Onespaworld Holdings Ltd (OSW) 2020 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the OneSpaWorld Second Quarter 2020 Earnings Conference Call. (Operator Instructions)

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

Thank you. Good morning, and welcome to OneSpaWorld's Second Quarter Fiscal 2020 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 impact 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. 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 second quarter 2020 earnings release, which was furnished to the SEC today on Form 8-K. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in 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 a review of the actions we have taken in response to COVID-19, including our key priorities, and then provide a business and liquidity update. Then Glenn will discuss our actions taken to return our staff home and our service offering. This will be followed by Stephen, who will provide more details on the financials and our liquidity.

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

Thank you, Allison. Good morning, and welcome to OneSpaWorld's Second Quarter Fiscal 2020 Results Conference Call. Our second quarter results were significantly impacted by the global COVID-19 pandemic. One of our health and wellness centers on cruise ships closed to passengers on March 14 and remained closed, pending resumption of voyages. In addition, all of our health and wellness centers at destination resorts were closed on March 26 and remained closed throughout the quarter.

Given the uncertain duration of the pandemic on April 30, we announced a $75 million equity financing, which was approved by our shareholders on June 10. As a result of this financing and our efforts to reduce expenses and capital expenditures, we ended the quarter with $79.6 million of liquidity, including cash on our balance sheet and borrowing capacity under our line of credit.

As we mentioned last quarter, our focus since the onset of the crisis was on 3 key areas: one, keep our staff safe; preserve liquidity; and thirdly, continue to innovate and collaborate with our partners. We are pleased to have made progress against each of these areas during the second quarter.

As it relates to our first priority to keep our staff safe, I would like to firstly thank our cruise lines and resort partners and each of our corporate employees for their efforts to ensure the safety of our shipboard and resort personnel. I'm equally gratified by the patience and support of our cruise ship staff while awaiting safe passage home. As a result of these efforts, as of today, we have repatriated 97% cruise personnel. I'm also extremely proud of our entire team's resilience and ability to quickly adapt to the changing operation conditions.

Moving to our second priority, liquidity. We are very pleased that our shareholders approved the $75 million equity offering in June, which we believe provides us with the resources to sustain our operational readiness. In the unlikely event there are no cruise lines that sail and with the limited destination resorts operating, we believe we have sufficient liquidity until December 2021.

We continue to prepare for the return of voyages with the health and safety of our staff and passengers as our highest priority. With this in mind, we are investing our resources in areas that we expect will add to our more than 90% market share in the operations of health and wellness centers at sea. We expect our operations to be limited throughout 2020, and we'll remain extremely disciplined in managing expenses, capital expenditures and working capital while continuing to innovate our service operators and spa experiences so that we are in a position to provide exceptional guest service in collaboration with our cruise line and destination resort partners when operations resume.

As it relates to our destination resort spa reopenings, where we have resumed operations, we are encouraged by the performance of our spas and the receptivity of our offerings. While we cannot predict the ultimate path of COVID-19, we remain confident that the advantages of our business model and significant market share have us poised to achieve our long-term performance objective as business conditions normalize.

And now I'll turn the call over to Glenn.

Thank you, Leonard. Good morning, everyone. We continue to navigate the pandemic by adapting quickly to the current operating environment with the health and safety of our staff as our #1 priority. Along those lines, as of today, we are pleased to have repatriated 97% of all cruise ship personnel, up from May's 52%. I would also like to thank those that insured the safe passage home of our cruise ship staff. I'm grateful for their efforts. I am equally proud of the way our onboard staff has handled this crisis. Their professionalism, understanding and patience during this unprecedented time is commendable.

While the hotels are operating at reduced capacity, we are pleased with the willingness of guests to book appointments and relax in our spas while they vacation during today's unprecedented times. We have also been pleased by the demand for spa appointments. Customer feedback has been overwhelmingly positive with those utilizing our facilities, noting that we have made them feel very comfortable with our enhanced safety protocols and are extremely satisfied with the level of service provided.

As we look ahead, we are continuing to focus on training our staff and investing in innovation so that we are ready to scale our global operations when the no-sail orders are lifted and more of our destination resort spas will open. We anticipate that most of our destination resorts spas will be open by the end of the third quarter, albeit at hotels with reduced occupancy and operating within the COVID-19 guidelines of local jurisdictions.

With that, I will turn the call over to Stephen, who will comment on our second quarter results and liquidity position.

Thank you, Glenn. Good morning, ladies and gentlemen. We completed a quarter unlike any other in our history, having no material revenues due to the closure of all of our health and wellness centers aboard cruise ships and in our land-based resorts due to the COVID-19 pandemic. With limited operations, our teams remain focused on the safety of our staff and preserving liquidity.

While I typically provide a full overview of our second quarter results, including productivity metrics, given the significant impact of COVID-19 on our operations, I will only share some highlights.

With this in mind, for the second quarter, total revenues were $1 million compared to $140.4 million in the second quarter last year. Revenues generated in this year's second quarter were primarily related to e-commerce sales on our timetospa.com website.

Adjusted EBITDA was a loss of $20.1 million as compared to income of $15 million in the second quarter of 2019. We incurred significant and higher-than-expected costs in the quarter related to the housing and repatriation of our teams onboard as well as costs incurred in preparation for fleet layups. Some of these costs continued into Q3, and we ended the quarter with cash and borrowing capacity under our line of credit of $79.6 million as compared to $20.5 million at the end of the first quarter of fiscal 2020.

As it relates to our outlook, given the uncertainty of the timing of the resumption of wages and the ultimate path that the global COVID-19 pandemic will take, we will continue to not provide guidance. However, I would like to share some observations with you in order for you to assess our business.

We believe Q2 will be the low point for sales as we expect 36 destination resource spas will be open by the end of August. We will continue to tightly manage expenses and identify additional cost savings if there is a further extension of the cruise line industry association announced no-sail date, which is currently October 31, 2020, for the U.S. Where resorts operations have resumed, we have seen strong receptivity to our offerings, and guests are comfortable with our enhanced safety and health protocols. While we do not expect to generate material revenues from health and wellness centers aboard cruise ships this fiscal year, we believe we have the talent and capabilities to quickly bring that personnel and scale our operations when voyages resume. We expect cruising to return on a gradual basis. And even with passenger capacity limited to 50% on board, on a 4-wall basis we would expect to breakeven. And when normalization of operations occurs, which will occur at some point, we just don't know when, we would expect to deliver revenue and EBITDA consistent with historical levels.

And with that, we'd like to open up the call for questions. Claudia, if you could please go ahead and open the call?

(Operator Instructions) Our first question is from Steph Wissink with Jefferies.

We have two questions, and Stephen, these might both be for you. But I'm wondering if you can help us break out within the quarter, in the cost structure, what costs were onetime in nature related to the repatriation of your staff now that you're almost complete with that exercise? And then I think you mentioned a second cost that seemed a bit more onetime in nature. So if you could just help us qualify what the costs were in the Q2 P&L that may not recur.

And then as we think about Q3 and Q4, how should we be modeling the salary and payroll and the administrative cost just on a go-forward basis?

Steph, so the largest component of the onboard costs, obviously, relate to housing of our employees onboard, otherwise known as (inaudible), and also the retainers that we've had to pay to some of the folks onboard. As you know, the process for repatriation has been extremely difficult due to no fault of our own or our cruise line partners. And while every effort has been made to get folks back to their homes as quickly and safely as possible, there were a myriad of problems that were encountered with local governments not allowing folks to get off vessels, et cetera. So we incurred approximately an additional $6.5 million of costs relating to keeping folks onboard and, ultimately, getting them home that we would not have originally anticipated.

While in a normal circumstance, I would tell you we would not expect to see these go forward, we don't -- we did still have some folks onboard in the month of July, and that has been significantly reduced to 87 people today. However, the number will not go to 0 because of situations, for example, where there are cruise lines in Italy where we have been told they expect to begin sailing in 2 weeks' time, which, by the way, that date has moved 3 time already. So we began to move staff back to put on to those vessels. Each time that date moved, we had to house the staff locally. And now we're putting those folks on to the vessels for a 2-week quarantine period in the hope that those vessels will begin to sail again.

So there will be additional costs going forward for some of those things, but we also hope, therefore, that there will be some revenue that comes in as those vessels begin to sail. But the point being that it is just a very, very difficult situation to forecast because of the fluidity of what is going on.

And as you know, some of our larger cruise lines have moved their return-to-sail dates in excess of 7 times already. And we are being good partners and trying to make sure that each time that happens, we are ready to go.

Other onetime costs in the quarter? We provided for an inventory reserve. As you know, Pullmantur, unfortunately, filed for reorganization. So in addition to providing for that accounts receivable number, which was not that large, we're assuming that some of our inventory there may get damaged or lost in transit as we repatriate. There's also the costs associated with moving inventory off of decommissioned vessels as that occurs and continues to occur.

So that's the bulk of the sort of onetime costs. We do expect it to diminish going forward. Exactly what it will be is difficult to say because, as I mentioned, as cruise lines tell us they're going to resume sailing, we prepare and gear up for that.

Okay. That's great. And then one follow-up question that we're getting is just understanding as vessels do return to the water, how your contracts work in terms of flexibility around capacity utilization? I think you had given us a stat on the last call regarding around 50% to 60% utilization, you feel like you can breakeven. Is that still what you anticipate? Or have any of your partnerships have had open conversations around thinking about those contracts and what your breakeven point might need to be?

We still do believe that with passenger counts at 50% to 60%, we would breakeven on a 4-wall basis on vessels.

Our next question is from Sharon Zackfia with William Blair.

I guess, given that you've reopened some of the land-based spas, and it was encouraging to hear some of your commentary there, could you give or kind of triangulate for us what the occupancy looks like right now at those facilities? What the occupancy looks like and how that's translating into the utilization of the spas? Just trying to think of if the cruise lines start out at 40% to 50%, what kind of capture rate you can get based on what you're seeing at the land base right now, if that kind of makes sense?

Stephen, I'll jump in and take that. Sharon, so it's a little bit of a mixed bag. Properties like Mohegan Sun up in Connecticut are running full -- with some full powers and doing very well in that regard, albeit our transient guest not necessarily threw lot of good business necessarily. So they're coming in into the spa, they're enjoying the spa. Probably, I would say, at a 75% throughput versus prior years at that particular property. In the Caribbean ocean club, for example, that has a 20% occupancy.

So you see it's a complete mixed bag. We just opened up (inaudible). Also Cherokee has about a 50% occupancy plus. So we have a mixed bag out of occupancy. Like, guests are coming to the spa. Do we have the same capture rate that we had this time last year at those properties? Not necessarily, but certainly full.

On some of the properties up in the northeast, Mohegan is another example, we can't do facials. It's a regulation put forth by the state, so we're not doing facials yet. That's not a permanent decision. It's ongoing discussion. So when we are able to capture that business again, we look forward to that. But the hotels claim that they're going to be running growing occupancies period-over-period, and Mohegan, again, is leading with occupancy levels at this point.

But overall, it's pretty much low occupancies compared to what we certainly expected.

That's helpful. And I guess, it's good to hear the 50% occupancy on the ships is where you can breakeven. But I'm curious, and I know this is a tough question to answer, how many ships do you estimate need to be sailing to breakeven?

Well, that's such a difficult question. There's so many dimensions because you also need to understand where the ships are sailing and all of the other complexities around that aspect of the business. I'll defer it to Stephen if he wants to commit to a number of vessels, but it really depends on the mix of ships and the mix of itineraries and the mix of revenue days that we have within our fleet. So out of our 172 ships, it depends on which of those ships would actually hit the water and how many revenue days we can actually compile from that equation. So it's a tough number to answer just with lack of when context.

Yes. Sharon, I think Glenn is exactly right. Because of the intricacies around the size of vessel, length of itinerary, number of (inaudible), et cetera, it does become challenging to commit ourselves to how many vessels will actually be sailing. We kind of look at it and say -- obviously, depending on our cost structure, but generally speaking, at around 50% or so, maybe 60%, depending on which number you look at on salary and payroll with regards to furloughs, et cetera, of prior year's revenue, on a company basis, we would breakeven.

Our next question is from Steven Wieczynski with Stifel.

So I want to go back to the kind of the cash burn and the monthly expenses. And I think we went back to May, you guys were kind of in the mid-$3 million in terms of cash burn. And now if our math is correct and we look out to the end of 2021, that number is kind of more in the mid-$4 million. And I understand there was some cost in 2Q. So I guess, the question really is, is that -- are you kind of -- when you base your liquidity and say you can get through the end of '21, is that based on that mid-$4 million number? Or can that get back into the mid-$3 million? And also because you've obviously got some land-based spas commencing operation and that's a small benefit to you guys that it's going to be some cash in the door?

Sure, Steve. So obviously, the pure math tells you that to get to December, it is sort of $4.2 million, $4.4 million in cash flow, which is higher than the $3.6 million that we had originally talked about. And part of the reason for that is the reality of the situation, some of which I talked about earlier, which is there will be situations where we know we're going to have to incur expenses, as we are right now. For example, getting folks onto vessels for quarantining and et cetera.

So can it get lower than that? Yes, perhaps. If somebody said to me definitively, there is definitely going to be no sailing until June next year, by way of wave example, there is action that we could take to reduce our expenses. But that situation, it doesn't seem likely, right? Because we have ships preparing to sail in Europe shortly. We may have ships sailing in the U.S. later this year, hopefully, early next year. So it really is such a fluid situation that I think we're being as realistic as we can right now with the number and saying based upon everything we know and being able to proceed and ready to go when the cruise ships sail that it's our best estimate of our expense right now.

Okay. Got you. And then your liquidity position, no matter which way you want to look at it, in terms of cash burn, it's still pretty strong at, let's say, 17 months right now. But Stephen, are you satisfied with where that's at right now? Or do you continue to explore other options to improve that position?

We will always continue to explore other options, Steve. We did take additional steps just recently, by the way, with regards to salaries and can now tell you that barring spas that are open, 100% of the company is on some sort of reduced salary portfolio, right? So employees are either furloughed or terminated or they've taken different levels of salary reduction throughout the entire organization from Leonard and Glenn, all the way down, we've put some things into place.

So I wouldn't say we're ever satisfied, and we'll continue to look at opportunities as we can. And to the extent that we learn more about delays, we may have to be more aggressive in some of the steps that we take to reduce expenses. But for right now we feel we're at a point where we can continue to manage the business and be ready to go as the cruise lines return to service based upon what they're telling us.

Okay. Got you. And can I ask one more quick one, it's actually for Glenn. And Glenn, what have the conversations been like with your employee base as to their willingness, when things do commence again, to go back to work?

So I imagine you're talking about our shipboard employee base.

Correct.

Well, first of all -- right. They are itching and ready to come back to work. So as Stephen mentioned, we already have crew sitting onboard one of the Costa vessels in a quarantine period. So these folks are even willing to -- they have to go into a 7-day isolation period at home before -- as an example, right? This is an obligation to just get back to work, 7-day isolation period at home, in addition to, of course, their COVID testing. Then they have to travel with all sorts of requirements. Then they have to get to the vessel and sit there for 10 to 14 days in isolation and quarantine. So you can imagine all of these burdens on them, and they still want to come to work and they're willing to have all of these pre-joining obligations. I commend them. And then go to work in a reduced environment of passengers. They don't know what the income will be, and we're assuring them that they're going to do just fine with a 50% occupancy.

We have created a database of our experienced crew. We understand who the veterans are, who the productive staff are. Steve, you've heard us mention that before. So we're bringing back the veterans, we're bringing back the productive staff first. These guys are dedicated to the cause. They're dedicated to OneSpaWorld. They're dedicated to leadership and their onboard spa management. And they really love their life at sea.

So we have a great pool. We're just waiting for logistics to fall into place so we know what to do with them. And these poor guys and girls are -- they're shuffled all about. As Stephen mentioned, 7 different return-to-service dates changed. Costa pushed back their first crews 3 different times, and this is with crew moving along the way with these folks. So I give them a lot of credit for hanging in there. But we're good with our labor force.

And don't forget, as ships have reduced occupancies from a guest perspective, we also have reduced manning. So it's not like we're staffing up for each vessel on the onset either.

(Operator Instructions) Our next question is from Assia Georgieva with Infinity Research.

Given Pullmantur, as you mentioned, Stephen, we have lost the use of those ships. And some of the changes, especially at the Carnival Corporation entity, do you assume a proportionate reduction in your projected revenues relative to the decline in the number of vessels that we'll be sailing on a constant basis? Let's assume, beginning in 2022, we should be back to normal.

Yes. Assia, yes, that's a good point. We are not assuming that Pullmantur or any of the vessels that have been announced for decommission will return to the fleet that OneSpaWorld operates, although we do know that it's likely that as some of those vessels are potentially sold to other partners with whom we have relations that we may operate upon them. I will tell you as a point of reference that taking into account Pullmantur and the ships that we're aware of being removed or decommissioned from service, it is less than 5% of our revenue. And so while it's not a tiny number, it's certainly not that significant.

Okay. That is helpful. So from a capacity percentage basis, it actually would have less of an impact to your revenue.

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

Great. Thanks, everyone, for joining us today. We appreciate your comments and questions, and we look forward to speaking with you on our third quarter call. Thanks very much.

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

Thanks, everybody. Bye-bye.