OneSpaWorld Holdings Limited (NASDAQ:OSW) Q3 2023 Earnings Call Transcript

OneSpaWorld Holdings Limited (NASDAQ:OSW) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good day, and welcome to the OneSpaWorld Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison Malkin: Thank you. Good morning, and welcome to OneSpaWorld’s Third Quarter 2023 Earnings Call and Webcast. Before we begin, I’d like to remind you that certain statements and information made available on today’s call and webcast may be deemed to constitute forward-looking statements. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2023 earnings release, which was furnished to the SEC today on Form 8-K.

We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman, Chief Executive Officer and President; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of our third quarter 2023 performance and provide an update on our operations and our key priorities, then Stephen will provide more details on the financials and our fiscal year 2023 guidance. I would now like to turn the call over to Leonard.

Leonard Fluxman: Thank you, Allison. Good morning, and welcome to OneSpaWorld’s Third Quarter 2023 Results Conference Call. I’m delighted to speak to you today and share another quarter of strong results, which once again exceeded our expectations. The third quarter saw us maintain our positive momentum with stellar performance across key financial and operational metrics, driven by our unwavering focus on the execution of our key priorities. To this end, we continue to introduce innovative products and offerings, empower our cruise ship staff to provide unsurpassed service levels, drive efficiencies through technology enhancements, introduce our health and wellness centers on new ship builds and win new contracts. As a result, we achieved our best-ever third quarter revenue income from operations and adjusted EBITDA and raised our full year revenue and adjusted EBITDA guidance by more than the outperformance we delivered in this quarter.

As we look ahead, we are very encouraged by the healthy demand environment we are seeing. Customers around the world continue to appreciate the unparalleled value proposition, cruising offers and our strategies are driving strong demand. Touching on performance highlights of the third quarter. Total revenues grew 33%, reaching a record $216.3 million and adjusted EBITDA increased 36% to a record $24.9 million. The expansion in our ship count continued in the quarter. At the end of the third quarter, we had health and wellness centers on 189 ships compared with 176 ships at the end of the third quarter of 2022. At year-end, we now expect to have in-service 193 ships, including 10 new builds introduced throughout 2023. We saw strength across key operating metrics, including a 22% increase in average week revenue per ship as compared to the third quarter last year.

High single-digit increases in average guest spend and a low single-digit increase in revenue per shipboard staff per day. Penetration of retail sales and pre-bookings also continued to improve. We continue to remain highly focused on supporting our operations at sea. Our ongoing initiatives to have experienced staff return for subsequent contracts is exhibiting greater success and we expect our proportion of experienced staff members in the first quarter of 2024 to surpass the level of experienced staff members in 2019. At quarter end, we had 3,927 cruise ship personnel on vessels increasing from 3,813 and 3,087 cruise ship personnel on vessels at the end of the second quarter of 2023 and the third quarter of 2022, respectively. We also have 24 traveling sales and revenue staff members who year-to-date have made 492 ship visits, equating to 3,271 days of sailing with their primary focus to enhance onboard productivity.

Now I’ll review and update our key priorities that we shared with you earlier this year: first, capture highly visible new ship growth with current cruise line partners. Our cruise line partners continue to introduce new ships, which adds to our growth. In the quarter, we introduced health and wellness centers on six new ships, including two Crystal Cruise vessels, Crystal Serenity and Crystal Symphony as part of the new agreement announced earlier this year and one vessel as part of a new agreement with Adora Cruises, which is a new Chinese-American cruise line. We continue to expect to introduce health and wellness centers on 12 ship builds this year; second, continue launching higher value services and products. We continue to focus on introducing exciting products and services, which are in various stages of implementation, including IV therapy, immunity protocols and facial toning devices; third, focusing on enhancing health and wellness center productivity.

Highlights of our achievements in this regard include high single- to double-digit increases across average guest spend pre-booking as a percent of service revenue, revenue per stock per day and in retail spend as compared to Q3 of 2019. And fourth, expanding market share by adding new potential cruise line partners. We have room to grow our 90-plus-percent market share in the outsourced maritime health and wellness market as evidenced by recent new contract wins to Virgin Voyages, Oceania Cruises, Regent Seven Sea Cruises, Celebrity cruises and most recently, Adora cruises. We are very excited about our business prospects into the fourth quarter and in 2024 and beyond. Our fourth quarter 2023 performance is off to a strong start despite it being a seasonally softer period for cruise operators as they reposition their fleets for the winter cruising season.

In light of our outperformance so far in the year and current business trends, we have raised our annual guidance for the third time this year, with our fiscal year outlook increased beyond the amount we surpassed third quarter expectations. As a result, for fiscal year 2023, we now expect total revenues to increase by 45% and adjusted EBITDA to increase by 73% versus fiscal year 2022 at the midpoint of our guidance ranges. Finally, before I turn the call over to Stephen, I want to convey that our hearts go out to all that have been impacted by the war in the Middle East, the ongoing war in Ukraine and the innocent lives lost. In response, the cruise lines have altered or canceled certain itineraries. However, we do not expect this to have a material impact on our results.

Stephen?

Stephen Lazarus: Thank you, Leonard. Good morning, everyone. We are pleased to report strong third quarter results and continued momentum across our key operational and financial metrics as well as improvements to our balance sheet. I will now share more details on our third quarter that we reported this morning. Total revenues were $216.3 million, an increase of 33% from $162.3 million in the third quarter of 2022. The increase was attributable to our average ship count increasing 11% to 185 health and wellness centers on board ships operating during the quarter compared with an average ship count of 167 health and wellness centers onboard ships operating during the third quarter of 2022. And our initiatives to drive revenue growth in each of our onboard health and wellness centers through enhanced guest engagement and experiences.

Our guest service and product offering innovations and the disciplined execution of our complex operating protocols by our onboard and corporate teams. Cost of services were $146.1 million compared to $110.6 million in the third quarter of 2022. The increase was primarily attributable to costs associated with increased service revenues of $175.8 million in the quarter from our operating health and wellness centers at sea and on land compared with service revenue of $132.8 million in the third quarter of 2022. Cost of products were $34.5 million compared to $25.3 million in the third quarter of 2022. This increase was primarily attributable to costs associated with increased product revenues of $40.4 million in the quarter from our operating health and wellness centers at sea and on land compared to product revenues of $29.5 million in the third quarter of 2022.

Product costs in the third quarter of 2023 benefited from retail price increases implemented onboard vessels ahead of an increase in the cost of those products. This resulted in an approximately 60 basis point margin improvement in the quarter. Net income was $23.4 million or net income per diluted share of $0.16 as compared to net income of $5.9 million or net income per diluted share of $0.06 in the third quarter of 2022. The $17.5 million increase was primarily attributable to the $7.1 million positive change in the fair value of warrant liabilities, a $7.1 million positive change in income from operations and a $3.4 million decrease in uncertain tax benefits related to foreign tax exposure as a result of the company’s participation in a tax amnesty program in Italy settled in August 2023.

The change in fair value of outstanding warrants during the three months ended September 30, 2023 was a gain of $7.4 million compared to a gain of $300,000 during the three months ended September 30, 2022. The change in fair value of warrant liabilities was the result of changes in market prices of our common stock and other observable inputs deriving the fair value of the financial instruments. Adjusted net income increased 75% to $22 million or adjusted net income per diluted share of $0.22 as compared to adjusted net income of $12.5 million or adjusted net income per diluted share of $0.13 in the third quarter of last year. Adjusted EBITDA increased 36% to $24.9 million compared to adjusted EBITDA of $18.3 million in the third quarter of 2022.

Turning to the balance sheet. Total cash at September 30, 2023 was $28 million compared to $30 million at June 2023, after giving effect to repayment of $20 million on our first lien term loan during the quarter. Total debt net of deferred financing fees at September 30 was $163 million compared to $223 million at September 30, 2022. The decrease primarily resulted from the full repayment of $25 million on the second lien term loan and the $36.6 million repayment on the first lien term loan since September 30 of last year. In the third quarter, we repaid $20 million on our first lien term loan. And as a result, since the second quarter of 2022, we have repaid a total of $69.1 million in debt instruments. Unlevered after-tax free cash flow was $62.2 million compared to $26.1 million in the nine months ended September 30, 2022.

The company expects to continue to generate positive cash flow from operations in the fourth quarter of 2023 and throughout 2024. Moving on to our guidance. We are increasing our fiscal year guidance for the third time this year to reflect our better-than-expected third quarter performance and our expectations for the fourth quarter. For fiscal 2023, we now expect total revenues in the range of $792 million to $797 million. At the midpoint, this represents an increase of 45% from the actual fiscal 2022 revenues of $546.3 million. Adjusted EBITDA is expected in the range of $86 million to $88 million. At the midpoint, this represents an increase of 73% from actual fiscal 2022 adjusted EBITDA of $50.4 million. We expect to end fiscal 2023 operating on 193 cruise ships and at 54 land-based resorts.

For the fourth quarter, we expect total revenue in the range of $193 million to $198 million and adjusted EBITDA in the range of $20 million to $22 million. Overall, we feel confident about our positioning and growth initiatives. We are encouraged by the momentum in the business and expect to continue our successful growth in the near and medium term. With that, we’ll open our call for questions. Please, operator.

Operator: [Operator Instructions] The first question comes from Gregory Miller with Truist.

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Q&A Session

Gregory Miller: I’d like to start off with service pricing. Could you share your current views on pricing heading into the 4Q holidays? And if possible, into next year, have you seen any pressure points in consumer spend? There will be impact if or how much you may raise pricing over the next year?

Leonard Fluxman: Yes, Greg. We’ve actually seen very little pressure on pricing at all. We’re — we continue to hold pricing where we’ve had it discounting only on shoulder days where necessary, but certainly not below our increased level. So there’s still hallmark pricing on a couple of services on some banners and we will obviously reintroduce Hallmark pricing through the Christmas New Year period across most of banners. So right now, as we said, our ships are — I should say the cruise lines are repositioning their ships, longer cruises, et cetera. So we still have not seen pressure on pricing thus far. So we’re in good shape.

Gregory Miller: Excellent year. And then for the follow-up. I thought I’d ask you about the commentary you’re providing about your staff, your experience staff training up at higher levels than in the past. Could you discuss what is driving that better return to see trend?

Leonard Fluxman: So as we’ve mentioned perhaps on prior calls, and it’s something we wanted to call out this call, experienced staff tend to produce at a much higher level. Definitely, after 2.5, 3 contracts, we see the productivity improve, retail attachment improve and just the experience level and then ultimately we try and move them up into management if they’re capable of such a move. We continue to reinforce training. We continue to take care of the well being on board. They’re busy. They’re doing well. This is definitely an incredible environment for them to earn money and save money to the extent that they wish to do that given that most of the expenses on board are taken care of. So we’re starting to see that retention number improve and with that comes greater experience and greater productivity.

Operator: Our next question comes from Steve Wieczynski with Stifel.

Steven Wieczynski: So Leonard, I think you heard — I think I heard you correctly that you talked about how the fourth quarter is already up to seems like a pretty strong start. So if that’s the case, is it fair to think the trends that you witnessed through October were essentially running at similar levels to what you witnessed during the third quarter. I guess what I’m just trying to understand here, has there been any real change in spend levels and then maybe how the quarter played out from a sequential standpoint.

Leonard Fluxman: Yes. Look, the third quarter, Steve, spend and a bunch of other metrics were extremely strong. I mean, as you know, the second and third quarter tend to be that way, but we actually saw improvements in average guest spend. Staff utilization as the third quarter staff — as the third quarter starts with the longer cruises can go up and down just depending on how long those cruises are, but we’re very, very encouraged by what we’ve seen even at the beginning of what we termed the softer quarter as these ships repositioned into new itineraries back to the Caribbean, back from Alaska or out of the Mediterranean and troubled areas. And so from what we’ve seen to date, I’m very encouraged by what I’ve seen so far in October. So yes, it continues to hold a strong pattern of demand.

Steven Wieczynski: Got you. And then look, I know it’s early. I know you’re not prepared to give 2024 guidance yet. But as we look into next year. Is there anything we should be thinking about in terms of seasonality or other factors that potentially could — whether that’s help or whether that’s hurt our operating performance as we just kind of think about 2024 more from a big picture perspective?

Leonard Fluxman: Not that I can see. I mean I look at the close-in bookings from the cruise lines, demand, pricing, 60% to 65% booked through 2024. I mean I guess we’ll hear more from the cruise lines as they report. But certainly, as we heard from Royal and NCL today, it seems that demand continues to be strong. And look, the value that cruising today provides guests in a somewhat inflationary environment is still an incredible vacation and value vacation. We continue to see demand for our services. We continue to see the cruise lines focus more on the prebooking in, which we know guests spend more if they pre-book. And I think the collaboration that we are experiencing with our cruise line banners and partners, is at a level where they’re seeing the benefits too from that prebooking.

So I think we’ll see them focus more on that. Outside of things, we just can’t control, Steve, geopolitical events. As you know, cruise lines will cancel and move away from trouble, which they’ve started doing or have done already. I don’t see outside of anything macro that’s out there, things that could sort of change my view on the demand for cruising, which seems to be outperforming any other vacation experience to date.

Operator: The next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia: I guess I’m curious on the revenue per staff per day. I mean, it’s holding at extremely high levels, particularly when you look at kind of what you were doing pre-pandemic. And I’m wondering if at this point, as you look forward, is the main opportunity in continuing to increase the revenue per staff per day? Or is it by adding more staff. I’m trying to figure out kind of how high realistically we could think about that revenue per staff per day going kind of on an annual basis? I know there’s seasonality there.

Leonard Fluxman: Tough question, but a good one, Sharon. So we continue to focus with our sales and revenue stuff that, as I mentioned, are out there all the time. Today, with the data, the metrics we have, we can really drill down and see who’s not performing, where the underperformance is coming from, which modality we need to shore up. I think the team has done an excellent job throughout this year and in the last two quarters of last year is focusing on the underperformance and raising them to the level of the higher performance. So we want to get everybody up to As and B-pluses. I think our team is doing an excellent job focusing on that, and we have the data now where we can see it earlier than we’ve ever done before, and that was all the preparation that we did in the pre-pandemic period and pandemic period.

So I think execution is a function of vigilance earlier retrieval of data acting on that data and reinforcing training where it’s needed. So we will balance staff across different itineraries as needed. And we will make sure that the balance is there so that staff continue to be busy. We don’t want them not to be busy, but we also want them to have the requisite rest that they need. So yes, it’s a continued balancing act. At the same time, our focus in 2024 is going to be looking at what is the best use of stock? Do we have one less massage therapist and add somebody in our medi-spa or acupuncture, which is outperforming. So we want to make sure that we’re putting the right staff on the right ship for the right itinerary for the right demographic.