Onespaworld Holdings Ltd
NASDAQ:OSW
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Onespaworld Holdings Ltd
Earnings Call Analysis
Q3-2023 Analysis
Onespaworld Holdings Ltd
OneSpaWorld made waves in the third quarter of 2023, riding a growing tide of success. The health and wellness specialist for cruise lines showcased a stellar performance, delivering its best-ever third-quarter results. Total revenues surged by 33%, hitting a high of $216.3 million while adjusted EBITDA made a splash with a 36% increase to $24.9 million. This financial buoyancy wasn't just a stroke of luck. It was the result of deliberate moves to enhance service levels, introduce innovative offerings, and smartly navigate through new contracts. The company's confidence is so strong that it's boosted its full-year revenue and adjusted EBITDA guidance well above what their third-quarter outperformance already promised.
Anchoring its growth, OneSpaWorld upped its count of health and wellness centers, raising the number from 176 to 189 ships year-over-year. Looking ahead, they're setting sail with ambitions to have 193 ships by year-end, capturing the momentum of 10 new builds in 2023. Not just expanding in numbers, the average weekly revenues per ship rode a 22% wave of increase, with guests also spending more and a modest uptick in revenue per staff member onboard each day. This combination of expanding operations and deepening revenue per operation underscores a strategy that's not just about growing bigger, but also better.
As OneSpaWorld cruises forward, it's innovating with engaging new products and services while anchoring its position in a vast market. The introduction of health and wellness centers on six new ships, along with exciting service offerings such as IV therapy and facial toning devices, reflects the company's drive to create waves in service revenue and guest satisfaction. This innovation supports an already robust market share, which stands at over 90%, with room to burgeon further as evidenced by new contracts with high-profile cruise lines like Virgin Voyages and Adora Cruises. The result is an enriched guest experience and deepened penetration of service and retail sales.
Financially, OneSpaWorld is in shipshape condition. Net income soared to new heights, with gains charting a course from $5.9 million to $23.4 million year-over-year, translating into a significant jump in earnings per share. But all this wasn't accomplished without incurring greater costs. The cost of services and products climbed in recognition of the greater volume of business and services provided, a necessary expenditure for the impressive revenue growth seen across the board.
Even with geopolitical tempests disrupting some cruise line itineraries, OneSpaWorld sails on undeterred. Despite itinerary alters and cancellations, they've charted a course that's expected not to materially impact their results. This speaks to their adaptability and robust operational strategy that keeps them afloat in the face of global uncertainties.
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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.
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.
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 sales 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 6 new ships, including 2 Crystal Cruise vessels, Crystal Serenity and Crystal Symphony as part of the new agreement announced earlier this year and 1 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, Region 7 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?
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 3 months ended September 30, '23 was a gain of $7.4 million compared to a gain of $300,000 during the 3 months ended September 30, '22.
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, '23 was $28 million compared to $30 million at June [ '23 ], 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 9 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 '23, 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 '23 operating on 193 cruise ships and at 54 land-based resource. 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 Instructions]
The first question comes from Gregory Miller with Truist.
I'd like to start off with service pricing. Could you share your current views on pricing heading into the 4Q holidays? And if possible, into next year, have you seen any pressure points in consumer spend the impact if or how much you may raise pricing over the next year?
Yes, we've actually seen very little pressure on pricing at all. We're -- we continue to hold pricing where we've had it discounting only on shoulder days where necessary, but certainly not below our increased level. So there's still hallmark pricing on a couple of services on some banners and we will obviously reintroduce Hallmark pricing through the Christmas New Year period across most of banners. So right now, as we said, our ships are -- I should say the cruise lines are repositioning their ships, longer cruises, et cetera. So we still have not seen pressure on pricing thus far. So we're in good shape.
Excellent year. And then for the follow-up. I thought I'd ask you about the commentary you're providing about your staff, your experience after at higher levels than in the past. Could you discuss what is driving that better return to see trend?
So as we've mentioned perhaps on prior calls, and it's something we wanted to call out this call, experienced staff tend to produce at a much higher level. Definitely, after 2.5, 3 contracts, we see the productivity improve, retail attachment improve and just the experience level and then ultimately try and move them up into management if they're capable of such a move. We continue to reinforce training. We continue to take care of the well being on board. They're busy. They're doing well. This is definitely an incredible environment for them to earn money and save money to the extent that they wish to do that given that most of the expenses on board are taken care of. So we're starting to see that retention number improve and with that comes greater experience and greater productivity.
Our next question comes from Steve Wieczynski with Stifel.
So Leonard, I think you heard -- I think I heard you correctly that you talked about how the fourth quarter is already up to seems like a pretty strong start. So if that's the case, is it fair to think the trends that you witnessed through October were essentially running at similar levels to what you witnessed during the third quarter. I guess what I'm just trying to understand here, has there been any real change in spend levels and then maybe how the quarter played out from a sequential standpoint.
Yes. Look, the third quarter, Steve, spend and a bunch of other metrics were extremely strong. I mean, as you know, the second and third quarter tend to be that way, but we actually saw improvements in average guest spend. Staff utilization as the third quarter starts -- as the third quarter starts with the longer cruises can go up and down just depending on how long those cruises are, but we're very, very encouraged by what we've seen even at the beginning of what we termed the softer quarter as these ships repositioned into new itineraries back to the Caribbean back from Alaska out of the Mediterranean and troubled areas. And so from what we've seen to date, I'm very encouraged by what I've seen so far in October. So yes, it continues continues to hold a strong pattern of demand.
Got you. And then look, I know it's early. I know you're not prepared to give 2024 guidance yet. But as we look into next year. Is there anything we should be thinking about in terms of seasonality or other factors that potentially could -- whether that's help or whether that's hurt our operating performance as we just kind of think about 2024 more from a big picture perspective?
Not that I can see. I mean I look at the close-in bookings from the cruise lines, demand, pricing, 60% to 65% booked through '24. I mean I guess we'll hear more from the cruise lines as they report. But certainly, as we heard from Royal and NCL today, it seems that demand continues to be strong. And look, the value that cruising today provides guests in a somewhat inflationary environment is still an incredible vacation and value vacation. We continue to see demand for our services. We continue to see the cruise lines focus more on the prebooking in, which we know guests spend more if they pre-book. And I think the collaboration that we are experiencing with our cruise line banners and partners, is at a level where they're seeing the benefits too from that prebooking. So I think we'll see them focus more on that.
Outside of things, we just can't control, Steve, geopolitical events. As you know, cruise lines will cancel and move away from trouble, which they've started doing or have done already. I don't see outside of anything macro that's out there, things that could sort of change my view on the demand for cruising, which seems to be outperforming any other vacation experience to date.
The next question comes from Sharon Zackfia with William Blair.
I guess I'm curious on the revenue per staff per day. I mean, it's holding at extremely high levels, particularly when you look at kind of what you were doing pre-pandemic. And I'm wondering if at this point, as you look forward, is the main opportunity in continuing to increase the revenue per staff per day? Or is it by adding more staff. I'm trying to figure out kind of how high realistically we could think about that revenue per staff per day going kind of on an annual basis? I know there's seasonality there.
Tough question, but a good one, Sharon. So we continue to focus with our sales and revenue stuff that, as I mentioned, are out there all the time. Today, with the data, the metrics we have, we can really drill down and see who's not performing, where the underperformance is coming from, which modality we need to shore up. I think the team has done an excellent job throughout this year and in the last 2 quarters of last year is focusing on the underperformance and raising them to the level of the higher performance. So we want to get everybody up to As and B-pluses.
I think our team is doing an excellent job focusing on that, and we have the data now where we can see it earlier than we've ever done before, and that was all the preparation that we did in the pre-pandemic period and pandemic period. So I think execution is a function of vigilance earlier retrieval of data acting on that data and reinforcing training where it's needed. So we will balance staff across different itineraries as needed. And we will make sure that the balance is there so that staff continue to be busy. We don't want them not to be busy, but we also want them to have the requisite [indiscernible] that they need.
So yes, it's a continued balancing act. At the same time, our focus in 2024 is going to be looking at what is the best use of stock? Do we have one less massage therapist and add somebody in our medi-spa or acupuncture, which is outperforming. So we want to make sure that we're putting the right staff on the right ship for the right itinerary for the right demographic. I think that will continue to support revenue per staff per day into 2024.
And then, I guess, a follow-up question on debt. I mean it seems like just given the trends in the business that you're going to delever pretty quickly in 2024 and probably could be debt free at some point in '25. I just want to level set that, Stephen, if that's kind of a realistic outlook because I assume that keeping debt on the balance sheet is not kind of very advantageous for you given your kind of tax-free status.
Correct. Broadly speaking, that is absolutely the case. We do have a portion of the debt that we allocate to the U.S., which helps where we do, therefore, get the interest leverage benefit from that. But outside of that, it really doesn't make sense, particularly as close to 10% interest rate. So debt paydown will continue to be a focus of our excess cash flow. I do think though at a point in time, it doesn't have to be mutually exclusive like the company, we'll get to a point where we will consider avenues for returning capital to shareholders as we deem appropriate.
Your next question comes from Max Rakhlenko with Cowen & Company.
Great. A nice job in the quarter. So you called out a number of key initiatives and priorities. Can you rank them in order of magnitude? And any key unlocks we should be looking for?
Max, we're always looking, obviously, for market share pickups, right? There's not that many out there we still continue to focus on that. We did pick up one more. At the end of the day, it could be perhaps focusing on other segments of cruising, whether it be river cruising, maybe there's more to pick up there, albeit that the ships are smaller, further even smaller than what we have on some of the small luxury ships.
So we focus on where the opportunity is. We think there could be some forthcoming. But it's too early to say what what we're working on and what we'll develop, right? So I would say market share and new ship introductions continue to be a high priority. But at the same time, we want to focus on productivity at the same time as launching and expanding our menus on board, particularly in the wellness and medi-spa area. And that's going to be a focus over the next 2 years.
And I would say that, that's a key focus of ours is how we can augment that, how we can increase our footprint, how we can increase more staff by convincing the cruise lines that there's definitely an opportunity there given the high ticket prices. And ultimately, to the extent that we can move those 2 modalities to a higher level of participation in our total gross revenue, that's obviously going to help expand revenue opportunities on board, the 135 ships that we have medi-spa on.
And then can you speak to the level of conservatism embedded in the 4Q guidance as data from the cruisers seem to suggest that you are being quite modest in your outlook?
Look, I don't want to get too far ahead of our skis. We've raised guidance, I think, in my mind, accurately to the extent that we have an opportunity in this, sort of, softer quarter to outperform, so be it. There's still a lot of balls in the air that who knows what happens. But I just feel that -- gosh, we've raised guidance each quarter since we've popped out of the first quarter. I think, if you've known us long enough, we definitely err a little bit on conservatism in case something does sort of wobble around, but we're pretty confident about where this fourth quarter is going to end up.
Got it. And just very quickly, any early thoughts on 2024 given such strong bookings called out by your cruise partners. And just any learnings from this year that will help you outperform next year?
Max, it's early to start talking about 2024. We typically do that sort of the weaker ICR, we'll give a high-level guidance and feel. We're still receiving inputs from the cruise lines with respect to change itineraries, et cetera, there could be some changes until we've totally circled the wagons here and everything. I think it's too early to comment at this juncture. But we'll have that guidance out typically as we do the first or second week of January.
Our next question comes from Laura Champine with Loop Capital.
I just wanted a little more detail on, there's a sense in the press release about deploying enhanced technologies to drive productivity. Could you be more specific on what types of things you're referring to there.
I think it's looking at scheduling. It's the most important thing that we do is we look at scheduling the day we sale. Obviously, the first day and vacation day is very important. We look at that demand. We look at the prebooked demand. We look at where the gaps are, and we focus on that. We have a lot more in our marketing toolkit that we use for promotions, et cetera, bundling, getting more and more people to have more frequent services as opposed to just one and all of that's paying off.
Got it. And then a follow-up to a prior question. I mean you've got -- we're looking at good-looking bookings from the public companies, how different do the private cruise line booking trends tend to be relative to public company booking trends.
Look, overall, load factors this year have moved very positively across both the public and nonpublic companies. They tend to move in lockstep. I would imagine it's the same. I mean, sometimes you've seen some of the higher end, perhaps not move at the same level. But generally speaking, I would say the confidence that the cruise lines see around near-end bookings and into '24 should be similar across the entire industry.
Our next question comes from Assia Georgieva with Infinity Research.
Excellent quarter. Great job. I had a couple of quick questions. First of all, one of your major cruise partners is kind of going into more longer, more exotic itineraries, is that structural change going to affect you in 2024? Or do you think given possibly a higher level revenue-generating client that it shouldn't have an impact.
In the scheme of the 180 to 193 ships that will be on in this year, last year, I mean. We've had cruises move into those longer itineraries. We've had many more world cruises than we've seen in the last year. We still know that the sweet spot is obviously the 7-day market. So can it impact some of the cruises, yes, a little bit. It will be built into our guidance next year, if it's so -- I just don't see it being a material impact at all. I think it's more companies moving back into more normalized itineraries as opposed to perhaps what they've had as they come out the pandemic. So I don't see this being a big change from what we saw in 2019 when we had those cruises.
That's good news. And kind of a related question, I think we will have more dry docks in 2024 than we would have typically relative to 2019, that will probably be sort of a short-term event, I would imagine.
Yes, I agree. Yes, exactly.
And lastly, maybe, Stephen, you touched on this when you were answering Sharon's question. With debt repayment at such significant levels, which is great and trying to get returning capital to shareholders. Are we thinking buybacks or possibly a dividend program?
Both will be considered. Determination will be made depending on what the stock price is, what interest rates are, et cetera. So I think the Board and the company will try and make the best decision for our shareholders.
Well, Stephen, that was a very diplomatic way of telling me I'm not going to answer this question.
No, he's not saying that at all. What it's really saying is you can see the free cash flow generation from this company. You can see the rate at which we're paying down debt. Clearly, at some point, whether it be at the end of '24, we'll have a much better idea of where we are on debt. Clearly, that's the best use of cash right now. And to the extent then that we continue to see the same optimism in our business, we will start to return in either of those forms. I don't think he's trying to be cute at all.
Well, and I didn't mean it that way. I guess I was trying to be cute.
So he is a very good diplomat, I will say.
Agreed. Again, a great quarter, and thank you so much for providing even better guidance for Q4.
This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.
Right. I just want to thank everybody for joining us on the call today. But before I leave, I just want to thank our entire leadership team that work so closely with us and all of our associations should put staff for their steadfast contributions and commitment to achieving the operational excellence evidenced by the third quarter results and expected fourth quarter results. So thank you, everybody. We look forward to speaking with you on the next quarter call.
The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.