OneSpaWorld Holdings Limited (NASDAQ:OSW) Q4 2023 Earnings Call Transcript
OneSpaWorld Holdings Limited (NASDAQ:OSW) Q4 2023 Earnings Call Transcript February 28, 2024
OneSpaWorld Holdings Limited misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.17. OSW isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the OneSpaWorld Fourth Quarter 2023 Earnings Call. All participants will be in 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, Investor Relations at ICR. Please go ahead.
Allison Malkin: Thank you. Good morning and welcome to OneSpaWorld's fourth quarter and fiscal year 2023 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 fourth quarter 2023 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 fourth quarter and fiscal year 2023 performance and provide an update on our key priorities as we begin fiscal 2024. Then Stephen will provide more details on the financials and fiscal year 2024 guidance.
I would now like to turn the call over to Leonard.
Leonard Fluxman: Thank you, Allison. Good morning and welcome to OneSpaWorld's fourth quarter and full year fiscal 2023 results conference call. The fourth quarter concluded an outstanding year of financial and operating performances for our company and continue to demonstrate the increasingly powerful impact of our strategies, innovation and scale across our complex business. The quarter was highlighted by records across revenue, income from operations and adjusted EBITDA, each of which grew at a double-digit pace versus the prior year fourth quarter. The period also marked our fourth consecutive record quarter resulting in our best ever performance in fiscal 2023. Our team continues to enhance our industry-leading business model, constantly innovating our unique value to our cruise line and destination resort partners and our delivery of outstanding experiences to their passengers and guests.
We continue to vet and introduce new and enhanced services product and facilities, while utilizing our strong cash flow to further invest in our powerful business model. We begin fiscal 2024 with strong momentum and expect to deliver another year of record performance and increasing value to our shareholders. Our confidence is further buoyed by favorable trends in the cruise line industry across our top banners. In fact our positive momentum has continued in the first quarter, as reflected in our guidance. Touching on performance highlights of the fourth quarter, total revenue was $194.8 million increasing 15%, from $168.9 million in the fourth quarter of 2022. Income from operations increased 18% to $12.6 million, even as we incurred a $2.1 million asset impairment charge for the expected closure of our health and wellness center compared to $10.7 million in the fourth quarter of 2022.
And adjusted EBITDA rose 13% to $23.4 million from adjusted EBITDA of $20.7 million in the fourth quarter of 2022. For the full year, revenue -- total revenue increased 45%, to a record $794 million compared to $546.3 million in fiscal year 2022. Income from operations increased $39 million or 258%, to a record $54.2 million including the $2.1 million asset impairment charge, as compared to $15.1 million in fiscal year 2022. Adjusted EBITDA increased 77% to a record $89.2 million, compared to $50.4 million in the fiscal year 2022. And unlevered after-tax free cash flow increased 75% to $79.1 million from $45.1 million, reported in fiscal year 2022 with after-tax free cash flow conversion rate of 89%. We continue to remain highly focused on supporting our operations at Sea.
At year-end we had 4,120 cruise ship personnel on vessels, increasing from 3927 and 3,566 cruise ship personnel on vessels at the end of the third quarter of 2023 and the fourth quarter of 2022, respectively. Our ongoing initiative to retain onboard staff for additional contracts is exhibiting success. We continue to expect our proportion of experienced staff members in the first quarter of 2024, to surpass the level of experienced staff members in 2019. The growth in experienced staff contributed to the delivery of double-digit growth across certain key operating metrics, as compared to fiscal year 2022 and 2019. Along with the strong financial results, the year included noteworthy progress towards our key priorities. First, we captured highly visible new ship growth with current cruise line partners.
In 2023, we added 10 new health and wellness centers as current partners launched new ships. And we entered into new agreements with Crystal Cruises and Adora Cruises. In 2024, we expect five new ship builds by existing partners. Second, we continue to launch higher value services and products. We continue to focus on introducing exciting products and services, which are in various stages of implementation including IV Therapy and Immunity Protocols and Facial Toning Devices. During the last quarter -- during the first quarter, we have begun the rollout of Cryo Body Services as well as introducing the new Cryo and LED Facial Services as part of the new Elemis BIOTEC 2.0 offering. Third, we focused on enhancing health and wellness center productivity as we introduce higher value services and products, driving double-digit growth in key performance metrics, including revenue per staff per day, pre-booking as a percentage of service revenue and average guest spend as compared to 2019.
As we have mentioned previously, guests that pre-book services spend approximately 30% more on average than guests that do not pre-book. The year, saw pre-booking available on 91% of the vessels that operate health and wellness centers and this is expected to grow to 93% in 2024. Initially, in 2023, the percentage of service revenue from pre-booked guests grew 10% year-over-year from 21% to 23% in 2023. Average guest spend also benefited by refinements in length of service and pricing architecture of certain services, which resulted in increases in service frequency and a mix towards higher-priced services and products. We also increased our medi-spa offering. At year-end, we had medi-spa services on 139 ships up from 128 ships in 2022. And in 2024, we expect to expand our medi-spa offering to 148 ships.
Fourth, we expanded our market share by adding new cruise line partners. We continue to believe we have to grow our 90%-plus market share in the outsourced Maritime health and wellness market, as evidenced by our 2023 contract wins with Crystal Cruises and Adora Cruises. First, we enhanced our capital structure and strengthened our already durable balance sheet while generating positive cash flow. To this end, in fiscal 2023, we fully repaid our second lien term loan and reduced the debt outstanding on our first lien term loan by $41 million. We simplified our capital structure through the completion of a warrant exchange and invested $9 million in cash to repurchase 789,046 million shares of our common stock. For the year, we invested a total of $65.1 million for debt pay down and share repurchase activity and still ended fiscal 2023 with total liquidity of $48.9 million.
In addition, on March 19, the approximately 4.7 million warrants that were issued and outstanding as of December 31, 2023, related to the business combination, are set to expire, which will further simplify our capital structure. Before I turn the call over to Stephen, I would like to personally thank the entire organization at OneSpaWorld for their continued dedication to advancing our strategy and the guests we serve. Combined, your contributions have increased our leadership position, contribute to the ongoing strength of our business and have us poised for continued positive momentum in the near and long term. With that, I will turn the call over to Stephen, who will comment on our fourth quarter and fiscal year 2023 results and guidance.
Stephen?
Stephen Lazarus: Thank you. Good morning, everybody. As Leonard mentioned, we were extremely pleased with our performance throughout the year. Even more impressive was our ability to deliver record fourth quarter revenue as we navigated turmoil in the Middle East and an unscheduled dry dock of a large cruise ship, which impacted our results. I would like to begin by highlighting two unusual items that impacted our fourth quarter results. First, our GAAP financials include a $2.1 million asset impairment charge related to the expected closure of a destination resorts or location, given the planned demolition of that hotel this year. This charge is excluded from adjusted EBITDA and adjusted net income, for the fourth quarter and fiscal year.
And secondly, our GAAP and adjusted financials include a onetime $5.4 million or $0.05 per share deleveraging payment fee that was required under the first lien term facility agreement due to our lower net debt leverage ratio at year-end. That is included and negatively impact adjusted net income and EPS for the fourth quarter and fiscal year. I will now share more detail on our fourth quarter and fiscal year results, that we reported earlier. Total revenue was $194.8 million in the current year quarter, increasing 15% compared to $168.9 million in the fourth quarter of 2022. The increase was attributable to our average ship count increasing 9% to 184 health and wellness centers onboard ships operating during the quarter compared with our average ship count of 169 health and wellness centers onboard ships operating, during the fourth quarter of 2022.
Additionally, our initiatives to drive revenue growth in each of our onboard health and wellness centers through enhanced guest engagement and experiences, service and product offering innovations, and the disciplined execution of our complex operating protocols by our onboard and corporate teams. Cost of service was $131.8 million compared to $114.9 million in the fourth quarter of 2022. The increase was primarily attributable to costs associated, with increased service revenue of $158.9 million in the quarter from our operating health and wellness centers at sea and on land, compared with service revenue of $139 million in the fourth quarter of 2022. Cost of products was $30.7 million compared to $24.3 million in the fourth quarter of 2022, with the increase primarily attributable to costs associated with the increased product revenues of $35.9 million, in the fourth quarter compared to product revenues of $30 million in the fourth quarter of 2022.
Net loss was $7.3 million or net loss per diluted share of $0.07 as compared to a net loss of $2.3 million or net loss per diluted share of $0.03 in the fourth quarter of 2022. The $5 million increase in net loss was attributable to firstly, a $3 million negative change in the fair value of our warrant liabilities. Secondly, a $1.8 million decrease in interest expense offset by the onetime $5.4 million deleveraging fee payable to our lenders, required under the first lien term loan facility due to our lower net debt leverage ratio at year-end. And thirdly, a $2.1 million long-lived asset impairment charge, which I referenced earlier posh assets [ph] by the $4 million positive change in income from operations prior to that long-lived asset impairment.
As you know the change in fair value of that and warrants during the three months, was a loss of $10.8 million compared to a loss of $7.8 million during the three months ended December 31st, 2022. The change in the fair value of the warrant liabilities was the result of changes in market prices of our common stock and other observable inputs deriving the value of these financial instruments. Adjusted net income was $12.5 million or adjusted net income per diluted share of $0.12, including the negative impact of a one-time $5.4 million deleveraging fee or $5 million per diluted share as compared to adjusted net income of $12.8 million or adjusted net of $0.14 in the fourth quarter of 2022. Adjusted EBITDA increased 13% to $23.4 million compared to adjusted EBITDA of $20.7 million in the fourth quarter of 2022.
And then briefly for the fiscal year, as mentioned, total revenue $794 million, an increase of 45% compared to $546 million for the prior year ended, adjusted net income more than doubled to $61.9 million or adjusted net income per share of $0.63 including that negative $5.4 million or $5 per diluted share one-time deleveraging fee. This compares to adjusted net income of $26.7 million or adjusted net income per diluted share of $0.28 in the year ended December 31st, 2022. And adjusted EBITDA increased an impressive 77% to $89.2 million compared to $50.4 million in the year ended December 31st, 2022. As it relates to the balance sheet, cash and borrowing capacity under the company's line of credit at December 31st totaled $48.9 million. In the fourth quarter, the company repaid $5 million on its first lien term loan bringing total payments for the year to $41 million.
Since the second quarter of 2022, we have repaid a total of $74.1 million in debt instruments reducing ongoing interest expense. We ended the year with total debt net of deferred financing costs of $158.2 million and importantly, a debt leverage ratio of 1.48 times at year-end which compares very favorably to our year-end 2019 debt leverage ratio of 3.62 times. As a result of our deleveraging, we have substantially strengthened our balance sheet and reduced future interest expense. In the fourth quarter, unlevered after-tax free cash flow was $16.9 million compared to $19 million in the fourth quarter of prior year. And for the fiscal year, unlevered after-tax free cash flow increased 75% to $79.1 million compared to $45.1 million in the prior year.
The company expects to continue to generate positive cash flow from operations in the first quarter of 2024 and throughout fiscal year 2024. Moving then on to guidance. For the first quarter of 2024, we expect total revenue in the range of $204 million to $209 million and adjusted EBITDA in the range of $21.5 million to $23.5 million. Our first quarter guidance assumes operating on 193 cruise ships and to operate at 51 resorts. For the full fiscal 2024 year, we continue to expect total revenue in the range of $850 million to $870 million and adjusted EBITDA in the range of $90 million to $100 million. We expect to end fiscal 2024 operating on 197 cruise ships and at 50 resorts. Overall, we feel very confident about our business outlook as we begin 2024.
Our business momentum remains strong and we expect the ongoing implementation of our strategy to deliver another year of record performance and increasing value for all of our shareholders. With that we will open up the call to questions. Operator, please go ahead.
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