What Does SeaWorld Need in a New CEO?

SeaWorld (SEAS 0.21%) delivered a strong second quarter quarter even as the company transitions to new leadership. Now, with the business on solid footing, it might be a more attractive job for its top CEO candidates.

In this video, the Industry Focus team discuss priorities for the incoming chief executive. They also cover the impact of new rides and how annual passes are a major part of the company's evolving strategy.

A full transcript follows the video.

This video was recorded on Aug. 14, 2018.

Vincent Shen: Now that the results are turning around, the company still has to look for someone to take the reins. SeaWorld is in a position where they need someone who can follow through the recovery process, but also start looking out a little further, shifting gears and thinking about longer-term growth.

High-level, I've heard management talk a lot about changes to SeaWorld's marketing strategy, which you've mentioned, to their ticket and pricing strategy, plus some of the new ride openings, as the big drivers of their attendance growth. On that third front, interim CEO John Reilly said in June, "We have a revamped capital strategy that we believe will also help drive attendance growth with the goal of offering a new ride, attraction, show, or event in every park, every year." I'm curious, Dan, have you tried any of these new attractions?

Dan Kline: You know I'm a fraidy cat. I'll do most rides that aren't roller coasters. The new ride at Aquatica is called Ray Rush. I actually did it, and it's super-duper terrifying. It's in water, you're in a raft with two or three other people, I forget what the limit is. There's a bit of a drop, and then you go into a bowl thing and slide up and down. It's not something I would typically do. But, I would say, it's absolutely on par with Miss Adventure Falls, which is the new addition at the Disney Typhoon Lagoon. Maybe the Disney one is a little bit more themey, but the actual ride is right on par.

That's where SeaWorld has been very smart. They're adding rides where they can compete. Some of their rides are subpar. Their whole penguin experience, the penguins are awesome, but the actual ride feels regional, it feels very small compared to a Disney attraction. But in roller coasters and water slides, they can offer world-class attractions, and that's what they've been doing. Infinity Falls, which is the new ride at SeaWorld -- which has unfortunately missed the summer season, in terms of an opening -- looks to be an absolutely tremendous flume-style water slide with the biggest drop. I'm not going anywhere near it. They've gotten very smart.

They've also stepped up their game in terms of offering more shows, more nighttime activities, more one-day events. There's a thrill ride event coming up. They're also really giving passholders reasons to come back. I went back this weekend because they offered a half-off Aquatica deal, and I had family in the area who didn't have an active pass to any water park, so for half the price of a regular ticket, they both got to come, and we spent the day at the water park.

Their new CEO is going to need to be able to do two things: you absolutely have to manage capital expenditures. You cannot put in a new top-tier roller coaster at every park. Some of them have to be lower-price shows or smaller additions. Then, you need someone who's really a master marketer. The challenge is, there are two people you're trying to reach -- the one-day visitor who's going to buy a full-price ticket and spend a bunch of money because they're not coming back all year, and the person who buys an annual pass that's going to come a lot and can eat and drink and buy hats and who knows what many times a year.

Shen: You've brought up pass holders a few times. I want to touch on season pass activity. That came up as a bright spot recently for the company's results. Reilly mentioned on the earnings call that season pass revenue growth was in the double digits thanks to some better features that are given to pass holders, and some of the pricing for those customers, as well.

A few final points before we move on -- management also shared 2020 targets in guidance recently as part of its latest earnings release. In 2017, SeaWorld reported about $300 million of adjusted EBITDA. By 2020, management hopes to grow that figure to $475 to $500 million. Components of that growth are in attendance, revenue per capita, and cost savings.

First, SeaWorld wants to grow that annual attendance about 1%, while also recapturing part of the 3.6 million customers that it lost since its peak attendance in 2012. Then, with per capita spending, they're targeting that increase to come partially from ticket pricing, and also some of the stronger in-park attractions and food offerings that you mentioned. Finally, management is looking for $50 million of cost savings to flow down to the adjusted EBITDA line. That's on top of $40 million of costs already cut since 2016.

You mentioned capital expenditures. To open the new rides, events, attractions, that the CEO wants at every park each year, annual capex estimated at $150 million for the next three years. Any final thoughts before we move on?

Kline: Their costs savings scares me. The one thing you notice at SeaWorld or Aquatica, they're both lovely parks, but the line to get food is often very long. Their drink service, you buy the all you can drink cup, it doesn't have the chip reader the way the higher-end theme parks do, you have to wait in line. So, it scares me that they're pursuing cost cuts at a time where I think they could increase visits by actually doubling down on a more Disney-like customer service experience.

Shen: I'll end with this note. SeaWorld has put up huge gains in 2018, one of the strongest performers in the broad market. The investments in the parks, they do need a steady guiding hand. Keep an eye out for the new CEO announcement.