ONESPAWORLD HOLDINGS Ltd Q1 FY2024 Earnings Call

Good day, and welcome to the OneSpaWorld First Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Allison Malkin for some introduction. Please go ahead, Allison.

Thank you. Good morning, and welcome to OneSpaWorld's First Quarter 2024 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. 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 is included in our first quarter 2024 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 our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman, Chief Executive Officer and President; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of our first quarter 2024 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and our guidance. I would now like to turn the call over to Leonard.

Thank you, Allison. Good morning, and welcome to OneSpaWorld's First Quarter 2024 Results Conference Call. I'm very pleased to report another strong start to the year with our first quarter generating record results. We delivered robust double-digit growth in total revenue, income from operations, and adjusted EBITDA, all of which were at record-setting levels. We also achieved significant accomplishments towards our strategic priorities, which provide for our ongoing growth in the current year and well into the future. The ongoing strong momentum of our business from fiscal 2023 into early 2024 resulted in the best first quarter in the history of our company. The success across all fronts is a testament to the superior execution of our strategy by our exceptionally talented team. Their relentless dedication to innovation, enhancement of partnerships, leveraging of our category dominance, and adept navigation of our intricate business model have yielded extraordinary guest experiences and outstanding service to our esteemed cruise line and destination resort partners, translating into increased value to our shareholders. As we look ahead, the second quarter is off to a positive start, and we expect continued superior execution of our strategy. Our ability to provide extraordinary service levels to our cruise and resort partners through a differentiated luxury experience for guests will position the company for continued success. Based on the strong execution by our talented team, new partnerships, and new initiatives driving organic growth, we have raised our annual outlook beyond the outperformance achieved in the first quarter. We currently expect total revenues to increase by 10% and adjusted EBITDA to increase by 12% at the midpoint of our guidance ranges from fiscal 2023. Additionally, in further demonstration of confidence in our strategy, our near- and long-term business prospects, and our strong balance sheet, our Board of Directors approved a $50 million share repurchase authorization. Turning now to the highlights of the quarter. Total revenue was $211.2 million, increasing 16% from $182.5 million in the first quarter of 2023. The income from operations increased 52% to $17 million from $11.2 million a year ago, and adjusted EBITDA rose 31% to $25.3 million from $19.3 million last year. The expansion in our ship count continued during the period. At quarter end, we had health and wellness centers on 193 ships, with an average ship count of 188 for the quarter compared to 179 ships and an average ship count of 173 ships in the first quarter of 2023. Also, at quarter end, we had 4,082 cruise ship personnel compared with 3,665 at the end of the first quarter of 2023. We saw strength across key operating metrics, recording increases in average weekly revenue per ship and average weekly revenue per shipboard staff per day above levels achieved in the first quarter of 2023. Notably, in the first quarter, we continued to surpass the level of experienced staff members in 2019, reflecting the success of our ongoing initiative to retain onboard staff members. The quarter also marked a key milestone for our company as we reached the fifth anniversary of our de-SPAC public listing. As Stephen will comment momentarily, in addition to our robust revenue and profit growth, OneSpaWorld warrant holders expressed their support for the company with 98% of all outstanding warrants converted. Importantly, we eliminated the overhang of our private equity investor, which sold its final tranche of shares, simplifying our capital structure while increasing trading liquidity in our public float. The quarter included progress towards our four strategic priorities, let me share some highlights. First, we captured highly visible new ship growth with current cruise line partners and added new cruise line partnerships to our portfolio. In the first quarter, we entered into a new exclusive agreement with Royal Caribbean and Celebrity Cruises for their 40 ships currently in service and future ships entering service during the agreement terms. Additionally, at quarter end, we added Aroya Cruises to our list of partners where we operate all health and wellness facilities beginning late 2024, strengthening our market-leading competitive position and providing further evidence of our best-in-class operating capabilities. We expect to end fiscal 2024 operating on about 198 vessels. Second, we continue to launch high-value services and products. Our innovation pipeline is robust this year with introductions of cryotherapy body services and new facial services to complement the new technology driven by Elemis Biotec 2.0 facial. Additionally, we are introducing LightStim therapy, augmenting other acupuncture services, which has dramatically improved acupuncture revenue on the vessels where we have introduced this protocol. Third, we focused on enhancing health and wellness center productivity. We grew key maritime operating metrics at double-digit rates, supported by a sustained pipeline of strategic initiatives to increase pre-bookings, the number of treatments per client, and the number of passengers utilizing the spa. We continue to drive higher revenue services by simplified service menus and modified treatment lengths, which contribute to growth in average spend per guest. The quarter included progress towards enhancing our financial position and flexibility. In addition to the simplification of our capital structure, we utilized our strong cash flow to repurchase our common shares and repaid $20 million of our first lien term loan during the quarter. This brought total debt reduction to $94.1 million since the second quarter of 2022. Overall, we remain excited about our business outlook and expect a strong start to the year, coupled with visible growth opportunities made possible by the advantages we possess in the operation of health and wellness centers at sea and a destination of sports on land, further buoyed by highly favorable market dynamics across the cruise line industry to position us for another record-setting year in 2024. With that, I will turn you over to Stephen, who will comment on our first quarter financial results. Stephen?

Thank you, Leonard. Good morning, everybody. We are pleased to report a strong start to the year with better-than-expected top and bottom-line results, along with further improvements to our balance sheet. I will share some more details on our first quarter that we reported this morning. Total revenue was $211.2 million, up 16% compared to $182.5 million in the first quarter of 2023. The increase principally was attributable to our average ship count increasing 9% to 188 health and wellness centers onboard ships operating during the quarter. In addition, we benefited from our initiatives to drive revenue growth and profitability in each of our onboard health and wellness centers through enhanced pre-booking of guest services, onboard guest engagement and experiences, our guest service and product offering innovations, and the disciplined execution of our complex operating protocols by our onboard and corporate teams. Cost of service was $144 million compared to $126.3 million in the first quarter of 2023. The increase was primarily attributable to costs associated with increased service revenues of $172.2 million in the quarter from our operating health and wellness centers at sea and on land compared with revenues of $150.1 million in the first quarter of 2023. Cost of products was $33.5 million compared to $28.3 million in the first quarter of the prior year. The increase was primarily due to costs associated with increased product revenue of $39 million in the quarter from our operating health and wellness centers at sea and on land compared to product revenues of $32.3 million in the third quarter of 2023. Net income was $21.2 million or net income per diluted share of $0.21 compared to a net loss of $15.9 million or net loss per diluted share of $0.17 in the first quarter of the prior year. The $37.1 million increase in net income was attributable to a $29.6 million positive change in the fair value of our warrant liabilities, a $1.7 million decrease in interest expense, and a $5.8 million positive change in income from operations. Adjusted net income was $19.3 million or adjusted net income per diluted share of $0.19, compared to adjusted net income of $12.3 million or adjusted net income per diluted share of $0.13 in the first quarter of last year. Adjusted EBITDA was $25.3 million compared to adjusted EBITDA of $19.3 million in the prior year, an increase of 31%. Turning to the balance sheet, cash at March 31, '24 totaled $66.6 million. In the first quarter, we repaid $20 million on our first lien term loan. Since the second quarter of 2022, we have repaid a total of $94.1 million in debt instruments, reducing our ongoing interest expense. At quarter end, total debt net of deferred financing costs was $138.6 million compared to $202.6 million at the end of the first quarter last year. We utilized $7.7 million in cash to repurchase 606,000 shares of our common stock during the first quarter. In the first quarter, unlevered after-tax free cash flow was $24.1 million compared to $17.9 million in the first quarter of 2023. That translates to a 95% conversion rate for unlevered after-tax free cash flow to EBITDA in the quarter. As it relates to the warrant exchange, on March 26 of '24, we announced that all remaining public warrants have been converted into common shares and exercised or canceled. This generated $51.7 million in net cash proceeds in the quarter. Over the five-year exercise period, a total of 24 million warrants were exercised, generating net proceeds to the company after deducting applicable fees of approximately $54 million. I'm delighted to say that there are now only 21,600 pipe warrants remaining, the only warrants remaining for the company. Our Board of Directors approved a $50 million share repurchase program, which will be executed opportunistically using available cash. Moving on to our guidance, we are increasing our fiscal year guidance based on our better-than-expected first quarter performance and favorable outlook while introducing expectations for the second quarter. For the full fiscal year 2024, we now expect total revenue in the range of $860 million to $880 million, versus our previous guidance of $850 million to $870 million. Adjusted EBITDA is now expected in the range of $95 million to $105 million versus our previous guidance of $90 million to $100 million. We expect to end fiscal 2024 operating on 198 cruise ships and at 51 resorts. For the second quarter, we have introduced guidance expecting total revenue in the range of $216 million to $221 million, and adjusted EBITDA in the range of $24 million to $26 million. Importantly, we feel very confident about our positioning and growth outlook as we look ahead for the balance of 2024. We are pleased with the continued momentum we are experiencing in the second quarter and expect to continue our track record of strong operational results throughout the year.

We'll start with a question from Steve Wieczynski from Stifel.

So I want to start with the revised guidance for the last 3 quarters of the year. I think this is now your third or fourth straight quarter in which you've materially beaten the midpoint of your guidance range. I guess as we think about the last 3 quarters of 2024, I'm just wondering how you're thinking about or what you're embedding in terms of the way you're thinking about your customer base? If you're assuming that spend levels stay at status quo or you're embedding some conservatism just because you really don't know where the consumer is going to go. I'm just trying to understand how you're thinking about spend levels for the last 3 quarters of the year.

Steve, I'll start off. So, as I mentioned, the first quarter saw very strong spend levels, which continued from the prior year. We have continued to see that as we've started into the second quarter. Obviously, nobody has a crystal ball of certainty around what's going to happen over the remainder of the year. We do think spend onboard should remain strong. Bookings are very favorable, the booking trends that all the cruise lines have talked about, you're keenly aware of, point in the right direction. However, having said that, in the latter part of the year, it’s not unlikely to expect maybe a slight softening in some of the spend, which we've accounted for, but we expect generally that onboard performance will remain strong.

Okay. Got you. And then maybe a bigger picture question, but based on your free cash flow generation, which remains obviously very strong, it's clear that your balance sheet could essentially be debt-free in the next year or so. How are you balancing share repurchase versus a potential dividend versus some kind of acquisition? If you thought about potential acquisitions down the road, what type of acquisitions would make sense for you?

Let me touch quickly on the cash use, and then I'll let Leonard talk about the acquisition side of things. So, as it relates to the buyback, the feeling was that was the most appropriate near-term action to take and it aligns specifically with the $15 million cash that came in from the warrants, which were converted on a cash basis. We felt it would be most appropriate to take that $50 million and reduce the share count back to what it would have been as if those shares were converted cashless. That doesn't change our thinking overall around paying off debt at these interest rates or potentially introducing a dividend. All those options remain on the table. We'll continue to evaluate what we feel are the most appropriate ways to return cash to shareholders. And I’ll let Leonard answer the part on acquisitions.

It’s interesting times. We haven't found any particularly compelling acquisition targets recently, although we continually receive proposals from bankers. We’ve discussed some of these ideas, but nothing is compelling on the table right now. We would want to do something that augments what we're doing onboard and adds incremental value to our offerings, ideally in the wellness mindful space where there are numerous new technologies. If we can identify targets with diagnostic tools that enhance what we can do onboard in our Medispa, then transfer that to a land-based or e-commerce experience, it would make a lot of sense for us. Not easy to find, but we're looking for opportunities that fit into that vision.

And now we have a question from Sharon Zackfia from William Blair.

It's really a nice surprise to continue to hear about the resilience in your business. We're not hearing that throughout the broader experience with space outside of cruise. When we think about a consumer looking for more value, how do you think you're communicating that? Do you think the consumer is just in a different mindset once they get on that ship? I'm also curious about pre-bookings, which is a big positive for you. Does the pre-booking cadence for future cruises look as good as it has been? Are we seeing any reticence there?

Thanks, Sharon. We're extremely pleased with the resilience of the onboard spend. We've simplified our service offerings to make it easier for guests to navigate, focusing on how to maximize their spending through our highest-level services. Retail sales during the quarter were also quite strong, and we’re not seeing pushback on price for both services and retail. Moving into the second quarter, our ships are seasonally moving to other geographies, but we've been optimistic about maintaining performance. Regarding pre-booking, we are still new with our rollout on NCL, which is a great opportunity for us that began late last year. The cadence of the pre-booking is still in early phases, but we're optimistic about its positive impact on our numbers, especially looking towards the third quarter.

Can you still hear me? Sorry, my phone cut out. I wanted to follow up because I think you're making some incremental investments in tech and AI this year. What are you doing there, and what do you plan for 2025 and beyond?

Across the company, we're investing in back-office automation with AI capabilities. We're navigation what we will tackle first for efficiencies. Onboard, we're looking at how we can use AI to improve marketing offerings, replicating best practices across all ships. Our architecture is being established now to enhance data capabilities and improve performance. We're able to identify weak points quicker than before, improving training and sell-through.

And our next question comes from Max Rakhlenko from TD Cowen.

What’s your latest thinking around the number of ships that we should be modeling for you over the next few years? And when you combine the new ships with your initiatives, what's the latest thinking regarding the medium-term revenue growth profile for the company?

Max, we continue to have a high number of vessels coming into service, new builds in 2024. In 2025, there are 8 more new ships expected. With the addition of new ships, we remain committed to our thesis that we can grow revenues in the high single-digit range, which is our medium-term growth rate.

Curious, how does the team now view the EBITDA margin power of the business and opportunities to expand beyond the high end, currently at 11.9% for the year? Can you rank order the line items with the greatest opportunity for margin expansion?

The focus remains on absolute dollar generation, not solely on margin expansion. We drive that through demand and improvements in our marketing programs. We understand that 85% of our model is variable. There is also a benefit in leveraging fixed costs as revenue scales. While we hope to see margin improvement, the main focus will remain on driving total revenue.

And our next question comes from Laura Champine from Loop Capital.

The share repurchases are not incorporated in the outlook for 105 million diluted shares in Q2. Can you provide color on the timing of potential share repurchases?

We want to be opportunistic. We'll be most aggressive in buybacks during stock weakness. I can’t indicate specific timing as our focus will be on an opportunistic basis.

Understood. I don't want to read too much into a small thing, but your product segment did grow a bit faster than services. Is there anything going on from a product innovation or promotion perspective that's helping drive that line?

The simplification of our menu has skewed heavily towards services, which tend to drive higher product sales. We are seeing strong results from new services like cryotherapy and LED treatments, and we are focused on improving retail attachments throughout 2023.

Another question comes from Gregory Miller from Truist Securities.

I wanted to ask about the new banner announcement with Aroya and your expectations regarding wellness spend from guests, particularly those from the Gulf region. What behavior are you anticipating in terms of wellness spending?

It's early to tell how this will play out as it's a new cruise line and a new geography. We are positioned well and have prior experience in the region. We’ll adapt to the new demographic but expect it to be a successful venture.

With the new ship orders from Norwegian, do you have any early insights into how your wellness facility size and staffing might be affected?

Whenever larger vessels are announced, we advocate for more space and staff, which are always at a premium. We discuss these needs early and are hopeful our requests will be fulfilled based on the high quality of NCL's spa offerings.

And our next question comes from Assia Georgieva from Infinity Research.

Congratulations on a great quarter and outlook. We're seeing improved occupancies, but not yet at 2019 levels across all banners, which presents an opportunity. With higher-quality passengers and some ticket pricing pressure late Q3, how do you balance that operationally? Regarding equity structure, are there any time limits on the $50 million share repurchase program?

Load factors have improved significantly compared to the first quarter of 2023. I’m not concerned about ticket pricing pressure because the quality of passengers purchasing will still connect well with our spa services. As for the board-approved buyback, there is no time limit on its utilization; it will be opportunistic.

Exactly. There is no time limit; it will be opportunistic.

Yes, the RCL renewal is indeed a multiyear agreement, and we're in a good position with this long-term contract.

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

Thank you for joining us today. I want to congratulate my entire leadership team and the team across all our ships on land and at our academies for an incredible quarter and their fantastic execution. Thank you, and we look forward to speaking with all of you when we report our second quarter earnings.

You may now disconnect. Thank you.