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spk08: And welcome to the ONESPA World Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Start then 1 on the touchtone phone. To withdraw your question, please press Start then 2. Please note, this event is being recorded. I would now like to turn the conference over to Alison Malkin with ICR. Please go ahead.
spk01: Thank you. Good morning, and welcome to One Spa World's second quarter 2023 earnings call and webcast. Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. These forward-looking statements reflect our judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. 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 2023 earnings release, which was furnished to the SEC today on Form 8K. We do not take any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. And the explanation of these metrics can be found in our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman, Chief Executive Officer and President, and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of our second quarter 2023 performance and provide an update on our operations and our key priorities. Then Stephen will provide more details on the financials and our fiscal year 2023 guidance. I would now like to turn the call over to Leonard.
spk10: Thank you, Alison. Good morning and welcome to OneSpar World's second quarter 2023 results conference call. I'm pleased to share outstanding second quarter results that completed an excellent first half of the year for our company. The period saw acceleration in our positive momentum with better than expected performance across key financial and operating metrics, driven by the relentless focus on the execution of our strategy by a highly talented team, buoyed by our extraordinary operating platform. As a result, we achieved our best ever second quarter revenue, income from operations, and adjusted EBITDA. Our ongoing strength and accelerating momentum evidence our unwavering focus on investing in and serving our cruise ship and destination resort partners by providing exceptional customer experiences for every guest and continuously innovating our operations to drive productivity gains across our health and wellness centers at sea and on land. In recognition of our unique capabilities, our innovative offerings and endearing services levels, we were awarded a new agreement with Crystal Cruises to be the exclusive provider of spa, salon, medispa, and fitness services onboard Crystal's newly refurbished Crystal Serenity and Crystal Symphony, as well as any additional vessels introduced into service during the term of the agreement. These two vessels will be reintroduced into service during the third quarter. We are more excited than ever about our business prospects. Our third quarter 2023 performance is off to an excellent start, with our summer itineraries across key destinations in Europe and in Alaska generating particular strength. We continue to focus on the advancement of our guest services, product offerings, and guest experiences We look forward to adding our health and wellness centers on board eight new shipbuilds that will be introduced into service during the second half of the year, joining the Oceania Vista and the Virgin Voyager Resilient Lady that commence service in the second quarter, thus bringing our total new shipbuild count to 10 for the 2023 fiscal year. In recognition of our strong first half performance and favorable outlook, we have raised our annual guidance for the second time this year with our fiscal year outlook increased beyond the amount we surpassed second quarter expectations. As you may recall, we increased our fiscal year 2023 revenue guidance by $15 million and increased our adjusted EBIT guidance by $6 million when we reported first quarter results in May. We are very pleased to share our performance has accelerated further, which has led to our raising fiscal 2023 total revenue guidance by an additional $16 million and our adjusted EBITDA guidance by an additional $10 million versus the annual outlook we provided in the first quarter. As a result, for fiscal year 2023, we now expect total revenues to increase by 43%, and adjusted EBITDA to increase by 65% versus the fiscal year of 2022 at the midpoint of our guidance ranges. Turning to highlights of our second quarter, total revenues grew by 57%, reaching a record $200 million, while adjusted EBITDA more than doubled to a record $21.6 million. The expansion in our ship count continued in the quarter, At the end of the second quarter, we had health and wellness centers on 183 ships, compared with 172 ships at the end of the second quarter of 2022. At year end, we now expect to have service on 192 ships, including 10 new builds. We saw strength across key operating metrics, including a 30% increase in revenue per ship per day, as compared to the second quarter last year, and high single-digit increases in average guest spend and revenue per stock per day. Penetration of retail sales and pre-bookings also continued to increase. We are excited to have now completed the full implementation of the pre-booking platform on all MCL ships, and as of today, 89% of our ships have pre-booking capabilities. At quarter end, we had 3,813 cruise ship personnel on vessels, increasing from 3,665 and 2,778 cruise ship personnel on vessels at the end of the first quarter of 2023 and the second quarter of 2022, respectively. We continue to focus on our key priorities, namely to capture highly visible new ship growth with current cruise line partners, as well as evaluating opportunities with new operators. We have demonstrated success advancing this priority as evidenced by entry into a new agreement with Crystal Cruise Lines and the addition of 10 new shipbuilds this year. And second, increased guest spend, frequency, spark capacity utilization, and retail revenues. Highlights of our achievements in this regard include a high single to double-digit increase across average guest spend, pre-booking as a percentage of service revenue, revenue for staff per day, and in retail spend as compared to Q2 of 2019. With that, I will turn the call over to Stephen, who will comment on our second quarter results.
spk09: Stephen. Thank you, Leonard. Good morning, everyone. We are very pleased to report strong second quarter results and continued momentum across our key operating and financial metrics, as well as further improvements to our balance sheet. I will now share more details on the second quarter that we reported this morning. Total revenues were $200.5 million compared to $127.4 million in the second quarter of 2022. This increase was primarily attributable to our average ship count of 177 health and wellness centers onboard ships operating during the quarter, compared with our average ship count of 144 health and wellness centers onboard ships operating during the second quarter of 2022, as well as higher occupancy of the average ships in service in the respective quarters. Cost of services were $137.2 million compared to $87 million in the second quarter of 2022. The increase was primarily attributable to costs associated with increased service revenues of $163.2 million in the quarter from our operating health and wellness centers at sea and on land compared with service revenues of $103.6 million in the second quarter of 2022. Cost of products were $32.2 million compared to $23.3 million in the second quarter of 2022. The increase was primarily attributable to costs associated with increased product revenues of $32.3 million in the quarter from our operating health and wellness centers at sea and on land, compared to product revenues of $23.8 million in the second quarter of 2022. Net loss was $3.2 million or net loss per diluted share of three pennies as compared to net income of 55.9 million or net income per diluted share of 46 pennies in the second quarter of 2022. The decrease was primarily attributable to the negative change in the fair value of warrant liabilities. The change in the fair value of the outstanding warrants during the three months ended June 30th, 2023 was a loss of $12.2 million compared to a gain of $58.5 million during the three months ended June 30th, 2022. The decrease in the change in fair value of warrant liabilities was the result of changes in market prices of our common stock and other observable inputs deriving the value of the financial instruments and the exchange of approximately 95% of the public warrants and approximately 50% of the sponsor warrants for the company's common shares that we concluded in April 2023. Excluding the change in fair value of warrant liabilities, the improvement in the second quarter of 2023 was primarily a result of the $12.4 million improvement in income from operations derived primarily from the increase in the number of health and wellness centers onboard ships operating during the quarter. Adjusted net income was $15 million or adjusted net income per diluted share of 15 pennies as compared to adjusted net income of $4 million or adjusted net income per diluted share of four pennies in the second quarter of 2022. Adjusted EBITDA was $21.6 million compared to adjusted EBITDA of $9.1 million in the second quarter of prior year. Turning to the balance sheet, Cash at quarter end was $30 million compared to $24 million at the end of the first quarter. In the quarter, we were paid the final $5 million on the second lean term loan and prepaid $15.5 million on the first lean term loan. Total debt net of deferred financing costs at quarter end was $182.5 million compared to $230.2 million at the end of the second quarter last year. This decrease reflects the $25 million repayment of the second lien term loan and the $7 million pay down of the revolving facility, as well as $17.1 million repaid on the first lien term loan since June 30th of last year. In this second quarter, Unlevered off the tax-free cash flow was $20.1 million compared to $7.8 million in the second quarter of 2022. The company expects to continue to generate positive cash flow from operations in the third quarter of 2023 and throughout the fiscal year. As it relates to our capital structure, our private equity shareholder, Steiner Leisure, is now an approximate 8% holder with around 8 million shares after the secondary offering completed in the second quarter and subsequently executing a rule 144 block trade. In addition to improving the liquidity of our stock, this also has reduced their holdings significantly. Moving on to guidance. We are increasing our fiscal year guidance based on our better than expected first half performance and our favorable momentum, which has led to us raising expectations for the back half of the year. For fiscal 2023, we now expect total revenue in the range of $770 million to $790 million and adjusted EBITDA to be in the range of $80 to $86 million. We expect to end fiscal 2023 operating on 192 cruise ships and at 54 land-based health and wellness centers. For the third quarter, we expect total revenue in the range of $205 to $210 million and adjusted EBITDA in the range of $21 to $23 million. Our third quarter guidance assumes an ending ship count of 188 and land-based health and wellness centers of 54. In addition, as it relates to our share count, assuming an average share price of $13 in the quarter, The year-to-date diluted share count would be approximately 100.1 million shares. Overall, we feel very confident about our positioning and growth initiatives. We are encouraged by the strong start to the second half and expect our favorable momentum to continue throughout the year. With that, we will open up the call to questions. Kyle, if you could go ahead, please.
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We kindly ask you to limit yourself to one question and one follow-up. Our first question comes from Steven Wisinski with Stifel. Please go ahead.
spk05: Hey guys, good morning. I want to start with the revised guidance. As we think about this, it's the second straight quarter in which you've materially beat the midpoint of your guidance range. As we think about the back half of the year, just wondering how maybe know, give us some color in terms of how you're thinking about your customer base. You know, I think before you were kind of assuming that, you know, again, with very limited visibility around your business, it's tough to, you know, to really kind of continue to model out these, you know, elevated spending levels. So just trying to understand how you might be thinking about your customer base, you know, through the back half of the year.
spk11: Yes, Steve, as you may recall,
spk10: when we gave guidance after the first quarter to your point, we weren't quite sure yet of how strong the European Alaska summer seasons would be. Although we were confident based upon forward bookings, based upon the strength we had heard from the cruise lines with respect to visibility, as well as the airlines mentioning just how heavily booked they were for the summer, we expected the summer to to start off well, which it did. And I think there was a little conservatism in the guidance around that, together with the fact that we really don't know, we still don't know to what extent, if any, there is some kind of recessionary proof. But I think we've executed an incredible second quarter and we've got off to a very good July so far. So the summer is Working its way out and performance has been where we expected, and perhaps in some cases it's stronger than we expected, and the consumer remains incredibly resilient. So I think that all wraps up into the positive guidance that Stephen mentioned previously.
spk05: Okay, gotcha. And then second question is, you know, is around attachment rates and wondering what, you know, maybe you're seeing at this point, you know, from your customers as they come in, you know, the user facilities, are they still spending, you know, the same amount after the treatments? I mean, at a pretty good, pretty good pace or pretty good clip. And I guess that's, you know, to us, it's one of the things we want to watch pretty closely to make sure, you know, yeah, folks might be coming in to use your
spk10: know your facilities but are they still kind of spending after they're essentially finished hopefully that kind of makes sense yeah no they they're look spend is a function of two things it's spend on the service the selection of the service the cost of that service and whether they're trading up or trading down and in fact we've seen guest spend move up in the in the second quarter it's up you know two percent and it's up so get a seven 7% against 2019 and 7% against 2022 at the same time. So guest spend continues to move positively. The retail attachment rate was up again. And so retail also is strong. And that continues to be a sign of a strong consumer with attachment. Pre-booking as a percentage of service is up as well now to 24%. So I guess penetration is now at normal historical levels of just slightly over 11%, but that ties in very, very normally with the load factors, which are now back to historical load factors of 103%. Okay, gotcha.
spk05: That's good to hear. Thanks, guys. Appreciate it, and congrats on a very solid quarter.
spk11: Thank you.
spk08: Our next question comes from Sharon Zaxia with William Blair. Please go ahead.
spk02: Hi, good morning. You know, I guess as we've been talking about the recovery in your business, we've kind of always thought of 2019 margins as kind of the bogey. And if I'm not mistaken, you met that here in the second quarter. And I think the back half imputed margins are above 2019. And I know you've been discounting less and you just talked about kind of positive mix shifts. I'm just wondering, as you've seen the consumer kind of coming out of the pandemic, have your thoughts changed on kind of what the potential margin opportunity is for the company?
spk11: Go ahead, Stephen.
spk09: Okay. You know, it's a great question, right? Because Margin is something, while as you know, our primary focus is on growing absolute dollars and we're always in favor of as long as there's incremental revenue and therefore EBIT to be had, marginal contribution will go ahead and discount, et cetera, because having staff on board that aren't working just doesn't make sense. Your point is valid in that we've seen continued strong demand on board. It hasn't waned. since the pandemic ended. And so part of that, a big part of that is reflected in the improved EBITDA margins. We've also done a lot of work around improving the way we operate on board with our marketing initiatives, etc. So while I wouldn't be prepared necessarily at this point to say what the high end is or the fact that we can continue to deliver Q2 levels, I think we're starting to get to a point where We could probably feel comfortable around being better than where we were in 2019. And again, a lot of it is going to depend on the consumer. But for right now, we would say, yeah, we probably, on a go-forward basis, can be better. But again, if things start to fall off in terms of demand, we'll revert to the marketing activities to drive the absolute dollars, to drive the absolute cash flow, which is ultimately what we're looking for.
spk02: Thanks for that. And it was good to hear about Norwegian being fully rolled out. I guess just given, I mean, you've done this on a lot of other brands. When does that start to kind of manifest itself more and the results that you have in terms of pre-booking being more meaningful on that Norwegian brand banner?
spk10: That's a good question, Sharon. So firstly, I'm thrilled that we finally got it all rolled out on all the ships. And in fact, the rollout started off a little later than we expected, but then accelerated and we completed it very recently. So for us to really start seeing the impact, because we know that a pre-poke passenger tends to spend anywhere between 25% to 30% more, and their frequency of treatment is higher, we do believe that it will take at least another quarter where they're all fully loaded into the system for us to start looking at what the impact will be. But given the spars on the ships and how they typically perform, I think the pre-booking component is only going to be accretive to us.
spk11: Okay, great. Thank you. Yeah, sure. Our next question comes from Laura Shen Pine with Loop Capital.
spk08: Please go ahead.
spk00: Thanks for taking our question. We were particularly impressed with the acceleration in weekly revenue per ship, up 27%. I'm wondering how that compares to the growth in the number of passengers at the ships where you operate, meaning how much of that is just more people coming back to cruising as opposed to your own efforts?
spk10: Well, clearly, higher load factors, moving back to the historical load factors, improves our ability to generate higher average weekly revenues. That being said, our penetration rate is back to historical rates. So even though there are more passengers on board, the penetration factor is exactly where it's expected to be. So in and of itself, productivity, has improved, taking advantage of the higher prices and discounting less has certainly allowed us to generate higher average weekly revenues. And the staff that we have on board now are starting to cycle through into second contracts since the pandemic. There's more experience. We have a much fuller complement of fitness staff on board and fitness staff generates certainly one of the most, I'd say the highest revenues of all the modalities on board. So I think the mix of passengers, the mix of our staff, better trained and experienced staff, together with load factors improving, have added to our ability to generate higher average weekly revenues per shift.
spk11: Understood. Thank you. You're welcome. Our next question comes from Max Reclinko with TD Cohen.
spk08: Please go ahead.
spk07: Hi, good morning, Stephen and Leonard. This is Bradley on for Max. Thanks for taking our questions. First, have you seen any increases in MediSpa utilization with the continued demand you're seeing overall for onboard services? Then more broadly, can you talk about what types of services that customers are looking for right now?
spk10: So Medispa services still continues to be less than double digits on board. Obviously, with more ships in service with Medispa, we have seen the uptick in some of the IV infusion stuff and services, the immunity shots that we're offering. So I think across the board of Medispa services that we're offering, we've seen an increase in the take rate. So those generally are at higher prices than sort of your average spa services, all of which is accreted to the average weekly revenue per shift.
spk07: Great, thanks. And then can you update us on how your service pricing strategies have continued to play out through the summer? Are you seeing any pushback at all from your consumers on that? And then do you feel that there's any more opportunity to play with pricing ahead for the Alaska and European seasons.
spk10: Yeah. So we won't be adjusting prices for each of these seasons. We're going to hold where we're at, which means we're holding where possible at the Hallmark pricing, discounting as needed, but less than expected. And every single week we do a check-in on the discounting per cruise, because that's one of my lookouts as to whether there's pressure points or anything against the pricing that we have, and thus far we have not seen anything. So we are not adjusting prices. Going forward into 2024, obviously we re-evaluate everything at year end. Our pricing continues to be at the higher end and with the lower discounting. To the extent that we need to take prices up, we'll consider it, but at this point we haven't made that determination.
spk11: Great.
spk07: Thanks so much, guys. Best of luck.
spk11: Thank you.
spk08: Our next question comes from Gregory Miller with Troist.
spk06: Please, go ahead. Thanks. Good morning. My first question is on the labor environment. Could you provide some additional detail on staffing and recruitment environment and perhaps staff count expectations today relative to a quarter ago?
spk10: Right, so certainly stopping for us continues to actually be one of our stellar achievements. We're close to about 98% stopped across all the banners. We stopped in every one of the modalities we need to be. There's no pressure. We've seen no pressure on restocking or rehiring or bringing experienced staff back. In fact, our bench is considerably stronger than it ever was before. And it's really a strong point and strength of the execution that we've seen so far. The staff dashboard, if you look at it today, we're at 3,000. So we're up from the 3,813 that we ended the quarter at to 3,884 today. So we are moving up in our staff numbers, and that just continues to strengthen our positions on all of the banners where those services are in demand.
spk06: Thank you. And then for my follow up, could you provide an update on the capacity utilization of the wellness facilities for port days? Are you seeing any changes or improvement there?
spk10: Well, we're seeing port day utilization pretty much where it was at this time in 2022. It's kind of flattish. We're working to continue to move that number up. Our target there is slightly higher than what we're achieving, all of which will be accretive. And we see opportunity for staff utilization at sea also to move up. The one area that brings down any of those metrics is certainly the longer cruises, which there were some in the quarter. And so the longer cruises... tend to have, you know, less utilization across a longer period of time, which is normal.
spk11: And historically, that's what we've seen. Great.
spk03: Thank you, Leonard.
spk11: You're welcome.
spk08: Our next question comes from Asya Gerjava with NVQ Research. Please, go ahead.
spk04: Good morning. Great job, guys. Fantastic quarter. And congratulations on the CRSTL program. contract, that was great to hear. I have a couple of questions. Leonard, I just mentioned that pre-cruise bookings currently stand at about 24%. Did I hear that correctly?
spk03: Yeah.
spk04: And when you mentioned that they would add, they would translate to about the 25% to 30% increase in actual onboard spend, Was that referring just to the NCL banner or is that across the entire fleet of ships?
spk10: So we're at 89% across all the banners in terms of pre-book. Clearly to the extent that we've now rolled out onto NCL ships, obviously they came on through the quarter and even at the start of the third quarter. So to the extent we start to see the NCL pre-booked numbers start to move directionally in the same way that we've seen other cruise lines have had it for longer, then that will be accretive because the guests are better spenders.
spk04: Could you quantify the extent of additional spend that you see on the pre-booked services?
spk10: Well, we tend to see passengers who pre-book tend to spend 25% to 30% more than people who don't.
spk04: Okay, across our brands, not just NCL.
spk10: Across all of our banners, yes.
spk04: Okay, great. Thank you. And I think all of us had a legitimate concern about European trends, and the cruise lines have mentioned that the Caribbean being exceptionally strong, Europe playing more of a catch-up. How do you see that develop, and is the quality of passenger demand possibly somewhat less desirable, given the closer and booking trends for Europe?
spk10: You know, I mean, the Caribbean, as you well know, is always a very, very strong spend. The itineraries are highly predictable. Europe, there are more port days, as you know, and even to some extent, Alaska, you know, has... Some ports, not as much as the European ports. We're going east and west across the Mediterranean. So, you know, in the level of spend, I would rate Caribbean, Alaska, and then Europe. But, you know, the Europe season this year has been surprisingly strong. But given the number of North Americans that we saw traveling over there, We expected strength in Europe, which we're seeing so far, and at the beginning of July. So we're very pleased with the execution so far.
spk04: Great. Sounds great. And one last question, if I may. Could you talk a little bit about sort of a longer-term roadmap in terms of your capital structure, let's say over the next 12 months or so?
spk10: Yeah, look, it's good to be back in the green with respect to free cash flow generation, as Stephen mentioned, paying down even now over $15 million on our first lien, all of which is helping us deleverage from these high interest rates, which will continue to be our number one focus. But to the extent that we start moving into 2024, we will obviously keep reviewing the capital structure internally and with our board, and to the extent that we can look at alternatives, and they're mutually exclusive, right? It means we can look at both, you know, deleveraging further as well as potentially considering in the future and at some point a dividend reinstatement again.
spk04: I was looking for that dividend comment, so thank you so much. I appreciate it.
spk03: You're welcome.
spk08: This concludes our question and answer session for today. I would like to turn the call back over to Leonard Flixman, Executive Chairman, President, and CEO for any closing remarks.
spk10: Right. Thank you, Carl. Firstly, I want to thank everybody for joining us today on our second quarter call. We're excited with where the business is at. We hope to continue this incredible resilience and incredible execution that we've seen And we'll speak to you all on our third quarter call in the early part of November.
spk11: Thank you all. The conference has now concluded.
spk08: Thank you for attending today's presentation. You may now disconnect.
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