ONESPAWORLD HOLDINGS Ltd Q4 FY2020 Earnings Call

Thank you. Good morning, and welcome to OneSpaWorld's fourth quarter and 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 judgments and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business.

Thank you, Allison. Good morning, and welcome to OneSpaWorld's fourth quarter and fiscal 2020 results conference call. Before turning to our results, I would like to personally thank my entire leadership team and team members around the globe for their resiliency and agility this year. To say that 2020 wasn't challenging would be an incredible understatement. It was without a doubt the most difficult and challenging year in our company's 50-plus-year history. After delivering strong performance in 2019 after reclaiming and being awarded the Legacy Ships of Celebrity that we lost in 2013, as well as winning the luxury brands of Oceana and Region Seven Seas, the foundation was well set for 2020 to be an even more successful year than 2019 until the pandemic hit us in March 2020. The year 2020 was unprecedented, and I'm proud of the efforts of our team as their passion, commitment, and ability to quickly adapt to the challenging environment enabled us to navigate this extraordinary period. As expected, our fourth-quarter results reflected a significant impact to operations driven by the COVID-19 pandemic. As we ended the year, the global pandemic shuttered our operations. In response to the pandemic, we remained focused on three key priorities throughout fiscal 2020, which served us well. These priorities were: one, ensuring the safety of our staff; two, preserving liquidity; and thirdly, preparing for a successful resumption of our cruise and destination resort spa operations as restrictions are lifted through innovation and collaboration with our partners.

Thank you, Leonard, and good morning, everyone. I, too, would like to thank our staff for their hard work and dedication this year. We are very pleased with our staff's resiliency and ability to quickly adapt to the changing operating conditions, and they stand ready to return as soon as operations ramp back up. During an unprecedented year of disruption, we were keenly focused on the well-being of our staff while investing in innovation and updating our operating procedures to position us to be ready to scale our global operations as soon as the no sail orders are lifted. Returning to service remains our top priority, and we're confident that our elevated practices, which include digital training, the implementation of our GPS guidelines for protection and sanitization, new culture and standards, as well as the expansion of our service offerings and technology enhancements, position us for a successful return to service.

Thank you, Glenn. Good morning, ladies and gentlemen. 2020 was indeed a challenging year given the difficult COVID impact on the operating environment. We closed out the year with no material revenues in the fourth quarter, given limited operations across our cruise line and resorts. Importantly, our intense focus on preserving our liquidity, as well as investing in innovation and training our staff, positions us to return to normal global operations as the cruise lines resume operations. I will now share just a few of the fourth quarter and fiscal 2020 highlights rather than provide a full overview of our quarterly and annual results, given the continued significant negative impact that the global COVID-19 pandemic has had on our operations. For the fourth quarter, total revenues were $3.8 million, compared to $139.4 million in the fourth quarter last year. Revenues generated in this year's fourth quarter were primarily related to the 45 destination resort spas that reopened during the quarter and ecommerce sales on our timetospa.com. Cost of services were $6.9 million compared to $95.6 million in the 2019 fourth quarter. Cost of products were $6.8 million and included a $4.9 million charge for the write-down of inventory that is expected to expire as a result of the extended pause in operations caused by the COVID-19 pandemic. Adjusted EBITDA showed a loss of $15.4 million as compared to a positive $13 million in Q4 of 2019. Cash burn was consistent with our expectations for the quarter.

Our first question is from Steve Wieczynski with Stifel.

Sure. Hi, Steven, it's Glenn. So clearly, our staffing levels are commensurate with load factors. So a 50% vessel in our calculations would require about a 60% to 65% staff. But it's all based on modalities. So you have to staff in full modalities where we have a lesser number of team members, your pain management staff, your Med Spa staff, as opposed to your massage staff when you have a much larger group, so we would reduce their numbers accordingly. There will be much less staff on the test cruises because these vessels will not be full even during the test cruises. So we're trying to do it just with simple representation for the moment while working and collaborating with the cruise lines based on their requirements.

Okay, understood. Second question, I guess this is probably going to be for Glenn as well, but I mean, the conversations you have with your staff today as they sit at home, essentially what are those conversations like? And again, I guess what I'm getting here is, are they anxious to get back to work? Are they willing to come back to work? It does seem like every cruise operator is going to mandate some type of vaccination for the crew. And I guess the last part of the question is, are they comfortable getting that vaccination?

So certainly, as you know, we repatriated 3,600 staff last year. Of the 3,600, we've confirmed that about 2,800 are eager to come back; they would return today if given the opportunity. We also have just under 1,000 folks who are new team members ready to join the ranks. So we have a full complement, a great team ready to get back to sea and get to work, all being digitally trained, and standards enhanced, etc. As far as the vaccinations are concerned, yes, we feel there is willingness. They are all eager, and as soon as those vaccinations are available to them, they will get vaccinated. We're working with our cruise partners, as Caribbean as an example. They would like to vaccinate their staff, and we will piggyback on their program to get our staff vaccinated along with their crew.

Okay, got it. So if I could ask one more, I apologize for asking three questions. But Stephen you talked about the cash burn in Q1 being in that $12 million to $15 million range. And I assume that's basically assuming that you're not moving any type of your crew around the world. I guess, as we move into Q2 and 3, as you start to put folks in place, will the cash burn move outside of that range or will it stick more to the high end of that range? Meaning as you start to move folks around, does it move about $15 million over a quarter?

Good morning, Steve. I know we do not believe so. We believe that $15 million would be the high-end in the beginning as we start to move folks. Then obviously, as you start to see some of these vessels sail, hopefully, we can generate cash flow from those vessels that could start to offset some of the subsequent movements. So we're comfortable; we think in that range for the forward period.

Hi, good morning. I guess the question just given your liquidity and how aggressive you've been on making sure that you're viable. Can you talk about why the ATM is out there and what optionality might be available in that context relative to your debt structure as well?

Yes. Good morning, Sharon. It's Stephen. I'll take that to start off with. As I mentioned, we did have some activity on the ATM in the fourth quarter, where we had gross proceeds of $11.6 million selling 1.26 million shares at an average price of $9.20, which was pretty good for the time. Having said that, we've really taken a view regarding the ATM as trying to look at it opportunistically, and one of two scenarios will likely evolve. The likely scenario, we hope, is that cruise lines gradually return to service throughout 2021, and they begin to start generating positive cash flow in the latter half, likely in Q4 of the year, and we will start to become cash flow positive again. Thus, cash from the ATM could be regarded as excess cash and, therefore, at a point in time likely in 2022 when there's more visibility, when ships are back in the water, cash flows are coming in again, consideration would be given to using some of that cash to pay off a portion of the debt. As you know, we have a $25 million second lien at LIBOR plus 7.5%, which is at a relatively high interest rate. Therefore, at minimum, paying it down would be accretive to the company.

That's helpful. Thanks. One more question. I guess kind of a very specific question, administrative costs kind of ticked up a lot sequentially as well as year-over-year. I don't know if there was anything unusual there. And then the stock has moved quite a bit. I mean, I know warrant cleanup is probably the lesser of the things you're focused on. But is there any thought process as we go throughout 2021 for cleaning up the warrants again?

Yes, there's always conversation, particularly at a board level around the capital structure, warrants, etc. As the stock price continues to move, that will become more of a consideration. So there could be something that happens regarding that; nothing definitive. Obviously, at the moment, we'll kind of wait and see what happens. Regarding the administrative expense, there were some incremental costs in the quarter not in administration mode but as part of the legal fees and some other one-time future legal expenses that we would not expect to recur.

Hi, this is Seb Barbero for Stephanie Wissink. And I have a couple of questions, please. The first one, as you guided for 24 more ships by the end of 2022 relative to where you were at the end of 2020, I was wondering if you can help me bridge the gap between disposals, cancellations, and postponements relative to your initial outlook two years ago for almost, I think it was 211 ships.

Yes, Seb, good morning. We currently have in the 159 plus a projected count of 24 vessels that we provided by the end of 2020. This does not include any of the 26 additional vessels that have been decommissioned by the cruise lines. It's our understanding that the vast majority of those vessels will return to service in some form or fashion with other cruise lines and/or other operators. We remain in active negotiations and are very positive about potentially getting back some of those cruise lines into our fleet. But at the moment, our count does not include any of that because we wouldn't increase it until we have definitive contracts signed.

All right. Thanks for that. Second question is as resorts and spas have reopened, anything that you can share in terms of your learning with regards to safety protocols, guest receptivity, or any measures that you're taking that could eventually be implemented on board cruise lines?

Well, the few anecdotes we can share are that our guests generally are risk-tolerant. Our mix of services, if you're looking at a pre-and post-COVID environment, all lean towards a pre-COVID world. People are buying or leaning towards selecting the same services that they used to choose pre-COVID back in 2019. We find that very interesting. It's not even an 80% ratio; it's virtually in the mid-90s or greater. They are not necessarily yearning for contactless or touchless technologies; they want to go to the spa, relax, rejuvenate, and enjoy traditional services. At the same time, retail sales are strong; people are buying personal care products. These are the anecdotes I can provide you from the resort division. It's also important to note that occupancies are certainly not at historic levels yet.

Okay. And then last one for me. With the business being largely paused for 2020, I noticed the issuance of stock compensation in Q4. Was that part of a multi-year program from prior year grants, or is that new? And how should we think about deadlines for 2021?

It's a combination of both things you mentioned; the majority of it is a continuation of prior programs. There was a portion of a new program put in place, which isn't a traditional new program but rather a typical annual program where equity is granted to management and participants within your organization to ensure that people are compensated, and most importantly, from a retention standpoint. I will follow up with you, Seb, regarding how to think about that for 2021. We haven't released anything yet concerning 2021.

Great. Thanks again, everybody for joining us. I think all I can say today is it's a better day than yesterday. We're looking at a two-month acceleration of vaccinating every adult in the United States, based upon President Biden's announcement yesterday. The joint efforts of America and Johnson and Johnson, along with all the positive news and the acceleration in numbers of people being vaccinated daily, will allow OneSpaWorld and the industry to get back to business with some real certainty now, which gives us a lot of confidence. We look forward to speaking with you all again on our first quarter call. Thank you very much.

Thank you, everyone.

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