1%. This year-over-year increase was the result of a $14 million increase in SG&A expense, which was partially offset by a $4 million decrease in cost of goods sold and a $4 million decrease in operating expenses. The decrease in operating expenses was primarily driven by cost savings initiatives that led to reductions in seasonal labor hours and in-park entertainment costs. These cost savings were somewhat offset by six incremental months of land lease expense at California's Great America, higher early season maintenance costs at several parks and increased insurance-related costs.
The increase in SG&A expense was primarily attributable to higher planned advertising during 2023. Looking a little more deeply at operating costs for a moment. As Richard mentioned, we remain focused on reducing operating costs and improving margins. This past year, these efforts including taking variable costs out of the system when attendance levels were below expectations as well as setting the stage for reimagining how we program and staff our parks in order to capture more permanent savings. Over the second half of the year, these efforts led to a $22 million year-over-year reduction in operating expenses. We made these adjustments while still entertaining nearly 600,000 more guests during that time. Our cost-saving efforts, combined with record revenues, led to a 210 basis point expansion in adjusted EBITDA margin over the second half of the year.
The reduction in second half operating cost was primarily driven by efficiencies in operating supplies and entertainment costs as well as reductions in both seasonal and full-time labor. Over the second half of the year, our park teams reduced total seasonal labor hours by more than 550,000 hours while our average seasonal labor rate was up a modest 1%. The changes we have made to our seasonal pay structure continued to help flatten the growth curve around labor rates, which is particularly important given that seasonal labor rates -- our seasonal labor represents our single-largest operating cost. For the full year, our average 2023 seasonal labor rate was up 2% from last year, in line with expectations coming into the year. The recent success of our cost-saving measures gives us confidence going forward that we have the right strategies in place to drive incremental operating efficiencies and expand margins while still delivering a park experience that meets the demands and expectations of our guests.
On the adjusted EBITDA front, for the full year, adjusted EBITDA totaled $528 million compared to $552 million in 2022. The $24 million decrease was primarily attributable to the year-over-year decreases in attendance and net revenues and, to a lesser extent, by the higher advertising, land lease and insurance-related costs in 2023. Now turning to the balance sheet. We ended the year with $65 million in cash on hand, no outstanding borrowings under our revolving credit facility and total net leverage just above our stated goal of 4x. Including our cash on hand and the available capacity under our revolver, we ended 2023 with total liquidity of $345 million, an adequate level to cover near-term cash needs. I want to look at long lead business indicators for just a moment.
As Richard previously mentioned, the early trends in sales of season pass products have been strong while group bookings and reservations at our resort properties are pacing in line with expectations. Our total deferred revenue balance at the end of the year was $192 million, representing an increase of $19 million compared to deferred revenues at the end of 2022. Through the end of January, sales of 2024 season passes were up approximately $16 million, driven by a 20% increase in unit sales. The increase in unit sales was somewhat offset by a decline in the average pass price, which reflects our pricing strategy aimed at building unit volume in the early months of the program as well as a shift in the mix of passes sold. With more than half of our season pass sales cycle remaining, including the spring window that accounts for close to 50% of total sales, we remain focused on maintaining the strong demand trends we've established to date.
Regarding our CapEx program, this past year, we spent $220 million on CapEx, including investments in new rides and attractions, upgraded and expanded food and beverage facilities and renovations to the Knott's Hotel. By comparison, we project investing between $210 million and $220 million on capital projects in calendar year 2024. Additionally, for modeling purposes, we are projecting full year 2024 cash interest payments of $140 million to $150 million and full year cash taxes of $50 million to $60 million. Finally, I want to provide an update on our planned operating days for 2024. After carefully evaluating demand levels and our performance this past year, we've made the strategic decision to condense our operating calendars at several parks as we look to concentrate attendance over fewer days and drive better operating efficiency.
The changes that are being implemented will primarily reduce operating days in the first two quarters, most notably at our small to mid-tier parks. In total, we are currently planning for 2,253 operating days in 2024 or 112 fewer days than in 2023. For additional modeling purposes, the breakdown of planned operating days by quarter, which will be impacted by natural shifts in the timing of holidays as well as by shifts in the timing of our fiscal quarter ends, are as follows: 119 days in the first quarter, 803 days in the second quarter, 998 days in the third quarter and 333 days in the fourth quarter. Despite the fewer operating days in 2024, we are confident we have the plans and initiatives in place to build on the momentum we established over the second half of 2023, pushing attendance at our parks back closer to 2019 pre pandemic levels.
With that, I'd like to turn the call back over to Richard.
Richard Zimmerman: Thanks, Brian. While somewhat disappointed by the way 2023 began, as I hope you can tell from our comments this morning, we are extremely pleased with our performance over the second half of the year and even more excited about the opportunities we believe can build on that momentum in 2024. Our positive outlook continues to be shaped by several factors. First, Consumer demand for amusement park entertainment remains strong and is pacing to soon surpass pre-pandemic attendance levels, an observation supported by our consumer research as well as our record second half performance in 2023 and the strong early trends in our long lead indicators, like 2024 season pass sales. Second, in 2024, we are set to unveil one of our most compelling and broadest-reaching capital programs ever.
We are especially excited about the debut of Cedar Point's Top Thrill 2, a project several years in the making and one that is certain to be one of the industry's most unique and anticipated new rides of the year. Our investments in world-class assets like TT2 place Cedar Fair on the amusement industry's leading edge of roller coaster technology and continue to build on our heritage of delivering thrills unlike any other. Although TT2's massive presence at our flagship park will most certainly steal this year's headlines, we are also introducing an incredible lineup of new attractions, dining and resort options across our entire portfolio of properties. Third, with each new season, we leverage more business intelligence and data analytics to inform our decision-making processes.
As evidenced this past year by our agility, these expanded capabilities help set strategies that drive revenue growth and uncover operating efficiencies that reduce cost and increase profitability. And lastly, I would emphasize few reporting periods have been impacted by macro factors as much as the first half of 2023. Under normalized operating conditions, this should translate into a comparative tailwind and a stronger first half in 2024. With Mother Nature hopefully on our side, we are excited about our prospects for delivering a solid start to the year, coupled with an outstanding game plan for the peak season and the proven strength of our all-important second half. 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 mid-season strategic decisions drove performance over the second half of the year. While we continue to work to get demand back to pre-pandemic levels and, at the same time, operate our parks more efficiently, we believe we are well positioned to deliver another outstanding year in 2024 and remain laser-focused on delivering solid returns for our investors. As a reminder, we have no further updates on the merger beyond what I shared at the beginning of the call today. We ask that you keep your questions focused on our performance and our results. Danica, that's the end of our prepared remarks. Please open up the call for questions.
Operator: [Operator Instructions] Your first question comes from the line of James Hardiman with Citi. Please go ahead.
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