Good day, welcome to the Lindblad Expeditions second quarter 2018 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Craig Felenstein, Chief Financial Officer. Sir, please go ahead.
Thank you, Steven. Good morning, everyone, Thank you for joining us for Lindblad's second quarter 2018 earnings call. With me on the call today is Sven-Olof Lindblad, our Founder and Chief Executive Officer. Sven will begin with some opening comments, Then I will follow with some details on our second quarter results before we open the call for Q&A. You can find our latest earnings release in the investor relations section of our website. Before we get started, let me remind everyone that the company's comments today may include forward-looking statements. Those expectations are subject to risks and uncertainties that may cause actual results and performance to be materially different from these expectations. The company cannot guarantee the accuracy of any forecast or estimates, We undertake no obligation to update any such forward-looking statements.
If you would like more information on the risks involved in forward-looking statements, please see the company's SEC filings. In addition, our comments may reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures and other associated disclosures are contained in the company's earnings release. With that out of the way, let me turn the call over to Sven.
Thank you, Craig, Thanks all for joining us on this call today. Lindblad's sustained financial and operational momentum continued into the second quarter, I'm pleased to have the opportunity to highlight our current results and speak to some key initiatives that will enable us to build on this momentum moving forward. The strong results we generated during Q2 demonstrates our growth opportunity ahead, as well as we add capacity to meet the increasing demand for high quality, authentic, and immersive expedition travel. Similar to Q1, the growth this past quarter was in large part due to the launch of the National Geographic Quest in July 2017. At the same time, occupancies across the broader fleet expanded by 500 basis points versus a year ago to 90%, while net yields increased 6% to over $1,000 per night.
Our ability to increase price and occupancy as we add additional inventory is a reflection of the accelerating demand we see, both from new as well as returning guests, and gives us confidence in the long-term growth prospects for Lindblad. At the same time, as Craig will discuss in a moment, we are on track to deliver on our short-term expectations as well. We have already booked 99% of our anticipated ticket revenue in the current year, with strong growth across both our owned and chartered vessels, as well as our diverse set of itineraries. The one destination which has performed slightly below expectations in 2018 was the South Pacific aboard the National Geographic Orion. While the transition period from Antarctica to summer this year was the best second quarter for Orion since 2014, the occupancies were just not quite as high as we expected to generate.
We arguably had too much inventory for one year. We have rebalanced our inventory in 2019 for this remarkable geography and are already well ahead on our way to a far healthier South Pacific season next year as a result. We are always looking for ways to fine-tune our product offerings. This is a good example of how nimble we can be in order to maximize the potential revenue opportunities across our fleet. By reducing the amount of inventory in the South Pacific next year, we will be able to generate high occupancies in that geography and have added voyages for Northern Alaska and the Russian Far East from mid-June to mid-September 2019. These departures are already filling up well over a year in advance. We have established another territory of strong itineraries, which allows for more diversification as demand increases and we add new ships.
As we have mentioned previously, creating new geographic opportunities is a key ingredient to sustained growth. Additionally, Egypt, where we entered cautiously beginning in October this year, has virtually sold out through the first quarter of 2020. We are looking at how to develop this highly popular program even further. As we continue to expand our geographic footprint and develop new destinations for our guests, we are also adding more shorter expeditions in order to bring new people into the fold, so to speak, who simply don't have the time or are not ready to try something longer. Our new four, five-day sailings are now on offer in Alaska, Baja California, the Channel Islands, along the West Coast of California, and the Galapagos Islands. Early demand is really promising.
Additionally, these shorter itineraries can also more readily be combined with land-based add-ons, which has proven to be an attractive idea for new constituencies. With demand for adventure travel continuing to grow, we are extremely excited about the launch of our second new build, the National Geographic Venture. She will have her inaugural voyage this December and will head from California down to Baja California before adding to our inventory for the high-demand Alaska season starting next spring. The National Geographic Endurance is also on schedule for delivery in the first quarter of 2020 and is shaping up not only to be the most capable expedition ship ever built for polar regions, but extremely beautiful and innovative as to her design.
We have mapped out her initial season with plenty of firsts, taking full advantage of her unparalleled ice class. These new itineraries will be officially open for sale next month. I am also really excited about the announcement we made last month that our board has authorized the building of an additional blue water vessel for delivery in 2021. This is the next step of our long-term global growth strategy to capitalize on the expanding demand for high-quality adventure travel. By marrying additional capacity with a dedicated and growing loyal customer base and decades of experience, we will be able to build upon our proven track record of delivering unparalleled expeditions in the world's most remarkable destinations. We recognize that the interest in expedition cruising is growing proportionally more than any other segment in the travel industry. That is why we are adding additional capacity.
We also know that the number of new entrants and new ships will be at an unprecedented level. I am often asked how this may affect our future prospects, an understandable question. First of all, in the scheme of things, some of the new buildings will replace older inventory. However, the aggregate total number of new expedition beds entering the market in 2019 and 2020 will still be less than one new mass-market cruise ship. Secondly, there is value in broadening the expedition market, which will activate the public's growing interest. The public that is interested in expedition travel conceptually is very discerning. They tend to do a lot of research, which I know will serve us well. We are, and many constituents know this, totally focused on expedition cruising and have been delivering high-quality and authentic expeditions for over 50 years.
That equates to a level of credibility not easily obtained for new entrants. We believe we have the best understanding of geography, the best, most qualified leaders and navigators, and a very deep understanding of what people seek in an expedition. Perhaps the most tangible expression of our deep respect for the essence of expedition travel is our commitment to ship capacity. Our new builds currently are 100 guests on our coastal ships and 126 for our blue water ships. These numbers are based on diligent research incorporating guests, our own leaders, naturalists, scientists, and navigators. Once you cross into larger numbers, your opportunities and the overall experience diminish dramatically. You are not allowed to land more than 100 people at a time in Antarctica, for example, and the Galapagos for decades has limited ship capacity to no more than 100.
Reality is that while economies of scale would suggest larger numbers, the experience and the potential effect on remote sensitive areas suffers. There's just no getting around that. We are focused on providing our guests the exhilaration of discovery while at minimum, doing no damage, and in many cases, enhancing the integrity of the places we explore. On this subject, we have been and will continue to be loud and clear. When it comes to expedition cruising, smaller is definitely better, and we will capitalize on all the added noise for our benefit. Additionally, we will continue to leverage our successful 14-year relationship with National Geographic. The opportunity as the dominant expedition travel company in the U.S. remains enormous.
At the same time, many of the trends powering the increase in expedition travel in the U.S. are manifesting themselves globally as well. Deepening our expansion into select international markets will be a part of Lindblad's growth strategy. We are also pursuing some very exciting new partnerships, which we believe will expose Lindblad to an array of potential guests and provide our existing guests with some unique additional travel opportunities. Our new head of business development has hit the ground running. We are exploring a variety of potential acquisitions and/or deeper partnerships with a focus on brand fit, crossover marketing, potential and strong crossover marketing, and reliable management, similar to what we have experienced with our acquisition of Natural Habitat. Ben Bressler and Natural Habitat team are doing a great job growing our land-based business.
The number of guests traveling across Nat Hab's diverse product offerings continues to expand with strong growth in all key areas, and particular expansion in Africa, which is becoming unbelievably popular. Natural Habitat and Lindblad are benefiting from cross-promotion, and it's manifesting itself way in excess of original expectations. In summation, Q2 was another stellar quarter for Lindblad. We are off to a great start in 2018. We are just beginning to harness the ever-increasing interest in expedition or experiential travel. The opportunity in front of us to provide new and returning guests with extraordinary experiences is significant. We remain as confident as ever that our years of delivering remarkable experiences in the world's most unique and fascinating geographies will allow us to deliver significant shareholder value in the years ahead.
Thanks for your time this morning. Now let me turn the call back to Craig.
Thanks, Sven. As Sven mentioned, Lindblad delivered another strong quarter during Q2 as the sustained strategic investments we are making to expand our capacity and develop our sales and marketing infrastructure are generating continued significant returns. As we have expanded our available guest nights, we have also been able to increase our occupancy rates and net yields across the fleet, which speaks to the quality of our guest experience and the growing demand for immersive and authentic expedition travel. During the second quarter of 2018, Lindblad delivered revenue of $69.5 million, growth of 25% versus the second quarter a year ago, led by 26% growth at the Lindblad segment and 19% growth at Natural Habitat. The revenue growth contributed to a $6.2 million, or 117% increase in adjusted EBITDA to $11.5 million.
Turning to each of the segments, the Lindblad segment generated revenues of $59.6 million, an increase of 26%, or $12.3 million versus the second quarter a year ago. This growth was primarily due to an 18% increase in available guest nights, mostly from the launch of the National Geographic Quest in July of 2017, and to a lesser extent, from the timing of dry docks in the current year. As I mentioned last quarter, in 2017, dry docks for the National Geographic Endeavour and National Geographic Orion were primarily completed during the second quarter. While in 2018, both the Endeavour and the Orion will be in dry dock during the end of Q3 and the beginning of Q4.
The revenue growth this past quarter also reflects a 6% increase in net yield to $1,002 per night due to higher pricing across most itineraries, and growth in occupancy from 85%-90% due to broad-based demand across the entire Lindblad fleet. Turning to the cost side of the business, Lindblad segment operating expenses increased 13%, primarily driven by a 19% increase in cost of tours, due mainly to the launch of the National Geographic Quest, and additional operating nights due to the timing of the dry docks. The second quarter of 2018 also included an 8% increase in sales and marketing due to increased commissions associated with the revenue growth.
G&A expenses increased 1% as higher personnel costs were mostly offset by lower stock-based compensation expense, primarily related to shares granted under the CEO allocation plan a year ago, and due to the majority of the outstanding options being fully expensed at the end of 2017. Excluding stock-based compensation, depreciation, and amortization and reorganization costs, Lindblad segment operating expenses increased 14% versus the second quarter last year, due mostly to the addition of the National Geographic Quest, the additional operating days and higher commission expense due to the revenue growth we are generating this year. Fuel costs in the quarter doubled versus the prior year, due in large part to the additional operating nights as well as from higher pricing year-on-year.
Fuel was 4.4% of revenue in the quarter versus 2.7% in the second quarter of 2017. We expect this year-on-year increase to continue for the remainder of the year. Adjusted net cruise costs on a per night basis declined to $767 due to the leverage we are seeing on sales and marketing and G&A expenses, as well as due to the dry docks during the second quarter a year ago. During dry docks, we incur operating expenses with no corresponding revenue days, so it negatively impacts costs on a per night basis. Overall, at the Lindblad segment, the 26% revenue growth far outpaced the cost increase, which drove a $6.3 million increase in adjusted EBITDA to $12 million. At the Natural Habitat segment, revenues grew 19% to $9.9 million due to additional departures and higher pricing.
Adjusted EBITDA declined slightly as the revenue growth was offset by a 20% increase in operating expense due to higher marketing and personnel costs to drive long-term growth initiatives and higher cost of tours for the additional departures. As a reminder, the majority of Natural Habitat's adjusted EBITDA is generated during the second half of the year due to the timing of the polar bear tours. Total company net income available to common stockholders in the quarter was $1.1 million, or $0.00 a share, versus a loss of $2.5 million, or $0.06 a share, reported in the second quarter a year ago. The improved operating results and lower stock-based compensation were partially offset by increased D&A related to the launch of Quest, higher interest costs associated with refinancing our credit facility, and increased foreign currency losses.
Turning to our balance sheet, we remain extremely well-positioned to invest in future growth opportunities. We ended the quarter with $92 million in unrestricted cash. Free cash flow for the six months ended June 30th was a use of $7 million, including $27 million spent on the new builds. If you include only maintenance CapEx, free cash flow for the six months was $20 million, an increase of $4.4 million from the same period a year ago. Turning to the full year 2018, the Lindblad segment is currently pacing $31 million ahead of the same point a year ago, and we are already at 99% of our full-year projected ticket revenues for 2018, despite the additional inventory from launching the National Geographic Quest. We were also at 99% of 2017 full-year ticket revenue at the same time a year ago.
Given the current operating environment and sustained positive booking trends, we continue to expect total company tour revenue in 2018 between $308 and $315 million, 16%-18% growth versus 2017, and adjusted EBITDA between $54 and $57 million, or 24%-31% growth versus 2017. We do anticipate the third and fourth quarter results for 2018 will be below 2017 due to the planned timing of scheduled dry docks. Please remember, as we discussed previously, full-year results will include the start-up costs associated with the launch of the National Geographic Venture in December and a $1.5 million negative impact due to the adoption of new revenue recognition rules under ASC 606. Thank you for your time this morning, and Sven and I would be happy to answer any questions you may have.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Chris Woronka with Deutsche Bank. Please go ahead.
Hey, good morning, guys. Pretty encouraging numbers on the yields and the pricing. My question is, as you look forward, does that make you want to
potentially hold back a little bit more inventory and try to capture even more close-in pricing? Are you able to do that, or are the booking windows too elongated for that?
Given the average booking window for the company is about nine months. In some cases, today we're booking plenty of stuff for 2020 already. We tend not to do that. We don't like to hold inventory back if our guests want to come travel with us and the availability is there, we want to book them. There really is no intention to hold back any inventory. We'll continue to raise prices in the high-demand areas and grow our yields over time.
Okay, great. Can you maybe give us a data point or two on the repeat business? I know that's been a pretty core part of the story, and it sounds like it's gaining more traction. Is there any way to put some data around what part of the customer base is recurring versus new?
Yeah, sure. We continue to see a very high repeat business from our, say, legacy guests that have traveled with us previously. If you look at the current year to date, we're close to 40% of our guests in the current year were repeat customers. That's been pretty consistent. It fluctuates in the mid-30s to 40% or so, and we would expect that to continue moving forward. We do anticipate, as we add inventory, to continue to leverage more and more new guests. As those guests join the fold, they'll become repeat customers in the following years. All in all, our guests tend to, once they travel with us, repeat several times over.
Okay, great. Then just as we think about the new blue water vessel you guys have recently announced for 2021, as you budget that out, has there been any increase in the construction cost or anything associated with the development just based on general inflation?
When we look at the cost of each of our vessels, we look at it at any given moment in time. What I mean by that is the design of the vessel, the cost of the materials, certainly fluctuate as you move forward. The design of this vessel for 2021 has not yet been finalized. It's hard for me to answer that question because we're not building something that's exactly the same to what we've already built, or at least we have not decided that as of yet. Once we know the design of the vessel, we can certainly talk to what the build cost will be. We are always looking for ways to lower the cost of what it is we're doing from a capital perspective. We'll continue to explore opportunities to do that.
Once we finalize where we're building this vessel, the size of the vessel, we'll certainly get back to you with what our expectations would be on cost.
Okay. Very good. Thanks, guys.
Thank you.
Our next question comes from George Kelly with Imperial Capital. Please go ahead.
Hi, guys. Thanks for taking my questions. Just to start, National Geographic now has a new owner. I'm wondering if that means anything to your agreement and if you've had any kind of past experience with Disney. Have you worked with them much before?
The agreement itself would not be impacted by any kind of change with regards to National Geographic. I'm obviously not going to comment on anything with regards to what's going to happen with that asset, but from our perspective, our agreement with National Geographic holds true, and most importantly, the relationship has been around with National Geographic for us since 2004. It's a relationship that's been fostered and extended over time, and we don't see any reason why that would change moving forward. Sven, why don't you give a little more color?
Yeah. Good morning. I can only imagine that the acquisition of Fox more broadly, which obviously incorporates National Geographic, has, if anything, very exciting implications because, of course, Disney is involved in the entertainment business and the movie business, and they have cruise ships and such, and they have a huge network. It would seem to me that one and one equals three here.
Great. That's helpful. Interesting. A couple other quick ones. You mentioned that the Venture startup costs will impact the fourth quarter. Can you quantify that?
Yeah. Some of it does relate to timing, I'm not going to get too specific on it. It would definitely be in the low single digits in terms of millions of dollars, probably $1 million or $2 million, depending on the timing of when we ultimately get through some of the launch protocols that we have to go through. What you're going to see in the fourth quarter of this year before it launches is you're going to certainly have some costs related to hiring the crew and training the crew in anticipation of the operations. You're going to have non-capitalizable costs related to the vessels, such as inventories and things of that nature. Those things will roll through predominantly in the fourth quarter, and we haven't finalized exactly what that would be, but my guess is it'll be somewhere around $2 million or so.
Okay. $2 million all in, and that's all included, though, in guidance. That's not something that you're adjusting out of guidance.
Correct. When you look at the year-on-year growth or year-on-year change versus fourth quarter a year ago, you have two negatives going out of the quarter, right? You have losses associated with the Venture because you have the start-up costs and not a whole lot of revenue in the quarter because it's not a whole lot of itineraries in the quarter. Then you have the changes in the revenue recognition policy. Those two things create a year-on-year hurdle, certainly on top of the dry dock timing, which this year has some more additional days in Q4.
Okay. Talking about new capacity in your prepared remarks, just wondering if you have seen any kind of pricing shift, is it becoming more competitive on 2019 and 2020 bookings?
Sven here. We have not seen anything material that is having an effect on pricing. It's interesting because certainly there are people out there that have prices that are lower. I'm absolutely convinced, and that's certainly borne itself out to date, and I really believe it will continue to do so in the future, that at the end of the day, people who are doing this kind of a thing, like going to Antarctica or going to the Arctic or the Galapagos or any number of places, are viewing it as a once-in-a-lifetime experience, which they ultimately will repeat, but at the time of doing it, and I think they're very cognizant of what represents the greatest likelihood for them to have a remarkable experience. We have not seen a negative effect as it relates to other people's pricing.
Okay.
We have certainly not been lowering our prices or adjusting our prices downward to compensate for any anticipated effect.
Okay. Last question from me. You mentioned some shorter itineraries to attract different customers. Do you expect that to have much of an impact on yields or any kind of your operating metrics for next year?
Well, there are a couple of reasons, just to be clear, for doing this. Well, number one, I'll just give you an example. The new shorter itinerary that we produced for the Galapagos Islands. It's four days on the ship and then, in certain instances, three or four days on land. In fact, you're funneling more people through the ship, and you're also getting a benefit from the value on land. In fact, in aggregate, if that proves to be an increasing model, you will, as a consequence, increase value as a result. In certain instances, we are producing these shorter trips in what we would call shoulder seasons, where they're going between prime areas. That has an effect on being able to add value to what otherwise would be a softer period, by just rejiggering or reconfiguring.
The main reason, though, for doing this is it's a very interesting vehicle to bring new people into the fold who can try something that they might not otherwise try because it's maybe too long or in total more money than they wish to spend at that time before they fully understand what the implications are. It has a multitude of components to it that we believe will not only add value in the short term, but certainly in the long term.
Thank you.
As a reminder, if you have a question, please press star then one. Our next question comes from Greg Pendy with Sidoti. Please go ahead.
Hey, guys. Thanks for taking my question. Just can you remind us, I guess, with the decision to go ahead in 2021 with sort of a 10th vessel, can you tell us how you're looking at the world just from a build versus buy, I guess, given the fact that Natural Habitat seems to be showing some momentum? Thanks.
Sure. Thanks for the question, Greg. We, I would say when it comes to our growth opportunities, are relatively agnostic. We are looking at all avenues of growth, whether it be an organic build opportunity from a vessel perspective where we see additional opportunities to capture more demand with additional capacity. We're also looking at buying vessels that are out there in the public space if there's an opportunity to buy a vessel at an attractive valuation and make it into our own. At the same time, we're looking at M&A opportunities. As Sven touched upon, we have not been quiet about our desire to continue to expand the business, both in terms of scale on the marine side, but also any kind of business that would augment our existing growth opportunity on that marine side.
I wouldn't say we're focused on one versus the other, but we're looking at anything and everything and for ways to increase the growth opportunities that we have over the next several years.
That's helpful. Just one other follow-up. Could you just speak to other revenues, I guess, was a bit light year-over-year despite the higher occupancy and additional ship. Is there anything there to look at or anything that maybe pressured that a bit?
When you think about other revenues, what that encompasses, it encompasses items like extension revenues, folks that add stuff onto the existing trips. It encompasses stuff like insurance revenue, when people take insurance on upcoming travel and cancellations revenues that happen when people do cancel and ultimately don't have insurance. There's no real, I would say, rhyme or reason to when it goes up or down in any given quarter. It tends to have fluctuations throughout the course of the year. Sometimes they don't mirror prior years. Sometimes it changes due to the itineraries that we're offering and the timing of certain voyages. I wouldn't read anything into that. It is something that we keep an eye on, but it is not something that I would say would drive a change in results year-on-year dramatically for the full year.
Okay, that's helpful. Thanks a lot.
Showing no further questions, this concludes our question and answer session. This also concludes our conference call for today. Ladies and gentlemen, thank you for attending today's presentation, and you may now disconnect.