Please ensure Javascript is enabled for purposes of website accessibility

OneSpaWorld Holdings Ltd (OSW) Q2 2019 Earnings Call Transcript

By Motley Fool Transcribing – Aug 8, 2019 at 1:24AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

OSW earnings call for the period ending June 30, 2019.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

OneSpaWorld Holdings Ltd (OSW 2.40%)
Q2 2019 Earnings Call
Aug 07, 2019, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you for standing by. This is the conference operator. Welcome to the OSW Holdings' second-quarter 2019 earnings conference call. [Operator instructions] I would now like to turn the conference over to Allison Malkin of ICR.

Please, go ahead.

Allison Malkin -- Investor Relations

Thank you. Good morning, and welcome to OneSpaWorld's second-quarter fiscal 2019 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 second quarter 2019 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.

Explanation of these metrics can be found in the earnings release filed earlier today. Joining me on today's call are Leonard Fluxman, executive chairman; Glenn Fusfield, chief executive officer and president; and Stephen Lazarus, chief financial officer and chief operating officer. Thank you. I'd now like to turn the call over to Leonard.

Leonard Fluxman -- Executive Chairman

Thank you, Allison. Good morning, and welcome to OneSpaWorld's second-quarter fiscal 2019 earnings conference call. We're pleased to announce the continued positive momentum in our business in the second quarter highlighted by solid growth in sales, cash flow and adjusted earnings per share. Moreover, we continue to show our ability to generate strong cash flow with a 92% conversion of adjusted EBITDA to unlevered after-tax free cash flow for the quarter and 94% for the year-to-date period.

We attribute our consistent positive performance to the strength of our competitive position, the success of our growth initiatives and the disciplined execution of our day-to-day operation. Among our accomplishments this year, both Norwegian Cruise Lines and P&O cruise lines extended their agreement with us. We are on track with our plans to commence operations as the exclusive health and wellness provider for the Regent Seven Seas and Oceania vessels. In addition, we were named exclusive health and wellness partner to Virgin Voyages' first-ever cruising offering.

OneSpaWorld has an enviable position in the marketplace with more than 84% global market share of the outsourced market for the operation of spas at sea. Our long-standing partnerships' vast operating platform, along with our efficient asset-light model, provides us with visible growth opportunities and strong cash flow. We look forward to continuing our expanding service to our cruise line and resort partners and their guests. And we believe our preeminent market position in a growing industry positions us well for continued success.

Let me touch on some of the highlights from our second quarter. Our remarks will focus on adjusted results year over year. Total revenues increased 4% to $140 million. Adjusted net income grew 15% to $8.4 million, achieving the higher end of guidance.

Adjusted EBITDA was $15 million also at the high end of guidance, and unlevered after-tax free cash flow increased 7% to $13.7 million. I'd now like to spend a few minutes discussing our progress on the growth strategy. We continue to focus on our core growth strategies, which include securing contracts on new cruise lines and select destination resorts, servicing new vessels under existing cruise line contracts and executing programs to increase onboard revenue through new products and services, all of which have been executed during the year-to-date period. Orders for new ships by cruise line partners remain robust paving the way for future growth.

In the second half, we anticipate providing services on the new Costa Smeralda, the Sky Princess, the Norwegian Encore followed by the Carnival Panorama. As mentioned, we're on track with our plans to commence operation as the exclusive health and wellness provider for the Regent Seven Seas and Oceania vessels, consisting of 10 vessels plus three new builds to be introduced post 2019. On July 2, we announced a five-year extension of our current 16-year relationship with P&O Cruises. This new agreement extends our service on the seven vessels that P&O Cruises currently operate and adds the exclusive right to operate the spa facilities onboard and execute a suite of premium health, beauty, wellness and fitness services and product.

Also as part of the agreement, OneSpaWorld will operate Iona, the largest boat for the British market, which sets sail on its inaugural voyage in May 2020. Iona will feature the next evolution of a spa taking relaxation and restoration to the next level. Additionally, we executed contracts with Saga Cruises and Windstar Cruises for four and five years, respectively. These agreements underscore our ongoing ability to provide exceptional spa and wellness offerings and further enhance cruise goers' guest experiences.

In closing, we are pleased with our progress as we begin the second half of the year and continue to expect our strategies to lead to strong, reliable growth and value creation for all our stakeholders for years to come. We have favorable tailwinds that in combination with our vast infrastructure and operational expertise position us well to reach our goals. In fact, the global cruise sector is expected to continue its rapid growth, with cruise capacity projected to increase at a CAGR of 8% from 2018 to 2022 fueled by favorable demographic trends, including the aging of global populations, continued health and wellness trends and the worldwide millennial focus on experiences. And now I'll turn you over to Stephen to review the financials and discuss guidance.


Stephen Lazarus -- Chief Financial Officer and Chief Operating Officer

Thank you, Leonard. Good morning, ladies and gentlemen. Total revenues for the quarter were $140 million, a 4% increase compared to the second quarter last year and in line with our expectations. The increase was driven primarily by six incremental net new shipboard health and wellness centers added to the fleet of cruise line partners, a continued trend toward larger and enhanced shipboard health and wellness centers and continued collaboration with cruise line partners.

The split of revenue growth between service and product revenues was as follows. Service revenue increased 4% to $107.3 million, while product revenue increased 2% to $33.1 million compared to the second quarter of fiscal 2018. Average weekly revenue per ship was $61,317, up slightly from $61,150 in the second quarter last year. Average revenue per shipboard staff per day was consistent year over year.

Average weekly revenue per land-based resorts decreased 14.6% as expected due to the larger number of managed bars in our mix during the quarter, which generate less revenue per facility. Cost of service increased $2.6 million or 3% compared to the second quarter of fiscal 2018. The increase was primarily attributable to the increase in service revenue. Cost of products increased $1.1 million or 4% compared to the second quarter of fiscal 2018.

This increase was primarily attributable to an increase in product revenue and the noncash impact of purchase price accounting adjustments related to inventory step-up in connection with the business combination. Administrative expenses increased $1.5 million to $4.3 million in the second quarter of fiscal 2018 driven primarily by expenses incurred in support of our operations as a publicly traded company. Salary and payroll taxes increased $600,000 to $4.3 million compared to the second quarter of fiscal 2018 as a result of increased headcount necessitated by being a publicly traded company. Adjusted net income increased 15% to $8.4 million and adjusted EBITDA was $15 million in the second quarter, up from $14.6 million in the second quarter of fiscal 2018.

Adjusted net income per diluted share totaled $0.12 based on 72 million diluted shares outstanding including the 6.6 million deferred shares to be issued to Haymaker and Steiner Leisure as part of the purchase consideration in connection with the business combination once certain milestones are made. These milestones consist of the earlier off the stock price equaling at least $20 for five consecutive trading days, or 10 years from the closing of the business combination, specifically March 19, 2029, or a change of control at or above $20 per share. Cash at June 30th totaled $14 million and total debt net of deferred financing cost at the end of the quarter was $234 million. We anticipate paying down approximately $20 million of debt by year end.

Unlevered after-tax free cash flow for the second quarter of fiscal 2019 was $13.7 million. Moving on to our guidance, for the full year, we are reaffirming revenue raising slightly adjusted EBITDA and adjusted net income, updating our diluted share count and reducing our capital expenditure outlook. We are also introducing third quarter guidance as follow. For the third quarter, we expect revenue in the range of $146 million to $151 million; adjusted EBITDA is expected between $15 million and $17 million; adjusted net income is expected between $8 million and $10 million or between $0.11 and $0.13 per diluted share based on the 72 million shares outstanding as of June 30, 2019; and capex, we expect in the range of $600,000 to $1 million.

Our forecast assumes 163 ships at the end of the period, with an average ship count of 162. Average ship count reflects the ships that are expected to be in and out of service during the quarter. It also assumes 69 resorts at the end of the quarter, with an average resort count of 69 as well. For fiscal 2019, we expect revenue between $570 million and $575 million; adjusted EBITDA between $58 million and $63 million.

This compares to 2018 adjusted EBITDA of $58.6 million or $55.8 million, including comparable public company costs; adjusted net income between $32 million and $36 million or between $0.45 and $0.50 per diluted share based on 71.8 million diluted shares outstanding year to date as of June 30, 2019; and capex to be between $3 million and $5 million. Our forecast assumes 170 ships and 67 resorts at the end of the year, with an average ship count of 161 and an average resort count of 68. And with that, we will open up the call for questions. Please, Karl.

Questions & Answers:


[Operator instructions] Our first question comes from Steve Wieczynski of Stifel. Please, go ahead.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

Hey, guys. Good morning. I guess first question, Leonard or Stephen, just trying to get an update on how you see the health of your core customer onboard. And what I'm getting at here is these folks are coming into your spa.

Are you seeing them still be pretty open to up-selling them on products or other services? And that probably leads to my second question, which would be still around that transition toward the medi-spa and maybe how that's progressing.

Leonard Fluxman -- Executive Chairman

Steve, we have not seen any pullback in consumer demand or spend onboard the ship as they transition both into Alaska and now we're mid-season in Europe. So certainly, the Caribbean still continues to perform well. So no to the first question. We have not yet seen any signs of pullback and demand still seems very fluid for services and product.

With respect to medi-spa rollout, we still continue for the new ships, obviously. We roll them out with medi-spa and some of them even have dedicated medi-spa facilities. We're still continuing with our rollout, as well as going back into certain of the ships where we can get the resources or the cabins for incremental spa with respect to adding additional equipment that certainly is the result over the long term.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

OK. And then second question would be just around the dilution factor moving forward. Obviously, your share count now is up to 72 million. Stephen, you called out the 6.6 million deferred shares.

As the share price moves higher, obviously, the warrants will continue to move further in the money, but is there anything else we should be focused on in terms of dilution moving forward over the next couple of quarters?

Stephen Lazarus -- Chief Financial Officer and Chief Operating Officer

No. There are -- the 6.6 million is the net total of all the deferred shares so there are no additional shares that can qualify in any manner like that. But as you appropriately point out, to the extent the stock price remains or continues to improve, there will be additional dilution from the warrants and from the options that were going to management. Roughly speaking, you can expect approximately 1.7 million additional dilated shares coming into the diluted share base for each dollar average increase in the share price and that breaks out more or less $1.4 million on the warrants and $300,000 from the options.

And just to round out that is important. I would reiterate that the company remains focused upon making a determination and announcing that determination on our Q3 call with regards to capital structure and going forward what you might anticipate doing with capital structure and/or any other use of cash.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

OK. Great. And if I could ask one more quick one and maybe I might be overthinking this a little bit. But as we look at the cruise industry's recent removal from Cuba, am I right in thinking that should be a net benefit to you guys albeit probably a small -- and what I mean by that is, yes, you'll probably get a lower yield in customer on certain itineraries, but at the same time, we've seen a lot of these non-Cuban revised itineraries carry more at-sea days.

Is that the right way to be thinking about this?

Leonard Fluxman -- Executive Chairman

Absolutely right. There was a small -- very small benefit in the quarter, but I think it characterizes absolutely correctly, Steve.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

OK. Thanks, guys. Appreciate it.


The next question comes from Sharon Zackfia of William Blair. Please, go ahead.

Sharon Zackfia -- William Blair and Company -- Analyst

Hi. Good morning. So two questions. I think embedded in guidance is a pretty steep acceleration on revenue growth in the fourth quarter and I just wanted to clarify whether that was just based on the cadence of new ship introductions.

Or whether there was some other initiatives that you expected to benefit fourth quarter revenue growth. And then secondarily on capital structure, is there any kind of opportunity to clean up the warrant?

Stephen Lazarus -- Chief Financial Officer and Chief Operating Officer

So on the cadence of revenue growth, it's primarily a function of ships being introduced into service and the benefit that those are newer to the company. And obviously, as we've said over and over again, we love nothing more than how cruise line partners introducing big vessels into their fleets that we provide services on. Continued with, obviously, all of the initiatives that we're doing around medi-spa prebooking, dynamic pricing, etc., which we believe will continue to accelerate growth. With regard to the warrant, yes, there's an opportunity.

It is not a simple equation. There's a lot of things that we're trying to factor into this, specifically dividends, warrants. How do you at this share price win? Theoretically, the warrants at $18, you can call them and the company would then receive a tremendous amount of money as you're aware from the people that have to tender those warrants and how that may play with identity theft, etc. So it's a very thoughtful process that the company is undertaking with our advisors to try and determine what would truly be in the best interest of shareholders as we move down that path and then come out with a position with regards to what do you do with the warrants, what do we do with the dividends, how does that impact, etc.

Sharon Zackfia -- William Blair and Company -- Analyst

OK. Thank you.


The next question comes from George Kelly of Imperial Capital. Please, go ahead.

George Kelly -- Imperial Capital, LLC -- Analyst

Guys, thanks for taking my questions. So first, just to follow up on the previous question. As you're going through that math and it sounds like there's an announcement coming sometime soon regarding your capital structure, how much debt are you comfortable with? What is an ideal level on your balance sheet?

Stephen Lazarus -- Chief Financial Officer and Chief Operating Officer

It's a good question, George. As you know, because we have such a low cash tax expense, carrying a lot of debt doesn't give us interest leverage. And so we don't really get that benefit. With regards to comfortable and how much we could carry, as you know, we have very, very good visibility into our forward free cash flow.

And so there's certainly comfort around carrying debt whether or not the most appropriate use of cash is probably a question that we're trying to entertain. So I think as we go through and come out with our positioning on all of that that will pave its way out. I would like to just say depending on what your definition is obviously, I mean, we don't anticipate making an announcement in that regard until our Q3 call, which would be a little while from now. So in some context, soon, in other words, it's not -- there's no imminent now next November.

George Kelly -- Imperial Capital, LLC -- Analyst

Understood. Understood. And then second question for me, just about some of your various yield improvement initiatives, dynamic pricing and prebooking, all that kind of stuff. Where are we and are you still seeing a positive contribution as those initiatives are implemented across the fleet?

Glenn Fusfield -- Chief Executive Officer and President

Absolutely. So as far as -- we're making great headway with all of our initiatives onboard, not only from the cruise lines with great traction but even with the cruise lines that have the new implementation. So just if you take the dominating initiative of our prebooking/prepayment platform, we're now up over 50% on our prebooking/prepayment platform, which is great. So we moved over to the third threshold.

By the end of the year, we'll be at hopefully two-thirds of our fleet in that regard. And of course, we now have direct marketing initiatives across virtually the entire fleet as well and then we've added many more layers of direct marketing, including ideas such as refer a friend, which has really taken off very well for us. So all of our collaboration with our partner is dispersing right now.

George Kelly -- Imperial Capital, LLC -- Analyst

OK. That's great. And I guess one quick follow-up to that. I know you took pricing on some services maybe a year and a half ago.

You think there's an opportunity to consider further price increases over the next year or so?

Glenn Fusfield -- Chief Executive Officer and President

Absolutely, George. So slowly, slowly we're doing price increases, banner by banner. We took a couple of more in Q2. And again, it's a slow process.

We work with our cruise partners. We're doing price compression where possible, really trying to strategically create our price and service catalysts where we would like our guest to land with their service selection. So it's working very well with our key large partner. Now we're trying to get our smaller banners to fall behind.

So we will ultimately start to look at each of our service price list and really consolidate it and never really wait the years. Like we waited in the past as we -- and really start to do that on a much more frequent basis now as it proved tactically beneficial to us.


[Operator instructions] Our next question comes from Stephanie Wissink of Jefferies. Please, go ahead.

Stephanie Wissink -- Jefferies -- Analyst

Thank you. Good morning, everyone. I have two questions for you. The first in your opening remarks, you talked about kind of an 8% CAGR for the industry.

How should we think about your business growth relative to that CAGR? And where do you see opportunities maybe step up your growth into more of that CAGR-type range?

Leonard Fluxman -- Executive Chairman

Right. So I mean, typically, we run faster than the industry capacity growth. So that's certainly something, historically, we've outperformed. And we continue to believe we can deliver that kind of growth rate going forward.

We know exactly which of the ships that we have under contract are coming into service and when they come into service. So I think we have good confidence behind that number. Sorry, what is the second part of your question?

Stephanie Wissink -- Jefferies -- Analyst

Just ways in which you can accelerate your growth into that industry growth. And maybe just a related question, I noticed in a couple of your recent contract announcements, you included more of the fitness and wellness side of your service proposition. I'm curious if you can just talk a little bit about is that an opportunity to increase throughput or utilization per vessel by expanding your service menu into other adjacent category?

Leonard Fluxman -- Executive Chairman

Yes. I think the real opportunity very much follows along what Glenn had spoken about. We continue to rollout will possible new initiatives, particularly supported by incredible collaboration from our cruise line partners with respect to the marketing initiatives, dynamic pricing, etc. And so we're looking not only to elevate from that, but we're also looking clearly with the mix of services obviously skewed.

We're trying to push more toward growth in the medi-spa area. That remains a very strong focus of us and we believe it's achievable. Clearly, it's being well-received right now and as we go back and reequip some of the ships with some of the new equipment that we're testing right now, the results have been phenomenal. So we're very confident that mix of services, even some of the older services like, for instance, hair services, etc., are getting traction which is kind of a dead category for a while, but we really restored that with a big carrier start initiative and supported by L'Oréal.

So we're excited about the opportunity not only to take the existing portfolio services, but to add services over time to feel that growth down the road.


This concludes the question-and-answer session. I would now like to turn the conference back over to Leonard Fluxman, executive chairman, for any closing remarks.

Leonard Fluxman -- Executive Chairman

I just want to thank everybody for joining us on this call today. And we look forward to speaking with you on our third-quarter earnings call in November. Thanks very much.


[Operator signoff]

Duration: 32 minutes

Call participants:

Allison Malkin -- Investor Relations

Leonard Fluxman -- Executive Chairman

Stephen Lazarus -- Chief Financial Officer and Chief Operating Officer

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

Sharon Zackfia -- William Blair and Company -- Analyst

George Kelly -- Imperial Capital, LLC -- Analyst

Glenn Fusfield -- Chief Executive Officer and President

Stephanie Wissink -- Jefferies -- Analyst

More OSW analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

OneSpaWorld Holdings Limited Stock Quote
OneSpaWorld Holdings Limited
$8.96 (2.40%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.