Lindblad Expeditions Holdings Inc. (NASDAQ:LIND) Q1 2018 Earnings Conference Call May 3, 2018 8:30 AM ET
Craig Felenstein - Chief Financial Officer
Sven Lindblad - Founder and Chief Executive Officer
Steven Pizzella - Deutsche Bank
George Kelly - Imperial Capital
Good day, and welcome to the Lindblad Expeditions, Inc. Reports First Quarter 2018 Financial Results Call and Webcast [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Felenstein. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for Lindblad's First Quarter 2018 Earnings Call. With me on the call today is Sven Lindblad, our Founder and Chief Executive Officer. Sven will begin with some opening comments and then I will follow with some details on our first quarter results before we open the call for Q&A. You can find our latest earnings release in the Investor Relations section of our Web site.
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, and 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.
And with that out of the way, let me turn the call over to Sven.
Thank you, Craig, and thanks to all of you for joining us on the call today. Lindblad is off to a very strong start in 2018, and I'm pleased to have the opportunity to review the company's performance during the first quarter, while highlighting some of the key initiatives that will enable us to build on this momentum moving forward.
The strong results we generated during Q1 highlights the opportunities we have, as we add capacity as well as invest in new businesses with significant untapped potential. Both the Lindblad segment and Natural Habitat delivered record breaking first quarters in terms of revenue and earnings, as more and more guests traveled with us to destinations across the globe.
At the Lindblad segment, the increase was due, in large part, to the capacity added from launching the National Geographic Quest last July. Importantly, even as we have expanded our overall inventory, we have still maintained high-occupancy levels across our fleet, while also growing net yields, a reflection of the significant demand of our expeditions both new -- both from new and returning guests.
We are also seeing increased demand from our land-based offerings at Natural Habitat. The number of guests traveling across Nat Hab's diverse product offerings continues to expand with strong growth in all key destinations. Nat Hab is also benefiting significantly from cross promotion across the Lindblad community, with a number of Lindblad guests traveling with Nat Hab up over 40% versus the first quarter a year ago.
At the same time, Nat Hab's audience continues to embrace the offerings at Lindblad, with booked guests for 2018 already up over 50% versus all of '17. So the thesis of accelerated cross selling is certainly proving out in excess of our original expectations.
The Natural Habitat acquisition has been a great fit for Lindblad as well as our guests, and we continue to be on the lookout for additional acquisition opportunities and partnerships to broaden our product offerings, diversify our businesses and expand our reach. Along those lines, we have recently hired a new Head of Business Development to further accelerate the evaluation of potential opportunities, and we look forward to exploring any and all leads to further build value within our company.
At the same time, we are really excited about the growth ahead for our existing business. Current booking trends remained very strong, with Lindblad bookings during the first quarter of 2018 up over 20% versus the same period a year ago, and this booking strength is broad-based with significant demand across all our vessels and itineraries.
We also continue to score new geographies and look for new destinations for all our guests. In Q1, we added an important destination to our mix when the National Geographic Quest explored Belize with 7 departures that were nearly sold out. We also committed to reenter Egypt beginning Q4, a destination that was once extremely important to Lindblad. Our first 6 departures in the fourth quarter and the first quarter of 2019 were in high – were in such high demand that we're now working to build back the available volume we once enjoyed.
We also laid out plans recently for future deployment in Northern Alaska and the Russian Far East for mid-June to mid-September 2019 on the National Geographic Orion. And these departures are already filling up well over a year in advance.
In March, I travelled to Gdynia, Poland along with our Senior Captain, our Head of New Builds and our Chief Expedition Officer for an important ceremony in the first tangible development of our new polar vessel, the National Geographic Endurance, slated for delivery in Q1 2020. We bought – we brought 2 coins, which we welded into the keel with great fanfare, fulfilling a mariner's tradition. It was a special moment, after which we headed straight to the Norwegian Arctic for a one-week expedition to see, validate and document the premise of why we're building this ship in the first place. To explore deeper, earlier and later in Polar Regions, which holds such understandable fascination for our guests.
The middle of March in the Arctic is spring and it's spectacular, however, we'd not be responsible to plan such possibilities without an ice class as high as the National Geographic Endurance, which will have the highest ice class designation of any passenger vessel built to date when she launches.
Geography matters a great deal in developing new access to the world's most spectacular places is a driving goal for our enterprise. This also becomes increasingly more important as we step up our engagement in foreign markets, broadening our reach beyond what is still a growing U.S. market. Success in this effort is not intended nor needed immediately, however, it could and should represent a significant opportunity for future growth as we continue to expand our fleet.
Although I've mentioned it regularly on our earnings calls before, it is important to reiterate that demand and interest in expedition travel is unprecedented in history. People seek adventure and exposure to the world's untraveled places. They want to learn, to feel, to record uniqueness. It is perhaps the greatest, most relevant description of luxury, redefined not by creature comforts alone but more importantly by intelligent opportunity. Great navigators, scientists, naturalists, photographers, historians and compelling geography, every human being now has the capacity to be a communicator in photos, videos and words simply with a device that fits in the palm of their hand. It is a burning hunger that people now have, enabled by technology, to experience and to share. And there is no question that an expedition where you travel, where a traveller becomes an explorer is a very compelling idea.
We have the good fortune, however, not to be following a trend but having focused on expedition travel for decades, well before all of this was broadly sought after. There is legitimacy in tenure in that, and I believe that as the category grows, more and more people will realize that Lindblad Expeditions, combined with National Geographic, provides the highest possible level of authentic, meaningful and responsible access to expedition travel.
2018 is really the new beginning of a plan we laid out in 2015. The National Geographic Quest will have their first full year of operation, and in Q4 we will launch her sistership, the National Geographic Venture, both fulfilling increased demand in core geographies. And our new protovessel, the National Geographic Endurance, named in honor of Ernest Shackleton's -- Lindblad Expedition's most revered explorer, will incorporate technical advances and create opportunities for guests, beyond the reach of any contemporary ship beginning in Q1 of 2020.
Our explorations of new markets are ongoing, exciting and full of promise, and our decades long commitment to do whatever it takes to provide our guest with the most extraordinary experiences invigorated by ever growing, explosive interest in expedition travel. We are off to a great start in 2018 and I believe this is just an early indication of what the future holds for Lindblad Expeditions, and we remain confident as ever in the growth opportunities in front of us as well as expanding long-range growth plans.
Thank you for your time this morning, and now let me turn the call back over to Craig.
Thanks, Sven. As Sven discussed, the momentum we generated during the back half of 2017 has continued into the first quarter of 2018 as the strategic investments we have made and continue to make to expand our capacity are generating significant financial returns. As we add inventory, we have also been able to maintain high yields in occupancy levels, giving us further confidence in the long-term growth opportunities, given the growing demand for high quality, immersive and authentic expedition travel.
Turning to the first quarter of 2018, on a reported basis, Lindblad delivered revenue growth of 31% versus the first quarter a year ago. And this revenue growth contributed to an $11.9 million increase in adjusted EBITDA to $22.2 million. These results do include the impact of several voyage cancellations in the first quarter a year ago, and excluding the impact of these cancellations, we estimate that revenue would have increased 14% and adjusted EBITDA would have increased 31 -- 33% year-on-year.
The substantial increase versus the first quarter a year ago was driven by the Lindblad segment, which generated 32% revenue growth on a reported basis to $70.5 million, this $17 million increase was primarily due to a 26% rise in available guest nights, mostly from the launch of the National Geographic Quest in July 2017 as well as from the negative impact of the voyage cancellations on the first quarter a year ago.
The revenue growth this past quarter also reflects a 12% increase in net yield to $1,127 per night to higher pricing across most of our itineraries, and growth in occupancy from 87% to 91% due to broad-based demand across the entire fleet.
Excluding the impact of the voyage cancellations a year ago, we estimate that the Lindblad segment revenue growth would have been approximately 13% in the first quarter due to an increase in available guest nights of approximately 10% as well as growth in net yields of 6% and occupancy expansion of 300 basis points.
Turning to the cost side of the business. Lindblad segment operating expenses increased 10% on a reported basis, primarily driven by a 9% increase in cost of tours and a 21% increase in sales and marketing. The first quarter of 2018 also included a slight reduction in G&A expenses due to lower stock-based compensation expense, related to the shares granted under the CEO allocation plan a year ago, and lower expense due to the majority of options being fully expensed the end of 2017. These were offset by $1 million of expense related to our -- refinancing our credit facility and increased depreciation and amortization, mostly related to the addition of the National Geographic Quest to our fleet.
Excluding these onetime items such as stock-based compensation, depreciation and amortization and refinancing costs as well as the impact of the voyage cancellations a year ago, the Lindblad segment operating expenses increased 7% versus the first quarter last year due mostly to the addition of the National Geographic Quest, and higher commission expenses due to the revenue growth we are generating in the current year.
Fuel costs in the quarter were 26% above prior year, due in large part to the additional operating nights in the Quest and the operation of Orion this year versus not operating a year ago. Fuel was 3% of revenue, slightly below the 3.1% of revenue in the first quarter of 2017.
Adjusted net cruise costs on a per night basis declined to $740 per night, due primarily to costs related to the canceled voyages a year ago. Such as guest reimbursements and operating costs that were not cancelable, that had no corresponding guest nights. Excluding the estimated impact of the voyage cancellations, adjusted net cruise cost on a per night basis was in line with the first quarter a year ago.
Overall, 32% revenue growth and stable cost base drove an $11 million increase in adjusted EBITDA at the Lindblad segment versus the first quarter a year ago to $20.9 million. Excluding the impact of the voyage cancellations a year ago, it is estimated that adjusted EBITDA would still have increased approximately $4.6 million or 28% year-on-year.
At the Natural Habitat segment, revenues grew 20% to $12 million due to additional departures and higher pricing. Adjusted EBITDA more than tripled to $1.3 million as Natural Habitat demonstrated significant operating leverage with a strong revenue growth due to the increased guest nights far outpacing a 12% increase in operating expense.
Total company net income, available to common stockholders in the quarter, was $10.8 million or $0.24 a share versus $0.6 million or $0.01 a share reported in the first quarter a year ago, as the improved operating results and lower stock-based compensation expense were partially offset by costs associated with refinancing our credit facility and higher taxes, primarily due to net losses in the first quarter a year ago.
Turning to our balance sheet, we remain extremely well positioned to invest in future growth opportunities. We ended the quarter with $97 million in unrestricted cash. Free cash flow for the quarter was a use of $4 million that included $13 million spent on the new bills. Including only maintenance CapEx, free cash flow was $8.6 million in the first quarter, an increase of $10.4 million for the same period a year ago.
In March of 2018, we also further expanded our financial flexibility by refinancing our existing $175 million credit facility. We increased the size of the facility to $200 million, extended the maturity of the loan out to 2025 and lowered the interest rate to LIBOR plus 3.50%, a reduction of a full point versus our previous facility. We also were able to modify various covenants to provide for additional strategic and operational flexibility moving forward.
Turning to the full year 2018. We anticipate significant growth, driven by increased capacity from a full year of operating the National Geographic Quest and the impact of the voyage cancellations in 2017. The Lindblad segment is currently pacing $34 million ahead of the same point a year ago, and we are already at 94% of our full year projected ticket revenues for 2018, despite the additional inventory, as compared with 93% of the 2017 full year ticket revenue at the same time a year ago.
Given the current operating environment and sustained booking trends, we continue to expect whole company tour revenue in 2018 between $308 million and $315 million, 16% to 18% growth versus 2017; and adjusted EBITDA between $54 million and $57 million or 24% to 31% growth versus 2017.
Please remember as I mentioned last quarter, full year results will include the negative impact associated with the launch of the National Geographic Venture in December given the start-up costs associated with that vessel. 2018 will also include a $1.5 million negative impact due to the adoption of the new revenue recognition rules under ASC 606.
Previously, all revenue for voyages under 10 days that started before quarter-end were recognized in the quarter the voyage departed, despite some of the operating days not taking place until the following quarter. Starting in 2018, we are required to recognize revenue in each quarter only for those days that actually operate within the current quarter, regardless of voyage start date and end.
Lastly, it is also important to note that the quarterly year-on-year results for the remainder of 2018 will be impacted by the timing differences of scheduled dry docks versus a year ago. Most notably in 2017, dry docks for the Endeavour II and Orion were primarily completed during the second quarter, while in 2018, both the Endeavour and Orion will be in dry dock during the end of Q3 and beginning of Q4. The shift in timing will certainly impact available guest nights and dry dock in each quarter.
Thank you for your time this morning, and now Sven and I would be happy to answer any questions you have.
[Operator Instructions] The first question comes from Chris Woronka with Deutsche Bank.
It's Steve Pizzella on for Chris Woronka. Looking at the 1Q, real strong growth year-over-year even with adjusting for the voyage cancellations. Can you talk about how that came in versus internal expectations? And the decision to leave guidance unchanged, is that just some conservatism? Or are you facing some fuel headwinds? Can you comment on that?
Sure. So certainly, we had a very, very strong first quarter. If I was pooling it versus our expectations, it certainly came in a little bit ahead of where we were looking at. But the year certainly had a cadence to it that we always expected, and that was given where the dry docks were that the first and second quarters would be the strongest quarters of the year, followed by some of the onetime items in Q3 and Q4 that I mentioned.
I think importantly, when you look at the trends, the operating trends of the business, they remain very, very strong, way past the first and second quarter, we're already looking at very strong growth into 2019. But there are some of these anomalies in each of these quarters with regards to available guest nights as well as launching the Venture at the end of the year, they're going to play into the full year. There's also some, I would say, relatively newer itineraries, which Sven can elaborate on in a second.
Later in the year, we still have a little bit of uncertainty around them, and that includes the launch of our Egypt product; it includes where we end up in the South Pacific, certainly; and we have launched some shore of the Galápagos strip, which Sven can get into a second. So all of these things along with the price of fuel, certainly given where we are in the year, have resulted in us leading guidance where it is right now. But as the second and third quarter play themselves out, we'll certainly update the full year expectations as results dictate. Sven, you want to talk a little bit about the -- some of the itinerary changes?
Well, one of the things you do particularly when you're having such a good year, it's a great opportunity to test certain ideas, how one of the levers that we believe are very important is to begin offering programs or a certain number of programs that are shorter because there are certain constituencies that we have to -- just simply don't have the time. So for example, in the Galapagos, we're testing some shorter programs in the fourth quarter, just to see if that has any sort of resonance that we can build upon into the future.
So in that it's still is an experiment, we're still keeping our eyes on it and it may not work 100% in the short term, although frankly, I believe it will, but we don't know that for a fact. We have launched a new initiative in Egypt in Q4 and the first quarter of 2019, and well beyond that, and that is -- people are responding to that incredibly well. However, we haven't been in Egypt for over a decade and so we're keeping our eye on that closely. So I think that really responds to some of the things Craig was referring to.
And then a lot has been made of 2019 overall industry supply growth, can you talk about kind of what is competitive to your business? And any early booking trends for next year?
Yes. Well -- and Craig can perhaps provide more detail but the booking trends for 2019 are very, very, very strong, in part because we've -- we will have the full year, first full year of the second new ship, the National Geographic Venture and we're opening up some new geographies. As it relates to the competition, I believe what is happening is that there is much more interest in this sector, and so there is a lot more noise, if you will, conversation around the idea of expedition travel. I view that as a good thing. So it just gets more people jazzed, it gets more people incorporated and interested in this.
And there's no question that as far as the public goes, this is absolutely one of the strongest growth trends in the travel industry. Of course, not in absolute numbers because it's still a relatively small niche but in terms of growth measured against itself.
Sure. Just to put a little color around some of the pacing that we're seeing for 2019, on the last call we spoke about 2019 pacings being up around 40%. I'm happy to say that trends have continued and we continue to be ahead of 2018 pacings at the same time, up about 40%, which is nice to see. And the best part about it is, Sven kind of touched upon it, is not only are we seeing nice pacing on some of the – our new vessel, the Venture, which is doing really well so far with its early bookings, but we're seeing nice bookings across the entire fleet as we continue to operate in some of our really strong geographies and also add some new geographies like the Russian Far East. So all in, I think we feel very confident about where we sit right now with relation to 2019, but it's still, obviously, a ways to go.
The next question comes from George Kelly with Imperial Capital. Please go ahead.
First one for Sven. You've been in the industry for quite a while now, and I was wondering if you could talk about sort of the state of the consumer and interest around this kind of travel. Have you ever seen the market so healthy?
George, I absolutely, unequivocally, have not seen it as healthy as this. And it's a confluence of factors, if I may expand a little bit. I think that people are becoming more and more aware of the fact that the environment matters, that it is of interest, that we ought to understand, know more about it. So I think part of its driven intellectually on the part of people's desires. I think the factor that everybody now is basically a communicator and a storyteller, everybody likes to share this material.
And so where are you going to go to do that, that's more compelling than geographies like the Antarctic and the Galapagos and Alaska and places like this? So I think it's a lot of factors that have come together. I think more and more people are traveling as families or traveling with friends because they want these shared experiences. So it's just there's so many compelling reasons why this is growing at a level it is.
And then next question, sort of related, but as you think about pricing, I know it's -- that generally, you only sort of tweak pricing maybe a couple times a year, correct me if that's wrong, but does the way that you've absorbed this new capacity and the strength in the consumer market, does that give you confidence? Do you think you could become more aggressive with pricing at any point in the next, say, couple of years?
Well, here's our view on pricing. First of all, we believe that the biggest opportunity is adding inventory, broadening our offerings. If you get too aggressive with pricing, it can be problematic in one form or another. First of all, we're at the highest level of pricing in the industry. And if we get too much higher, it just creates too much opportunity for others to make an issue of that, if you will, so our play is really on broadening our offerings. And we think that's where the best opportunity, by far, exists. And we want to be very, very careful because at a certain juncture, you can reach a wall of sorts with pricing and you regret it, you just get too -- I'm not going to use the word "greedy," but there's a line there, I -- and we don't wish to cross it.
And then last, I guess, you mentioned that the Galapagos shorter itineraries, is there anything different in that market that's worth commenting on? Has anything changed, just generally, in the Galapagos?
No, this isn't a factor of anything changing in the Galapagos. And by the way, these shorter itineraries, we're developing these in other parts of the world as well. We have some out of California that we're experimenting with, in Baja, California that we're experimenting with. So the whole notion here is this -- I and colleagues run into people all the time that say we'd love to travel with you, however, we don't have that much time. And so really this is a response to what we've heard from a variety of people. And so what we're trying to do is -- or what we are doing is we're creating programs where people can leave home and get back home entirely within a work week, if you will.
And just one last stab, a modeling question on your full year guidance. Can you quantify the impact -- the negative impact from Venture? Are there any incremental dry docks to what you had last year that -- can you quantify that as well?
Sure. So we're not going to get too specific on the Venture but it is several millions of dollars with regards to the losses in the current year, just given the timing of the vessel. You have to hire crew, you have to put supplies and items on the vessel ahead of launching the vessel, and obviously some of those things you can't capitalize. There's a fair amount of cost at the end of Q3 and into Q4, which will roll through. And then given the Venture won't really launch with guests towards -- until the tail end of the year, there's not a lot of revenue to offset that in the current year, certainly that would be a negative in the current year and we'll see a lot of the benefit from the launch of the Venture, both from an EBITDA as well as the free cash flow in 2019. So that is -- that's the answer to that question.
In terms of the dry dock, the dry dock schedule is actually, in totality, it's very similar this year to where it was a year ago, which really is a shift timing from predominantly in Q2 to the end of Q3 into the early part of Q4. The one exception to that really is the Quest – sorry, not the Quest, the Endeavour II, which had launched at the end of 2016, and as a result only had a shorter wet dock in 2017, whereas it will have a full dry dock in 2018. But that's only a few extra days. So all in all, the schedule will be very similar, it's just the shift in the course.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, everybody, for joining us this morning. We appreciate your time. And if you have any follow-up questions, please don't hesitate to reach out, we'll be around most of the day. Thank you.
I apologize, we have one more question if you -- if we may take it please.
I'm sorry. They dropped their line. Okay. Thank you so much.
All right. Thank you, everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.