Thanks, thanks everybody for joining us this afternoon. I'm Steve Wieczynski. I'm the Gaming and Leisure Analyst at Stifel. I t'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 or take a minute or two and kind of give a brief overview of what OneSpaWorld is.
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 five years left on most of the major banners that we service right now, so there's plenty of runway with respect to contractual term on the ships and particularly the big banners, and the operation in 2024 has been fantastic. The consumer remains strong for us. Cruise lines are sailing much fuller, and overall, the environment has been quite favorable for us. Thanks, Steve.
Yeah, thanks. So one of the questions I think we get the most about your company is that 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? Obviously, these are revenue share agreements. That's a lot different than where they were five, six years ago. So just kind of how your relationship is with your larger banners as well.
Yeah. So look, Stephen and I have been running this business for about 50 years collectively between the two of us. We've seen these banners come to the table year in, year out, although we typically do contracts that are five, seven, even eight years in term. But the single biggest thing that keeps us in a dominant position, 90% market share, is we have, over the last three 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 nine training centers. We recruit hundreds of staff. Some of them don't make it through the testing period. Then they get on board. 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.
We're graduating hundreds of people every month to go on board ships and join. These staff, it's hard. They typically stay on board for nine months. 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. 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 have 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 bought out, one of which went out of business, Canyon Ranch right before. Well, 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.
I think that's the real reason we've stayed ahead of the curve and managed to keep out most of the competition.
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 2008, 2009, 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. 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 that's a long, long question.
It'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 2024 as well as us, and their ticket pricing has continued to rise. They're looking very favorable for 2025. 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. They're not looking at any pricing coming down thus far, and from what we've seen, all itineraries look strong and well booked. That's a good sign for us.
Whenever we have that kind of demand and healthy consumer on board, 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 guest on board.
Just remember, Steve, as everybody knows, we're generally servicing about 11% of the guests on board 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 the people on board, the cruise lines, as you know, do an excellent job of bringing these folks on board every single cruise, 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 pre-announced your fourth quarter this morning. It was another beat. I think this is six quarters in a row. I know your release said four. I think it's longer than that. I think it's at least six. 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. If we 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.
Yeah, 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, there are nine new vessels coming into service that will come under the purview 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 we take 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 two larger spas being under construction during the year. And so that'll 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 obviously, we've taken all of that into account and it rolls up into the total.
Yeah. And I think to your point, Stephen, the issue around land-based is not that they haven't met their expectations or forecast for 2024. They did and slightly beat. Some of the construction that we anticipated in 2024 has been pushed into 2025, 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 reconstruction, 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 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 2024 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 do.
I kind of am. I don't think we'll get 15% or 16% upside from where we are today. But 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? Yeah. But let's see what happens. I wouldn't want to go out today with a definitive.
We're kind of halfway through. Are there any questions out there, or should I keep going? OK. I'll keep going. So if we think about now, 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?
OK. So before Stephen answers that question, just backing into his last question on guidance, there are nine ships coming into service here. That's a big number, more than average. Typically, it's six or seven, nine 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 five 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.
Capital allocation, as you know, we have. So as an overarching theme, we've tried to adopt a balanced capital allocation strategy. Our focus prior to this was primarily on debt paydown. As you rightly point out, we have moved that down to now a very manageable level. The last reported number was $50 million of net debt. We refinanced that debt to a new five-year maturity and also hedged the entirety of the debt at a favorable interest rate, including the spread, which was just over 5%. That helps us. Interest rates higher for longer is obviously, therefore, not a bad thing for us. We will therefore change the emphasis of where we use that cash away from debt paydown and more to stock repurchase. We have initiated and continue to pay the dividend. It's only been two quarters that we've paid the dividend.
At some point, there'll be a review of what the appropriate amount should be and whether that amount stays the same or not, but clearly, as we've said, love to buy back some more stock. I mean, the stock has performed well, and so I would like to buy it on a pullback, but that hasn't happened yet, so we'll see. If it does, we'll be there, and if it doesn't, maybe we'll have to get more aggressive on the price at which we would buy it back, but it's definitely good news from a return to shareholder of capital strategy.
And if we think about potential other uses of that cash, including M&A, we've known each other forever, going back to Steiner Leisure. And you were making acquisitions back then. I think this is probably a little bit of a different company versus the previous Steiner Leisure. But would you be open to M&A? And if so, based on your business, what might that look like? Or what would you be essentially targeting?
So definitely, we'd look at M&A if it was the right M&A. We learned a few lessons in our previous go-around at SLL, what the street likes, what the street doesn't like. But at the same time, while we were definitely of the view that pretty much all of those acquisitions made sense in terms of our business, clearly, they weren't all that made sense to the street. So lesson learned is we're trying to continue to keep the business as asset-light as possible. But at the same time, we've had a tremendous amount of M&A opportunities brought to us, none of us which have really stuck. There's lots of them out there.
And we are going to focus primarily on how we can go out there and find something that we can bolt on either through an M&A deal, through a licensing deal, or a JV deal, where we can bring something that's going to absolutely add to the offering on board, but at the same time may possess an existing e-commerce platform or even one or two units that they need to have in terms of offering more of the functional health services that we provide on board ships. And maybe that could be more of what we'd like to do. I mean, some of it's hampered by the fact that there's still no real opportunity for us to do blood draws on board. But when that becomes available with the right technology, then the sky's the limit in terms of the analysis we can do.
So we will continue to look for the right fit. We're in no rush, absolutely no rush at all. And it's going to have to be something that we feel we can either grow, but it's going to be accretive to what we're doing on board. Otherwise, we're not really interested.
Okay. Going back to an earlier point, we talked about the visibility of your businesses is very low. But one of the things you guys have been working on a lot is the pre-booking and getting more folks to pre-book. So just wondering if you could give us an update in terms of where you stand from a pre-booked perspective and maybe the relationship with your larger banners in terms of them giving you more access to your customers before they do come on board and just maybe some stuff like that.
Pre-booking is incredibly important. The cruise lines are using a lot of it. Some of the larger banners, Royal, Carnival, NCL, their CEOs are hyper-focused some more than others on why the pre-booking app that they have, our pre-booking app that's on their app, is very important because two things. One is, A, you know how to manage yield with a pre-booked number. We're running around about 21%, 22% on pre-book. When you say, how do we manage it? We don't manage it. Unfortunately, if we did manage it, I think we'd do a better job just because we'd know how to manage the yield, the inventory, et cetera. But more than that, when you land on our page right now, depending on the banner, you could see a couple of different varieties of how to pre-book. Some are not as good as others.
Those that are doing a better job actually have a pre-booking percentage higher than 22%. We'd like to get that closer to 30%. And we think it's possible. But it's going to take time, effort, and the cruise lines putting a lot more in terms of focus and resources into it. Because once we show them back of the napkin, we know a pre-booked guest tends to spend about 30% more than somebody who didn't even know there was pre-booking on board. Their frequency is higher. Their spend's higher. So you want to move to a pre-booked platform as fast as possible. So it's been very, very good. We're on 91% of the ships that we service right now. But even amongst the top four banners, there's a lot of room for improvement.
They could be doing much more in terms of outbound marketing, et cetera, right before they cruise.
If we think about margins, I know this has never really been a margin expansion story. I think if we think about if we look at your guidance for 2025, I think I want to say the midpoint was like 12%-12.5% EBITDA margin, which is basically kind of flattish to, I think, where 2024 will end up. If we do think about margin or the potential for margin expansion, where would that come from? Would it be pure price? Would it be a mix in services? Sort of kind of a combination of all those things. Because from a labor perspective, I don't think there's much you can do because of the commission.
The variability, yeah. So yes, it would be ultimately a combination of the factors can drive the margin. I'll say two things, right? One of which I always say is we love to drive margin, but we love even more to drive absolute cash. And so to the extent we might need to do things to bring people in on a port day, for example, at a slightly lower price, which de facto might drive your margin down, we would rather do that and have a therapist working there, not working all the time. Putting that aside for a moment, go back, prior to 2019, we were at about a 10% EBITDA margin. So now we're at 12.5%, which is a really, really nice step up, right? Almost 25% improvement. That's not something that you will typically see year after year where we continue to strive for slight improvements, yes.
What will drive it? Yes, pricing, marketing efficiency on board, scalability. As you get bigger, you get some scale with regards to your overhead costs, et cetera. So it's a slow process. And at the end of the day, I will always rather prefer to have more cash in the bank than worry about is a margin 10 or 20 basis points higher.
Yeah, just expanding on that, Steve. I know you love to talk about it often: the perishable nature of our inventory. So that's why we're chasing absolute dollars every single day, port day, sea day. Doesn't matter. Obviously, port day is even better if you can get higher occupancy. Sea days, you typically in excess of 90% booked out just because people want to do spa at sea or medi-spa or acupuncture or fitness. So the mix of service is important. But generating as much money from each ship on every single day at sea is the best way to improve absolute dollars, which could give us some leverage back on the SG&A front as opposed to just the mix itself.
So that actually goes to my next question, which was going to be, I mean, if you kind of look at the cruise industry in general, it's clear the larger players are making calls of actually adding in more sea days and also a lot more days at private islands. You obviously have seen CocoCay with Royal Caribbean and Celebration Key, which is now Carnival's private island, which is going to open in July of this year, so with that change of kind of moving away from a traditional St. Thomas port, something like that, is this something that should benefit you guys over the long term?
Any time they move away to more sea days, it's beneficial because we do much better at sea. Higher occupancy, staff are utilized, utilization goes up. So we tend to love sea days much more. But the truth of it is they produce much more money. The fact that they've got these incredible islands is not a disadvantage for us. I mean, people are highly selective. And also, they know if they're going to go to the island, there are some islands. Some of the banners have spa facilities. They're clearly not as bespoke as the ones on ship, but they're OK. Some are better than others. Now, as we move forward, we're going to be moving to try and get them to invest in better spa cabanas, better spa facilities on those islands.
But then again, when I was on one of the private islands last time with Royal Caribbean, what I did notice is that there were a lot of men with kids. And most of the women were on board doing what they wanted to do. So I think it allows for selectivity, like choices. Do I want to go to the island? Do I want to join my family later? People are smart and they're informed. And they're making good decisions. So if they don't want to do a cabana experience or they want to do medi-spa, I just think it allows for choices. And I don't think it's going to impact us negatively at all.
OK, so we are officially out of time. Leonard, Steven, thank you guys so much as always, and take a look at OneSpaWorld. It's a really interesting stock, especially for capital return story moving forward, so thanks, everybody. Appreciate it.
Thank you. Thank you. Thanks for having us.