OneSpaWorld Holdings Limited (OSW) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the OneSpa Second Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 5, 2021. I would now like to turn the conference over to Allison Malkin, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to OneSpaWorld' Second Quarter 2021 Earnings Call and Webcast. Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. The COVID-19 pandemic continues to have a significant impact on our operations, cash flow and financial position. The uncertain and dynamic nature of current conditions and its ongoing impact could materially alter our outlook. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter 2021 earnings release, which was furnished to the SEC today on Form 8-K. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman and CEO; and Stephen Lazarus, CFO and COO. Leonard will begin with a review of our second quarter 2021 performance and provide an update on our operations and our key priorities. Then Stephen will provide more details on the financials and our liquidity. I would now like to turn the call over to Leonard.

Thank you, Allison. Good morning all, and welcome to OneSpaWorld's Second Quarter 2021 Results Conference Call. The second quarter represented a terrific start to OneSpaWorld's resumption of service at sea and continued positive momentum across our destination resort spas that have reopened. While we continue to operate in a fluid environment, sequential revenue improvement from the first quarter was significant. In total, our second quarter results mainly reflect the performance of our destination resort spas. Of the 14 ships in service at the end of the quarter, 10 resumed operations in June. That said, our intense focus and successful implementation of our actions to ready our staff and health and wellness centers to safety, often led to a flawless execution of our new protocols and outstanding service by our highly dedicated staff members. I would like to thank our crews and destination resorts spa staff and corporate teams for enduring endless hours of training among many other hardships to support our outstanding return to service. We expect to build upon our favorable momentum as more ships return to service during the second half of the year. Turning to highlights of the quarter. Total revenues were $9.2 million and mainly reflected destination resorts spa revenues. Adjusted EBITDA was a loss of $9.7 million. Of note, our destination resort spa has generated positive EBITDA in the quarter, and we are increasing staff at almost all locations to meet higher-than-expected demand, and we ended the quarter with total liquidity of $54.8 million. As of yesterday, we operated on a total of 42 cruise ships, 7 more than we estimated when we reported first quarter results in May. While occupancy and stopping are below historical levels, we are continuing to see strong customer demand and spend for our services. To this end, in the month of July, customers spent exceeded July 2019 levels onboard the cruise ships that we sailed. This was accomplished despite lower than historical promotional activity. We also are encouraged that recent prebooking statistics are up versus 2019. In keeping with OneSpaWorld's tradition of supporting our onboard staff, our corporate team has already visited 30 of the 42 ships that have returned to service to ensure we generate the highest possible revenue, while maintaining the highest standards. Flawless return to service is our top priority. We successfully placed 779 cruise ship personnel on vessels at the end of the second quarter for actual and anticipated voyages, overcoming the challenges of the pandemic, securing visas, COVID testing and other travel restrictions. Despite these hurdles, our team members are ecstatic to be back at sea. We are adjusting our plans on a daily basis so that we are in a position to react immediately to any additional unplanned return to service. By the end of September, we expect to have 1,383 staff reembarked on vessels. We believe we are well positioned to continue our flawless execution as we welcome staff back and prepare to resume operations on an additional 37 ships by the end of September. We were also delighted to see the U.S. government approved sailings in Alaska, which represents an important market for us, generating some of our best operating metrics. We believe our initial return to service performance confirms that we are positioned powerfully to capitalize on the strength of our team, operating platform and business model to drive long-term profitable growth as cruise ships and destination resorts spa operations fully resume. Overall, we will continue to execute with intense financial discipline, while implementing strategies that enable the company to not only return to peak levels of sales and profitability but also elevate our brand and further expand our service offering in our ongoing efforts to increase value for all our OneSpaWorld stakeholders. With that, I'll turn the call over to Stephen, who will comment on our second quarter 2021 results and liquidity position. Stephen?

Thank you, Leonard, and good morning, ladies and gentlemen. As Leonard mentioned, the second quarter saw sales and operating performance accelerated from the first quarter of the year, reflecting our team's experts ability to prepare and return staff to service and the extraordinary conditions. I will now share just a few of the second quarter 2021 highlights. For the second quarter, total revenues were $9.2 million compared to $1 million in the second quarter last year. Revenues were generated primarily from our destination resort spas. 14 of our health and wellness centers onboard ships had resumed operations as of June 30, 2021, with the majority of those coming into service towards the end of the quarter. Cost of service were $9.6 million compared to $12.6 million in the 2020 second quarter. The decrease was attributable to significant costs incurred related to the repatriation of onboard personnel and costs due to the COVID-related closure of all of our health and wellness centers in the 2020 second quarter. Cost of products were $1.5 million compared to $1.6 million in the 2020 second quarter. Cost of product in the second quarter of this year reflected increased freight expense related to the resumption of service, while cost of product for the 2020 second quarter included the establishment of a $500,000 inventory reserve. Net income was $300,000 compared to a loss of $20.7 million in the second quarter of 2020. The $21 million improvement in the second quarter of fiscal 2021 was primarily a result of a $10.5 million improvement in our loss from operations, plus the $8.6 million positive change in the fair value of warrants. The change in the fair value of warrants is the result of changes in the market prices, deriving the value of these financial instruments. Adjusted EBITDA was a loss of $9.7 million as compared to a loss of $20.1 million in the second quarter of 2020. We ended the quarter with total liquidity of $54.8 million. Additionally, at quarter end, $19.3 million remained available under the ATM program. Availability under our line of credit was $13 million at quarter end. The cash burn rate for the quarter of $10.9 million was approximately $4.1 million below our expectations, driven by timing of payments and increased revenue. We expect cash burn between $10 million and $12 million in the third quarter as we increase activity in anticipation of increased sailings. We expect resumption of our cruise ship operations to accelerate in the third quarter, and thereafter, and generate improved cash flow from operations, ultimately leading to positive cash flow in December. As it relates to our outlook for 2021, due to the ongoing business disruption and uncertainty surrounding the continued impact to our business from the COVID-19 pandemic, we will continue to not provide guidance. Notwithstanding the foregoing, for the third quarter and 2021 fiscal year, we expect to incur a net loss on a GAAP and adjusted basis. And with that, we will open up the call for questions. Operator, if you could please take over.

[Operator Instructions] Our first question comes from the line of Steve Wieczynski of Stifel.

So first of all, obviously, labor is a big pressure point out there for most companies at this point. I totally understand you guys are better positioned versus most employers given your specialized labor fleet, and the fact that, for the most part, they're pretty much commissioned. But if you look at your land-based operations, can you give us any idea of what labor availability has looked like or if that's a pressure point for you guys?

Yes. Look, I mean it's 2 complete different labor pool models, Steve, you're correct. We certainly are starting up where necessary with demand and extended hours being given to us by the different resorts that we operate in. Certain positions are proving a little tougher to get, and there is increased competition on land for staff. But so far, so good. And we're managing to start up when necessary and stay abreast with the demand. It's definitely a tight market, no question about it. Probably not as fluid as we're able to get staff from 85 different countries that we recruit from. But yes, it's definitely a tighter model at this point, but so far, so good.

Okay. Got you. And then you guys mentioned that spend levels on board have been very strong in about 2019. And can you help us think about what passengers are spending on? Meaning is it more spending on products after services are complete? Or is it folks just wanting more complex or expensive services? And then I don't know if there's any way you can kind of talk us through this. But is most of the spend coming from the cash paying customer? Or are these from onboard credits? Hopefully, that all makes sense.

Yes. So look, we've got July under wraps. We've had a good look at it. And I can tell you right now, every single metric has been positive and above where we were at July 2019, which is very encouraging, with ship occupancy only being about 39% overall on all the ships that we're at. So while our ship occupancies are down, the frequency is up, spend is up, spend is up despite onboard credits. And while we don't have enough data right now to be able to pull to what extent that's factoring into the total spend. I can tell you that people are spending more on a prebook basis on the first day of implication than we've ever seen before. I mean some of the amounts that we've seen spent on the first day is mind-blowing and very encouraging, which is a testament to us getting up our prebook system with shorter lead times on changing itineraries. So overall, if I look at a summary and a snapshot of what we're seeing for July in every single category, frequency spend, average ticket total, it's up versus '19. So it's a good indication thus far of pent-up demand for just legacy services. And obviously, with that comes some retail attachment. So we're excited about what we're seeing so far, and the execution from our team has really been incredible.

Okay. That sounds great. And if I could sneak one more in. Your liquidity position kind of hovering in that mid-50s to 65, if you include the ATM component. I guess, obviously, there's a fear out there around variance and what that could do to the operators themselves, whether it's having to eventually cancel cruises or just itineraries and stuff like that. So with where your liquidity position is today and your cash burn, so to speak, do you guys feel pretty comfortable that even if there is some kind of slight disruption you guys are still pretty well positioned?

The short answer to that is yes, with a slight disruption, I think we would be okay. Clearly, the cruise lines are taking increased initiatives right now just in the last day or so, in fact, on Carnival, for example, with requiring outdoor testing despite vaccination status in order to border vessel will be now required. So we think the cruise lines are doing a great job in terms of mitigating any potential exposure on board. And while it will certainly happen. We've also seen increases where it does, that the actions that they're taking and the protocols that they have in place are very good with containing and identifying very quickly potential exposure. So it's pretty much a wait-and-see situation for us. But based upon everything that we see and today, we feel comfortable.

[Operator Instructions] Our next question comes from the line of Stephanie Wissink of Jefferies.

It's Chris [indiscernible] on the line for Steph. Just a couple of quick ones for me. How should we be thinking about modeling revenue per ship as you ramp up from 14 to 79? Is there a general framework for volume per ship? Or is there really kind of a percentage of prepandemic levels that we should be thinking about here?

It's probably a little too soon, honestly, to get that general because different cruise lines are starting out with different occupancy levels onboard depending on our itineraries, depending on occupancy levels, depending on when in the quarter those ships come into service, will all influence the type of revenue generation. So honestly, at this stage, it's so fluid there's so many changes that overarching assumptions with regards to revenue generation or just too soon to be talked about for us.

Fair enough. And then I also want to dig deeper on cash burn specifically around staffing dynamics. How early do you need to bring back staffing pre-voyage? And then how do you really balance that staffing given the uncertainty around COVID variants?

Yes, it's a great question. And it's something that our team has done an incredible job, London Wellness Academy, all of our recruiting staff around the world. I mean there are certain countries, obviously, that are just still in red and we're not going to those countries. Each banner that we serve has different requirements in terms of the quarantine, the vaccination, et cetera. And in some cases, we're bringing in staff 45 days ahead of the actual voyage going either for a test crews or for an actual revenue crews to give us adequate time to quarantine and have them go through both of their vaccination protocols. So what that does is, it puts a lot of pressure and stress on all the recruiting and training, but this is something that we have done historically very well. Clearly, we have never put so many ships back in the water with staff. So yes, it's a Herculean task, but at the same time, to date, we've been managing very well. There are obviously days where you have some blips or somebody is put back into quarantine, but we have enough staff on the bench right now to cope with all the demand that we're projecting through the end of the year.

Our next question comes from the line of Assia Georgieva of Infinity Research.

I think the industry, in general, you guys, in particular, have done a really great job under these circumstances. So keeping my fingers crossed that everything continues to go ahead smoothly. In terms of the good spend that you're seeing, would you attribute some of that to the quality of passengers that you're seeing? I imagine these are more experienced cruisers that are coming back first on board. In the past, it seems that first-time cruisers may have offered a better spend for you, am I correct?

Yes, I think it's hard to delineate between first-timers and experienced crews in terms of the total spend onboard. That's just not something that we're able to dig into right now. But I will say that there's definitely a higher percentage of experienced cruises. But given that the more experienced cruises typically don't spend as much as first-timers as we're simply encouraged by the pent-up demand that we're seeing. So it seems like the exuberance getting out there on the sea again, all of that's playing well into the prebook and the spend and demand for our services right now.

And do SECs issued by the cruise companies directly help? Or is it difficult to delineate how much spend is coming from that portion?

It's something we're going to try and get you more visibility on as we're in the third quarter or fourth quarter. It's a tough breakout in sort of the recap of every single cruise. It's not something that we necessarily track on any of the individual POSs when we've set it off back to the state portfolio. But we'll try and get you better visibility. I will say that it's helping. But I think the stand above and beyond the SECs is definitely encouraging because people are not only having one service, they're having more than one service, and they're spending on more of the expensive services. So that's a good indication, not only of the quality of the guest but of the pent-up demand for these type of legacy services.

That sounds great. We all are aware of the inherent uncertainties surrounding whether it's the Delta variant or possibly [indiscernible]. If we exclude that for a moment, what are some of the potential risks that you see over the next, let's say, 6 to 12 months? Is there anything else that has you concerned at this point?

I'm not concerned about our team, our operation, our ability to execute. I mean, I think we've done an amazing job of returning on to so many ships this quickly with August, September being big months as well. The only thing that sort of keeps me up a little bit at night, obviously, is the continued ability to contain the delta variant spreading where onto the ship. I will say that from everything that we've seen from even the increased level of protocols that a lot of the banners are putting out there in the last couple of weeks with the increase in surge in the variant, it's encouraging to see a few outbreaks that have been on board. So their protocols are definitely working, and I think there's a heightened awareness of what they need to do going forward to keep the ships in sea.

Well, I think the industry should deserve some credit for sort of being indirect advocates for vaccination and getting people to get vaccinated at a faster rate. So again, I think you guys are doing a great job, so keep it up.

Thank you.

And there are no further questions at this time. I'll turn the call back to you, panelists. Please continue.

All right. Thanks again, everyone, for joining us today. We look forward to speaking with you and updating you on our progress and report our third quarter results in early November. Thanks again for joining us today.

And that does conclude today's presentation. We do thank you for your participation and ask that you please disconnect your lines. Have a great rest of the day, everyone.