OneSpaWorld Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the OneSpa World Second Quarter 2023 Earnings Call. All participants will be in listen only mode. By 0. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Alison Malkin with ICR. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to OneSpa World's Q2 2023 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.

Speaker 1

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 Q2 2023 earnings release, which was furnished to the SEC today on Form 8 ks. We do not take 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 Q2 2023 performance and provide an update on our operations and our key priorities. Then Stephen will provide more details on the financials and our fiscal year 2023 guidance.

Speaker 1

I would now like to turn the call over to Leonard.

Speaker 2

Thank you, Alison. Good morning and welcome to 1 Spar World's Q2 2023 results conference call. I'm pleased to share outstanding second quarter results that completed an excellent first half of the year for our company. The period saw acceleration in our positive momentum with better than expected performance across key financial and operating metrics, driven by the relentless focus on the execution of our strategy by our highly talented team, buoyed by our extraordinary operating platform. As a result, we achieved our best ever second quarter revenue, income from operations and adjusted EBITDA.

Speaker 2

Our ongoing strength and accelerating momentum evidence our unwavering focus on investing in and serving our cruise ship and destination In recognition of our unique capabilities, our innovative offerings and endearing services levels, We were awarded a new agreement with Crystal Cruises to be the exclusive provider of spa, salon, MediSpar and Fitness Services onboard Crystal's newly refurbished Crystal Serenity and Crystal Symphony as well as any additional vessels introduced into service during the term of the agreement. These two vessels will be reintroduced into service during the Q3. We are more excited than ever about our business prospects. Our Q3 2023 performance is off to an excellent start with our summer itineraries across key destinations in Europe and Alaska generating particular strength. We continue to focus on the advancement of our guest services, product offerings and guest experiences and look forward to adding our health and wellness centers onboard 8 new ship builds that will be introduced into service during the second half of the year, joining the Oceania Vista and the Virgin Voyager Resilient Glady that commenced service in the Q2, thus bringing our total new ship build count to 10 for the 2023 fiscal year.

Speaker 2

In recognition of our strong first half performance and favorable outlook, We have raised our annual guidance for the 2nd time this year with our fiscal year outlook increased beyond the amount we surpassed 2nd quarter expectations. As you may recall, we increased our fiscal year 2023 revenue guidance by $15,000,000 and increased our adjusted EBIT guidance by $6,000,000 when we reported first quarter results in We are very pleased to share our performance has accelerated further, which has led to our raising fiscal 2023 total revenue guidance by an additional $60,000,000 and our adjusted EBITDA guidance by an additional $10,000,000 versus the annual outlook we provided in the Q1. As a result, for fiscal year 2023, we now expect total revenues to increase by 43% and adjusted EBITDA to increase by 65% versus the fiscal year 2022 at the midpoint of our guidance ranges. Turning to highlights of our 2nd quarter. Total revenues grew by 57 percent reaching a record $200,000,000 while adjusted EBITDA more than doubled to a record $21,600,000 The expansion in our ship count continued in the quarter.

Speaker 2

At the end of the second quarter, we had health and wellness centers on 183 ships compared with 172 ships at the end of the second quarter of 2022. At year end, we now expect to have service on 192 ships, including 10 new builds. We saw strength across key operating metrics, including a 30% increase in revenue per ship per day as compared to the Q2 last year and high single digit increases in average guest spend and revenue per staff per day. Penetration of retail sales and pre bookings also continued to increase. We are excited to have now completed the full implementation of the pre booking platform on all MCL ships.

Speaker 2

And as of today, 89% of our ships at pre booking capabilities. At quarter end, we had 3,813 cruise ship personnel on vessels increasing from 3,665200 2,778 cruise ship personnel on vessels at the end of the Q1 of 2023 and the Q2 of 2022, respectively. We continue to focus on our key priorities, namely to capture highly visible new ship growth With current cruise line partners as well as evaluating opportunities with new operators, We have demonstrated success advancing this priority as evidenced by entry into a new agreement with Crystal Cruise Lines and the addition of 10 year ship builds this year. And second, increased guest spend, frequency, spa capacity utilization and retail revenues. Highlights of our achievements in this regard include a high single to double digit increase across average guest spend, Pre booking as a percentage of service revenue, revenue per staff per day and in retail spend as compared to Q2 of 2019.

Speaker 2

With that, I will turn the call over to Steven, who will comment on our Q2 results. Steven?

Speaker 3

Thank you, Leonard. Good morning, everyone. We are very pleased to report strong second quarter results and continued momentum across our key operating and financial metrics as well as further improvements to our balance sheet. I will now share more details on the 2nd quarter that we reported this morning. Total revenues were $200,500,000 compared to $127,400,000 in the Q2 of 2022.

Speaker 3

This increase was primarily attributable to our average ship count of 177 health and wellness centers onboard ships operating during the quarter compared with our average ship count of 144 health and wellness on board ships operating during the Q2 of 2022 as well as higher occupancy of the average ships in service in the respective quarters. Cost of services were $137,200,000 compared to $87,000,000 in the Q2 of 2022. The increase was primarily attributable to costs associated with increased service revenues of $163,200,000 in the quarter from our operating health and wellness centers at sea and on land compared with service revenues of $103,600,000 in the Q2 of 2022. Cost of products were $32,200,000 compared to $23,300,000 in the Q2 of 2022. The increase was primarily attributable to costs associated with increased product revenues of $32,300,000 in the quarter from our operating health and wellness centers at sea and on land, compared to product revenues of $23,800,000 in the Q2 of 2022.

Speaker 3

Net loss was $3,200,000 or net loss per diluted share of 0.03 pennies as compared to net income of 55,900,000 or net income per diluted share of 0.46p in the Q2 of 2022. The decrease was primarily attributable to the to the negative change in the fair value of warrant liabilities. The change in the fair value of the outstanding warrants during the 3 months ended June 30, 2023 was a loss of $12,200,000 compared to a gain of $58,500,000 during the 3 months ended June 30, 2022. The decrease in the change in fair value of warrant liabilities was the result Exchange of approximately 95% of the public warrants and approximately 50% of the sponsor warrants for the company's common shares that we concluded in April 2023. Excluding the change in fair value of warrant liabilities, The improvement in the Q2 of 2023 was primarily a result of the $12,400,000 improvement in income from operations derived primarily from the increase in the number of health and wellness centers onboard ships operating during the quarter.

Speaker 3

Adjusted net income was $15,000,000 or adjusted net income per diluted share of $0.15 as compared to adjusted net income of $4,000,000 or adjusted net income per diluted share of 0.04 dollars in the Q2 of 2022. Adjusted EBITDA was $21,600,000 compared to adjusted EBITDA of $9,100,000 in the Q2 of prior year. Turning to the balance sheet. Cash at quarter end was $30,000,000 compared to $24,000,000 at the end of the first quarter. In the quarter, we repaid the final $5,000,000 on the 2nd lien term loan and prepaid $15,500,000 on the 1st lien term loan.

Speaker 3

Total debt net of deferred financing costs at quarter end was $182,500,000 compared to $230,200,000 at the end of the Q2 last year. This decrease reflects the $25,000,000 repayment of the 2nd lien term loan And the $7,000,000 pay down of the revolving facility as well as $17,100,000 repaid on the 1st lien term loan since June 30 last year. In the 2nd quarter, unlevered after tax free cash flow was $20,100,000 compared to $7,800,000 in the Q2 of 2022. The company expects to continue to generate positive cash flow from operations in the Q3 of 2023 and throughout the fiscal year. As it relates to our capital structure, our private equity shareholder Steiner Leisure is now an approximate 8% holder with around 8,000,000 shares after the secondary offering completed in the Q2 and subsequently executing a Rule 144 Block trade.

Speaker 3

In addition to improving the liquidity of our stock, this also has reduced their holdings significantly. Moving on to guidance. We are increasing our fiscal year guidance based on our better than expected first performance and our favorable momentum, which has led to us raising expectations for the back half of the year. For fiscal 2023, we now Total revenue in the range of $770,000,000 to $790,000,000 and adjusted EBITDA to be in the range of 80 to $86,000,000 We expect to end fiscal 2023 operating on 192 cruise ships and at 54 Land Based Health and Wellness Centers. For the Q3, we expect total revenue in the range of $205,000,000 to $210,000,000 and adjusted EBITDA in the range of $21,000,000 to $23,000,000 Our Q3 guidance assumes an ending ship count of 188 and land based health and wellness centers of 54.

Speaker 3

In addition, as it relates to our share count, assuming an average share price of $13 in the quarter, The year to date diluted share count would be approximately 100,100,000 shares. Overall, we feel very Confident about our positioning and growth initiatives, we are encouraged by the strong start to the second half and expect our favorable momentum to continue throughout the year. With that, we will open up the call to questions. Kyle, if you could go ahead, please.

Operator

Thank you. We will now begin the question and answer session. We kindly ask you to limit yourself to one question and one follow-up. Our first question comes from Steven Wieczynski with Stifel, please go ahead.

Speaker 4

Yes. Hey, guys. Good morning. So I want to start with The revised guidance. As we think about this, it's the 2nd straight quarter in which you've materially Beat the midpoint of your guidance range.

Speaker 4

So as we think about the back half of the year, just wondering how maybe Give us some color in terms of how you're thinking about your customer base. I think before you were kind of assuming that Again, with very limited visibility around your business, it's tough to really kind of continue to model out these Elevated spending level. So just trying to understand how you might be thinking about your customer base through the back half of the year?

Speaker 2

Yes. So Steve, as you may recall, when we gave guidance after the Q1, To your point, we weren't quite sure yet of how strong The European Alaska summer seasons would be, although we were confident based upon forward bookings, Based upon the strength we have heard from the cruise lines with respect to visibility, as well as the airlines mentioning just How heavily booked they were for the summer. We expected the summer to start off well, which it did. And I think there was a little conservatism in the guidance around that together with the fact that we really don't know I still don't know to what extent if any, there is some kind of recessionary proof. But I think we've Executed an incredible Q2 and we've got off to a very good July so far.

Speaker 2

So the summer is Working its way out and performance has been where we expected and perhaps in some cases, it's stronger than we expected And the consumer remains incredibly resilient. So I think that all wraps up into the positive guidance that Stephen mentioned previously.

Speaker 4

Okay, got you. And then second question is around attachment rates And wondering what maybe you're seeing at this point from your customers as they come in, they use your facilities. Are they still spending the same amount after the treatments? I mean, they're pretty good pace or pretty good clip. And I guess that's To us, it's one of the things we want to watch pretty closely to make sure, yes, folks might be coming in to use your facilities, but are they still kind of spending After they're essentially finished.

Speaker 4

Hopefully that kind of makes sense.

Speaker 2

Yes. No, they're look, spend is a function of 2 things. It's spend on the service, the selection of the service, the cost of that service and whether they're trading up or trading down. And in fact, we've seen guest spend move up In the Q2, it's up 2% and it's up 7% against 20 7% against 2022 at the same time. So guest spend continues to move positively.

Speaker 2

The retail attachment rate was up Again, and so retail also is strong and that continues to be a sign of A strong consumer with attachment, pre booking as a percentage of service is up as well now to 24%. So I guess penetration is now at normal historical levels of just slightly over 11%, but that ties in very, very Normally with the load factors, which are now back to historical load factors of 103%.

Speaker 4

Okay, got you. That's good to hear. Thanks guys. Appreciate it and congrats on a very solid quarter.

Speaker 2

Thank you.

Operator

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

Speaker 5

Hi, good morning. I guess as we've been talking about the recovery in your business, we've kind of always thought of 2019 margins is kind of the bogey. And if I'm not mistaken, you met that here in the second quarter. And I think The back half imputed margins are above 2019. And I know you've been discounting less than you just talked about kind of positive mix shift.

Speaker 5

I'm just wondering, as you've seen the consumer kind of coming out of the pandemic, have your thoughts changed on kind of what the Potential margin opportunity is for the company.

Speaker 2

So, sir, go ahead, Stephen. Okay.

Speaker 3

It's a great question, right, because margin is something While as you know, our primary focus is on growing absolute dollars and we're always in favor of As long as there's incremental revenue and therefore EBIT to be had marginal contribution will go ahead and discount etcetera because Having staff on board that aren't working just doesn't make sense. Your point is valid in that we've seen continued strong demand on board It hasn't waned since the pandemic ended. And so part of that a big part of that is We've also done a lot of work around improving the way we operate on board with our marketing initiatives, etcetera. So while I wouldn't be prepared necessarily at this point to say what the high end is or the fact that we can continue to deliver Q2 levels, I think we're starting to get to a point where we could probably feel comfortable around being better Than where we were in 2019. And again, a lot of it is going to depend on the consumer.

Speaker 3

But for right now, we would say, yes, we probably On a go forward basis, can be better. But again, if things start to fall off in terms of demand, we'll revert the marketing activities to drive the absolute dollars, to drive the absolute cash flow, which is ultimately what we're looking for.

Speaker 5

Thanks for that. And it was good to hear about Norwegian being fully rolled out. I guess just given And you've done this on a lot of other brands. When does that start to kind of manifest itself more and the results that you have in terms of Pre booking being more meaningful on the Norwegian brand banner?

Speaker 2

That's a good question, Sharon. So Firstly, I'm thrilled that we finally got it all rolled out on all the ships. And in fact, the rollout started off a little later than we expected, But then accelerated and we completed it very recently. So For us to really start seeing the impact because we know that a pre booked passenger tends to spend Anywhere between 25% to 30% more to better and their frequency of treatment is higher. We do believe that it will take at least another quarter where they're all fully loaded into the system for us to start looking at what the impact will be.

Speaker 2

But Given the spas on the ships and how they typically perform, I think the pre booking Component is only going to be accretive to us.

Speaker 1

Okay, great. Thank you.

Speaker 3

Yes, sure.

Operator

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

Speaker 5

Thanks for taking our question. We were particularly impressed with the acceleration in weekly revenue per Ship up 27%. I'm wondering how that compares to the growth in the number of Passengers at the ships where you operate, meaning how much of that is just more people coming back to cruising as opposed to your own efforts?

Speaker 2

Well, clearly, higher load factors moving back to the historical load factors Improves our ability to generate higher average weekly revenues. That being said, our penetration rate is back to historical rates. So even though there are More passengers on board, the penetration factor is exactly where it expected to be. So in and of itself, Productivity has improved, taking advantage of the higher prices and discounting less has certainly allowed us to generate higher average weekly revenues. And the staff that we have on board now are starting to cycle through Into second contracts since the pandemic, there's more experience.

Speaker 2

We have a much fuller complement of fitness staff on board And fitness staff generates certainly one of the most, I'd say the highest revenues of all the modalities on board. So I think the mix of passengers, the mix of our staff that are trained and experienced staff together with load factors improving Have added to our ability to generate higher average weekly revenues per share.

Speaker 5

Understood. Thank you.

Speaker 2

You're welcome.

Operator

Our next question comes from Max Ratcliffe with TD Cowen. Please Go ahead.

Speaker 6

Hi, good morning, Steven and Leonard. This is Bradley on for Max. Thanks for taking our questions. First, have you seen any increases in MediSpa utilization with the continued demand you're seeing overall for onboard services? Then more broadly, can you talk about what types of services that customers are looking for right now?

Speaker 2

So MediSpa Services still continues to be less than double digits on board. Obviously, With more ships in service with MediSpa, we have seen the uptick In some of the IV infusion stuff and services, the immunity shots that we're offering. So I think across the board Many spa services that we're offering, we've seen an increase in the take rate. So those generally are At higher prices than sort of your average spa services, all of which is accretive to the average weekly revenue per ship.

Speaker 6

Great. Thanks. And then can you update us on how your service pricing That continued to play out through the summer. Are you seeing any pushback at all from your consumers on that? And then do you feel that there is any more opportunity To play with pricing ahead for the Alaska and European seasons?

Speaker 2

Yes. So we won't be adjusting prices for each of these We're going to hold where we're at, which means we're holding where possible, at the hallmark pricing, discounting as needed, but less than expected. And every single week, we do a check-in on the discounting per cruise because that's one of my lookouts As to whether there's pressure point or anything against the pricing that we have and thus far we have not seen anything. So we are not adjusting prices. Going forward into 2024, obviously, we reevaluate everything at year end.

Speaker 2

Our pricing Continues to be at the higher end and with the lower discounting. To the extent that we need to take prices up, we'll But at this point, we haven't made that determination.

Speaker 6

Great. Thanks so much, guys. Best of luck.

Speaker 2

Thank you.

Operator

Our next question comes from Gregory Miller with Trudy. Please go ahead.

Speaker 7

Thanks. Good morning. My first question is on the labor environment. Could you provide some additional detail On staffing and recruitment environment and perhaps staff count expectations today relative to a quarter ago?

Speaker 2

Right. So certainly, stopping for us This is actually one of our stellar achievements. We're close to about 98% stopped across all the banners. We stopped in every one of the modalities we need to be. There's no pressure.

Speaker 2

We've seen no pressure on restarting or Rehiring or bringing experienced staff back. In fact, our bench is considerably stronger than it ever was before. And it's really a strong point and strength of the execution that we've seen so far. The staff dashboard, if you look at it today, We're at 3,000. So we're up from the 3,813 that we ended the quarter at to 3,008 184 today.

Speaker 2

So we are moving up in our stock numbers and that just continues to strengthen Our positions on all of the banners where those services are in demand.

Speaker 7

Thank you. And then for my follow-up, Could you provide an update on the capacity utilization of the wellness facilities for port days? Are you seeing any changes or improvement there?

Speaker 2

Well, we're seeing Sporte utilization pretty much where it was At this time, in 2022, it's kind of flattish. We're working to continue to move that number up. Our target there is slightly higher than what we're achieving, all of which will be accretive. And we see opportunity for stock utilization at sea also to move up. The one area that brings down any of those metrics is certainly the longer cruises, which there were some in the quarter.

Speaker 2

And so the longer cruises tend to have less utilization across a longer period of time, which is normal and historically that's what we've seen.

Speaker 7

Great. Thank you, 100.

Speaker 2

You're welcome.

Operator

Our next question comes from Afya Jurjawa with Invict Research. Please go ahead.

Speaker 8

Good morning. Great job, guys. Fantastic quarter and congratulations on the Cristal contract. That was great to hear. I have a couple of questions.

Speaker 8

Leonard, I just mentioned that pre cruise bookings currently stand at about 24%. Did I hear that correctly? Yes. And when you mentioned that they would add they would About the 25% to 30% increase in actual onboard spend, was that referring just to the NCL banner or is that across The entire fleet of ships.

Speaker 2

So we're at 89% across all the banners in terms of pre book. Clearly, to the extent that we've now rolled out on to NCL ships, obviously, they came on through the quarter And even at the start of the Q3. So to the extent we start to see The MCL pre book numbers start to move directionally in the same way that we've In other cruise lines we've had it for longer, then that will be accretive because the guests are better spenders.

Speaker 8

Could you quantify the extent of additional spend that you see on the pre booked

Speaker 1

Services?

Speaker 2

Well, we tend to see passengers who are pre booked tend to spend 25% to 30% more than people who don't.

Speaker 8

Okay. Across our brands, not just NCL?

Speaker 2

Across all of our banners, yes.

Speaker 8

Okay, great. Thank you. And I think all of us had a legitimate concern about European trends. And the cruise lines you've mentioned that The Caribbean being exceptionally strong, Europe playing more of a catch up. How do you see that develop?

Speaker 8

And is the quality of passenger Possibly somewhat less desirable, given the closer end booking trends for Europe.

Speaker 2

I mean, the Caribbean, as you well know, Asia is always a very, very strong Spend, the itineraries are highly predictable. Europe, there are more port days, as you know, and even to some extent, Alaska Has some ports not as much as the European ports, so you're going east and west across the Mediterranean. In the level of spend, I would rate Caribbean, Alaska and in Europe, But the Europe season this year has been surprisingly strong, but given the number of North Americans that we saw Traveling over there, we expected strength in Europe, which we're seeing so far and at the beginning of July. So we're very pleased with the execution so far.

Speaker 8

Great. Sounds great. And one last question, if I may. Could you talk a little bit about Longer term roadmap in terms of your capital structure, let's say, over the next 12 months or so?

Speaker 2

Yes. Look, it's good to be back in the green with respect to free cash flow generation, as Stephen And should pay down even now the $15,000,000 in our first lien, all of which is helping us deleverage From these high interest rates, which will be continued to be our number one focus. But to the extent that we start moving into 2024, We will obviously keep reviewing the capital structure internally and with our Board and to the extent that we can look at alternatives And they're mutually exclusive, right? It means we can look at both deleveraging further as well as potentially considering in the future and at some point A dividend reinstatement again.

Speaker 8

I was looking for that dividend comment. So thank you so much. I appreciate it.

Speaker 3

You're welcome.

Operator

This concludes our question and answer session for today. I would like to turn the call back over to Leonhard Flixmann, Executive Chairman, President and CEO for any closing remarks.

Speaker 2

Right. Thank you, Carl. First, we want to thank everybody for joining us today on our Q2 call. We're excited with where the business is at. We hope to continue this incredible resilience and incredible execution that we've seen, and we'll speak to you all on our 3rd quarter

Operator

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

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OneSpaWorld Q2 2023
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