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Celebrity Health:

Celebrity Health: Motley Fool Transcribing

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OneSpaWorld Holdings Ltd (NASDAQ:OSW)

Q3 2019 Earnings Call

Nov 13, 2019, 10:00 a.m. ET

Celebrity Health: Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Celebrity Health: Prepared Remarks:

Operator

Welcome to the OSW Holdings third-quarter 2019 earnings conference call. [Operator instructions] I would now like to turn the conference over to Ms. Jessica Schmidt, ICR. Please go ahead.

Jessica SchmidtICR, Investor Relations

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Thank you. Good morning, and welcome to OneSpaWorld’s third-quarter fiscal 2019 earnings call and webcast. Before we begin, I’d like to remind you that certain statements and information made available on today’s call and webcast may be deemed to constitute forward-looking statements. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business.

Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third-quarter 2019 earnings release, which we 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 in this call.

Explanation of these metrics can be found in the earnings release filed earlier today. Joining me on today’s call are Leonard Fluxman, executive chairman; Glenn Fusfield, chief executive officer and president; and Stephen Lazarus, chief financial officer and chief operating officer. Thank you, and I’ll now turn the call over to Leonard.

Leonard FluxmanExecutive Chairman

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Thank you, Jessica. Good morning, and welcome to OneSpaWorld’s third-quarter fiscal 2019 earnings conference call. As we indicated on our last earnings call, we’ll be providing an update on our capital allocation framework with third-quarter results. We remain confident that our prominent market position in an ever-growing industry positions us for sustained success.

Consistent with our focus on delivering value to shareholders, we are delighted to announce the initiation of our cash dividend program today. The board’s approval of a dividend program to be paid quarterly reflects our strong cash flow generation after investment in our growth initiative. The initial quarterly dividend payment approved is $0.04 per common share, and the indicated annual rate of $0.16 per share represents dividend yield of approximately 1%. The first quarterly dividend is payable on February 28, 2020, to shareholders of record as of the close of business on January 10, 2020.

Furthermore, the board continues to evaluate the various options and advice as it relates to the conversion of the 24 million outstanding warrants. Now turning to a review of our third-quarter period. Our third-quarter performance was highlighted by increases in sales and adjusted EBITDA, growth in adjusted net income and strong after-tax free cash flow conversion. We continue to show our ability to generate strong cash flow with a 92% conversion of adjusted EBITDA to unlevered after-tax free cash flow for the quarter and 93% for the year-to-date period.

We’re pleased to deliver these results even as we endured an unprecedented hurricane and lost revenue days from unexpected ships out of service. Hurricane Dorian was a unique storm, given its duration, slow movement, strength in part that closed ports from Miami all the way up north to Port Canaveral. While we have returned to normal operations, we do expect a small impact to fourth-quarter performance related to the hurricane, which is included in our updated guidance. As many of you are aware, we attended the final presentation for the RFP process for the Celebrity legacy fleet, which includes nine ships, and we believe our presentation was received favorably.

We are encouraged and remain hopeful that a favorable outcome will be determined imminently. Let me touch on some of the highlights from our third quarter. My remarks will focus on adjusted results that exclude the negative impact of Hurricane Dorian and unexpected ships out of service year over year. Total revenues increased 3% to $147 million.

Adjusted net income grew 24% to $9 million, in line with guidance. Adjusted EBITDA was $15.9 million, up 7%, in line with guidance and unlevered after tax-free cash flow increased 7% to $14.6 million. I’d now like to spend a few minutes discussing our progress on our growth strategy. We continue to focus on our core growth strategies, which include securing contracts on new cruise lines and select destination resorts, servicing new vessels under existing cruise line contracts, and thirdly executing programs to increase onboard revenue through new products and services, all of which we have executed during the year-to-date period.

Orders for new ships by client partners remain robust, paving the way for future growth. So far in the fourth quarter, we commenced service on the Sky Princess, the Norwegian Encore and the Carnival Panorama is on track for early December. The Costa Smeralda, which was due to come into service late October, has now been delayed to late December. As mentioned, we are on track with our plans to commence operations as the exclusive health and wellness provider for the Regent Seven Seas and Oceania vessels, consisting of 10 vessels, plus their three new builds.

These agreements underscore our ongoing ability to provide exceptional spa and wellness offerings and further enhance cruise goers guest experiences. In closing, we are confident in the future of our business and pleased to communicate to our shareholders our first ever dividend announcement in such a short period of time of being public. The company continues to make progress on furthering our leading market share and capitalizing on the ongoing momentum in the cruise line travel industry. We continue to expect our strategies to lead to reliable growth and value creation for all our stakeholders for years to come.

The favorable industry tailwinds in combination with our vast infrastructure and operational experience positions us well to reach these goals. In fact, the global crew sector is expected to continue its strong sustained growth, with cruise capacity projected to increase at a CAGR of 8% from 2018 through 2022, fueled by favorable demographic trends, including the aging of global population, continued health and wellness trends and the worldwide millennial focus on experiences. By way of example, the publicly available global order book for new cruise ship has reached an all-time high. I’ll now turn it over to Glenn to provide details regarding other operational highlights, including an update on our prebooked and dynamic pricing initiatives.

Glenn?

Glenn FusfieldChief Executive Officer and President

We continue to expand our superior service and product offering, giving guests more choice and experiences while making it easier for them to book and prepay. This drives incremental revenue for OneSpaWorld and our cruise line partners. To this end, during the quarter, prebooking is now available on 81% of our total vessels, increasing from 16% at the end of Q2. Prepayment is offered on 64% of our total vessels, increasing from 51% at the end of Q2.

And dynamic pricing is utilized on 57% of our vessels, up from 32% at the end of Q2. Our plan is to roll out these initiatives to the majority of the fleet, as appropriate. As you know, 2020 marks an unprecedented amount of new ships for OneSpaWorld. And as you would expect, our resources are intently focused on staffing and training ahead of this activity.

With that, I will now turn the call over to Stephen, who will provide additional information on our third-quarter financials and guidance.

Stephen LazarusChief Financial Officer and Chief Operating Officer

Thank you, Glenn. Good morning, ladies and gentlemen. I’ll begin with a review of the third quarter and then share our stated guidance. Total revenue for the quarter were $145 million, a 2% increase compared to the third quarter last year.

Hurricane Dorian and unexpected ships that were out of service negatively impacted revenue in the quarter by approximately $2 million. Excluding this negative impact, revenue increased 3%. The increase from last year was primarily driven by three incremental net new shipboard health and wellness centers added to the fleet of cruise line partners, a continued trend toward larger and enhanced shipboard health and wellness centers and increasing collaboration with cruise line partners. This was partially offset by the aforementioned negative impact of the hurricane and expected ships out of service.

The split of revenue growth between service and product revenue was as follows. Service revenue increased 2% to $111 million, while product revenues were essentially flat at $34 million compared to the third quarter of fiscal 2018. Average weekly revenue per ship was $63,473, up 1% from $62,787 in the third quarter last year. Average revenue per ship port dock per day was down 1% year over year to $493.

Excluding the impact of three large vessels with significant year-over-year itinerary changes, dock productivity would have been unchanged. Average weekly revenue per land-based resort decreased 25%, as expected, due to the larger number of managed spas in our mix during the quarter, which generate less revenue per facility coupled with the negative impact of Hurricane Dorian, specifically as it related to our destination resort, health and wellness centers in the Bahamas and Florida. Cost of service increased $1.9 million or 2% compared to the third quarter of fiscal 2018, and this increase was primarily attributable to the increase in service revenue. Cost of product increased $300,000 or 1% compared to the third quarter of fiscal 2018.

The decrease was primarily attributable to lower product revenue partially offset by the noncash impact of purchase price accounting adjustments related to inventory fair value adjustments in connection with the business combination. Administrative expense increased $3 million to $5.4 million compared to the third quarter of fiscal 2018, driven primarily by expenses incurred in support of our operations as a new publicly traded company and an increase in depreciation expense due to the noncash impact of purchase price adjustments related to the fair value adjustment to property and equipment in connection with the business combination. Salary and payroll taxes decreased $1.1 million to $3 million compared to the third quarter of fiscal 2018 as lower incentive compensation expense was partially offset by increased headcount necessitated by being a new publicly traded company. Adjusted net income increased 17% to $8.5 million, and adjusted EBITDA was $15.4 million in the third quarter, up 3% from the third quarter of fiscal 2018.

Excluding Hurricane Dorian and unexpected ships out of service, adjusted net income and adjusted EBITDA would have increased 24% and 7%, respectively. Adjusted net income per diluted share totaled $0.11 on 75 million diluted shares or $0.13 per diluted share, excluding a $0.01 per diluted share negative impact of Hurricane Dorian and unexpected ships out of service and a $0.01 per diluted share impact due to the increase in the diluted share count versus guidance. Cash at September 30 totaled $16 million, and total debt net of deferred financing cost at the end of the quarter was $226 million. In the fourth quarter, we anticipate reducing debt by approximately $10 million.

Unlevered after-tax free cash flow for the third quarter of fiscal 2019 was $14.1 million. Moving on to our guidance. We are updating our full-year guidance to reflect our sales and net income performance year to date, an increase in the diluted share count, as well as our current expectations for the fourth quarter. We’re also introducing our fourth-quarter guidance as follows.

We expect revenue in a range of $137 million to $142 million. Adjusted EBITDA is expected between $12 million and $14 million. Adjusted net income is expected between $6 million and $8 million or between $0.08 and $0.11 per diluted share based on 75 million shares diluted and outstanding as of September 30, 2019. Capex is expected in the range of $1 million to $1.4 million.

Our forecast assumes 170 ships at the end of the period, with an average ship count of 164 for the quarter. Average ship count reflects the ships that are expected to be in and out of service during the quarter. It also assumes 68 resorts for us at the end of the quarter, with an average resort count of 69. For fiscal 2019, we expect revenue between $560 million and $565 million.

We expect adjusted EBITDA between $58 million and $60 million, and this compares to 2018 adjusted EBITDA of $58.6 million or $55.8 million, including comparable public company costs. Adjusted net income between $33 million and $34 million is our forecast, which is consistent with the adjusted net income guidance that we provided on our very first Q1 earnings call, which was our first guidance as a public company. Adjusted net income per share is expected between $0.44 and $0.47 per diluted share, based on 73.4 million diluted shares outstanding on a year-to-date basis as of September 30, 2019. For the full year, we expect capex to be between $3.4 million and $3.8 million.

Our forecast assumes 170 ships and 68 resorts at the end of the year, with an average ship count of 161 and an average resort count of 68. And with that, we’ll open the call up for questions. Travis, if you could please open the call.

Celebrity Health: Questions & Answers:

Operator

Thank you, sir. [Operator instructions] Our first question comes from George Kelly with Imperial Capital. Please go ahead, sir.

George KellyImperial Capital — Analyst

Hi, guys. Thanks for taking my questions. So first, just if you could go back to guidance, I’m curious about your full-year guidance and it sounds like the impact from the storms is about $2.5 million and full-year revenue guidance came down somewhere around $10 million, so just wondering if you could bridge that — the difference.

Stephen LazarusChief Financial Officer and Chief Operating Officer

Yeah. Good morning, George. So obviously, from a full-year perspective, the guidance takes into account the actual performance in Q3, which is lower than was implied previously. It also takes into account the second delay, unfortunately, in the delivery of the Costa Smeralda, which is unprecedented and typically ships are always delivered on time, but as you know, this is a unique vessel in that it’s going to be LPG powered, and so hopefully that will come out on time as well.

There is also some lingering effect on our resorts in the Bahamas where we’re seeing some lower occupancy and a little bit lower-than-expected performance. And then finally, there is a slight decline, and we’re taking account of that with regards to some Mediterranean itineraries that are sailing, and that is reflected in our guidance as well.

George KellyImperial Capital — Analyst

OK. OK. That’s helpful. Then next question for me, just about the dividend and free cash.

So your dividend still allows for a lot of flexibility, so what are your priorities with the additional — with all the free cash that’s left?

Stephen LazarusChief Financial Officer and Chief Operating Officer

Yeah. So the priority still remains, obviously, the deleveraging with our expectation that we will continue to deleverage and bring down the debt that the company currently has while at the same time paying the dividend and also investing in any other growth initiatives, etc., that we see. But as it relates to debt, we would anticipate by the end of ’21 getting down to $175 million or less and then down to $140 million by the end of ’22 or less. So I think it’s a fair combination of returning cash to shareholders while at the same time continuing to deleverage at a fairly rapid rate and having cash available to invest as appropriate in any growth initiatives.

George KellyImperial Capital — Analyst

OK. And then last question for me, just about CBD. Can you give us an update where you are with that testing?

Glenn FusfieldChief Executive Officer and President

George, this is Glenn. Working and forging forward heavily, we will start U.S.-based with our resorts in e-commerce before maritime. At this point, it looks like it’ll be Q1 of 2020, still overcoming all of the regulatory hurdles and the federal agencies that want to step in as it pertains to the maritime industry. So the product is developed.

Packaging is done. Marketing is ready. We’re just dealing with all the regulatory issues. But 2020 will be the year for CBD.

Leonard FluxmanExecutive Chairman

Hey, George, just going back to your last question on cap structure, we still have — we spoke — I spoke a little bit about that we are studying the warrant situation and the way we’re going to move. At our last board meeting, we did a very, very deep dive, long conversation, a lot of advice, given a lot of optionality there. I think we’re very, very close to making a decision. We haven’t as yet finalized exactly which parts we’re going to take, but I would say we’re much closer than we were on our last quarter when we spoke to you.

George KellyImperial Capital — Analyst

OK. Thank you.

Operator

Our next question is from Sharon Zackfia with William Blair. Please go ahead.

Sharon ZackfiaWilliam Blair — Analyst

Hi. Good morning. I’m afraid, I missed part of the answer to the last question. I think you said something about the Mediterranean in the fourth-quarter outlook.

Could you just clarify what that impact is?

Stephen LazarusChief Financial Officer and Chief Operating Officer

Yes. So Sharon, good morning, it’s Stephen. We have seen a little bit of softness with certain brands failing in the Mediterranean as it relates to spend on board, particularly as it relates to product sales. And we don’t necessarily know whether that will continue or not, but taking some of that into account in our guidance.

So that’s specifically what I was referring to.

Sharon ZackfiaWilliam Blair — Analyst

OK. That’s helpful. And then one of the things that kind of stood out for me just in the quarter other than, obviously, Hurricane Dorian was salary and payroll declined in dollars sequentially. Is that something seasonally in your business or was there sort of one-off offset there that would have brought down that number from the second quarter?

Stephen LazarusChief Financial Officer and Chief Operating Officer

Yeah. It’s a one-off. It is a one-off offset. It’s basically a certain incentive compensation was lowered because of not reaching targets.

Sharon ZackfiaWilliam Blair — Analyst

OK. So that’s something we should expect to hopefully rebound then in the third — in the fourth quarter?

Stephen LazarusChief Financial Officer and Chief Operating Officer

We all hope so.

Sharon ZackfiaWilliam Blair — Analyst

Perfect. And then my last question is really on Celebrity. So can you give us an idea, I mean, obviously, it would be a big win in terms of number of ships and what you would need to do to mobilize. So what’s the latest, if you get a decision and actually take over the ships? And then kind of a corollary was with Prestige.

I don’t know if I know how integrated you’ll be when you take over Prestige, like, will you be — where will you be on prebooking and prepayment and dynamic pricing, the moment you take over Prestige next year?

Leonard FluxmanExecutive Chairman

So probably, Glenn and I will jump in on both aspects, Sharon. Prestige is — we have a lot more visibility into start dates, which is going to be very late in the fourth quarter, beginning of the first quarter of 2020. To the extent it’s sooner, obviously, we are ready. We have staff ready.

We have systems ready. We have inventory ready and able to be deployed. With respect to prebooking systems, etc., Glenn you’ll have —

Glenn FusfieldChief Executive Officer and President

We are targeting the latter half of 2020 for prebooking and prepayment for those two brands, not Norwegian. So the two smaller brands, the Regent and Oceania, we are targeting for 2020.

Leonard FluxmanExecutive Chairman

And then to your second question, Celebrity, as much as I commented in here, I mean, clearly, a determination on the RFP process has yet to be made. All I can say is, we did everything we were asked to do. Our presentation, we believe, was well-received. We’re still anxiously waiting for the results of that.

So we really have no idea, no visibility. We just know nine ships are up for grabs, but we don’t know when those ships will become available, should we win the contest.

Sharon ZackfiaWilliam Blair — Analyst

OK. Thank you.

Operator

Our next question is from Harry Curtis with Instinet. Please go ahead.

Harry CurtisNomura Instinet — Analyst

Good morning, everybody. Can you comment on kind of same-store revenue growth in the third quarter? It looks to me like it was up roughly 1%. And specifically, if you could address what you think pricing power looks like going forward, given that most of the revenue growth is really coming from new units, maybe talk about mix in higher versus lower-priced services, that kind of thing.

Glenn FusfieldChief Executive Officer and President

Sure, Harry. On the same-store, we certainly were stable and stable to flat on the same-store sales. Again, tough comparable, measuring the holes and all of the changes that take place year over year, quarter over quarter and itineraries shift and changing voyage variable. The outboard initiative and programs that we have in place to drive the higher average ticket in guest spend, we are focusing on our key platforms of dynamic pricing, which is moving very well.

We’ve taken our reported claim revenues on a CAGR basis, almost 8% now over the recent years, which is really a derivative of our dynamic pricing implementation. Our mid-spa is going very well, we’re now just under 100 vessels. So we’re doing very well there with an average guest spend over $1,100 within that program. So we continue to remain focused on those key initiatives.

Of course, we have quarter-over-quarter, month-over-month programs that we implement to drive traffic into our facilities, brand by brand. We collaborate with the cruise lines on pricing on extra promotions and any sort of communication we can precruise to the best of our ability. We want to be able to roll out the dynamic pricing and prepayments as quickly as we can as key platforms. We are at the mercy of our cruise partners.

So we work collaboratively with them to do this as expeditiously as possible. The platform is ready to go. It’s almost plug and play for us. But again, it takes development from both sides.

Harry CurtisNomura Instinet — Analyst

Very good. And I had two quick housekeeping questions. The first is the lift in administrative expense, do you expect the level in the third quarter to represent what it should stabilize that going forward? And the business combination expenses, when would you expect to see those in their final form?

Glenn FusfieldChief Executive Officer and President

So quite frankly, I would have thought we would have gotten much closer than we already, Harry. We received very late, quite frankly, from some of our service providers in the legal and accounting fields billings related to the business combination that, obviously, where Stephen paid in the third quarter, and hence, you see that number tick up. There’s likely a little bit that’s pulling us into the fourth quarter. And obviously, I would expect it to be none going forward, except for if there are any types of securities that we have been participating with shareholders, but I wouldn’t expect a lot going forward.

Harry CurtisNomura Instinet — Analyst

I see. Very good. OK, that does it for me. Thanks very much.

Operator

[Operator instructions] Our next question comes from Steph Wissink with Jefferies. Please go ahead.

Steph WissinkJefferies — Analyst

Thanks. Most of our questions have been asked, but one thing I didn’t catch was on the prepayment and the dynamic pricing figures. I think, Glenn, you went through those pretty quickly. Can you just give us those numbers one more time and then thematically talk about some of the gains, it looks like some pretty sizable gain versus where you were previously, what you’re seeing from those two initiatives?

Glenn FusfieldChief Executive Officer and President

Certainly. So just to give you the statistics again, Steph, so we are now, as of the end of Q3, 81% of our vessels prebooked. Prepayment, 64% of our vessels, which is up from 51% last quarter. And 57% of our vessels are on dynamic pricing strategies, which is up from 32%.

And the latter half of the second question was?

Steph WissinkJefferies — Analyst

Systematically, how should we think about?

Glenn FusfieldChief Executive Officer and President

Oh, so we added Princess Cruise lines and Carnival Australia, were with the two brands that we added. So that was over 20 vessels in Q2 — in Q3, I’m sorry.

Steph WissinkJefferies — Analyst

And as you look ahead, what’s the optimal penetration, particularly on the dynamic pricing and kind of the overall —

Glenn FusfieldChief Executive Officer and President

100% optimal is as much as possible. So clearly, we want the large players with the ability to communicate will communicate the messaging to our guests and the large banners are the questions of that strategy. We are also creating widgets in an effort to help some of the smaller brands that don’t have the infrastructure to use this platform from a user experience. So we are trying to create a widget that they can use as a temporary, let’s just call, front-end platform on their behalf if they don’t have the financial resources or don’t have resources to get it implemented and developed.

So we’re working on their behalf to do that as well. So we’re trying every angle because this is how important it is and how much we believe in the strategy.

Steph WissinkJefferies — Analyst

And just one final follow-up on that. Should we see the benefits of those strategies in utilization in average ticket? What are the measures from a dashboard perspective that you’re looking at in terms of validating?

Glenn FusfieldChief Executive Officer and President

Right. So clearly, the prebook prepaid guest spends, on average, 30% more than that of a walk-in guest. Now having said that, about 18 to — on average, 18% of our service revenue is prebooked. And it goes as high as 25%, depending on the banner.

So there is tremendous opportunity there. We need to communicate the message. Of course, not every guest goes online and prebooks and plans their itinerary and vacation well ahead of time, but that number is growing whether we want to say year over year, quarter over quarter, but the statistics are improving, and certain brands just have a better method of communicating the message to their guests. But in time, you will see more and more guests preplanning their vacations accordingly.

Leonard FluxmanExecutive Chairman

Yeah. And I mean, Steph, just to reiterate, I mean, while there was a big ramp, these things take a little time. A lot of the ramp was toward the back end of the quarter. So effectively, we do not see what Glenn is talking about, which would be the size and success of these initiatives.

But as we continue to roll more of these initiatives out, we’re expecting to see obviously different brands respond differently, different groups to work with us differently. And the way we get it out to the passengers, precruise is obviously the most important part about getting high utilization of spend.

Steph WissinkJefferies — Analyst

OK. Thank you. Very helpful.

Operator

Our next question comes from Steve Wieczynski with Stifel. Please go Ahead.

Steve WieczynskiStifel Financial Corp. — Analyst

Yeah. Hey, good morning, guys. If I go back to George’s, I think it was his first question, I’m still a little bit confused in terms of the difference in guidance on the revenue side versus where it was three months ago versus where it is today. I mean, that $10 million difference, obviously, you called out $2.5 million for weather.

And I guess, what I’m confused around is, it just doesn’t seem like one cost to ship and then maybe some weakness in product sales in the Med would kind of caused that remaining $7.5 million difference. So I guess, the question is, are you being a little bit more conservative around onboard expectations in the fourth quarter and maybe that is because of the booking window tightening up a little bit because of weather?

Leonard FluxmanExecutive Chairman

No. Look, I think part of that’s correct, Steve. I think you’ve also got to account for the fact that seasonally the third quarter is typically a stronger quarter to the extent that requantifying the impact of Dorian in those numbers I think it probably could have been a little more than just the impact that we spoke about, $2.5 million. I think overall we typica

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