Earnings Call Transcript - OSW Q1 2021

Allison Malkin, ICR Representative

Thank you. Good morning, and welcome to OneSpaWorld's first quarter 2021 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 impacts could materially alter our outlook. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements.

Leonard Fluxman, Executive Chairman

Thank you, Allison. Good morning, and welcome to OneSpaWorld's First Quarter 2021 Results Conference Call. As the travel and tourism industry has begun to reopen, we are ready, we are eager, and we are excited to welcome guests to our health and wellness centers and deliver our extraordinary OneSpaWorld guest experiences. We have invested aggressively for 14 months in protecting our people, sustaining our operations, enhancing our competitive position and comprehensive protocols to ensure a safe and successful return to service, while taking actions to maintain strong liquidity. The dedication of our team throughout this unprecedented pandemic positions us to flawlessly execute our resumption of operations aboard the first 33 expected ships scheduled to resume sailing by the end of July. Our onboard operating protocols are complete, and our onboard staff is fully trained. We are operating health and wellness centers aboard 3 of our 160 cruise line vessels that have commenced voyages. We have opened our spas in 47 of our 53 destination resorts, realizing revenue and stock utilization in line with our expectations and with operating metrics increasing sequentially month-over-month. These initial returns confirm that we are positioned strongly to capitalize on the strength of our team, operating platform and business model to drive long-term profitable growth as cruise ship and destination resort operations fully resume. During the quarter, we prioritized activities to ensure a successful return to service and maintain strong liquidity with the first quarter, making strong progress on both fronts, including continuing to focus on elevating our practices, including previously mentioned digital training, the implementation of guidelines for protection and sanitization, culture and standards, as well as expansion of our service offering and technology. We are implementing these initiatives with the focus on flawless delivery to the additional 31 ships expected to return by the end of July. Accordingly, our initiatives have shifted from creating and stress-testing in anticipation of return to service, to going live, providing feedback and making enhancements to our processes. Each of our initiatives optimizes our effectiveness, focuses on cost efficiencies and ensures a flawless return to service.

Stephen Lazarus, Executive Vice President

Thank you, Leonard, and good morning, ladies and gentlemen. While the first quarter, as you know, continued to be impacted by the global pandemic's impact on the travel and tourism industry, we remain intently focused on preserving our liquidity as well as investing in innovation and training our staff as we prepare our operations for a return to service. I will now share just a few of the first quarter 2021 highlights rather than provide a full overview of our quarterly results, given the continued significant impact that the global COVID-19 pandemic has had on our operations. For the first quarter, total revenues were $5.6 million compared to $114.3 million in the first quarter last year. Revenues generated in this year's first quarter were primarily related to the 47 destination resort spas that were opened during the quarter and e-commerce product sales through our timetospa.com website.

Steven Wieczynski, Analyst

Yes. So I understand the cash burn is going to look something like $15 million for the second quarter. And for the most part, you still won't have any type of material maritime operations in the second quarter as well. But as you look out to the third quarter, and let's say you get those 30-ish ships back in somewhat operation, just trying to understand what your cash burn would look like under that type of scenario. Meaning would you guys actually be cash flow positive with that number of ships in service? Or would you still need a higher level of ships?

Stephen Lazarus, Executive Vice President

Steve, we do not anticipate, currently, with that number of ships that we would be cash flow positive in the third quarter. We do expect, though, based upon what we're seeing and with regards to anticipated incremental sailings in the fourth quarter that, by the end of the year, we would start to be cash positive, but we're not anticipating it this time. Although we certainly don't expect to be at a cash burn rate of $15 million, we do not expect to be cash flow positive in Q3.

Steven Wieczynski, Analyst

Okay. Got you. And then second question would be around just maybe what you guys are seeing at this point in terms of spend levels, both at your land-based spas and then the 2 ships that actually are in service today. Just trying to understand how those spend levels look, and if they're as strong as what we're seeing across other consumer verticals that we track.

Leonard Fluxman, Executive Chairman

Yes, the demand has been strong, although we have limited data since we only have two ships in operation. We're experiencing significant demand and increased spending despite the lower occupancy rates, and this trend is also evident at our resorts. As a result, we are beginning to ramp up staffing levels at some of the resorts due to this high demand, which we have struggled to meet. Initially, we had lower staffing, but after reviewing demand last week, we decided to gradually increase it to better accommodate the needs. The retail spending in our resorts has also been quite good, surpassing historical levels, indicating a strong attachment rate.

Steven Wieczynski, Analyst

And last question, just to follow-up on that. And for the land-based operations that you have today, are you guys capacity constrained? Meaning that whatever jurisdiction you're operating in, you can't operate at full capacity?

Leonard Fluxman, Executive Chairman

We are not presently under those conditions anywhere right now. And that's why we're starting to look at hiring back more and more of our staff in those locations.

Sharon Zackfia, Analyst

I want to apologize my cell phone dropped. So if I asked something that was in the prepared commentary, it's AT&T's fault, not mine. I guess a question on bookings. Are you seeing, for the maritime operations, any change in kind of pre-booking levels? Are customers kind of more eager than they were pre-pandemic to kind of get these things on the books for when they do eventually sail?

Leonard Fluxman, Executive Chairman

On the prebooking side, Sharon, we still don't have visibility from the cruise lines yet. I mean the only thing we're seeing is obviously high demand, pent-up demand, obviously, from a cruise ticket perspective. But the pre-open bookings are on the back end right now. As they start to confirm passenger accounts for each of the sailings, the bookings will start to flow in. We expect that to happen imminently.

Sharon Zackfia, Analyst

Okay. I think there was some discussion in the prepared commentary about metrics improving sequentially each month. How does revenue per staff for land-based compare now to pre-pandemic?

Leonard Fluxman, Executive Chairman

So we really look at it on a revenue per staff basis like we look at sea. We really look at this sort of revenue per occupied group. And that's certainly, in some cases, better than it was pre-pandemic. But that's also a function of occupancies at the resorts themselves. So as the resorts start to fill up, the revenue per occupied room will probably come back down a little bit. But right now, that metric in itself is outpacing pre-pandemic levels.

Sharon Zackfia, Analyst

Okay. And then I know you talked about the staff, that you're going to be kind of getting ready to go on board soon. What is staffing levels going to look like on ships relative to pre-pandemic? I mean are you going to be fully staffed? I know you mentioned that, land-based, you started off a bit lower and now you're staffing up. I'm just curious what the staffing is going to look like on the ships.

Leonard Fluxman, Executive Chairman

In Singapore, we have begun with occupancies below 50%. The size of the team on the ship is about one-third or possibly even less than one-third of what it should be. However, as occupancies improve, we plan to increase the team size to at least half of the full complement on that ship.

Sharon Zackfia, Analyst

That's helpful. And then, Stephen, I know you said that you're hopeful to be cash flow positive towards the end of the year. I mean what is your line of sight right now on how many ships do you think will be sailing by the fourth quarter?

Stephen Lazarus, Executive Vice President

We do have, from the ongoing meetings, constant meetings, honestly, that we have with the cruise lines, some line of sight with regards to when they expect to launch their vessels. I think we'll probably be remiss of me to state that number at this point in time because it's not definitive. Suffice it to say that we certainly expect that the number of vessels sailing by year-end to be significantly more than the number of vessels that we think will be sailing at by the end of July.

Sebastian Barbero, Analyst

Team, it's Seb Barbero for Steph Wissink. A couple of questions from me, please. The first one is, any learnings from the resort spas that's influencing how you reshape your service menu on board as you prepare to reopen?

Leonard Fluxman, Executive Chairman

Could you just repeat that? I didn't hear the first part of it.

Sebastian Barbero, Analyst

Yes. Are there any learnings from the 47 resort spas that are currently operating that are influencing how you reshape your service menu on board as you prepare to reopen?

Leonard Fluxman, Executive Chairman

They're very different models, particularly regarding the offerings we have available. It's interesting to note that despite having contactless services, there is still a significant demand for the traditional basic facials, massages, and body services. The legacy services are in higher demand, both on land and from what we're observing with cruise ships. Even with the availability of contactless service options, the preference for traditional services remains strong.

Sebastian Barbero, Analyst

And any anticipated changes in ship count from here into year-end? And any visibility into what the portfolio will look like in 2022?

Leonard Fluxman, Executive Chairman

Look, I think if we take a look at what we're hearing from the cruise lines and what we've heard from some of the presentations made by management, I think there is going to be a much faster scaling into the fourth quarter of ships all over the world on a global basis. So we're anticipating that most of the 160 ships that we will be on will be in service by the first quarter of 2022.

Sebastian Barbero, Analyst

Okay. Can you provide your thoughts on the portfolio, which ended Q1 at 159? How do you expect it to look at the end of 2021, and do you have any insights into how it might appear in 2022?

Stephen Lazarus, Executive Vice President

We expect that by the end of 2022, there will be an additional 24 new vessels added to the various fleets. However, it's a bit early to have certainty about the number at the end of 2021 because it is highly dependent on when the cruise lines will return to service, particularly with North American sailings and how they progress with the CDC.

Assia Georgieva, Analyst

A couple of quick questions. First of all, different cruise brands in the corporate entities are tackling the vaccination requirement somewhat differently. Would you expect to ask your crew to be fully vaccinated? And you mentioned that 97% of your existing crew were totally willing to be vaccinated. Is that something that you envision will be a requirement for your crew?

Leonard Fluxman, Executive Chairman

If you consider the CDC's requirements for 98% of the crew to be vaccinated and 95% of the passengers, we have seen a lot of work being done by the cruise lines that have announced sailings, and they have already begun vaccinating the crew. Many of the cruise lines are handling the vaccinations now. We also noted that the WHO approved a Chinese vaccine for people in the Philippines, which will be utilized there. As long as individuals can provide proof of vaccination, that meets the cruise line's requirements, and they won't need to be revaccinated. There is a significant pent-up demand among our staff to return, and the majority are willing to get vaccinated, whether through the cruise line or through other accepted vaccines, as different brands have their preferred options. Most cruise lines we have spoken to are currently vaccinating their crew to comply with CDC guidelines.

Assia Georgieva, Analyst

And Leonard, would that include your crew?

Leonard Fluxman, Executive Chairman

Yes. Yes, absolutely.

Assia Georgieva, Analyst

So the cruise lines would actually be willing to provide vaccinations. I know in Port Canaveral, they've actually opened up, which I think is a great idea, within the port, the vaccination site for crew members. So that would cover your crew, you would not have the responsibility and the organizational issues relating to that?

Leonard Fluxman, Executive Chairman

Most of the major cruise lines are currently administering vaccinations. In one case, a cruise line brought a ship back to Miami to ensure that everyone could be vaccinated because that particular area lacked vaccine access. Due to how the U.S. government has managed vaccine distribution, not all Caribbean ports have had vaccine availability for the ships. Consequently, those ships are returning to the U.S. where vaccines are accessible. We've seen a couple of ships already undertake the same vaccination efforts as those in Port Canaveral. The process is progressing quickly, although some are moving faster than others, but these are the initial ones taking action.

Assia Georgieva, Analyst

Sometimes, I wish I was a good crew member because I've been fighting to get a vaccine. I did get the first shot. And a completely separate question. Maybe, Stephen, you can help me out on this one. In terms of land-based resorts, so you have 47, pretty much the vast majority are open. They are below breakeven at this point because of occupancy? Or what is the model going forward, let's say, in 2022?

Stephen Lazarus, Executive Vice President

To clarify, towards the end of the first quarter, that division was not losing money; it was actually positive in terms of EBITDA. We are beginning to see positive cash flow generation from the resorts that are currently open.

Leonard Fluxman, Executive Chairman

Well, thank you all for joining us on this call. I just want to mention, which we didn't mention, was we actually had some very successful contract extensions during the first quarter, which we didn't put in the press release, one, because we just can't. But the Disney contract was renewed for an additional 8 years. And we were successfully awarded the new Cunard contract. Although we don't have an executed contract right now, we did get that awarded, and that's actually a market share addition, and we'll be awarded a 3-year contract. So we're very excited about market expansion in the first quarter, and we continue to look at some other opportunities as well. So the future looks brighter than it ever did before. And hopefully, we'll have more to share with you and talk with you on our second quarter call. Thank you for joining us today.