Good day, and welcome to the OneSpaWorld Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Thank you. Good morning and welcome to OneSpaWorld'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 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 2024 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, Chief Executive Officer and President; and Stephen 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, Allison. Good morning and welcome to OneSpaWorld'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 to 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 after-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…

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 the 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 a 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 to service revenue of $175 million in the third quarter of prior year. As to 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 $0.20, as compared to net income of $23.4 million, or net income per diluted share of $0.16 in the third quarter of prior year. The change in net income was primarily attributable to…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Steve Wieczynski with Stifel. Please go ahead.

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

Yes, 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 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. Got you. Thanks for that, Stephen. And then second question I'm not sure if this is for Leonard or you Stephen but – and maybe we're meeting – we might be reading too much into this. But if we look at your land-based weekly production relative to your maritime weekly production I mean there's quite a big difference going on there between the two of them. Obviously, the cruise industry is doing so well right now and I think a lot of that's just due to the massive value proposition. But just wondering or if you have any idea why those land-based 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 Steve 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.

Yes. 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 the business is a little challenged because some of the biggest spas as Stephen mentioned have not been opened because of the construction.

So as those renovations kind of come to a close and as we think about 2025, 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 rate 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. Got you. Thanks, guys. Appreciate it and congrats on the solid quarter.

Thank you.

The next question comes from Max Rakhlenko with TD Cowen. 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 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 spend 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-Spa 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 2025 and 2026.

Got it. That's helpful. And then just switch 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 like a 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 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 you this way, right? We -- 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 relates 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 up 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 Zackfia with William Blair. Please go ahead. Q – Sharon Zackfia: 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 products or anything along those lines?

There's an election, next week? So, good morning.... Q – Sharon Zackfia: Sorry, to remind you.

Yes. 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. Q – Sharon Zackfia: 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% 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 prebooking 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. Q – Sharon Zackfia: 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.

Yes. So, it's interesting. So we did restructure the debt, not only in the quantum of the debt, but also in where it is divided. And we put a large portion of the debt now actually in the US, 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 the refinancing, with the increasing of the maturity, with the hedge that we get 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 buyback 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 and the stock repurchase 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.

Thank you.

The next question comes from Gregory Miller with Truist Securities. Please go ahead.

Thanks, good morning, gentlemen. I have a couple of 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 they're relative to a Central American or Western Caribbean port of call?

The islands when we first started to see a lot more of them being developed some are different to others. Some offer sort of massage treatment 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 improve the offering onboard that. But I think people are smart. So they know they're going to go to one of the islands x number of hours a day and depending who's with them, they will either pre-book in the morning to do something, or. although when they come back from the Island, in and it not a net negative but I think as time goes by and we see more of our services being offered in addition to the waterpark 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 once, 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 like 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 and they move forward.

I appreciate. Thank you. The next question comes from Assia Georgieva with Infinity Research.

Good mooring, 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 onboard during a sea day? Or would you be competing sort of with your port pricing onboard the ship if you're offering the same type of services at a private island?

Generally speaking, they're going to be similar Assia. 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% prebooked rate. And I think from what we've heard so far from the cruise companies they are looking at much higher pre-booked onboard, and I understand that the mix is certainly different where they're looking at the WiFi 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?

Yes. I think as I mentioned in my call we have one particular larger banner that's not yet at scale. We've continued 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 we're really -- it's not -- 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 sense. Thank you, Leonard.

Yes. 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 -- 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, the offering the way that which the website looks when you land on it from the front end of the cruise line, 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 certainly point those out. But more importantly it's how they market what can be prebooked. So if they're marketing meals if they're marketing shore 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 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 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.

Yes.

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 is now concluded. Thank you for attending today's presentation. You may now disconnect.