Onespaworld Holdings Ltd (OSW) 2021 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the OneSpaWorld Fourth Quarter and Fiscal Year 2021 Earnings Call. (Operator Instructions)

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

Thank you. Good morning, and welcome to OneSpaWorld's Fourth Quarter and Fiscal Year 2021 Earnings Call and Webcast.

Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. The COVID-19 pandemic continues to have a significant impact on our operations, cash flow and financial position. The uncertain and dynamic nature of current conditions and its ongoing 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 fourth quarter and fiscal year 2021 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 our earnings release issued earlier this morning.

Joining me today are Leonard Fluxman, Executive Chairman and Chief Executive Officer; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of our fourth quarter and fiscal year 2021 performance and provide an update on our operations and our key priorities. Then Stephen will provide more details on the financials and liquidity.

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

Thank you, Allison. Good morning, and welcome to OneSpaWorld's Fourth Quarter and Fiscal Year 2021 Results Conference Call. We delivered a strong fourth quarter, which represented an excellent finish to the year. The period was highlighted by significant acceleration in our top and bottom line trend. Total revenue for the fourth quarter nearly doubled from the third quarter and increased significantly year-over-year. Key operating metrics compared favorably to fourth quarter 2019, representing our most recent comparable period of normal operations. We had positive adjusted EBITDA for the first time since the pandemic began and Q4 cash burn was better than our initial outlook. We attribute our strength and performance to our enhanced business model, which executed a seamless return to service even as we faced extraordinary challenges.

Overall, the year was to successfully executed our strategy, which furthered our market leadership in the operation of health and wellness centers at Sea and at destination resorts on land. Our return to service protocols and readiness as well as our team's flawless operating execution were further tested with the anticipated emergence of the Omicron COVID-19 variant in December, which resulted in a moderation of our trends late in the fourth quarter and at the start of Q1 2022. More recently, our positive performance trajectory has resumed on the strength of our business model and staff. We expect our performance trends to accelerate throughout 2022 and generate sequential growth with our annual performance expected to deliver positive adjusted EBITDA and positive adjusted net income. I want to thank our entire team for the tireless efforts that have contributed to our improved performance, your combined efforts led to an outstanding experience for the guests that visited our health and wellness centers as more voyages resumed and occupancy increased at our destination resort spas.

Turning now to the highlights of the quarter. Total revenues were $85.7 million, nearly double third quarter total revenues of $43.6 million. This growth reflects contributions from health and wellness centers that reopened on 118 ships that resumed operations and the contribution from 48 destination resort spas. Adjusted EBITDA was positive $4.8 million with positive contribution from our health and wellness centers on board cruise ships and in destination resorts spas on land, and we ended the quarter with total liquidity of $46 million. We had many accomplishments for the quarter, most notably, our flawless return to service continued. As mentioned, the quarter saw us ready and trained staff to reembark on an additional 40 cruise ships. At quarter end, we had health and wellness centers on 118 ships that had resumed voyages and expect to resume services on 167 ships by the end of the second quarter and all contracted ships by the end of the third quarter.

In 2022, we anticipate operating health and wellness centers on 12 new ships, new ship builds that will be introduced into service by our cruise line partners. We saw record demand by cruise ship guests for our services. While capacity on cruise ships remains below historical levels, we were very pleased to see continued high demand for our services. Key operating metrics during the quarter of 2021, also compared favorably with our fourth quarter 2019 performance, the most recent comparable period of normalized operations. For example, we continued to see record penetration rates of overall cruise ships serviced in our health and wellness centers. Additionally, prebooked statistics and average guest spend handily exceeded 2019 performance. We saw growth across key operating metrics as compared to fourth quarter of 2019, the most recent quarter with operations not impacted by COVID.

To this end, the quarter included double-digit growth in average service spend per guest and average guest spend with revenue per staff per day up in the high single digits. Free booking as a percentage of service revenue was another positive story with a 300 basis point increase versus Q4 of 2019. In keeping with OneSpaWorld's tradition of supporting our onboard staff, our corporate team, we introduced our traveling sales and revenue support teams commensurate with the increase in volume of ships returning to service. Ensuring a flawless return to service will continue to be our top priority going forward with the team completing numerous training and service audits, while onboard vessels.

We had a tremendous response from prior personnel and new applicants who have been eager to come back to our health and wellness centers. At year-end, we successfully placed 2,200 cruise ship personnel on vessels for actual and anticipated voyages, overcoming the challenges of the pandemic, securing visas, COVID testing, and other travel restrictions. Despite these hurdles, our team numbers are ecstatic to be back at sea. By the end of the first quarter, we expect to have 2,339 staff reembarked on 126 vessels. As a leader in training and certification, we were also pleased to see our London Wellness Academy reopened during the third quarter. The Academy is experiencing very strong demand from applicants with nearly 300 students trained since reopenings. Innovation in our service and product offering continued, and we continue to expand our offering in many spa technologies with Thermage, CoolSculpting, truSculpt, and microneedling, among other therapies and now including IV infusions.

In our continued focus on providing recovery service, we began to offer hyperice service and retail product on board. As we look ahead, we will continue to invest in our exemplary staff, constantly innovate and guest experience service and product offerings and leverage our irreplaceable global operating infrastructure to build upon our preeminent position. Clearly, we believe in our unwavering strategy throughout the devastating pandemic positions, which positions us to deliver long-term revenue and earnings growth across the global expense of our operations, always seeking to enhance value for all our one small world stakeholders.

With that, I'll turn the call over to Stephen, who will comment on our fourth quarter and fiscal year '21 results and our liquidity position. Stephen?

Thank you, Leonard. Good morning, ladies and gentlemen. As Leonard mentioned, the fourth quarter saw sales and operating performance accelerate strongly from the third quarter with our key operating metrics nicely ahead of Q4 2019. We are very proud of our staff and team for their commitment to OneSpaWorld and their dedication to providing service excellence is exemplary, especially given the extraordinary circumstances created by COVID-19 and its variants.

I will now share a few of the fourth quarter and fiscal year results. For the fourth quarter, total revenues were $85.7 million compared to $3.8 million in the fourth quarter of 2020 and up from $43.6 million sequentially compared to the third quarter of 2021. The 3 months ended December 31, 2021, revenues were derived primarily from our 118 health and wellness centers onboard ships having resumed voyages and our 48 open and operating destination resort health and wealth centers.

Cost of services were $58.7 million compared to $6.9 million in the 2020 fourth quarter. The increase was primarily attributable to costs associated with increased service revenues of $66.1 million in the quarter from our operating health and wellness centers at sea and on land and increased costs related to the resumption of operations at our health and wellness centers at sea and on land.

Cost of products were $15.5 million compared to $6.8 million in the 2020 fourth quarter. The increase was primarily attributable to costs associated with increased product revenues of $15.8 million in the quarter from our operating health and wellness centers at sea and on land together with a $2 million non-cash inventory reserve recorded in the current quarter to reflect the write-down of inventory. The fourth quarter of 2020 also included a $4.9 million noncash inventor charge for the write down of inventory. The write down in both periods is a result of inventory that is expected to expire due to the extended pause in operations caused by the COVID-19 pandemic.

Net loss was $10.9 million compared to a net loss of $71.4 million in the fourth quarter of 2020. The $60.5 million improvement was primarily a result of a $21 million improvement in our loss from operations plus the $40.3 million positive change in the fair value of warrants. The change in fair value of warrants is the result of changes in the market prices deriving the value of those financial instruments.

Adjusted EBITDA was positive $4.8 million as compared to an adjusted EBITDA loss of $15.4 million in the fourth quarter of 2020. Importantly, this represented the first quarterly period that the company recorded positive EBITDA since the onset of the COVID-19 pandemic.

For the fiscal year, total revenues were $144 million compared to $120.9 million in the 2020 fiscal year. Results in both 2021 and 2020 were substantially driven by the COVID-19 pandemic, which resulted in the cancellation of all cruise ship voyages and closure of all destination resort health and wellness centers during mid-March 2020 through December 31, 2020. The 12 months ended December 31, 2021, revenues were derived primarily from the operations of health and wellness centers onboard ships having returned to service and our destination resort health and wellness centers having resumed operations primarily during the last 2 quarters of the year.

Cost of services were $108.9 million compared to $107.3 million in the 2020 fiscal year. The increase was primarily attributable to the resumption of operations in the last 2 quarters of 2021 and offset by the impact of the COVID-19 pandemic during 2020.

Cost of products were $26.6 million compared to $32.0 million in the 2020 fiscal year. The decrease or improvement was attributable to a lower amount required in 2021 versus 2020 related to the decrease in the inventory write-down for the decline in the net realizable value of inventories, principally the result as mentioned of excess, slow-moving, and exploration of inventory caused by the cessation of our cruise line operations and consequently, our operations due to the COVID-19 pandemic and an improvement in our business mix.

Net loss was $68.5 million compared to a net loss of $288 million in the 2020 fiscal year. The decrease or improvement in the net loss principally resulted from the nonrecurring $190.8 million goodwill and trade name intangible asset impairment charge recorded in 2020, offset by the positive impact of the resumption of operations in the last 2 quarters of 2021.

Adjusted EBITDA for the year was a negative $18.9 million as compared to an improved negative $42.7 million in the 2020 fiscal year.

We ended the year with total liquidity of $45.8 million. At year-end, $10 million remained available under the at-the-market program. With projected liquidity continuing to improve, we do not intend to utilize the remainder of the ATM program. The current availability under our line of credit is $13 million. The cash burn rate for the quarter of $5.3 million was better than our expectations of $8 million to $10 million, and that was at the better end of our updated guidance that we provided on January 10. We expect cash burn between 2 and $3 million in the first quarter of the year due to canceled voyages and lower passenger rates driven by the surge in COVID cases due to the Omicron variant. That said, we expect to achieve positive cash flow beginning in the second quarter and continuing quarterly thereafter as well as for the full fiscal year.

As it relates to our outlook for 2022, (inaudible) uncertainty surrounding the continued impact to our business from the COVID-19 pandemic, we will (inaudible). We expect to incur (inaudible). However, we expect (inaudible) EBITDA and positive adjusted net income for the year.

And with that, we will open up the call for questions, please.

(Operator Instructions) Our first question comes from Steven Wieczynski of Stifel.

So I guess, as we think about this year, positive EBITDA can mean a lot of different that can obviously have a lot of different outcomes, just kind of saying positive EBITDA. And I understand you're not going to give real guidance at this point. It's just too difficult to do. But I guess maybe if you could help us think about maybe some of your high-level assumptions to get you to that positive EBITDA level that might be helpful. And meaning, do you assume spend levels remain status quo? Or maybe what type of occupancy are you assuming your cruise line partners are running through the year? I mean anything to kind of help us kind of frame the year would be very helpful.

Yes, Steve. The biggest driver of the positive change in EBITDA and the delivery for the year obviously is volume, right? So it's the ship count levels that we've referred to. We ended Q4 with 118 is a significant increase to the end of Q1 to 126 and then an even more significant increase to Q2 of 167 with all vessels sailing by the end of Q3 and ending the year on 178. So as we've seen, because of the increases in spend on board, even at below 50% occupancy levels, we've been able to generate positive EBITDA on a 4-wall basis and with the increased number of vessels that is now translating into generating positive EBITDA on an enterprise basis. So we don't expect full occupancies till later in the year, Q3, but more than likely Q4. Even without that, though, we do believe that we will achieve positive EBITDA starting perhaps this quarter, but certainly next quarter and continuing for the year.

And you're assuming from a spend level perspective, I mean, I assume you haven't seen any kind of material changes in spend levels over the past couple of months, and you're just kind of assuming that spend levels remain pretty much status quo through the full year?

We have not seen any changes. The first quarter remains strong despite the fact that particularly in January and a little bit in the beginning of February, there was certainly some impact from Omicron with regards to occupancy levels, but the folks that were coming in were still -- even without that incremental spend level, we're confident that our EBITDA numbers will be positive for 2022.

Second question, current liquidity position, I mean, it seems like you guys are now in a pretty good spot, assuming your cruise partners continue to roll out their entire fleets, which looks like they're -- they're on a pretty good pace at this point. But I guess moving forward, as your free cash flow base starts to grow, can you maybe help us just remind us what the priorities for that cash flow generation are going to be?

Yes, of course. So as we thought about it more, and as we've said and consistent with what we've said in the past, we want to build a little bit of cash on the balance sheet, an alternative to doing that and the way the path that we will go down most likely is -- the first thing we will do is we will pay off the $6 million that is drawn on our revolver because that de facto gives you that increased flexibility if you need to redraw it. The second thing we will likely do is turn our attention to paying down our $25 million second lien, which carries interest at LIBOR plus 7.5%. So we think that it will be good, and it's certainly accretive to take that out of the mix. Thereafter, and so now we're poring to look into 2023, we would revisit again all of the things we've talked about in the past with regards to perhaps paying down some of the first lien and/or and it doesn't have to be mutually exclusive, returning cash to shareholders in the form of stock repurchases and/or dividends.

Our next question comes from Sharon Zackfia of William Blair.

So I guess a few questions. On the Omicron impact, are you kind of back to where you were pre Omicron? Is that kind of the positive trajectory you're referring to? And then curious on the -- I believe some of the cruise ships are starting to relax the mask mandates. I'm wondering what you're doing in your spas and kind of how impactful or not that might be for your business?

Yes. So Sharon, I mean, let me just stop the first part of the question again. I'll address the second part first. The cruise line -- all 3 of the big brands have pretty much said we know they've all signed up for the voluntary guidance and oversight of CDC recently. So they're all on board with that. But what's interesting is, from March onwards, they're going to relax wearing for the mask mandates that they had, particularly in indoor areas. It remains to be seen exactly where they might still require. But at least for now, it looks like masks are going to be somewhat -- if you want to wear, if you don't want to wear one, that's fine too, which I think is going to allow for a guest to feel so much more relaxed in some of the indoor areas that they previously had to wear a mask. So I think that's -- that's a big change in terms of the guest experience. And I think that's certainly going to help confidence build back in the total experience of cruising as it used to be. Sorry, your first question was?

Yes, sure. So on the positive trajectory that you cited recently, does that mean you're back to like pre Omicron trends?

Yes, I would look at -- as I look at the fourth quarter, I mean, we were really -- November was really, really a good month. Going into December, we still continue to pick up speed. And then right at Christmas, when Omicron kind of hit us badly, we saw a fall of not necessarily in the number of people cruising, because the load factors over Christmas and New Year were obviously high. People have booked those cruises and went on board. But I think Christmas, they can suddenly when everybody saw how contagious Omicron was, we certainly saw a falloff in participation on board. But then it picked up again over New Year. So New Year was decent, not, I would say, as decent as we had hoped, but it was certainly much better than Christmas. Then January, as Stephen mentioned, we saw some falloff, we saw cruise lines, have a tremendous amount of cancellations of cruises, people deferred their cruise bookings out. But from everything that we have seen, we have certainly seen the trajectory of demand pick up again here in February. And from what I'm seeing right now based upon all the metrics we saw yesterday and the ending of February, we're starting to pick up steam again. So I'm very optimistic. It's going into spring break with mask mandates coming off. Omicron definitely falling in terms of cases, even death. It looks, hopefully, like we're beyond this thing. And I think the confidence in guests coming on board is certainly getting back to pre-COVID levels.

I can't wait for spring break as well. And then last question, just on the 12 new ships you have coming in this year. I mean, any kind of new innovation or design changes we should think about?

So we're going to definitely expand. As I mentioned, we are looking at what we can do with hyperice sort of these centers where we can do extended services as well as retail. We introduced that in December and actually have pretty decent retail attachment along with those recovery services. And they have an array of different services and products that we intend to expand in 2022. We're also going to have more drip lounges out there and do much more of the IV infusions, maybe immunity shots. We have a host of new innovation ideas coming through the pipeline right now that we presented to the Board and were adopted in December, and we continue to work on the delivery of all of those projects. So we're very excited about not only seeing the demand for our service continue at a high level penetration, continue at better than historical levels, even with the lower occupancy levels that we're seeing, the spend obviously is high single digits. I think with all the newness that we're doing, some of the design features that we will introduce onto some of the ships, we're pretty excited about what the back half of 2022 is starting to look like.

Our next question comes from Steph Wissink of Jefferies.

We just had a couple of follow-up questions to the prior set of questions from the analysts. I wanted to ask a little bit about the pricing and what you're seeing kind of real time in terms of your ticket value. It does seem like the maybe more comfortable cruisers are back spending a bit higher. How should we think about that as the next wave of ships comes online? Do you expect that average transaction to moderate? Or do you think you can maintain an elevated level of spend per passenger?

Yes, it's a great question, Steph. I mean, obviously, we've seen great success with the rollout of our new pricing strategy and pricing architecture and moving people more out of the 50-minute slots into the 75-minute slight at higher prices, while not falling off in terms of the frequency of services that we are seeing and demand is high. I would say, listen, onboard spend across most of the cruise lines vanities is solid, including ours, which we certainly have reported here in our fourth quarter and continue to see now in February, again, once we got passed this sort of little blip from Omicron. So I think it's going to be very interesting to see if we can sustain it. Certainly, the demand is very strong, and people are coming in and they're spending and continue to look at some of the longer services, and certainly, they're priced accordingly.

And then just on the model, the salary and payroll taxes line has been building back, and I wanted to just make sure we're clear about how to model that line item. If you can give us any direction on as you staff back up as you build back your corporate structure, how we should be thinking about that as a percentage of the go-forward revenue?

So we've been very, very disciplined with regards to bringing back positions at corporate. And quite frankly, with Omicron we actually took a bit of a pause in some of our proposed hirings just to make sure and see how that actually played out. We will continue to, however, have the necessity to start bringing additional folks back as new ships are introduced to service, and we're trying to measure the cadence of bringing them back to try and align that with when those ships are reintroduced into service. So you should expect to continue to see that number increase all the way through the year up until the end of the year, likely back to where we've been at before, although we may have some productivity improvements at this point in time, I think it's the safest bet to assume we get back to the same types of headcount at the corporate level.

I'm not sure one more out just because it's topical in the headlines. But with respect to Eastern Europe, some of the geopolitical unrest there, any reason to think changes in your ability to source labor or any of those kind of Mediterranean corridor prices that would have been occurring, that might see some impact?

No, we don't expect to see any -- I mean we have a lot of Ukrainians on board, maybe 1 or 2 Russians. I think most of them had left clearly before the last 6 days of war. We don't have that bigger contingent from that area. And certainly, all the other areas that were impacted by Omicron are now opening up, including Australia. So I don't foresee a shortfall if indeed, we see a continuation of the war for a longer period than maybe expected. So it's not going to impact the way in which we recruit or train. I don't see any impact to our labor force.

We do have 2 smaller -- yes, we do have 2 smaller land-based hotel destination spas in Russia. And those 2 assume will be impacted here in the near term, although they are not material. The revenue last year from both facilities was less than $150,000. So we do expect just a very minimal impact specifically as it relates to that.

Our next question comes from Assia Georgieva of Infinity Research.

Congratulations, Leonard and Stephen on the great execution and offering such great results on an EBITDA and cash flow basis. I wondered whether, given the metrics you provided, the penetration rate and the occupancy of the spas can compare to Q4 2019, given that ships were sailing in some cases, well below 50% occupancy?

We really did knock it out the park in terms of every single part of the execution. I mean, the team is fantastic. Our onboard staff are performing well, and it's been difficult -- it has been difficult. But look, as I mentioned before, penetration on board is better than it was in 2019. And so it will remain to be seen as we introduce more and more ships if that level can continue to stay as high as it is, which is mid-double digits, which is certainly an improvement over the historical 11%. We do believe that with all of our initiatives that we put in place, our ability, our diagnostic tools that we're using now to watch the first 48 hours of the cruise, the last 48 to troubleshoot where we're not doing well, that we are on top of our business day-to-day more so than we were able to do so in 2019, and that's a function of all the work that we did during the COVID period to improve our diagnostic capabilities with data, et cetera. So I have never seen a team more in charge of the data and able to impact the data, not on a historical basis, but on a prospective basis. So that's a good thing. And I think we will certainly see pre-booking continues to be a major focus of ours. We have one major brand that will come on at the beginning of the second quarter. That's going to improve our ability to prebook and as you know, prebooking is an important part of guest spend, prebooking guests spend 35% more than people only book on the first day of implication. So all in all, I would say, given low load factors compared with 2019, our performance has been exemplary.

So you've been able to capture the same -- you have had the same occupancies in the spa as if the ships were full or would that be a stretch on my part?

That would be a big stretch because we haven't got there yet. I mean these ships are still carrying less than 60% on average. And only Christmas cruises were above and across the different banners. I do believe that now that we're getting to the tail end of Omicron, we're going to see load factors continue to improve here post-spring break and into the summer. Certainly, I think Europe is looking good despite what's going on in the Baltic. Certainly, those ports that are impacted will be avoided by the cruise lines. But the rest of the mid looks to be healthy so far as well as Alaska. So I think load factors, as Stephen mentioned, will improve certainly in the second quarter, get back to normalized levels probably at the beginning of the fourth quarter and continue to stabilize thereafter.

I think you're uniquely insulated from the impacts of the war. So that is helpful by having basically the cruise ships to deal with this problem as opposed to you having to work with the logistics of that. In terms of prebookings, I think you mentioned a 300 basis point increase. Can we compare that to what the base for that was previously?

Can you just repeat that, compared to what?

300 basis point increase in prebooked services. We are working off of what number if I could ask?

So prebookings were sort of high mid double digits. They're now closer to 20%. So they've certainly moved up.

So that's a very large increase then.

It's a very good increase, yes. It's what to be done. It's definitely an improvement, and we've been speaking about prebooking for a long time. But I think with the adoption by a lot of the cruise lines and one more big cruise line to come on board, we're expecting to move the needle on that over time.

And you just gave me a great segue. You mentioned that at the end of Q2, you expect a major cruise line to come on board. Would you share the name?

No, no. I expect…

I do know the answer to that.

No, no, no. We're not expecting new market share. We're expecting a new major brand or should I say an existing major brand to adopt our pre-booking platform.

I understand. And Azamara is part of the portfolio at this point. Is that fair?

We have Azamara.

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

Thanks again, everybody, for joining us today. We look forward to speaking with you when we report our first quarter results. Thank you.

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