Earnings Call Transcript - LIND Q2 2023

Operator, Operator

Ladies and gentlemen, welcome to the Lindblad Expeditions Holdings, Inc. report on the second quarter financial results. My name is Glenn, and I will be the operator for today's call. At the moment, all participants will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. I will now hand you over to your host, Craig Felenstein, Financial Officer. Craig?

Craig Felenstein, CFO

Thank you, Operator. Good morning, everyone, and thank you for joining us for Lindblad's 2023 Second Quarter Earnings Call. With me on the call today is Sven-Olof Lindblad, Lindblad's Founder and Chief Executive Officer. Sven will begin with some opening comments, and then I will follow with some details on our financial results, balance sheet, and current 2023 expectations 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

Thank you, Craig, and good morning, everyone. I appreciate you joining us. Hard to believe that it's been about two years since I participated in an earnings call, and I welcome the chance to discuss with you the performance of the company today and the opportunities we see moving forward. Before I do that, I would like to thank our recently departed CEO, Dolf Berle, for the dedication and commitment he brought to Lindblad Expeditions these past couple of years. Together with the management team, the Board of Directors, and our employees around the globe, we steered the company through the longest downturn in our history and helped position the company for success moving forward. I appreciate Dolf and the entire organization for their relentless hard work, adapting virtually daily to the challenges posed by COVID while maximizing our existing product portfolio and exploring opportunities to broaden our platform, all while keeping our guests' experience at the center. I wish Dolf the best in his new role closer to home. While we wish him well, I couldn't be more excited to return and help navigate this great enterprise into a new era. So what do I mean by a new era? First of all, putting the COVID pandemic definitively behind us. Yes, we still have the occasional case, but they no longer significantly impact overall operations. Our financial results have already started to reflect this reality with EBITDA of $61 million in the first half of the year compared to where we were a year ago. Second, it means capitalizing on the massive growth of interest in expedition travel. We've been providing authentic, high-quality experiences to our guests for five decades. Along with our partner, National Geographic, we are poised to build on that success. The pull to connect authentically with nature and culture is growing daily, and there is no other company in this segment with our track record or our commitment to providing unique and immersive expeditions. Third, it means building our technology to support innovative ways to drive the business. This quarter, we launched our new reservation system, integrating 15 critical systems across the company, including sales, marketing, accounting, operational, and analytics tools. This marked the biggest and final building block in our digital stack transformation, which also included a new CRM, a new content management system, a new digital asset management system, and a new customer data platform. Looking ahead, we see tremendous opportunities to leverage the combined capabilities of the stack to drive more effective and personalized marketing, enhanced customer service levels, better forecasting, pricing and promotional tactics, and efficiency gains for our sales associates. Our implementation has already supercharged our online bookings, enabling cabin selection, providing new ways to display and merchandise various aspects of our voyages, and enabling faster searches for trips and information. We're also able to dynamically price our departures, ensuring that we're pricing each cabin on each trip appropriately. Fourth, the new era means reconnecting with our community in creative ways after distancing with so much happening during these past years. It involves creating the most modern marketing and sales platform to propel growth. I just mentioned the technology opportunities, but it's more than that. It's mining our historically successful marketing approach, which largely centered around direct mail and targeted emails, with meaningful digital lead generation, focusing on driving first-time bookings through elevated search campaigns to capture and convert more prospects than ever before. We are also looking for innovative ways to reach new audiences, such as our recently launched collaboration with Food and Wine, featuring 14 expeditions in 2024 along the Columbia and Snake River in Washington and Oregon, complete with programming elements, wine selections, and special guests chosen by the Food and Wine editorial staff. At the same time, we are doubling the size of our sales force to grow our relationships with travel advisers across the country and internationally. More advisers are booking their clients on expedition cruises than ever before, and we've hired industry-leading salespeople to help us increase our share among these important distribution partners. A new era also means bringing R&D back to the forefront in terms of new geographies and experiences. In regions where we have visited for years, we are innovating our ways to immerse our guests in these remarkable destinations. COVID limited our boots-on-the-ground approach, which is critical in developing our unique offerings. We have reconstituted our experienced team and redeployed personnel around the globe to ensure we deliver unparalleled experiences for our guests. Additionally, we are exploring ways to broaden and deepen our platform of product offerings as we maximize our existing portfolio. Expanding our fleet, either through acquisitions or building new capacity, and looking for opportunities to diversify our land offerings. The four land companies we have acquired since 2016 have generated significant growth from acquisition levels. Each has strong momentum coming out of the pandemic, providing high-quality remote adventure travel opportunities to audiences that were cooped up for many months, and we have maintained that momentum in 2023 as we fine-tune product offerings and focus on reaching wider audiences. As we continue to scale these businesses with our dedicated and passionate founders, we will focus on finding additional companies that are best-in-class and aligned from a mission perspective, where we can collectively propel meaningful growth. So, what is the sum of what I mean by a new era here for Lindblad Expeditions? This is a time where only those best suited for adaptation will survive. We have a wealth of tenured people, a fantastic Board of Directors, and some very talented individuals. Everyone knows that the mantra of adhering to the way we have always done it is no longer viable. We must respect our past, but we must always evolve as the world turns and changes. While we are excited about the momentum across our business today, we are not yet where we need to be. Occupancy across our fleet in 2023 will be up year-on-year, but it is not yet at our historical levels of 90%. Some headwinds still remain, such as the large-scale discounting we are observing in the marketplace as new entrants attempt to gain market share, a practice that has no chance of success in the long run. This is not the first time we have seen this dynamic across the industry. As we have in the past, we will maintain our commitment to high yields given the experiences we provide. Other headwinds are beginning to wane; cancellations, for example, while still slightly elevated from 2019 levels, are improving weekly as travelers become more comfortable coming out of the pandemic and as we update our cancellation policies. As we navigate the short term, I believe the core question is: where are we going? And are we poised for sustained and meaningful growth? I believe the answer is without doubt, yes. Each point of occupancy should yield $4 million to $5 million in additional EBITDA. Clearly, the most valuable opportunity is to return to the occupancy levels we historically achieved. As we focus on returning to these levels while maintaining robust yields, we will also explore ways to diversify our portfolio of product offerings to further increase the company's earning potential. Bottom line, we are excited and motivated and definitely poised for continued growth, and I am both grateful and ready to take the helm of this great ship of expeditions. And with that, I'd like to turn the call back to Craig.

Craig Felenstein, CFO

Thanks, Sven. Lindblad's strong year-on-year growth continued during the second quarter as we further ramped operations with broader fleet utilization and additional departures across our growing land businesses. As we deliver sustained year-on-year growth, we are taking the operational and strategic steps necessary to capitalize fully on the expanded earnings potential of the company. The significant investments we have made in additional capacity, diverse product offerings, technological capabilities, and our overall infrastructure have uniquely positioned us to significantly capitalize on the growing demand for high-quality experiential travel. Turning to the quarter specifically, second quarter total company revenue of $125 million increased $34 million, or 37% versus the second quarter a year ago, as we continue to ramp operations with strong growth across both our operating segments. At the Lindblad segment, revenue of $87 million increased $23 million, or 36% versus the second quarter a year ago. The year-on-year growth was driven by a 34% expansion in available guest nights from broader utilization of the fleet and by increased pricing, contributing to a 5% increase in net yield to $1,034 per available guest night. Occupancy of 74% was slightly below a year ago, primarily because of significant additional shoulder season inventory as we broaden the use of the fleet and the Peru cancellations early in the quarter, which we mentioned on the last call. The Lind Experiences segment reported revenue of $37 million, an increase of $11 million, or 39% versus the second quarter of 2022, led by additional departures and guests across our land companies, including natural habitat trips to Africa and the Galapagos Islands, off the beaten path trips to Alaska and the U.S. national parks, Dubai's bike tours in Italy and France and classic journeys across Europe. Strong revenue performance across both segments generated significant operating leverage, with total company adjusted EBITDA of $6 million in the second quarter, an increase of $12 million versus the second quarter a year ago. The year-on-year growth was driven by a $10 million increase at the Lindblad segment and a $2 million increase at the Land Experiences segment, which is traditionally a slow season. Looking a little closer at the cost side of the business, operating expenses before depreciation and amortization, stock-based compensation, interests, and taxes, increased $21 million, or 22% versus the second quarter of 2022, led by a 24% increase in the cost of tours, primarily related to the ramp in ship utilization as well as expenses related to operating additional land-based trips. Fuel costs in the quarter were 5% of revenue compared to 7% of revenue in the second quarter of 2022, reflecting slightly lower fuel prices and the increased revenue profile. Sales and marketing costs increased 18% versus a year ago, primarily due to higher commissions and royalties related to the increase in revenue. The quarter also included some additional costs associated with our digital initiatives, most notably those related to the implementation and integration of our new reservation system, which, as Sven mentioned, launched during the quarter. G&A expenses during the quarter increased 18% versus a year ago, excluding stock-based comp and one-time items, primarily due to higher personnel and sales tax costs as we ramp up operations and increased credit card commissions related to final payments for upcoming itineraries and for higher deposits on new reservations for future travel. The total company net loss available to stockholders was $25.6 million, or $0.48 per diluted share, which improved by $4.5 million compared to the net loss available to common stockholders of $30 million, or $0.59 per diluted share reported in the second quarter a year ago. The improvement reflects the significant ramp-up in operations, partially offset by the write-off of $3.9 million in deferred financing costs related to our export credit agreements and additional interest expense of $2.2 million net associated with higher rates and increased borrowings related to our debt refinancing in May. Turning to the balance sheet, we ended the quarter with $197 million in cash and short-term investments, a $77 million increase from the end of the first quarter, led by $68 million in cash provided by financing activities as we solidified our balance sheet by refinancing our export credit agreements with notes that mature in 2028. The 9% fixed-rate notes replaced variable rate debt that had an interest rate of approximately 8.5% in the first quarter, eliminating principal payments of over $20 million annually. In addition to the cash provided by the refinancing, the company generated positive operating cash flow of $17 million during the quarter, which was partially offset by CapEx of $8 million, primarily maintenance CapEx and spending on our digital initiatives. Turning to the full year of 2023, we are excited about the sustained operating momentum across our portfolio and continue to anticipate significant growth as we ramp operations and capitalize on our expanded platform. The Lindblad segment has already booked nearly 100% of its full year projected ticket revenues for the year, and we continue to expect total company tour revenues in 2023 between $550 million and $575 million and adjusted EBITDA between $70 million and $80 million. These projections reflect the impact of the elevated cancellations on occupancy during the first half of the year. However, as Sven mentioned, we have seen a slowdown in cancellation rates with regards to bookings for the back half of the year and well into 2024. Please note that quarterly results for the remainder of the year will reflect the seasonality of our business, with the third quarter benefiting from more complete fleet usage and peak seasons across both our fleet and land companies. Conversely, the fourth quarter will be impacted by less available guest nights due to heavy dry dock and transit time across our fleet, which will lead to more shoulder season inventory and the seasonality for our land businesses. Overall, we are pleased with the operating momentum across our businesses. While there will be quarterly fluctuations, we are well positioned for sustained growth as we take full advantage of the expanded earnings potential of the company and the growing demand for authentic and immersive experiences. Thanks for your time this morning, and now Sven and I would be happy to answer any questions you may have.

Operator, Operator

Thank you. Ladies and gentlemen, if you have a question, please ensure your phones are unmuted. We have our first question comes from Steven Wieczynski from TiVo. Stephen, the line is now open.

Steven Wieczynski, Analyst

Hi, guys, good morning. So Craig, we did this last quarter, but I need to do some simple math here again. Okay, so you did $33 million in EBITDA in the first half of the year. Based on your unchanged guidance, you're saying the business will do what, let's call it $42 million for the last two quarters of the year at the midpoint. And that's with a pretty nice book position at this point. I fully understand the seasonality of your business, but I have really no idea how this business will only do $42 million of EBITDA over the last two quarters, especially with where the land-based business is at this point. Can you help me here a little bit? Are you being super conservative? Are you seeing something we aren't seeing? I'm really just trying to sort out why the full year guidance here wasn't touched.

Craig Felenstein, CFO

Sure. Thanks, Steve. So when you look at the full year, there are a number of variables that obviously play into things when you look at the next months. Certainly, cancellations are trending in the right direction. However, they do still remain elevated from where they were back in 2019. We need a better feel for how that's going to impact really the fourth quarter, which will drive significant variability right now. Obviously, for the third quarter, we feel pretty good. But for the fourth quarter, that variability will depend on how those cancellation rates change based on the timeline of when people are allowed to cancel heading into the fourth quarter. That would be the first thing. The second thing is, obviously, the last-minute bookings. Those that come in for the fourth quarter or for the end of the third quarter now, we obviously don't have a whole lot of cost associated with them, given the fixed cost nature of our platform. So those last-minute bookings will either drive outperformance or end up where we expected. That remains to be seen. What we have seen with regards to booking windows is that people are booking a shorter timeline than they did historically. The traditional booking window for the company has been around nine months. Right now, it's trending shorter than that, which lends to some additional short-term bookings. Interestingly, we're not seeing so much in the next three months; we're seeing more bookings for the first quarter of 2024 and the second quarter of 2024. So it's really those two things that will play the most regarding the rest of the year. And then certainly, on the cost side, how fuel prices ebb up or down will certainly have an impact. Lastly, we'll have some decisions to make regarding the marketing side of the house. Right now, the marketing spending is providing really nice returns. If that continues, we may look to spend a little more on marketing in the back half of the year to drive bookings into the back half of 2024 and 2025. Given some of the new tools and digital initiatives we’ve implemented, we'll be able to make those decisions more timely.

Steven Wieczynski, Analyst

Okay, got you. And then you just touched on this a little bit, but I wanted to try to understand that again. Bookings for '23 look good; you're in a very good book position for this year. But can you give us any color on how maybe early '24 looks at this point relative to where you would be historically?

Craig Felenstein, CFO

Sure. When you look at where we are for overall 2024, I’m not going to put a number out there just yet. We'll provide that later in the year. However, from a percentage of sales, for example, a percentage of our inventory sold, I'd say we are a little bit behind where we were in 2020 during the same time, but we obviously have a significantly larger inventory. So I think we're in pretty good shape. We don't have the same advantage of all the bookings carried over from 2023 due to the pandemic. However, we're seeing nice gains. The gross bookings for 2024 throughout the second quarter were up significantly compared to bookings made in 2019. The trends are all moving in the right direction. I would like to provide an opportunity for Sven to discuss this a bit as well.

Sven-Olof Lindblad, CEO

Yes. Well, when you think about it, past guests make up about 30% to 35% of our overall business. In certain geographies on our blue water ships, in particular, the more esoteric ones that really count on past guests have lagged a bit. In 2020 and 2021, we obviously didn't have past guests, and those who became past guests recently are the most reliable source of new business. So, we lost those 34,000 people over those two years to draw from for future itineraries. We are making up for that now, and it’s returning to a normal pace, but that loss has caused a bit of a shortfall for some of these wins for a short period simply because the base of recency isn’t there to the same extent. However, that will be a historical situation and should be resolved very soon since, starting in '22 and more robustly, this base is being built up again.

Steven Wieczynski, Analyst

May I ask one more question? I apologize. Sven, while you're there, I think one of the questions we get from the investment community is why you came back to run the company again? Obviously, you're the founder and were very involved, but could you share your thoughts on your current mindset? Is this something temporary, or do you see yourself staying in this position for an extended period?

Sven-Olof Lindblad, CEO

Well, first of all, when Dolf elected to move to another opportunity, I was still very much involved with the company over the last two years. I participated regularly in management meetings and was involved in strategic decisions. So even though I wasn't in the role of CEO, I was involved in day-to-day activities. When Dolf elected to leave, it seemed like a rational idea, and the Board and I spoke about it, and we decided this was the best path forward. I have a deep understanding of the business built up over all those decades. When we eventually decide it's time to get another CEO, and I don't know exactly when that will be, I aim to help that individual better understand the complexities of the business. This is not an interim position, but it’s one we will assess after each year and decide how we feel about it. Right now, I’m extremely happy to be back doing this, and I believe the timing is very beneficial for the business.

Operator, Operator

Thank you, Steve. We have our next question coming from Alex Fuhrman from Craig-Hallum Capital Group.

Alex Fuhrman, Analyst

The results in Q2 were definitely stronger than we were expecting; nice profitability and revenue. The occupancy was a significant step down from Q1. I know, Sven, you mentioned some of the headwinds to ramping up during the shoulder season or more esoteric itineraries. Is that the primary driver of the sequential drop in occupancy? As we think about the second half of the year, should we expect a similar dynamic, where occupancy is stronger in the third quarter when you run more of your peak season itineraries?

Sven-Olof Lindblad, CEO

Yes, definitely. When you look at our business broadly, there are some key geographies that we know well. You've developed programs that can be repeated for several months or the entire year, like our Alaska program which runs four months with four ships. Ultimately, those programs bring in new audiences. But you can't run them all at once. You want diversity in your offerings. The imbalance of inventory is a significant component. The drop in occupancy is directly correlated with the two-year loss of building our guest community. The inventory that was developed did not account for that loss, so we will return to our historical occupancy rates of around 90% as that situation normalizes.

Alex Fuhrman, Analyst

That does answer my question. Thank you very much.

Craig Felenstein, CFO

One thing I would add on top of what Sven mentioned is that we often focus on specific metrics during these calls, but the reality is the drivers of the business are straightforward: occupancy, pricing, and yield are key factors. In the second quarter, we will continue to see the same dynamic in the third quarter. We will have more available guest nights, which will be significantly higher than where we were in 2022 and 2019. Pricing will also increase relative to last year and compared to 2019. So with two of those drivers performing well, we expect continued growth across the company in both the third and fourth quarters.

Operator, Operator

Thank you for your questions. If there are no further inquiries, we will conclude today's call. Thank you for joining us, and you may now disconnect your lines.