Norwegian Cruise Line Holdings Ltd.

Good morning and welcome to Norwegian Cruise Line Holdings' third quarter 2021 earnings conference call. My name is Lori and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions for the session will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. And as a reminder to all participants, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Jessica John, Vice President of Investor Relations, Corporate Communications, and ESG. Ms. John, please proceed.

Thank you, Lori, and good morning, everyone. Thank you for joining us for our third quarter 2021 earnings and business update call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings, and Mark Kempa, Executive Vice President and Chief Financial Officer. Frank will begin the call with opening commentary, after which Mark will follow to discuss our financials before handing the call back to Frank for closing remarks. We will then open the call for your questions. As a reminder, this conference call is being simultaneously webcast on the company's investor relations website at www.nclhltd.com slash investors. We will also make reference to a slide presentation during this call, which may also be found on our investor relations website. Both the conference call and presentation will be available for replay for 30 days following today's call. Before we begin, I would like to cover a few items. Our press release with third quarter 2021 results was issued this morning and is available on our investor relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also reference non-GAAP financial measures. a reconciliation to the most directly comparable GAAP financial measure, and other associated disclosures are contained in our earnings release and presentation. With that, I'd like to turn the call over to Frank Del Rio. Frank?

Thank you, Jessica, and good morning, everyone. And thank you for joining us today. And as always, I hope that all of you, as well as your loved ones, remain healthy and safe. Today, we will discuss commentary on three areas. First, the progress we have made on our great cruise comeback. Second, our recent booking and demand trends, which have shown particular strength for sailings operating in the second half of 2022 and for all of 2023 when our fleet is expected to be back in full operation and at normalized occupancy levels. And finally, on our exciting pipeline of new vessels, which we expect to contribute outsized IBAGIC growth and other important financial metric improvements. Slide 4 outlines how far we have come on our return to service plan. When we last spoke in early August, we had just relaunched the first vessel in our fleet, Norwegian Jade in Greece, and we're on the verge of resuming cruising in the U.S. with Norwegian Encore, making her West Coast debut, sailing to Alaska from Seattle. Since then, we have successfully relaunched 11 of our 28 vessels with all three of our award-winning brands resuming operations. We couldn't be more pleased with the performance of our relaunched ships. First, our crew has not missed a beat since returning, seamlessly adapting to our new health and safety protocols and going above and beyond to deliver the exceptional vacation experiences our brands are known for. This commitment to service has resulted in record high guest satisfaction scores with each month sequentially better than the month before. And second, we are seeing the power of our industry-leading bundling strategy pay off as guests are boarding our vessels with fresh wallets, which, coupled with robust pent-up demand for all kinds of experiences, is translating to remarkably strong onboard revenue generation. In fact, onboard revenue has exceeded our baseline expectations by over 20%, with broad-based strength across all shifts, regions, and revenue streams. While I would caution, though, against extrapolating these figures as permanent or indicative of steady-state future performance just yet, as there are several transitory factors that may be contributing to the elevated current levels, including pent-up demand, cabin, and guest mix, it is nonetheless an encouraging and positive signal of the healthy consumer demand we are experiencing. Lastly, and most importantly, these relaunch shifts have already contributed positive cash flow in the third quarter, even with our self-imposed occupancy level caps. Despite our return to service coinciding with the unfortunate summer surges of Delta variants, I'm happy to say that our robust, multilayered, sail-safe health and safety protocols work as designed to mitigate the introduction and transmission of COVID-19 aboard our vessels. The prevalence of cases we identified in pre-boarding testing, mid-cruise, and then at deportation were inconsequential and well below what we all saw in the general population during this time. In short, we were able to fairly evaluate and fine-tune our rigorous protocols during one of the highest heights of the pandemic, and the stellar results speak for themselves. Today, all ships in our fleet continue operating with a strict 100% vaccination requirement, coupled with universal pre-embarkation testing and multiple layers of additional protection once on board, including upgraded air filtration systems and well-resourced medical centers. We will continue to follow the science and evaluate and modify our protocols as needed with guidance from our team of experts led by former FDA Commissioner Dr. Scott Gottlieb and from applicable public health authorities. As I have said time and time again, our commitment to health and safety is far and away the most important principle that guides how our company operates at all levels, and not just now, but pre- and post-pandemic as well. And we are willing to go to great lengths to protect our guests, crew, and the communities we visit. Just last week, we were pleased to receive positive news from the CDC with a temporary extension of the framework for conditional sailing order through January 15th of 2022, at which point the order will revert to a voluntary program. We view this as a positive step forward for our company and the industry at large, and we were encouraged to see positive recognition by the CDC of the successful resumption of cruising and the length we have all taken to enhance our already stringent health and safety protocols in response to COVID-19, which continue to be much more rigorous and much more comprehensive than those implemented by any other travel, leisure, or hospitality sector. With the progress society has made with vaccinations, therapeutics, and adapting to living in the ongoing pandemic environment, the worst is seemingly behind us. Each day we become increasingly confident in our ability to flawlessly execute on our phase-void resumption, which is detailed by brand and by vessel on slide 5. We continue to expect our full fleet to be back in operation by April 1st of 2022, and with this steady and prudent trajectory, we are well positioned for a projected return to pre-pandemic occupancy levels across our fleet no later than the beginning of the third quarter of 2022 and in time to capture peak summer season demand and pricing. While we expect to continue seeing some fits and starts as we ramp up our relaunch, we are keeping a close watch on port availability, travel restrictions, and any other changes to the global public health environment, which could affect our return to service plans as we are ready to adapt accordingly. Turning to slide six, we shift today's discussion to our booking and demand trends. I am pleased to report that we continue to see robust future demand for cruising, particularly for sailings operating in the second half of 2022 and all of 2023, as evidenced by our record cumulative book position during these periods. You'll recall at the beginning of our third quarter, our book position for full year 2022 was meaningfully and significantly ahead of 2019's record levels and at higher pricing. However, and consistent with the pullback seen by the broader economy and, in particular, the travel and leisure sector, the summer Delta variant surge resulted in a marked slowdown in our net booking volume. The impact was heavily weighted to closer in-sailings, particularly for fourth quarter 2021 and first quarter 2022, with the impact lessening sequentially throughout 2022 and beyond. Rather than chase scarce demand during the Delta surge by dropping prices and or spending marketing funds in a less than optimal manner, we strategically chose to wait for consumer sentiment to rebound as we have seen direct ebbs and flows in our booking patterns throughout the pandemic, coinciding with changes in the public health environment. Throughout this difficult 10-week period, we remain disciplined and continue to hold or even raise pricing, and the outcome is that today we see both record load and record pricing for the second half of 2022 and for all of 2023. We are intently focused on the long-term brand positioning and profitability of the company and are simply not willing to sacrifice pricing in order to increase load factors in the upcoming transitional quarters. As has happened in past surges and as the COVID-19 situation recently improved, we have experienced a rebound in bookings with net booking volumes improving sequentially over the past six weeks. We believe this improvement will accelerate moving forward as, first, our brands begin to ramp up their demand-generating marketing investments in mid-November, coinciding with Black Friday and Suburban Monday promotions, and, second, the much-anticipated and expected recovery in the travel agent channel space. And lastly, the approval of vaccines for children ages 5 through 11, which came just last night, and will allow for an expanded group of 100% vaccinated guests, especially families, to sale on our brand. Our go-to-market and full vaccination strategy has paid off in droves. And today, our full-year 2022 load factor remains in line with 2019 record levels and at higher pricing, even when including the dilutive impact of future cruise credits. In addition, we are meaningfully better booked for second half of 22 and full year 23 sailings and at better pricing than at any similar point in time in the past. Our primary focus continues to be on these periods. When our fleet is expected to be in full operation and at normalized occupancy levels, And as I mentioned before, just in time to capture the all-important third quarter peak summer season, which traditionally is the most profitable quarter for the industry. Now, breaking down our book position for full year 2022 further, more than 55% of bookings are from loyal repeat cruisers to our brand. In addition, approximately 75% is comprised of new cash bookings, with the remainder comprised of future cruise credits. So far, approximately 60% of the total value of our outstanding FCCs have been redeemed. As a reminder, the value-added 125% future cruise credits that we issued at the beginning of the pandemic can only be applied to sailings through year-end 2022, resulting in zero yield dilution when we look to 2023 and beyond. And while still early, booking trends for 2023, as I've hinted thus far, are also off to an impressive start. Our booking windows continue to be elongated versus historical levels, with guests booking further into the future, particularly for the Oceana Cruises and Region 7 Caesars Cruises brands. Case in point, in August, Regent set a record for the largest booking day in its 29-year history with the launch of its 2023-2024 voyage collection. Reservations surpassed its previous record by approximately 15%. And while all itineraries were popular, notable destinations of interest were Africa, Asia, and the Baltics, demonstrating our guests' continued appetite for long and exotic itineraries. And in September, the sales launch of just a single ship, Oceana Cruises' new 1,200-passenger Vista, which doesn't debut until April of 23, set an all-time single-day booking record for that brand that surpassed the most recent record set in March of 2021 by nearly 60%. Half of the available inventory for Vista's inaugural season was sold in a single day, with 30% of bookings coming from new to brand guests. These incredible, record-breaking milestones are further proof of the exceptional demand we continue to experience for our brand's unique product offerings from both new and loyal guests alike. Strong future demand in both load, factor, and pricing is also empirically evident in our advanced ticket sales bill. Our advanced ticket sales increased approximately $500 million in a gross basis in the quarter, equating to an approximately 65% increase versus the prior quarter's build. In addition, and more importantly, our cash advanced ticket sales for sailings beginning in the second quarter of 2022 and beyond are approximately 45% higher than at the same time for record year 2019. As we move forward with phasing in the rest of our fleet, we expect this tremendous momentum to continue sequentially. Looking to the future, 2022 will also mark an exciting new chapter for our company as we welcome the first ship in the next class of vessels for Norwegian Cruise Line, Norwegian Prima, in summer of 2022. I just returned from the shipyard in Italy a few weeks ago where I was able to witness firsthand what an evolution Prima is for the Norwegian brand and for the industry at large, which you can see on slide 7. Everything about her was impressive, as she has been meticulously designed to elevate the guest experience. Last month, we unveiled Prima's entertainment lineup, including its interactive headline show, the Tony Award-nominated musical, Summer, the Donna Summer musical. Norwegian Prima will also showcase numerous cruise industry firsts, and new-to-brand experiences, including the world's first transforming venue that converts from a three-story theater into a Vegas-style nightclub, exhilarating free-fall drop-dry slides, and a tri-level, 1,200-foot-long racetrack, the largest at sea. The Prima Speedway will be the first-ever three-level racetrack and is over 20% larger than that on Norwegian Encore, featuring 14 turns where drivers can reach speeds of nearly 40 miles per hour. Prima's advanced sales continue to impress, even after her record-shattering sales debut in May, which set a single best booking day and best initial booking week record, doubling the previous record set by Norwegian Bliss in 2018. And despite her introduction being six weeks later than Norwegian Bliss, her booking volumes are trending in line with that of Bliss, the previous fastest-selling new build for the line, and at materially higher prices. As you can see on slide 8, Norwegian Prima is just the first shift to look forward to in our industry-leading growth profile of nine world-class shifts coming online through 2027. These new bills will grow our birth count by approximately 40%, adding 24,000 additional births across our three brands. In 2023, when our fleet is back in full force, we expect our berth capacity to be approximately 20% higher than 2019's pre-pandemic levels. The addition of these new cutting-edge ships will also favorably change our cabin mix, as illustrated on slide 9, with premium cabins increasing to approximately 65% of total berths versus approximately 60% today. In addition to the premium mix of real estate on board, our new ships have all the bells and whistles, additional streams for onboard revenue generation with new and innovative experiences, and the latest technology to improve efficiency versus our existing fleet. Excitement around new shifts is also a significant demand driver and a powerful engine to fuel future yield, EBITDA, cash flow, and ROIC growth. It brings new guests to our brand, and it brings back repeat guests as well, helping us to appeal to every segment that we are targeting. And given our base of only 28 ships in our fleet, we are ready and eager to easily and profitably absorb this new capacity as it will allow us to further diversify our product offerings and penetrate numerous attractive and high-potential unserved and underserved markets globally. The strategic addition of the Prima and Prima Plus class, for example, which are smaller but more upskilled than our previous Breakaway and Breakaway Plus class at approximately 3,200 births for the first two Prima class shifts and increasing to nearly 3,600 births for the next four Prima Plus class shifts will give us additional bandwidth and flexibility to optimize the deployments that are most profitable and allow the line to continue commanding premium pricing with the right size shift in the right place and at the right time. And as slide 10 shows, we have historically demonstrated our success in not only absorbing capacity, but translating this capacity growth into outsized revenue, outside adjusted EBITDA, and operating cash flow growth that significantly outpaces the growth in absolute capacity. We fully expect to continue this trend and drive meaningful growth to the top and bottom lines with the addition of these exciting new shifts. I'll be back later to provide an update on our ESG efforts as well as provide closing remarks, but for now, I'd like to turn the call over to Mark for a financial update.