SeaWorld Entertainment (SEAS) Q1 2017 Results - Earnings Call Transcript

SeaWorld Entertainment, Inc. (NYSE:SEAS) Q1 2017 Earnings Call May 9, 2017 9:00 AM ET

Executives

Mark Trinske - SeaWorld Entertainment, Inc.

Joel K. Manby - SeaWorld Entertainment, Inc.

Peter J. Crage - SeaWorld Entertainment, Inc.

Analysts

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Barton Crockett - FBR Capital Markets & Co.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Timothy A. Conder - Wells Fargo Securities LLC

Matthew Brooks - Macquarie Capital (USA), Inc.

Edward Wendel - Barclays Capital, Inc.

James Hardiman - Wedbush Securities, Inc.

Christopher Prykull - Goldman Sachs & Co.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the SeaWorld Entertainment's First Quarter 2017 Financial Results Conference Call. My name is Denise, and I will be your conference operator today.

I would now like to turn the conference over to Mark Transkei, SeaWorld's Vice President of Investor Relations. Please go ahead, sir.

Mark Trinske - SeaWorld Entertainment, Inc.

Thank you, and good morning, everyone. Welcome to SeaWorld's first quarter 2017 earnings conference call. Today's call is being recorded and webcast live. A press release was issued this morning and is available on our Investor Relations website at www.seaworldinvestors.com. Replay information for this call can be found in the press release and will be available on our website following the call.

Joining me this morning are 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 2017 financial results, and then we will open up the call to your questions.

Before we begin, I would like to remind everyone that our comments today will contain forward-looking statements within the meaning of the federal securities laws. These statements are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward-looking statements, including those identified in the Risk Factors section of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. These 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 adjusted EBITDA and free cash flow, which are non-GAAP financial measures. More information regarding our forward-looking statements and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are included in our earnings release available on our website, and can also be found in our filings with the SEC.

Also, after the conclusion of the call today, if you have any additional questions, please feel free to contact SeaWorld Investor Relations at 855-797-8625.

Now, I would like to turn the call over to Joel Manby. Joel?

Joel K. Manby - SeaWorld Entertainment, Inc.

Thank you, Mark, and good morning, everyone, and thank you for joining us. We are now in the second year of our five-point strategic plan to improve performance and create value for our shareholders, and strengthen our foundation for the future.

As a reminder, the five points of our plan are: one, repositioning the SeaWorld brand from animal entertainment to experiences that matter; two, delivering distinct guest experiences that are fun and meaningful, and deliver on our new brand positioning; three, pursuing organic and strategic revenue growth; four, addressing our challenges; and five, enhancing financial discipline.

We continue to make solid progress in key areas of our plan, and have strengthened our position in advance of the seasonally-important second and third quarters. With our strong attendance in April, we have recaptured the entire Easter attendance shift. On a year-to-date basis through April, attendance is essentially flat compared to the first four months of 2016. Remember, this is without any new rides or major attractions except for InvadR at Busch Gardens Williamsburg. Also, season pass sales revenue improved and are up about 6% from the same period last year. This gives us a solid base from which to grow for 2017 as we introduced our strong lineup of new rides and attractions this summer. I'll give you more detail on that later in the call.

Our early attendance numbers to-date and our slate of upcoming new product offerings gives us confidence for the remainder of the year. And one of the points of our plan is enhancing financial discipline across the organization, and we made significant progress this quarter. We proactively managed our debt which Peter will discuss in a moment. And we are on pace to achieve our net cost savings target of $40 million by the end of 2018.

We also believe our strategy and progress received a strong vote of confidence in March with the announcement of the acquisition by Zhonghong Zhuoye Group of Blackstone's 21% stake in the company at $23 per share, a significant premium to our current price.

In connection with the closing which happened yesterday, the board will appoint Mr. Maruyama and Mr. Wang to the SeaWorld board of directors immediately after this year's annual meeting of shareholders. We believe that as board members, Mr. Maruyama and Mr. Wang will provide the perspective of a long-term shareholder and substantial experience in global themed entertainment and business development in the United States and China.

Additionally, we are exploring international expansion possibilities beyond Abu Dhabi and our agreements with Zhonghong to support the creation of concept designs and provide development analysis for theme parks, water parks, interactive parks, along with supporting the visioning of a preliminary family entertainment center concept enable us to evaluate potential development opportunities with Zhonghong in China, Taiwan, Hong Kong, and Macau over the next three years.

These agreements will utilize SeaWorld's existing business development and design teams efficiently making use of our resources while generating approximately $14 million in revenue for SeaWorld over the next three years. We look forward to a long-term highly-constructive relationship with Zhonghong.

With that, I will turn it over to Peter to discuss our financial results and provide some additional context. I'll then return to give you a look ahead and walk through some of our exciting attractions and initiatives that we have underway for this summer that give us increased confidence in our improved performance. Peter?

Peter J. Crage - SeaWorld Entertainment, Inc.

Thanks, Joel, and good morning everyone. On the call today, I'll touch briefly on the first quarter but given the impact of the Easter shift, and the relative size of the first quarter which represents less than 15% of our annual attendance, I'll make the rest of my prepared comments on the first four months of 2017 in order to provide context for our view of the business as we enter our critically important second and third quarters.

As Joel mentioned, attendance through April is essentially flat to 2016 as a result of strong attendance in April which compensated for the Easter attendance shift. Total revenue per capita for the first quarter decreased slightly to $66.41. This was primarily due to a decline in admission per capita driven largely by the impact of the Easter shift which caused some of our international and domestic attendance to shift into the second quarter.

Additionally, admission per capita also declined due to increased utilization of season pass products and promotional ticket offerings. As Joel mentioned, though, we are encouraged to see our season pass sales revenues up almost 6% thus far this year. For more details on our first quarter alone, please refer to our earnings release.

On our last call, we mentioned some softness at our San Diego park as a result of the end of the One Ocean orca show prior to the opening of the new Orca Encounter and in advance of our new product coming online this summer.

We took action to address this softness by adjusting our marketing and pricing in California. Specifically, we launched the All Day Orca Play campaign and accelerated a weekday and weekend ticket promotion, and a targeted media campaign in the California market. We are pleased with the results these measures have yielded in April and are encouraged that we have stemmed the attendance decline in San Diego. We now look forward to the opening of the new Orca Encounter along with Ocean Explorer and Electric Ocean in the second quarter.

We have also seen softness in our UK visitation. We are keeping a close eye on this trend and have taken steps to soften the impact. However, keep in mind that our UK guests represent approximately 5% of our annual attendance, and are concentrated at our Florida locations.

With regard to our Latin America visitation, in recent weeks, we have seen a slight improvement and are cautiously optimistic this trend will continue throughout the year. However, we do not expect this visitation to return to past levels for at least a couple years.

On the cost management side, following up on our actions in the fourth quarter of 2016, we are taking additional steps on operating and SG&A costs directly through a needs analysis and deploying process efficiency activities in both our park operations and administrative disciplines. Our ambassadors are engaged and committed to delivering exceptional guest service while becoming a more efficient organization. For the first quarter, we did see additional savings in operating costs year-over-year, understandably, some volume based. However, we are on track to achieve our net annualized savings target of $20 million by the end of this year and $40 million by the end of 2018.

And finally, in March, we took an important step in strengthening our balance sheet. We renewed and increased capacity on our revolving credit facility to $210 million and refinanced $1 billion or two-thirds of our existing term debt. Our new term loans are competitively priced and stagger our debt maturities more effectively, greatly enhancing our financial flexibility. We will continue to evaluate our capital structure and take advantage of market dynamics to build even more flexibility over time as we focus on improving operating cash flow.

Now, turning to our guidance for the year. Based on our results to date, our positive outlook for the seasonally important second and third quarters, continued progress on our cost optimization program and considering potential impacts from UK visitation we are already seeing, we expect full year adjusted EBITDA for 2017 to be in the range of $330 million to $360 million.

We have an exciting lineup of new product at our parks for the upcoming season, and we are intently focused on running a more efficient business. Judging by the great response to our newest attraction at Busch Gardens Williamsburg, our positive season pass sales revenue numbers, and the progress we are making on our cost optimization efforts, we are encouraged and look forward to a successful 2017.

Now, I'd like to turn the call back to Joel.

Joel K. Manby - SeaWorld Entertainment, Inc.

Thank you, Peter. Multiple new initiatives are now underway, and they give us confidence that we will deliver improved performance for the remainder of the year. The board and management are intensely focused on execution, and we are moving with urgency to continue our progress and achieve the clear goals we have established to increase value for our shareholders. (12:10-13:53)

Operator

We'll pause for a moment as questions come into queue.

Joel K. Manby - SeaWorld Entertainment, Inc.

Excuse me, ma'am? Yeah. So just let me go and then we'll go into the queue. So, what I was saying is, we have a number of initiatives that we're intensely focused on execution. And as I've discussed before, generating stronger organic growth is the absolute key focus on our five-point plan.

Based on our focused work with a leading pricing consulting firm, we've already launched tactical pricing initiatives this year and we'll be launching additional strategic initiatives to drive organic growth by increasing our per capita yields.

We have launched dynamic pricing initiatives for our general admission products in Virginia. Next week, we will implement our dynamic pricing initiatives for our general admission products in Texas and in Pennsylvania. With this combination of direct price increases and dynamic pricing initiatives, we anticipate achieving an admissions per-cap increase in 2017.

Creating guest experiences that are fun and meaningful is also a critical component of our five-point plan because this is what drives attendance growth. As part of our fundamental repositioning of the company, we have redeployed our capital towards developing the ambitious schedule of new rides and attractions that are coming online this year.

We have worked with great urgency and have brought these exciting guest-facing products from design to market in only an 18-month timeframe, which is half the industry average. These attractions, which will premiere over the next month or so, represent one of the most robust and exciting lineups of new rides and attractions ever coming on line across our portfolio of parks and this is one of the reasons we are so confident about the upcoming quarters.

In the future, we expect to open new rides and attractions earlier in the year, but in this case, we accelerated capital into 2017 to try to turnaround the SeaWorld brand faster. As Peter mentioned, Busch Gardens Williamsburg launched InvadR on April 7 and I'm pleased to report that the response have been very, very positive. As a matter of fact, Busch Gardens Williamsburg set an all-time attendance record for April, partly as a result of the great interest in this exciting new ride, and this ride was our most efficient coaster spend as we continue with our capital investment strategy of doing more with less.

Now, in San Diego, we're launching our most robust lineup of new product offerings in the history of this park. In late May, it begins with the opening of a new realm called Ocean Explorer and the new Orca Encounter. The Orca Encounter will provide guests a dynamic new way to experience these majestic and complex animals and all within a more naturalistic educational setting.

Nearby, at the new Ocean Explorer area, families will be able to set up close to some of the nation's and ocean's most fascinating creatures in our new exhibit called Sea Bases as well as enjoy five new rides including Submarine Quest, our new interactive marine submarine ride.

And moving to SeaWorld San Antonio, we're launching the new Wave Breaker rollercoaster. This jet ski-style ride launches over water twice for a breathtaking thrill ride while bringing awareness to the efforts of our animal rescue teams. On Wave Breaker, guests will assist in helping ill, injured, orphan, and abandoned animals around the world similar to the rescue efforts featured on our Emmy award-winning SeaWorld Rescue television show.

Additionally, we're pleased to be launching three new virtual reality experiences planned over the next 12 months. In June, at SeaWorld Orlando, we are reintroducing Kraken, our popular rollercoaster with a whole new virtual reality experience called Kraken Unleashed, and it will feature a new digital overlay with VR headsets to deliver a high-performance digital adventure. This creates a whole new experience at a fraction of the cost of the new coaster.

In San Diego, we will also launch the first of our new deep sea VR digital experience called Orca 360. This 3D upcharge experience will offer our guests a chance to be up-close and, for the first time ever, underwater with our killer whales. And in 2018, we will be launching a first-of-its-kind VR motion ride experience at Busch Gardens Williamsburg, featuring the fantastic story worlds of Ireland.

And we're very excited about all three of these VR attractions. And as we learn from their rollout, we hope to accelerate the use of immersive digital experiences so that we can continue to offer innovative new attractions with less capital investment than in the past.

In addition to VR, we continue to enhance our festival strategy to increase in-park per capita spending and drive increases in season pass sales and visitation. Now to that strategic end, we have launched a new Summer Night initiative with the launch of our new Electric Ocean event, which targets our critical San Diego and Orlando SeaWorld markets.

Electric Ocean features bioluminescent lighting, music, live entertainment, fireworks, and fountain displays to bring the brilliant colors of the sea to the skies above the park. This should give our guests a great reason to stay later at night, spend more money, and energize our SeaWorld parks.

Also, we brought our popular Seven Seas Food & Wine Festival to Orlando. This top-performing festival is now at all three of our SeaWorld parks.

So, as you can tell, I'm very confident and excited about our new rides and attractions coming in 2017.

So, in summary, with the strong performance we have seen in April, our improved financial foundation as a result of our debt refinancing, and our new exciting rides and attractions, we are well positioned to drive growth this summer and anticipate this would be the first year of adjusted EBITDA growth for SeaWorld since 2013.

And with that, I'll open it up for questions.

Question-and-Answer Session

Operator

Your first question comes from Mike Swartz with SunTrust. Your line is open.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Hey. Good morning, everyone.

Joel K. Manby - SeaWorld Entertainment, Inc.

Hey, Mike.

Peter J. Crage - SeaWorld Entertainment, Inc.

Good morning.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Hey. Just wanted to touch on the EBITDA guidance for the year, and get a greater sense I guess. Looking over the next three quarters, it would imply double-digit growth in EBITDA. Obviously, we haven't seen that in a while. So, just maybe you could layout some of the larger drivers into how you think we get there?

Peter J. Crage - SeaWorld Entertainment, Inc.

Sure, Mike. This is Peter. As Joel and I pointed out in the call, the second and third quarters for us this year are, obviously, critically important. They deliver, on an average basis, two-thirds of our revenue and, given our operating margin leverage, the vast majority, if not all, of our cash flow for the year. And given the lineup of capital that we have, we're very encouraged that we'll deliver this year. Last year, we deployed capital. This year, we're deploying more capital with less money. So, the second and third quarters are critical for us and we certainly expect to outperform in these two quarters.

Secondly, as we pointed out in the call, we are getting really nice traction in our cost optimization efforts. As I pointed out, the first quarter had some volume-related cost impacts, but we are seeing strong performance in that area and we expect to be at that $20 million that we had guided, and much of that will happen in the second and third quarters. But that's all tempered by what we're seeing in the UK. We're seeing some softness. We have some forward view on that at Discovery Cove. So, we're being very cautious. We're doing things about it. But those three main components are what get us to our guidance.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Okay. That's helpful. And then just sticking on the guidance, does the $330 million to $360 million include any add-backs from the cost optimization initiatives?

Peter J. Crage - SeaWorld Entertainment, Inc.

No, they do not in this year. We are focused on reducing costs on a run rate basis. And if you'll remember, just to remind you, that back in 2016 we did pull forward $10 million of cost reduction that we accomplished on December 6. So, $10 million fits in the $330 million. But as you look forward to the end of 2017, that full $20 million on a run rate basis, our goal is to have that flow-through adjusted EBITDA.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Okay. That's helpful. And then just last question, on the new Zhonghong relationship, could you talk about maybe how you're thinking about potential park development in Asia and what maybe the timeline we should think about around anything that could be announced there?

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah, sure, Mike. First of all, we started this relationship in really a commercial discussion. Since we had Abu Dhabi settled and started, we wanted to then go to the next biggest market, which is China. As we talked to them, we saw they were a very strong, really mall developer, real estate developer. They wanted expertise in the theme park business and a strong brand, and it was a good marriage from that standpoint.

From a timing standpoint, we are just beginning the actual negotiations on an affirmative deal for development in that country. That's what that three-year consulting and review process is that we detailed in the 8-K. It will generate about $15 million in revenue which is different in our Abu Dhabi deal. We weren't getting paid along the way with firm deliverables. In this one, we will get paid along the way with firm deliverables.

I would say it's at least five to seven years before you'll see a theme park of any kind, but we are also looking at a FDC type strategy large in that country, very, very, very early stage. So nothing you can really model. I think the real opportunities are too far out. But it does show real strength in the brand. It shows that the Middle East and Asia are both very interested in expanding SeaWorld as a capital-light strategy. It fits with our resources and what we can do. So, we're very excited.

And one last point on Zhonghong, Yoshi Maruyama, who is one of the new board members, has extensive experience domestically as well with he was with Universal Studios. He has been with DreamWorks. He's a Japanese-American who is an incredibly bright guy and has a lot of experience in this industry domestically and internationally. So that's one point I wanted to make.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc.

Okay, great. Thanks. That's helpful.

Operator

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

Barton Crockett - FBR Capital Markets & Co.

Okay. Great. Thanks for taking the question. I think of one of the things that's been just a real kind of concern for a lot of people is the new attractions that are coming to Orlando from Disney with the Avatar, World of Pandora and Universal building this new Volcano Bay water park right by your water park, I think. And so, I was encouraged that you were able to talk to the growth in the season pass and the stability in attendance through April and to embrace an EBITDA guidance range that is not terribly dissimilar with where we were sitting. But I was curious. Do you see any impact on these new attractions? Is it having any impact on people's interest in buying a season pass for SeaWorld, visiting SeaWorld? Is it too early to say? I mean, what are you seeing down there?

Joel K. Manby - SeaWorld Entertainment, Inc.

Hey, Barton. It's Joel. Good to hear you. First of all, from a macro, and I'll answer your question. From a macro perspective, I've lived in this market now for two years. One, the first year was a pretty strong market with Harry Potter, still hangover. Last year, it was pretty soft market. I can tell you I'd rather be living in a strong market than a soft one. Hotel occupancy was down last year. Brazil hit the whole market pretty hard. And it causes a lot of issues, more intense pricing and competition.

I believe when the market is strong and Disney and Universal are bringing people from all over the world and country, it actually is a positive thing for the market. I do believe that the rising tide raises all boats. Having said that, I also think that we do. We are shifting and have shifted, as I've articulated, a unique value proposition and strategy within the Orlando market. I do think it's easy for investors or analysts to underestimate SeaWorld for many, many years, 40 years. Was pricing right with those two competitors? Universal and SeaWorld were very similar in their approach.

Now, Universal and Disney are clearly both a sequestration strategy, and our strategy is different. We're growing market share, 300 miles and in. It is a stronger value play. Our tickets are purposely below theirs, and when they are rational competitors, they have to increase price. They have to get a return on their massive investments, and we're carving out a different niche where we know we can win, and that's where we're gaining market share.

Domestically we're holding firm, and we're trying to get our fair share of carving out a day from those who come for Universal and Disney. And so far, that strategy appears to be working with increased season pass sales in Orlando in a year when those customers know that those huge attractions are coming into town. So obviously, it's too early to say whether or not it's clearly a success, but so far so good. And we'll continue to monitor it. And certainly, we'll always adjust if we need to.

Peter J. Crage - SeaWorld Entertainment, Inc.

The only thing I would add to Joel's point on increased demand, the rising tide, is on the water parks. Supply came out of the market with the Wet 'n Wild, Barton, closing. So supply came out of the market and we expect that to bode well for our water park.

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah. As we said in the past, they're taking out about 1 million capacity with Wet 'n Wild shutting. So, even if they do 1.5 million, that may be 0.5 million coming out of the market. If it doesn't close, there's five other water parks in the market equally distributed. We don't anticipate that being a huge impact. We built that into our guidance. But we actually, we welcome a strong market.

Barton Crockett - FBR Capital Markets & Co.

So just to understand on that, the water park commentary. I mean, the Wet 'n Wild is closed for the first half of the year. So that gives you some capacity. Is Volcano Bay kind of fully replaced in your view or is there going to be a smaller park or a larger park than Wet 'n Wild?

Joel K. Manby - SeaWorld Entertainment, Inc.

What I meant is, even if they replace a 1 million Wet 'n Wild with a 1.5 million plus Volcano Bay, I don't know that, I'm just horseshoeing it by looking at it and see how big it is, that's a 0.5 million new water park tickets in this market that may come out of other people, other water parks. And there's five other water parks. I'm just equally distributing the "pain" amongst five other parks.

Barton Crockett - FBR Capital Markets & Co.

Okay.

Joel K. Manby - SeaWorld Entertainment, Inc.

Now primarily their strategy is to package with their hotels. But still having said that, we know its competition, but again we're going strong after the 300 miles and in customer. I think they're going more after the domestic customer staying a week at their hotels. And it's two very different customers with a different value mindset.

Barton Crockett - FBR Capital Markets & Co.

Okay. And then following up on your commentary around the UK. So, last year, the LatAm attendance headwinds kind of snuck up on us and ended up being, I think, a one to two percentage point kind of drag for the year. That does seem to be leveling out, which is great. But what you're seeing in the UK, does it look as bad as what we saw in Latin America, not as bad? Is your UK attendance exposure comparable or somewhat different. Can you give us a little bit more color there?

Joel K. Manby - SeaWorld Entertainment, Inc.

Sure. Absolutely. Let me start there and Peter you add if I miss something. It is, A; it's not as bad; B; we have the same size exposure but it's clearly not as bad. The exchange rate hit in Brazil was 50%. So far, it's only been about 15% to 20% for Brexit. They don't have the government – well, at least at this point, the same government upheaval that Brazil had.

At a more macro level, I think we have also adjusted more quickly this time. Frankly, we are already making strong moves in Discovery Cove. Just one example, it's a small park as you know, high per-cap, small volume. But we saw early some weakness in the advanced ticket sales for UK and to Discovery Cove, so we just shifted marketing dollars heavily to a local and domestic market. We actually had a record year in April at Discovery Cove even though that UK market was down. So, we have adjusted faster there.

I think for the theme parks, now I think – I know for the theme parks we haven't seen that impact yet, but we are already making moves either through trying to increase more share in the 300 mile and in radius or bumping up our domestic spent to offset anything that's happening in the UK. We are also adjusting pricing in UK to make sure we're very, very aggressive in our pricing. The marketing is done mostly by distributors so we can't adjust a lot there. But hopefully, that gives you some color. We were on top of it, and everything that we see is incorporated in that guidance. And that's why I think at the low end, it maybe a little lower than some anticipated, it's mostly because of that issue.

Barton Crockett - FBR Capital Markets & Co.

Okay, great. Thank you.

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah. You're welcome, Barton.

Operator

Your next question comes from Steve Wieczynski with Stifel. Your line is open.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

15% drop in attendance. Hey. Good morning. How are you guys?

Joel K. Manby - SeaWorld Entertainment, Inc.

Hi, Steve. Start over. You got cut off.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

All right. Can you hear me okay now?

Joel K. Manby - SeaWorld Entertainment, Inc.

Yup. We can.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay. So, when you guys look at the 15% drop in attendance in the first quarter, is that pretty much what you guys were looking for internally, or did that surprise you one way or the other?

Joel K. Manby - SeaWorld Entertainment, Inc.

We had a range and it's a little higher – it is higher than we anticipated. The good news is we made it all back in April. So, the April shift was a little bigger than we thought. I think that's pretty much true for our other competitors. Well, if you look at Six and Cedar, I think they had a similar dynamic, but the good news is we made it all up. So, Peter, do you have any other?

Peter J. Crage - SeaWorld Entertainment, Inc.

No, no, I think that's, as we mentioned, San Diego was a bit soft. We took action there, but Joel covered it.

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah. At least on the issue of share.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay, got you. And, Peter, can you give us the deferred – your deferred revenue balance at the end of the quarter?

Peter J. Crage - SeaWorld Entertainment, Inc.

At the end of the quarter – let me get that for you, hold on – essentially flat. I think it was off maybe $1 million, essentially flat to the third quarter of 2016. I don't have the absolute number in front of me.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay. I'll get it. I'll get it later. It's fine.

Peter J. Crage - SeaWorld Entertainment, Inc.

Yeah. It'll be in the Q tomorrow. That is flat for last year.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay. And then last question, can you guys touch on the 28% to 30% adjusted EBITDA margin and how you guys are feeling around that target range right now? And maybe I think what I'm trying to get at here is more around the timing. You guys said that's a near-term target. And just maybe what's your definition of near-term is and kind of your updated thoughts around that.

Peter J. Crage - SeaWorld Entertainment, Inc.

Sure. We feel pretty good about it. As I mentioned earlier, we're seeing traction and we're on cost optimization. The team is committed. They're energized around it. And when we say near-term, we think of that through this announced cost optimization program through the end of 2018. Obviously, we expect to grow revenue over that period of time and, given our margin leverage, that will have some impact on margins as well. But 2018 – by the end of 2018, our goal would be to be in that range.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay, great. Thanks, guys. Appreciate it.

Joel K. Manby - SeaWorld Entertainment, Inc.

Thanks, Steve.

Operator

Your next question comes from Tim Conder with Wells Fargo. Your line is open.

Timothy A. Conder - Wells Fargo Securities LLC

Thank you, gentlemen. A couple of things here. It doesn't sound like the UK attendance decline in absolute terms was that large. Just wanted to confirm that or if it was noticeable, if you have any quantification of that. And then, on the season passes, are you seeing that growth across all brands or is it concentrated in the SeaWorld brands? And then maybe just any color by each of the three SeaWorld parks.

Peter J. Crage - SeaWorld Entertainment, Inc.

Hi, Tim. It's Peter. On UK, obviously the UK visitation is impacted by the Easter shift as well. We saw some of that come back, but we still saw a deficit. And we also have a view, although smaller numbers on our Discovery Cove product, of which the UK are buyers of that product. So, the first quarter is difficult to draw conclusions on UK. We're looking at, in our communication with investors and the Street, is about what we're seeing through, and then what we're seeing on a forward-looking basis. So, hopefully, that's helpful.

Joel K. Manby - SeaWorld Entertainment, Inc.

On season passes, it's almost across the board. And it's not just SeaWorld parks, it includes the Busch parks as well.

Timothy A. Conder - Wells Fargo Securities LLC

So, fairly balanced, Joel, is what you're saying?

Joel K. Manby - SeaWorld Entertainment, Inc.

Yes. Yes, fairly balanced.

Timothy A. Conder - Wells Fargo Securities LLC

And, Peter, just do you have a rough number what you've got built in for the UK attendance shortfall into the adjusted EBITDA guidance that you provided?

Peter J. Crage - SeaWorld Entertainment, Inc.

All I can say on that is that, as we pointed out last year on Brazil, Brazil, as Joel pointed out, was deeper, a bigger, a larger exchange rate issue that we lost in the second quarter 45% to 50% of our prior year visitation, and during the year, on a 45% to 50% exchange rate decline. Joel pointed out that we have, right now, about a 15% to 20% exchange rate decline. So, we're correlating, at least in our analysis here, high and low range, taking those sort of metrics into consideration. So, hopefully that's helpful.

Joel K. Manby - SeaWorld Entertainment, Inc.

And I think the only thing I would add is because it's so early in the year, and because so far we've made up for that weakness at Discovery Cove by taking aggressive action. At the high end of our guidance, we're really not assuming any impact there.

So, it's so early, we're just trying to be very transparent, but we've built it into our guidance that that high end of the guidance is really seeing we can make up for it in other ways, which we're absolutely trying to do.

Timothy A. Conder - Wells Fargo Securities LLC

Okay. Okay. And then a little color, gentlemen. You called a free ticket promotion in the release. Just a little color on that, the details, how long that's running? And then on another subject, hotel partner update, just where – any update on how that's progressing?

Joel K. Manby - SeaWorld Entertainment, Inc.

Second one?

Peter J. Crage - SeaWorld Entertainment, Inc.

The second one, I'm sorry.

Joel K. Manby - SeaWorld Entertainment, Inc.

Ask the second one again.

Peter J. Crage - SeaWorld Entertainment, Inc.

Hotel partners?

Joel K. Manby - SeaWorld Entertainment, Inc.

Because you cut out a little bit.

Timothy A. Conder - Wells Fargo Securities LLC

Yeah. The hotel partner update and looking or developing hotel partners and a couple of options.

Joel K. Manby - SeaWorld Entertainment, Inc.

Absolutely. Yeah. I'll take both of them. And the first one, I think it's – this is a really critical point. Yes, we did call it out, but actually our strategy, as you all know, to increase net admissions per-cap, which we have to do, the first step is to stop the discounting that went on when our brand was the most damaged and we're easing ourselves off of that. We have a very specific plan to do that. In this particular case where we got hurt the most, frankly, was not a new promotion. It was just increased use of something that had been in place that we hadn't pulled back on yet. It was a bring-a-friend promotion. The weather was fantastic, frankly, in the first quarter in Orlando, and the people utilize that free bring-a-friend ticket more than we had anticipated. That's all it was. We are not adding new promotions. We're dialing them back as our brand strengthens, as our product strengthens. That's a very specific part of our strategy.

On the second piece, look, we have activity going on. We have enough property to build, five hotels. We have at least circle plans, if not definitive plans, on which we're moving. We have announced Evans in San Diego. The board feels and I'm a board member, we all feel the same way. It's difficult to pull the trigger and start moving harder on that until we've absolutely shown you and us that the core business has turned and moving forward. And I assure you that there's a very, very small group of people, literally talking two people who are on that, but we're moving, and we're ready to go if we just get the right traction and move – and I'm excited about it. If you could see the opportunities, it's very engaging, very fun. And it will bring incremental and more sticky EBITDA.

Timothy A. Conder - Wells Fargo Securities LLC

Okay. Joel, thank you for that on those two answers, very, very helpful. I appreciate it.

Joel K. Manby - SeaWorld Entertainment, Inc.

All right. Thanks so much, Tim.

Operator

Your next question comes from Matthew Brooks from Macquarie. Your line is open.

Matthew Brooks - Macquarie Capital (USA), Inc.

Good morning, guys.

Joel K. Manby - SeaWorld Entertainment, Inc.

Hey, good morning.

Matthew Brooks - Macquarie Capital (USA), Inc.

A couple of questions. First one, can you quantify at all the revenue earnings impact from the change in the orca show in San Diego, perhaps any sort of initial thoughts you have on what might happen in Orlando next year, I mean, you would have learned a little bit from what happened in San Diego, perhaps the impact would be less.

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah, absolutely. I will say, we had impact, as you know and you can tell from some of the revenue rents, the rent to the city. However, we have made huge moves quickly to stabilize that situation out there. We pulled forward marketing. We started marketing our new All Day Orca Play, which is something we – it's a marketing approach that we put in place quickly.

We're very pleased with where we are in San Diego now. And with our product all coming the end of May, 1st of June, we're very, very confident about where we're going to end up in San Diego. As far as applying that to Orlando, first, we know we can do a better time in closing the gap between closing one show and opening the others.

The other thing that happened, we can't control, frankly, what the press does and even though we were marketing the new Orca Encounter, they focused 2,000 articles on the last of the One Ocean show, and 2,000 press impressions is hard to overcome. But we are learning from that and we will apply that to Orlando and how we market the new Orca Encounter there.

Matthew Brooks - Macquarie Capital (USA), Inc.

Okay. That's good to know. And second, you've got this goal of a 20% return on the capital deployed. Based on your guidance that you've got so far, does it look like you're going to meet that target this year?

Peter J. Crage - SeaWorld Entertainment, Inc.

Yeah. We obviously, we fully intend to. The capital comes on. We look at that in over a year, a 12-month basis. The capital is coming on a little in June, May and June. So we built that into the guidance at those expected levels on growth capital.

Matthew Brooks - Macquarie Capital (USA), Inc.

Right. Last one on capital allocation, I think your trailing leverage may be just a bit above 5. Is it sort of the plan to build the cash until your leverage falls below 5 and then do buybacks? Or when might buybacks be on the table this year?

Peter J. Crage - SeaWorld Entertainment, Inc.

Yeah. The 5 is a bit of an aberration given the Easter shift. Of course, the Easter shift affected adjusted EBITDA, adjusted EBITDA and debt. That will, with a more normalized second quarter, given the fact that Easter is now in the second quarter, that will drop below 5 times and be back around the sort of mid to high 4 range. Our goal on leverage has always been to reduce absolute leverage whether the growth of adjusted EBITDA or repayment of debt. But when it comes to capital allocation, we have a pretty flexible capital allocation model, and we'll just evaluate that as time goes on.

Matthew Brooks - Macquarie Capital (USA), Inc.

So, that means buybacks might be on the table later in the year or you'll just assess it at the time?

Peter J. Crage - SeaWorld Entertainment, Inc.

They could be. It's one component of our capital allocation that could be provided that we're otherwise not precluded from being in the market.

Matthew Brooks - Macquarie Capital (USA), Inc.

Okay. Thank you.

Operator

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

Edward Wendel - Barclays Capital, Inc.

Hi. Good morning, everyone. This is Ed Wendel on for Felicia. Just want to – can you help us understand a little bit better how you're thinking about the $20 million of cost savings for 2017, just because it seems like some of your costs were lower year-over-year driven mainly by lower SBC and asset write-offs. So just trying to understand, aside from the benefit that you've gotten from the head count reduction last year, maybe you can quantify how much of the $20 million of cost savings were realized for 1Q 2017?

Peter J. Crage - SeaWorld Entertainment, Inc.

Yeah. It's obviously, given the quarter was volatile year-over-year because of the Easter shift, it's difficult to isolate. We'll tell you though, if you adjust for those items you mentioned, we cut about a little over $8 million in operating expense and we were up about $2 million in SG&A. That $2 million is primarily timing. We talked about pulling forward some marketing particularly to respond to San Diego.

We'll tell you what we are seeing, and we're not giving guidance necessarily on quarter-by-quarter cadence of cost reductions. But we are seeing the benefit of the actions we took in December of last year on a run-rate basis. And we're isolating and focusing on third-party costs and efficiency as I mentioned in the prepared remarks.

Of that $8 million, some of that $8 million is sticky. Some of it is volume-based. I would not say the majority of it is volume-based. I would say the majority is sticky. And then we'll continue to focus on second, third, and fourth quarter and deliver. Our objective is to deliver that $20 million by the end of the year on a net basis.

Edward Wendel - Barclays Capital, Inc.

Okay. Very helpful. Now just shifting gears here. So now that you guys have strategic relationships in parts of the Middle East and in Asia, are you looking to form further international partnerships at this time? And just as a follow up, if so, how much of your total business could you envision coming from these international partnerships over time?

Joel K. Manby - SeaWorld Entertainment, Inc.

We are always looking at new opportunities. However, I would say that our main focus, our number one focus by far is turning around the domestic operation. That's where we spend almost all of our time. These third-party relationships, we have specific individuals on them that do report to me and we are going to build those at the right time.

Our focus internationally, though, is the Middle East and is China. There is so much opportunity there that to go into other countries just to get very, very small kind of revenue fees for licensing, I feel could be a distraction right now. We have plenty on our plate. If we execute, we not only get back to where we used to be, but we go beyond it. And there is no shortage of opportunity, and within China, Middle East and domestically especially, if we just execute. So I'd say, there is not much focus on other countries right now.

Edward Wendel - Barclays Capital, Inc.

Okay. Very good. And just last one, just sort of a housekeeping question. Of that $14 million revenue benefit from Zhonghong over the next three years, how's that spread over that three-year timeframe and how much of that falls to the bottom line? And is that number set in stone, or could that go higher in the future?

Joel K. Manby - SeaWorld Entertainment, Inc.

It's spread evenly. We don't want to guide at all on how much drops through because, frankly, it's too early. The difference is though, we do have firm deliverables. We are going to try to have some EBITDA flow through on that to the bottom line, unlike really what we're experiencing on the Abu Dhabi deal. But that's about all we'd like to say right now. We want to under-promise and over-deliver on that.

Edward Wendel - Barclays Capital, Inc.

Okay, makes sense. Thank you very much.

Joel K. Manby - SeaWorld Entertainment, Inc.

Yes.

Operator

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

James Hardiman - Wedbush Securities, Inc.

Hi. Good morning. A couple questions from me on the guide. So, last year the EBITDA number was $332 million, I believe, the sort of net cost savings. If I think about that, it's $10 million, and then you get something from the international deal. It seems like we're pretty much at the midpoint of your guide already. Is that over-simplifying things or should I think about this as basically flat revenue – at the midpoint of your guide, basically flat revenues and then the growth coming from the cost savings, so how should I think about that?

Peter J. Crage - SeaWorld Entertainment, Inc.

Hi, James. It's Peter. Yeah, I think you're thinking about the right way. Let me just put a little color to it. Now, you're absolutely right. $330 million, round it to $330 million, include a $10 million pull forward. We expect another $10 million to get us to $340 million this year. The international is minor. As Joel pointed out, very minor. We don't know. We have, obviously, deliverables and there's costs associated with those. So, that's not really going to move the needle.

I think at the midpoint, you're going to see – obviously, we expect to be successful in our cost reductions and have some revenue improvement at the midpoint. But of course, at the high end, more revenue improvement, and at the low-end, an exogenous factor such as the UK rearing its ugly head even worse than we're seeing right now. So, I think you're thinking about it the right way.

James Hardiman - Wedbush Securities, Inc.

Great. And then, on the international front, let's talk about the brand a little bit. Last couple of years, you've adjusted your brand from being animal-focused to, I think, you referred to it as experiences that matter. Do you expect to go down that same path? As you contemplate international parks, is there going to be the same focus on animals? Is there the opportunity to have orcas in your international parks? Or is that opening up a can of worms that you don't want to do? How should I think about all that?

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah. First of all, I would correct you to say, we're not animal-focused. We – our mission – when I say experiences that matter, we have a variety of attractions in our park that create a very, very fun experience. But even if it's a coaster like Mako, even if it's the launch coaster in San Diego, even if it's a show, the messaging, the mission, the cause is to protect the oceans and all that's in it. And that is the wonderful marine animals that we helped protect. So, it's just – the stories don't always have to be told with live animals, but the stories are always about protecting the oceans and animals. So, that's just a correction. And we'll always be that way because that is what the Millennials want and people want to make a difference in who they support and that's why we're right in the crosshairs, really, of growth.

As far as going into China, we will have one brand worldwide. We've talked in detail with the new board members and the new owners. They know our strategy. They support it. Many of the animal issues that have happened in the United States are already happening there. And so, there, in China, we will be a leader in that cause. They've just ended ivory trade partly because of their NBA basketball star there that's really driven that cause.

So, we feel in China, we will be ahead of the curve, not perhaps in the middle of the tip of the spear so to speak. So, we are on it and our partners are with us on it.

James Hardiman - Wedbush Securities, Inc.

It sounds like, if I'm hearing this right, you probably wouldn't even consider having orcas in any of your international parks?

Joel K. Manby - SeaWorld Entertainment, Inc.

No.

James Hardiman - Wedbush Securities, Inc.

Got it. And then, lastly for me, you talked about how per-caps were negatively impacted by the Easter shift. You gave us sort of the catch-up through April that you were flat. Are you also – did you flatten out in terms of per-caps such that revenues are also flat through April or is there still some catch-up to do?

Joel K. Manby - SeaWorld Entertainment, Inc.

We're not going to comment on revenue through April. However, I will say, most of the issue in the first quarter was Easter shift issues because we had fewer domestic customers, fewer international customers coming in which bring a higher per-cap. And also, the higher growth overall was at our lower per-cap parks. So, hopefully, that's enough color. We feel confident where we are and it's all factored into our guidance.

James Hardiman - Wedbush Securities, Inc.

No, that's very helpful. Thanks, guys.

Operator

Your last question comes from Christopher Prykull with Goldman Sachs. Your line is open.

Christopher Prykull - Goldman Sachs & Co.

Good morning. Thanks for taking my question.

Peter J. Crage - SeaWorld Entertainment, Inc.

Hello.

Joel K. Manby - SeaWorld Entertainment, Inc.

Hi, Chris.

Christopher Prykull - Goldman Sachs & Co.

I know it's still early but can you discuss any learnings from or additional details on your new strategic and tactical pricing initiatives or maybe the dynamic pricing initiative in Virginia?

Joel K. Manby - SeaWorld Entertainment, Inc.

Sure. We launched a test last winter on Christmas, and it was an – as I've said before, so taking a step back, anything that has a fixed seat in our company, we're already doing dynamic pricing on, whether it's a cabana, whether it's Discovery Cove, whether it's a ride, frankly, and selling a Quick Queue or a house at Halloween. Those already had dynamic pricing on our Quick Queues. This was the first experiment where we took a park pricing with no really capacity limitation and started doing dynamic pricing.

We saw, even with really bad weather last year, that caused attendance to be down about 4-ish-percent, we saw a revenue increase of $1 million which, given that attendance decline, is a very strong performance for dynamic pricing. So, we're rolling that out now. And as we said in the rest of that park and then also in Texas and in Sesame, we anticipate that will help per capita as well as our consulting firm has looking at all of our discrete ticket pricing as well as season pass pricing. We've taken several price increases already, but we're trying to simplify our messaging and be more strategic going forward. So, all of those initiatives will lead us to increase in net admissions per-cap. The only acceptable failure in that would be if we over-performed so much in season pass, but that per-caps maybe touched or maybe not as strong as we want. However, if that happens, overall revenue will grow, and overall revenue would then exceed our expectations.

And again, this is all about stepping back from it all. We've got to increase revenue. That happens through our attractions and our pricing, and we've got to keep our cost in line, and that will lead to EBITDA growth this year. And we're incredibly focused on that. We know we need to grow this company's EBITDA this year, and we will show that the SeaWorld brand has stabilized and starting to grow again, and then we can start making these other investments we've been talking about.

Christopher Prykull - Goldman Sachs & Co.

Got it. That makes sense and is helpful. I just wanted to ask about the Seven Seas Festival and just the event strategy altogether. Can you discuss maybe some of the changes you made this year or throughout the spring to the event? And any learnings that you can improve going forward or potentially implement at your new Summer Night event?

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah. With our festival strategy, we're not going whole hog, meaning we're not open the whole week because it's a big cost risk, and with the way our attendance flows, there's so many more customers on the weekends that we're starting with – we first started a year ago, two years ago, depending on park, with just Saturdays. Now, we're expanding to Sundays, then Fridays to have all the booths open, all the food, how we market it.

And we're trying to expand that a little bit at the time, and that's what we did here in Orlando. We're also getting very good at who we're focusing within 300 miles from a demographic standpoint as well. We're also doing a good job on tracking food per-cap, culinary per-cap, and exactly how much we need to really drive attendance but still keep our cost down.

How we apply that to the Electric Ocean is I think we'll start by not having it every single night at the full force. We'll grow into it, and usually a good strategy in festivals will take three years to completely fill out from learnings in cost. There's a balance of inserting cost versus getting a return on it.

I do think Electric Ocean will be much stronger from a merchandise per-cap standpoint than food. Obviously, the food and wine was more culinary, and I do believe Electric Ocean will be much heavier in merchandise.

Christopher Prykull - Goldman Sachs & Co.

That's helpful. And then just one last one, if I could. There's been some news around the potential budget cut to the VISIT FLORIDA organization. Does that concern you at all for the overall market if it were to actually be passed?

Joel K. Manby - SeaWorld Entertainment, Inc.

We're always concerned when some of our government partners or other associations do that. I don't believe it will have an impact, but we're continuing to lobby and do everything we can to get attendance. We'd make sure attendance is strong.

Christopher Prykull - Goldman Sachs & Co.

Great. Thanks and good luck in the summer.

Joel K. Manby - SeaWorld Entertainment, Inc.

Yeah. Thank you so much.

Peter J. Crage - SeaWorld Entertainment, Inc.

Thank you.

Operator

And there are no further questions queued up at this time. I'll turn the call back over to Mr. Manby.

Joel K. Manby - SeaWorld Entertainment, Inc.

Well, thank you so much. First of all, I'm sorry about the technical difficulties. I was trying to speak, but we're in the wrong mode, and got cut into the wrong mode. So, I'm sorry about that, but hopefully everybody got their question answered, and if you don't, we'll follow up with you.

I'm very encouraged that, in April, we made up for everything that we missed in the first quarter, and again I said it earlier but I want to reiterate how we are very, very focused on execution. I think, we have an amazing product portfolio coming and that's going to drive attendance. We have pricing initiatives in place that are going to stop our three-year slide in admissions per-cap. And with our cost initiatives, we know that we have that under control and we're going to try to even beat our target. But we are very, very focused on it.

So, with revenue increasing and cost getting a lot focus, our goal is to get that guidance hopefully even exceed it and grow EBITDA for the first time in three years. And that's what we're very focused on doing.

So, with that, I thank you all for your support and look forward to talking to you again soon.

Operator

This concludes today's conference call, you may now disconnect.