Earnings Call Transcript - LIND Q3 2023

Operator, Operator

Good morning, everyone, and welcome to the Lindblad Expeditions Report for the 2023 Third Quarter Financial Results. My name is Chach, and I will be your host for today’s call. I would now like to introduce Craig Felenstein, Chief Financial Officer, to begin. Please proceed.

Craig Felenstein, CFO

Thank you, operator. Good morning, everyone, and thank you for joining us for Lindblad's 2023 third 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, everybody, and thank you for joining us. Craig will discuss our record financial results in a moment. But before he does, I would like to take a few minutes to discuss some momentum across our operations, along with where we are focused as a company to further take advantage of the earnings potential of our platform and the growing demand for experiential travel. When I returned to CEO in June, I made it clear to the organization that we have three key priorities. First, as has been the number one principle since we founded the company back in 1979, ensure that everything we do elevates and enhances the guest experience. Second, given the fixed cost nature of our fleet, fill our expanded capacity to the same levels we were doing prior to the pandemic, and third, continue to rapidly grow the diverse businesses we have acquired while strategically and selectively looking for accretive acquisitions where we can further broaden our offerings and, when appropriate, create cross-marketing opportunities that provide meaningful incremental value. I'd like to provide a little color on each of these priorities, starting with the guest experience. Ensuring our quality is the highest level possible before, during and after the expedition has always been essential because it is our promise to guests. High quality is what they rightly expect, and it's even more important today given the evolving competitive landscape. We are proud of the consistently excellent guest satisfaction scores we have always achieved and we are dedicated to continuing to earn those results as we continue to grow in the months and years ahead. There have been some short-term challenges on the pre-voyage from the changes in our operating environment, and changes to our company infrastructure have created deeper and longer conversations between guests and our service teams. This takes more time to ensure that they have all the information needed for upcoming and prospective voyages. So we have adjusted the employee numbers dedicated to this effort to swiftly accommodate the rise in inbound call volume. Simultaneously, we are adapting to a massive change in technology as we significantly upgraded our digital stack with the rollout of a new CRM system, reservation platform, content management system, customer data platform and company website. Fully integrating these tools will provide far greater efficiency for our guests and employees. After the expected initial challenges as we integrated 15 critical systems across the company, including sales, marketing, accounting, operational and analytical tools, we are beginning to see the benefits from these investments. As we focus on our pre-voyage interactions and integrating technology, we are also now back to full force with research and development. It is the lifeblood of providing unparalleled experiences and having significant boots on the ground, planning and developing itineraries as an essential ingredient to cultivating new experiences in parts of the world we have been visiting for years and curating new expeditions in additional destinations worldwide. The same can be said for in-person training of our field staff, marine personnel and hotel operations. All key ingredients to the unparalleled service and experiences that Lindblad has been synonymous with over the last five decades. Turning to our second priority, filling our ships. This is obviously imperative as they are basically fixed cost platforms. The vast majority of each additional guest beyond our current occupancy drops to the bottom line, as each unsold bed represents a lost opportunity to maximize our platform and increase margins. We have discussed in the past how every point of occupancy is worth approximately $4 million to $5 million, all else being equal. So it's easy to see the tremendous upside in getting from the current occupancies to historic levels. The key to doing so is multifaceted, starting with the right balance of inventory. As we strategically expanded our fleet beginning in 2016, we focused on maintaining that balance, investing in capacity that would serve the guest demand we were seeing across the globe. By doing this, we expanded our U.S. fleet, nearly tripling our capacity in key areas such as Alaska, while maintaining high occupancy levels and increasing yields. We're on the same path with our expanded blue water fleet when COVID hit, which was further exacerbated by Russia's invasion of Ukraine, causing the rescheduling of many of our new itineraries like crossing the Northeast Passage and any others involving Russia. These itineraries had to be recrafted and remarketed while we also lost two years of generating new past guests due to COVID. These past guests are critical to generating strong demand for all of our more esoteric itineraries. They have traveled with us once, have an appreciation for what we do, and they present recent drivers. Therefore, it is imperative that we rebuild that past guest pipeline to maximize the opportunity across our fleet. We are already making significant inroads on that front. Itineraries that are drivers of new guests, like Alaska and Galapagos, for example, are already performing near historic levels. The system is now fully active again, producing the necessary pipeline for balanced across-the-board occupancy in future years. At the same time, as I laid out on our last call, we continue to focus on creating the most modern marketing and sales platform to propel growth. We are marrying the historically successful approach, which centered around direct mail and targeted emails, with meaningful digital lead generation, emphasizing driving first-time bookings through elevated search campaigns to capture and convert new audiences. We are also continuing to grow our relationship with travel advisers across the globe, as more advisers are booking their clients on expedition cruises than ever before, and we've hired industry-leading salespeople to help us grow our share from these important distribution partners. As we grow occupancy, we are also focused on ensuring that we maintain our premium price point given the experience we deliver. This requires that we continue to reinforce the messaging around our value proposition with an emphasis on the differentiated high-quality expeditions we can provide, given our heritage, experience, and knowledge base, as well as our long-standing partnership with National Geographic. For many travelers, a destination like Antarctica is a once-in-a-lifetime experience. We strongly believe that the exceptional experience should not be compromised. With us, it won't be. We clearly have the best and most experienced navigators, expedition leaders and naturalists, as well as the best ships from the perspective of providing expedition excellence and elegance. The final priority is to continue to drive results across our land portfolio. The rapid growth we are delivering at Natural Habitat, DuVine, Classic Journeys, and Off the Beaten Path is a testament to the founders and leaders of these businesses, who share my commitment to the guest experience. We had significant momentum coming out of COVID in 2022 and are certainly building on that success in 2023. The collaboration and sharing of best practices with regard to product, marketing, and operations is helping to attract more and more travelers, and we believe we are just scratching the surface of opportunity that the land portfolio has to offer. As we grow our existing business, we also continue to explore additional opportunities to further broaden our product offerings. We recognize that our travelers have diverse interests. A person may be with us in Antarctica in December and on Safari in Africa in September. The more diverse options we can provide, the better. So we are very focused and excited about selectively finding additional companies that are best-in-class and aligned from a mission perspective to bring into the fold. The biggest opportunity we have in the short term is to increase the execution of our existing portfolio. Augmenting our long-term growth opportunity with additional drivers remains a priority. Overall, we are very excited by the momentum across our entire company as we deliver strong results today while setting ourselves up to leverage the premium platform we have built. In many ways, we are a much different company now than we were right before the pandemic with a fleet that is 40% larger, a land portfolio that is quite beautiful, and an involved technological footprint and overall company infrastructure. While there is significant opportunity ahead, there will also be a lot of hard work involved in ensuring the success of the priorities I've laid out. The organization fully understands and embraces their importance, and we look forward to delivering continued growth in the months and years ahead. And with that, I will turn the call back to Craig.

Craig Felenstein, CFO

Thanks, Sven. As Sven mentioned, Lindblad delivered record third quarter results, building on the momentum we generated during the first half of the year. As we further ramped operations with broader deployment of our expanded fleet and additional departures across our diversified portfolio of demand businesses. Equally as important, while we deliver sustained year-on-year growth, we continue to take the necessary operational and strategic steps to further position us to take full advantage of the growing demand for high-quality experiential travel. The earnings potential of the company has increased dramatically compared to pre-pandemic levels, and the significant investments we have made in our overall infrastructure, technological footprint and marketing and sales capabilities will allow us to maximize that earnings potential in the years ahead. Turning to the third quarter specifically. Total company revenue of $176 million increased $31 million or 22% versus the third quarter a year ago as we continue to ramp operations with strong growth across both of our operating segments. At the Lindblad segment, revenue of $109 million increased $25 million or 30% versus the third quarter a year ago. The year-on-year growth was driven by a 21% expansion in available guest nights from broader utilization of the fleet and increased pricing, which contributed to a 9% increase in net yield to $1,110 per available guest night. Occupancy of 81% was in line with the third quarter a year ago, despite the significant increase in available guest nights year-over-year. At the Land Experiences segment, revenue of $67 million increased $6 million or 10% versus the third quarter of 2022, led by additional departures and guests across our land companies, including Natural Habitat trips to Africa, Alaska, Canada and the U.S. national parks. Off the Beaten Path trips to Alaska and the U.S. national parks, DuVine bike tours in Italy, France and Portugal, and Classic Journey trips across Europe. The strong revenue performance across both segments generated significant operating leverage with total company adjusted EBITDA of $34 million in the third quarter, an increase of 83% versus the third quarter a year ago, driven by a $15 million increase at the Lindblad segment with strength in Alaska, the Galapagos and the Arctic. Looking a little closer at the cost side of the business, operating expenses before depreciation and amortization, stock-based compensation, interest and taxes increased $16 million or 13% versus the third quarter of 2022, led by a 9% increase in cost of tours, primarily related to the ramp in ship utilization, as well as expenses related to operating additional land-based trips. Fuel costs were 3% of revenue as compared to 6% of revenue in the third quarter of 2022, reflecting the increased revenue profile and lower fuel prices versus a year ago. We have seen a steady increase in fuel costs from the second quarter of this year, which will likely impact our fourth quarter and 2024 results. However, overall, fuel remains a relatively small component of our operating costs. Sales and marketing costs increased 21% versus a year ago, primarily due to higher commissions and royalties related to the increase in revenue, as well as additional marketing spend to drive future bookings. The quarter also included some additional costs associated with our digital initiatives, most notably associated with the integration of our new reservation system. G&A expense during the quarter increased 18% versus a year ago, excluding stock-based compensation and one-time items, primarily due to higher personnel costs as we ramp operations and position the company for future growth, as well as increased credit card commissions related to final payments for upcoming itineraries and higher deposits on new reservations for future travel. Total company net income available to stockholders of $4.5 million or $0.08 per diluted share improved $14.3 million versus a net loss available to common stockholders of $9.8 million or $0.18 per diluted share reported in the third quarter a year ago. The improvement primarily reflects the significant ramp in operations, partially offset by additional interest expense of $3.1 million, associated with higher rates and increased borrowings related to our debt refinancing in May. Turning to the balance sheet. We ended the quarter with $205 million in cash and short-term investments. A $7 million increase from the end of the second quarter, and the company generated positive operating cash flow of $27 million during the quarter, which was partially offset by interest payments of $12 million and CapEx of $8 million, including maintenance CapEx and spending on our digital initiatives. Turning to the full year 2023, we are excited by 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 all of its full-year projected ticket revenues for the year, and we continue to expect total company revenue in 2023 between $550 million and $575 million and adjusted EBITDA between $70 million and $80 million. Please note, as we mentioned last quarter, the fourth quarter results will be impacted by the heavy dry dock and transit times across our fleet, more shoulder season inventory, and seasonality to our land businesses. We have made several of the repositioning trips across the Pacific and down the Atlantic available to guests, which will increase our available guest nights and contribute to revenue growth versus a year ago. However, we do anticipate lower occupancy on these voyages given their nature. Additionally, occupancy will be impacted by the heightened cancellations on each of our voyages as a result of recent worldwide events. Overall, we continue to be excited about the opportunity ahead. While there may be short-term fluctuations, the investments we have made in strengthening our existing operations and expanding our product platform are delivering more guests today than ever before and ideally situate us to further capitalize on the growing demand for high-quality, authentic and immersive experiential travel. Thank you for your time this morning. And now Sven and I will be happy to answer any questions you have.

Operator, Operator

Our first question today comes from Steve Wieczynski from Stifel. Please go ahead.

Unidentified Analyst, Analyst

Hi. This is Jackson on for Steve. First of all, excellent quarter, really nice balanced performance across land-based and cruises, nicely ahead of consensus EBITDA. Given the beat, can you talk about what went into the decision to leave your guidance unchanged here? And what sort of question marks still remain that might push you towards the top or bottom of that $70 million to $80 million range?

Craig Felenstein, CFO

Sure. Thanks, Jackson. Appreciate it. So there's a couple of things. Obviously, we're pretty much well into the fourth quarter and we have good visibility as to where the rest of the year plays out. The reason we didn't change anything at this point really circles around, I would say, three items, which are probably more variable than less visibility here moving forward. The first certainly is cancellation levels; we don't know for sure what cancellation levels are going to look like. Cancellation levels thus far, aside from media—which I’ll get into in a second—have been relatively minimal, still trending a little bit above 2019 levels. But they certainly have come down significantly from where they were at the start of the year. So where they ultimately end up will have an impact on the fourth quarter, as they do traditionally at this time of year, you're not seeing a whole lot of new bookings coming into the fourth quarter given the time frame of our bookings window. The second item is Egypt. Obviously, we have a presence in Egypt today, which is being impacted a little bit by what's going on in the world. How cancellations ratchet up with regard to Egypt specifically will have an impact in the quarter, and we'll have better visibility on that probably within the next two to three weeks. Lastly, the last item I would say is the fuel prices. I did mention how they're increasing versus where they were earlier in the year. But how high they ultimately increase and what the impact of that is in the fourth quarter still has a little bit of variability. So those three things are what's kind of keeping us where we are today, and we'll see how they play out over the next several weeks and months.

Unidentified Analyst, Analyst

Okay. Great. Really appreciate all the detail there. If I could ask one more, I would just say, in your release, you noted 2023 bookings remained solidly ahead of pre-pandemic, 42%. But can you give any commentary around 2024 bookings and recent booking trends? And I guess, specifically, have you noticed any hesitance from your customer base further out, particularly tied to the heightened geopolitical tensions globally?

Craig Felenstein, CFO

Sure. Here's what I'll say. The booking trends have been relatively consistent. When we look at the bookings during the third quarter, for example, gross production in the third quarter was up close to 20% versus where it was in 2022 in the third quarter. So we continue to see nice growth year-on-year in terms of the volumes that we're bringing in. Regarding where we are for 2024, we'll provide more color on that certainly in February during our year-end earnings call. What I will say is from a percentage of sale of our available inventory for next year, we are in a really nice spot heading into 2024. We are behind where we were for 2023 a year ago, but that was predominantly due to a year ago when we had some benefit from all the people who had canceled or pushed their bookings from travel in 2021 and 2022. So we had a better base, but we're closing that gap every single week and we expect to be in a great shape as we head into 2024. We haven't seen any real impact yet other than the cancellations from Egypt with regard to what's going on in the world. The booking window for next year remains pretty consistently in that nine-month average. So no real change yet. Obviously, we don't know if that continues, but today we are not seeing any impact.

Unidentified Analyst, Analyst

Okay. Great. Thanks, Craig.

Craig Felenstein, CFO

Thank you.

Operator, Operator

Next question on the line is from Alex Fuhrman from Craig-Hallum Capital. Please go ahead.

Alex Fuhrman, Analyst

Hi, guys. Thanks for taking my questions. I wanted to ask about the occupancy. It looks unchanged here from last year at 81%. Can you kind of break down what the difference is between that 81% and the 90% or so that you were operating at for the most part prior to the pandemic? I think you mentioned that short-term cancellations are starting to come down a little bit. Was that still the lion's share of the delta there in Q3? And how much of the shortfall in occupancy relative to 2019 is a function of needing more time to ramp up itineraries on the new ships, especially in the shoulder season?

Sven-Olof Lindblad, CEO

Yes. It's a complicated equation, but I'll try to keep it as clear as I possibly can. We have certain products, which are drivers for new people coming in, mostly bucket list destinations and certain ones like Alaska, for example, in the Galapagos. Then we have a certain number of itineraries, particularly on the blue water ships that are more esoteric in the South Pacific, Papua New Guinea, certain parts of the Arctic, South America. These are heavily dependent on past guests. We had 2020 and 2021 and then a bit of a weaker 2022 where we were not generating the same number of new guests. The pipeline got stagnant, if you will, or didn't expand in those years. Our inventory was a bit out of balance. A key factor was that we had a lot of new itineraries planned, primarily involving parts of Russia, the Northeast passage, for example, which originally filled quickly. Obviously, we had to reroute and involve geography that was less new, and a lot of those past guests had already visited those areas. There's some rebalancing of inventory needed until that pipeline gets back to where it needs to be in order to provide the fuel for those esoteric programs. We're in the middle of that. We've already done some of that rebalancing for '24, and we are going to do some more work on that front for '25. By '26, we think we'll be back to a normal cadence again.

Alex Fuhrman, Analyst

Great. That's really helpful. Appreciate that.

Operator, Operator

It appears we have no further questions.

Craig Felenstein, CFO

Great. Thank you, operator, for your time. Thank you, everybody else for joining us. I know it's a busy morning on a variety of fronts. If you have additional questions, please feel free to reach out, and we're happy to continue the discussion.

Sven-Olof Lindblad, CEO

Thank you.

Operator, Operator

This concludes today's presentation. You may now disconnect your lines and enjoy the rest of your day.