Lindblad Expeditions Holdings, Inc. Q4 FY2020 Earnings Call

Good morning, and welcome to the Lindblad Expeditions, Inc. Fourth Quarter 2020 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Craig Felenstein, Chief Financial Officer. Please go ahead.

Thank you, Kate. Good morning, everyone, and thank you for joining us for Lindblad's 2020 Fourth Quarter and Full Year Earnings call. With me on the call today is Sven Lindblad, our Founder and Chief Executive Officer. Sven will begin his 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, along with the presentation regarding the acquisitions that we announced this morning.

Thanks, Craig, and good morning to everybody. I appreciate you joining us today. While preparing for this review for 2020 and my thoughts on the future, I looked back at my comments from a year ago on our 2019 year-end call. I couldn't have been more wrong regarding expectations regarding the effects of COVID-19. This turned out to be very different than SARS, 9/11, the 2008-2009 economic crash, and really anything else I or you have ever experienced. This is now an event that has shut down our and most other travel businesses globally for a year. And while we are optimistic that we will be selling again soon, exactly when that will be is still uncertain. No one in our lifetime has experienced such a long-lasting business interruption outside of war. As Charles Darwin suggested in the seminal book, The Origin of Species, it is not the most intellectual who survives, it is not the strongest that survives, but the species which survives is the one that is able best to adapt and adjust to the changing environment in which it lives. In Lindblad Expeditions, we are indeed adaptable. And the entire organization is very much focused on how not to let this crisis go to waste. We have done it before over our last 40 years, and we are determined to come out of this pandemic a strong and vibrant company that is here once again to take our guests to the world's most remarkable destinations. So what have we done that ensures that this will be the case? First and foremost, we shored up our capital position. Craig will discuss this further, but it started immediately upon shutting down our operations last March and is still a focus point today. We have been inordinately successful at cutting costs across all facets of the company without destroying the fabric that we aimed at. We also were opportunistic with regards to raising additional capital externally. In August, we added $85 million through a preferred stock offering. And in December, we added an additional $85 million of low-interest funds through the Main Street Lending Program.

Thanks, Sven. Before I begin, let me once again thank our dedicated crew across the world as well as our diligent office personnel for the resilience during this uncertain period and for their commitment in preparing us to return to operations while preserving capital wherever possible. It has been nearly a year since we closed our operations, and we continue to execute on the comprehensive plan we put in place back in March of last year to fortify our liquidity position. This was and remains imperative for two reasons. First, given the uncertainty around when operations resume and how quickly they will ramp back to normal levels, we want to ensure we emerge from the COVID pandemic as the same strong and vibrant company we were prior to the cessation of operations, with expanded capacity and the ability to capitalize on the growing demand for expedition travel. Second, having a strong liquidity runway allows us to be opportunistic with regards to additional growth drivers, both organically and through targeted acquisitions. As a result of the proactive steps we took this past year, we ended 2020 with $188 million in unrestricted cash and $17 million in restricted cash related primarily to deposits on voyages that originate in the United States, a $95 million increase over where we ended 2019. We previously discussed the reduction of our cash burn, which I will highlight for Q4 in a moment, as well as the $85 million we raised in August through the issuance of redeemable preferred stock to a diversified group of high-quality, long-term focused investors. This past quarter, we further enhanced our liquidity position with the issuance of $85 million under the Main Street Expanded Loan Facility program. This loan, which has a 5-year tenure and carries an interest rate of LIBOR plus 3%, has solidified that when we emerge from this pandemic later this year, we will do so as a strong company poised to regain the momentum we had prior to the virus. It also provided us additional financial flexibility to look for opportunities to augment our long-term growth profile. And as you have seen, we did just that with our recent acquisitions of DuVine and Off the Beaten Path. Sven has walked you through the strategic rationale of each, so let me lay out the financial parameters. Combined, the total acquisition price was approximately $10.5 million, comprised of $8.7 million in cash and $1.8 million of Lindblad stock. While not yet material to our current earnings, as Sven mentioned, we do believe there is a significant opportunity to grow these businesses given their strong brands and attractive addressable markets, combined with our marketing platform, expertise, and resources. Plus, we have a blueprint, having grown Natural Habitat from $3.9 million in EBITDA in 2016, the year we acquired them, to over $8.6 million in 2019. We also think this is just the beginning, and we will look to continue to be opportunistic on both the M&A and organic growth front. Turning to our operations. During the fourth quarter, all of our ships remained safely anchored with the minimally required crew, and we continue to minimize ship and land-based expedition operating and capital costs. We did spend a little over $1 million on maintenance CapEx this past quarter, primarily due to dry docks for the Explorer and Endeavour II, as we prepare to resume sailing. For the full year 2020, we managed to reduce maintenance CapEx by over 70% versus our original budget for the year. On the advertising and marketing front, we suspended the majority of our spend during the fourth quarter, focusing primarily on digital opportunities and paid media that were generating appropriate returns with regards to future bookings. And we continue to minimize general and administrative spending through employee furloughs, workload reductions, and the elimination of all nonessential travel, office expenses, and discretionary spending. Looking at the P&L, the measures we have taken enabled us to reduce total operating expenses before depreciation and amortization, interest factors by 70% during the fourth quarter versus the same quarter a year ago. On the cash front, we lowered our cash spend this past quarter to $26 million, which included approximately $18 million in operating costs, $5 million in principal and interest payments, and $3 million in Capex. The cash usage was partially offset by the positive net cash flow from guests as payments for future travel exceeded guest refunds on rescheduled voyages. On the voyages canceled and rescheduled thus far, which primarily includes expeditions through the end of May, the majority of our guests continue to opt for future travel credits as opposed to full refunds. And as I mentioned last call, our refund exposure is significantly lower moving forward as the majority of our unearned revenue is for travel where the guests have already decided on their future travel plans. Turning to current booking trends. Demand for travel continues to be very strong, and we are well situated for once we return to operations later this year as well as for 2022. The bookings for the back half of 2021 are currently in line with where they were for the second half of 2022 a year ago. And when you look ahead to next year, we are currently 37% ahead of where we were for 2021 at the same time a year ago. The strong year-on-year trends do reflect guests on canceled voyages that have opted to reschedule, but they only make up about a quarter of our bookings for the remainder of this year and 16% for 2022. We are also seeing strong new bookings from both returning guests as well as new audiences. And we have only just begun to market in earnest, focusing on digital targeting and social opportunities as well as increased outreach through trade advertising and travel advisers. Based on the feedback we are getting from guests, we believe that there is significant pent-up demand to get out and explore the world's amazing geographies, and these efforts will secure additional bookings for this year as well as next. As we work towards resuming operations, we estimate that our cash usage will return to $10 million to $15 million monthly on average, including all ship and office operating expenses, necessary capital expenditures, and expected interest and principal payments, but excluding any new guest payments for future travel and refunds of previously made guest payments. This includes the ramp in marketing spend I just referred to, spending on our digital transformation project and bringing back furloughed employees as necessary to prepare for a resumption in operations. Looking at our debt obligations, we ended the year with $496 million in principal outstanding, an increase of $266 million from the end of 2019. This reflects the incremental $85 million Main Street Loan during the fourth quarter as well as the drawdown of $45 million under our revolver earlier in the year. During the year, we also borrowed $108 million in conjunction with our final payment upon delivery of the National Geographic Endurance in March and an additional $30.5 million for the third installment payment for the National Geographic Resolution in April. With regards to our leverage covenants, the company has worked with its lenders to amend its existing credit agreements, including suspension of leverage ratio covenants through June 30, 2021. Turning to our expectations for 2021. Due to the uncertainties around COVID-19, we are not providing P&L guidance at this time. We will continue to update our anticipated cash usage as circumstances evolve. Aside from our operational cash usage, we anticipate maintenance CapEx in the $15 million to $17 million range, which includes modification of ventilation systems across our fleet to increase fresh airflow and mitigate the spread of contaminants. For growth CapEx, which includes costs for the resolution and spending on our digital projects, is projected to be between $75 million and $80 million this year. This does not factor in any potential new ship builds that we continue to explore. The remaining contract installment payments on the resolution are fully covered by our second export credit agreement with $15 million scheduled to be drawn in April and $45 million drawn upon delivery of the ship, which is still anticipated to be towards the end of this year. Lastly, in 2021, we will also have approximately $10 million in principal payments, predominantly for payments under our export credit agreements. As we come close to resuming operations, the steps we have taken to reduce costs and increase our liquidity runway will enable us to emerge from this pandemic as a strong company ready to once again capitalize on the growing demand for expedition travel. At the same time, the strategic steps we are taking to expand and enhance our product platform will provide us further avenues to drive long-term growth and build additional shareholder value in the years to come. Thank you for your time this morning. And now Sven and I will be happy to answer any questions you may have.

Our first question comes from Steve Wieczynski of Stifel.

So, Sven, I want to make sure I understood you correctly. It seems you fully expect to be operational in June at some capacity, particularly focusing on Alaska. This is significant since the larger cruise operators will be restricted from that market this year. Therefore, the question is whether the demand for that type of product is incredibly strong. Are there any issues with getting your passengers to Alaska? I hope that makes sense.

Yes. No, I do not believe there is an issue with getting our passengers or guests to Alaska at all. We have a very deep relationship with Alaska Airlines, which has been cultivated over many decades actually. And we're in constant conversation with them about how the landscape is changing, when we're anticipating starting, etc. As I think I've mentioned before as well, we've had a team in place since the very beginning of the pandemic, starting in April of last year, whose charge is to really constantly emulate new information in terms of opportunities related to protocols, vaccines, etc. And so that's been a very dynamic aspect of our business, and we talk about it literally every day in our management meetings. Where are we? What have we learned? Has this changed the landscape at all? And we believe everything is moving in a very, very positive direction. Certainly, in terms of people getting vaccinated, which is a total game changer. And we believe that certainly by the end of June, pretty much everybody in the United States who wants to be vaccinated will have had that opportunity, and certainly most people in our demographic by the end of May will have been given the opportunity to be vaccinated. So this is a big, big deal in terms of getting the world moving again in relationship to travel.

Okay. Got you. And then the second question would be really a bigger picture question about just competition. And obviously, there's a lot of competition these days for markets like the Arctic, the Galápagos, where it seems like every operator is trying to move some type of asset into those markets. So I guess the question is, what keeps you guys at this point in such a good position? I mean, is it something that your assets at this point can go to places where other competitors can't go? Is it the length of service of your captains? Or how would you position yourselves? Or what do you tell folks in terms of the way you market yourselves as to why they should take a Lindblad product versus somebody else's?

Yes. Well, just using the Galápagos as an example, the amount of new entrants really isn't changing. There are a certain number of these licenses. They're called cupos. And what they do is they occasionally change hands from one company to another. But the maximum number of people nor the number of these coupes hasn't changed in many, many, many years. So unlike Antarctica, where anyone who wants to go down there can basically do that, that's not true in the Galápagos. And in Antarctica, certainly, the number of ships have been built and are continuing to be built, and they are focusing on these polar areas for a variety of reasons. And so it is going to become certainly more competitive, but it's also happening because there's clearly growing interest in the geography. I believe that our leg forward, if you will, is we are the pioneers of these regions of the world, actually, but certainly Antarctica. My father began his company bringing people to Antarctica in 1966. And so there's a legacy factor that has been built into a trust factor that I believe is meaningful. We put tremendous priority into the quality of our marine teams because I don't care what anybody says, Antarctica does pose unusual circumstances that can become threatening to people who are not incredibly well trained. So our captains have been to Antarctica over 100 times. And they know the area backwards and forwards, and our expedition leaders and the officers on the bridge are just extremely knowledgeable. And we talk about that a lot because we believe if it’s not important to people, it should be. And it's a very distinguishing factor. I don't believe anybody else has the depth of experience, the depth of personnel, and the depth of respect for that geography, and in fact, every geography, but that one happens to be one where you need to have a bit more respect than a lot of others because it can hurt you if you don't.

The next question is from Chris Woronka of Deutsche Bank.

I want to ask again, you seem quite confident that you'll be able to return in a couple of months. How do you perceive the changes in protocols that will be necessary for various vaccinations? How have these changes evolved over the last couple of months? Are you fairly certain at this stage that the requirements won't change unexpectedly?

Yes, I don't believe that those goalposts will move negatively. We have been very engaged with various stakeholders, including the CDC, the State of Washington, and the Director of Health in Alaska. We anticipated certain requirements before they were officially announced and began developing our protocols accordingly. I believe our protocols are among the strongest in the industry, and the authorities acknowledge that. In some cases, they have considered our approach as a potential model for industry-wide requirements. While I can't specify the institutions right now, that is indeed the case. We feel confident in our protocols and have made necessary physical changes to our ships, particularly regarding ventilation systems. We have put in significant effort to ensure that our plans will be difficult to reject in the future.

Chris, it's Craig. One of the other things that I'll mention is some of the requirements have certainly changed over time. And the steps that I’ve taken previously will make it easier to deal with those moving forward, especially because some of the things that we're going to have to do will be less relevant. So, for example, when we first started looking at getting back into operations, one of the things that we spent a fair amount of time on was charter flights for the various destinations that we serve. With the advent of the vaccinations, those charter flights, many of them will not be necessary. So the cost components of those certainly go way down. We've also secured the testing requirements; the testing capabilities have already been solidified for us. So we already have the capabilities of doing that; how much we have to do that and how often remains to be seen. But we already have the capabilities to do that. So I think a lot of the investment that we needed to make has already been done. And if anything, moving forward, it will be less restrictive than we originally anticipated.

Okay, very helpful. Regarding the acquisitions you announced this morning, both seem quite interesting. My question is, looking ahead, how broadly can you expand your search? From a financial perspective, how do you assess these acquisitions? Is it based on the potential value of a customer you might acquire, or are there other factors at play in terms of not only making these businesses more profitable but also growing their revenue? Is it challenging for us to gain a clearer understanding of how you evaluate some of the smaller companies you encounter?

Yes. And I would like to share my thoughts on this as well. Our travelers have diverse interests, which we have recognized for quite some time. For example, you might find someone in Antarctica one year, then on a safari in Africa the next year, and the following year traveling around Southern France. Ultimately, if we establish a group of companies that cater to their varied interests, we can create lasting opportunities for them. For instance, a family trip organized by a grandmother, where three generations visit Antarctica, is quite a significant choice. They may not embark on such an extravagant trip again for many years, but they will still seek other experiences together as a family. The more options we provide them, the more likely they are to stay with us. Additionally, the cost of attracting a new guest significantly decreases after they’ve had a positive experience. Therefore, retaining customers is crucial for us and is very cost-effective. Our cross-marketing efforts with Natural Habitat have shown remarkable growth year after year, which has been beneficial for both companies. If we are strategic in building a wide-ranging platform, we can prevent them from seeking alternatives, resulting in numerous advantages.

Yes. I'll add on top of that, aside from capturing a greater share of wallet from the existing travelers, you're also going to be able to help them to increase their loads, right? So these are very strong businesses and very strong brands that were built by some very strong founders. What we bring to the table is we bring in operating expertise that we've been doing for many, many years, even before we acquired Natural Habitat, but now including Natural Habitat. And if you could increase the occupancy across all of these opportunities, you'll certainly be able to ramp revenue relatively quickly. You look at what happened with Natural Habitat, having gone from $45 million in revenue back in 2016 to supposed to have been well over $80 million in 2020. It's a pretty fast ramp, and that was done partially by cross-promotion, partially by adding additional marketing leverage, and partially by adding increased occupancy. So we think there's a unique opportunity across both of these assets moving forward.

The next question is from Greg Pendy of Sidoti.

Yes. Just a quick question. In light of the digital marketing hire, I believe pre-COVID, you had a step-up year in your marketing efforts. If I'm correct on that, it seems like you might be shifting more towards digital. Is that the case? And what is the expected run rate when things normalize that we should consider, if that's correct?

I'm not sure how I answer the net run rate part of the question.

I was wondering if there will be savings as you allocate more funds towards digital advertising. Is this part of a cost-saving initiative, or is it simply that increasing your investment in digital advertising is yielding a better return?

Yes. Let me take that, and you can jump in afterwards. So the question is an interesting one because you're not comparing apples to apples, right? So you can compare where we are today versus where we were pre-pandemic; the amount of inventory that we have across our ecosystem has gone up dramatically. We've increased the number of beds, we've increased the number of high-priced beds. So the notion of reducing marketing is probably not at the forefront of what we're trying to accomplish here, especially given the explosion that we're seeing in the space. We want to be able to capitalize on the explosion of the space. But what we will be able to do because of this digital transformation is we can be much more efficient with that spend. So we'll be able to target folks regarding the marketing materials that they're receiving in a much more focused manner, which will allow us to have a higher return on the marketing dollars that we're spending. And we can also be a lot more flexible. It's a lot easier to turn this bigot on or off when you're looking at digital spend than when you send a hardcore brochure. So it's going to be a marriage of the old and the new as we move forward, and we'll be much more efficient as we move forward, and we can certainly tweak that up or down based on the returns that we're getting as we're spending.

Great, that's helpful. One last question. As things start to normalize and you begin to ramp up efforts in June, will there be any relief on dry docking since the ships have been stationed, or is that still something that happens approximately every three years?

No, there won't be any meaningful difference in terms of dry docking. Some of those dry docks are regulatory and must be completed based on the specific ship and its flag, which will not change. We have delayed certain maintenance work due to the pandemic, but we will address it in the future as originally planned, with no material changes expected.

The next question is from Swan Lawrence of Undervalued Shares.

So Sven and Craig, you've spoken a lot about building a platform, and you just announced these two acquisitions, neither one of which is a cruise ship company. So this is maybe more a question for Sven. So if you looked out 10 years into the future, would you still see Lindblad Expedition as primarily a cruise ship company? Or would you see something more like a broader travel company specialized in nature and exploration experiences?

I think the latter because we still see the expedition ship aspect of the business as dominant in our entire mix with no changes expected. However, we will also incorporate a considerable amount of other opportunities. Our goal is to become a diversified adventure and experiential travel company, recognizing there are many ways people travel. We believe in applying our ethos to this and particularly collaborating with founders of travel companies, who possess a deep passion and commitment. They are valuable resources but often lack the necessary financial structure and marketing capabilities, which are crucial in today’s sophisticated market. Our advantage lies in the marketing platform we've developed, aimed at attracting rapidly growing ship tenders, allowing us to provide these companies with resources they've lacked, rather than making them build everything from scratch, which is a limitation for smaller companies. I am eager to work with these entrepreneurs and founders to appreciate their extraordinary innovations while supporting them with practical structural needs to enhance their productivity and profitability. At one point, we considered building the land business ourselves, as we had been heavily involved in it before 9/11. After that event, we chose to focus solely on our ships and fixed commitments, which proved to be a wise decision. Focus is essential in building travel businesses, leading us to decide not to create these ideas independently but to develop them through acquisitions of capable companies. Currently, we have three acquisitions and are closely assessing future opportunities.

That makes a lot of sense. And if I can just ask one follow-up question, please. Obviously, your platform and your marketing depend a lot on the National Geographic link that you have, which is an amazing link. And there's always that looming date of that partnership expiring the next time in 2025. I obviously appreciate you can't look that far into the future. But is there something you can do or you could say, to alleviate anyone's worries about that coming up for renewal in four short years?

Yes, this is a very mutually productive relationship that has now lasted over 16 years. We feel confident that we will continue beyond 2025 because it is in both our interests. This is a deep, long-standing relationship, and I see no reason why it shouldn't continue.

This concludes our question-and-answer session. I would like to turn the conference over to Craig Felenstein for closing remarks.

Thank you, everybody, for joining us this morning. And we look forward to speaking over the next couple of days about the full year, the fourth quarter, and the acquisitions that we just completed. Thank you.

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