OneSpaWorld Holdings Limited (OSW) Earnings Call Transcript & Summary

Thanks, everybody, for joining us this afternoon. I'm Steve Wieczynski, I'm the Gaming and Leisure Analyst at Stifel. It's so bright up here, I can't see anything. And I'm thrilled to be joined today from OneSpaWorld. To my right is Leonard Fluxman, their Chief Executive Officer. And to his right is Stephen Lazarus, who is their Chief Operating Officer and Chief Financial Officer. So we've got about 25 minutes. I want to make this as interactive as possible. So if you do have questions, raise your hand, I'm not sure if I can see you, but just somehow flag me down and ask whatever you want. But I'm going to start with a couple of questions to these guys, and we'll kind of go from there. So I guess, first of all, Leonard, Stephen, I don't know what the level of knowledge is about OneSpaWorld in the room. So maybe just give -- take a minute or 2 and kind of give a brief overview of what OneSpaWorld is.

All right. Thank you, Steve. Thank you for having us today, and good morning, afternoon to everybody. OneSpaWorld has been the eminent outsourced provider of health, wellness, spa, fitness services onboard cruise ships. We presently operate their services across luxury, premium, mass and contemporary on about 199 ships right now. We also operate 49 locations on our small little land-based operation, which is less than 10% of the overall revenue and even less than that of EBITDA. We've evolved our services over time. Today, we see acupuncture in high demand, medi-spa in high demand. We provide all the staff. We train all the staff. And we have about 4,200 staff members on board right now, slightly more than we were sort of pre-pandemic. So the business has come back incredibly well. The cruise lines are sailing at load factors historically, very similar to what they were pre-pandemic, 106% load factors through November. And so we're in, what I would call, a normalized environment right now. We continue to do very well in our renewal process. We have about 5 years left on most of the major banners that we service right now. So there's plenty runway with respect to contractual term on the ships and particularly the big banners. And the operation in '24 has been fantastic. Consumer remained strong for us. Cruise lines are sailing much fuller. And overall, the environment has been quite favorable for us. Thanks, Steve.

Yes, thanks. So one of the questions I think we get the most about your company is your market share, obviously, is extremely, extremely high into the low to mid-90s from a market share perspective. And we get asked a lot what makes you guys so unique? Why aren't there other competitors coming in trying to take share away? And what's the relationship like with the larger banners today in terms of your relationship with them? It's obviously, these are revenue share agreements. That's a lot different than where they were 5, 6 years ago. So just kind of how your relationship is with your larger banners as well?

Yes. So look, Stephen and I have been running this business for about 50 years collectively between the 2 of us. We've seen these banners come to the table year-in, year-out, although we typically do contracts that are 5, 7 or even 8 years in term. But the single biggest thing that keeps us in a dominant position, 90% market share is we have, over the last 3 decades, built an incredible moat around this business, and the moat consists of the ability to recruit and train staff around the world. Today, we have 9 training centers. We recruit hundreds of staff. Some of them don't make it through the testing period, then they get onboard, they might not make it. So we've got to have a robust bench available. Staff are constantly being trained. We send out about 100 staff a week. So we're graduating hundreds of people every month to go onboard ships and join the staff. It's hard. They typically stay onboard for 9 months. But really, it's the moat itself, the training capabilities, the HR capabilities. We have a back-to-sea program. We have incredible data that even the cruise lines don't even have about their passengers who come into the spa. We have an incredible logistics reach, supply chain second to none. And unless you have all of those working well, you just can't get to the revenue that the cruise lines have projected for you. And so where newcomers that come into this business, even those that have had a footprint on land, and we've had some come in over the years, one of which we brought out, one of which went out of business, Canyon Ranch right before -- or they went out of the cruise business, not business. They went out of the cruise business right at the pandemic, so we got that market share back. But unless you've got all of these incredible parts of the moat working well, it's very, very difficult to stay up with the churn of staff, the type of productivity that we show the cruise lines, and we're seamless. And so the last thing that they want to worry about is a division or a department on their ships that's not working well. And I think that's the real reason we've stayed ahead of the curve and managed to keep out most of the competition.

So I want to ask just staying on the demand side of things. Obviously, the demand for the cruise vacation right now is incredibly, incredibly strong. I think if we were -- or the consumer was going to slow down, you guys would probably be one of the first ones to probably see it on board. I mean if you kind of go back and look at '08-'09, the first thing to roll over wasn't the folks booking, it was as they came on board, they pulled back once they were on board. So just -- that's a long-winded question of what are you seeing today from a demand perspective? I think the important thing for you guys is maybe attachment rates as well, what are you seeing from that perspective? And then maybe talk a little bit about the discounting component. And if there was going to be some softness, I think your discounting would be a little bit higher than where it is historically and maybe, it's a long, long question.

That's okay. So we have not seen softness thus far. I think there was a little trepidation about the softness in the consumer, how soft the landing are we going to get, et cetera, et cetera. The cruise lines have had an incredible '24 as well as us. And their ticket pricing has continued to rise. They're looking very favorable for '25. The booking window right now is well underway and far out. They go through wave season or a function of wave season because a lot of the stuff is done direct to consumer today. But even the wave season is still an integral part of how they book the year, and it's looking good. And they're not looking at any pricing coming down thus far. And from what we've seen, all itineraries look strong and well booked. So that's a good sign for us. Whenever we have that kind of demand and healthy consumer onboard, and to the extent that they're not discounting as much as they used to pre-pandemic, obviously, that bodes very well for the spend of the consumer and the guests onboard.

Just remember, Steve, as everybody knows, we're generally servicing about 11% of the guests onboard anyway. And so those are typically the higher tier guests as well. And so while there may be people that are being squeezed at the lower end, they're generally not the folks that would be coming into our facilities anyway. So that people onboard, the cruise lines, as you know, do an excellent job of bringing these folks onboard every single crews. And so because of the tier of people that we're targeting, there just hasn't been any softening.

Okay. So turning to financials. You guys preannounced your fourth quarter this morning. It was another beat. I think this is 6 quarters in a row. I know your release said 4, I think it's longer than that. I think it's at least 6. So that looks pretty good. So when you think about the guidance you laid out, preliminary guidance for 2025, maybe talk about what you guys have embedded in your guidance for kind of the health of your consumer, is -- if you kind of look at the low end versus the high end, is it low-end consumer backs off a little bit? Is it high-end consumer kind of stays relatively status quo? Just trying to figure out where that midpoint is and what would get you to both ends of that spectrum.

Yes. So it's a valid point. And there are a couple of things I think you should think about as you think about the guidance. So on the one hand, they are 9 new vessels coming into service that will come under the purvey of OneSpaWorld by virtue of our contracts. The vast majority of those are very weighted towards the back end. So that does drive some of the growth rate versus what might otherwise be anticipated. Generally, we expect the consumer to remain strong to the extent that they remain as strong as they have been. We could see some upside. We have not taken service pricing into account. And so to the extent that there's an opportunity to do that, that would be helpful to us. There's still a nice discount versus land-based vacations. And to the extent that the cruise lines take pricing and/or retake pricing, that would be helpful. One of the small drags that we do see on our business, frankly, and again, it's a very, very small piece, right, is on the land-based side. So land based is hurting a little bit, and it's exacerbated by the fact that we anticipate 2 larger spas being under construction during the year. And so that will be a short-term drag that should rectify itself once that is completed. And Asia, again, of a small piece, it's even a smaller piece, but Asia has been a little bit more pressured. So we would like to do better there. But if you -- obviously, we've taken all of that into account and that rolls up into the total.

Yes. And I think to your point, Stephen, the issue around land based is not that they haven't met their expectations or forecast for '24, they did and slightly beat. Some of the construction that we anticipated in '24 has been pushed into '25, which might not be a bad thing. And that's one of the largest spas that we operate, which is Atlantis, so that's a big reconstruct, one in Puerto Rico as well. And so that's why I wouldn't call it, it's just that they're impacted rather than the division itself is under pressure.

So if we -- we talk about this all the time. I think you're a very conservative management team, and that does make sense given the visibility in your business is basically day to day. You don't really get a lot of forward indications of what demand is going to look like. So if we go back to last year at this point at ICR, I think the midpoint of your '24 guidance was like $95 million, and you guys will end up doing, what, $111 million, $112 million of EBITDA this year. So whatever that is 15%, 16% upside from your original midpoint. If we think about this year, I don't want to say your guidance is conservative but you've got kind about. I don't think we'll get 15% or 16% upside from where we are today. But is -- I would assume there is a chance if the consumer does stay and attachment rates stay pretty status quo to be at least on the high end of that range. Is that fair?

I think it's fair. I think if we take pricing, it certainly helps move you down that path. Look, as you know, we're sort of in the second week in January here, right? So we'll see how things play out. But we feel really, really good about where we are right now. What we've put out for now is certainly something that we feel comfortable achieving. And yes, you're looking out for the year, but as you know we have literally decades and decades of itinerary-by-itinerary data that helps us go from a bottoms up and arrive at a number. But in a perfect world, would we do better than what we announced today? Yes, but let's see what happens. I wouldn't want to go out today with a definitive.

Let me -- we're kind of halfway through. Are there any questions out there? Or should I keep going? Okay. I'll keep going. So if we think about now the -- I mean you guys are an incredible company. I mean you have incredible market share. You have no debt for the most part, very, very little debt, and you generate -- you convert 94% of your EBITDA directly into free cash. So as we think about this moving forward, you're going to be just harvesting cash. What will be the uses of cash moving forward?

Okay. So before Steven answers that question, just backing into his last question on guidance, there are 9 ships coming into services this year. That's a big number, more than average. Typically, it's 6 or 7, 9 coming in. However, the guidance takes account of the fact that the majority of those ships are only coming in back of the third quarter, at least beginning of the fourth quarter, last week of the third quarter. So they're really not going to have a full year in service. But the good news is they'll have a full year in 2026 when we have 5 new ships coming in. So 2026 will be advantageously good for us because of the late arrivals of all those new builds in the last quarter.