SeaWorld Entertainment, Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good morning. My name is Sharon. I'll be your conference operator today. At this time, I would like to welcome everyone to the SeaWorld Entertainment First Quarter 2016 Earnings Conference 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. Thank you. Mr. Mark Trinske, Vice President of Investor Relations, you may begin your conference.

[Mark Trinske:]

Thank you. And good morning, everyone, and welcome to SeaWorld's First Quarter 2016 Earnings Conference Call. Today's call is being recorded and webcast live. Our press release was issued this morning and is available on our Investor Relations website at 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 Joel Manby, our President and Chief Executive Officer; and Peter Crage, our Chief Financial Officer. On today's call, we will review our first quarter 2016 financial results along with recent factors impacting our business. And then, we will open up the call to your questions. Before we begin, I'd 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 filed with the Securities and Exchange Commission on February 26 of 2016. These factors may be updated from time-to-time and will be posted in our filings with the SEC and made available on our website. We undertake no obligation to update any forward-looking statements. In addition, on the call, we will reference certain non-GAAP financial measures. More information regarding our forward-looking statements and reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the earnings release and can also be found in our filings with the SEC. Now, I would like to turn the call over to Joel Manby. Joel?

[Joel K. Manby:]

Thanks, Mark, and good morning, everyone. Thanks for joining us today. As indicated in our earnings release this morning, we delivered revenue growth in the first quarter driven by higher attendance, particularly at our Virginia, Texas and California park locations. This is encouraging, particularly for the SeaWorld brand in California. I'll turn the call over to Peter in a moment and he'll provide more details on our results for the quarter. But first, I want to take a moment to review the important actions we have taken over the past four quarters, which we believe will position SeaWorld to deliver positive and consistent performance over the long term. Just over a year ago, when I started my tenure here, the board and I began a thorough analysis of the business. We used the results of that analysis to build our long-term strategic plan, which we outlined for you in November at our Analyst Day. We then put our senior leadership team in place, bringing in new talent from the outside and promoting excellent team members from within. And I'm confident we now have the right people to drive our plan forward. Our next step was to take a bold stance and address head-on the orca in captivity issue. Our decision to make this the last generation of orcas at SeaWorld was a very difficult and emotional decision, but it was the right decision for our guests and for the future of this company. And most recently, we are making changes to our board composition and have proposed shareholder-friendly enhancements to our corporate governance policies. Specifically, Ronald Bension joined our board in April. Ron is President of House of Blues Entertainment and former Chairman and CEO of Universal Studios Recreation Group, where he was responsible for running all aspects of Universal Studios Hollywood and Universal Studios Florida, in addition to developing international theme park joint ventures. We also nominated Donald Robinson, formerly the Executive Vice President of Hong Kong Disneyland for election at the 2016 Annual Meeting. During his 33-year career with Disney, Don was involved with the opening phase of two theme parks, one water park, a retail/dining/entertainment venue, and 12 resort hotels on three continents. We look forward to working with these highly accomplished theme park industry executives and are sure to benefit from the perspective and experience that they bring. As we look to the future, investing in a regular cadence of compelling new attractions is a key component of creating the distinctive experiences that will bring guests to SeaWorld. As you know, we have three exciting new attractions opening this summer season. First, Discovery Point in San Antonio is a new dolphin habitat and underwater viewing area. All guests who visit SeaWorld in San Antonio can see the underwater viewing area with their admissions ticket, or they can reserve our signature Dolphin Swim, the only place to swim with dolphins in Texas for an upcharge. I'll tell you, I was just there last Sunday for a season passholder event and the attraction looked simply amazing, very proud of what we accomplished there and we look forward to it opening this quarter. We also created a separate gate for our Aquatica San Antonio water park, which has already driven increased attendance and provides us with the opportunity to market multi-park tickets at this location. And we opened two new roller coasters in Florida late in the second quarter; Mako, the longest, tallest and fastest coaster in Orlando, and Cobra's Curse, a unique family-friendly spinning coaster at Busch Gardens, Tampa. We have begun to roll out a new advertising campaign to generate awareness and excitement about coming to Orlando and Tampa to ride these two great new coasters. Mako is a great example of what we intend to be in the future; fun and meaningful. We recently announced a partnership with Guy Harvey, the famous sea life painter and a doctor of marine biology. So in our queue lines of Mako, our guests will learn about the research that Guy does and some of the plight of sharks in the wild. And in the exit retail after enjoying an incredible ride, they'll be able to buy Guy Harvey prints and apparel with a portion of the proceeds going to help whatever Guy is working on in the wild to protect sharks, and specifically shark finning. So we're very excited about these new attractions and are looking forward to giving our guests another reason to visit or revisit our parks. Now, the first quarter was a big quarter for news from SeaWorld, and early feedback from our March announcement has been very positive. We are confident that our transformative announcement to stop orca breeding and transition our theatrical whale shows into more natural encounters, as well as partnering with the Humane Society of the United States, is the right path forward for SeaWorld. It is consistent with our brand promise to a whole new generation of guests, as well as a large percentage of the population who want to learn and connect more directly to the natural world. We believe this move will contribute to gradual improvement in performance over time, as consumers begin to recognize our continued commitment to providing them experiences that matter. Importantly, I also believe that these changes will enable us to gradually reallocate resources, including management's time, as well as our financial resources toward the most productive investments in the business to drive revenue and growth. Before I turn the call over to Peter, I want to share one last item. Last week, our Sea Rescue television show won a Daytime Emmy Award for the Outstanding Children's Series category. Our creative and zoological teams are doing a fantastic job creating a wonderful program that shares SeaWorld's rescue efforts, and I'm excited that they receive this important recognition for the quality and the content of their work. Sea Rescue tells the stories of rescue, rehabilitation and return of sea life back to their natural habitat by our SeaWorld rescue team and our partner organizations. These compelling stories, combined with the program's emphasis on the critical need for the conservation and preservation of animals, embodies our new brand promise, creating experiences that matter. People want to be associated with these efforts and learn more about them, and we will give them that opportunity when they visit our great parks. And with that, I'll turn the call over to Peter to walk through our first quarter financial results and our 2016 full year guidance.

[Peter J. Crage:]

Thanks, Joel, and good morning, everyone. I'd like to share some more color on our financial results with you now. Total revenue was $220.2 million, up 3% over the first quarter last year. And attendance was 3.3 million, an increase of 2.6%. As we mentioned in our earnings release, approximately 33,000 of the increase in attendance related to the separate gate for Aquatica San Antonio, which opened in March. Excluding the impact of the separate gate, attendance improved primarily from the benefit of an earlier Easter holiday along with additional operating days for our Virginia park locations. This increase was offset by reduced attendance at our Florida park locations, resulting from a decline in international guests from Latin America, uncharacteristically wet weather in January, and a decline in passholder attendance at our SeaWorld Orlando park, resulting from fewer season pass sales due to less discounting on season pass products. Total revenue per capita was $66.80, relatively flat, but in-park per capita spending was strong, increasing by 4.5% to $25.27 in the first quarter 2016, primarily due to increased sales of in-park products, such as all-day dining packages and front of the line Quick Queue access. Admission per capita decreased by 2.5% to $41.53, primarily due to the impact of an unfavorable park attendance mix and fewer international guests compared to the first quarter of last year. We reported a net loss of $84 million or $1 per diluted share, compared to a net loss of $43.6 million or $0.51 per diluted share in the prior-year quarter. However, after adjusting for accelerated depreciation related to the disposal of the deep-water lifting floors, incremental equity compensation expense resulting from vesting of certain performance shares, the write-off of costs associated with the Blue World Project and other items we feel are not indicative of our ongoing performance, adjusted net loss was $46.9 million or a loss of $0.56 per diluted share in the first quarter of 2016 compared to an adjusted net loss of $43.5 million or $0.51 per diluted share in the first quarter of 2015. Adjusted EBITDA declined from a loss of $3.8 million in the first quarter of 2015 to a loss of $5.9 million in 2016, primarily related to increased direct labor and benefit costs, offset by increased revenue. Operating expenses increased by $26.5 million or 17%, primarily due to additional equity compensation expense, an increase in asset write-offs, and an increase in other direct labor costs. The increase in asset write-offs largely related to $6.4 million associated with the Blue World Project. Labor and benefit costs increased due to wage and merit increases, along with the cost impact of the earlier Easter holiday. SG&A expenses increased by $16.3 million or 32% in the first quarter of 2016, but it is important to note that $18.5 million of the increase was related to an increase in equity compensation expense largely related to the performance shares. So excluding equity compensation, SG&A would have been down $2.2 million as a result of our cost saving initiatives. Depreciation and amortization expense increased 71% to $75 million from $43.9 million in the prior-year quarter. The increase was due primarily to $33.7 million in accelerated depreciation incurred on the disposal of the deep-water lifting floors previously discussed, along with new asset additions, and was partially offset by fully depreciated assets and asset retirements. The increase in equity compensation expense in both SG&A and operating expenses relates to the expense for performance restricted shares, which were tied to a return of proceeds to investment funds affiliated with Blackstone. We have not expensed any of the equity compensation related to these shares previously under the accounting guidelines as they were not considered probable of vesting. Based on our first quarter dividend declaration, these shares became probable of vesting and the full expense was recognized. Turning to the balance sheet, we ended the first quarter with $41.5 million of cash and cash equivalents. Our net leverage ratio at the end of the first quarter of 2016 was approximately 4.5 times adjusted EBITDA. With anticipated reductions in revolver borrowing during the second quarter and improved performance during the third quarter, we expect our net leverage ratio will drop below 4.5 times for the succeeding quarters, giving us the same restricted payments capacity in 2016 as in 2015 of $120 million. With our transformational March announcement, our new attractions and the need to address some early headwinds, we view 2016 as a transitional year. We are taking the necessary steps to return the company to consistent financial performance, but we still have challenges to navigate. And while our long-term outlook is positive, in the short term we continue to see demand pressures in international attendance, a decline in passholder attendance at our SeaWorld Orlando park, as we previously discussed, and a calendar shift that pushes Memorial Day back a week compared to 2015. These factors may pressure second quarter financial results, but we are addressing them head-on. We have modified our international marketing to reflect more appropriate ticket offers in light of the foreign currency exchange rate pressures, and we have shifted portions of our marketing spend from Latin America to our domestic markets. We have also introduced strategic season pass promotions for SeaWorld Orlando. In addition, two highly anticipated new roller coasters, Mako and Cobra's Curse, will open in our Florida park locations late in the second quarter. In Texas, our new Discovery Point dolphin experience at SeaWorld San Antonio will also open in the second quarter in May. But keep in mind that much of the potential upside from our new attractions is concentrated in the third quarter and back half of this year, where visibility is more challenging. This brings me to our guidance. This 2016 guidance is based on current management expectations, is subject to change, and the company undertakes no obligation to update the guidance. Please refer to the discussion of forward-looking statements in our earnings release and related SEC filings for additional information. We expect adjusted EBITDA to be in the range of $335 million to $365 million for the full year 2016. This guidance is based on a number of factors. First, our new coasters in Florida and the Discovery Point dolphin attraction in Texas will be introduced late in second quarter and will contribute to our adjusted EBITDA, so the financial impact will be more fully realized in the second half of the year. Second, as we've discussed, decreased international attendance primarily from Latin America, which we expect to continue through the remainder of the year, represents the majority of revenue pressure and, to a lesser extent, a decline in passholder attendance at our SeaWorld park. In addition, our reputation campaign spend will continue in 2016 as we transition to more natural orca encounters and message accordingly, although it is expected to decrease in 2017. And, as I mentioned, Memorial Day is a week later this year, resulting in the loss of 18 operating days in Q2 as compared to 2015. We believe these headwinds may offset the positive impact of our capital investment in our new attractions in the short term, but we are confident that we are on the right path. We know it will take us some more time to get where we want to be, as we work to execute our plan, stabilize the company and return to growth over time. Now I'd like to return the call back to Joel.

[Joel K. Manby:]

Thanks, Peter. We're a company in transition and we are taking actions to reposition the company for the long term while, in the near term, our focus remains on operational excellence and delivering consistent and sustainable financial performance. The evolution of the SeaWorld brand will not happen overnight, but we have taken the most important and significant first steps. We are advancing our mission to inspire our guests to explore the wild world, to learn more and to take action on behalf of the animals we care for and we care so deeply about. This is the foundation for the distinctive guest experience that will enable us to build sustainable growth for the long term. We believe this is the right plan to position our company for enhanced shareholder value, and we have the right people in the right roles, both in management and on our board, to oversee this continued transformation. Thank you all for your continued support. And with that, I will open up the call for questions.

[Operator:]

Your first question comes from Tim Conder from Wells Fargo Securities. Your line is open.

[Tim A. Conder:]

Thank you. Joel, I guess my primary question here would relate to since the announcement relating to the sunsetting of the orcas, can you talk about your season pass sales, particularly in San Diego, how you're seeing the trend there and then in-park consumer surveys, again particularly in San Diego, but also any feedback you've had from any of the other parts related to that move?

[Joel K. Manby:]

Yeah, absolutely. Thanks, Tim. First of all, from an announcement standpoint, we feel that we're incredibly well. 65% of Americans knew about the announcement the day after we made it strictly from earned media, which is an incredibly strong figure, tends to be more like 10% to 30%. So, we got a lot of airtime, we got a lot of publicity. We anticipated it being positive from the research we did and we've done post surveys already from the announcement and it was along the lines that we shared in our investor deck, the day of the announcement that the positive to neutral or negative ratio of their feelings about SeaWorld were seven to one, which is incredible, so their positive feelings about SeaWorld grew in a seven to one ratio and their intent to visit grew about a four to one ratio, which was in line with what we anticipated. We do think those are leading indicators to what people will do in visitation to the park. I think it's too early to try draw a link directly to season passes immediately changing, but we're very confident that it's cleared the runway and people are seeing us in a more positive light and that will start to change. We're pleased with the results in California and in Texas, it seems like, we are turning the corner there on those brands and we also with better product coming in 2017 and 2018 in San Diego, we are very confident that that increasing trend will continue there. We've also seen social media volume change dramatically and is very positive. And in fact, the day of the announcement was one of the most positive – it was the most positive day on social media we've ever had since we started tracking the data and that was a nationwide survey. So, again, too early to tell, but between social media results, the survey results of the positives and people's feeling about SeaWorld, their intent to visit, but also the partnership calls we're getting since the announcement all point to positive trends there.

[Tim A. Conder:]

Okay. Okay. And then as it relates to Florida and the season pass commentary that you made, was this anticipated on the season pass sales given the pricing increase and just a little more color I guess on your approach in Florida, in particular with season passes encompassing the park that you're pulling out together. And then finally on the calendar, the operating days being hurt in Q2, can you talk about the full-year and are the operating days is shifting where you would potentially make some of those up or not over the balance of the year? Thank you.

[Joel K. Manby:]

So I might take the first one, maybe Peter if you could take the second one. Look, in Orlando on season passes, one of the major issues is we were lapping a buy one get one free offer that we have, as I've said, we have a pricing strategy where we're trying to basically remove ourselves from discounts, lead with product and then follow with a good value proposition as well as making our proposition simpler and making our compelling value versus Disney and Universal more, I think easy to understand for the customer, because we have followed Disney Universal for so many years. It's going to take us a little time to reposition ourselves as a strong, strong value play for families, which is an area we know we can win and still increase per caps. Having said that, I do think what we've learned in our season pass offer in Orlando is perhaps we moved a little too quickly to – we eliminated the BOGO entirely and a lot of those customers are very, very, very price-sensitive. So for that group, we did now introduce a lesser discount, basically get Aquatica free and we've seen that gap shrink quite a bit, and in fact, we're on plan with what we anticipated going forward. The guidance part of it is because we're not sure with the other issues like Brazil, we can recover what we've lost so far, but what we – but we have had a mitigation effort here. And I think the big picture learning stepping back from it is, we've got to ease into a reduction eliminate – I'm sorry discount elimination and do it a little, in a more smooth trajectory. As an example, we did it much better frankly in Tampa. They have a buy early and save strategy. Their season passes are up. They also had late entry of their product into the market, opening later than we would like, and they have executed frankly a little bit better on that. So it's a learning for us. It's not something we anticipate will continue, but that's what caused the issue early and why we built that into guidance moving forward.

[Tim A. Conder:]

Okay. I think the strategy we've seen at other regional park operators of slowly continuing those discount was clearly been proven.

[Joel K. Manby:]

Yeah. It's been proven. I just think we need to ease it in a more refined fashion, but we reacted very quickly and I think we will be in much better shape moving forward.

[Peter J. Crage:]

And, Tim, this is Peter. With regard to the operating days as we mentioned in the remarks, we have 18 days primarily at the early part of the summer at primarily water parks that opened earlier last year because of the additional week in the season. Making up those 18 days will be difficult. For obvious reasons, most of our parks are year round. Obviously, we look to ways to do that during the year, particularly at the backend of the season with our seasonal parks, but we have modeled in those 18 days into our guidance and that's one of the reasons for the guidance where it's at.

[Tim A. Conder:]

Okay. Thank you, gentlemen.

[Operator:]

Your next question comes from Afua Ahwoi from Goldman Sachs. Your line is open.

[Afua Ahwoi:]

Thank you. Can you hear me?

[Joel K. Manby:]

Yes. We can you hear you great. How are you, Afua?

[Peter J. Crage:]

Good morning.

[Afua Ahwoi:]

I'm good. How are you?

[Joel K. Manby:]

Good.

[Afua Ahwoi:]

Just a few questions. First on the Easter impact to Q1, I know you called it out, but you didn't give a number. Is that something you can sort of help us quantify? And then, you noted that California attendance was positive. Was that a benefit of the Easter or have trends there really changed it beyond the marketing campaign? Is there anything else you can point to that may have sort of caused the changes since then?

[Peter J. Crage:]

Afua, this is Peter. Good morning. On the first question with regard to Easter, no, we haven't called out. What we have done though is, we – I think we pointed out – point out again that the weather in the early part of January essentially offset the business that moved into the first quarter given the Easter shift. But, most importantly in the first quarter, one of the things that most disappointed us was the Brazil, the reduction of Brazilian traffic. So, as we think about the first quarter, we have three extra days of Busch Gardens, Williamsburg in the early part of the quarter, which were very positive for us. Weather offset Easter and then Brazil was a drag.

[Afua Ahwoi:]

Got it. And then, just a follow-up. I noticed – we can't help but notice that at the midpoint of your guidance it would still suggest another down year in EBITDA for 2016. How much of that is just maybe baking in some conservativism given you said you're not sure how the ride will be received in the back half of the year or it's difficult to forecast those trends or how much of it is based on trends that you're seeing right now?

[Peter J. Crage:]

Sure. It's a great question. It's based on trends we're seeing right now, although the last thing we want to do is give you guidance that is unrealistic, we want it to add value to you. So the way we think about it, there are really three main buckets that have informed our guidance. Brazil, as we mentioned, the largest has been a pretty significant drag for us. And if you range this to $15 million to $20 million of drag for the full year, as we mentioned, season pass has been a bit of a drag. As Joel pointed out, we believe we're turning the corner, but making up some of what we've lost here we believe will be difficult, but working hard to do it. That could be a $10 million to $12 million impact to us. And then the 18 days which I just spoke of is a $6 million to $8 million drag. So if you take a look at those drags right now, we possibly could have a $30 million to $40 million drag at a 80% flow-through, you'll see that that – it does inform it has a significant impact on our guidance. Having said that, we're obviously doing things to fill the gap, but that's how our guidance was informed with some conservatism without question.

[Afua Ahwoi:]

All right. Thanks.

[Joel K. Manby:]

I think the only thing that I would add to that is, if the Brazilian issue to us is a more of a macroeconomic issue that we don't necessarily see abating with their economy there and although anticipated a little – that's a big impact versus previous year. You just take those three buckets even without the season pass issue, there's just Brazil and the operating day issue, we would have been more in the $20 million increase range on EBITDA because the Brazilian issue is so large. And it is such a significant part of our first quarter business, because Orlando is such a big part of the first quarter, that I think that certainly drives the range – the slightly larger range of guidance that you saw there and admittedly conservative. But with that large of a macroeconomic issue, it really has impacted us versus previous year. But as far as the other issues of stabilization of the SeaWorld brand, which has been the overhang of previous year, given that what we see as a turnaround coming in Texas, I'm really happy with how we're holding in in California. Without product, it's really just an announcement change and some other issues there I think that is positive. There are some other signs at least the SeaWorld brand hangover is starting to abate.

[Afua Ahwoi:]

All righty. Thank you.

[Operator:]

Your next question comes from Matthew Brooks from Macquarie. Your line is open. Matthew Brooks - Macquarie Capital (USA), Inc. Good morning, guys. I've got a follow-up question on, I guess, the season pass in Orlando. Did you see an increase in local visits, specifically in Orlando, and did it come from passholders, and any idea whether if you did have an increase, whether it was caused by the timing of Easter?

[Joel K. Manby:]

You want me – just, I'll start. We are actually seeing good flow, good attendance from our drive-in overnight and our domestic tourism visitors. It really is international and Brazil and somewhat local. And what we're anticipating is, with the opening of the ride and the marketing of the ride, we'll get more local customers coming in because the ride opening not until June. But our season pass issue -- I think I've already articulated why we think we were down early and our trends are better in Orlando since we introduced the Aquatica season pass offer that I articulated earlier.

[Peter J. Crage:]

And Joel, I don't know if you mentioned. We have moved to a $69 day pass for the parks, which is we've seen some...

[Joel K. Manby:]

Yeah, we've seen...

[Peter J. Crage:]

...some improvement.

[Joel K. Manby:]

That's a very good point. What we felt we were seeing to a lesser degree is some wait for the coaster. So we offered a $69 daily ticket, if they buy and visit before the coaster opens in June, and we're seeing very good uptick there. So I think we've made the mitigating actions to correct what had happened in the first quarter, so we feel good about that. The conservativism is that we're not anticipating ticking that up from what we lost in the first quarter. I do think that's an opportunity with the coasters opening. And if we get good weather and good execution on our marketing and good combo tickets with Tampa, there's a possibility of exceeding what we've said, but we want to be conservative. Matthew Brooks - Macquarie Capital (USA), Inc. Okay. And also can you remind us, you've talked about the rides and attractions you've got sort of beat (33

[Joel K. Manby:]

Yeah. Matthew Brooks - Macquarie Capital (USA), Inc. ...at Mako?

[Joel K. Manby:]

Anthony Esparza, our new Head of Creative, brought him in about 90 days after I got here. He's been tasked with we've got to be better at bringing things out right at Memorial Day or earlier, and it just helps so much with the buy early and save strategy that we are moving to that we've seen very successfully in other regional parks but also in really any great theme park execution, buy early and save. That's a critical component of it. He's on it, he owns it, and we anticipate that starting in 2017 and beyond. As far as attractions, we can't speak to anything that we haven't been public about, but we have a very strong cadence for our SeaWorld Parks. We can do that within our capital requirements and our cash flow requirements. We feel very good we can meet all our other obligations with our plan, and I feel very confident that what we have coming can meet the strategy that we laid out in November. Matthew Brooks - Macquarie Capital (USA), Inc. So there wouldn't be an increase in CapEx, specifically in Orlando to offset.

[Joel K. Manby:]

Well, as we said – we said in the November Analyst Day that we had that we are increasing the cadence in Orlando versus the previous cadence. So instead of kind of every third or fourth year, it would be every other year and, in some cases, two consecutive years. It just depends on the situation. But yes, we are increasing cadence from what was in place two years ago. And in San Antonio and in San Diego, we have announced that it's basically two out of three years we will be in all the SeaWorld brands. Bottom-line is an increasing cadence to assure that we have the product to match our pricing strategies to completely turn the brand around and move it in the right direction.

[Peter J. Crage:]

From a dollars perspective, we're still focused on $175 million to $190 million in CapEx on an annual basis.

[Joel K. Manby:]

And I think in stepping back to kind of maybe the question behind the question is, in Orlando, since we are moving to a more value-based proposition, since we have very rational competitors and they are vastly exceeding the $100 per day mark, we can basically get a full season and market of full season, like our Fun Card, for less than the price of a daily ticket at Disney Universal, which is a very effective strategy, and still do so increasing our net per cap, which is the magic here. But again, people have to realize, we've stayed with Disney Universal for 30 years in the way we've marketed and we need to make sure people clearly understand the value that we offer and that does take a little bit of time. But with that, our capital allocation matches that and I think we can execute. If we were trying to compete at $130 a day ticket, it would take more capital than we're talking about, but we feel confident we can differentiate ourselves with our experience and with our capital and with our marketing to be a clearly differentiated experience from Disney Universal in Orlando. Matthew Brooks - Macquarie Capital (USA), Inc. Okay. Thanks for your time, guys.

[Operator:]

Your next question comes from Alexia Quadrani from JPMorgan. Your line is open.

[James Kopelman:]

Hi. Good morning, guys. This is James in for Alexia. Can you remind us how much – what percentage of the Orlando revenue comes from Brazil versus other international territories? And maybe you could provide some color on how other territories are performing into April and the remainder of the June quarter? I know currency is stabilizing in some other regions, for example, euro. So I'm wondering if there are any other territories that are getting any better for you.

[Peter J. Crage:]

Yeah. This is Peter. In the first quarter – well, for the year, Orlando generates about 30-or-so percent of its attendance from international guests. We don't drill down into each of those countries, but Brazil is the lion's share of that when you compare it to the other countries, so it's significant for us. We're seeing some softness in others, but Brazil really stands out, obviously, because of the currency, the currency difference and we're hearing anecdotally in businesses around Florida and Miami that Brazil is an issue for them as well. So, for the first quarter, it stands out. Although the first quarter is only 15% of our overall business for the year, it is primarily Orlando and Florida, and international is a big component of that, so that's why it stands out. So hopefully that answers the question.

[James Kopelman:]

And just shifting gears to consumer events, could you provide a bit of color on sort of where you're getting the best traction, what do you think is working, not working as we move not just through Q2, but through the rest of the year, and maybe any specific events that you think have the most opportunity to drive revenue going forward?

[Joel K. Manby:]

Well, we continue to execute on our strategy to beef up our events and make them a tradition, sometimes change the marketing hooks underneath them, but certainly make sure our guests know that they're coming and plan for them. We are adding to Halloween and also especially to Christmas, we anticipate some good opportunity at Christmas with – we are bringing out the Rudolph the Red-Nosed Reindeer brand, which is a classic for Christmas, the number one rated television show and we have the rights to that in the theme park. So, that's another way to beef it up. But again, that helps our season pass strategy especially to start making it viable to come back multiple times and increase the value of the ticket. So we don't have any new events planned to introduce this year, but we are beefing up the ones that we have to make them more of a tradition. I think another key thing that we are improving is to have all the hooks within those festivals, at least the key marketable hooks, ready to market in the fall for the following year, so on the buy early and save strategy, we can create a lot of value by communicating the entire package of entertainment value and not kind of leak it out over time, which is not as effective in showing value proposition. And so part of it is our whole strategy of getting everything decided earlier, ready-to-market earlier and get it out there in a consolidated high value package and that has started to happen and will definitely be happening in a stronger level in the 2017 marketing starting this fall.

[James Kopelman:]

Great. Thanks a lot, guys. Thanks for taking the questions.

[Joel K. Manby:]

Sure.

[Peter J. Crage:]

Sure.

[Operator:]

Your next question comes from Felicia Hendrix from Barclays. Your line is open.

[Felicia Hendrix:]

Good morning. Thank you. I understand for the first quarter that there were pressures that offset Easter. But as we think about Easter, I'm just trying to think about it kind of normalized for the calendar shift. So is there any way you could help us to know what attendance looked like April year-to-date, which would basically help normalize that shift?

[Peter J. Crage:]

Sure. As we take a look – first, as you know, Easter shift will negatively impact comparables year-over-year, that's a drag on the second quarter for us. But as we think about looking at March and April together, we've taken that and we've incorporated it into our guidance. We did see some softness, although very low-single-digits, on a normalized basis when you consider those two months, but those have all been incorporated into the guidance; nothing that stands out as a significant issue for us around Easter, as I said low-single-digit declines.

[Felicia Hendrix:]

In attendance?

[Peter J. Crage:]

In attendance, very low-single-digit declines.

[Felicia Hendrix:]

Okay, okay. That's good, because I think a few years back when Easter and spring break overlapped, it compressed visitation. So it doesn't sound like you're seeing that kind of compression this time.

[Peter J. Crage:]

No.

[Felicia Hendrix:]

Okay. And then my next question is just regarding the lower visitation from Brazil, you've made that clear why that is. But I was just wondering, if you could help reconcile that with the visitor traffic that Orlando Airport reports, because international visitation was up double-digits in the quarter to the region. So if you were just only looking at that number, it might not reconcile with how you're talking about Brazil. So I'm wondering if you were also seeing some kind of share shift in the quarter.

[Peter J. Crage:]

Yeah, that's something we've wrestled with too. A couple of facts. The information that we receive on deplanements is all visitation from all international locations, and it doesn't split leisure versus convention. And as you might expect, in the early part of the year, first quarter convention business here is pretty robust. The other thing it doesn't take into consideration is that many Latin Americans will fly through Miami or into Miami. So when we begin to try to correlate that broad data set, the airplane deplanements into what we're seeing in Brazil, it's difficult and not impossible, only because we don't have those pieces of information.

[Felicia Hendrix:]

Okay. That's helpful. That makes a lot of sense. And just a housekeeping follow-up, can you guys help us think through what your CapEx might be for the year?

[Peter J. Crage:]

Yeah. I think, again, that range of $175 million to $190 million I think is good. It all depends on when we pay bills from a cash flow perspective, but I think you modeled in the $175 million to $195 million range, I think it'd be pretty close.

[Felicia Hendrix:]

Okay, great. Thank you.

[Operator:]

Your next question comes from James Hardiman from Wedbush Securities. Your line is open.

[James Hardiman:]

Hi. Good morning. Thanks for taking my call. So if I think about your guidance, you're looking at about a 3% decline in EBITDA at the midpoint. Doesn't seem like you're going to give sort of top-line versus margins, but help us think around that issue, should we think about similar sales declines to EBITDA and holding the margin line? Obviously you had costs sort of redeployed going from protecting the brand to sort of going on the offense with the brand. But what's changed there? And then, maybe just help us distill – obviously you're not going to give us a second quarter number, but it kind of sounds like from everything that I'm hearing versus the full year EBITDA decline, second quarter is going to be dramatically worse than that. It sounds like 6% to 8% type declines just from the Memorial Day shift, and then you've got Easter in there, which would almost suggest back half of the year to be up. Anything you could do to help us think through the phasing of revenues and costs as we go through the year?

[Peter J. Crage:]

Sure. James, Peter. Good morning. On the cost side, as we laid out, we had some OpEx pressure on labor and the shift of Easter, but getting rid of this shift we've had some pressure on labor and the operations. On the flip side, if you tease out all those one-time items that we have flow through there on equity comp, we actually had a reduction in SG&A. So we're still committed to taking out SG&A, perhaps not at the same pace that we talked about in November given the announcement and our view that the reputation spend needs to continue through the end of the year, that may be delayed somewhat and that was a big piece of it. As we've said previously, $15 million to $16 million of reputation spend, if we could take that down $5 million a year over the next three years, that's 30 basis points or more on an annual basis, but we're still committed to that and we're still seeing some success there. With respect to 2Q/3Q, we've been clear that this is really a 3Q story this year. We have a lot of things happening in the second quarter, and the two negatives are obviously the Easter shift as well as 18 less days. The positive is that capital is deployed later in the second quarter. We wish it was earlier, but it isn't. So third quarter really is the quarter where we believe we can make up. So that's not going to necessarily give you percentages because it's too early to tell what those percentages would be, growth or otherwise. But we have built conservatism into this. And as Joel pointed out, the issues that are pressing are not macro issues. And so I think it's important to repeat that.

[James Hardiman:]

That's helpful. And then maybe if we could just drill down a little bit more on the California park. Obviously you called out improving attendance there. I guess help us, given that a lot of people look at that as the bellwether with respect to your brand issues, how would California attendance have looked excluding the Easter shift. Was it still up excluding that impact? Was it better than what we saw in the fourth quarter? And then help us think through the Harry Potter impact on Universal to that California park. I think one of the bigger frustrations of investors in the first year or so, when you guys – post IPO, was getting their arms around that the addition of such a big competitive attraction in the Orlando market, and I think we certainly got that wrong. Help us think through how to think about that in the Southern California park and any sort of color on trends before and after that park opened would also be extremely helpful.

[Joel K. Manby:]

I think from a big picture perspective, the attendance is up there, which we are pleased with, given, as you said, there is a major competitor opening a good attraction in LA. I will say LA versus San Diego is very different than Orlando. San Diego is a very different market, a lot of local visitation into our park there. So I think the impact will be mitigated versus Orlando. And also, any attraction we are putting in, including what's been announced for 2017 and what we are thinking about and planning for in 2018 there, we always test against the major attractions that we know are coming in that market. And we know that we can increase attendance even with those attractions because of either our differentiation or our pricing strategy against it. So we're confident that what we have coming will continue the turnaround there of the SeaWorld brand and including anything that comes in LA from how we've tested it. And just like we tested the announcement and we knew what the results would be or anticipated it, and it's been true to form so far. So I feel very confident of what's happening in California, and I do think we will perform better against a great attraction perhaps there than even in Orlando.

[James Hardiman:]

Okay. And just so we're clear, California was up excluding the Easter shift?

[Peter J. Crage:]

Yeah.

[Joel K. Manby:]

It's very close. I actually don't know that we give that figure out, but it's a good performer. Well, let me just say, we're pleased with the performance there and especially given there's really no product to talk about this year and – against another competitive product. So I think you got to keep that in mind.

[James Hardiman:]

Got it. Thanks, guys.

[Peter J. Crage:]

Sure.

[Operator:]

Your next question comes from Barton Crockett from FBR Capital Markets. Your line is open.

[Barton E. Crockett:]

Okay, great.

[Peter J. Crage:]

Hi, Barton.

[Barton E. Crockett:]

Hello there. I wanted to make sure I understood how you guys think about your cash flow returns in this environment that you're conservatively guiding for a potential EBITDA decline of around 7%. If the low end of your guidance came through, it would seem that free cash flow would be somewhat below what you're paying in dividend potentially. Would you agree with that math? And if that were to play out, how would you guys frame thinking about your commitment to the dividend?

[Joel K. Manby:]

No, we don't agree with that. Our dividend -- we don't feel there's any issue there. But Peter, you want go ahead and answer that?

[Peter J. Crage:]

Sure. No, Barton, I mean obviously on the low end, it gets tighter. I think as you think about $335 million, which we believe at the low end, our objective is to be between interest expense and debt service of say $70 million or $80 million and CapEx in the $175 million to $185 million range, we still have adequate cash to pay the dividend. So no, that dividend commitment is still there. The question becomes would we make repurchases of stock and that really, at the end of the day, depends on where we're trading and what we see as the year goes along. But hopefully that's helpful.

[Barton E. Crockett:]

Okay. And just to kind of elaborate, I mean the math on one of your slide decks that you just put up said you had $79 million of LTM free cash flow in 2016 through March 31, and if EBITDA is down $25 million, that would compare to kind of cash for dividends of $72 million. So that's where the math is coming from, but I understand kind of maybe there are some factors there that give you a little bit more cushion. But in a hypothetical situation where free cash flow is below the dividend for any period of time, are you willing to kind of dip into your liquidity there to support the dividend? Is that the kind of commitment that you have?

[Peter J. Crage:]

Well, first of all, if we came to that point in time, the board would have to evaluate that, and we're not at that point in time. The guidance is just that, guidance, and we're trying to provide something that's valuable given the headwinds that we see. But at this point in time, no, the company and the board are committed to the guidance. And if that were to transpire and we were to see a dramatic change in our performance, we'd evaluate that and make a decision accordingly.

[Barton E. Crockett:]

Okay, all right. And then in terms of the – on the impact of the attractions, you gave us kind of all of the negatives in terms of the Brazil attendance and the operating days. Can you give us any sense of what kind of lift you think you might get from the attractions to help offset the – give us some of the good with the bad in terms of the puts and takes this year?

[Joel K. Manby:]

Yeah. And I think that's where, admittedly, we think the guidance, because we broadened it, it takes into consideration what we see in Brazil and what we've seen in our season pass start and the worst case scenario of not making that up and then the operating days. On the positive side, I think that if we get really good weather and we execute well, we have not anticipated huge increases in our ride attendance growth in that guidance. It's more kind of down the middle. So we execute well and we get some good weather, we can possibly exceed those attendance increases that we're planning in the guidance, and also a strong fall and winter season would be incredible. So there is upside potentially given our historical performance with those kind of rides and attractions, but we haven't built that in.

[Peter J. Crage:]

And Barton, on the numbers, as Joel pointed out, we'd likely see lift, no question, from the rides. I've outlined some of the headwinds, the micro headwinds that we're seeing. And if you work through that math, you'll see that those headwinds even with growth. If we can get past those headwinds, we will see growth. If we can't get past those headwinds, even with that growth as a result of capital, we'll be dipping down well into that guidance range. So just from a numbers perspective, it plays out and it makes sense.

[Joel K. Manby:]

Because if you go back to those numbers Peter articulated earlier, if you just back out the $15 million to $20 million revenue impact of Brazil alone and just the operating days, you are talking in the range of $20 million to $30 million in EBITDA impact, and that's in comparison to last year. So you back that out, the rides are getting good cash flow growth and good returns on their investment. Now, are we going to accept that? Are we trying to mitigate against that? Absolutely, but we also want to – based on what we see out of Brazil in the first quarter, we didn't want to put out something too optimistic given that.

[Barton E. Crockett:]

Okay. And then if I could just squeeze in one other, I mean last year in May the San Antonio Park was basically closed down for a good chunk of the month because of essentially hurricane-like conditions. Presumably that won't happen again this year, knock on wood, can you give us a sense of how big of an impact that really extraordinary weather was for you guys last year in May?

[Joel K. Manby:]

Well, we articulated last year it did have a significant impact. Houston had huge floods two weekends ago, which was concerning. But so far, the weather has been slightly better in Texas. Any other comments on that?

[Peter J. Crage:]

Yeah. I think at the end of the year, we looked at the entire year and it had a significant impact. We would have, I think if you remember at the end of the year, we would have – I think we articulated we would have met guidance for the full year had we not had the impacts in Texas. So we're really excited that Texas is coming back.

[Joel K. Manby:]

Yeah.

[Barton E. Crockett:]

Okay, great. Thank you.

[Joel K. Manby:]

And we also have good products this year. It's a product issue as well; you've got to have good things to talk about. And I just saw, as I said in my opening comments, Discovery Point is just beautiful and it also reopens the shark habitat that we have there, shark aquarium. And we will do well in Texas, I believe.

[Operator:]

Your next question comes from Scott Hamann from KeyBanc Capital Markets. Your line is open.

[Scott W. Hamann:]

Yeah, thanks. Good morning. As we kind of think about the year and what's contemplated in your guidance around pricing versus – or per caps versus attendance, it seems like you've taken a little bit of incremental promo early in the year in reaction to some of the issues you highlighted. So how should we think about what per caps versus attendance look like this year? And maybe help understand what's an artificially impact there with these incremental promotions and how we should think about that trend longer term?

[Joel K. Manby:]

Well, from a promotional standpoint overall, our overall strategy is to ease ourselves off of those and that should obviously drive a per-cap improvement, and we've seen some of that already in Orlando and Tampa. However, it's offset to some degree by the Aquatica gate opening in Texas, which will increase attendance, take down the per cap a little bit, but obviously our numbers and our research say that, overall, that's a accretive decision and so far, in 30 days or less of opening, it has proven that to be the case. You had any other comments?

[Peter J. Crage:]

The other is international.

[Joel K. Manby:]

Yes.

[Peter J. Crage:]

Particularly, the Brazilian...

[Joel K. Manby:]

Yeah, that makes sense.

[Peter J. Crage:]

...spends a lot of money when they come here. And if that continues, that obviously has a depressing impact on the per-caps we're trying to turn by virtue of less discounting, and that's been an unfortunate occurrence for us.

[Scott W. Hamann:]

Okay. And is legal expense something this year that's a material impact on your business?

[Joel K. Manby:]

We don't see it materially changing this year. It's in the guidance, we've built it in. We certainly hope over time and – not hope, we plan that it will come down, but I think this year is still a transitional year.

[Peter J. Crage:]

But to level set, even if we were to eliminate all of that noise, we're in the low single-digit millions.

[Scott W. Hamann:]

Okay. Thank you.

[Operator:]

We have no further questions at this time. I will turn the call over to the presenters.

[Joel K. Manby:]

Well, thanks a lot. I just want to close with a broader point of view here. I want you guys to leave the call knowing that we feel that we reviewed our business very clearly with our board, a strong strategic review. We shared that plan with you in November. We've done a ton of work with the team building some promotions from within, some bringing from the outside, and we've made a fundamentally game-changing announcement in March that cleared the runway and the data is reflecting that very positively. We've also made some very important, I think, transitions on the board as well with two strong people coming in on the board. So all those combined, I want to reiterate, we're very confident that we are turning the corner in this company and the stabilization does continue. I understand that the guidance has a wider range and I'm sure people would love it to be higher. However, some of those are macro and a big portion of it in Brazil. The majority is a macro issue that we don't feel that we can completely mitigate and we are doing our best. But the other issues of the SeaWorld brand, especially in Texas and California, are seeing positive results there. And on the controllable issues, we feel like we have a solid plan, we're building a foundation, we're establishing ourselves for the future with new partnerships, new attractions, new positioning of the company. And we're very confident that this is the transitional year for us and we feel very good going forward and feel like we have a lot of solid things ahead of us. So we appreciate your support, we appreciate the great questions and look forward to continuing dialogue. Thank you so much.

[Operator:]

This concludes today's conference call. You may now disconnect.