Good day, and welcome to the OneSpaWorld Second Quarter Fiscal 2024 Earnings Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Allison Malkin of ICR. Please go ahead.

Thank you. Good morning, and welcome to OneSpaWorld's second quarter 2024 earnings conference 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 second 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 second quarter 2024 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and fiscal year 2024 guidance. Following our prepared remarks, we will turn the call over to the operator to begin the question-and-answer portion of the call. I would now like to turn the call over to Leonard.

Thank you, Allison. Good morning, and welcome to OneSpaWorld's second quarter 2024 earnings conference call. It's a pleasure to speak to you all today to share another period of record performance. Our team delivered an outstanding second quarter, capping off an excellent first half of the year. The consistent strong performance of our business evidences the power of our operating platform to provide unsurpassed guest experiences for our cruise line and destination resort partners. And driven by a continued momentum and scaling impact of our growth drivers, we are once again increasing our annual guidance beyond the quarter's outperformance. With earnings today, we also announced that our Board of Directors adopted an annual cash dividend program, which recognizes our ability to leverage our industry-leading operating platform, integrated growth initiatives, and asset-light business model to generate ongoing increasing after-tax free cash flow. Turning to the highlights of the quarter. Total revenues increased 12% to a record $224.9 million compared to $200.5 million in the second quarter of 2023. Income from operations increased 40% to a record $18.8 million compared to $13.4 million in the second quarter of 2023. Adjusted EBITDA increased 25% to $27.1 million compared to $21.6 million in the second quarter of 2023, and unlevered after-tax free cash flow increased 18% to $23.8 million compared to $20.1 million in the second quarter of 2023. The unlevered after-tax free cash flow conversion rate was 88% in the second quarter of 2024. The expansion in our ship count continued during the period. At quarter end, we had health and wellness centers on 197 ships with an average ship count of 188 ships for the quarter compared with 183 ships and an average ship count of 177 ships in the second quarter of 2023. At quarter end, we had 4,300 cruise ship personnel on vessels compared with 3,813 cruise ship personnel on vessels at the end of the second quarter of 2023. The quarter included continued progress towards our key strategic priorities. Let me share some highlights with you. First, we captured highly visible new ship growth with current cruise line partners and added new cruise line partnerships to our fold. To this end, in the second quarter, we opened health and wellness centers on two new ship builds, one with Cunard and the other with Silversea Cruises. This follows the opening of our health and wellness centers on the Icon of the Seas and Sun Princess in the first quarter, bringing our year-to-date new builds to four. We continue to expect to end fiscal 2024 operating onboard 198 vessels. Second, as it relates to our higher value services and products, as you recall, we introduced new cryotherapy body services and new cryotherapy and LED facial services to complement the new technology-driven Elemis Biotec 2.0 facial and LightStim therapy, which augments our acupuncture revenue. We will continue to ramp these new services to the entire fleet over the next few quarters. Third, we focused on enhancing health and wellness center productivity. We grew key maritime operating metrics with continued strong growth in revenue passenger per day, weekly revenue, and revenue per staff per day. This was driven by growth in total cruise guests utilizing the spa and the number of treatments per guest, which benefits from the success of our technology enhancements, our expertise in staff training, and the simplification of our service menu options and treatment blends. Additionally, we continue to attract and retain staff, which has led to an increasing percentage of experienced staff members working onboard. We are pleased to see more of our staff members sign on for additional contracts, reflecting the compelling workplace environment we provide and their affinity towards our company. These more experienced staff members are also skilled at recommending product and service options, which combined with the simplification of our service menu and treatment blend led to growth in higher-priced products and services. Pre-booking revenue as a percentage of services remains strong at 23%, even as we phase in new partners that are just beginning to scale. We continue to see passengers that pre-book services spend 30% more than those that do not pre-book. And finally, we continue to expand productivity within our Medi-Spa. The quarter saw same spa revenue overall up double-digit year-over-year. We continue to increase the number of doctors and nurses we have onboard and add to our service offerings. At quarter end, Medi-Spa services were available on 144 ships, up from 142 ships in the first quarter this year, and up from 129 ships at the end of the second quarter of 2023. We remain on track to expand Medi-Spa offerings to 148 ships this year. Fourth, we further enhanced our financial position and flexibility. Our balance sheet strength was bolstered by our repayments of our first lien term loan this quarter. And fifth, as mentioned, our Board of Directors approved and reinstated an annual cash dividend program with the initial quarterly dividend payment of $0.04 per common share payable to shareholders on September 4, 2024 of record as of the close of business on August 21, 2024, reflecting the strength of our asset-light business model and consistent record of growth. In summary, we are pleased to report an excellent second quarter and first half of the year and remain excited about our business outlook. Our third quarter is off to a strong start, and we remain confident in our ability to deliver robust operating and financial performance, both in the near and long-term. Overall, we continue to expect fiscal 2024 to represent another year of record growth and increased value for our shareholders. With that, I'll turn the call over to Stephen, who will provide more details on our second quarter results and guidance.

Thank you, Leonard. Good morning, everyone. We are pleased to report ongoing strength with the delivery of better-than-expected results across all key financial metrics in the second quarter. We continue to drive shareholder value with the quarter generating record revenue, record net income, and record adjusted EBITDA. And we ended the period with a stronger balance sheet and delivered positive cash flow. I am also pleased that our Board demonstrated confidence in our business outlook and our ongoing ability to generate strong cash flow with the initiation of an annual cash dividend program. Sharing more detail on the second quarter we reported earlier this morning, total revenues were $224.9 million compared to $200.5 million in the second quarter of 2023. The increase primarily was attributable to our average ship count increasing to 188 health and wellness centers onboard ships operating during the quarter compared with our average ship count of 177 health and wellness centers onboard ships operating during the prior quarter together with our continued productivity gains across our operations. Cost of services were $150.8 million compared to $137.2 million in the second quarter of 2023 with the increase again being primarily attributable to costs associated with increased service revenues of $180.8 million in the quarter compared with service revenue of $163.2 million in the second quarter last year. Cost of products were $37.1 million compared to $32.2 million in the second quarter of 2023, the increase primarily attributable to costs associated with increased product revenue of $44 million in the quarter compared to product revenue of $37.3 million in the second quarter of 2023. Net income was $15.8 million or net income per diluted share of $0.15 as compared to a net loss of $3.2 million or net loss per diluted share of $0.03 in the second quarter of 2023. The improvement was primarily attributable to a $12.2 million decline in other expense from the change in the fair value of the warrant liabilities and more importantly, a $5.4 million increase in income from operations. As you know, the change in fair value of warrant liabilities was the result of the remeasurement to fair value of the warrants exercised during the second quarter of 2024, reflecting changes in the market price of our common stock and other observable inputs deriving the value of these financial instruments. Importantly though, there are no outstanding warrants as of quarter end. The $5.4 million positive change in income from operations primarily derived from the increase in the number of health and wellness centers onboard vessels and our continued productivity gains. Adjusted net income was $21.7 million or adjusted net income per diluted share of $0.20 as compared to adjusted net income of $15 million or adjusted net income per diluted share of $0.15 in the second quarter of last year. Adjusted EBITDA was $27.1 million compared to adjusted EBITDA of $21.6 million in the same period of 2023. Moving on to the balance sheet, we ended the quarter with a stronger balance sheet including total cash of $63.7 million after repaying $15 million of our first lien term loan during the quarter. Since the second quarter of fiscal 2022, we have repaid over $109 million of indebtedness and we have reduced our debt now to $123.8 million as of June 30, 2024. In the second quarter, unlevered after-tax free cash flow was $23.8 million compared to $20.1 million in the second quarter of 2023. Moving then on to the guidance, with our strong second quarter performance and a positive outlook, for the second time this year, we have increased our fiscal 2024 guidance beyond the outperformance in the first half. We now expect revenues to increase 11% and adjusted EBITDA to increase 18% at the midpoint of the guidance ranges from our fiscal 2023 actual results. For full-year 2024, we now expect total revenue in the range of $870 million to $890 million versus our previous guidance of $860 million to $880 million and adjusted EBITDA is now expected in the range of $102 million to $108 million, up from our previous guidance of $95 million to $105 million. We expect to end fiscal 2024 on 198 cruise ships and at 52 resorts. For the third quarter, we expect total revenue in the range of $235 million to $240 million and adjusted EBITDA in the range of $27 million to $29 million. Our third quarter guidance assumes an ending ship count of 197 and resort count of 52. In summary, we enter the third quarter strongly positioned. We are confident in our outlook and our ability to continue to deliver increased value for our shareholders as we execute our proven strategies supported by our advantageous operating platform, robust growth initiatives, and asset-light business model. And with that, we will open up the call for questions.

Thank you. We will now begin the question-and-answer session. The first question will come from Gregory Miller with Truist Securities. Please go ahead.

Thank you very much. Good morning, Leonard and Stephen. My first question relates to product spend. I'm curious how product spend is trending post-treatment today. The second quarter revenues looked quite strong. Are you seeing any changing trends and what types of products or price points are resonating more with your guests today? Hey, there. Can you hear me?

We can, Greg. I thought Leonard would take the question. Maybe he just dropped off momentarily.

Yes, sorry, Greg. I was on mute. Yes, thanks. Product demand and service demand continues to be very strong. We see many benefits associated with some of the new services we've rolled out, the many simplifications. And so we see retail attachments being just where we need it. I think there's room to improve it as we continue to simplify menu choices, which actually promotes good retail attachments. So demand is there, and we're very happy with the progress on retail attachment.

Thanks. And in terms of my follow-up, this relates to spa menu pricing, and it's maybe a little bit more of a hypothetical question, but I'm going to try to ask anyway. To my understanding, you look at United States high-end resorts for benchmarking in terms of spa menu pricing. I'm curious, how much is the U.S. resort spa menu pricing a potential ceiling for you in terms of your own spa menus? For example, if you're in the position where your demand is stronger than a U.S. resort today, which is quite possible, given many affluent Americans are traveling abroad this summer, including, of course, going on cruises, do you expect to get much pushback if you raised pricing above an equivalent state-size alternative?

We always consider land-based high-end resorts. Not every brand fits into that specific category, and we look across various demographics and consumer segments. We analyze a wide range of land-based data to decide on pricing. Compared to luxury or high-end options, we still maintain a value-oriented approach. While there may be potential for future opportunities, we are not looking to implement changes at this moment. However, during our budgeting process for 2025, we will explore opportunities to adjust pricing further.

Understood. Thank you very much.

Yep. You're welcome.

The next question will come from Max Rakhlenko with Cowen & Company. Please go ahead.

Hey, thanks a lot guys. And congrats on a really strong quarter. So first, curious if you can provide some additional color on the implied fourth quarter revenue and margin guidance. Seems like it could be pretty conservative on both top and bottom line, just given the run rates you're seeing, as well as the implied third quarter. So just how are you framing and sort of what's the thinking that's going into the fourth quarter?

Yes, Max, good morning. As you know, the fourth quarter seasonally is a softer quarter for us, and historically, that has been the case, shift, reposition and, obviously, we come out of the much more productive summer vacation period for North American school holidays. So it's not atypical to see a softer fourth quarter than the third quarter, and our implied margin for the fourth quarter at the midpoint is 11.9% on an EBITDA basis. So it's not far short of where we've delivered in the first and second quarter, and just gives us the opportunity to the extent that we would need to do any type of promotional activity because of those re-positionings, etc., to do so. So I think the short of it is it's what we would expect seasonally and also from a demand perspective based upon where the ships begin to sail during the first half of that quarter as they reposition.

Got it. Okay, that's helpful. And then congratulations on announcing the dividend. So curious, what's the strategy around the growth profile of the dividend? How are you thinking about that? And then balancing it with continuing to pay down debt, is the strategy to pay down debt completely over the medium term, or would you be okay continuing to carry some level even longer? So just curious about the balance of dividend versus the debt paydown.

Yes, I think the word that you use is most appropriate, the balance. As you obviously know, we do continue to have debt. We also do have a share repurchase program that is in place, and so we like the flexibility to be able to allocate between the share repurchases, the debt paydown, and of course now there's also the dividend. Yes, we would be comfortable carrying some debt. I think we've already previously mentioned that the debt is at a very manageable level, net debt well below 1% in terms of where we would want it to be. So I mean, one turn rather. So, yes, we're absolutely comfortable, and I think it'll just come down to what makes the most sense, right? Opportunistically, the stock repurchases may come into play over time. There's certainly the opportunity to grow the dividend, and depending on what happens with interest rates will drive how aggressive we are in paying down the debt.

Got it. And just a quick follow-up on that point. Your cash on the balance sheet continues to grow. So is that related to potentially just having some dry powder to buy back stock, or what's the rationale for that?

So it is at a higher point than it traditionally has been. A driver of that is, as you know, our line of credit expired in March, and we did not renew it. So it really is just to have some additional liquidity on the one hand, and, yes, look, to the extent that there's an opportunity on the stock repurchase side, it's always nice to have some cash to be able to pull the trigger on that.

Got it. Thanks a lot. Best regards.

Take care.

The next question will come from Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning. It was really impressive to see what it looks like spot productivity actually accelerate from where you had been, which is already at really good levels. And I know, Leonard, in your comments, you talked about treatments per guest improving and some tech enhancements that were helping drive that, among other factors. Can you talk about what those tech enhancements are and kind of what you have coming down the pike? I think you have some investments in AI going on right now, but I'm not sure if they've manifested yet in any way in the back of house or front of house at the spas.

Yes, thanks, Sharon. These are good questions. So let me just answer the simple one first. We have not rolled out any AI enhancements yet. They're still in the development phase. I would say sort of first innings. We're going through identification of opportunities, particularly onboard, and then certainly in supply chain and other areas in the back office of OneSpaWorld. But there's nothing in place right now, nor anything that will, in 2024, impact the ability to use AI to drive better productivity. So, we're working on it. It's in its early stages of development, and we certainly are very, very excited about some of the areas that we are going to tackle with respect to enhancing further productivity enhancements from start with the use of some of the AI technology. But once we have it fully developed, once we have it ready to roll out, we will certainly be happy to talk to everybody in the community, shareholders, et cetera, about what this AI will do for the operations. Obviously, it's going to take some testing, et cetera. So, too early to comment, but certainly exciting to see what it may do for us once we roll it out. With respect to productivity gains, we saw definitely a pickup in the number of guests coming through our spas. I mean, it was close to about 500,000 more. But then the denominator of the new ships went up a lot more. So effectively, we're treating more people. The simplification of our menus, which is helping promote both service demand and retail attachment, all led to better productivity during the quarter. And certainly, that productivity continues as we start at the third quarter.

Thank you for that. Now, regarding product margin, it seems to be exceeding my expectations each quarter. Stephen, could you explain what factors are influencing product margin? Even though you no longer have ownership of Elemis, what are your thoughts on the potential for product margin growth? Are we witnessing any positive effects from Medi-Spa that could contribute to this? I'm trying to understand where we currently stand in the mid-teens, which is significantly higher than in 2019. What is the potential for further increases in product margin?

Sure. So, Medi-Spa, no. There's no real product attachment of note as it relates to Medi-Spa services at this point in time. So that is not helping. As it relates to the cost of the product, and yes, we no longer own Elemis. But, as you know, we did enter into, pre the companies disaggregating, a long-term supply agreement. So the cost side of that is fixed in terms of go-forward. And so, where you see improvements there, it's around things that we're doing onboard. And the biggest driver right now, frankly, is just the continued productivity improvements and the lack of discounting being required in order to promote those sales.

Okay, thank you.

The next question will come from Laura Champine with Loop Capital. Please go ahead.

Hi, my question is also on that product side, which is beating our estimates. I'm wondering if you have looked at additional product lines you could add there. I know we've talked about ways to build an e-commerce business so that your customers keep paying you even after they've left the ship. Is there M&A that could be done there that we would need to do to have sort of an e-commerce side of the business or just share kind of your growth thoughts on products?

Yes, thanks, Laura. We don't have a need for additional products. Elemis is involved in our R&D efforts. We participate in the discussions and share insights about what works in our context compared to their retail channels. We provide feedback on what we believe may be needed, and as a significant customer, they consider our input and develop products accordingly. In some luxury segments, we do offer a smaller complementary range. We've even included products we don't own in those selections when necessary. However, Elemis' offerings for face and body are sufficient for our growth. All the services and protocols we implement are supported by the Elemis product range both in the back bar and retail. We're very excited about the new products launching from Elemis next year, so we don't see a need to explore other options. We do receive frequent inquiries to add new products due to our impressive showcase and testing opportunities for our guests and consumers. Nonetheless, we have a strong long-term partnership with Elemis, as Stephen noted, and we will maintain that as our primary product range. Regarding e-commerce, we sell Elemis products online, but Elemis also has a robust e-commerce presence on its own site. While there is some competition, it primarily involves our guests purchasing products we offer on board. We're actively seeking ways to enhance our e-commerce strategy, which is performing better than it did in 2019. If we identify any worthwhile additions for e-commerce related to post-guest experiences, we will consider them, but nothing is currently in the pipeline.

Understood, thank you.

Welcome.

The next question will come from Assia Georgieva with Infinity Research. Please go ahead.

Good morning guys. I want to start with my congratulatory remarks. Great Q2, great increase to the outlook. And the fact that you reinstated the dividend is fantastic. And then, Stephen, you said that we don't have to deal with the warrants is the date that I remember quite clearly. Can I ask a question on occupancy because I think it's an opportunity and it can go both ways. One of the major brands that you serve on has pretty much gotten to the historical levels of occupancy. Another one who may have reported earlier today is still lagging behind the historical levels. So it seems that with greater occupancy opportunity, you might be able to continue to grow beyond what the ship count is. Is that a fair assessment?

I want to highlight that we only cater to a small segment of guests on board, and overall, occupancy levels have largely returned to what they used to be, with some even exceeding those rates. However, when occupancy exceeds 100%, it’s often because they are accommodating more children, which isn't our primary target audience. Therefore, I don’t believe we are missing out on many opportunities from a cruise line occupancy perspective. We appreciate that they consistently fill their ships and are currently maintaining that trend. Yet, once occupancy hits over 100%, the additional benefits for us are not particularly significant.

Thank you, Stephen. You mentioned Silversea and Icon, and if I can include Utopia, they represent three distinct demographic groups that travel on those ships. How do you see the offerings from Royal, specifically the shorter party-style trips on Utopia compared to the family-oriented experiences on Icon of the Seas and the high-end, longer voyages on Silversea, whether it be Ray or Nova, which cater to a more affluent customer base without kids? How do you perceive these three different demographic target markets?

Assia, thanks. I think it's a very smart way that Royal Caribbean has approached the market. They're offering a family choice and the Icon is an incredible layout for families and kids. And then I think by introducing Utopia, shorter cruises, more younger demographic, maybe a little bit more partying going on, I think is also quite smart as well. And I think we've seen those kinds of demographic across different banners, and it's never been an issue for us. And look, our training and the way that we go to work on different types of length of itineraries, different types of demographics, caters to this. So I think it's very exciting that they are offering two identical ships catering to two different demographics. And I think they'll do equally as well. Silversea in the luxury markets, beautiful ships, longer itineraries, no kids, as you say. We continue to excel on there as well, and our recent results on there have been outstanding.

And so between Utopia, the party market, the younger demographic, and Icon, the more family-oriented, do you think that you may have a greater penetration rate at Utopia?

It's too early to tell. I think a three, four-day mix makes people make quicker choices because they've got a shorter period of time with the three days or four days, they got one extra day for deciding when they're going to participate in some of the amenities including spa. But listen, I think the ship is outstanding. I think the itinerary that it's chosen for the three, four days, I think, will complement competitiveness against their other vessels. So no, I don't see any challenges. Certainly nothing that we can't adapt to. And this is not the first time we're handling three and four day party cruises. We've done this for decades.

I was actually going the other way. I was thinking this was more of an opportunity than a challenge. Younger couples don't have kids, can spend time at the spa as opposed to playing with their kids. And I sound like I'm anti-kid and I'm sorry, I'm not. Is the Utopia-type product is actually better for you.

It could well be. But remember, whether you're on the family ship or the party ship with no kids or if you're on the family ship, the Icon with kids, the way in which the itinerary is laid out on the Icon, the ability to put different kids at different ages in different types of programs doesn't impede the married couple from participating and enjoying many things that adults like to do onboard. So no, look, is there an opportunity to do better with the younger crowd? Possibly. But then again, we'll have to see, as a consumer group, how they behave. So yes, it could be an opportunity, but I certainly don't think the Icon is disadvantaged by it.

All right. Fair enough. And if I may ask one last question. We know that pre-bookings tend to be a multiplier in terms of what gets spent onboard. And you mentioned in your prepared remarks that having brands that are onboarding with you, they may not be quite as attuned to or not have the pre-booking engine that would actually feed into pre-booked spa. So what is the opportunity in 2025, do you think in terms of pre-booking penetration versus what we have had this year?

So look, as I mentioned, we were still onboarding different banners and continue to onboard them to get to scale. We think pre-booking will continue to move upwards. There are some good banners still to get onto the pre-booking platform at scale. We think there is a lot of work to be done with our cruise line partners with respect to enhancing the pre-booking experience and journey. We continue to provide content. We continue to provide different types of views of what is available onboard and we will continue to augment that so that they adapt to it and continue to improve the pre-booking journey. I think if they utilize everything that we're giving them, we will certainly see pre-booking start to move northwards.

And currently, we're at about a 30% rate, correct?

Sorry, you broke up there. What was the question?

Pre-booking, we are currently at about 30% penetration in terms of pre-bookings?

It's 23%.

Pre-booking is about 23% right now as we reported.

Okay. I'm sorry.

The 30% you mentioned is, a pre-booked guest, on average spends 30% or slightly more than that than a guest that does not pre-book.

Okay, perfect. Thank you so much guys and again great quarter and thank you for the great news this morning.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Leonard Fluxman, Executive Chairman for any closing remarks. Please go ahead, sir.

All right. Thanks, Chuck. Once again, thank you all for joining us today. We're very excited about the results for the first half of 2024, and we look forward to speaking with you when we report third quarter results and seeing many of you during our upcoming investor meetings. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.