Lindblad Expeditions Holdings, Inc. (LIND) Q1 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Lindblad Expeditions First Quarter 2019 Financial Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would like to the conference over to Craig Felenstein, Chief Financial Officer. Please go ahead

Thank you, operator. Good morning, everyone, and thank you for joining us for Lindblad’s first quarter 2019 earnings call. With me on the call today is Sven Lindblad, our Founder and Chief Executive Officer. Sven will begin with some opening comments and then I will follow with some details on our first quarter results before we open the call for Q&A. You can find our latest earnings release in the Investor Relations section of our website. Before we get started, let me remind everyone that the company’s comments today may include forward-looking statements. Those expectations are subject to risks and uncertainties that may cause actual results and performance to be materially different from these expectations. The company cannot guarantee the accuracy of any forecast or estimates, and we undertake no obligation to update any such forward-looking statements. If you would like more information on the risks involved in forward-looking statements, please see the company’s SEC filings. In addition, our comments may reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures and other associated disclosures are contained in the company’s earnings release. And with that out of the way, let me turn the call over to Sven.

Thanks, Craig, and thanks to all of you who have made time to join us today. 2019 is off to a strong start for Lindblad, building off the sustained momentum, we have generated over the last 1.5 years. Our strategic investments throughout the past several years, along with a proven track record for delivering authentic, high-quality expeditions and growing demand for expedition travel, are bearing fruit, and we are extremely well positioned to deliver continued growth in both the short and long term. I would like to take a few minutes this morning to discuss some of the key components to our first quarter results while also highlighting some of the initiatives that will help build on this momentum moving forward. The biggest driver this past quarter was the addition of our second new-build, the National Geographic Venture. The interest from our guests was certainly high and it was important for us see to how she should adapt in Baja California as a 100-guest ship in a geography that we have served with 60-guest ships for decades. So certainly, there was a bit of fine-tuning needed in the 3 different itineraries we conducted, but both we and our guests were delighted with the amazing experience she provided in this remarkable geography. At the same time, her sister ship, the National Geographic Quest had a second successful season in Costa Rica, Panama and Belize, as we diversified the offerings on our new vessels ahead of the Alaska season. With the addition of this new capacity, we have been diligent in looking to develop diversified itineraries for our existing inventory. This past quarter, we experimented with a short, focused, 5-night program on the National Geographic Sea Bird in Magdalena Bay, a wildlife-rich region in Baja California. This new idea turned out to be incredibly popular despite being offered with very little lead time. This program, along with 10 others, which we refer to as wild escapes, is building out our concept of short itineraries primarily for our smaller ships, most notably the National Geographic Sea Lion and Sea Bird, with the goal of bringing in new somewhat younger guests who may not have so much time at this stage in their lives. This also allows us to provide some clear differentiation between this class of vessel and our new coastal U.S. vessels. We are extremely delighted by the reception of these short programs and believe they’re a key component to our success and growth in the future. As we diversify our offerings in terms of itinerary lengths and configurations, we also have teams engaged in deep research as to new geographies which we wish to add to the mix. Unfortunately, I will wait as to specifics, probably best not to alert competitors any earlier than necessary. It’s clear, though, that as we grow finding new geography is a key component to any successful plan. Overall, we are off to a great start with our expanding fleet. Occupancies this past quarter once again were over 90% despite the additional inventory, and we are excited about the opportunities our increased capacity provides. Revenues in Q1 were up 9%, led by the increased inventory and occupancy strength, while EBITDA came in as planned, similar to Q1 a year ago, as several building blocks of growth were expanded in the period. Craig will, of course, go into further detail on our financial performance in a few minutes, but we are already seeing positive signs in terms of lead generation in bookings for future travels from our increased marketing investments as we execute our media plan and begin the rollout of our new brand campaign. Additionally, in Q1, we began work in earnest on a series of 4 technology projects that we believe will provide us with a platform to both sustain and accelerate our growth plans as well as continue to deliver an industry-leading guest experience. These programs which include the launch of a new reservation system, a new CRM and marketing cloud solution and a new website, will begin rolling out later this year and into early 2020. We will gain myriad of new capabilities as part of this effort, including a full online booking capacity, live inventory, a fully integrated dynamic pricing platform and the ability to price in multiple currencies. Robust and cross and up-sell capabilities that can be delivered both digitally and over the phone and the ability to ensure our guests and travel partners have an even more seamless experience across their journey via our CRM implementation. As we invest for the future, we continue to see growing demand from new and returning guests for our diverse set of vessels and itineraries. Current reservation trends remain very strong, with Lindblad generating record bookings during the first quarter of 2019. It was the highest-generating booking quarter in our history, and we are seeing demand strength for travel in both 2019 and beyond. Bookings for expeditions in 2019 are up double digits versus bookings for 2018 at the same point a year ago and pacing for 2020 is nearly 50% ahead of 2019 at the same time last year driven in part by the introduction of the National Geographic Endurance while not diminishing the pacing on the other ships. Speaking of the Endurance, her hull and superstructure were assembled in Poland this past quarter, and she was delivered to Norway late last month, where she will be completed for a launch in 2020. The Endurance has been designed as the ultimate expedition platform with a focus on the guest experience, safety and comfort, and we couldn’t be more excited about the remarkable experiences she will provide to our guests for years to come. Given the sustained booking strength across our fleet and for the Endurance, in particular, we announced last quarter that we will be building a sister ship to the Endurance, which will be the fourth ice class ship in the Linblad-National Geographic fleet. Steel cutting begins this month and we anticipate delivery in Q3 of 2021. As we add capacity and look for ways to further expand our fleet, we also continue to explore a variety of M&A opportunities. We are very diligent in our evaluation given the opportunity for organic growth, but also because we have the blueprint for a successful acquisition and integration with Natural Habitat. All of the features that made this acquisition so successful, well-run, limited distraction, cross-marketing opportunities, a diverse and loyal audience, continue to bear fruit, and we expect another year of strong growth from Natural Habitat in 2019. Before I finish up, I do want to touch upon one other topic. Since we spoke several months ago, so much has changed in the world in a multitude of fronts. One area of particular note as it relates to our world is an ever increasing acknowledgment, that climate change is real and needs to be urgently confronted; that the environment more broadly has been under considerable assault, which too needs to be urgently confronted; that plastic in our oceans has reached alarming levels and this too, needs to be urgently confronted. We are seeing an ever-increasing sense of urgency on the part of people, who want to see the world’s wild places. At the same time, they want to learn more about what they can do. They want to be with companies that they believe take these issues seriously and are addressing them positively. We do not use any single use plastics. We work very hard to source sustainable fish, we pressure suppliers to mitigate waste in packaging, and we together with our guests invest nearly $2 million a year in conservation, education and science via the Lindblad-National Geographic Fund. We have two very significant initiatives, which will vastly broaden our commitment to these issues. However, we are not quite ready to announce them, but we will do so on Oceans Day, June 8. There is such synergy between our guests, our enterprise, and the places we visit. There always has been, but now there is simply greater urgency, and all parties benefit in accelerated innovation to create greater balance between humans and the natural world. The acceleration of innovation is a powerful driver behind all we do, which I believe provides a tonic of purpose, an elixir for our guests, our personnel and for the places we explore, and it is a key and essential ingredient to propel this enterprise to ever high – ever higher long-term value. And now, if I may please turn this back to Craig and again many thanks for joining us this morning.

Thanks, Sven. Lindblad strong first quarter once again highlights our ability to deliver sustained financial results as we further invest in additional capacity, upgrade our infrastructure and expand our sales and marketing capabilities. With the addition of our 2 U.S. coastal vessels, we have expanded our available guest nights by over 20% from pre-expansion levels and despite the added inventory we continue to generate high yields and occupancies. Our proven track record of delivering authentic and high-quality experiences, along with a strong booking environment, will allow us to grow significantly in 2019 even as we invest to further capitalize on the long-term opportunity given the growing demand for adventure travel. Turning to the first quarter of 2019, total company revenue increased 9% versus the first quarter a year ago, led by 8% growth at the Lindblad segment and 14% growth at Natural Habitat, while adjusted EBITDA was down 1% as the revenue increase was offset by the planned timing of marketing and personnel spend to drive long-term growth initiatives. Looking at the individual segments, the Lindblad segment generated revenues of $76 million as compared with $70.5 million during the first quarter of 2018. The 8% year-on-year growth was primarily driven by a 9% increase in available guest nights, mostly from the launch of the National Geographic Venture in December 2018, and a slight increase in occupancy to 91%. Net yield remained very strong in the quarter at $1,099 per night, and while it was down 2% versus the first quarter a year ago, that was predominantly a result of price increases being more than offset by itinerary changes in the current quarter. We still expect to increase net yield for the full year of 2019. Turning to the cost side of the business, Lindblad segment operating expenses increased 9% on a reported basis, primarily driven by a 9% increase in cost of tours, led by the addition of the National Geographic Venture to the fleet. Fuel costs in the quarter were 27% above prior year, due in large part to the fleet expansion and higher prices. Fuel was 3.5% of revenue as compared to 3% of revenue in the first quarter of 2018. Sales and marketing costs increased 12% versus a year ago, due to higher commission expense associated with the revenue growth as well as from the investments we discussed in our year-end call, including costs associated with the rollout of our new CRM and reservation systems and increased marketing spend as we look to further capitalize on our increasing capacity and the growing demand for expedition travel. The first quarter of 2019 also included $1.1 million of increased depreciation and amortization, mostly related to the addition of the National Geographic Venture to the fleet, while the first quarter of 2018 included $1 million of expense related to refinancing our credit facility a year ago. Excluding stock-based compensation, depreciation and amortization and refinancing and reorganization costs, Lindblad segment operating expenses increased 11% versus the first quarter a year ago, including 15% growth in G&A expense due to higher personnel and credit card costs. Overall, adjusted net cruise costs on a per night basis of $743, was in line with the first quarter a year ago. Adjusted EBITDA at the Lindblad segment of $20.9 million was in line with the year ago as well as the revenue growth was offset by the timing of investments for future growth initiatives. At the Natural Habitat segment, revenues grew 14% to $13.6 million due to additional departures and higher pricing. Adjusted EBITDA of $1.1 million decreased $0.2 million versus the first quarter a year ago, as the revenue growth was offset by a 17% increase in operating expenses due to costs associated with the additional departures as well as the timing of marketing and personnel spend to drive future growth. Total company net income available to common stockholders in the quarter was $14.7 million or $0.31 per diluted share versus $10.8 million or $0.24 per diluted share reported in the first quarter a year ago, primarily due to a $3.1 million tax benefit in the current year and a $1.1 million swing in foreign currency gains in the current quarter. Turning to our balance sheet, we remain extremely well positioned to invest in future growth opportunities. We ended the quarter with $70 million in unrestricted cash, free cash flow for the quarter was a use of $20 million, primarily reflecting $32 million spent on the newbuilds. Including only maintenance CapEx, free cash flow was $12 million in the first quarter, an increase of $3 million from the same period a year ago. Following the quarter, we further expanded our financial flexibility by securing an additional export credit agreement with regard to our second Norwegian blue water build. This loan is available at our option when installment payments are due and will bear either a fixed interest rate of 6.36% or a floating rate equal to LIBOR plus a margin of 3%. The next installment payment of approximately $30 million is anticipated to be paid on this new vessel in September of this year. Turning to our full year expectations for 2019, we continue to anticipate significant growth driven by capacity expansion as well as increased net yields. The Lindblad segment is currently pacing 11% ahead of the same point a year ago with regards to bookings, and we are already at 94% of our full year projected ticket revenues for 2019, despite the additional inventory, as compared with 95% of the 2018 full year ticket revenue at the same time a year ago. Given the current operating environment and the sustained booking trends, we continue to expect total company tour revenue in 2019 between $350 million and $358 million, 13% to 16% growth over versus 2018 and adjusted EBITDA between $67 million and $70 million or 22% to 28% growth versus 2018. Thank you for your time this morning. And now, Sven and I would be happy to answer any questions you might have. Operator?

[Operator Instructions] The first question comes from Greg Badishkanian with Citi.

It’s actually Fred Wightman on for Greg. I apologize, Craig, if I missed this, but did you call out the specific EBITDA impact either from marketing initiatives or the headcount investments in the quarter?

We had not given specific guidance for the additional marketing spend in the quarter. We have talked about the full year. When you look at the IT projects that we have in the current year as well as some of the additional costs related to the Endurance this year, which won’t launch until 2020, the impact of those 2 things combined will be somewhere in that $3 million to $4 million range. The increased marketing spend we have not specifically highlighted. That said, when you look at the marketing spend in the current year, this is not something that’s going to recur itself every single year in terms of the magnitude of the increase. We do expect this year to be a step function, partially due to what we’re seeing in the marketplace in terms of the noise out there around expedition travel and partially because we’re adding new capacity. And when you do those things, you want to take advantage of the opportunity, and we think this is the right time to spend that investment. The return on that investment will really start to take fruit at kind of the tail end of 2019, but certainly significantly in 2020.

Okay. That makes sense. Could you just give a little bit of color on the Alaska market specifically? I know your capacity’s up pretty significantly there this year. But just any other color you could add would be helpful?

Well, the Sven here. One thing is clear is, is that the Alaska market is still incredibly strong, for us at least. I’m not very, very cognizant of how it’s going for the big cruise lines specifically, but our occupancies are as high as they’ve ever been, probably a bit higher, and we’re taking way more people as a consequence of now having 4 ships. It’s the first summer we’re going to have 4 ships in Alaska, so basically 320 beds, which is, obviously, a significant increase. And the bookings for 2020 are looking very, very strong. So, I see no dilution of that market at all.

Okay, great. And then just finally, could you talk about any expected changes from the National Geographic relationship after the Disney deal?

Well, the only thing I can tell you at this juncture is that I would anticipate that good things will happen as a consequence of it because, obviously, Disney’s reach and Disney’s ability as it relates to business to consumer are massive and way, way greater than they were with Fox, obviously. And so as far as I’m concerned, I see nothing, but benefit. Of course, it will take a while for Disney, I would imagine to assimilate this part of the whole transaction and decide how they want to move forward and engage with it. But I see nothing but positive opportunities.

Thank you so much.

The next question comes from Steve Wieczynski of Stifel. Please go ahead.

Hi guys. Good morning. So, Craig or Sven, I guess if we look at your EBITDA guidance for the year, it remains unchanged. If we back out the $22 million you did in the first quarter, that’s essentially saying you guys are expecting some pretty significant growth. I mean, I think, it’s kind of low-40s growth over the last 3 quarters. So, I guess, the question is, at this point, what gives you so much confidence in that growth? And look, I understand the increase in the capacity days. But I guess, what I am getting at here is with the increased spend on the marketing side and some other initiatives you are doing that EBITDA growth still seems does that still seem pretty realistic? That makes sense.

Sure. So, we look at the course of the year for us, the real power or the full power, I should say, of adding this additional inventory really is yet to come. When you look at the first quarter, yes, we launched the Venture, but we did pull back a little bit with some of our older inventory. Sven did mention that we did do some experimenting on the Sea Bird, but we did pull back a little bit on the Sea Bird and the Sea Lion in the first quarter. But we always expected the full power of that additional inventory to be there, really in the second and third quarters and a little bit into the fourth quarter. So that’s the first thing. The second thing that we’re really seeing is when you look out to the remainder of the years, yes, we booked so much of our inventory already for this year that we feel really comfortable about where the year is going to play itself out because of that inventory and, frankly, because of the pricing that we expect to see moving forward because the yields are going to grow throughout the year as well. The last thing I would say is, the timing of the marketing spend is going to vary throughout the course of the year. Each quarter, the increase is going to be different, but when you look at the plan that we have for the year, the plan in the first quarter was always anticipated. The growth that we see in the second and third quarter is going to come in as anticipated, it looks like. And now, it’s really just about finalizing some of the additional inventory that we have about there in Q4, which we feel very comfortable with given the historical operating trends.

Okay, guys. And then I don’t know if this question is going to make sense. But if you look at your yields in the first quarter, they were down slightly. Is there any way to help us think about what those yields would have looked like without the itinerary shifts? I don’t know if that makes sense.

Yes, they certainly would have been up. We haven’t guided to individual quarters from a yield perspective, because so many things can affect that in any given moment. But when you look at the first quarter, the primary driver of the yields being lower than they were a year ago, is some of the experimentation which we did on the Sea Bird in the first quarter. When you’re doing some experimenting a, stuff tends to go on sale a little bit later; b, it tends to price at a little bit more advantageous to see what kind of traction you can get and that certainly had an impact in the quarter. If you took that out of the equation, just that one item, you would have been up year-on-year. So, we feel pretty good about where the yields are. The demand for existing inventory has been really, really strong. The demand for the new inventory, which certainly has a higher price point in some instances, has been really strong, and that’s not just true for the first quarter, but we look out to the full year of 2019 and, frankly, into 2020. So, we feel really good about where the yields are headed right now.

Okay, got it. And last question just a quick housekeeping question. Craig, any changes with the available guest nights in terms of the way we should be thinking about those over the last 3 quarters of the year?

Sure. So, when you look at the next few quarters, I can give you some direction with regards to the available guest nights. We haven’t seen any change in our expectations. We do expect the second quarter to be very similar from an increase perspective to the first quarter. We will see a probably a step-up a little bit on that growth in Q3. And then in Q4, it will come down as we start to lap a little bit of the Venture launch from a year ago. And then certainly, when you look out to 2020, you get the launch of the Endurance in April of 2020. So that will certainly increase the overall capacity in 2020. So that’s really how it should play out for the remainder of this year and looking into next.

So, it’s still full year kind of that upper single-digit range?

Correct.

Okay thanks guys appreciate it.

Thanks Steve.

The next question comes from Greg Pendy of Sidoti. Please go ahead.

Hi, guys. Thanks for taking my questions. Just I guess you mentioned, you don’t give the quarterly guidance on the yield and I understand that. But is most of the catch-up, is it fair to say that the itinerary is going to be more favorable in 3Q this year? I think last year, you had some itineraries, I think they were in Europe, that you’re not going to be doing this year?

Yes. We do expect there to be yield expansion for the remainder of the year. The quarter that you mentioned will probably have the largest increase, which would be the third quarter, but it’s less a byproduct of Europe than it is of the South Pacific a year ago. And Sven and I talked about that a year ago that the South Pacific yields were lower than some of the other yields that we had traditionally. And as a result, we have less inventory this year and the yields that we’re getting on the Orion this year for some of the other voyages are certainly significantly higher than what was in the South Pacific in 2018. So, I would expect the largest increase to be in Q3, but we do expect for the full-year to have net yield expansion overall.

Okay, great. And then just one more, I guess, on the step-up in the marketing. Can you just kind of give us – you mentioned a brand campaign. Right now, I guess, you’re kind of operating under 3 different names. Are you looking to really kind of maintain I guess, Natural Habitat as its own name? Are you looking to kind of brand everything into the Lindblad name? Can you just kind of give us a big picture strategy?

Yes. So, we are not going to take Natural Habitat and offer it under our – under the Lindblad brand, because Natural Habitat does have a strong brand. It has strong loyalty. It has a very, very strong community of repeat travelers. And so we see no value in subsuming that brand, if you will. Our own brand development is really around really understanding the key ingredients that matter to guests. We do this periodically. It just helps hone our voice, if you will. It – and that then translates through everything, our advertising, how we approach messaging and direct mail, how we approach the web development, et cetera, et cetera. And as we were migrating into a total new, should we say, reconfiguring of the web or redevelopment of the web, we wanted to make sure we had our ducks in order and did some research in the context of current times, because what people care about and what matters to them changes. So, it’s really more honing of our messaging that’s at play and we do that every few years, because you just want to keep that up to-date and keep that modern.

Okay, that’s helpful. Thanks a lot.

Thank you.

The next question comes from George Kelly with Imperial Capital. Please go ahead. George Kelly, your line –

George Kelly?

Can you guys hear me?

Yes.

Yes.

I can now.

Okay, thanks.

Hi, George.

So, few questions for you. First, on the technology side, you talked about the updates coming out this year. Can you remind us the timing of the biggest features and just when they’re going to start to roll through? And then when should we benefit from those technology enhancements? Are you baking anything into your 2019 guidance or is it more of a kind of 3-year type story there?

Sure. So, we are rolling out certain functions with regards to the new systems really over the next few months, but that’s – those are going to be predominantly behind the scenes, either they’re going to help us with our marketing and some of our customer journey tracking will certainly happen behind the scenes. The bulk of the forward-facing elements of the IT transformation will take place in Q3 and Q4 of this year. Some, such as certain features of the website will take place even in the first quarter of next year. When you look at the benefits of, I would say, this rollout, the vast majority of it will not be in 2019. Actually, in 2019 to be frank, these investments will be negative just because the outflow of both cash on a capital perspective, as well as an operating expense perspective will outweigh the positive benefits, but that will certainly reverse itself in force in 2020. And you will see the majority of the benefit start really in the first half of 2020, but really kick in, in the second half of 2020 and into 2021.

Okay, got it. And then next on the bookings strength that you commented on record quarter, I think you said for the – just level of bookings. What – is there anything you can isolate that drove that? Was it any specific geography or anything, and did you see that strength continue after the end of the quarter?

Yes. The booking curve, I would say, it’s hard to pinpoint one item specifically for 2019. For 2020, certainly, a significant piece of that increase is the new demand for the Endurance while as Sven mentioned, maintaining the demand across the remainder of the fleet. So, that’s been a really, really good sign. The thesis always being as you add new inventory being able to maintain what you have on the existing front and then just layering that on top is certainly the big growth engine of this company. But when you look for travel in 2019, again, very broad-based, whether it would be Galápagos, whether it would be Alaska, whether it be the Arctic, it’s been very strong across the board. Interestingly, enough, when you look at the bookings that we already have for 2019, we’ve already exceeded significantly the bookings we had for all of 2018. So, this notion of adding additional inventory and filling it is certainly playing itself out in both the short-term, as well as the long-term.

And so it sounds like that’s continuing after the quarter too, I mean you’re still –

Yes. Obviously, we’re just talking about the month of April, but the month of April bookings were very, very strong year-on-year. We saw some nice growth overall and we don’t see any reason why it should slowdown.

Great. And then last question for me. And I’m not exactly sure how to phrase this, but over the last year, year and a half, you’re adding all these new customers and what – what do you, I guess, all this new capacity that you’ve added and you’re talking about booking strength, is it mostly a function of adding new people into the mix or is it that your repeat customers are coming back more frequently? And I guess, the big question for me is just as you add – as more people are becoming interested in this type of travel, what kind of repeat dynamic – do they look like your legacy customers? Do they come back as frequently and can you talk at all just to that?

Yes, so sort of a broad answer and then one can drill down a little bit. But the reality is, is we have a multitude of channels that we were – we have a travel agent channel, we have charters, we have affinity organizations, we have National Geographic, we have past guests, and we have different mechanisms for attracting new guests. And they all sort of have a life of their own, if you will, and they – and they’re all monitored very carefully and they’re all adjusted according to need in one form or another. So, for example, we’ve made – we’ve – obviously, knowing that we were going to expand our inventory, we increased our activity in the channels that we felt were most productive and by and large, that has been very, very successful some more than others. Obviously, they don’t all behave exactly the same, but all of them actually have behaved pretty well. But some extraordinarily well in terms of their improvement, as a consequence of identity – relating the – identifying the need and then activating the channels. And so it’s kind of a complex matrix of activity, because you just want to make sure and I think I’ve stressed this before in some previous calls. You want to make absolutely sure that your machine, if you will, or your system for generating new guests is proportionate to your growth and inventory, the only thing that can really, really badly hurt companies in this business if those two things are out of balance. And so we are very cognizant of that in my entire life since I started this business, I was – that was like an obsession to make sure that our marketing reach is ahead of your inventory, which is, again, why we’ve made some significant investments in that area this year, because we want to take advantage of growing interest. We want to make sure we’re very, very much out there so that we’re top of mind and that we capture as much of market share as we possibly can as a consequence. That’s kind of an overview on marketing, if that’s helpful, and if I haven’t answered anything that you really need more than that just let us know and I’ll dig deeper.

No, that’s great. Thanks.

[Operator Instructions] There is no question at the moment. This concludes our question-and-answer session. I would like to turn the conference back over to Craig Felenstein for any closing remarks.

Thank you very much for joining us today everybody. We appreciate your time this morning. And if you have any additional follow-up questions, feel free to reach out to us here in New York at any time. Thanks.

Thank you.

The conference call is now concluded. Thank you for attending today’s presentation. You may now disconnect.