OneSpaWorld Holdings Limited (NASDAQ:OSW) Q3 2023 Earnings Call Transcript
OneSpaWorld Holdings Limited (NASDAQ:OSW) Q3 2023 Earnings Call Transcript November 4, 2023
Operator: Good day, and welcome to the OneSpaWorld Third Quarter 2023 Earnings Conference Call. [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.
Allison Malkin: Thank you. Good morning, and welcome to OneSpaWorld's Third Quarter 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 third 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 third quarter 2023 performance and provide an update on our operations and our key priorities, then Stephen will provide more details on the financials and our fiscal year 2023 guidance. I would now like to turn the call over to Leonard.
Leonard Fluxman: Thank you, Allison. Good morning, and welcome to OneSpaWorld's Third Quarter 2023 Results Conference Call. I'm delighted to speak to you today and share another quarter of strong results, which once again exceeded our expectations. The third quarter saw us maintain our positive momentum with stellar performance across key financial and operational metrics, driven by our unwavering focus on the execution of our key priorities. To this end, we continue to introduce innovative products and offerings, empower our cruise ship staff to provide unsurpassed service levels, drive efficiencies through technology enhancements, introduce our health and wellness centers on new ship builds and win new contracts. As a result, we achieved our best-ever third quarter revenue income from operations and adjusted EBITDA and raised our full year revenue and adjusted EBITDA guidance by more than the outperformance we delivered in this quarter.
As we look ahead, we are very encouraged by the healthy demand environment we are seeing. Customers around the world continue to appreciate the unparalleled value proposition, cruising offers and our strategies are driving strong demand. Touching on performance highlights of the third quarter. Total revenues grew 33%, reaching a record $216.3 million and adjusted EBITDA increased 36% to a record $24.9 million. The expansion in our ship count continued in the quarter. At the end of the third quarter, we had health and wellness centers on 189 ships compared with 176 ships at the end of the third quarter of 2022. At year-end, we now expect to have in-service 193 ships, including 10 new builds introduced throughout 2023. We saw strength across key operating metrics, including a 22% increase in average week revenue per ship as compared to the third quarter last year.
High single-digit increases in average guest spend and a low single-digit increase in revenue per shipboard staff per day. Penetration of retail sales and pre-bookings also continued to improve. We continue to remain highly focused on supporting our operations at sea. Our ongoing initiatives to have experienced staff return for subsequent contracts is exhibiting greater success and we expect our proportion of experienced staff members in the first quarter of 2024 to surpass the level of experienced staff members in 2019. At quarter end, we had 3,927 cruise ship personnel on vessels increasing from 3,813 and 3,087 cruise ship personnel on vessels at the end of the second quarter of 2023 and the third quarter of 2022, respectively. We also have 24 traveling sales and revenue staff members who year-to-date have made 492 ship visits, equating to 3,271 days of sailing with their primary focus to enhance onboard productivity.
Now I'll review and update our key priorities that we shared with you earlier this year: first, capture highly visible new ship growth with current cruise line partners. Our cruise line partners continue to introduce new ships, which adds to our growth. In the quarter, we introduced health and wellness centers on six new ships, including two Crystal Cruise vessels, Crystal Serenity and Crystal Symphony as part of the new agreement announced earlier this year and one vessel as part of a new agreement with Adora Cruises, which is a new Chinese-American cruise line. We continue to expect to introduce health and wellness centers on 12 ship builds this year; second, continue launching 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, immunity protocols and facial toning devices; third, focusing on enhancing health and wellness center productivity.
Highlights of our achievements in this regard include high single- to double-digit increases across average guest spend pre-booking as a percent of service revenue, revenue per stock per day and in retail spend as compared to Q3 of 2019. And fourth, expanding market share by adding new potential cruise line partners. We have room to grow our 90-plus-percent market share in the outsourced maritime health and wellness market as evidenced by recent new contract wins to Virgin Voyages, Oceania Cruises, Regent Seven Sea Cruises, Celebrity cruises and most recently, Adora cruises. We are very excited about our business prospects into the fourth quarter and in 2024 and beyond. Our fourth quarter 2023 performance is off to a strong start despite it being a seasonally softer period for cruise operators as they reposition their fleets for the winter cruising season.
In light of our outperformance so far in the year and current business trends, we have raised our annual guidance for the third time this year, with our fiscal year outlook increased beyond the amount we surpassed third quarter expectations. As a result, for fiscal year 2023, we now expect total revenues to increase by 45% and adjusted EBITDA to increase by 73% versus fiscal year 2022 at the midpoint of our guidance ranges. Finally, before I turn the call over to Stephen, I want to convey that our hearts go out to all that have been impacted by the war in the Middle East, the ongoing war in Ukraine and the innocent lives lost. In response, the cruise lines have altered or canceled certain itineraries. However, we do not expect this to have a material impact on our results.
Stephen?
Stephen Lazarus: Thank you, Leonard. Good morning, everyone. We are pleased to report strong third quarter results and continued momentum across our key operational and financial metrics as well as improvements to our balance sheet. I will now share more details on our third quarter that we reported this morning. Total revenues were $216.3 million, an increase of 33% from $162.3 million in the third quarter of 2022. The increase was attributable to our average ship count increasing 11% to 185 health and wellness centers on board ships operating during the quarter compared with an average ship count of 167 health and wellness centers onboard ships operating during the third quarter of 2022. And our initiatives to drive revenue growth in each of our onboard health and wellness centers through enhanced guest engagement and experiences.
Our guest service and product offering innovations and the disciplined execution of our complex operating protocols by our onboard and corporate teams. Cost of services were $146.1 million compared to $110.6 million in the third quarter of 2022. The increase was primarily attributable to costs associated with increased service revenues of $175.8 million in the quarter from our operating health and wellness centers at sea and on land compared with service revenue of $132.8 million in the third quarter of 2022. Cost of products were $34.5 million compared to $25.3 million in the third quarter of 2022. This increase was primarily attributable to costs associated with increased product revenues of $40.4 million in the quarter from our operating health and wellness centers at sea and on land compared to product revenues of $29.5 million in the third quarter of 2022.
Product costs in the third quarter of 2023 benefited from retail price increases implemented onboard vessels ahead of an increase in the cost of those products. This resulted in an approximately 60 basis point margin improvement in the quarter. Net income was $23.4 million or net income per diluted share of $0.16 as compared to net income of $5.9 million or net income per diluted share of $0.06 in the third quarter of 2022. The $17.5 million increase was primarily attributable to the $7.1 million positive change in the fair value of warrant liabilities, a $7.1 million positive change in income from operations and a $3.4 million decrease in uncertain tax benefits related to foreign tax exposure as a result of the company's participation in a tax amnesty program in Italy settled in August 2023.
The change in fair value of outstanding warrants during the three months ended September 30, 2023 was a gain of $7.4 million compared to a gain of $300,000 during the three months ended September 30, 2022. The change in fair value of warrant liabilities was the result of changes in market prices of our common stock and other observable inputs deriving the fair value of the financial instruments. Adjusted net income increased 75% to $22 million or adjusted net income per diluted share of $0.22 as compared to adjusted net income of $12.5 million or adjusted net income per diluted share of $0.13 in the third quarter of last year. Adjusted EBITDA increased 36% to $24.9 million compared to adjusted EBITDA of $18.3 million in the third quarter of 2022.
Turning to the balance sheet. Total cash at September 30, 2023 was $28 million compared to $30 million at June 2023, after giving effect to repayment of $20 million on our first lien term loan during the quarter. Total debt net of deferred financing fees at September 30 was $163 million compared to $223 million at September 30, 2022. The decrease primarily resulted from the full repayment of $25 million on the second lien term loan and the $36.6 million repayment on the first lien term loan since September 30 of last year. In the third quarter, we repaid $20 million on our first lien term loan. And as a result, since the second quarter of 2022, we have repaid a total of $69.1 million in debt instruments. Unlevered after-tax free cash flow was $62.2 million compared to $26.1 million in the nine months ended September 30, 2022.
The company expects to continue to generate positive cash flow from operations in the fourth quarter of 2023 and throughout 2024. Moving on to our guidance. We are increasing our fiscal year guidance for the third time this year to reflect our better-than-expected third quarter performance and our expectations for the fourth quarter. For fiscal 2023, we now expect total revenues in the range of $792 million to $797 million. At the midpoint, this represents an increase of 45% from the actual fiscal 2022 revenues of $546.3 million. Adjusted EBITDA is expected in the range of $86 million to $88 million. At the midpoint, this represents an increase of 73% from actual fiscal 2022 adjusted EBITDA of $50.4 million. We expect to end fiscal 2023 operating on 193 cruise ships and at 54 land-based resorts.
For the fourth quarter, we expect total revenue in the range of $193 million to $198 million and adjusted EBITDA in the range of $20 million to $22 million. Overall, we feel confident about our positioning and growth initiatives. We are encouraged by the momentum in the business and expect to continue our successful growth in the near and medium term. With that, we'll open our call for questions. Please, operator.
Operator: [Operator Instructions] The first question comes from Gregory Miller with Truist.
See also 25 Largest Economies in the World by 2075 and David Tepper Latest News and Portfolio Changes.
To continue reading the Q&A session, please click here.
