Earnings Call Transcript - LIND Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Lindblad Expeditions Incorporated Reports Third Quarter 2020 Financial Results Conference Call. Please be advised that today's call is being recorded.

Craig Felenstein, Speaker

Thank you, Alicia. Good morning, everyone, and thank you for joining us for Lindblad's 2020 Third 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 detail 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.

Sven-Olof Lindblad, CEO

Thanks, Craig, and good morning, everyone, and thank you again for joining us today. During our last earnings call, I spoke to you from French Polynesia. I was there to learn about the possibilities, what could be developed in order to position one of our ships there. Throughout the years I've been fortunate to spend a fair amount of time in this remarkable location. If you think of a place like a recipe, French Polynesia has an excess of ingredients. The incredible lagoons, the turquoise waters, reefs, fish, mountains, forests, flowers everywhere, and really some of the nicest and happiest people on earth. I was able to spend my time there working with local leaders and laying the groundwork for what I believe will be one of the strongest, most sustainable expedition experiences we have ever developed. Now back in New York, we are all somewhat consumed by an upcoming election and made aware each day of the grip that COVID-19 has on our country and much of the world. This is a stubborn pandemic that clearly will be with us into next year and will significantly affect our short-term plans. Over the past few months, our start-up team has worked diligently to develop a robust set of stringent protocols that would allow us to operate sooner rather than later in a variety of geographies. We had these protocols vetted by a number of health officials and local authorities who were all impressed with the procedures we had established and were willing to work with us to resume operations. At the same time, we reached out to our guests who were scheduled to travel with us over the next few months through a series of webinars to gauge whether they were ready to join us on an immersive expedition, and the response was very encouraging. Based on that feedback, we have planned to start reactivation by operating our newer ship, the National Geographic Endurance in Antarctica beginning this December. Unfortunately, despite the current guest demand, we have now decided to cancel this Antarctica season. On October 26, the CDC issued a warning advising U.S. travelers to defer all cruise travel. Clearly, we do not look upon ourselves as a cruising company, and the size of our ships, along with where we travel, creates a totally different risk profile. However, we decided that given the significant uncertainty as to the evolution of COVID over the next months, both in reality and in terms of perception, rescheduling was the right thing to do for our long-term future. We've been around for four decades and will continue to grow and prosper for many, many more. But for a while longer, we simply must stay dormant. We are continuing to evaluate the short-term operating potential in additional geographies such as the Galapagos in Baja California, while actively beginning to market April 2021 and beyond with a robust plan that involves every tool in our arsenal. We have also unearthed new concepts and itineraries which we believe respond well to the times. Please remember, we have a very fortunate circumstance; because of our size and what we are known for and the reputation we have developed over these decades, we offer the kind of travel that countries and regions really want in a post-COVID world. This I've been told over and over again. We are also largely nature-based, which means being outdoors and naturally distanced from large human concentrations. Our spring and summer finds us almost entirely in the wild: Alaska, the Arctic, Galapagos, the Amazon, and Polynesia. As a result of our capital raised in August, along with an already significant cash position, we can weather this pause for quite some time. Our teams have done a remarkable job of paring down expenses while at the same time ensuring that we are ready to reactivate when it is the right time. Every aspect of the organization has had to undergo an analysis of what can reasonably be saved without damaging the long-term future. That, in essence, was the driving force behind the capital raised; never, never damage your long-term future. Significant capital reserves also allow us to look and seriously consider strategic opportunities that are compatible and broaden our long-term offerings. Clearly, there are and will continue to be such prospects as companies reevaluate their future. This pause is also a time to look internally and focus on things that never seem possible when you're at full throttle: internal IT systems, sales relationships, operational structure. In other words, the back office items that, while mostly hidden, make a huge difference both financially and in terms of efficiency. I've spoken to many colleagues in the industry who had the exact same experience. There is little time to efficiently correct course when you're driving at 100 miles an hour. Of course, everyone is asking when will this be over? When will we get back to normal? And while no one knows for sure when, clearly this will pass: better, more rapid testing, treatments, credible vaccines, and flattening of curves. These will all happen. And then we will return to an altered world. We will have found strengths we didn't know existed. We will have learned more about handling stress than we could have ever imagined. We will be more excited and motivated than ever to return to business, and we will respect and nurture our guests more than ever before. When I refer to COVID at this time, I use the word pause. Many have said to me, 'Sven, aren't you beside yourself with what's happening to the business?' Frankly, I'm not. I'm deeply saddened by what's happened in the world for the people who have become sick or died, for those who have lost their livelihoods, and for animals that have been killed because their countries simply couldn't afford to protect them. As to the business, COVID presented a crisis. We acknowledged it and built a plan to ride out of the pause, including building a large cash reserve. What I do know beyond the shadow of a doubt is that when the doors open again, we will be ready with what I believe will be among the most relevant and sought-after opportunities for traveling. And that position will last far into the future. Lindblad Expeditions and Natural Habitat celebrate the wonders of our world, whether they be natural, cultural, or historical. Our offerings are smart, respectful, and full of value. People will seek out these opportunities in far greater numbers than ever before. Of that, I am 100% certain. So thank you for your time today. And now please, I'd like to turn the call back over to Craig.

Craig Felenstein, Speaker

Thanks, Sven. Good morning, and I do hope everyone remains healthy and safe during these truly unprecedented times. I would also like to once again thank our crew across the globe and our office personnel for their resiliency during this period and for their diligence in preparing us to return to operations while simultaneously finding ways to preserve capital. It has been over seven months since we paused our operations, and we continue to execute on the comprehensive plan we put in place back in March to reduce costs and improve our liquidity position. Given the uncertainty around when and how quickly we will be able to ramp up operations, in August, we further extended our liquidity runway through the issuance of $85 million in redeemable preferred stock to a diversified group of high-quality, long-term-focused investors. I will discuss our overall liquidity position in a moment, but this investment, which was substantially oversubscribed, will help secure our return to operations and allow us to explore potential strategic opportunities to augment our long-term growth profile. Operationally, all of our ships remain safely laid up with minimally required crew, and we have eliminated a considerable portion of our ship and land-based expedition operating as well as capital costs. On the advertising and marketing front, we suspended the majority of our spend, focusing primarily on digital opportunities and paid media that is generating appropriate returns with regards to future bookings. We have also significantly lowered general and administrative spending through employee furloughs, salary reductions, and elimination of all nonessential travel, office expenses, and discretionary spending. Additionally, we suspended all repurchases of common stock under our existing stock repurchase plan. On the P&L front, the measures we have taken enabled us to reduce operating expenses before depreciation and amortization, interest, and taxes by 76% during the third quarter versus the same quarter a year ago. On the cash front, we lowered our cash spend this past quarter to $36 million, which included approximately $20 million in operating costs, $5 million in principal and interest payments, and less than $1 million in CapEx. 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 December as well as our upcoming seasons in Antarctica, South Georgia, and the Falklands, the majority of our guests have continued to opt for future travel credits as opposed to full refunds, and this trend has been very, very consistent since March. One other important facet with regards to refunds is that our 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. As we have highlighted previously, we were off to a great start in 2020 prior to COVID. And while voyage cancellations have resulted in current bookings for 2020 down 74% versus 2019, the demand for future expedition travel remains very strong, and we are well positioned for 2021 and beyond. Bookings for 2021 are still 4% ahead of 2019 at the same point in 2018, and while bookings are now behind where they were for 2020 at the same point a year ago, that is predominantly due to scheduled voyages and cancellations for Q1 of next year. Looking at the last nine months of 2021, which is more apples-to-apples, we remain 12% ahead of the same point a year ago for 2020. A portion of that growth is certainly from guests on canceled voyages that have opted to reschedule, but we have also generated over $44 million in new bookings since March 1 from guests not utilizing future travel credits. As a reminder, we have also not yet, as Sven mentioned, resumed marketing in earnest. We do anticipate ramping up our marketing efforts beginning in Q4 with some additional spend on direct mail and social opportunities as well as increased outreach through trade advertising and travel advisers. Based on the feedback we are getting from guests directly, we believe that there is a significant pent-up demand to get out and explore the world's most amazing geographies. And these efforts will secure additional bookings for 2021 and 2022. We ended the third quarter with $130 million in unrestricted cash and $17 million in restricted cash related primarily to deposits on voyages that originate in the United States. This is a $44 million increase over where we ended the second quarter as the cash usage was more than offset by the capital raised through the preferred stock issuance. Our monthly cash spend this quarter was below original expectations due to targeted cost-cutting measures and cash management. Moving forward, we continue to estimate that our monthly cash usage will be $10 million to $15 million on average, including all ship and 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. On the debt front, we ended the quarter with $412 million in principal outstanding and have only $500,000 in principal payments due for the remainder of the year. We have deferred $9 million in principal payments related to our export credit agreements from June 2020 through March 2021. We have no material debt maturities until 2023. 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. Finally, looking at our new build obligations, the remaining installments in payments of approximately $62 million on our second new blue-water ship, the National Geographic Resolution, are fully covered by our 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. While there is unfortunately no way to be sure when we will resume sailing, the steps we have taken since the realities of the pandemic became apparent have provided us significant runway to weather the uncertainty. We are continuing to evaluate additional steps to further reduce our operating expenses and enhance our liquidity position so we can emerge from this unprecedented period as a strong company ready to once again capitalize on the growing demand for expedition travel. Thanks for your time this morning. And now Sven and I would be happy to answer any questions you may have.

Operator, Operator

Your first question comes from the line of Steve Wieczynski of Stifel.

Steven Wieczynski, Analyst

To your continued pause in sailings. And I guess the question is, given you don't fall technically under the CDC's guidelines, I guess we're probably surprised, I think other investors were surprised at this point, you haven't tried to get something operational sooner rather than later. So I guess the question, the biggest question is, is the issue here still trying to get customers to the ships themselves? Meaning that there's still kind of a lack of reliable air capacity at this point? Or are there just other factors that are keeping you out of the water at this point?

Sven-Olof Lindblad, CEO

Good morning, Steven. Thank you. We touched on this in our last call, but I want to emphasize some key points. To reactivate operations, you primarily need three things. First, a credible medical solution, which we have developed and are confident in. Second, you need acceptance from various regions to welcome you back. For instance, Argentina, Chile, and areas in the Antarctic are currently not open to American travelers. However, we are working diligently to secure a special allowance based on our protocols. Third, you need the willingness of potential travelers, and this situation has been quite fluid. Last week, we were prepared to restart operations in Antarctica and had engaged with our guests, receiving a strong positive response. We had developed marketing strategies to fill any gaps and were fully set to go. Then, there was a sudden spike in COVID cases nationwide, which overshadowed everything else in the news, alongside the election. On October 26, the CDC issued a statement advising U.S. citizens against traveling on cruise ships, which, although we don't fall under their restrictions since we're below the threshold they regulate, still impacted public perception. Given this recommendation and the challenges posed by distant travel locations amidst rising COVID concerns, we faced diminishing returns in potential customers. It became evident that sending ships under these circumstances wouldn't be economically viable. Given the possibility of worsening conditions before our planned voyages, we decided it would be wiser to pause operations. We have reserves in place and aim to reconfigure the organization for a significant restart in April. We may explore some operations in the U.S. and in the Galapagos Islands before then, but the current situation does not permit effective operation.

Steven Wieczynski, Analyst

So it sounds like you're just erring on the side of caution at this point. Is that fair?

Sven-Olof Lindblad, CEO

No, it's not fair because we're not erring on the side of caution. We're erring on the side of facts that tell us that there is no possibility to effectively operate in an area, send a ship down, fill it full of fuel, put crew on and do all of that and have it be a good result.

Craig Felenstein, Speaker

Yes. Steven, it's Craig. One of the things that's important to remember when you think about Antarctica is that it's a season, right? So it runs from November to, call it, March. So in order to get that season up and running, there's a whole lot of things that have to be done. And then that season is over. Unlike the Galapagos which runs pretty much year-round. So the decision on Antarctica had to be made by a certain point in time, and there was just too much uncertainty for us to get going from a cost perspective; it just wasn't worth the risk factor.

Sven-Olof Lindblad, CEO

But Steve, the reason I react to the word 'caution' is that we had developed an unbelievable set of protocols that would keep people safe, that people all over the industry and in countries were using as models for what they said was literally the best and the most well-thought-out protocols they had ever seen. And so we felt absolutely secure that we could bring people to the Antarctic and do it safely and give them a great experience at the same time. It was just that when the forces outside that you have absolutely no control over and when a government institution like the Center for Disease Control makes a statement like that, that creates a huge headwind in terms of trying to go up against it.

Steven Wieczynski, Analyst

Okay. Understood. My second question pertains to the new booking number you mentioned, which is $44 million since March, reflecting an increase of $14 million from three months ago. Is that $14 million a typical sequential slowdown in bookings? Or is this decline attributed to uncertainty about when you will resume cruising? I hope that makes sense.

Craig Felenstein, Speaker

Yes, Steve, the slowdown has not really been a slowdown. You got to remember that the early days, when you look at the March time frame was still very heavy because there was still a fair amount of new bookings coming in. When I look at the new bookings called over the last four to five months, it actually has been very consistent. So every week, it looked very similar. Obviously, there's some higher weeks and lower weeks. But if you look at the averages, the averages per week have actually been very, very consistent. Even right now, heading into the election, we're still seeing the same consistency, whereas in the past we've seen a little bit of a slowdown heading into the election. We haven't seen that with regards to new bookings, albeit the numbers are a lot smaller.

Operator, Operator

Your next question comes from the line of Alex Fuhrman of Craig-Hallum Capital.

Alex Fuhrman, Analyst

Question, I was wondering if you could talk a little bit about the range of scenarios that you're planning from in terms of the ability for Americans to travel to other countries, when you think you might see that voyages can resume in other countries. And then, if this ends up being most of 2021, where it's just impractical to get American to Europe and Argentina and Chile, are there possibilities where you could really ramp up your domestic cruises, maybe in the Continental U.S. in addition to Alaska to help mitigate the cash burn next year?

Sven-Olof Lindblad, CEO

That's a great question. There are several factors to consider regarding the reactivation of travel. We believe that with advancements in vaccines, treatments, and testing, these components are progressing and should be available sooner than in typical circumstances due to the urgency surrounding them. We expect that from April onwards, we will be able to operate in many of our traditional areas. For the summer, our newer ship, the Endurance, will be in the Arctic, while our four American ships will operate in Alaska, and other vessels will be in less impacted regions as opposed to areas with high COVID stress like the Mediterranean or the West Coast of Europe, which makes us more cautious. An example illustrates our flexibility: this year in Antarctica, we had two fully booked 30-day voyages from Argentina to Antarctica that were supposed to finish in New Zealand. However, when we realized New Zealand was closed, we informed passengers about changing the itinerary to focus on Antarctica and nearby islands. Most passengers accepted the change willingly, finding the new plan equally appealing. This shows our ability to adapt itineraries when necessary, as we have significant freedom to adjust our routes without being restricted to specific docking slots. We continuously assess our options to ensure we have alternative plans based on external circumstances.

Operator, Operator

Your next question comes from the line of Chris Woronka of Deutsche Bank.

Chris Woronka, Analyst

Wanted to ask if you have done any work around trying to understand the opportunity to potentially get some folks who may have been loyal to one of the bigger cruise brands and now they're looking for post-COVID a different experience. Is there any way to gauge or how do you direct your marketing efforts to some of those people?

Sven-Olof Lindblad, CEO

Yes. That's also a great question. One of the things I personally learned during this period of COVID, which was a great sort of awakening of sorts is, well, I always felt that the travel adviser community or travel agents, as some people may refer to them, was important. What I realized during this period is they are way more important than I had really fully realized. They have a real relationship with their clients, and they really do act as advisers, just like a financial adviser would act in relationship to finances. They advise in relation to travel opportunities, which they now are really, really important to the people they deal with. And we've had conversations with many of them about this very subject. People are going to change their preferences. And I think that’s going to bode well from our perspective because I think the idea of being in any sort of large gathering is just going to become less attractive. People are just going to be less attracted to crowds and obviously a large cruise ship. I'm not saying I don't want to denigrate that in any way, shape or form, but it's a fact of life. It's a critical mass that is significant. It’s also a critical mass that is way, way lower. And certainly, people in the travel trade recognize this, and they're going to be instrumental in an acceleration of shift in our favor. And that isn't just something I believe; that’s something we've discussed, that’s something I’ve heard over and over again and something we will really, really nurture.

Craig Felenstein, Speaker

Hey, Chris, one other thing that I'll add is when you look at the new bookings that we're getting in right now versus folks that are being rescheduled, out of the new bookings it's pretty much split down the middle between guests that have been here previously, and also new guests. That percentage of new guests is nice for us to see, especially during this time. So we are seeing just natural inbound interest on top of some of the work that Sven said we're going to be doing with some of the third-party travelers.

Sven-Olof Lindblad, CEO

And incidentally, that's not the only avenue. But I just want to illustrate that as a specific avenue. Obviously, in our communication, in our marketing, we are completely sort of rebranding, not rebranding, but our catalog, the one piece that is like critical every year that sort of launches the following year and the year after; we're completely reinventing it, if you will, in terms of emphasis and focusing on getting back into and developing a different relationship with wild places. So the combination of size and the combination of geography, I think, is a very potent mix.

Chris Woronka, Analyst

Thank you for the insights. When considering a potential restart, whether it's in April or earlier, and taking into account the ongoing protocols that may still be required—hopefully, these will eventually disappear—does this significantly affect the economics in terms of who is responsible for testing and other necessary measures? I understand that it would be beneficial to resume operations, but as we model this situation, will there be a different margin profile during the initial months or quarters?

Craig Felenstein, Speaker

Yes. Certainly, there's a couple of things that are going to happen out of the gate for us. When you need to get all the crew up and running and get them from where they are to the ships and then get the ships ultimately ready to sail and then the ships down to where they ultimately are going to take guests, that will certainly be additional cost in the startup process, nothing that we haven't planned for and part of the overall economics when we factor in whether it makes sense to sail or not. So that shouldn't be too out of the ordinary. There will be, when you start off, depending on geographies, some additional costs. Certain geographies are going to require charter planes potentially. Certain geographies are going to require more medical capabilities. Certain geographies may decide to pull some captains out of service. So I would say in the short term your margins will be a little bit impacted, albeit not too dramatically. You'll still be significantly profitable. When you think about these ships in general, the majority of our ships operate at gross margins well over 50%. So we would still expect to have very high margins on these ships when we operate them. And then those costs will certainly dissipate over time. So I would expect the first year margins to be impacted. But when you look out to years two and three, we should get back to the places where we've been historically.

Operator, Operator

Gentlemen, there are no further questions.

Craig Felenstein, Speaker

Thank you, operator. And thank you, everybody, for joining us today. We look forward to connecting over the next few days if you have additional questions. Thank you.

Sven-Olof Lindblad, CEO

Thank you.

Operator, Operator

This concludes today's conference call. You may now disconnect.