OneSpaWorld Holdings Limited (NASDAQ:OSW) Q4 2022 Earnings Call Transcript

OneSpaWorld Holdings Limited (NASDAQ:OSW) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Good day, and welcome to the OneSpaWorld Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 fourth quarter and fiscal year 2022 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 fourth quarter 2022 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 fourth quarter and fiscal year 2022 performance and provide an update on our operations and our key priorities.

Then, Stephen will provide more details on the financials and 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 fourth quarter and fiscal year 2022 results conference call. I’m very pleased to report an outstanding finish to an excellent year of growth. The fourth quarter saw our highest quarterly revenue, income from operations and adjusted EBITDA delivery in our history. These results clearly demonstrate that the strategies we implemented during the pandemic have not only led to our successful return to normal service, but importantly, raised our capabilities to deliver even greater levels of performance in the future. I’m proud of our team as their combined efforts executed a stellar return to service that included placing over 5,000 staff onboard cruise ships, embarking on 6,661 voyages, conducting 1,115 management visits to Ships in Port, operating 48 destination resort health and wellness centers and continuing to provide innovation in our products and services.

All of this contributed to our achievement of double-digit increases across key operating metrics. Our fourth quarter and fiscal 2022 results once again attest to our company’s unique positioning and capabilities as the pre-eminent operator of health and wellness centers at sea and on land, which drives extraordinary value for our cruise line and resort partners. Turning to the highlights of the quarter, total revenues were $168.9 million, increasing 97% from $85.7 million in the fourth quarter of 2021. This growth reflects contributions from health and wellness centers that reopened on 177 ships that resumed operations compared to 118 ships at year end last year and the contribution from 48 destination resorts bars that were open and operating as of December 31.

Income from operations increased $14.7 million to $10.7 million compared to a loss from operations of $4 million in the fourth quarter of 2021 and adjusted EBITDA was $20.7 million, an improvement of $15.9 million from adjusted EBITDA of $4.8 million in the fourth quarter of 2021. For the year, total revenues increased 279% to $546.3 million compared to $144 million in fiscal year 2021. Income from operations increased $67.2 million to $15.1 million compared to a loss from operations of $52 million in fiscal year 2021. Adjusted EBITDA increased $69.3 million to $50.4 million compared to negative $18.9 million in fiscal year 2021. Unlevered after-tax free cash flow increased to $45.1 million compared to negative $22 million in fiscal year 2021, and we ended the quarter with total liquidity of $53.3 million.

Our flawless return to service continued. The fourth quarter saw us commence service on board two new ship builds. At quarter end, we had health and wellness centers onboard 179 ships, of which 177 had resumed voyages as of quarter end. This compares to 172 ships that resume voyages at the end of the third quarter of 2022 and versus 118 ships that resume voyages by the end of Q4 2021. We continue to see record demand by cruise ship guests for our services. While load factors onboard cruise ships remained below historical and 2019 levels, we were very pleased to see continued high demand for our services. Key operating metrics during the fourth quarter of 2022 compared favorably with our fourth quarter 2019 performance, the most recent comparable period of normalized operations.

Average guest spend and revenue per staff per day were up double-digits compared to Q4 2019. In addition, pre-booking as a percentage of service, revenue, service frequency per guest and guest penetration also compared favorably to the fourth quarter of 2019. These improved operating metrics were driven by the continued innovation in our offering and focus on staff training. In Q4 ’22 versus Q4 ’21 metrics also compared favorably, for example, average weekly revenue per ship rose 9.6% from Q4 2021 and revenue per ship, per staff, per day increased 13.5% from Q4 2021. In addition, average weekly revenue per resort rose 16% from Q4 of 2021. It’s incredible to consider that just one year ago, we’re in the midst of Omicron. Ships were still returning to service by cruise line services and load factors were below 60%.

Photo by Colin Watts on Unsplash

We are eager for load factors to return to a more normalized level, which our cruise line partners expect by the end of spring. This will allow us to increasingly showcase our even more attractive business model to passengers. As such, we continue to prepare for this by leveraging our unique capabilities, including our core competency of recruiting and training. In the fourth quarter, we on-boarded 1,068 staff members and by the end of the quarter, we had 3,566 cruise ship personnel on vessels for actual and expected voyages, and this figure is expected to grow to 3,663 employees by the end of Q1 2023. Our priorities in 2023 are focused on capturing highly visible new ship growth with current cruise line partners, which most recently was demonstrated by a new agreement with Norwegian Cruise Line Holdings through 2029, covering 29 ships currently sailing and eight new ships anticipated to come into service during the term of the agreement.

Additionally, we expanded our contract with Marella, adding two new ships in Q4 and now operate health and wellness centers on their entire fleet. Second, increasing guest spend, spa capacity utilization and retail revenues. We expect to accomplish this as we continue to launch higher value services, including pain management and recovery technology, expand the adoption of dynamic pricing by cruise line partners and grow pre-booking and pre-payment appointments, which yield a 30% lift in revenue versus services booked onboard. Notwithstanding certain economic headwinds, our positive performance has continued in the first quarter of fiscal 2023, reflecting our outstanding guest service and product offerings, buoyed by the heightened consumer demand for hospitality travel experiences.

With our full fleet of cruise ships finally sailing and 10 new builds commencing voyages this year, we expect fiscal 2023 to be another year of accomplishment and increasing value for OneSpaWorld shareholders. With that, I’ll turn the call over to Stephen, who will comment on our fourth quarter and fiscal year 2022 results. Stephen?

Stephen Lazarus: Thank you, Leonard. Good morning, everyone. We showed significant progress across all of our key performance metrics through fiscal 2022, in addition to substantially strengthening our balance sheet position. I will now share more details on our fourth quarter and fiscal year results that we reported this morning. Total revenues were $168.9 million as compared to $85.7 million in the fourth quarter of 2021. The revenues generated in the three months ended December 31, 2022, were derived primarily from our 177 health and wellness centers onboard ships having resumed voyages and our health and wellness centers at 48 open and operating destination resorts. The three months ended December 31, 2021 revenues were primarily related to our health and wellness centers on 118 cruise ships and in 48 destination resorts that were opened during the quarter and e-commerce product sales to the company’s timetospa.com website.

Cost of services were $114.9 million compared to $58.7 million in the fourth quarter of 2021. The increase was primarily attributable to costs associated with increased service revenues of $139 million in the quarter from our operating health and wellness centers at sea and on land compared with service revenue of $68.8 million in the fourth quarter of 2021. Cost of products were $24.3 million compared to $15.5 million in the fourth quarter of 2021. The increase was primarily attributable to costs associated with increased product revenues of $30 million in the quarter from our operating health and wellness centers at sea and on land compared to product revenues of $16.8 million in the fourth quarter of 2021. Net loss was $2.3 million compared to a net loss of $10.9 million in the fourth quarter of 2021.

The improvement in the fourth quarter of 2022 was primarily a result of the positive $14.7 million change in income from operations, the right from our operating 177 health and wellness centers onboard ships having resumed voyages, offsetting higher other expense attributable to increases in interest expense and the change in the fair value of our warrant liabilities. Adjusted net income was $12.8 million or adjusted net income per diluted share of $0.14 as compared to adjusted net loss $800,000 or adjusted net loss per diluted share of $0.01 in the fourth quarter of 2021. Adjusted EBITDA was $20.7 million compared to adjusted EBITDA of $4.8 million in the fourth quarter of the prior year. For the fiscal year, total revenues were $546.3 million compared to $144 million in the year ended December 31, 2021.

The revenues generated again in the year drove primarily from our 177 health and wellness centers onboard ships have resume voyages and our health and wellness centers at 48 open and operating destination resort spas. Revenues for the year ended December 31, 2021 were negatively impacted by the COVID-19 pandemic and the resulting March 14, 2020, no sale order. With revenues derived primarily from health and wellness centers onboard 118 ships and in 48 destination resorts that were open and operating for partial periods during the 12 month period and e-commerce product sales through the company’s timetospa.com website. Cost of services were $375.1 million compared to $108.9 million in the year ended December 31, ’21. The increase was primarily attributable to costs associated with increased service revenues of $446.5 million in the year from our operating health and wellness centers at sea and on land compared with service revenue of $15.9 million in the 12 months ended December 31, 2021, and the increased costs related to the resumption of operations at our health and wellness centers at sea and on land.

Cost of products were $87.6 million compared to $26.6 million in the year ended December 31, 2021. The increase primarily attributable to costs associated with increased product revenue of $99.7 million in the year ended December 31, 2022 compared to product revenue of $28.1 million in the year ended December 31, 2021 from our operating health and wellness centers at sea and on land. Net income was $53.2 million compared to a net loss of $68.5 million in the prior year. The improvement in the year ended December 31, 2022, was primarily a result of the $67.2 million positive change in income from operations derived from 179 health and wellness centers, having resumed voyages and the change in the fair value of warrant liabilities. As you know, the change in fair value of the outstanding warrants during the year ended December 31, 2022 was again a $54.4 million compared to a loss of $2.6 million during the year ended December 31, 2021.

The change in the fair value of the warrant liabilities is the result of changes in the market prices deriving the value of these financial instruments. Adjusted net income of $26.7 million or adjusted net income per diluted share of $0.28 compared to adjusted net loss of $40.2 million or adjusted net loss per diluted share of $0.45 in the prior year. Adjusted EBITDA was $50.4 million compared to negative $18.9 million in the prior year. Turning then to our balance sheet, cash and borrowing capacity under the company’s line of credit, which is fully available at December 31, 2022 totaled $53.3 million. In the fourth quarter, the company repaid $10 million on its second-lien term loan and in February, paid another $5 million, leaving $10 million remaining under this loan.

The second lien carries interest at a rate of LIBOR plus 7.5%. We expect to continue utilizing cash generated from operations to extinguish this facility and have no material debt maturities until March of 2026. We ended the year with total cash of $33.3 million, and total debt net of deferred financing costs was $212.8 million. In the fourth quarter, unlevered after-tax free cash flow was $90 million compared to $3 million in the fourth quarter of 2021. For the fiscal year, unlevered after-tax free cash flow was $45.1 million compared to a negative $22 million in the year ended December 31, 2021. The company expects to continue to generate positive cash flow from operations in the first quarter of 2023 and throughout fiscal year 2023. Moving then on to guidance, with our full return to service, normalizing operations and operational visibility, we are pleased to reintroduce our quarterly outlook and have reiterated our annual outlook.

For the first quarter, we expect total revenues in the range of $170 million to $175 million and adjusted EBITDA in the range of $16 million to $18 million. Our first quarter guidance assumes an ending ship count of 179, and we expect to have 3,663 employees on cruise ships by quarter end and to operate at 52 destination resorts. For fiscal 2023, we expect total revenues in the range of $660 million to $680 million and adjusted EBITDA in the range of $64 million to $70 million. We expect to end fiscal 2023 operating on 187 cruise ships and at 52 destination resorts. Overall, I feel very confident about our growth initiatives. We begin fiscal 2023 operating from a position of strength. Our health and wellness centers onboard cruise ships and our destination resorts on land are open.

Our staff is providing exceptional experiences for guests, and we are continuing to innovate our product and service offering. This, in addition to our strengthened balance sheet, has us well positioned to continue innovating a highly complex business model to deliver annual year-over-year growth in revenue, earnings and cash flow. And with that, David, we’ll open the call for questions. Thank you.

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Q&A Session

Operator: We will now begin the question-and-answer session. Our first question comes from Steve Wieczynski with Stifel. Please go ahead.

Steven Wieczynski: Hey, guys. Good morning. So can you help us think about, how we should be thinking about any material seasonality this year? And I guess, what I’m getting at is, we go back and look at 2018, 2019, even when you guys were Steiner Leisure, again, there was a little bit of a different business. It seems like there really wasn’t much seasonality here, except really around the fourth quarter. And I guess what I’m trying to understand is, based on what you just put up in the fourth quarter and based on what your first quarter guidance is, it seems to us if the consumer stays pretty much status quo through the year, shouldn’t there be some upside to your current guidance range? Am I not thinking about that the right way?

Leonard Fluxman: Yes, Steve here. You’re absolutely right. I mean, we have very moderate seasonality in our business. I mean, the second and third quarters have always been the strongest, I mean, clearly, 2022 fourth quarter surpassed our expectations. We had a very healthy fourth quarter even though you have a lot of ships that are repositioning back from Alaska in the mid, we just knocked it out the park completely. The first quarter is — came out of the gates and it typically does. I mean, New Year fell at the right time this year. So we got a strong push off into the first quarter. But first quarter typically is not as strong as second and third, but it’s decent. So to your points, we’re really in the early innings of the year.

I mean, the strength that we’ve seen thus far through 1.5 months is definitely gives us a lot of confidence. But I think it’s premature for us to start guiding upwards, but we’re very comfortable with the guidance that Stephen read out to on the call.

Steven Wieczynski: Okay. That’s perfect. I didn’t think you were really going to answer that too much, but I took my best shot at it. Second question, uses of your free cash, look, again, if we go back to your guidance, it seems to us you’ll be generating, let’s call it, $60 million to $65 million of free cash flow this year. You only got $10 million left to go on your second lien. So that’s going to leave a sizable amount of cash to be put to use. I just want to understand maybe how you guys are kind of thinking about that once you do pay down that second lien?

Stephen Lazarus: Steve, I think I will answer that simply as it depends. Some of it will depend on what happens with interest rates and how they play out through the remainder of the year. But I will tell you that, as always, we evaluate uses for cash, given current interest rates, it’s likely that we continue to pay down debt. But our overarching theme would be that we will continue to evaluate best uses of cash, including a dividend payment.

Steven Wieczynski: Understood. Thanks, guys. Really good quarter. Appreciate it.

Stephen Lazarus: Thank you.

Operator: Our next question comes from Max Rakhlenko with Cowen & Company. Please go ahead.

Maksim Rakhlenko: Great. Good morning and nice shot guys. So first, you discussed some of the ways that you’re looking to increase guest spend, which initiatives do you think will be the top needle movers this year and how should we think about the cadence of the rollout?