Edited Transcript of OSW.OQ earnings conference call or presentation 26-Feb-20 3:00pm GMT – Yahoo Finance

Posted: March 7, 2020 at 3:43 pm


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Mar 7, 2020 (Thomson StreetEvents) -- Edited Transcript of OneSpaWorld Holdings Ltd earnings conference call or presentation Wednesday, February 26, 2020 at 3:00:00pm GMT

* Leonard I. Fluxman

* Stephen B. Lazarus

Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst

Thank you for standing by. This is the conference operator. Welcome to the OneSpaWorld Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Jessica Schmidt with ICR. Please go ahead.

Thank you. Good morning, and welcome to OneSpaWorld's Fourth Quarter Fiscal 2019 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 fourth quarter 2019 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. Explanation of these metrics can be found in the earnings release filed earlier today.

Joining me today are Leonard Fluxman, Executive Chairman; Glenn Fusfield, Chief Executive Officer and President; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with his highlights of our fourth quarter and fiscal year and then discuss the key priorities we are focused on in fiscal 2020. Then Glenn will discuss our service offering innovation, followed by Stephen, who will provide more details on the financials and share our outlook as well as the impact on our business from the coronavirus.

And I'd now like to turn the call over to Leonard.

Leonard I. Fluxman, OneSpaWorld Holdings Limited - Executive Chairman [3]

Thank you, Jessica. Good morning, and welcome to OneSpaWorld's Fourth Quarter Fiscal 2019 Earnings Conference Call. The year was a milestone for the company. We successfully entered the public markets. We grew sales and after-tax free cash flow conversion. We initiated our first-ever quarterly dividend. And importantly, we increased training our staff by 20% to prepare for a record number of new vessels in 2020.

Indeed, the year saw several accomplishments towards our strategy to leverage our robust operating platform to grow our market share at sea. We are pleased to deliver financial results in line with our updated guidance despite absorbing increased public company costs and an unprecedented number of ships temporarily taken out of service.

In total, for the fiscal year, net revenues increased 4% to $562.2 million; adjusted net income grew by 4% to $32.5 million; adjusted EBITDA of $58.2 million increased from 4% from 2018 adjusted EBITDA of $55.8 million, inclusive of comparable public company costs; and unlevered after-tax free cash flow increased 2% to $54.1 million compared to $52.9 million in the prior year.

Highlighting some of our accomplishments made during the year. We commenced cruise ship contracts and extended existing agreements for health and wellness at sea, including extending agreements with Norwegian Cruise Line, P&O Cruises, Saga Cruises, Windstar Cruises and Crystal Cruises; commencing services on Costa Venezia, Spectrum of the Seas, Sky Princess, Norwegian Encore, Carnival Panorama and Costa Smeralda; being named Oceania Cruises and Regent Seven Seas Cruises' official partners to operate spa and wellness centers on their entire fleet; being named Virgin Voyages' official partner to operate health and wellness centers on their first-ever cruise offering; and being named Celebrity Cruises' official partner to operate health and wellness centers on their entire fleet, increasing the Celebrity vessels operated on in 2020 by 9.

We introduced new services in medi-spa and fitness while making it easier and more efficient to schedule spa visits with expanded online and pre-booking options. This field increases in average weekly revenue per ship and in average weekly revenue per staff -- shipboard staff per day for the fourth quarter and fiscal year.

I would like to thank our entire team and attentive staff for their dedication, commitment and contributions to the year. We are entering fiscal 2020 with the highest market share, highest vessel count and largest vessel additions in our history. This, along with strong free cash flow and a robust operating platform, will continue to drive the company's successful expansion in the years ahead.

For fiscal 2020, we are focused on the following priorities for the business. First, to efficiently and effectively introduce our health and wellness programs across 27 new vessels, have already begun service on 4 Oceania and 1 Regent vessels in late December 2019. At the same time, we remain focused on maintaining excellent service levels across our entire fleet.

Second, to expand our treatment, products and services to our customers as we seek to grow onboard revenue. Glenn will discuss this activity in greater detail, but let me share some of the highlights. We are introducing new recovery treatments beyond acupuncture and exclusive fitness programs, while adding medi-spa services to new vessels. This year, we will introduce medi-spa on 14 new ships as well as enhance our product offering on new and existing vessels with additional body contouring and the advanced Thermage FLX amongst other new services. Overall, we will continue to build on our capabilities to reinforce our market position and -- as the preeminent health and wellness provider by redefining these experiences.

Let me now turn the discussion on the coronavirus and its impact on our business. The outbreak of the coronavirus continues to dominate headlines, and we are closely monitoring the situation to, first and foremost, ensure the safety of our employees as well as plan for business continuity. Currently, we can confirm there are no suspected or confirmed coronavirus cases for any of OneSpaWorld employees.

Our guidance includes only the known impact from this health crisis to our first quarter performance as the situation remains fluid and continues to evolve. Therefore, we are unable to determine the full impact on guidance to fiscal 2020 beyond the first quarter. The coronavirus has also negatively impacted and increased the volatility of our stock price, and as such, the underlying trading value of our warrants. Our significant progress had been made on our warrant retirement plan. The Board of Directors determined it was prudent to put this program temporarily on hold.

And now I'll turn the call over to Glenn to provide details regarding other operational highlights, including an update on our medi-spa initiatives, fee book and dynamic pricing initiatives. Glenn?

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Glenn J. Fusfield, OneSpaWorld Holdings Limited - President, CEO & Director [4]

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Thank you, Leonard. As Leonard mentioned, we remain committed to enhancing and expanding our services and product offerings that deliver superior experiences and choices to our guests. We are increasing investment in our medi-spa business this year to accelerate growth by expanding medi-spa to new vessels as well as offering a whole new breadth of treatment options. We will also continue to experience prepaid and prebook initiatives, which drive incremental sales to OneSpaWorld as well as our cruise partners.

I would like to provide a few operational highlights to demonstrate the progress we are achieving. In medi-spa, we have seen an average spend increase to $1,400, helping to drive year-over-year growth in our business. On average, prebooked and prepaid guests average spend within the OneSpaWorld platform is over 30% more than a walk-in guest.

Across cruise ships with prebooking platform, 16% to 24% of service revenue is prebooked, and over 80% of our fleet continues to offer prebooking, of which 65% is through the dynamic OneSpaWorld platform.

I would also like to highlight a few financial metrics that demonstrate the success we are delivering with our service enhancements. Average weekly revenue per ship count increased 4% in Q4 compared to the prior year, and average revenue per shipboard staff per day increased 2% in Q4 compared to the prior year.

We continue to roll out the following initiatives across the majority of our fleet as well as accelerate our investments to expand our offering to new products, services and vessels. In 2020, we will launch our medi-spa on 14 new ships, add body-contouring capabilities to 13 new vessels, expand our Thermage by 20 vessels. We will test IV therapy with a new cruise line partner. We will add micro-needling to our menu of medi-spa services.

We will test an expansion of our detoxifying and recovery capabilities with a state-of-the-art specialty treatment table and add stable in-cabin wellness programs to one of our cruise lines. Selectively enhance our fitness offering with the world-renowned F45 training program that provides an exclusive fitness experience.

We're going to launch our CBD product line in the first half of 2020, which will initially be limited to selected patients in the United States as well as e-commerce platform. And we are excited to update you on our Celebrity Cruises and ambassador-led women and wellness program, leveraging industry-leading influencers to highlight key areas of wellness and fitness.

We are also beginning to test a number of other exciting initiatives and programs within health and wellness, which we'll update you on in future quarters. This year, we will launch an unprecedented number of new ships for OneSpaWorld, and we will remain acutely focused on appropriately training our staff by leveraging our robust platform to ensure we deliver exceptional services to cruise line guests.

With that, I will turn the call over to Stephen, who will provide additional information on our fourth quarter financials and guidance.

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Stephen B. Lazarus, OneSpaWorld Holdings Limited - COO & CFO [5]

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Thank you, Glenn. Good morning, ladies and gentlemen. I'll begin with a review of the fourth quarter and full year and then update you on our 2020 guidance.

Total revenue for the quarter were $139 million, which was right at the midpoint of our Q4 guidance and a 4% increase compared to the fourth quarter last year. The increase from last year was driven primarily by 7 incremental net new shipboard health and wellness centers added to the fleet of cruise line partners, a continued trend towards larger and enhanced shipboard health and wellness centers and increasing collaboration with cruise line partners.

The split of revenue growth between service and product revenue was as follows: service revenue increased 5% to $107 million and product revenue expanded 1% to $32 million compared to the fourth quarter of fiscal 2018.

Average weekly revenue per ship was $60,965, up 4% from $58,636 in the fourth quarter of the prior year. Average revenue per shipboard staff per day increased 2% year-over-year to $461. Average weekly revenue per land-based resort decreased 11%, which was expected due to the larger number of managed spas in our mix during the quarter, which generate less revenue per location.

Cost of service increased $5.2 million or 6% compared to the fourth quarter of fiscal 2018. The increase was primarily attributable to the increase in service revenue and the noncash impact of purchase accounting adjustments related to the fair value step-up of fixed assets in connection with the business combination. Cost of products increased $2.1 million or 8% compared to the fourth quarter of fiscal 2018. The increase was primarily attributable to the noncash impact of purchase accounting adjustments related to the inventory step-up in connection with the business combination.

Administrative expenses increased $1.6 million to $4 million compared to the fourth quarter of fiscal 2018, driven primarily by expenses incurred in connection with the business combination and costs associated to support our operations as a newly publicly traded, stand-alone company. Salary and payroll taxes decreased $200,000 to $3.9 million compared to the fourth quarter of fiscal 2018, as lower incentive compensation expense was offset by an increased headcount to support our operations as a newly publicly traded, stand-alone company.

Adjusted net income was $6.3 million, and adjusted EBITDA was $12.5 million in the fourth quarter, slightly below the midpoint of our guidance due to higher training costs incurred in preparation for the large number of vessels that we will serve in 2020. Adjusted net income per diluted share totaled $0.08 on 75.1 million diluted shares. Cash at December 31 was $14 million, and total debt net of deferred financing costs at the end of the quarter was $221 million. We had repaid $5 million of debt during the fourth quarter. Unlevered after-tax free cash flow for Q4 was $54.1 million.

Turning briefly to the full year. Total revenue for the year was $562 million, a 4% increase compared to prior year. The increase from last year was primarily driven by 7 incremental net new shipboard health and wellness centers added to the fleet of cruise line partners, the continued trend towards larger and enhanced shipboard health and wellness centers and the ongoing collaboration and improvement with cruise line partners. The growth was partially offset by the negative impact of an unprecedented number of ships temporarily taken out of service in 2019.

The split of revenue growth between service and product revenue was as follows. Service revenue increased 5% to $431 million and product revenue expanded 1% to $131 million compared to fiscal 2018. Adjusted net income increased 2% to $32 million, and adjusted EBITDA rose 4% to $58.2 million when including public company costs in fiscal 2018. Adjusted net income per diluted share totaled $0.44 on 74 million diluted shares for the year.

Moving then on to the guidance. As it is related to guidance, Leonard mentioned, we have included the known impact of the coronavirus in our first quarter fiscal 2020 guidance. However, given that there are still too many variables and uncertainties to reasonably forecast the full fiscal year for 2020, we are not yet able to determine the impact on guidance for the first -- full fiscal year beyond the first quarter.

For the Q1 we have experienced thus far, the known impact related to the coronavirus, including 141 canceled and modified itineraries, lower resort revenue associated with our land-based destination resort spas across Asia and associated expenses. Combined, these measures have an estimated impact on Q1 revenue of approximately $5 million and adjusted EBITDA of approximately $2 million.

This known impact is included for our full year 2020 guidance, which is as follows. We expect revenue for the full year in the range of 100 -- sorry, for the first quarter, I apologize. For Q1 of 2020, we expect revenue of $142 million to $147 million. Adjusted EBITDA is expected between $11 million and $13 million. This obviously includes the negative impact of the aforementioned $2 million from the coronavirus and compares to last year's first quarter adjusted EBITDA of $15.3 million, which did not include expenses associated with being a stand-alone and public company. As you recall, we went public in the latter part of March.

Adjusted net income is expected between $5 million and $7 million or between $0.07 and $0.10 per diluted share based on 75.1 million shares outstanding as of December 31, 2019. CapEx is expected in the range of $1 million to $3 million, and our forecast assumes 176 ships at the end of the period with an average ship count of 163. Average ship count reflects the ships that are expected to be in and out of service during the quarter. It also assumes 68 resorts at the end of the quarter with an average resort count for the period of 68.

For fiscal 2020, we expect revenue between $620 million and $630 million, with adjusted EBITDA expected between $58 million and $64 million. This compares to 2019 adjusted EBITDA of $58.2 million or $53.8 million, including comparable public company costs and excluding the $2.8 million reversal of incentive compensation expense in 2019.

Adjusted net income is expected between $31 million and $36 million, and adjusted net income per share is expected between $0.43 and $0.48 per diluted share based on 75.1 million diluted shares outstanding as of December 31, 2019. For the full year, we expect CapEx to be between $5 million and $10 million.

Our forecast assumes 191 ships and 69 resorts at the end of the year, with an average ship count of 175 and an average resort count of 68. Excluding the impact of coronavirus on our 2020 guidance, it is in line with the guidance that we previously indicated for 2020.

And finally and importantly, as we noted in our press release this morning, the Board of Directors declared a quarterly cash dividend of $0.04 per share payable to shareholders of record as of the close of business on April 10, 2020, which is payable on May 29, 2020.

And with that, we'll open up the call to questions. Claudia, if you could take the questions and pass them on, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Sharon Zackfia with William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [2]

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I was hoping to get some more clarity on kind of current trends in your business outside of the voyage cancellations. I guess, first, could you remind us for the contractual minimums that you have to pay the cruise lines, how that might work? I assume you would not be on the hook for voyages that are canceled, but if you could kind of clarify that. And then secondarily, is there any -- are you sensing or seeing any reluctance of passengers to utilize the spa? Are you having to do any kind of incremental discounting? And the sourcing of staff, any kind of issue at this point?

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Leonard I. Fluxman, OneSpaWorld Holdings Limited - Executive Chairman [3]

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Sharon, it's Leonard. I'm trying to remember all your questions here. Firstly, from the perspective of have we seen any impact with regard to spending in the spa, the U.S. consumer still remains very robust. And globally, there might be some weak pockets. Obviously, Asia has dropped off relatively to the coronavirus and the fact that most cruises and activities have been canceled in that region. We have not seen a reluctance to come into spa in any of the ships that are cruising here in the United States, Caribbean, et cetera. And quite frankly, it's too soon to even tell that, and I don't think we're presently under a threat and we don't have the visibility to determine what, if any, impact is happening with the cruise lines. Only to the extent that they've reported perhaps any softness in bookings, which some of them have come out and said there is some of that already.

But remember, the most important thing about the way OneSpaWorld platform and our ability to penetrate, we don't need full ships. We just need great passengers. And as long as we can still continue to penetrate at 11%, we're still going to continue to generate decent weekly revenues.

From a staffing perspective, which I think was the last part of your question, clearly, staff in Asia, we're sending home if the ships are out of service. That obviously -- if ships are canceled for voyages for longer than 3 weeks, we'll send them home, and we'll get them back as soon as we can reactivate and the threat of the coronavirus has passed. With respect to sourcing from any other parts of the world, obviously, we're focused on areas where there may be potential risks not to hire from that region. But we have sufficient capacity and bandwidth to hire in other regions, such that it will not put imminent pressure on our ability to staff the number of ships that we're taking on this year.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [4]

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I think the other part of the question that maybe wasn't addressed was on your contractual minimums with the cruise companies, and how that -- the market...

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Leonard I. Fluxman, OneSpaWorld Holdings Limited - Executive Chairman [5]

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Yes. That clearly should not be a factor because our minimums are not on a weekly basis or a quarterly basis. They're based on the prior year's actual, and they've set -- we went into a whole new construct after the financial crisis in 2007, 2009. And I do not expect any of those guarantees to be an issue for us, even with lower passenger count potentially through the year.

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Operator [6]

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Our next question is from Steve Wieczynski with Stifel.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [7]

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You've obviously quantified the impact around COVID for the first quarter. But hypothetically, let's say things don't get better, we see more cancellations. I mean we just saw that last night at Royal Caribbean. I guess the question is, how should we think about the impact moving forward? I guess what I'm getting at here is most of the cancellations I think you've seen so far for the first quarter have been mostly Asian-based sailings, which there really should probably have less of an impact on your business. And I guess if we start to see more European or North American cancellations, wouldn't the impact be more than what's embedded in your first quarter guidance? I guess I just don't want people to take that number and kind of just push it through the entire year. I assume there might be more of an impact.

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Stephen B. Lazarus, OneSpaWorld Holdings Limited - COO & CFO [8]

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Yes. Steve, it's Stephen here. So that's exactly right. Remember, our guidance only includes cancellations through March 31. So as you mentioned, even as recently as last night, there were additional cancellations. Because of the fluidity of the situation, we don't know yet. Obviously, nobody knows how many cruises could be canceled before the end of the year. So there will be additional downside to our 2020 numbers as cruises continue to be canceled. And obviously, we'll do whatever we can in terms of driving revenue elsewhere. But the number so far is through March, and cruises canceled subsequent to that will have additional downside to our 2020 number.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [9]

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Okay. Got you. And then I don't know, this might be for Glenn. But wanted to ask about the prebook, prepaid options. And maybe some of the conversations or lack of conversations you've had with other ship partners that don't have that capability, maybe why has that been so slow to adapt? And I guess when you showed on the stats that you mentioned earlier in the call, what's their response to that?

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Glenn J. Fusfield, OneSpaWorld Holdings Limited - President, CEO & Director [10]

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Edited Transcript of OSW.OQ earnings conference call or presentation 26-Feb-20 3:00pm GMT - Yahoo Finance

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