ONESPAWORLD HOLDINGS Ltd Q2 FY2020 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the OneSpaWorld Second Quarter 2020 Earnings Conference Call. Please remember that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. I will now pass the call over to Allison Malkin with ICR. Please proceed.

Thank you. Good morning, and welcome to OneSpaWorld's second quarter fiscal 2020 earnings call and webcast. Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. The COVID-19 pandemic continues to have a significant impact on our operations, cash flow, and financial position. The uncertain and dynamic nature of current conditions and its ongoing impact could materially alter our outlook. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that are included in our second quarter 2020 earnings release, which was furnished to the SEC today on Form 8-K. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in the earnings release filed earlier today. Joining me today are Leonard Fluxman, Executive Chairman; Glenn Fusfield, Chief Executive Officer and President; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of the actions we have taken in response to COVID-19, including our key priorities, and then provide the business and liquidity update. Then Glenn will discuss our actions taken to return our staff home and our service offering. This will be followed by Stephen, who will provide more details on the financials and our liquidity. And now, I'd like to turn the call over to Leonard.

Thank you, Allison. Good morning, and welcome to OneSpaWorld's second quarter fiscal 2020 results conference call. Our second quarter results were significantly impacted by the global COVID-19 pandemic. All of our health and wellness centers on cruise ships closed to passengers on March 14th and remain closed pending the resumption of voyages. In addition, all of our health and wellness centers at destination resorts were closed on March 26th and remain closed throughout the quarter. Given the uncertain duration of the pandemic, on April 30th, we announced a $75 million equity financing, which was approved by our shareholders on June 10th. As a result of this financing and our efforts to reduce expenses and capital expenditures, we ended the quarter with $79.6 million of liquidity, including cash on our balance sheet and borrowing capacity under our line of credit. As we mentioned last quarter, our focus since the onset of the crisis has been on three key areas: One, keep our staff safe; preserve liquidity; and thirdly, continue to innovate and collaborate with our partners. We are pleased to have made progress against each of these areas during the second quarter. As it relates to our first priority, to keep our staff safe, I would like to personally thank our cruise lines and resorts partners, and each of our corporate employees for their efforts to ensure the safety of our shipboard and resort personnel. I'm equally gratified by the patience and support of our cruise ship staff while awaiting safe passage home. As a result of these efforts, as of today, we have repatriated 97% of cruise personnel. I'm also extremely proud of our entire team’s resilience and ability to quickly adapt to changing operational conditions. Moving to our second priority, liquidity. We are very pleased that our shareholders approved the $75 million equity offering in June, which we believe provides us with the resources to sustain our operational readiness. In the unlikely event that there are no cruise lines that sail, and with limited destination resorts operating, we believe we have sufficient liquidity until December 2021. We continue to prepare for the return of voyages with the health and safety of our staff and passengers as our highest priority. With this in mind, we are investing our resources in areas that we expect will add to our more than 90% market share in the operations of health and wellness centers at sea. We expect our operations to be limited throughout 2020. We remain extremely disciplined in managing expenses, capital expenditures, and working capital by continuing to innovate our service offerings and spa experiences, so that we are in a position to provide exceptional guest service in collaboration with our cruise line and destination resort partners when operations resume. As it relates to our destination resort spa reopening, where we have resumed operations, we are encouraged by the performance of our spas and the receptivity of our offerings. While we cannot predict the ultimate path of COVID-19, we remain confident that the advantages of our business model and significant market share have us positioned to achieve our long-term performance objective as business conditions normalize. And now, I'll turn the call over to Glenn.

Thank you, Leonard. Good morning, everyone. We continue to navigate the pandemic by adapting quickly to the current operating environment, with the health and safety of our staff as our number one priority. Along those lines, as of today, we are pleased to have repatriated 97% of all cruise ship personnel, up from May’s 52%. I would also like to thank those that ensured the safe passage home of our cruise ship staff. I'm grateful for their efforts, and I'm equally proud of the way our voyage staff has handled this crisis. Their professionalism, understanding, and patience during this unprecedented time is commendable. While the hotels are operating at reduced capacity, we are pleased with the willingness of guests to book appointments and relax in our spas while they vacation during these unprecedented times. We have also been pleased by the demand for spa appointments. Customer feedback has been overwhelmingly positive, with those utilizing our facilities noting that we have made them feel very comfortable with our enhanced safety protocols and are extremely satisfied with the level of service provided. As we look ahead, we are continuing to focus on training our staff and investing in innovation so that we are ready to scale our global operations once those sail orders are lifted and more of our destination resort spas open. We anticipate that most of our destination resort spas will be open by the end of the third quarter, albeit at hotels with reduced occupancy and operating within the COVID-19 guidelines of local jurisdictions. With that, I will turn the call over to Stephen who will comment on our second quarter results and liquidity position.

Thank you, Glenn. Good morning, ladies and gentlemen. We completed a quarter unlike any other in our history, having no material revenues due to the closure of all of our health and wellness centers on board cruise ships and in our land-based resorts due to the COVID-19 pandemic. With limited operations, our teams remain focused on the safety of our staff and preserving liquidity. While I typically provide a full overview of our second quarter results, including productivity metrics, given the significant impacts of COVID-19 on our operations, I will only share some highlights. With this in mind, for the second quarter, total revenues were $1 million compared to $140.4 million in the second quarter last year. Revenues generated in this year's second quarter were primarily related to e-commerce sales on our timetospa.com website. Adjusted EBITDA was a loss of $20.1 million compared to income of $15 million in the second quarter of 2019. We incurred significant and higher-than-expected costs in the quarter related to the housing and repatriation of our teams on-board, as well as costs incurred in separation for fleet layups. Some of these costs continued into Q3. And we ended the quarter with cash and borrowing capacity under our line of credit of $79.6 million compared to $20.5 million at the end of the first quarter of fiscal 2020. As it relates to our outlook, given the uncertainty of the timing of the resumption of voyages and the ultimate path that the global COVID-19 pandemic will take, we will continue to not provide guidance. However, I would like to share some observations with you in order for you to assess our business. We believe Q2 will be the low point for sales as we expect 36 destination resort spas will be open by the end of August. We will continue to tightly manage expenses and identify additional cost savings if there is a further extension of the cruise line industry association announced no sail date, which is currently October 31, 2020 for the U.S. Where resort spa operations have resumed, we have seen strong receptivity to our offerings, and guests are comfortable with our enhanced safety and health protocols. While we do not expect to generate material revenues from health and wellness centers aboard cruise ships this fiscal year, we believe we have the talent and capabilities to quickly bring back personnel and scale our operations when voyages resume. We expect cruising to return on a gradual basis. Even with passenger capacity limited to 50% on a four-wall basis, we would expect to break even. When normalization of operations occurs, which will occur at some point—we just don't know when—we would expect to deliver revenue and EBITDA consistent with the historical levels. And with that, we'd like to open up the call for questions.

Our first question is from Steph Wissink with Jefferies. Please go ahead.

We have two questions. And Stephen, it's hopefully for you. But I'm wondering if you can help us break out within the quarter in the cost structure, what costs were one-time in nature related to the repatriation of your staff? Now that you're almost complete with that exercise. And then I think you mentioned the second—costs that seemed a bit more one-time in nature. So if you could just help us qualify what the costs were in the Q2 P&L that may not recur? And then as we think about Q3 and Q4, how should we be modeling the salary and payroll and the administrative costs just on a go forward basis?

Good morning, Steph. So, the largest component of the on-board costs obviously relate to the housing of our employees onboard, as well as the retainers that we had to pay to some of the folks onboard. As you know, the process for repatriation has been extremely difficult due to local government restrictions. While every effort has been made to get folks back to their homes as quickly and safely as possible, there were a myriad of problems encountered, such as local governments not allowing folks to get off vessels, etc. We incurred approximately an additional $6.5 million of costs relating to keeping folks onboard and ultimately getting them home that we did not originally anticipate. While in a normal circumstance, I would tell you, we would not expect to see this forward, we did still have some folks onboard in the month of July. Although the number has been significantly reduced to 87 people today. However, the number will not go to zero because of situations, for example, where there are cruise lines in Italy, where we have been told they expect to begin sailing in two weeks’ time, which, by the way, they just moved three times already. So we begin to move stock back to put onto those vessels. Each time that they've moved, we had to house the stock locally, and now we're placing those folks onto the vessels for a 2-week quarantine period in the hope that those vessels will begin to sail again. So there will be additional costs going forward for some of those things. But we also hope, therefore, that there will be some revenue that comes in as those vessels begin to sail. The point being that it is just a very, very difficult situation to forecast because of the fluidity of what is going on. Some of our larger cruise lines have moved their return to sail dates in excess of seven times already, and we are being good partners, trying to ensure that we are ready each time that happens. On the one-time costs in the quarter, we provided for an inventory reserve, as you know Pullmantur unfortunately filed for reorganization. So in addition to providing for that accounts receivable number, which was not that large, we’re assuming that some of our inventory may get damaged or lost in transit as we repatriate. There are also costs associated with moving inventory off decommissioned vessels as that occurs and continues to occur. So that’s the bulk of the sort of one-time costs. We do expect it to diminish going forward. Exactly when it will be is difficult to say because, as I mentioned, as cruise lines probably resume sailing, we’ll prepare and gear up for that.

Okay, that's great. And then one follow-up question that we're getting is this understanding as vessels return to the water, how your contracts work in terms of flexibility around capacity utilization? I think you had given us a stat on the last call regarding around 50% to 60% utilization; you feel like you can break even. Is that still what you anticipate, or have any of your partnerships had open conversations around thinking about those contracts and what your breakeven point might need to be?

We still believe that with a passenger count at 50% to 60%, we would break even on a four-wall basis on vessels.

Our next question is from Sharon Zackfia with William Blair. Please go ahead.

I guess given that you’ve reopened some of the land-based spas, and it was encouraging to hear some of your commentary there. Could you give—or kind of triangulate for us what the occupancy looks like right now at those facilities? Sorry, my two-year-old associate is talking in the background. What the occupancy looks like and how that's translating into the utilization of the spas? Just trying to think of, if the cruise lines start out at 40% to 50%, what kind of capture rate you can get based on what you're seeing at the land-based right now, if that kind of makes sense?

Stephen, I'll jump in and take that. So—hi Sharon, good morning. So it's a little bit of a mixed bag. Properties like Mohegan Sun up in Connecticut are running full with some pull throughs and doing very well in that regard, albeit a little change in guests, not necessarily to a lot of group business. So they're coming into the spa, they’re enjoying in the spa. Probably I would say at a 75% throughput versus prior year’s at that particular property. In the Caribbean, Ocean Club, for example, has about 120% occupancy. So you see, it's a complete mixed bag. We just opened up and Cherokee has about 50% occupancy. So, we have a mixed bag of occupancy, but guests are coming to the spas. Do we have the same capture rates that we had this time last year at these properties? Not necessarily, but certainly flowing on some of the properties up in the Northeast, Mohegan is another example; we can’t do facials, it's a regulation put forth by the state. So we're not doing facials yet. That's not a permanent decision; it’s an ongoing discussion. We are able to capture that business again, and we look forward to that. But the hotels are growing occupancies period-over-period and Mohegan again is leading with occupancy levels at this point. Overall, it's pretty much low occupancy compared to what we certainly expected.

And I guess, it's good to hear that 50% occupancy on the ships is where you can break even. But I'm curious—and I know this is a tough question to answer—how many ships do you estimate need to be sailing to break even?

Well, that's a difficult question. There are so many dimensions because you also need to understand where the ships are sailing and all of the other complexities around that aspect of the business. And I will defer to Stephen if he wants to commit to a number of vessels, but it really depends on the mix of ships and the mix of voyages and the mix of revenue days that we have. So it's a tough number to answer, just like in one context.

Yes, Sharon, I think that's exactly right, because of the intricacies around the size of vessel, length of itinerary, number of ship days, etc., it does become challenging to commit ourselves to how many vessels will actually be sailing. We kind of look at it and say, obviously depending on our cost structure, but generally speaking, at around 50% or so, maybe 60% depending on which number you look at, settling on payroll with regards to furloughs, etc. of prior year's revenues. On a company basis, we would break even.

Our next question is from Steven Wieczynski with Stifel.

So I want to go back to the—kind of the cash burn and the monthly expenses. And I think we went back to May; you guys have been kind of in the mid 3s in terms of cash burn, and now if our math is correct, and we look out to the end of 2021, that number is kind of more the mid 4s. And I understand there were some costs in Q2. So, I guess the question really is, are you kind of—when you base your liquidity so you can get through the end of '21, is that based on that mid 4s number or can that get back into the mid 3s? And also because you've obviously got some land-based spas commencing operation and that’s a small benefit to you guys, but it's going to be some cash in the door?

So obviously the pure math tells you that to get to December that is sort of $4.2 million, $4.4 million in cash burn, just sliding on $3.6 million than we had originally talked about and part of the reason for that is the reality of the situation—I talked about earlier which are that there will be situations where we know we're going to have to incur expenses as well—now for example, getting close to this whole quarantine and etc. So can it get lower than that? Yes, perhaps. If someone said to me definitively, there is definitely going to be most sailing until June next year, for example, there is action that we could take to reduce our expenses. But that situation doesn't seem likely right, because we have ships preparing to sail in Europe shortly. We may have a ship sailing in the U.S. later this year, but for the early next year. It really is such a good situation that I think we're being as realistic as we can right now with the number, based upon everything we know and being able to proceed and be ready to go when the cruise ships sail.

And then your liquidity position, no matter what you want to look at in terms of cash burn, is still pretty strong, let's say 17 months right now. But Stephen, are you satisfied with where that's at right now? Or do you continue to explore other options to improve that position?

We will always continue to explore other options, Steve. We did take additional steps just recently, regarding salaries; I cannot tell you that, barring spas that are open, 100% of the company is on some sort of reduced salary portfolio. Employees are either furloughed or terminated, or they've taken different levels of salary reduction throughout the entire organization from Leonard and Glenn, all the way down. We’ve put some things into place. So I wouldn't say we're ever satisfied, and we'll continue to look at opportunities as we can, and to the extent that we learn more about delays, we may have to be more aggressive in the steps that we take to reduce expenses. But right now, we feel we are at a point where we can continue to manage the business and be ready to go as the cruise lines return to service, basically what they're telling us.

One more quick one. It's actually for Glenn. And Glenn, what have the conversations been like with your employee base regarding their willingness, when things do commence again, to go back to work?

So imagine talking about our shipboard employee base. First of all, they are ready to come back to work. As Stephen mentioned, we already have crews sitting onboard while we got our vessels in a quarantine period. These folks are even willing to—they have to go into a 7-day isolation period at home, for example. This is an obligation to just get back to work: a 7-day isolation period at home, in addition to their COVID testing. They have to travel with all sorts of requirements, then they have to get to the vessel and sit there for 10 to 14 days in isolation and quarantine. You can imagine all of these burdens on them. And they still want to come to work, and they're willing to meet all of these pre-joining obligations. I commend them, and then go to work in a reduced environment of passengers. They don't know what the income will be, but we're showing them that they're going to do just fine with the 50% occupancy. We have created a database of our experienced crew, and we understand who the veterans are among the productive staff, or—Stephen kind of mentioned that before. We're bringing back the veterans first. These guys are dedicated to the cause; they're dedicated to OneSpaWorld; they love their life at sea. We have a great goal. We are just waiting for logistics to fall into place so we know what to do. These poor guys and girls are shuffled about. As Stephen mentioned, 7 different return to service dates have changed, causing delays to push back their first crews three different times, and this is with crew moving along with these folks. I give them a lot of credit for hanging in there, but we're good with our labor force. And don’t forget, as ships have reduced occupancies from the guests' perspective, we also have reduced managing, so it's not like we're staffing up for each vessel on the onset either.

Our next question is from Assia Georgieva with Infinity Research. Please go ahead.

Given Pullmantur, as you mentioned, Stephen, we have lost those ships. And some of the changes, especially at the Carnival Corporation entity, do you assume a proportionate reduction in your projected revenues relative to the decline in the number of vessels that will be sailing on almost a constant basis? Let's assume beginning in 2022 we should be back to normal?

Good morning, Assia. Yes, that's a good point. We are not assuming that Pullmantur or any of the vessels that have been announced for decommissioning will return to a fleet that once operated regularly. Although we do know that it's likely that some of those vessels are potentially sold as partners with whom we have relations that we may operate upon then. I will tell you, as a point of reference, that taking into account Pullmantur and the ships that we're aware of being removed or decommissioned from service, it is less than 5% of our revenue. While it’s not a tiny number, it’s certainly not that significant.

This concludes the question-and-answer session. I would like to turn the conference back over to Leonard Fluxman for any closing remarks.

Thanks, everyone, for joining us today. We appreciate your comments and questions, and we look forward to speaking with you on our third quarter call. Thanks very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.