OneSpaWorld Holdings Limited

Good day, and welcome to the One Spa World Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Alison Malkin of ICR. Please go ahead.

Thank you. Good morning and welcome to One Spout World's third quarter 2024 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 judgments 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 third quarter 2024 earnings release, which was furnished to the SEC today on form 8K. 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, Chief Executive Officer and President, and Steven Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of our third quarter 2024 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and guidance. Following our prepared remarks, we will turn the call over to the operator to begin the question and answer portion of the call. I would now like to turn the call over to Leonard.

Thank you, Alison. Good morning and welcome to OneSpot World's Third Quarter 2024 Earnings Conference Call. It's a pleasure to speak to you today and share another period of record performance. Our team delivered exceptional third quarter results, achieving all-time records for total revenues, income from operations, and adjusted EBITDA that once again surpassed our expectations. Our sustained strong performance continues to evidence the talent of our team to leverage our complex operating model and competitive strengths to deliver outstanding guest experiences for our cruise line and destination resort partners. This positions us well to continue to achieve outstanding results for our company and our partners. As outlined in our earnings release issued earlier this morning, based on our performance, our continued momentum and positive outlook across the business we have increased our annual guidance for the third time this year. Turning to the highlights of the quarter. Total revenues increased 12% to a record $241.7 million compared to $216.3 million in the third quarter of 2023. Income from operations increased 48% to a record $25 million compared to 17 million in the third quarter of 2023. Adjusted EBITDA increased 33% to a record 33 million compared to 24.9 million in the third quarter of 2023. And unlevered after-tax free cash flow increased 28% to a record 31 million compared to 24.2 million in the third quarter of 2023. The unlevered off the tax free cash flow conversion rate was 94% in the third quarter of 2024. We continue to grow our ship count year over year. At quarter end, we operated health and wellness centers on 196 ships with an average ship count of 195 for the quarter. This compares with a total of 189 ships and an average ship count of 185 ships for the third quarter of 2023. At quarter end, we had 4,204 cruise ship personnel on vessels compared with 3,927 cruise ship personnel on vessels at the end of the third quarter of 2023. The quarter included continued progress towards our key strategic priorities. Let me share some of those highlights with you. First, we captured highly visible new ship growth with cousin cruise line partners and added new cruise line partners to our fold. To this end, during the third quarter, we opened a health and wellness center on the new shipbuild, Utopia of the Seas. With this opening for the first nine months of the year, we have introduced health and wellness centers on five new shipbuilds. Looking ahead, we continue to expect to end fiscal 2024 operating on board 198 vessels. Second, as it relates to our higher value services and products. As you recall, we introduced new cryotherapy body services, which saw strong double-digit growth in revenue in Q3 as compared to Q2. Additionally, our new cryotherapy and LED light facial services that complement the new technology-driven Elemis Biotech 2.0 facial and light stem therapy continues to be a very successful addition to our facial and acupuncture revenues. We will continue to ramp these new services to the entire fleet over the next few quarters. Third, we focused on enhancing health and wellness center productivity. We grew key maritime operating metrics with continued strong growth in revenue passenger per day, weekly revenue, and revenue per staff per day. This was driven by growth in total cruise guests utilizing the SPAR and an increase in the number of treatments for guests both of which benefit from the success of our technology enhancements, our expertise in staff training, and the simplification of our service menu options and treatment lengths. Additionally, we continue to attract and retain staff, which has led to an increasing percentage of experienced staff members working on board. We continue to see more of our staff members sign on for additional contracts, reflecting the compelling workplace environment we provide and their affinity toward our company. These more experienced staff members are also skilled at recommending product and service options, which combined with the simplification of our service menu and treatment leads led to growth in higher-priced products and services. We remain focused on initiatives that retain our best staff. Pre-booking revenue as a percentage of service revenue remains strong at 22%. even as we phase in new partners that are just beginning to scale. We continue to see passengers that pre-book services spend 30% more than those who do not pre-book. And finally, we continue to expand productivity within our med spas. The quarter saw same spa revenue overall up double digit year over year. We continue to increase the number of doctors and nurses we have on board and add to the service offering. At quarter end, MediSpar services were available on 144 ships and up from 135 ships at the end of the third quarter of 2023. We now expect to have MediSpar services offerings to 144 ships this year. Fourth, as it relates to capital allocation, we further enhanced our capital structure and financial flexibility. During the quarter, we refinanced our first lean term loan with a new $100 million five-year facility at a lower interest rate and entered into a five-year revolving credit facility up to $50 million, which was undrawn at quarter end. Our efficient capital structure, asset-like business model, and robust cash flow generation allows us to invest in support of our future growth while paying and ongoing quarterly dividend and evaluating opportunities to optimize our capital structure. With this in mind, the quarter saw us deliver on each of these activities. We ended the quarter with $50 million in cash after paying down debt of $24.6 million and investing $11.3 million to repurchase our common shares in the quarter, as well as dispersing $4.2 million in quarterly dividends. We believe we will remain well-positioned to continue to invest in support of our growth and return value to shareholders. First, earlier this month, we issued our inaugural Sustainability and Social Responsibility Report, which highlights our commitment to exemplary care for employees, outstanding service to our partners and their guests, and responsible stewardship of the environment and communities of our community impact across the globe. This commitment and our ongoing ability to leverage our industry leading operating platform integrated growth initiatives and asset life business model to generate consistently increasing off the tax key cash flow positions as well as to deliver continued strong near term and long term financial performance. In summary, we are pleased with the ongoing strength of our business and excited about our business prospects. With a clear path for growth, a highly talented team, and successful strategies in place, we continue to expect fiscal 2024 to represent another year of record growth and increased value to our shareholders. With that, I'll turn you over to Stephen, who will provide more details on our third quarter results and guidance. Stephen.

Thank you, Leonard. Good morning, everybody.

We are pleased to report ongoing strength with the delivery of better than expected results across all key financial metrics in the third quarter. We continue to drive shareholder value with a quarter generating record revenue, record net income, record adjusted EBITDA, and record unlevered after-tax free cash flow. And we enhanced our already strong balance sheet, ending the period with a strong cash position even as we utilize cash to reduce debt, repurchase our shares, and pay a quarterly dividend. Sharing more detail on the third quarter that we reported earlier today. Total revenues were $241.7 million compared to $216.3 million in the third quarter of 2023. The increase primarily was attributable to our average ship count increasing to 195 health and wellness centers onboard ships operating during the quarter, compared with our average ship count of 185 health and wellness centers in the third quarter of 2023, together with continued productivity gains across our operations. Cost of service were $159.6 million compared to $146.1 million. and the increase was primarily attributable to costs associated with our increased service revenue of $194 million compared with service revenue of $175 million in the third quarter of prior year. As would be expected, cost of products, $40.1 million compared to $34.5 million in the third quarter of 2023, with the increase primarily attributable to costs associated with increased product revenue of $47.3 million in the quarter compared to product revenue of $40 million in the third quarter of 2023. Net income was $21.6 million, or net income per diluted share of 20 pennies, as compared to net income of $23.4 million, or net income per diluted share of 16 pennies in the third quarter of prior year. The change in net income was primarily attributable to a $7.4 million decline in the fair value of the warrant liabilities reflected in other expense in Q3 of 2023 and a $8.1 million increase in income from operations. As you know, the change in fair value of warrant liabilities was the result of the re-measurement to fair value of the warrants exercise during the third quarter of 2023. reflecting changes in market prices of our common stock and other observable inputs deriving the value of these financial instruments. As a reminder, we have no outstanding warrants as of the 2024 quarter end. The $8.1 million change in income from operations primarily derived from an increase in the number of health and wellness centers onboard ships operating during the quarter and our productivity gains across our operations. Adjusted net income was $27.3 million or adjusted net income per diluted share of 26 pennies as compared to adjusted net income of $22 million or adjusted net income per diluted share of 22 pennies in the third quarter of 2023. And adjusted EBITDA was $33 million compared to adjusted EBITDA of $24.9 million in the third quarter of prior year. Turning to the balance sheet, we ended the quarter with a stronger balance sheet, including total cash of $50 million after repaying $24.6 million on our first lean term loan, repurchasing 745,000 common shares for $11.3 million, and paying the $4.2 million dividend during the quarter. quarter end, we had $38.7 million, therefore remaining on our current share repurchase authorization. Since returning to service in fiscal 2022, we have repaid over $133 million of indebtedness, reducing our debt to $99 million, and have also repurchased a total of 2.14 million shares in total for $28 million. In addition, We refinanced our first lean term loan with a new $100 million five-year facility, lengthening our maturity and reducing our ongoing interest expense to so-called plus 1.9%. Also in the third quarter, unlevered after-tax-free cash flow was a record $31 million compared to $24.2 million in the third quarter of 2023. Moving now on to guidance. With our strong third quarter performance and a continued positive outlook for the third time this year, we have increased our fiscal year 2024 guidance. We now expect revenue to increase 12% and adjusted EBITDA to increase 24% at the midpoint of the guidance ranges from fiscal 2023 actual results. For the full year of fiscal 2024, we expect total revenues in the range of $888 million to $893 million versus our previous guidance of $870 to $890 million. And adjusted EBITDA is now expected in the range of $110 to $112 million versus our previous guidance of $102 to $108 million. We expect to end fiscal 2024 operating on 198 cruise ships and at 51 land-based resorts. For the fourth quarter, we expect total revenue in the range of $210 to $215 million and adjusted EBITDA in the range of $25 to $27 million. So in summary, we enter the fourth quarter strongly positioned We are confident in our outlook and our ability to continue to deliver increased value for our shareholders as we execute our now proven strategy supported by our advantageous operating platform, robust growth initiatives, and asset-light business model.

With that, Betsy, could you please open the call for questions?

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 ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Steve Wyzynski with Stifel. Please go ahead.

Hey guys, good morning. So Leonard or Steven, I want to ask about the margin expansion in the quarter that was probably much, much better than what we were kind of expecting. I mean, if we look at the service margins you know, those expanded by about 100 basis points. And then, you know, on top of that, on the operating expense side, your salary line was, you know, was actually down about 100 basis points. So, you know, you put that all together, you've got this massive 200 basis point, you know, kind of plus move in EBITDA margins. So, you know, just wondering if there was anything we need to think about in terms of, you know, maybe one-time benefits or, you know, maybe a better question is just, you know, how were you able to push those margins so much? And You know, how should we think about margin expansion moving forward?

Steve, good morning. Let me start off with the second part of your question as it relates to salary and payroll taxes being down versus the same quarter of prior year. And really, that is just a function of incremental expense in the prior year related to the timing of higher performance-based compensation. And so this year, that has been spread more evenly throughout the quarters. And so it reflected itself now in the third quarter of current year being less than the third quarter of prior year. As it relates to the service margin, I would say two things, right? So number one, as you've heard from the cruise lines that have already reported to date, onboard demand remains particularly strong. Guest spend remains robust. That translates for us into demand minimal promotional activity that we need to do which we're obviously delighted and encouraged about and so to the extent that those continue to play out we continue to feel very very good i'd also just remind you that as we continually preach right we will focus on absolute dollars so at a point in time if there is any softening and we have not seen any then we would do promotional activity in order to drive the absolute dollars. But where we stand right now, we feel really good about how things are playing out.

Okay, gotcha. Thanks for that, Stephen. And then, you know, second question, I'm not sure if this is for Leonard or you, Stephen, but, you know, and maybe we're meeting, you know, we might be reading too much into this, but, you know, if we look at your land-based activities, um, weekly production relative to your maritime weekly production. I mean, there's quite a big difference going on there between the, you know, between the two of them, obviously the, you know, the cruise industry is doing so well right now. And I think a lot of that's just due to the, you know, to the massive value proposition, but, you know, just, you know, wondering, or if you have any idea why, you know, why those land-based, um, you know, spas aren't seeing the same type of kind of revenue generation that you're seeing on the maritime side.

A number of the hotels are actually undergoing renovation projects, and so that has negatively impacted some of the performance in the land-based resorts, particularly at some of the bigger locations.

Yeah, we had like three or four this year versus last year, Steve, so that has impacted Certainly revenue per week on average at the resorts. We've also had some softness in Asia where they have not had the same occupancy. I mean, room occupancy is down overall across Asia and the Caribbean. Just not getting as many people as they had last year. And, you know, the business is a little challenged because some of the biggest bars, as Stephen mentioned, have not been open because of the construction.

So as those renovations kind of come to a close, and as we think about 25, we should start to think about that land-based spa side of the business starting to grow again. Is that kind of fair?

I think it's fair to assume. We've got to work harder on penetrating and capture rates in the resorts. We have to make sure that all of our marketing tools are in play. And so we're doing a number of different things right now. to put some more energy and life into producing those results. And I think 2025 should be a little better.

Okay, gotcha. Thanks, guys. Appreciate it. And congrats on the solid quarter. Thank you.

The next question comes from Max Rukalenko with TD Cowan. Please go ahead.

Hey, great. Thanks a lot, guys. And congrats on a really nice quarter. So first, how are you thinking about pricing on the service side, both for fourth quarter and 2025? Are you seeing consumer acceptance to higher price points? And just how are you thinking about how much room you may have to push that a little bit further?

So, Max, I think, you know, based upon the comments both Stephen and I have made, I mean, demand, the cruise lines have also spoken about demand for an incremental onboard span still continuing to be robust. We've taken, we obviously took pricing last year. We took very little pricing this year, except in some cases in some of the med spot treatments. But as we deploy or innovate or add to the lineup new services, those will be incrementally higher. We also continue to look within the pricing transformation process that we've done, which is simplification of menu, et cetera, moving people from shorter services to longer services with higher price points. To the extent that we think the demand, and we firmly believe that right now, will continue, We will look across the board at some of the services and see if more pricing can be taken. Look, we don't want to get ahead of ourselves. We never have. But I think there's some opportunities in some of the services to still have some smaller increases in 25 and 26.

Got it. That's helpful. And then just switching over to margins. Obviously, as we just touched on, really nice outperformance versus the initial guide provided earlier this year. Do you view 2024 as the correct jumping off point with potentially small levels of expansion there on out? Or how should we just think about 2024 EBITDA margin versus where the company can go over the medium to longer term?

I think you phrased it appropriately in terms of the jumping off point, so to speak, with more incremental improvements over time. As you know, with such a high variable cost nature business, it is difficult to drive those margins. Obviously, we saw them flow through very, very nicely in the third quarter with significant outsized revenue. that then helps as it relates to scale and covering some of your fixed costs. So I think I would put it to this way, right? We're obviously, as you know, in the process now of looking at 2025. There is nothing at this point that gives us pause with regard to 2025. We don't talk specifically around those numbers just yet. But as we go through our budget process and then early next year, we would come out more formally with our expectations. for 2025, but as of right now, we remain optimistic about where we're at as of today and how we see the outlook playing out.

Okay, great. Thanks a lot, guys. Best regards.

Thank you.

The next question comes from Sharon Zaxia with William Blair. Please go ahead. Hi, good morning.

I was hoping, just given the election that's coming up next week, could you go over any tariff risk that you guys might have either in the maritime or land-based resort business as it relates to your acquisition of product or anything along those lines?

There's an election next week? Sharon, good morning.

Sorry to remind you.

Yeah. The... The majority of our product technically does not come into the United States, although physically it enters into a bonded warehouse and then goes straight back out onto the ships and into international waters. And so for the vast majority of our activities, we are not anticipating any impact from any tariffs.

Great, and thank you. Sorry, I'm getting all choked up as I talked about the election. I also wanted to ask, I know your long-term algorithm, I think, is for high single-digit revenue growth, and you've obviously been doing better than that for this entire kind of post-pandemic timeframe. And I think the fourth quarter implied revenue is kind of in that 10%-ish range. Do you think that you can sustain kind of something a bit above that long-term algorithm, just given the momentum both in the cruise space and what's happening with pre-booking specifically for your business.

I don't think we'd be comfortable just yet in taking that up above what we've typically talked to. We certainly feel very comfortable with all of the initiatives in place with the 10 new builds coming into service next year, that high single-digit revenue growth is certainly achievable. Obviously, to the extent that we can do better than that, we will be delighted and we will continually strive to do that. But at this point in time, I don't think we want to go out and change the long-term algorithm metrics as we've previously communicated.

And Stephen, do you want to keep any debt on the balance sheet? I mean, it seems like you could be debt-free at this time next year if you want to.

Yeah. So, you know, it's interesting. So we did restructure the debt, not only in the quantum of the debt, but also in where it was divided. And we put a large portion of the debt now actually in the U.S. where we will get some interest shield. So if you ask me and Leonard personally, do we want to keep any debt due to our conservative nature, the response would be no. Why? Why would we pay interest to somebody else when we can rather just return all of that money and do something better with it? I will tell you that with With the refinancing, with the increasing of the maturity, with the hedge that we've entered into that gives us an incremental slight benefit, at least for now, on the interest rate, the focus on paying down debt will perhaps not be as high as it has been in the past, and I think we will continue to employ a balanced capital allocation strategy where we've talked about doing all three things which is pay down debt, buy back shares, and pay a dividend. And that balance allocation strategy is something that we remain very, very focused on. It's likely, though, that over the shorter term, the next year or so, there is less of a focus on debt and more of a focus elsewhere. But we will pay down some debt. And again, the stock we purchase, as we've said all along, is opportunistic. So when there's weakness, we'll go ahead with it. It's not programmed. It's not a certain amount per quarter or anything like that.

Okay, thank you. The next question comes from Gregory Miller with Truist Securities. Please go ahead.

Thanks. Good morning, gentlemen. I have a couple questions related to the cruise line private islands. First off, do you anticipate that your revenue generation would be better or worse as these islands increasingly become part of the Caribbean itineraries relative to a Central American or Western Caribbean port of call?

You know, the islands, you know, when we first started to see a lot more of them being developed, some are different to others. Some offer sort of massage treatments, some don't, some will. We continue to work with the cruise lines on exploring the opportunities to develop more real estate on the island to do more services, I think that would be a good addition. I certainly think that they're listening, and hopefully as we move forward with some of the new developments that are happening with two of the cruise lines, we'll be able to, you know, improve the offering on board there. But I think people are smart. So, you know, they know they're going to go to one of the islands for X number of hours a day, and depending who's with them, they will either pre-book in the morning to do something, or they'll do it when they come back from the island. So in and of itself, it's not a net negative, but I think as time goes by and we see more of our services being offered in addition to the water park stuff, I think it will be accretive to us.

Thanks. And just as a brief follow-up, What makes a cruise line determined to add your services after a private island becomes operational?

Can you just repeat that? What makes them what?

So if you have an existing private island that's already in operation, what would make a cruise line make that determination to add OSW services at a later time?

Well, usually it's feedback from passengers. things that they'd like to see on the island. I mean, they do a lot of census on board the ships to see which amenities they liked, which they'd like to see, which they didn't see. And so I think collectively they take all the feedback they can get from us as well as the cruise passengers. And to the extent there's demand, then they move forward.

I appreciate it. Thank you.

Yes, no problem.

The next question comes from Asia Georgieva with NVIDIA Research. Please go ahead.

Good morning, guys. Congratulations on this record quarter and hopefully continued smooth sailings into 2025. Gregory basically asked pretty much my first half of the question. So are the economics on those private islands similar to what you would get on board during a sea day, or would you be competing sort of with your port pricing on board the ship if you're offering the same type of services at a private island?

Generally speaking, they're going to be similar, Asia. To the extent we can't complete the same length of service, obviously it's priced accordingly. But other than that, it's very similar.

Okay, and a second somewhat unrelated question. You mentioned the 22% pre-booked rate, and I think from what we've heard so far from the cruise companies, they're looking at much higher pre-booked onboard, and I understand that the mix is certainly different where they're looking at the Wi-Fi beverage packages. And given the fact that you have new cruise partners, What would you say is the max penetration rate that you have at this point with the more established partners? And do you still see an opportunity for them? Let's say it's 30%. Do you still see an opportunity for that to grow?

Yeah, I think as I mentioned in my call, we have one particular larger banner that's not yet at scale. We continue to work with their shoreside revenue and marketing folks to try and improve that. It's really a function of allocating. Some allocate more resources. Some understand it. Some actually have folks in marketing that own it. I think we have a big and strong focus for 2025 in how to move the needle on the pre-booking because it's a real opportunity because they spend better and they tend to have more or more. The frequency of services is higher. So We go to our quarterly meetings. We demonstrate some of the metrics to them. We show them where there's room for improvement. And it's really up to them then to allocate more resources because, look, it's more money for everybody. So I think there's a strong understanding and they're receptive to it. It just comes down to do they have the resources at the time to allocate, but there is room for improvement overall.

And do you think, and again, I understand that it will probably depend on each marketing team and each management team and whether they're more focused on the services that they provide directly. Do you think that it's possible to move that needle by five percentage points, meaning from 22 to 27 over the course of 12 months or so?

Look, we'd certainly love to see it move above 25. Our target internally is definitely above 25. But the dependency is not on what we're capable of doing because we manage very efficiently the back end of that pre-booking function and the yield management. I think if we can get more of our cruise lines to give more attention to it, particularly because the spend is so much higher, then I think the potential to go above 25 is certainly there for the future.

Perfect. Makes a lot of sense. Thank you, Leonard.

Yep, you're welcome.

The next question comes from Laura Champine with Loop Capital. Please go ahead.

Hi, thanks for taking my question. Sorry if this has already come up, but any progress on getting the cruise lines to share more data so that you can offer more personalized discounts to passengers?

No.

Laura, no. They don't like this. They never have, and I don't think they ever will. They're very protective about the data. I mean, we try different ways to get more granularity on the data we need, but honestly... it's unlikely they're going to share more than they have to.

Understood. So what are the things that move the needle on pre-bookings for you guys? Like what are the tools you can use to drive that number even higher?

So to the extent that, firstly, all the visual, all the navigation tools, the offering, the way in which the website looks when you land on it from the front end of the cruise line. You know, we're working with a lot of different banners to improve that, to improve the imagery, adding videos, showing people things that they just didn't know we offered. All of that capability is certainly things where they can improve the way in which people view our services and get to book them. I think if there are inefficiencies on the booking side of the navigation, we can certainly point those out. But more importantly, it's how they market what can be pre-booked. So if they're marketing meals, if they're marketing show excursions, we would love to see more of a focus around the spa as part of what they're pre-booking and just having them point out, you know, there are certain days where if you don't pre-book, you're not going to get that service. So I think it's really important. collaborating with their marketing folks in a much more meaningful way that will drive a better result out of the pre-booking for us.

Got it. Thank you. Of course.

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

Right. Thanks, everybody, and thank you for joining us today. We look forward to speaking with many of you at the upcoming investor conferences that we'll be attending and when we report our fiscal year results in February. Thanks for joining today. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.