Onespaworld Holdings Ltd (OSW) 2019 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the OneSpaWorld Limited first-quarter 2019 earnings conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. (Operator Instructions).

I would now like to turn the conference over to Jennifer Davis, Senior Vice President at ICR. Please go ahead.

Thank you. Good morning, and welcome to OneSpaWorld's first-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 first-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 our earnings release filed earlier today.

Joining me on today's call are Leonard Fluxman, Executive Chairman; Glenn Fusfield, Chief Executive Officer and President; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer.

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

Thank you, Jennifer. Good morning, and welcome to OneSpaWorld's first earnings call. As we reenter the public market, we are very excited to be back. By way of background, OneSpaWorld was the largest business under the Steiner Leisure Limited umbrella. Steiner Leisure was public for almost 20 years before it was acquired by private equity firm L Catterton in 2015. While private, L Catterton invested with us to further evolve and enhance our business model. And during that time, OneSpaWorld continued to experience significant growth and improve our differentiation in the marketplace.

We reentered the public market in March as a pure play global operator of health and wellness centers onboard cruise ships and at destination resorts worldwide. We have an enviable position in the marketplace, with more than 80% global market share of the outsourced market for the operation of spas at sea. Our long-standing partnerships, vast operating platform, along with our efficient, asset-light model, provides us with visible growth opportunities and strong cash flow.

Let me touch on some of the highlights from our first quarter. My remarks will focus on adjusted results that assume we were public for the full quarter. Total revenues increased 7% to $137 million. Adjusted net income grew 29% to $8.9 million or $0.14 per diluted share. And adjusted EBITDA increased 10% to $15.3 million. As you are aware, the Company had not previously provided quarterly guidance. The results for this quarter were in line with our expectation. Stephen will discuss them in more detail shortly.

Our first-quarter results were driven by our five primary growth strategies, which are: one, new ship growth with current cruise line partners; second, new potential cruise line partners; thirdly, the continued addition of more value-added services and products; fourthly, the enhancement of health and wellness center productivity; and fifth, selectively expanding our footprint at land-based destination resorts. With these strategies, our business model remains well-positioned for sustained and profitable long-term growth.

I'd now like to spend a few minutes discussing each in more detail, starting with new ship growth with current cruise line partners. During the first quarter, we entered into a new agreement with Norwegian Cruise Line which extends the term of our agreement through 2024. This applies to the 16 vessels currently sailing under the NCL banner, as well as any new vessels that come into service during the term of the agreement.

Additionally, beginning in January 2020, we will become the exclusive health and wellness provider of NCL's Regent Seven Seas and Oceania fleets, which currently include four Regent Seven Seas and six Oceania vessels, as well as the three unannounced new vessels that will come into service during the term of the agreement. Collectively, these 13 new vessels represent over 10,000 new berths for us.

We are developing two unique brands for Regent Seven Seas and Oceania which we will unveil later this year. In addition to providing traditional spa, medi-spa health and wellness and beauty-related services, we will also integrate the health and wellness concept of these new brands into each of the cruise lines' shore excursion programs and onboard culinary products.

Second, adding new potential cruise line partners. We recently announced our exclusive partnership with Virgin Voyages, where we will operate the spa and wellness offerings, including fitness centers, yoga studios, massage, and medi-spa treatments and salon services onboard the first three Virgin Voyages vessels. The first vessel is scheduled to launch in 2020, with the second in 2021. and the third in 2022.

Third, continue to add more value-added services and products. We continue to evolve our offering and roll out services based on the latest trends in consumer health and wellness. Notably, we offer many innovative services, including Botox, CoolSculpting, Thermage, and Restylane, amongst others. In the first quarter, we saw service revenue rise 8%, driven in part by the strength of these services.

Fourth, enhancing health and wellness center productivity. Historically the extent of our collaboration with cruise lines was limited to spa branding, design, and signage onboard. Today we benefit from a more collaborative relationship in data-driven outcomes, recently meeting to discuss initiatives to drive onboard revenue and enhance guest satisfaction. We continue to work alongside our cruise line partners with the rollout of the proprietary onboard application, development, and to strengthen our pre-booking, prepayment, dynamic pricing, and push messaging. Our goal is to eventually have dynamic pricing in place on all banners.

And finally, selectively expanding our footprint at land-based destination resorts. OneSpaWorld is a turnkey operator of 70 destination resort spas around the world, including globally recognized proprietary brands such as Mandara and Chavana Spa. We maintain long-term relationships with marquee resort operators such as Atlantis, Paradise Island; Marriott; Four Seasons; and Lotte hotels and resorts, to name just a few. Historically, our resort division operated as a separate business within Steiner Leisure. Now we are bringing our successful strategy at sea to land.

During the first quarter, we opened two destination resort spas in Asia. Relative to the same quarter last year, we operated an incremental 13 destination resort health and wellness centers. We expect to open two more destination resort spas during the second quarter, and another two in the back half of the year.

In closing, we are very excited to have brought the new OneSpaWorld back to the public markets, and expect our strategies to lead to strong value creation for all our stakeholders for years to come. We are proud of the strong results we posted in the first quarter, and even more excited to maximize the opportunities that lay in front of us.

Global megatrends support our robust long-term outlook for continued growth. The global cruise sector is expected to continue its rapid growth, with cruise capacity projected to increase at a CAGR of 8% from 2018 to 2022, fueled by favorable demographic trends, including the aging of global populations, continued health and wellness trends, and the worldwide Millennial focus on experiences.

And now I'll turn it over to Stephen to review the financials and discuss guidance. Stephen.

Thank you, Leonard. Good morning, ladies and gentlemen. Total revenue for the quarter were $137 million, a 7% increase compared to the first quarter of fiscal 2018, which was in line with our expectations. The increase was driven primarily by six new shipboard health and wellness centers added to the fleet of cruise line partners, 13 new destination resort health and wellness centers opened in Asia, as well as a continued trend towards larger and enhanced shipboard health and wellness centers, and continued improved collaboration with our partners.

Service revenue increased 8% to $106 million while product revenue increased 2% to $31.5 million compared to the first fiscal quarter of 2018. Average weekly revenue per ship increased 2.4% year-over-year in the first quarter, and average revenue per shipboard staff increased slightly year-over-year. This increase was negatively impacted by the higher number of non-revenue-generating staff onboard the larger vessels. More non-revenue-generating staff are required to be placed onboard these larger vessels in order to maintain the highest quality of guest experience.

Average weekly revenue per land-based resort spa decreased 13.9% year-over-year in the first quarter due to the increased number of managed spas, which generate less revenue per facility. This is aligned with our strategy to garnish more asset-light, land-based business agreements, which by the nature of the agreements generate less revenue than those facilities where historically we have invested capital to fund all or a portion of the buildout of the facility. In other words, as we pivot to more management contracts, the year-on-year numbers are not really comparable for this metric.

Cost of service increased $6 million or 7% compared to the first quarter of fiscal 2018. The increase was primarily attributable to the increase in service revenue, which increased 8%. As a percent of service revenue, cost of service improved 70 basis points compared to the same quarter last year due to improved service mix.

Cost of product increased $0.5 million or 2% compared to the first quarter of fiscal 2018. The increase was primarily attributable to the increase in product revenue, which also increased 2%. As a percentage of product revenue, cost of product improved 20 basis points compared to the same quarter last year due to improved product mix.

Administrative expense increased $2.7 million to $5 million in the first quarter of fiscal 2018, driven primarily by expenses incurred in connection with the business combination. Salary and payroll taxes increased $46.8 million to $55.6 million compared to the first quarter of fiscal 2018, due to stock-based compensation of $20.4 million and change in control payments of $26.3 million made by OneSpaWorld's predecessor, both of which are a result of the business combination.

Excluding this stock-based compensation, change in control payments, and the other items outlined in more detail in our press release, adjusted net income increased to $8.9 million, and adjusted EBITDA increased to $15.3 million, respectively a 29% and 10% increase compared to the first quarter of 2018.

Cash on hand at March 31 totaled $16 million, and total debt at the end of the quarter was $239 million. We anticipate paying down approximately $35 million of debt by year-end. Unlevered after-tax free cash flow for the first quarter of fiscal 2019 was $14.7 million.

Moving on to our guidance. Now that we have reentered the public markets, this is our first time providing quarterly guidance. We plan to provide guidance for one quarter out as well as for the remainder of the full year. So for the second quarter, we expect revenue in the range of $137 million to $142 million, with Q2 adjusted earnings per share estimated at $0.11 to $0.13. We expect adjusted EBITDA between $13 million and $15 million, and capital expense to be approximately $1 million.

Our forecast assumes 164 ships at the end of the period, with an average ship count of 161. Average ship count reflects the fact that ships are expected to be in and out of service during the quarter. It also assumes 71 resort spas at the end of the quarter, with an average resort spa count of 69, given the timing of openings during the quarter.

For fiscal 2019, we expect revenue between $570 million and $575 million and adjusted EPS of $0.49 to $0.54 based on 65.2 million diluted shares outstanding. We expect adjusted EBITDA between $57 million and $62 million. This compares to 2018 adjusted EBITDA of $58.6 million or $55.8 million including comparable public company costs. We are anticipating capital expenditure to be between $5 million and $7 million.

Our forecast assumes 169 ships and 73 resort spas at the end of the year, with an average ship count of 161 and average resort spa count of 71.

And with that, we would like to open the call to questions. Gaylene, if you could please open the call. Thank you.

(Operator Instructions). Steve Wieczynski, Stifel.

Welcome back to these fun calls you have to do now. So, Leonard, if I heard you right, if we look at the projections that you guys laid out before you came public again, in terms of like EBITDA and revenue and stuff like that going out through 2020, none of those assumptions have really changed. Did I hear you correctly there?

Absolutely right, yes. We've changed nothing since we were on the road, consistent with the investor deck, and the revenue growth and EBITDA growth as we projected.

Okay. Second question would be that revenue per staff, per day metric. And I know you talked about how some of the larger ships at this point in the non-revenue-generating staff on board will depress that metric. Is there any way we can -- is what we saw in the first quarter the same way we should be thinking about that metric moving through the rest of the year?

So it's a good question and observation. And let's just get a little color and backdrop. In the first quarter of 2019, we saw a much larger contingent of ships in drydock versus the quarter a year ago. Clearly that impacted that metric materially, more so than perhaps the change-up in the non-revenue-producing staff.

So I don't want you to look at this being a trend. I am just trying to highlight the fact that on these much larger ships, which typically are ships with lower berths greater than 4,500, we typically have, in order to sustain and maintain the guest satisfaction standards and ratings with our cruise line partners, we will have more non-revenue-producing staff on that ship than something that typically sort of 3,000 lower berths.

So we're not suggesting a trend. But to the extent in any quarter you have a higher level of introduction on a weighted average basis (inaudible) rest of the population of our ships, clearly one has to be cognizant of the fact that they carry more non-revenue-producing staff.

Okay. But for example, like in 2020, when you take on the prestige ships or Oceania/Regent ships, given how small those assets are, you would expect to see a nice uplift off of that.

Yes, exactly.

Okay.

That's exactly the right (multiple speakers).

Got you. And that's rare that that happens. Last question, real quick. Service revenue up nicely, 8% in the quarter. Can you go into a little more detail about what went into that? Is that any mix changes there in terms of overall services?

And I guess the second part of that question is service costs behind that were up 7%. So I guess what I'm getting at here is with the higher-dollar services beginning to increase, what kind of overall leverage could we see in that category?

Sure. I'm going to let Glenn take that one, [and will] give us some specificity as to the strength in services.

Hi, Steve, it's Glenn. Thanks for the question. We increased 6.5% overall for our mix of -- within the services, driven primarily by our body services, about 9.5%, and med spa over 9%. So those were the two key drivers there (inaudible) slightly as well over the overall average. So that's really the trend I think for 2019. We're focusing heavily on med spa, clearly, which is very, very important area of growth for us. (inaudible) double-digit growth on the med spa overall for the balance of the year, and body services continues to grow strongly for us.

Okay, great. Thanks, guys. Appreciate it.

Harry Curtis, Instinet.

Leonard, you mentioned that in your EBITDA guidance, nothing has changed. I was surprised by the range of EBITDA comp for 2019, the midpoint of which is $59.5 million versus the $62 million that was in the investor deck. Can you just walk us through whether or not there's been anything that has -- in your business that has shifted or has grown; you're incrementally a bit more conservative about?

Harry, no. Listen, I guess you and I will have to get to know each other a lot better. My guidance has typically been, even when we were public, somewhat conservative. I will tell you nothing has changed in our business model. If anything, I can tell you, if you look at that range that we gave you, I'm more comfortable around the higher end of that range. And I have no problem in telling you that I have comfort with that, given what I'm seeing in our business today.

Okay, very good. And then the other interesting thing about coming public and not having any predecessor research is that -- is quarterly cadence. When you look at consensus, it would have -- it had predicted about $0.28 of earnings power in the first half of 2019, $0.23 in the second half of 2019. And that now looks like it's a bit more evenly split. If you could just give us a sense of the ebb and flow of your business so that we can better understand the seasonality in the earnings trend.

Yes, sure. Stephen, you want to just go through seasonality and the guidance here? And maybe just give Harry a background of the fact that the largest (technical difficulty) typically come in toward the end of the third quarter and fourth quarter. And we've also got the strength of each of the quarters.

And Harry, please remember, both I and Stephen reiterated, we have never given any quarterly guidance whatsoever. So the (technical difficulty) of the quarters will take a few quarters to come into play, and everybody will start to see the cadence. But you can't ignore the strong free cash flow characteristics of this business, which will continue and will remain strong, just as we said to you on the street.

But I'm going to let Stephen answer you more specifically.

Thanks, Leonard. So, I think a lot of that is indeed the answer, right? We have some larger vessels coming in later in the year; of course, the Spectrum of the Seas, et cetera, which will help drive growth later in the year. Typically as is the case -- and we expect it to be the case here, as well -- the third quarter is the strongest quarter for us, but not significantly so. There is not a large degree of seasonality in the business. The third quarter is better aligned with North American school vacations, et cetera, when more people are vacationing with our families, et cetera. And typically we see better spend onboard as well as obviously through the Christmas and year end cruises, which are always very, very strong for us.

So not a tremendous amount of seasonality. Q1 and Q2 more or less the same, Q3 better, and then Q4 is more or less what Q1 and Q2 is because there's some repositioning cruises that occur. So that's kind of where we're at, and we do feel comfortable with what we provided.

Very good. And my last quick question, going back to your prior comment, Leonard, is your unlevered free cash flow, which at $14.7 million in the quarter was nicely higher than what we were looking for. If you could give us a sense, is that a level or a trend of quarterly unlevered free cash flow that investors should expect for the balance of the year? Or was there anything unusually positive in the first quarter that explains what was quite a nice number?

Yes, no. We're pleased with that, and that's why I remain very confident around the free cash flow characteristics. Remember, look, we deliver more than 90% unlevered after-tax free cash flow conversion, and I think that's distinctly unique. It's truly a unicorn characteristic of this business. And that strength was not lost on us in the first quarter. The cadence of that will typically follow as we continue down the path of the next three quarters.

So there was nothing that stood out in terms of the number itself, Harry. And we'll talk -- Stephen spoke to our focus on the debt paydown as we go through the year; together with other consideration that we are taking into account now with our Board and outside folks, which is looking at what we can do with the debt. Obviously that's accretive for us. And clearly we'll take advantage of wherever we can pay down more costly debt at the right opportunity. We'll take a look at the concept of dividend, as we sit on the road.

All of these are -- and the warrants as well, which are all first-world problems for us because of the strength of our free cash flow generation capability. And so at the right time, later on this year, once we've done all our research and diligence around what we should be doing with the free cash flow, we will come back to the Street and tell you exactly what we're going to be doing later on this year.

Looking forward to that. Thank you very much.

Sharon Zackfia, William Blair.

A couple of questions on the new contracts that you have. So any insight you could give us on the extension with Norwegian and whether you found that to be favorable or similar to your prior arrangement with them? And then I'm assuming on Regent and Oceania that's going to be a richer mix of passengers. Maybe if you could talk about that, and what your initial expectations would be for the Virgin ships and what those might look like relative to your fleet.

Yes. So the contract terms are very similar, Sharon. And so we're very excited about the Regent and Oceania. And, yes, there is -- it's a very favorable demographic for us. It feeds well into our whole concept of wellness, [pain] management, and some of the ancillary services that we provide on some of the other luxury brands and banners that we service. So we're excited.

We're working alongside their marketing folks and leadership team as we develop all the concepts, branding, and ancillary support that we are looking to elevate the existing program in a manner that I think Glenn and I and the team are incredibly excited about.

So look, there's a lot of work to go. We still got the balance of the year. We start operating on them beginning of 2020, as we mentioned. And so this is an exciting time.

And then any initial thoughts on the Virgin passenger mix and what that might look most similar to in terms of other ships that you service?

Well, that's really exciting. Because I think the demographic on there's going to be -- I mean, look, Virgin always pushes the envelope. I think from what we've seen around their programming -- and while I'd love to talk more fully about it, we can't. But certainly things in terms of technology, the experience onboard, all the way into the cabin, from everything that we've seen, they push the envelope.

And I got to tell you, it's exciting to see some of the things that they are thinking about. I think it's going to excite the industry. I think it's going to excite a lot of guests, and it's going to bring potentially that younger Millennial passenger onboard which is going to fit like a glove into everything that we're going to offer and what we're designing with them around the experience.

Great. I might need to go on one of those ships. And then secondarily (multiple speakers) -- maybe we could do an Analyst Day on one of the ships. The pre-booked percentage, could you talk about how that is trending? And just give us some kind of perspective on where you think high is, in terms of where pre-booked could go as a percent of the offerings that you have on the ships.

Right. Let me give that to Glenn, Sharon. And remember, there's two concepts on the (technical difficulty) pre-book alone; and there's pre-book and pre-paid. So Glenn, maybe just sort of (multiple speakers)

So this is a huge initiative for us, Sharon. So on the pre-booking side, we're currently probably about a third of the way through the banners on the true pre-booking. I would say we have about -- on the prepayment side. We probably have over 50 to 60 vessels where we're prepaying -- pre-booking and prepaying, which is really the optimal situation that we need. And that would include a dynamic pricing platform.

We are working -- and we have no choice but to work alongside our cruise partners on the implementation of our platform, to do the proper inventory control and the dynamic pricing platform, select the prepayment on behalf of our cruise partners. So we have to work at the pace and the cadence of their IT resources. And as you know, all of the major cruise lines are currently working on their own initiatives with IT and generating all of their mobile technologies and on board ocean -- Medallion ocean programs and Excalibur programs and the like, as you are all familiar with. So we are working alongside those programs with their resources in order to implement, so it been a little bit of a slow down.

So I would say currently where we have the programs, we're upwards of about 18% of our week is pre-booked on the maximum, with about 8% on the low side. Where we do flash sales and where we have great focus, and certain cruise lines lead in that regard, we really can push that double-digit and get it upwards of into the high teens. And we have had voyages where it exceeds one-third of the overall population for the entire voyage.

Great. Thank you.

(Operator Instructions). George Kelly, Imperial Capital.

So first to just follow up on the pre-book, prepayment conversation from the previous question. Can you help at all with your expectation for how quickly -- I mean, I don't know if you could hint just generally at where you expect that capability -- how many additional ships you hope to add this year?

And then where it is offered, you went through the number of customers that are pre-booking on the ships where you currently offer that service. What is the yield differential? How -- just general terms, is there much of a yield pickup on those ships?

So George, first of all, it is completely out of our control as far as the implementation of the platform. I would say we'll have another two banners this year rolled out with the prepayment -- pre-booking prepayment, and that would be large banners -- or midsized to large banners. And we're really shooting hopefully for the end of 2020 to really have everything rolled out and implemented.

Carnival Australia and Princess will launch pre-booking in this quarter, clearly. So we're working towards that, and that would include prepayment at the same time, so that will be a nice boost for us. And then with that, we'll work towards getting a dynamic pricing implemented at the same time. So those are really two very important partners of ours.

And can you repeat the second part of your question for me?

The yield issue.

Right. So our pickup is terrific. We know that if folks pre-book and prepay, that we have that statistic. It's very important. And we'll have a 30% uplift potentially with a pre-book (multiple speakers).

Okay, that's sizable. And then second question for me, kind of similar, talking yields more. First quarter, it looked like a bit of a deceleration in your average revenue per week, per ship. Just wondering if you could help with how you think that will progress throughout the year.

Yes, I'm not sure. Can you just repeat -- did you say deceleration in the productivity metric?

Yes, the 2.5% in the first quarter. I was wondering if you could talk at all about your expectation for how that will progress throughout the year. Just the average revenue per ship, per week.

Look, I think it moves up from here on. Remember, there were a lot of larger ships in drydock that are going to impact us more favorably as they come back into service. And the Oasis of the Seas, which was out for a little bit in the first quarter, it's a very productive ship for us. So, look, clearly some headwinds that were unexpected in the first quarter. But despite that, I think the productivity results were very decent.

Got you. And then (multiple speakers)

You also have some repositioning of vessels that occur at the latter part of Q1, which you would not necessarily see going into summertime and so forth. So that also had some impact.

Understood. Thank you. That's all I had.

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

Great. Thanks again for joining us today, all. We are very excited to be back in the public market. We look forward to seeing many of you at upcoming conferences and speaking to you when we report quarter -- our Q2 results in August. Thanks for joining us today.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.