Thank you for standing by. This is the conference operator. Welcome to the OneSpaWorld Holdings First Quarter 2020 Earnings Conference Call. [Operator Instructions] 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 first quarter fiscal 2020 earnings call and webcast.Before we begin, I would like to remind you that certain statements and information made available on today’s call and webcast maybe deemed to constitute forward-looking statements.

The COVID-19 pandemic continues to have a significant impact on our operations, cash flow and financial position. The uncertain and dynamic nature of current conditions and its ongoing impact could materially alter our outlook.

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 discussions 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 first quarter 2020 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 today are Leonard Fluxman, Executive Chairman; Glenn Fusfield, Chief Executive Officer and President and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer.

Leonard will begin with highlights of our first quarter, including the impact of COVID-19 and then review our key priorities.

Then Glenn will discuss our actions taken to return, our staff home and our service offering innovation followed by Stephen, who will provide more details on the financials, our liquidity and actions taken due to the impact of COVID-19.And now, I would like to turn the call over to Leonard..

Thank you, Allison. Good morning and welcome to OneSpaWorld’s first quarter fiscal 2020 results conference call. The environment we are operating in today is one that no one would have predicted at the start of the year. Indeed, we began fiscal 2020 with outstanding momentum.

Our global market share at sea was at an all-time high at over 90%, and we had the highest vessel count and largest vessel additions in our history. Further to this, our initiatives and the innovation in our services and product offering were expected to add materially to our growth.

Our performance through February was tracking in line with our expectations for increased sales and EBITDA despite headwinds from COVID-19 in the Asia-Pacific region, affecting both crews and resort activity in the region.We continue to advance our growth initiatives commencing operations as the exclusive health and wellness provider for Oceana Cruises and Regent Seven Seas cruises.

In total, we added 5 net new ships to our fleet of cruise line partners during the quarter. We furthered our trend towards larger and enhanced health and wellness centers and continue to expand our close collaboration with our cruise line partners to elevate our service offerings.

This drove increases across all key business metrics, including average weekly revenue per ship and average weekly revenue per ship boot staff through February.However, mid-quarter the global spread of COVID-19 disrupted operations for our company and the cruise and hospitality industry overall.

We proactively pivoted our priorities, focusing first and foremost on the safety and well-being of our staff as well as preserving cash and enhancing our capital structure, to ensure we are positioned to not only navigate through an extended period of time with limited operations, but also emerge from a position of strength following this extraordinary period with the financial flexibility to cement our industry leadership, advance our cruise line partner relationships, leverage our highly differentiated business model and continue to innovate our product and service offerings to prepare for the eventual resumption of voyages and opening of destination resorts.I would like to thank our entire team and attentive staff for their dedication, commitment and service during this unprecedented time.

Our team moved quickly to begin the process of bringing cruise ship staff home, and our corporate employees transitioned with ease to remote working. In total for the first quarter, net revenues were $114.3 million, a decline of $23.2 million from the prior year first quarter.

The estimated revenues lost related to COVID-19 and the resulting canceled voyages and closed destination resorts during the quarter, was $35 million. Adjusted net loss was $1.2 million compared to adjusted net income of $9 million in the first quarter of fiscal 2019.

Adjusted EBITDA was $5.1 million as compared to $15.3 million in the first quarter of fiscal 2019 and un-levered after-tax free cash flow was $3.6 million as compared to $15.3 million in the first quarter of fiscal 2019.In response to this unprecedented pandemic, we took decisive actions to protect our staff and preserve our liquidity.

We eliminated all nonessential operating and capital expenditures, deferred payment of our previously announced dividend and suspended our dividend program.

These actions, combined with our highly strategic equity offering backed L Catterton, our longstanding partner, provided us with the resources to sustain our business for more than 24 months with limited operations.

Going forward, we will continue to aggressively manage expenses while remaining focused on investing our resources in areas that will elevate our more than 90% market share in the operation of health and wellness centers at sea.While all our operations on cruise ships and destination resorts are currently closed, we continue to advance the priorities we set for the business at the start of the year.

These are two. First, efficiently and effectively introduce our health and wellness programs. As I mentioned, we began service on 4 Oceana and 1 Regent vessels in late December 2019, and having completed our rollout to the remainder of the fleet in January 2020, including the region Regent Seven Seas Splendor, prior to the cancellation of all voyages.

At the same time, we remain focused on maintaining excellent service levels across all our entire fleet.

Second, to expand our treatments, products and services to our customers as we seek to grow onboard revenue, while work was ongoing with respect to expanding medi-spa and recovery treatments as well as body contouring and advanced Thermage FLX, among other new services, this activity has temporarily been put on hold due to COVID-19.And now I will turn the call over to Glenn to provide details regarding our actions taken to ensure the safety of our staff, and update you on our service and product offering initiatives, including across the areas of medi-spa pre-booking and dynamic pricing.

Glenn?.

Thank you, Leonard. Before I begin, I would like to thank our team for their dedication and commitment during this very challenging period. Since the start of this pandemic, our priority has been intently focused on the safety and well-being of our staff.

Throughout this period, we have been working tirelessly with our cruise line partners and government authorities to securely transport staff home as soon as possible. Since our update on April 30, we have repatriated an additional 7% of our crew ship personnel, bringing the total thus far to 52%.

We expect an additional 20% of our cruise ship personnel to be repatriated shortly as the vessels in which they are sailing head to their home countries.

We are also remaining closely aligned with our cruise line partners by maintaining operational agility to rapidly scale our business once voyages do resume.During this period, we are collaborating with our cruise line partners on initiatives to enhance our onboard guest experience and maximize our shared economics, while developing and implementing strict comprehensive personal care and safety protocols for our staff and guests.

We are maintaining readiness to rapidly engage and scale our global operations when voyages resume and resorts open.

While all of our spa operations and cruise ships and destination resorts remain closed, we continue to make progress on expanding our treatments, products and services to customers in order to continue to increase onboard revenue.Prior to COVID-19, we experienced continued favorable trends in average spend and pre-book services as well as dynamic pricing.

In fact, onboard revenue and productivity metrics through February were trending higher than prior year. We are continuing to work with our partners to roll out these initiatives across our fleet.

However, because of the uncertainty of the timing of new ship introductions and the resumption and scale of cruise lines returning to service, it is difficult to ascertain our initiatives rollout at this point.While 2020 will be challenging, we plan to accelerate our investments by expanding our offering of new products, services and rollouts of key programs to certain vessels when voyages resume.

With our recent capital raise, we will continue to fuel our innovation of these service offerings and spa experiences during this period.

These efforts will enable us to fully capitalize on our commanding market share, position and growth opportunities when normal operations resume.With that, I will turn over to Stephen, who will provide additional information on our first quarter financials and discuss our liquidity position related to the COVID-19 impact..

the issuance of approximately 18.8 million common shares for a total of $75 million, reflecting a 5% premium to the 20-day volume weighted average price of our shares through the market close on April 29, 2020.

The issuance of 5 million warrants to purchase common shares of the company at an exercise price of $5.75 per share, an exercise warrants will expire on the 5th anniversary of closing and are redeemable at the option of the company when OneSpaWorld shares trade to $14.50.Steiner Leisure will expand its representation on our Board to 3 of the 10 directors and the Steiner Leisure and OneSpaWorld management and Directors’ newly issued shares will be subject to a lockup period of 12 months from closing.

Proceeds from the transaction will be used for general, corporate and working capital purposes and to pay transactions fees and expenses related to the transaction.

We expect the transaction to close in June and the increased liquidity to enable us to remain in compliance with our loan agreements for the foreseeable future as well as provide us with the resources to continue to invest in innovation and the necessary support to quickly allow us to resume operations and fully capitalize on our market position and growth operations when conditions warrant.

Given the unprecedented disruption related to COVID-19 and the rapidly evolving nature of the pandemic, we are not able to provide a reasonable basis for guidance at this time. As such, we are currently not providing an outlook for our second quarter or full year.And with that, we will open up the call to questions.

Steve, if you could please take ahead?.

[Operator Instructions] The first question comes from Sharon Zackfia with William Blair. Please go ahead..

Hi, good morning. Thanks for taking my question. I guess obviously, there is a lot of fluidity in the situation right now, and we’ve heard a number of the publicly traded companies that are in the cruise business talk about cold lay-ups for a number of their ships.

I guess as you look at the going-forward plan as it stands right now, I mean, how would you peg kind of the maximum number of ships that you might serve in the third quarter? And then if you can help us kind of understand, once those ships start to sail – if they do sail it kind of lower-than-normal occupancy, how that might affect any kind of revenue or margin opportunity for you? And in particular, as it relates to any kind of minimums that you might owe the cruise companies at that point?.

Right. Thanks, Sharon. It’s really difficult to answer exactly how many ships could be in service in the third quarter. I mean the only thing that’s governing return to service right now is obviously the CDC orders, which extends through July 24.

And despite the fact some cruise lines have start dates earlier than that, I just don’t think they’ve been revised, and they will continue to be revised. It’s a fluid situation, as you said.

I think we will see in the third quarter, based upon at least what we saw Carnival show on their website with August 1 return to service, if that’s even possible, is much shorter cruises focused on where sort of they drive cruises available people that can drive and board.

So I think you’re going to see shorter cruises, less ports of call, clearly because not all the ports are open to the cruise lines, even in the Caribbean. And as such, you will probably see shorter number of ports, more sea days, which is obviously good for us.

But at the same time, as you mentioned, we are not expecting occupancies to be much higher than 60% starting out. In fact, they will probably be 50%, maybe a little better. We have seen the cruise lines release some really positive numbers on sort of pent-up demand going into ‘21 as well as in the fourth quarter.

So there’s clearly demand for cruising out there. I know the cruise lines are working very, very hard and closely with the CDC to step-up in every single way, what’s going to be required to return to service. But I think it’s too early for us to say exactly how many ships will be in service at that time..

So if you have ships that are sailing at half occupancy, can you talk about what that means for your minimum payments to the cruise lines? I mean are those handicapped based on occupancy or would we see pretty significant margin implications for you?.

So remember, minimums are based upon when the ships are actually sailing. So to the extent there’s no sailing, obviously, the minimums are a – there are no minimums in play right now.

So when they return to service, and if they are selling at 50%, 60% or slightly better, depending on where the geography is – remember, we only need 11% of the best possible guests’ onboard participation to do what we need to do. Obviously, we’re hoping that the guest profile demographic is decent.

I expect it’s going to be challenging in the beginning, but as a reset, obviously, with respect to guarantees every single year. So what happens in the third and fourth quarter, to the extent the cruise lines start sailing again, then clearly, that will impact how the guarantees are calculated going into ‘21..

Thank you.

And then just the last question, as you get ready to start sailing again in the third quarter, can you talk about any start-up costs that you might incur kind of getting staffing back in place? And whether or not you’re seeing any challenges or reluctance for folks to go back and work on the cruise ships or if that’s still a pretty fertile market for you in terms of recruiting new staff? I know you’ve done an extraordinary job with staff turnover in the past several years.

I just don’t know what the headlines might mean for the ability to attract staff now..

Sharon, this is Glenn. If I can take this one, Leonard, if I may..

Yes..

The demand to come back has just been phenomenal, believe it or not. And given the low occupancies of the guests on the ship – on each ship, of course, we’re going to have reduced staffing – or commensurately reduced staffing. So we’re actually in a position where we’re hand choosing the staff that we’re breaking back now.

So we’ve actually ranked our high producing staff by modality and so forth. So we’re going to be bringing back the best of the best. And certainly, the folks are already lining up and requesting to come back. We just don’t know what ships to assign them to or what brands are going to go first and so forth as it is a fluid situation, as Leonard remarks.

So clearly, we’re not so concerned about the recruitment effort. Our back to sea program has been in touch with all of our already repatriated staff. We have daily communication with all of the vessels to which our staff still remain onboard the ships.

And as you know, there’s a tremendous amount of crew members that still remain industry-wide around the world. So we communicate fluidly with all. So again, the only true efforts are just to coordinate who and what and when, and really bring back the veterans.

As the new builds start to reenter the marketplace, then we’ll start to enhance the recruitment efforts because we always like to infuse new vessels with some new staff as well, not just the veterans. And then, of course, we will resume our halted training operations at that point at the same time.

So we’re not expecting a large expense associated with that task, by any means. It will certainly be an effort, but we’re sitting in a very nice position to pick and choose the folks that we want to bring back..

Thank you. Best of luck..

Thanks, Sharon..

The next question comes from Steven Wieczynski of Stifel. Please go ahead..

Hi, guys. Good morning. So starting with the – actually I want to start with the equity and the warrant raise you guys recently did and dig into that a little bit more.

And I guess the question here is, maybe how did you decide on kind of going down that route? And maybe help us think about other options you explored as well as you try to raise capital.

And then the last part of that question is, moving forward, what options are still out there today, if you needed to raise additional liquidity down the road?.

Yes. Good morning Steve, it’s Stephen Lazarus speaking. So we chose the private placement transaction as it gives the company the most certainty on the timing and size of the investment necessary to be in compliance with our covenants and to continue operating for an extended period.

And we obviously, as you know, engaged financial advisers in terms of [indiscernible] and Nomura to advice the Special Committee with regards to the process that we would proceed upon. We both of them have significant experience in their respective fields and Nomura particularly has experienced with the company previously.

With regards to other options, well this is the option that we are pursuing right now. As you know, the preliminary proxy was filed on Monday, and we’re going to set this up for a shareholder vote at the Annual General Meeting in June. With – we do not have other options right now with regards to additional liquidity.

This is the path that we are proceeding down..

Okay, got it. The second question would be – you kind of hinted at this before, but around maritime operations commencing again. And I assume you guys have done all kinds of scenarios around when stuff resumes operations and what capacity levels look like but asking this a little bit differently.

Is there any way you guys can help us think about what kind of cruise capacity needs to be in service in order for you guys to break even from a cash flow perspective?.

So if cruise capacity – when – with regards to passengers on board, yes, if there is 50% capacity, so to speak, passengers on board, we would be breaking even. As you know, a significant portion of our onboard spend is variable in nature.

And so literally, as soon as we start generating revenue, we very quickly start generating profit, and then that obviously helps to offset some of the fixed costs that we have elsewhere. So at a 50% onboard guest count, we would be breaking even on an EBITDA basis..

Okay, that’s helpful.

And then one real quick last one probably for you, Stephen as well, but the $3.6 million monthly cash burn rate, is that pretty much as good as it gets or is there some flexibility that that number could actually go lower over time?.

To the extent that there are additional and long-lasting delays, we would look at additional opportunities for reducing that number. We have taken it down, as we’ve mentioned, quite significantly through a lot of the furloughs and other actions that we’ve already taken. There is some other not as significant opportunity.

But to the extent that things continue to remain closed for an even longer period, we would have to consider taking some additional action..

Okay, great. Thanks. Appreciate it..

The next question comes from Steph Wissink of Jefferies. Please go ahead..

Thanks. Good morning everyone. I am wondering, Stephen, if you can just help us bridge the cash balance. Without a full balance sheet and cash flow, it’s hard to see where some of the cash – use in cash – sources of cash were.

Can you just give us a few thoughts on the ending cash position in the quarter relative to the December quarter end and where some of the sources and uses were?.

So we ended the quarter with $20 million of cash. The queue will actually be published today and you will be able to see the cash flow with all of the detail on the sources and uses, but obviously as you would expect, prior to January and February good months, generating some cash.

March was then a different story with no revenue coming in for a particular period of the month. And also we had not yet implemented the activities and actions with regards to reducing expenses.

So obviously, there were uses of cash in that regard, but some of it being offset by actions that we took on being more aggressive with regards to working capital and delaying payments, etcetera. So later today, you’ll see the – all the details in the queue. And if you have questions, we can go and take more from there..

Okay. That’s helpful. And then secondly, just a follow-up to a prior question – or a couple of follow-ups, can you just – on the calculus around the passenger penetration on board, looking at that 11% participation number that you mentioned, but also the 50% occupancy level to breakeven.

Are you assuming that your penetration of onboard passengers goes up or that you retain a similar penetration to a lower occupancy?.

As a percentage of the passengers on board, we would assume that it goes up..

Okay.

How should we think about throughput, just with respect to safety and protocols? Can you talk a little bit about how you are thinking about your menu of services configuration of your wellness centers any additional costs that you may incur to maintain higher grades of safety for your guests and your staff?.

Sure. Stephen, if I can take that one. Steph, this is Glenn. So first of all, we are working diligently with each and every banner. And as you know, we have 22 cruise partners, and they’re all approaching their safety protocols with somewhat of a common thread, but then of course nuanced as they have individual perspectives.

So we are in a little bit of a great situation, but an unusual situation where we have to work alongside everybody’s philosophies.

We have developed and are in the process of finalizing a very comprehensive and thorough set of guidelines – a playbook, as we call it, for complete health and sanitation and safety on how to operate the spa and really educate not only our staff from the new culture of safety, but really the guests at the same time to give them that level as you see of course as all of the states and cities are reopening in one by one.

So without all of these protocols, we will have the typical physical distancing guidelines or social distancing guidelines. We will have the reduced occupancies into the facilities. It’s much more of a reduction in facility usage than you will see in a reduction of services necessarily. We’re not looking to eliminate any services that we do.

But you will see less folks, perhaps, in the physical – in the fitness facilities. We won’t have as many folks queued up to make appointments. We have new procedures in place for pre booking onboard and to make appointments onboard and to have our consultations done ahead of time.

We are doing everything in place to really mitigate the potential spread of any virus or illness or concerns. We have very thorough training that’s taking place, sanitation that will be taking place after each and every guest.

The facility and cleanliness will be the responsibility of the cruise lines in addition to our own obligations and owners that we’ve taken upon ourselves. So I think it will be, if not one of the safest and sanitized facilities onboard in addition to the food and beverage areas.

We really want to instill that culture and education to the guest so that they feel comfortable. And that will start within the cabin. It’ll start with digital marketing. Of course, within each and every cabin, we’re looking at push messaging to phones and marketing that way instead of printed materials.

All of our protocols have now new sanitation guidelines. The PPE, of course, will be in place for all of our staff.

And as you know, the cruise lines are taking credible actions to ensure the health and safety of all the guests and everything that they are doing from embarkation to debarkation and all of the controlled experiences, just from the nature of avocation onboard. So we think it will all be covered.

And again, we are working with the cruise line specifically. And there won’t be the same approach, cruise line to cruise line, but there will be a common thread of health and safety protocol work throughout. We will have some additional expense associated with PPE just because of the nature of – we didn’t have it yesterday, but we have it tomorrow.

And we’re still working through what that expense will be as we’re not quite sure how many ships and many staff we’ll have, at least in fiscal ‘20..

Thank you..

Sure..

The next question is from Assia Georgieva with Infinity Research. Please go ahead..

Glenn, maybe I can ask you my first question? With repatriating crew onboard cruise ships, do you bear any significant cost associated with that or is it pretty much the food component that’s related to it?.

No, we do. We, of course, have an obligation to repatriate our staff to get home, which we would have that obligation regardless, right. So even in the normal operating circumstances, we’d be repatriating them. Now having to repatriate thousands of crew members all at once is not our typical cash flow and expense line.

But we’ve been confronted with that since March. Now having said that, it has been mitigated somewhat as these vessels, as you know, there are currently about four dozen vessels sailing the world, bringing crew members home, what we call ferries that are ferrying the crew home. So the cruise lines are all bringing their staff home.

We are participating alongside them. So that’s actually helped us somewhat, and the cruise lines are great partners, and we’ve been – they’ve been working with us to get our staff home as all of the airports have closed around the world. So we’ve mitigated that expense.

We do have a little bit of a [indiscernible] obligation, of course, but that’s certainly far less than astronomical airfares. So really, it’s a little bit of a wash in that regard. But remember, the staff are onboard, we do have to provide them accommodations, room board and general well-being while they’re on board and being repatriated home.

So we’ll get them home one way or another, whether it be by vessel or by air or any other means possible..

And by the same token, once operations restart, the cruise lines might need to pretty much go and pick up their crew from some of the similar countries that you have been using in store markets for crew.

So is it possible to – on the way back in, that you could use the ferrying option as opposed to airfare, which is more expensive, I imagine?.

Well, I certainly think it’s a possibility. We have not necessarily heard that, but on the rebound, they’re going to be picking up as they redeploy these vessels. Where these ships are bringing the crew members, they’re not typical home ports from a vacation experience, and they’re certainly not source markets to start a vacation.

We’re talking the far reaches of the Philippines, India, Asia and the like. So if that were the case and whether it be in South America or Europe, maybe we could take it back and they would welcome us to be a part of that. And remember, we don’t have the full obligation to bring staff at our expense to a vessel.

Typically, a staff member would find their way to get to their vessel on their own..

Okay. I’m just waiting for the business to restart. So trying to foresee....

Yes we all are..

I’m sure. And a separate question. So with some changes in terms of shareholders and some commonality, have you heard anything from the grapevine in terms of possible changes to the attitude towards your contracts? And related to that, there were some changes to America.

So I wondered whether that may have any impact in terms of the people that you speak with there, and possible difference in thinking..

Those changes at management are just recent, and we’re only just hearing about that and read about it in the press as you do. We don’t have any other insight to that. But as you’ve probably heard us say many times over the years, we have the stability in this industry, and we continually educate the cruise industry on health and wellness.

And we’ll continue to do so with all the new regimes that are put in place, and we’re happy to be a part of that..

Okay, Glenn. Thank you so much for your interest and thank you guys for taking the time to update us all..

Thank you..

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

Alright. Thanks everybody for joining our call today. It’s briefer than usual. Obviously, different times, but we look forward to speaking with you all on our second quarter call. Thanks again for joining us today..

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..