Lindblad Expeditions Holdings, Inc. Q2 FY2020 Earnings Call

Good Day, and welcome to the Lindblad Expeditions Inc. reports Second Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. Please go ahead.

Thank you, Brent. Good afternoon, everyone, and thank you for joining us for Lindblad’s 2020 Second Quarter Earnings Call. With me on the call today is Sven Lindblad, our Founder and Chief Executive Officer. Sven will begin with some opening comments, and then I will follow with some details on our financial results and liquidity before we open the call for Q&A. You can find our latest earnings release in the Investor Relations section of our website. Before we get started, let me remind everyone that the Company’s comments today may include forward-looking statements. Those expectations are subject to risks and uncertainties that may cause actual results and performance to be materially different from these expectations. The Company cannot guarantee the accuracy of any forecast or estimates and we undertake no obligation to update any such forward-looking statements. If you would like more information on the risks involved in forward-looking statements, please see the Company’s SEC filings. In addition, our comments may reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures and other associated disclosures are contained in the Company’s earnings release. And with that out of the way, let me turn the call over to Sven.

Thank you, Craig, and good afternoon everybody, and thanks for joining us today. Usually we conduct our earnings calls in the morning, but we made an exception today, as I’m speaking to you from French Polynesia, a remarkable destination that is only two to two and a half hours further than Hawaii from the West Coast, which is an exotic locale with a playground of hundreds of islands and atolls to explore the resort alive with coral and fish. Hiking is world class; the rivers are explored by kayak; people are delightful. And there is still a distinct South Sea culture to appreciate. Let me take a moment to tell you why I’m here and what being here represents. Above all, it represents hope and an acknowledgment that our world three months, six months, or nine months from now will be a very different place. French Polynesia is an example of what people will seek out when they are ready and able to travel again. Beauty, peace, and exploration. Our guests, in particular, will not want crowds or unnecessary proximity; small will become even more desirable. What we do, immersing our guests in the exploration of the world’s most amazing geographies, was very much on the rise pre-pandemic, and I believe will explode post. And Lindblad Expeditions is in a very good place to capitalize on this new future. I had an exhilarating week here; I met countless people in the tourism sector: ministers, the CEO of the National Air Carrier, and people from the hotel sector. French Polynesia has opened, as of July 15th, to American visitors without the need for quarantine. They really have thought it through: a PCR test within 72 hours of departure, another four days after arrival. We found one case to date on August 3rd, but it has seemingly been totally contained. Other than that, there hadn’t been a COVID case in over two months. This could really be the first safe place on Earth that opened safely to tourism. It started, and we are exploring ways to make French Polynesia part of our reactivation plan. Incidentally, just as a caveat here, there have been a few more cases in the last couple of days from French nationals coming in, but still only one case of a tourist. Speaking of reactivation, we have a diversified team that includes executives, operational leadership, dedicated employees, along with our consultants, physicians with expertise in infectious disease, that are meeting every day to improve and refine protocols for reactivation. We have always taken pride in our robust health and safety protocols across our fleet and are continually exploring ways to augment existing standards. For example, last year ahead of the pandemic, we introduced a new revolutionary cleaning system called ACT Premium Purity. It is a light-activated self-disinfection system that significantly reduces any viral and bacterial transmission. Our restart team is working closely with leading health experts and local officials to ensure that we are taking every step necessary. They are monitoring all countries where we have future travel plans for possible itinerary changes in their requirements and, in certain instances, offer suggestions as to how we might operate while maintaining safety. In order to reactivate, we are focusing on three key ingredients. The first is credible practical medical solutions that involve double PCR testing, rigorous sanitation protocols, and creative social distancing that does not intrude on the guest experience. Second, we need a welcome mat in geographies that wish to travel. Every country we visit must activate its protocols and what will allow them to stay open. Strides are being made, like those taken by French Polynesia. More will be learned each day, and I anticipate in the weeks and months ahead, more and more countries will find practical and acceptable ways to open their borders. Third, acceptance by travelers that they can be reasonably assured of their safety while maintaining the integrity of the expedition. So, here we are, nearly five months into total shutdown; nobody is sure how much longer it will last. It is exasperating to be sure, but it will at some point be resolved. And as I mentioned earlier, I do believe that pent-up demand and new demand for expedition cruising will skyrocket. We have heard this from so many people: travel professionals and travelers alike. What is needed during this period of shutdown is clear: continue to conserve cash as much as possible while avoiding anything that could damage the brand for the trust that exists amongst travelers and the business managers with whom we work. What I would say every day to our employees is simple: although we don’t know exactly when we will come out of this, when we do, we want our reputation to have remained intact. We must never squander that trust, which we have built over decades. Since our last earnings call, we had several meaningful conversations with guests through webinars, phone calls, and emails. We wanted to assess how they viewed our protocols and our vision of how expeditions would be conducted. It was gratifying to see that over 50% have indicated they were ready to get on a plane and proceed. They are eager to get back out there and exhibited clear trust that we have always and will always take their welfare and the welfare of our crew very seriously. One of the aspects of our business that guests consistently cite as a key differentiator for them is the size of our ships and the authentic, immersive experience an average vessel size of 93 passengers provides. While this is an enormous competitive advantage in normal times, it becomes even more so in the current environment. Everyone I speak to says the same thing: you are fortunate to have small ships, and that is true for so many reasons. The sheer logistics of starting again will be far easier because of our size. Clearly, we can manage medical solutions more effectively, and we can alter our itineraries at any point if necessary. We do not require ports, except when we begin and end, and even if there was a problem with space, we could function from anchor. We are also finding that countries are happier with the idea of smaller ships, and our brand stands for small and remote. So, we don’t have to reinvent ourselves during this COVID environment. Most of the time we are in the wild. It is also gratifying to see that our reputation is really meaningful when it comes to discussing with countries and communities the subject of restarting. There is respect, which is critical in times like this; the conversations with authorities and countries we visit have been heartwarming. They clearly exhibit the sentiment of wanting us back and often have said one way or another, your kind of tourism is what we want. These past five months have been tough on so many fronts. We have taken a financial hit, and we have had to furlough our employees and reduce the salaries of loyal team members who have worked to build this company over the last 40 years. We had one event that was particularly exciting for all of us: dramatically getting the last of our crew home on June 26th. We called it Operation Argosy and used our newest ship, the National Geographic Endurance, to deliver our last 103 crew members for both the National Geographic Explorer in Denmark and those onboard the Endurance to Germany, where they boarded buses to Hamburg and then their flight home on a privately chartered flight from Manila. Our staff was so energized by this achievement that they gave us all a much-needed boost. We remain optimistic that we will resume sailing soon, but there is no question that our broader industry, and Lindblad specifically, will continue to face uncertainty moving forward. Fortunately, we have the resources to weather this into next year if necessary. Travel and tourism is not going away. Millions of people each year will want to get out and explore the world. The question is how and when, and what they will value. We firmly believe that we have a proposition that is incredibly differentiated and valuable to a wide array of travelers. It was before the pandemic, and I believe it will be so even more so after. This is not the first time we have faced adversity, and every time our resiliency has helped us overcome challenges and crossroads in the long term. We can’t wait to return to doing what we do so well: exploring our world in meaningful ways. Thank you for your time today. And now let me turn the call over to Craig. Thanks, Sven.

Thanks, Sven. Good afternoon, and I hope everyone is staying healthy and safe during these extraordinary times. Before I begin, I would like to once again thank all of our crew and office personnel for the diligence and resiliency they have shown in preparing us to return to operations and for their continued efforts to identify ways to preserve capital. As Sven mentioned, it has been nearly five months since we closed our operations despite not having had any cases of the COVID-19 virus across our fleet. Once it became readily apparent that the virus was going to impact our operations, we swiftly put in place a comprehensive plan to reduce costs and enhance our liquidity position. All of our ships have been carefully laid up with the minimally required crew, and we have eliminated a considerable portion of our ship and land-based expedition operating costs. We have also reduced our expected annual maintenance capital expenditures by over $10 million, saving more than 50% from the originally planned levels. On the advertising and marketing front, we have suspended the majority of our spend, focusing primarily on search opportunities that are generating appropriate returns with regards to future bookings. We have significantly lowered general and administrative spending through employee furloughs, salary reductions, and elimination of all non-essential travel, office expenses, and discretionary spending. Additionally, we have deferred payment of the majority of bonuses earned for 2019 performance, including all C-suite bonuses. We are deferring cash compensation for the Board of Directors, and we have suspended all purchases of common stock under the stock repurchase plan. On the P&L front, the measures we have taken have enabled us to reduce operating expenses before depreciation and amortization, interest, and taxes by over 60% this quarter versus the same quarter a year ago. On a cash front, we have lowered our estimated monthly cash usage to $10 million to $15 million. This includes all ship and office operating expenses, necessary capital expenditures, and expected interest and principal payments, but excludes any new guest payments for future travel and reforms of previously made guest payments. Let me take a minute to provide some color on the second quarter cash usage before turning to our current liquidity position and cash runway. Net cash spent during the quarter was $57 million, which included approximately $31 million in operating costs excluding refunds. It is important to note that our ships were not in full layoff status throughout the entire second quarter, as it took some time to reposition the ships and, as Sven mentioned, repatriate crew. Therefore, we would expect a further reduction in operating spend moving forward. The second quarter also included approximately $9 million in growth CapEx not covered by our export credit borrowings, primarily related to the launch of the National Geographic Endurance, and approximately $5 million in principal and interest payments. The remaining cash usage was primarily refunds paid to guests, partially offset by payments for future travel. It has been very encouraging that on the voyages canceled and rescheduled thus far, which includes expeditions through the end of September, the majority of our guests are opting for future travel credits as opposed to full refunds, and this trend has been very consistent since March. One other important facet with regards to refunds is that our exposure is significantly lower moving forward as the bulk of guest deposits were related to the voyages canceled or rescheduled through September, and these guests have already decided their future travel plans. Turning to current booking trends, as we had highlighted previously, we were off to a great start in 2020 prior to COVID, and while voyages cancellations have resulted in current bookings for 2020 being down 62% versus 2019, the demand for future expedition travel remains very strong, and we are well-positioned for 2021 and beyond. Bookings for 2021 are currently 6% ahead of 2020 at the same point a year ago, and 35% ahead of 2019 at the same point in 2018. A portion of that growth is certainly from guests on canceled voyages that have opted to reschedule, but we have also generated over $30 million in bookings since March 1st from guests not utilizing future travel credits. As a reminder, we have also not yet resumed marketing awareness, and we believe based on the feedback we are getting from guests that there is significant pent-up demand to get out and explore the world’s amazing geography. At the end of the second quarter, the company had $81 million in unrestricted cash and $21 million in restricted cash related primarily to deposits on voyages that originated in the United States. Aside from continuing to explore ways to further reduce operating costs, this past quarter, we also enhanced our liquidity position through deferral of approximately $9 million in principal payments from June 2020 through March 2021 under our export credit agreements. On the debt front, we ended the quarter with $412 million in principals outstanding. During the quarter, we drew down an additional $30.6 million under our second export credit agreement, and we used the proceeds for the third installment payment for the National Geographic Resolution. The remaining installment payments of approximately $62 million for the Resolution are fully covered by the second export credit agreement and are not scheduled until next year, with the majority due upon delivery of the ship, which is still anticipated to be towards the end of 2021. With regards to our leverage covenants, the company has worked with its lenders to amend existing credit agreements, including the suspension of leverage ratio covenants through June 30th, 2021. The company has no material debt maturities until 2023, and we continue to evaluate several additional strategies to enhance our liquidity position, including, but not limited to financing for both the public and private markets through the issuance of both equity and debt. The timing and structure of any transaction will certainly depend on market conditions. Thank you for your time this morning, and now Sven and I would be happy to answer any questions you may have.

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

Good afternoon, guys. So, first question would be around your 2021 booking commentary. And Craig, did I hear you say that the $30 million of future travel that you booked since March? That is all new bookings. Did I hear that right?

Yes, the $30 million represents new bookings. Obviously, when you factor in bookings that have been transferred from folks who are using future travel credits from 2020 into 2021, the actual booking number is much larger if you factor all those in, but we have booked over $30 million in people who are not using future travel credits for 2021.

And I don’t know if you can say this, but where approximately would that normally be? I mean, that seems like a pretty impressive number?

Yes, we are not going to give you exactly where it would have been versus where we were in the past. It is certainly less than what we would do historically, but it does speak to the fact that we are seeing significant interest from not only guests that were previously booked, but also guests that are looking to come out of this with something to do and someplace to go. We respect that demand to continue because it has been pretty consistent since, I would say, the early part of March.

Okay. And then Craig, do you have more cash coming in the door today from new bookings versus refunds going out the door?

As of today, that is not the case. Now, I shouldn’t say that. I would say that was not the case through July. Certainly moving forward, we would expect that to start to shift because now the amount of refunds that are going out the door will certainly be significantly less, as we have not received a significant amount of final payments for travel that is further into the future. What is important is we are still seeing significant deposits for future travel. Final payments are coming in as scheduled, but because we canceled so many voyages through September and because final payments are no longer due right now 90 to 120 days in advance, those payments have been pushed back, and the final payments are later. But when you look out to the rest of the year, I would expect the future cash payments to exceed refunds barring a significant number of future cancellations.

Okay, got you. I want to ask about the ability for you guys to return to operations. And look, I fully understand you have no clue when that is going to happen, but any updated thoughts as to the air service or the chartering service you guys were thinking about implementing? I think we talked about that the last time you guys reported, given you don’t fall into the CDC's no-sail policy. That is obviously a benefit to you guys, but I know the air issue seemed to be the kind of the hang-up right now?

Yes, let me respond to that. Sven here. So, that largely depends on geography. In many instances, we are still looking at the prospect of charter. And so people are prepared to pay a certain amount for commercial; chartering is obviously going to be somewhat more than that. But it mitigates or offsets part of it, and it should, we would imagine, protect the idea of more people staying committed, which also mitigates the cost of that charter. And so we are still actively pursuing that or have planned for that in various geographies. There are a couple where that equation doesn’t necessarily work so well. But at the end of the day, what we want to do is have people have a PCR test within four or five days of leaving home, a positive or negative test. Then at the gathering point from which we depart to get to the ship, we want to have another test done, which is meant to be returned within 12 hours. We have worked out with various people, including the University of Washington for certain geographies. Then, we would go in a private charter, so we would essentially have a bubble at that point, and we would modify itineraries so that we very much limit interaction with other communities unless we deemed it safe. So, that is generally the protocol, and it varies a little bit depending on the geography.

Okay, got you. And last question actually for you, Sven, as you are in Tahiti. I want to ask you something about the topical question. But there was a small ship, and I understand it is not as small a ship. But, you tried to start up operations, and it had some issues. I guess, since you are over there, what did you hear kind of happened on that ship? And then maybe what do you guys learned from that experience?

Well, what happened was one guest who had a negative - their protocols here are that you have to have a negative PCR test within 72 hours of leaving and then you register into a system online here in French Polynesia. Four days after arrival, you take another self-administered test. This individual was proven to have come back positive on the second test. She had arrived with a negative test, and four days later, took the second test that turned out to be positive. She was immediately isolated. Interestingly enough, at least as far as I know from what has been reported, there have been no other identified cases either from the guests on board or the crew. So, at some point in the transition between the time she took the first test, she contracted it but did not transmit it to others. I met the other day with the folks in the Ministry of Tourism, and they are looking at this so carefully. They put a lot of thought into the protocols for managing the reopening of tourism and anything that has happened they are looking at very closely in terms of whether they should modify their procedures in any way. I have to say, I have been incredibly impressed with how the French Polynesians have dealt with this.

Okay, great. Thanks, guys. I appreciate it.

Thanks, Steve.

Our next question will come from Alex Furman with Craig-Hallum. Please go ahead.

Great. Thank you very much for taking my question, and congratulations on getting your crew home. Certainly seems like a noteworthy accomplishment in this environment here. A couple of things I wanted to ask about. One is about the liquidity position, and I know you have mentioned consistent with last quarter. It sounds like a $10 million to $15 million monthly cash burn. Can you sort walk us through the process of bringing your ship back online? Would you expect if you were to have your entire fleet back up and running at some point, would there be incremental costs relative to that $10 million to $15 million burn that you would need to incur to be able to get your ships back into operations?

Sure. Aside from the normal operating costs, once they are back in operations, the costs to get them operational again are not that significant. The two biggest costs that you are going to incur are: first, you will need to get all the crew back on the ship, so there are certainly costs associated with travel to the location and certainly salaries once you bring them back on board. The second thing is you are going to have to take care of any repairs that need to be done ahead of when they launch. Now, that said, there is a fair amount of work that is done every year in dry dock, which for us is very much weighted towards the September/October time frame for many of our ships. So, the cost that we’re looking at to get these ships up and running would very much be in line with what a normal dry dock would be, which is not insignificant.

Great, that is definitely helpful. Thanks, Craig. And then can you just kind of walk us through a little bit the next few major regions that you would normally be sailing through over the next three, six, or nine months? I imagine Alaska is a really important geography to you; it seems like just based on what you normally have for your trips, that season would normally be over in the next month or two anyway. Beyond Alaska, what are some of your major regions and seasons that we should be thinking about for the winter and for the spring coming up?

Yes, so the next region really for us is Antarctica, starting in November, so that is November, December, January, February. So, that is the single most important geography aside from the Galapagos Islands where we have two ships permanently; that is another key geography. Alaska, of course, is done for this year. I mean, you could still go there now because we are not obviously doing that. Baja California in Mexico is an important geography, but not nearly as important as the Galapagos and Antarctica. And then Central America is another important geography. So, those are the main ones we are looking at right now. And then coming into March and beyond, one of the reasons I’m here in French Polynesia is that I think there is a clear opportunity here to turn this into a much more major geography for us in the post-COVID situation. For every year for the past several years, we have been here for a couple of months, plus or minus. I think there is a distinct possibility that we could be here with one of our ships far longer than that, so that is some of the highlights. But, you know, it is made up of all kinds of things, but that is really the bulk of the focus over the next several months.

Perfect, thanks for that, Sven. And lastly, if I could just ask, in terms of the new bookings coming into the $30 million or so of new bookings, as well as the rebooked voyages for passengers who had their voyages canceled. Anything noteworthy about what those passengers are booking? Are the passengers who are receiving incremental credit for canceling booking multiple voyages? Are they booking longer voyages or maybe upgrading their cabins with that incremental credit?

Yes, I think go ahead.

Sure. So, right now, what you are seeing is, I wouldn’t say there is one specific geography or one specific group of guests doing a certain action. I think what we are seeing is those that are using their future travel credit, have had a voyage canceled; in most cases, they are going back to those same voyages in the future. Some are looking to upgrade to additional cabins, some are looking to add additional cabins to bring other guests alongside, obviously paying additional funds to do that. But to use the credit in that way. Others are using the credit to book voyages in the future. There are also some folks who have gotten the future travel credit who right now have decided to not book anytime in the future and wait and see what happens and book what works best for them down the road. So, I think it really runs the gamut, and there is not one specific type of rebooking that we have seen, and I think it will continue to evolve as we get back into operations.

Great. That is really helpful. Thank you both.

Thank you.

At this point, I’m showing no further questions. So, this will conclude our question-and-answer session. I would like to turn the conference back over to Craig Felenstein for any closing remarks.

Thanks, Glen. Thank you, everybody, for joining us today. We appreciate your time this afternoon, and if you have additional questions, please let us know. Thanks.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.