Good day, and welcome to the OneSpaWorld Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Thank you. Good morning and welcome to OneSpaWorld's third 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 third 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 third quarter 2024 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and 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 third quarter 2024 earnings conference call. It's a pleasure to speak to you today and share another period of record performance. Our team delivered exceptional third quarter results, achieving all-time records for total revenues, income from operations and adjusted EBITDA that once again surpassed our expectations. Our sustained strong performance continues to evidence the talent of our team to leverage our complex operating model and competitive strengths to deliver outstanding guest experiences for our cruise line and destination resort partners. This positions us well to continue to achieve outstanding results for our company and our partners. As outlined in our earnings release issued earlier this morning based on our performance our continued momentum and positive outlook across the business we have increased our annual guidance for the third time this year. Turning to the highlights of the quarter. Total revenues increased 12% to a record $241.7 million, compared to $216.3 million in the third quarter of 2023. Income from operations increased 48% to a record $25 million, compared to $17 million in the third quarter of 2023. Adjusted EBITDA increased 33% to a record $33 million, compared to $24.9 million in the third quarter of 2023, and unlevered after-tax free cash flow increased 28% to a record $31 million, compared to $24.2 million in the third quarter of 2023. The unlevered after-tax free cash flow conversion rate was 94% in the third quarter of 2024. We continue to grow our ship count year-over-year. At quarter end, we operated health and wellness centers on 196 ships with an average ship count of 195 for the quarter. This compares with a total of 189 ships and an average ship count of 185 ships for the third quarter of 2023. At quarter end we had 4,204 cruise ship personnel on vessels compared with 3,927 cruise ship personnel on vessels at the end of the third quarter of 2023. The quarter included continued progress toward our key strategic priorities. Let me share some of those highlights with you. First, we captured highly visible new ship growth with current cruise line partners and added new cruise line partners to our fold. During the third quarter, we opened a health and wellness center on the new ship build Utopia of the Seas. With this opening for the first nine months of the year we have introduced Health and Wellness centers on five new ship builds. Looking ahead, we continue to expect to end fiscal 2024, operating on board 198 vessels. Second, our higher value services and products. As you recall we introduced new cryotherapy body services which saw strong double-digit growth in revenue in Q3 as compared to Q2. Additionally our new cryotherapy and LED light facial services that complement the new technology driven Elemis Biotec 2.0 facial and LightStim therapy continues to be a very successful addition to our facial and 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 an increase in the number of treatments per guest both of which benefit from the success of our technology enhancements, our expertise in staff training and the simplification of our service menu options and treatment lengths. Additionally, we continue to attract and retain staff, which has led to an increasing percentage of experienced staff members working on board. We continue to see more of our staff members sign on for additional contracts reflecting the compelling workplace environment we provide and their affinity toward 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 led to growth in higher price products and services. We remain focused on initiatives that retain our best staff. Pre-booking revenue as a percentage of service revenue remains strong at 22% 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 who do not pre-book. Finally, we continue to expand productivity within our Medi-Spas, with same spa revenue overall up double-digit year-over-year. We now expect to have Medi-Spa services offerings on 144 ships this year. Fourth, as it relates to capital allocation, we further enhanced our capital structure and financial flexibility. During the quarter, we refinanced our first lien term loan with a new $100 million, five-year facility, at a lower interest rate and entered into a five-year revolving credit facility up to $50 million which was undrawn at quarter end. Our efficient capital structure, asset-light business model and robust cash flow generation allows us to invest in support of our future growth, while paying an ongoing quarterly dividend and evaluating opportunities to optimize our capital structure. We ended the quarter with $50 million in cash after paying down debt of $24.6 million and investing $11.3 million to repurchase our common shares in the quarter as well as dispersing $4.2 million in quarterly dividends. We believe we will remain well positioned to continue to invest in support of our growth and return value to shareholders. We issued our inaugural Sustainability and Social Responsibility Report, which highlights our commitment to exemplary care for employees, outstanding service to our partners and their guests, and responsible stewardship of the environment and communities across the globe. This commitment, combined with our ongoing ability to leverage our industry-leading operating platform, integrated growth initiatives, and asset-light business model, positions us to deliver continued strong financial performance. In summary, we are pleased with the ongoing strength of our business and excited about our prospects. With a clear path for growth, a highly talented team, and successful strategies in place, we continue to expect fiscal 2024 to represent another year of record growth and increased value to our shareholders. With that, I'll turn you over to Stephen, who will provide more details on our third quarter results and guidance.

Thank you, Leonard. Good morning, everybody. We are pleased to report ongoing strength with the delivery of better than expected results across all key financial metrics in the third quarter. We continue to drive shareholder value with the quarter generating record revenue, record net income, record adjusted EBITDA and record unlevered after-tax free cash flow. We enhanced our already strong balance sheet, ending the period with a strong cash position even as we utilized cash to reduce debt, repurchase our shares and pay a quarterly dividend. Sharing more detail on the third quarter that we reported earlier today. Total revenues were $241.7 million, compared to $216.3 million in the third quarter of 2023. The increase primarily was attributable to our average ship count increasing to 195 health and wellness centers onboard ships operating during the quarter, compared with our average ship count of 185 health and wellness centers in the third quarter of 2023 together with continued productivity gains across our operations. Cost of services increased to $159.6 million, compared to $146.1 million, primarily attributable to costs associated with our increased service revenue of $194 million, compared to service revenue of $175 million in the third quarter of the prior year. Product costs were $40.1 million, compared to $34.5 million in the third quarter of 2023, with the increase primarily attributable to costs associated with increased product revenue of $47.3 million in the quarter compared to product revenue of $40 million in the third quarter of 2023. Net income was $21.6 million, or net income per diluted share of $0.20, as compared to net income of $23.4 million, or net income per diluted share of $0.16 in the third quarter of prior year. The change in net income was primarily attributable to a $7.4 million decline in the fair value of warrant liabilities reflected in other expense in Q3 of 2023 and a $8.1 million increase in income from operations. The $8.1 million change in income from operations primarily derived from an increase in the number of health and wellness centers onboard ships operating during the quarter and our productivity gains across our operations. Adjusted net income was $27.3 million, or adjusted net income per diluted share of $0.26, as compared to adjusted net income of $22 million, or adjusted net income per diluted share of $0.22 in the third quarter of 2023. Adjusted EBITDA was $33 million, compared to adjusted EBITDA of $24.9 million in the third quarter of the prior year. We ended the quarter with a stronger balance sheet including total cash of $50 million after repaying $24.6 million on our first lien term loan, repurchasing 745,000 common shares for $11.3 million, and paying the $4.2 million dividend during the quarter. At quarter end, we had $38.7 million remaining on our current share repurchase authorization. We have repaid over $133 million of indebtedness since returning to service in fiscal 2022, reducing our debt to $99 million and have also repurchased a total of 2.14 million shares for a total of $28 million. In addition, we refinanced our first lien term loan with a new $100 million five-year facility, lengthening our maturity and reducing our ongoing interest expense. During the third quarter, unlevered after-tax free cash flow was a record $31 million compared to $24.2 million in the third quarter of 2023. Moving now onto guidance. With our strong third quarter performance and a continued positive outlook, for the third time this year, we have increased our fiscal year 2024 guidance. We now expect revenue to increase 12% and adjusted EBITDA to increase 24% at the mid-point of the guidance ranges from fiscal 2023 actual results. For the full year of fiscal 2024, we expect total revenues in the range of $888 million to $893 million versus our previous guidance of $870 million to $890 million, and adjusted EBITDA is now expected in the range of $110 million to $112 million versus our previous guidance of $102 million to $108 million. We expect to end fiscal 2024 operating on 198 cruise ships and at 51 land-based resorts. For the fourth quarter, we expect total revenue in the range of $210 million to $215 million and adjusted EBITDA in the range of $25 million to $27 million. In summary, we enter the fourth quarter strongly positioned. We are confident in our outlook and our ability to continue to deliver increased value for our shareholders, as we execute on our proven strategy supported by our advantageous operating platform, robust growth initiatives, and asset-light business model. With that, could you please open the call for questions?

We will now begin the question-and-answer session. The first question today comes from Steve Wieczynski with Stifel. Please go ahead.

Hi guys, good morning. So Leonard or Stephen, I want to ask about the margin expansion in the quarter that was probably much, much better than what we were kind of expecting. I mean, if we look at the service margins, those expanded by about 100 basis points. And then on top of that on the operating expense side, your salary line was actually down about 100 basis points. So you put that all together, you've got this massive 200 basis point kind of plus move in EBITDA margin. So, just wondering, if there was anything we need to think about in terms of maybe one-time benefits or maybe a better question is just how were you able to push those margins so much? And how should we think about margin expansion moving forward?

Yes, Steve. Good morning. Let me start off with the second part of your question as it relates to salary and payroll taxes being down versus the same quarter of the prior year. And really that is just a function of incremental expense in the prior year related to the timing of higher performance-based compensation. This year, that has been spread more evenly throughout the quarters and so it reflected itself now in the third quarter of current year being less than the third quarter of the prior year. As it relates to the service margin, I would say two things, right? So number one, as you've heard from the cruise lines that have already reported to date, onboard demand remains particularly strong. Guest spend remains robust. That translates for us into minimal promotional activity. We are obviously delighted and encouraged about. To the extent that those continue to play out, we continue to feel very, very good. I'd also just remind you that, as we continually preach, we will focus on absolute dollars. So at a point in time, if there is any softening, and we have not seen any then we would do promotional activity in order to drive the absolute dollars. But where we stand right now we feel really good about how things are playing out.

Okay. Got you. Thanks for that, Stephen. And then second question I'm not sure if this is for Leonard or you Stephen but – and maybe we're meeting – we might be reading too much into this. But if we look at your land-based weekly production relative to your maritime weekly production I mean there's quite a big difference going on there between the two of them. Obviously, the cruise industry is doing so well right now and I think a lot of that's just due to the massive value proposition. But just wondering or if you have any idea why those land-based spas aren't seeing the same type of revenue generation that you're seeing on the maritime side?

A number of the hotels, Steve, are actually undergoing renovation projects, and so that has negatively impacted some of the performance in the land-based resorts, particularly at some of the bigger locations.

Yes. We had like three or four this year versus last year, Steve. So that has impacted certainly revenue per week on average at the resorts. We've also had some softness in Asia, where they have not had the same occupancy. Room occupancy is down overall across Asia and the Caribbean just not getting as many people as they had last year. The business is a little challenged because some of the biggest spas, as Stephen mentioned, have not been opened because of construction.

So as those renovations kind of come to a close and as we think about 2025, we should start to think about that land-based spa side of the business starting to grow again. Is that kind of fair?

I think it's fair to assume. We've got to work harder on penetrating and capture rate in the resorts. We have to make sure that all of our marketing tools are in play. We are doing a number of different things right now to put some more energy and life into producing those results. I think 2025 should be a little better. Thank you.

The next question comes from Max Rakhlenko with TD Cowen. Please go ahead.

Hey, great. Thanks a lot guys and congrats on a really nice quarter. So first, how are you thinking about pricing on the service side both for the fourth quarter and 2025? Are you seeing consumer acceptance to higher price points? Just how are you thinking about how much room you may have to push that a little bit further?

So Max, I think based upon the comments both Stephen and I have made, demand – the cruise lines have also spoken about demand for an incremental onboard spend still continuing to be robust. We've taken – we obviously took pricing last year we took very little pricing this year except in some cases for some of the Med-Spa treatments. As we deploy or innovate or add to the lineup new services, those will be incrementally higher. We continue to look within the pricing transformation process that we've done, which is the simplification of the menu, et cetera, moving people from shorter services to longer services with higher price points. To the extent that we think the demand, and we firmly believe that right now, will continue, we will look across the board at some of the services and see if more pricing can be taken. Look, we don't want to get ahead of ourselves. We never have. But I think there's some opportunities in some of the services to still have some smaller increases in 2025 and 2026.

Got it. That's helpful. And then just switch over to margins. Obviously, as we just touched on really nice outperformance versus the initial guide provided earlier this year. Do you view 2024 as the correct jumping off point, with potentially small levels of expansion there on out? How should we just think about 2024 EBITDA margin, versus where the company can go over the medium to longer-term?

I think you phrased it appropriately in terms of being a jumping off point so to speak, with more incremental improvements over time. With such a high variable cost nature in our business, it is difficult to drive those margins. Obviously, we saw them flow through very nicely in the third quarter, with significant outsized revenue that then helps to relate to scale and covering some of your fixed costs. I would put it to you this way, we are in the process now of looking at 2025. There is nothing at this point that gives us pause with relates to 2025. We don't talk specifically around those numbers just yet. But as we go through our budget process, and then early next year, we would come up more formally with our expectations for 2025. But as of right now, we remain optimistic about where we're at as of today and how we see the outlook playing out.

Okay. Great. Thanks a lot guys. Best regards.

Thank you.

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

HI, good morning. I was hoping just given the election that's coming up next week, could you go over any tariff risk that you guys might have either in the maritime or land-based resort business as it relates to your acquisition of products or anything along those lines?

There's an election next week? So, good morning.... The majority of our product technically does not come into the United States although physically, it enters into a bonded warehouse and then goes straight back out onto the ships and into international waters. For the vast majority of our activities, we are not anticipating any impact from any tariffs.

Great and thank you. Sorry, I'm getting all choked up, as I talked about the election. I also wanted to ask, I know your long-term algorithm, I think is for high single-digit revenue growth and you've obviously been doing better than that for this entire kind of post-pandemic timeframe. The fourth quarter implied revenue is kind of in that 10% range. Do you think that you can sustain kind of something a bit above that long-term algorithm, just given the momentum both in the cruise space and what's happening with pre-booking specifically for your business?

I don't think we'd be comfortable just yet in taking that up above what we've typically talked to. We certainly feel very comfortable with all of the initiatives in place, with the 10 new builds coming into service next year, that high single-digit revenue growth is certainly achievable. To the extent that we can do better than that, we will be delighted and we will continually strive to do that. But at this point in time, I don't think we want to change the long-term algorithm metrics, as we've previously communicated.

And Stephen, do you want to keep any debt on the balance sheet? I mean, it seems like you could be debt-free at this time next year, if you want to.

Yes. It's interesting. We did restructure the debt, not only in the amount but also in where it is divided. We've put a large portion of the debt now actually in the US, where we will get some interest shield. So if you ask me and Leonard personally, do we want to keep any debt? The response would be no. Why? Why would we pay interest to somebody else when we can rather return all of that money and do something better with it? With the refinancing, increasing the maturity, and the hedge we entered into that gives us an incremental slight benefit now on the interest rate. While paying down debt will perhaps not be as high as it has been in the past, I think we will continue to employ a balanced capital allocation strategy where we've talked about doing all three things: paying down debt, buying back shares, and paying a dividend. That balanced allocation strategy is something that we remain very focused on. It's likely that over the shorter-term, the next year or so, there is less of a focus on debt and more of a focus elsewhere, but we will pay down some debt. The stock repurchase, as we've said all along, is opportunistic. So when there's weakness, we'll go ahead with it. It's not programmed or a certain amount per quarter.

Thank you.

The next question comes from Gregory Miller with Truist Securities. Please go ahead.

Thanks, good morning, gentlemen. I have a couple of questions related to the cruise line private islands. First off, do you anticipate that your revenue generation would be better or worse as these islands increasingly become part of the Caribbean itineraries relative to a Central American or Western Caribbean port of call?

The islands, when we first started to see a lot more of them being developed, some are different from others. Some offer massage treatments, some don't. We continue to work with the cruise lines on exploring the opportunities to develop more real estate on the island to do more services. I certainly think they are listening. As we move forward with some of the new developments that are happening with two of the cruise lines, we'll be able to improve the offering onboard that. I think people are smart, so they know they're going to go to one of the islands for a specific number of hours a day. Depending on who they are with, they will either pre-book in the morning to do something, or when they come back from the island, it is not a net negative. But I think, as time goes by and we see more of our services being offered in addition to the waterpark stuff, I think it will be accretive to us.

Thanks. And just as a brief follow-up, what makes a cruise line determine to add your services after a private island becomes operational?

Usually it's feedback from passengers about things they would like to see on the island. They do a lot of surveys onboard the ships to see which amenities they like, which they would like to see, and which they didn't experience. They take all the feedback they can get from us as well as from the cruise passengers, and to the extent there's demand, they move forward.

I appreciate. Thank you. The next question comes from Assia Georgieva with Infinity Research.

Good morning, guys. Congratulations on this record quarter and hopefully continued smooth sailing into 2025. Gregory basically asked pretty much my first half of the question. So are the economics on those private islands similar to what you would get onboard during a sea day? Or would you be competing sort of with your port pricing onboard the ship if you're offering the same type of services at a private island?

Generally speaking, they are going to be similar, Assia. To the extent, we can't complete the same length of service obviously it's priced accordingly. But other than that it's very similar.

Okay. And a second somewhat unrelated question. You mentioned the 22% pre-booked rate. As we heard, the cruise companies are looking at much higher pre-booked onboard, specifically for your business. Given the fact that you have new cruise partners, what would you say is the max penetration rate that you have at this point with the more established partners? Do you still see an opportunity for them? Let's say it's 30%. Do you still see an opportunity for that to grow?

Yes. I think as I mentioned on my call we have one particular larger banner that's not yet at scale. We've continued to work with their shoreside revenue and marketing folks to improve that. It's really a function of allocating resources. Some allocate more, some understand it, some have folks in marketing that own it. We have a strong focus for 2025 in moving the needle on pre-booking because it's a real opportunity; they spend better and have a higher frequency of services. We demonstrate metrics to them in our quarterly meetings and show them where there's room for improvement. It ultimately depends on their ability to allocate more resources, which is more money for everybody. There's a strong understanding of this and they are receptive to it, but it comes down to whether they have the resources at the time to allocate.

And do you think it’s possible to move that needle by five percentage points, meaning from 22% to 27% over the course of 12 months or so?

We would certainly love to see it move above 25%. Our target internally is definitely above 25%. We manage very efficiently the back end of the pre-booking function and the yield management. If we can get more of our cruise lines to give more attention to it, particularly because the spend is so much higher, then I think the potential to go above 25% is certainly there for the future.

Perfect. Makes a lot of sense. Thank you, Leonard.

Yes. You’re welcome.

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

Hi. Thanks for taking my question. Sorry, if this has already come up, but any progress on getting the cruise lines to share more data so that you can offer more personalized discounts to passengers?

No. Laura, they don't like to share, and I don't think they ever will. They're very protective about the data. We try different ways to get more granularity on the data we need, but honestly, it's unlikely they'll share more than they have to.

Understood. So what are the things that move the needle on pre-bookings for you guys? Like what are the tools you can use to drive that number even higher?

To the extent that firstly all the visual elements, the navigation, the offering, the way that which the website looks when you land on it from the front end of the cruise line, we're working with many different banners to improve that, improve the imagery, adding videos, showing people things that they just didn't know we offered. All of that capability can certainly improve the way that people view our services and get to book them. If there are inefficiencies in the booking side or the navigation, we certainly point those out. But more importantly, it's how they market what can be pre-booked. If they market meals or shore excursions, we would love to see more focus around the spa as part of what they're pre-booking, just having them emphasize that there are specific days where if you don't pre-book you're not going to get that service. Collaborating with their marketing teams in a much more meaningful way will drive better results out of the pre-booking for us.

Got it. Thank you.

Yes.

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

Thanks, everybody, and thank you for joining us today. We look forward to speaking with many of you at the upcoming investor conferences that we'll be attending and when we report our fiscal year results in February. Thanks for joining today. Take care.

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