Cedar Fair, L.P. (NYSE:FUN) Q1 2024 Earnings Call Transcript May 9, 2024
Cedar Fair, L.P. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Cedar Fair Entertainment Company 2024 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants this call is being recorded. Thank you. I’d now like to hand over to Cedar Fair.
Michael Russell: Thank you, Gavin, and good morning to everyone. My name is Michael Russell, Corporate Director of Investor Relations for Cedar Fair. Welcome to today’s earnings call to review our 2024 first quarter results for the period ended March 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 Chief Executive Officer, Richard Zimmerman; and our Chief Financial Officer, Brian Witherow. 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 the 2024 first quarter results and answer related questions. During Q&A, management will not be taking questions about the proposed merger with Six Flags.
With that, I would like to introduce our CEO, Richard Zimmerman. Richard?
Richard Zimmerman: Thank you, Michael. Good morning and thanks to everyone for joining us today. Before we discuss our results, let me provide a quick update on where we stand in terms of the proposed merger with Six Flags. Back in March, Six Flags shareholders overwhelmingly approved the merger-of-equals transaction, which we continue to believe will be completed before the end of the second quarter. At this time, we have substantially complied fully with the Department of Justice second request, and both companies continue to work constructively with the DOJ in its ongoing review of the merger. At the same time, our teams have been working diligently to complete the initial phases of a joint integration plan that upon closing of the transaction will allow us to bring our two strong companies together efficiently and effectively and realize the full potential of the strategic combination.
Naturally, as this process moves forward, we will keep the market apprised of other material events. Now, let’s move on to our operating results and our outlook for the year ahead. Earlier this morning, we reported first quarter results that maintained the positive momentum we established during last year’s record second half. Our first quarter results were solidly in line with our expectations coming into the year. Although our first quarter historically represents only about 5% of our full year attendance and revenues, getting off to a strong start and building solid demand in our long lead channels is critical. Our first quarter performance positions us well for the peak summer season ahead and validates the strength of our portfolio and strategy, as well as our belief that consumers continue to place a high priority on experiential entertainment.
In a few minutes, Brian will review our operating results in more detail. First, however, let me highlight a few specific factors that underpin our confidence in Cedar Fair’s long-term business model and the season ahead. First, we are coming off a record 2023 second half and the key drivers and strategy behind those results remain in place. Second, our long lead indicators, led by season pass sales, are trending very well. Third, our initiatives to operate more efficiently without sacrificing guest service are working and we are confident this will drive long-term margin expansion. And lastly, in 2024, we have our most complete and compelling capital program since the disruption of the pandemic and we are already seeing increased anticipation and excitement in our markets for all of the new rides and attractions.
For the upcoming season we strategically allocated capital dollars across our portfolio and are introducing marquee caliber attractions at six of our parks, including our four largest parks, as well as investing in numerous enhancements to the food and beverage, retail and premium experience offerings across our portfolio. Headlined in this year’s collection, two marquee attractions include Top Thrill 2 at Cedar Point, the world’s tallest and fastest triple-launch strata coaster and a record-breaking thrill ride unlike any other anywhere. The ride debuted to the public this past weekend and the response from our guests was incredible. Iron Menace at Dorney Park, the northeast’s first dive coaster. The world’s first kids water coaster at our Schlitterbahn Park in New Braunfels, Texas.
And finally the addition of new family coasters to the Camp Snoopy areas at both Kings Island and Knott’s Berry Farm. We are confident these new rides and attractions will drive urgency and strong demand with our guests. I’m equally excited about the work our team is doing behind the scenes on the digital technology front. Based on our consumer roadmap strategy, we are making investments in scalable technologies that enhance the guest experience, drive revenue growth, and improve operational efficiencies for our associates. An integral part of our long-term strategic planning process is a holistic analysis of the guest journey. We take a deep dive into every step our guests take in the process associated with a park visit, from researching and buying tickets to leaving the parking lot for the ride home.
The objective for this exercise is known as making fun easy, which is consistent with our goal to continually evolve and enhance the guest experience. Fast forward to what this means to our guests and our associates in 2024. In April, Carowinds, our park in Charlotte, became the first outdoor entertainment complex in the country to offer next gen 6G-enabled WiFi coverage. And by the end of this year, this same technology will drive the wireless network at our 6th largest parks. Deploying a robust wireless network with improved coverage and capacity is consistent with our goal to seamlessly integrate and support the best possible digital experience for our guests and our associates. For the 2024 season, we’re also introducing our next-gen mobile app that features a broader range of capabilities and experiential enhancements, including Fast Lane wait times and improved mapping of our parks.
Our new park app has been introduced at all parks except for the Schlitterbahn Waterparks, where the app is targeted for rollout later in the year. Throughout the season, our team will be activating additional user friendly features park by park, including real-time ticketing upgrade capabilities, incremental guest access to dining menus with mobile ordering functionality and other unique guest engagement options. We are also rolling out single use Fast Lane passes at seven of our parks, including our five largest parks. This enhancement to our front of the line program has the potential to make the premium offering of Fast Lane more attractive to a wider segment of our guest base, providing us with another opportunity for meaningful growth in guest spending.
Looking ahead, we are developing other scalable technologies to enhance a wide range of systems and processes, including a more guest friendly design on online ticketing, a next-gen e-commerce system that operates seamlessly across all consumer devices, the addition of more robust data capturing platforms to enhance the capabilities of our business intelligence group, a cloud-based hotel management system to accelerate innovations at our resort properties and finally AI partnerships that target value creation and risk mitigation across our enterprise. For decades, our parks were a convenient and enjoyable getaway to unplug from the outside world. For most of us today, staying plugged in is a way of life no matter where we go. The expectation to always be connected now drives our consumer roadmap.
Strategically, it’s the same rationale we leaned into over the last decade when we invested tens of millions of dollars to build or enhance high volume culinary engines that offer higher quality food and beverage options. It’s simply listening to and responding to what our guests demand. With that I’ll turn it over to Brian.
Brian Witherow: Thanks, Richard, and good morning. I’ll start by discussing our first quarter results before wrapping up my remarks with updates on our balance sheet and the current state of our long lead indicators. As Richard mentioned, due to the highly seasonal nature of our business, first quarter results represent only 5% of full year attendance and net revenues as most of our parks are closed during the period. As such, the company typically operates at a loss during the first quarter. It’s also important to note that due to the fiscal calendar shift in the current year, the first quarter of 2024 includes 13 weeks of results compared to only twelve weeks in the first quarter last year. Because of the impact of the fiscal calendar shift, I’ll start my comments with a recap of our financial results as reported before reviewing first quarter performance trends on a comparable week basis.
Including the planned extra week in the period, operating days in the quarter totaled 117 compared with 161 operating days in the first quarter of 2023. The net decrease of 44 operating days was primarily the result of a strategic decision to eliminate lower value, higher risk operating days early in the year at several parks. These strategic calendar changes were primarily concentrated at three of our seasonal parks: Carowinds, Kings Dominion, and California’s Great America. For the quarter, we generated a record $102 million in net revenues on attendance of 1.3 million guests. This compares with net revenues of $85 million and attendance of 1.1 million guests during the first quarter of 2023. In addition to the 290,000 visit increase in attendance, the higher net revenues during the period reflect a $4 million increase in out-of-park revenues to a record $23 million.
The increases in per capita, I’m sorry, the increases in first quarter attendance and out-of-park revenues were partially offset by a 6% or $3.94 decrease in in-park per capita spending. The increase in attendance during the quarter was the direct result of higher season pass sales and improved weather at Knott’s Berry Farm, as well as the inclusion of the extra calendar week in the current period. Meanwhile, the increase in out-of-park revenues reflects the impact of the extra week as well as the improved performance of the Knott’s Hotel, which was under renovations at this time last year. The decline in per capita spending is due to a planned decrease in season pass pricing and a higher mix of season pass visitation at Knott’s Berry Farm during the period.
The softer per caps at Knott’s were partially offset by improved in-park per capita spending at the four other parks with limited first quarter operations. Moving to the cost front, operating costs and expenses in the first quarter totaled $215 million, up $25 million compared with the first quarter last year. The period over period increase reflects a $15 million increase in SG&A expense, a $9 million increase in operating expenses and a $1 million increase in cost of goods sold. The increase in SG&A expense was largely attributable to costs related to the proposed merger with Six Flags. Excluding the merger related costs, SG&A expense for the quarter increased $5 million, the result of the additional calendar week in the current period and higher spend on technology initiatives.
The increase in first quarter operating expenses was entirely due to the additional calendar week offset in part by a reduction in full time wages and related benefits. Meanwhile, cost of goods sold as a percentage of food, merchandise and games revenue decreased 250 basis points compared with last year’s first quarter, the result of planned initiatives to reduce food and beverage costs. Shifting our focus for a moment to comparable period operating results on a same week basis or comparing the three months ended March 31, 2024, with the three months ended April 2, 2023, net revenues increased 3%, or $3 million, and attendance was up 10%, or 125,000 visits. Meanwhile, out-of-park revenues were up 8%, or $2 million, and in-park per capita spending was down 8%, or $5.39.
We’re very pleased with the increase in attendance as it was generated over 62 fewer operating days than the same period last year. On a same week basis, first quarter attendance per operating day was up more than 4,500 visits, in-part the result of eliminating the smaller attendance days in January and February at our seasonal parks. On a same week basis, first quarter operating costs and expenses were up $10 million with the increase entirely due to the merger related costs. Excluding these costs, operating costs and expenses were essentially flat between years despite our parks entertaining 125,000 more guests during the period. As we discussed on our last earnings call, we remain laser focused on improving margins by increasing demand and driving operating efficiencies across the portfolio, particularly around variable operating costs such as seasonal labor.
During the quarter, we reduced our seasonal labor hours by 3% on a comparable week basis, while at the same time pushing our average seasonal labor rate down approximately 1%. As more of our parks come online, we will continue to aggressively manage seasonal labor hours and other variable costs, as well as look for opportunities to reduce general and administrative overhead costs. As evidence of this, our lone park with substantial first quarter operations, Knott’s Berry Farm, was able to improve EBITDA margins on a comparable week basis by more than 200 basis points during the quarter by driving demand levels higher and tightly managing variable costs, something we are confident can be replicated across the full portfolio going forward. Now turning to the balance sheet.
At the end of the first quarter, Cedar Fair’s balance sheet remains strong with ample liquidity to fund future cash obligations. Last week, we fully redeemed our 2025 notes using proceeds raised through a new $1 billion term loan, while also securing a new $300 million revolving credit facility, which replaced our former revolver. The transaction execution was excellent and demand for the loan was significantly oversubscribed, underscoring the market’s confidence in Cedar Fair and our management team. Following the financing and subsequent bond redemption, we have no near term debt maturities. This refinancing was part of a series of financing transactions undertaken by Cedar Fair and Six Flags in anticipated of the merger closing. The steps taken improved Cedar Fair’s capital structure flexibility and position the future combined company with sufficient liquidity to address any near-term debt maturities and anticipated fees and obligations associated with closing the merger.
At the end of the quarter, Cedar Fair’s net debt totaled $2.4 billion and we had total liquidity of approximately $157 million, including $35 million of cash on hand and $122 million of available borrowings under our revolver. Regarding the use of cash during the quarter, we spent $57 million on capital investments, which was in line with expectations and consistent with our plans to invest between $210 million and $220 million for the full year. During the period, we also used $14 million of cash for interest payments, $3 million on payments for income taxes and $15 million on cash distributions to our unitholders. Taking a closer look at our long lead business indicators for a moment, as Richard mentioned, we are very encouraged by the strong start and the solid trends we are seeing within our long lead indicators.
This includes positive booking trends within our group sales channel and at our resort properties, as well as a record pace for unit sales of season passes and other all season products. Through the end of the first quarter, sales of season passes on a comparable week basis were up 8%, or approximately $15 million, driven by a 17% increase in units sold, or an increase of more than 270,000 units. The lift in units sold was partially offset by an 8% decrease in the average season pass price, which was primarily the result of the strategic decision to adjust season pass pricing at a few park – in a few markets to drive demand, most notably at Knott’s Berry Farm, which has our largest season pass base. Meanwhile, total sales of other all season products through the end of the first quarter were up $13 million, or 27%, on a comparable week basis, reflecting an increase in units sold and higher average pricing.
Driven in large part by the outstanding start to our season pass sales program, our deferred revenue balance at the end of the first quarter totaled $233 million, up approximately 10% compared to the same time last year. Excluding carryover pass benefits during the COVID disrupted years, this level of deferred revenues would represent a record for the first quarter. Consistent with our strategy of dynamically pricing when demand trends permit, we’ve adjusted season pass pricing up since initially launching the program last fall. Most recently, average season pass pricing has trended up mid single digits, while unit sales have also paced up mid single digits. Heading into our peak season pass sales cycle, we are optimistic these positive trends combined with tailwinds and other demand channels such as group bookings and reservations at our resort properties position us well to deliver another outstanding season in 2024.
With that, I’d like to turn the call back over to Richard.
Richard Zimmerman: Thanks, Brian. Before we open the call to questions, I’d like to share a couple of additional thoughts. First, as Brian mentioned, our team remains laser focused on improving margins by driving higher attendance and activating cost saving measures across the portfolio. These cost saving efforts are multifaceted. However, there is a concentrated effort around labor, given it represents more than half of our overall cost structure. And while we are focused on driving efficiencies, we are also committed to maintaining appropriate staffing levels and delivering the high quality experience our guests have come to expect, particularly as attendance levels continue to improve. The importance of labor availability and the recruiting process is an area of our business that is often overlooked.
It was a hot button issue coming out of the pandemic when labor supply was limited and we saw a structural shift in labor rates. At the time, we made the strategic decision to increase our rates to market leading to ensure our parks were adequately staffed, so that all our rides were operating and all our revenue centers were open. As attendance has recovered and labor markets have stabilized, we have successfully optimized both seasonal labor rates and seasonal staffing levels, largely due to the decisions we made back in 2020 and 2021. And as a result, heading into the 2024 summer season, we are enjoying some of our healthiest staffing levels in years and we continue to realize seasonal rate efficiencies. Some of those gains are the result of automating our recruiting process, including the addition of an AI chat feature on our career site, which has measurably increased applicant flow and expedited the overall hiring process.
Our recruiting and hiring process remains active throughout the season, but we remain cautiously optimistic about the labor outlook given our applicant flow and hiring to date. And as I hope you can tell from our prepared remarks, I am as excited as I’ve ever been for the future growth potential of our business and this industry. Based on our record performance over the second half of 2023 and the momentum we’ve carried into the start of 2024, we remain optimistic about the health of the consumer and the general strength of our core markets overall. Because operating days are relatively few during the first few months, this period best serves as an early gauge for the season ahead. It is also the one-time of year we can clearly see the tangible results of our long-term vision at play.
The years of decisions that now fill our parks reinforce how we got here, respect for a culture that remains steadfast in dreaming big, planning smart and executing with precision. For decades, this time tested and successful approach to building our business has delivered results, and we are confident that we remain on the right path to drive long-term profitable growth regardless of market conditions. We have built a strong team of professionals who continue to excel and deliver against any challenge thrown their way. We are fortunate to have a high quality business model we can rely on. One that produces free cash flow year after year to reinvest in the breadth and quality of our entertainment product that consumers have come to love and appreciate.
We know this because season after season, our loyal guests continue to purchase their day tickets and their season passes and frequently return to our parks, demonstrating a recognition of the strong value we offer in family entertainment. 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 first quarter performance and our results. Gavin, that’s the end of our prepared remarks. Please open the call for questions.
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