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spk06: Good morning and welcome to the Norwegian Cruise Line Holdings fourth quarter and full year 2022 earnings conference call. My name is John 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 touch tone 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, Jessica John, Vice President of Investor Relations, ESG, and Corporate Communications. Thank you, Ms. John. Please proceed.
spk01: Thank you, John, and good morning, everyone. Thank you for joining us for our fourth quarter and full year 2022 earnings and business update call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings, Mark Kempe, Executive Vice President and Chief Financial Officer, and Harry Sommer, President and Chief Executive Officer of Norwegian Cruise Line. 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 websites. 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 fourth quarter and full year 2022 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 Dalrio.
spk05: Thank you, Jessica, and good morning, everyone, and thank you for joining us today. 2022 was a year like no other in our company's 56-year history as we successfully concluded our great cruise comeback with the last vessel in our fleet reentering service midway through the year. Our team continually pushed forward through this challenging transition year, achieving several significant milestones on our road to recovery and preparing for the next chapter of our storied brands. With our full fleet back to the high seas, we significantly ramped up occupancy levels, carrying nearly 1.7 million guests, welcomed our newest ship, Norwegian Prima, to our world-class fleet, reached several critical financial inflection points, maintained our industry-leading pricing, and perhaps more telling, ended the year in a record book position for 2023 and at record prices. These accomplishments are even more impressive when considering they were achieved against the backdrop of lingering COVID-19 impacts, as well as ongoing macroeconomic and geopolitical uncertainty. I want to take the opportunity to once again thank our entire team, both shoreside and shipboard, for their hard work, dedication, and tenacity, which has propelled us forward as we strive to be the vacation of choice for everyone around the world. I'm incredibly proud, honored, and inspired to work alongside each and every one of you. And I also want to express our sincere thanks to our loyal guests, valued travel partners, lenders, shipyards, investors, and all of our stakeholders for their continued support and partnership. Shifting our attention to what is certainly a bright future for our company, let's turn to slide six, which outlines our current positioning and the key catalysts we have on the horizon. First, we are encouraged to see that our target consumer, which tends to skew more upmarket than the broader cruise industry, continues to be financially healthy and resilient and is prioritizing consumption of experiences over the purchase of physical goods. We've talked previously about the two high-level indicators we carefully monitor to evaluate the willingness of consumers to spend on cruise travel, the first being the length of the booking curve, which is a forward-looking indicator, and the second one being onboard revenue, a real-time indicator of a consumer's actual spending, both of which continue to hold strong with no signs of fading. In fact, the booking window in the fourth quarter was well elongated compared to the same quarter in 2019. Onboard revenue also continues to be a bright spot with gross onboard revenue per passenger cruise day in the quarter increasing approximately 25% higher than the comparable 2019 period. The bottom line is our target consumer continues to be willing to spend on travel and experiences now and in the future. This gives us confidence that not only is the incredible value proposition for cruising resonating with consumers, but the unique and compelling offerings of our three brands are also appealing to their respective markets. Second, we are taking actions across our business to align with our strategic priorities and strengthen the foundation for sustained profitable growth. This includes a broad and ongoing initiative we began in the fourth quarter to improve operating efficiencies and the right size our cost base so that we can rebuild and enhance our margins. You may ask, why start this initiative now? Well, the past few years have been unlike anything we could have imagined. First, we were focused on taking the necessary measures to withstand a prolonged and unprecedented period of disruption by minimizing cash burn, raising capital, enhancing our health and safety programs to adapt to a rapidly evolving public health environment, and advocating for the industry to restart cruise operations. We then shifted our focus to relaunching our operations while providing our discerning guests the same unparalleled vacation experience they expect from our leading brands. We also took this unique opportunity to raise the bar on pricing for the long term. Now that our phased occupancy ramp is nearly complete and our loyal guests know that cruising in our brands is back and even better than before, we are squarely focused on how to maximize profitability as we embark on a period of transformational growth Every aspect of our business is being evaluated through the lens of how we can realize our full value potential for all stakeholders. We are exploring further opportunities, first and foremost to reduce our cost profile and to maximize revenue generation. You've likely seen some of the actions we've already taken to improve our cost structure, including normalization of marketing spend, corporate overhead reductions, itinerary optimization, supply chain initiatives, and thoughtful rationalization of product delivery. We will continue to leave no stone unturned as we identify and evaluate incremental opportunities. And of course, we will not lose sight of our guests, the very heart of our business, and we will continue to prioritize delivering an exceptional guest experience and superior service levels. The last catalyst I want to touch on is our industry-leading new build pipeline. This year, for the first time in our history, we are gearing up to deliver one new build for each of our brands, as shown on slide seven, adding over 5,000 additional births to our fleet, including an over 20% increase in our upscale births. On a capacity-day basis, this will result in approximately 19% growth in 2023 compared to 2019. As you can see on slide eight, we have made some modifications to our new build pipeline primarily related to the last two shifts in the Prima class. These shifts have been lengthened in part to accommodate the future use of alternative fuels. We now expect gross tonnage for the third and fourth Prima class to be approximately 10% larger and the fifth and sixth Prima class shifts to be approximately 20% larger than Norwegian Prima and Viva. As a result, delivery days have shifted a bit, and we now expect one larger Prima Class shift to be delivered each year from 2025 through 2028. We remain confident in our ability to profitably absorb this capacity with continued consumer demand for travel, our expansion into the many unserved and underserved markets around the world that our brands have not yet tapped into, and in the broader industry's vast underpenetration particularly when compared to land-based vacation alternatives. Shifting our discussion now to our booking, demand, and pricing trends, as you can see on the slide down in the fourth quarter, our load factor reached 87% in line with guidance. This is approximately 20% below the comparable 2019 quarter, yet demonstrates another sequential improvement in closing the occupancy gap versus 2019. This ramp is continuing through the first quarter of 2023, as we have already achieved 100% occupancy in the quarter, leading to a return to historical levels beginning in the second quarter of 2023 and beyond. In terms of pricing, slide 10 illustrates another strong result in the pricing front, with our net per diem growth in the fourth quarter of 2022 up approximately 14% on an as-reported basis and up 15%, in constant currency over 2019. Turning to slide 11, at year end, our cumulative book position for 2023 was within our optimal range of approximately 60 to 65%. We continue to believe this is our sweet spot as it strikes the delicate balance of encouraging guests to book early while also optimizing pricing. Full year 23 book position is now ahead of 2019's record performance and at higher prices. Since we last spoke in November, we have been pleased to see positive booking momentum continue, including a very strong wave season that likely started two months earlier than usual. In fact, November was a record-breaking month for Norwegian Cruise Line as it celebrated a record day, record week, and record month of sales boosted by its Black Friday and Cyber Monday holiday push. Subsequently, in January, a strong start to traditional wave led the line to setting another record booking month. Our region brand also experienced a similar positive reception to its 2023 wave offer launch, which resulted in a record launch day with net booking volume nearly four times last year's wave launch and 2019 pre-pandemic levels. Our current cumulative book position and the strong demand dynamics that we continue to experience across our brands gives us further confidence that we can achieve our 2023 guidance, which Mark will discuss shortly in more detail. I'll be back with closing comments a little later, but for now, I'll turn the call over to Mark for his commentary on our financial position and outlook.
spk09: Mark? Thank you, Frank, and good morning, everyone. My commentary today will focus on our fourth quarter 2022 financial results. 2023 guidance and the progress on our financial recovery. Unless otherwise noted, my commentary on net per diem, net yield, and adjusted net cruise costs, excluding fuel per capacity day metrics, is on a constant currency basis. Slide 12 outlines key metrics highlighting our fourth quarter results, nearly all of which met or exceeded guidance. Focusing on the top line, Strong ticket pricing and onboard revenue generation drove total revenue per passenger cruise in the quarter up approximately 24% versus 2019, with net per diems increasing approximately 15%, continuing the strong pricing performance we have achieved since our relaunch. Turning to costs, adjusted net cruise cost excluding fuel per capacity today was in line with expectations. with the second half 2022 decreasing approximately 10% versus the first half as our operations continue to ramp up. As our 2023 guidance indicates, second half 2022 is not representative of a go-forward run rate. For the second half of 2022, adjusted EBITDA was nearly break-even. We did, however, achieve another significant milestone in the fourth quarter, generating positive adjusted free cash flow for the first time in three years. This represents another stepping stone as we return to a normalized operating environment. Looking at expectations for the full year 2023 on slide 14, we are pleased to return to our normal cadence of providing annual and quarterly guidance. Adjusted EBITDA is expected to be in the range of 1.8 to 1.95 billion with the high end of our targeted range representing record adjusted EBITDA for the company. This is expected to translate to adjusted EPS of approximately 70 cents at the midpoint of our guidance. Taking a closer look at the components of this outlook, net per diem growth is expected in the range of approximately nine to 10 and a half percent as compared to 2019. This translates to net yield for the year expected to increase in the range of 5% to 6.5%. This stellar top line performance is reflective of our go-to-market strategy and emphasis on price discipline. Moving to costs, adjusted net cruise cost ex-fuel per capacity day is expected to average approximately $160 for the full year. This represents a nearly 15% decrease as compared to the average of $187 in the second half of 2022. The key drivers of this expected decrease include the scaling back and normalization of marketing investments, which were elevated in the second half of 2022 as we focused on resetting expectations and raising the bar on pricing during our relaunch, moderation in hyperinflationary pressures in certain areas, including food and logistics, normalization of capacity days as a result of the elimination of previously required protocols, timing and optimization of scheduled dry docks, and finally, the results of our operating efficiency and cost minimization efforts as part of our broad and ongoing margin enhancement initiative that Frank touched on. Keep in mind that costs are expected to sequentially trend lower over the course of the year as occupancy increases and reduction initiatives are realized, which is expected to lead to a lower cost run rate as we exit 2023 as compared to our full year guidance. As we have consistently communicated, our costs will be elevated when compared to 2019 on baseline, both due to normal and hyperinflation over the past three to four years, as well as a mixed headwind as we add higher operating cost capacity which we do expect will gain a premium on the top line. I want to reiterate that we are committed to right-sizing our cost base and are taking deliberate actions across our business to best position us for the future as a stronger and leaner organization. There is no silver bullet, but we will continue to evaluate all opportunities to accelerate revenue and improve operating efficiencies while continuing to deliver an exceptional guest experience. Our goal is not only to rebuild our margins, but over time continue to enhance them, and we look forward to demonstrating this improvement over the coming quarters. Now let's take a look at our expectations for the first quarter. Compared to 2019 levels, net per diem is expected to increase approximately 6.75% to 7.75%, while net yield is expected to increase approximately 1.25% 2.25%, primarily as a result of our continued occupancy ramp and with pricing expected to be higher for the remaining quarters of 2023. Adjusted net cruise cost excluding fuel per capacity day is expected to be approximately $165 or approximately 12% below the second half of 2022. First quarter is expected to be the highest cost quarter due to lower occupancy and and as actions taken in recent months to reduce costs will not yet be fully realized. When looking at our implied guidance for the remaining quarters of 2023, the expected decrease in costs is approximately 16% compared to the same period in 2022. Taking all of this into account, adjusted EBITDA for the first quarter is expected to be approximately $195 million, and adjusted EPS is expected to be a loss of approximately 45 cents. Moving to our balance sheet, slide 15 demonstrates the results of our deliberate and opportunistic measures to optimize our debt maturity profile. In 2023, we have approximately $1 billion of scheduled debt service, the vast majority of which are related to our export credit agency-backed SHIP financing. In recent months, we also addressed a large portion of our 2024 maturities. First, we completed an amendment of our operating credit facility and extended approximately $1.4 billion of this facility by one year to January 2025. Earlier this month, we took advantage of significant improvements in the bond markets to complete a refinancing transaction of the remaining non-extended term loans under the operating credit facility. we issued 600 million of new eight and three-eighths senior secured notes through 2028 and used the proceeds to repay these term loans, allowing us to de-risk and replace near-term debt maturities with longer-dated debt at only a marginally higher cost. As you can see with these actions, we have a manageable maturity profile over the course of the next few years. When you look at the totality of our debt, Approximately 40% is ECA-backed debt. This is a unique differentiator of the cruise industry, which is part of a broader connected ecosystem, which includes, among others, the operators, the shipyards, and the governments, and export credit agencies, all of which rely on shipyards and suppliers for significant economic and employment-related benefits. As all of our interests closely align, these partners are incredibly supportive and as demonstrated by the very efficient financing we are able to secure for our new builds, as well as the support they provided during the pandemic. For additional detail on the breakdown of upcoming debt payments, we also provide a detailed schedule on our investor relations website. Turning to liquidity, our overall liquidity position remains strong, and just last night we announced two transactions which further enhance our liquidity, outlined on slide 16. First, we revised and extend our existing $1 billion undrawn backstop commitment. As part of the agreement to secure a second year extension option on the commitment, the company issued $250 million of nine and three quarter notes due 2028. At the same time, we revised the undrawn commitment to reduce the amount to $650 million, with the agreement now extending through February 2024 with the option at our sole election to extend through 2025. We do not currently intend to draw on this commitment. And in total, the combination of these two actions provides the company approximately $900 million of liquidity to the bottom line. Second, we also entered into a new $300 million unsecured and undrawn backstop commitment. This facility will be available to draw beginning in the fourth quarter of 2023. Securing this facility provides a backstop for the remaining portion of the non-extending operating credit facility, which matures in January 2024. Pro forma for these recent transactions, our liquidity position at year end is approximately 1.8 billion, which includes approximately 650 million under the available commitment. For housekeeping, this does not include the enhancement to future liquidity, we obtained with the $300 million undrawn commitment as it is currently not available to draw. Before handing the call back to Frank, I want to reiterate our relentless focus on executing on our medium and long-term financial strategy as laid out in slide 18. We will continue to be opportunistic and are committed to delivering value for all stakeholders. But most of all, we are excited to be back in full operation And once again, delivering incredible vacation experiences on our three brands to all corners of the globe. With that, I'll turn it back to Frank for closing comments.
spk05: Thank you, Mark. Before we wrap up our prepared remarks, I'd like to provide an update on our global sustainability program, Settle and Sustain, which slide 19 outlines a few key highlights. Since we last spoke, we have made meaningful progress to advance our commitment to pursue net zero greenhouse gas emissions. we successfully completed the testing of biodiesel fuel blends on three additional ships in our fleet, a promising potential lever to help reduce emissions on our existing fleet. In addition, we recently modified our contract for the final two Prima-class ships for Norwegian Cruise Line, scheduled for delivery in 2027 and 2028, to reconfigure these ships to accommodate green methanol as an alternative fuel source in the future. While additional modifications will be needed in the future to fully enable the use of dual fuels, both methanol and diesel, this action reinforces our commitment to decarbonization and represents an important and exciting step forward in our pursuit of net zero. Before turning the call over to Q&A, I'd like to leave you with some key takeaways which you can find on slide 20. First, we believe we are well positioned in the current economic environment and our target upmarket consumer remains resilient. This is especially true for the all-important North American consumer, from we enjoy an outsized benefit given our strategic sourcing mix and focus on global versus national brands. Second, booking momentum is positive, buoyed by a strong start to the year with wave season, and we are pleased with our book position and pricing for 2023. Third, we are focused on strengthening the foundation for sustained profitable growth and we will continue to take strategic measures to best position the company for its next era. And lastly, our cash generation engine continues to rev up, which along with our transformational new build pipeline provides a path to meet our liquidity needs and to restore our balance sheet in the coming years. We've covered quite a bit today, so I'll conclude our commentary here and open up the call for your questions. Operator.
spk06: Thank you, Frank. If you have a question at this time, please press the star and then one key on your touch-tone telephone. In order to get in as many people through the queue, we ask that you please limit yourself to one question. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Thank you.
spk01: Before we get to the questions on the line, we first want to address a top question from our online shareholder Q&A platform. which provides all of our investors another avenue to submit and upvote questions for management. The top question this quarter was, what are our plans to bring in new customers and also reward brand loyalists to entice them to cruise? Frank, do you want to take that one?
spk05: Sure. I think both past guests and new guests are absolutely critical for our continued growth. have a great base of loyal guests who love our product because each of our brands have incredibly high repeat rates, running anywhere from 45% for the Norwegian brand to as high as 55% for Regent. And we're always looking for new ways to engage with them, including through our popular loyalty programs that each brand operates. We also have a robust new build pipeline, as we just finished discussing. One new build being introduced for each brand this year alone is We all know new ships and the buzz surrounding new ships have historically brought outside attention to the brand. Just consider the buzz when Katy Perry performed as godmother of Norwegian Prima this past summer. And just recently, Giada De Laurentiis was named godmother of Oceana's upcoming Vista, which highlights the brand's focus on having the funnest cuisine at sea. These announcements create excitement, not just among loyal guests, but also to new brand and even to new to cruise guests. You've heard us say many times that the cruise industry as a whole is vastly under-penetrated, and we have a significant runway ahead to attract new to cruise guests. Creating awareness, drawing buzz, partnering with the travel agent community, and even having investors such as yourselves deliver the message of the value and unique experiences that cruises offer is a large part of what we do every single day. And we'll continue to do so to drive that message to as many possible guests as we possibly can.
spk06: And thank you, Frank. Our first question comes from the line of Dan Pulitzer with Wells Fargo. Please proceed with your question.
spk07: Hey, good morning, Frank. Good morning, Mark. Thanks for taking my questions. I wanted to touch first on the balance sheet. Obviously, there's a lot of work that you guys have been doing there. How do you think about leverage this year, next year, and to what extent is your appetite to issue equity relative to debt? Thanks.
spk09: Hi, good morning, Dan. Well, first and foremost, the discussion of issuing equity is a Board decision. So I will leave it there, but what I can tell you is that has not been in discussion in any of our Board meetings. We've said time and time and again, we do not believe that it is prudent to issue more equity to deliver the company. As we look forward and we look at our balance sheet, we have said that our internal goal here is we want to turn the year with a 5x handle. And for clarification, that does include an adjustment for the new builds that we take delivery of in this year, since we do not have the full earnings potential. But that's what the company has rallied around, and that's what we're focused on. We've said before it's not an easy task, but we're rallying against that, and that's what we're using as our stake in the sand. So there's a lot of opportunity ahead in the industry, and especially for our company for the year. We are in a dynamic environment. All signs that we see are looking good, and that's evidenced by our pricing power and our Q4 results as well as our our guidance for the year. But nevertheless, there is some unknowns out there. So we're feeling pretty good right now. We continue on our path of hitting our guidance that we've just issued. And we feel good about our overall liquidity and balance sheet position where it stands today, but there's a lot of work to do.
spk07: Understood. And then just for a follow-up, bookings are obviously positive. You're putting through all these cost efficiencies Do you have any expectation, you know, as bookings progress and you guys continue to recover, when you can get back to that $100 EBITDA for APCD level? And also, along with that, if you could just maybe give a little bit more color on the cost efficiencies, you know, total amount, the time that they're going to be achieved, and, you know, to what extent there could be further room coming years. Thanks.
spk09: Great. That's a lot to unpack there. So let me start with the EBITDA per capacity day. Look, this is going to take time, right? You know, if we look at where this industry was not so long ago, it was only last May of 2022 where we started operating all of our vessels. So we are progressing. We are hitting our milestones that we've laid out for several quarters now. It is a progression. Bookings are doing well. Onboard revenue spend is trending well. But it will take time. It's not an overnight process. And so as we think about that, part of that is enhancing our revenue, enhancing margins, obviously, and increasing right-sizing our cost base. We've said that our strategy coming out of the pandemic was we wanted to reset the bar on pricing. We believe we've done that, which we believe will be a longer-term benefit for all our constituents. And now we are squarely focused on right-sizing our cost base. As we look to the future, we're on a period of transformational growth. We have almost 50% growth between now and 2028 with our scheduled pipeline of deliveries. So we have to do better, and we are going to do better on leveraging our scale, and that's what we're focused on. So it's going to come from a lot of different places. But we focused on the top line. Now we're squarely focused on the cost, and that's going to translate to improved margins, which, again, will then translate ultimately into achieving that pre-pandemic EBITDA per capacity day.
spk07: Understood. Thanks so much for all the color.
spk06: And the next question comes from the line of Steve Wachinski with Stifel. Please proceed with your question.
spk03: Hey, guys. Good morning. I want to ask, Frank, this is probably for you. I want to ask about how you guys think about cutting costs versus balancing the customer experience. And I guess what I'm getting at is we've read out there you guys have taken some action on board, whether that's cutting things like entertainment or servicing cabins, things like that, which I assume is, you know, is being done to reduce costs. But, you know, do you worry about the customer experience, you know, that starts to be impacted and, you know, you eventually start to hurt the long-term perception of your product? Just trying to figure out how you balance those two things.
spk05: Good morning, Steve. It is a balance. Obviously, you don't want to kill the goose that lays the golden egg, which is the customer. We believe that the We're trying to balance what customers pay, what they actually pay for, and what they receive. So, for example, we did not cut the turndown service that you mentioned across all brands nor across all cabin categories. It's only in the lower cabin categories that equate to a lower per diem. So, look, it's management's responsibility to – optimize revenue and minimize costs. That's economics 101, and that's what we're doing.
spk09: Steve, I think, you know, the other way to think about it is we're simply aligning ourselves to what others in the hospitality sector have done as well. So this is nothing new. I think customers in today's society are used to getting a different level of service. We're not degrading the product. We're squarely focused on making sure that the guest experience is wholly intact and but we're going to align ourselves to what is the new normal for the hospitality sector. I think it's the right thing to do.
spk03: Okay, that makes sense. And then second question, Mark, this is probably going to be for you, and it's kind of a quasi-accounting question, which I'm not an expert in, but we've seen you guys also, at least I think I've seen you guys kind of increase your service fees or your gratuities by a pretty decent amount. And I would assume that some portion of that has to you know, does that hit your, you know, half of it hit your yields and then the other half hit costs? I'm just trying to figure out, you know, if you guys could help us think about, you know, what that impact is on that yield side. And I guess what I'm trying to get out of here is I don't want to, you know, I'm hoping that expectations for yields, you know, don't get too ahead of themselves, if all that kind of makes sense.
spk09: Boy, Steve, you're taking a big chance asking me an accounting question, but I think I'm going to go for it. Look, absolutely, when we increase the service fees, it does get rolled up as part of our gross revenue, but there's also a cost to that. And there's obviously some direct cost to that, but there's also the employment cost, which go against that, which hit in our net cruise cost. So service fees, again, the vast majority of that all goes to our dedicated crew and employees who are working on the ship, but there is a revenue component to it and there is a cost component to it. But again, that's something that's been consistent for us over the years. No change in the accounting or no change in the comparability.
spk03: Okay, gotcha. Thanks, guys. Appreciate it.
spk06: And the next question comes from the line of Connor Cunningham with Mellius Research. Please proceed with your question.
spk10: Hi, everyone. Thanks for the time. Just in terms of the cost initiatives that you're talking about, can you just frame up the buckets and where you're expecting the biggest improvement and maybe like a potential upside there. And then maybe just unpack a little bit about when it's going to hit. I would assume that a lot of it's second half weighted, but if you could just give a little bit more detail, that would be helpful. Thank you.
spk09: Yeah, certainly. So on the cost, as I said in my prepared remarks, Q1 will be the highest cost quarter. And then as we look forward sequentially, we expect those costs to decrease each quarter as some of our initiatives progress. gain hold and take place. And I think the way to think about it is as you look toward the back half of 2023, that's going to be a little bit more representative of what our exit rate would be as well on a go-forward basis. There is one thing I want to remind you of as well as We have a more pronounced mix effect with the operating capacity that we're bringing online as well. As you guys know, we are bringing on an Oceana-class vessel in May of this year and a Regent vessel at the tail end of the year. Those, by default, have a much higher operating cost than the NCLH average. So there is some impact in that overall cost guidance as a result of the mix, So keep that in mind. And then when you think about the overall buckets on the cost, it's everything you can think of. We've said before we spent a lot on marketing in 2022, going after the customer, creating that demand, elevating pricing. We believe we've been successful there, so we're going to start scaling that back. But it's everyday things, everything we do on our corporate side, on our ship side. whether it's optimizing our supply chain initiatives, optimizing our itineraries so that we're getting the best fuel consumption. There's no silver bullet in this industry, but it's a lot of little things that can add up, and that's what we're squarely focused on going forward.
spk10: Okay. And then to follow up maybe on pricing, you know, there's still some – I mean, you guys still sound great on pricing, but there's still some concerns about a weakening consumer overall. So I was just curious if you could unpack your current bookings a little bit. The only reason why I ask is deployments have shipped a little bit, and I don't know if there's been something on the margin that implies weakness somewhere. So any help there could be helpful. Thank you.
spk05: Yeah, this is Frank. We simply don't see any weakness. As I mentioned in my preferred remarks, we've seen very, very strong record, near-record booking levels dating back to November 2020. And, you know, it's our view that as long as consumers have a job and the labor markets remain strong, that they'll continue spending on the things they normally spend their money on, including vacations. So we simply don't see a weakening consumer. If you look at our forward bookings, each quarter in 23 is better booked than the comparable quarter in 2019. And even if you start looking into 24, it's never too early to talk about next year. 2024 bookings are running ahead at higher prices than they were same time in 2019 for 2020, which, you know, before the pandemic. So we simply haven't seen any indication that the consumer is shying away from taking cruise vacations, at least not with R3 brands.
spk10: Great. Thank you.
spk06: And the next question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.
spk12: Hi. Good morning, everyone. Good morning. Going back to, you know, some comments from last, I believe last summer and last fall, You know, you had talked about expectations of, or you seem pretty confident in record EBITDA for this year. However, when I look at, you know, the range, certainly at the midpoint and below, if I'm comparing apples to apples, would not imply a record EBITDA. And then, you know, additionally, it looks like, if I'm getting this correctly, your expectations since last earnings for bookings are now ahead. I think previously it was in line. You know, kind of what's changed in how you think about hitting that record EBITDA target as it relates to the guided range? And I hope that makes sense, what I just asked.
spk09: Yeah, we think we got it. So, Patrick, nothing has changed. You know, I think if there's anything we've learned as a management team in society over the last year or two, is that we're in a unique environment. On one hand, we have a very strong consumer. We have very strong wage growth and employment. And on the other hand, we have economists telling us that there's a high chance of recession. So you take your pick. I liken to this as we're in uncharted territory today. You know, in the world. So nothing has changed. But we think by being, you know, we want to be conservative. We want to make sure we're hitting, putting out reasonable targets. But nothing should be implied from that. We're confident of where we are. But we think a range is the most appropriate way to go at this point, given all the factors that are in front of the world as a whole.
spk12: Okay. Okay. Okay. I just have a couple, hopefully, quick follow-up questions. Can you just explain again why you dipped into the Apollo financing? You know, it sounded like last summer, last fall, that would not have been the intention at that time, but that's changed. Can you just review with us the rationale there?
spk09: Certainly. So, you know, first and foremost, it was $250 million, which, you know, It's really minimal. But the most important reason we did that is we wanted flexibility on the facility. And as you recall, and if you look in the past, we had six-month options. We had eight-month options, 12-month options. We wanted a two-year option. And the price to do that was our counterparty wanted a small draw on the overall facility. So when you look at the totality of that draw, which is relatively minor in the broader scope of our debt versus having a two-year flexible backstop, we thought that was the prudent course of action to take at a relatively reasonable cost on the overall facility.
spk12: Okay. And then the last one, this question actually might save Mark, you, and Jessica a number of callbacks later. I do see your share count is going up for the full year to $460 million. I assume that's from the converts or exchangeable notes converting sometime in the year. Can you just remind us which, I think it's the May 24 and August 25, and how many If that's correct, and how many shares are added from each of those, if those are the correct ones, and roughly at what quarter might you expect that to occur?
spk09: Yeah, Patrick, I think we'll take some of those details offline on our post call. But what I can tell you is that, you know, we've been telegraphing that we expect our average fully diluted share count to be approximately 470 to about 470 million in which I believe we have in our slide deck for a couple calls now. And that assumes that the 2027 convertibles are converted in cash, which we've been saying from the get-go. But it really is just a reflection of where the convertibles, the 2024 and 2025 convertibles, which will be equitized. We do not have a choice there. But that is really just the accounting for it. So on average, I would use about $460 for the fully diluted share count for the year.
spk12: Thank you. I'll check out the slide deck on that. Thank you.
spk06: And the next question comes from the line of Fred Whiteman with Wolf Research. Please proceed with your question.
spk08: Hey, guys. Thanks for the question. Can you just touch on the plans or changes to the Prima class? It sounds like those are going to be a little bit bigger than the first few iterations. I know that you guys were excited about offering a smaller ship size initially when that was introduced. So what exactly changed? Was it the cost, the guest experience, something else?
spk11: Yeah, this is Harry Sommer. Listen, we were really excited about the performance of Prima. She's come out of the gate as our best-booked ship, great yields, great onboard revenue, and most importantly, great performance. On guest experience, excuse me, great guest satisfaction scores. When we looked at the platform now that it's in operation, we think we can take that great guest experience, great financial performance, and get slightly better economies of scale by driving the ships a little bit bigger, hence the slight increase for Prima 3 and 4, which will be delivered in 25 and 26. The last two is really a combination, as Mark mentioned in the prepared comments, making them methanol-ready, which we think is very important for our decarbonization goals over time. We're very excited about the technology. We work with a lot of different experts in the field to hone in on methanol being the future for ships being built in the later part of the 2020s. But in addition to having the ship larger to house, the methanol tanks, we're able to get more scale on those as well, more passenger count. So again, the key is to deliver a fantastic guest experience and see what we can do to leverage scale and become more decarbonized along the way.
spk08: Makes sense. And then just on the marketing spend that you guys had talked about for a while in the back half of 2022, Could you maybe give some qualitative feedback on whether that met your expectations? Did you get the pricing benefit that you had expected? Was the consumer feedback in line with sort of what you were hoping for when you earmarked that spend or not?
spk05: You know, our basic go-to-market philosophy is we market to fill. We don't discount to fill. And throughout the pandemic period and coming out of the pandemic period, being able to keep our industry-leading net per diems in yields was of utmost importance. We've seen what happens to others when the discounting goes too far. It takes years, if not decades, to be able to climb back up that slippery hill. So if marketing was the cost of maintaining our industry-leading yields, then it was well worth it. and we turned the year in our best booked position ever. I mean, to be able to say that at the end of 22, we were better booked than at any time in our history, given what this industry had just gone through, where the full fleet was not in operation until the mid-year, is an incredible statement to make, and at higher prices. So yes, unquestionably, It was the right strategic decision to make for our company. Now, we believe that we've got momentum back. We had to create momentum. The industry was on its knees. We hadn't operated the full fleet in two years. Zero revenue for 500 days. So we had to stimulate the market. And you can do it one of two ways, in my estimation. You can discount and, you know, you can give away the product, or you can market, and we choose to market. And now that we've done so and have regained momentum and bookings continue to be strong and we're better booked today than we were a year ago or 2019, the same period, we think we can now start paring back on that marketing spend. Now, at the same time, we're adding three new ships and those have to be filled. So on a per capacity day basis, I think marketing costs will come down. On a gross basis, not sure the exact number. Maybe Mark knows that number. But on a PCD basis, marketing costs will come down as a result of the dynamics that I just laid out.
spk11: And, you know, this is Harry again. It's not just a theoretical comment. You know, when we look at in the metric that Frank describes, marketing costs divided by capacity day sold, which I think is the right metric for marketing, we've seen decreases, material decreases in Q4 versus Q3. So we're already starting to realize that, but as Frank mentioned, we have more capacity days to sell with three new shifts coming across the brands this year. Great. Thank you.
spk06: And our next question comes from the line of James Hardiman with Citi. Please proceed with your question.
spk04: Hey, good morning. Thanks for taking my call. So just wanted to make sure I understand sort of a trajectory on per diems. Really strong rebound here in the fourth quarter. I think we went from on a net basis from plus five to that, you know, 14 to 15% growth range versus 2019. I guess as I think about the first quarter, it's going to be up six and a half and for the year in that nine and a half percent range. I guess why the decel? I'm assuming there's some mix involved here, but I know that you're launching an Oceana ship and a Regent ship, which I would think would be accretive to per diem. So maybe just walk us through sort of the undulations of that per diem number.
spk09: Hi, James. It's Mark. So, look, I wouldn't classify anything as a deceleration, and I think when you look at our yield growth for the full year, you were spot on, 9% to 10.5%. a pretty strong number given the value proposition of where the cruise industry vis-a-vis the broader vacation market. But when you look at Q1, you go from Q4 to Q1, it's really a mixed impact of where our fleet is operating. We have a much higher weighting of exotic itineraries in Q1, which were slightly impacted on the slower restart or the slower opening of the world. whether it was cruises in Japan or Australia or that area of the world, there was a little bit more hurdles than we anticipated getting those back to operation, and there was a little more hesitation on the consumer. So Q1 was really just impacted by that. I would characterize it as the last normalization quarter, so to speak. But when you look beyond that and you look at our implied guidance for the remaining three quarters, I think you're seeing very strong growth there of 9% to 10%. based on our guidance. So we're feeling good where the pricing is today.
spk04: Okay, and just maybe a point of clarification. You talked for the fourth quarter, you talked about how revenues and net cruise costs X fuel were in line with your expectations, but EBITDA was a bit short. What sort of was the hang-up there? It seems to point to fuel, but I thought fuel generally... at least the spot prices seem to get better since October. So what led to that miss on the EBITDA line?
spk09: Yeah, it was very slight, James, and it was really just truing up some of our year-end accruals and making sure that going into the year we were fully stocked, so to speak, to ensure that we had no lagging issues affecting our 2023 performance. So nothing material. It was just all items on the margin.
spk04: Got it. Thanks, guys.
spk06: And our next question comes from the line of Paul Golding with Macquarie. Please proceed with your question.
spk02: Thanks so much. My first question is around just a comment I think, Mark, you just made around the exotic destinations. So could you give us any qualitative background on how the destination mix right now compares to last year given the geopolitical disruptions last year? In other words, from a just a Baltics and Eastern Med disruption last year, how the timing of these more exotic, higher-yielding destinations line up to fill that gap on a year-over-year basis? Thanks.
spk09: Yeah, certainly. So I think, you know, when we look at the year overall, we do have more, you know, we are leaning to a more exotic deployment mix. But that's not really concerning to us because as we cycle through Q1 and we look toward the latter part of third quarter and fourth quarter, We see accelerating demand for those products. We do have more European capacity this year. We have slightly less Caribbean capacity and more Alaska capacity. So overall, we are trending to, again, a bit more exotic or longer itinerary-based deployments, but that's shaping up well for us absent this what we would call a one-time Q1 anomaly with the overall restart.
spk05: Okay, we have time for one more question, operator.
spk06: Okay, thank you. And the final question comes from the line of Robin Farley with UBS. Please proceed with your question.
spk00: Great. Thank you. I have two expense questions. One is you talked about how the exit rate by Q4 for expense would look a little bit more normalized. With the full year kind of up 18% and Q1 up 22%, does that imply the exit rate sort of going forward would still be in kind of the low to mid-teens increase versus 2019? Is that kind of what we should think of as the sort of a normalized run rate for you? And then my other expense question is on the $1.3 billion in higher new build CapEx. And I know you talked about upsizing a number of the Prima ships and adding some alternative fuel systems. to two of them. It seems like maybe there are some other things contributing to that $1.3 billion than just those additional births and the alternative fuel. Just based on the numbers, it seems like there may be other things in the higher new bill CapEx number. Thanks.
spk09: Hi, Robin. I think there was two questions in there, so I'll start with the last one because that's the one I can remember. Regarding new build, look, we're increasing the size of four vessels pretty significantly by I think it's more than 10% on three and four and almost more than 20%. So there is a cost to that. It's not just adding cabins. It's lengthening the vessels, widening the vessels. But also, more importantly, on five and six, we are getting those vessels to be methanol ready. I always say going green is not free. There is a cost to it. But we think this is a good cost. We think it's the right cost. I would... hesitate or caution you to just simply take the additional bursts and look at it as costing 1.2 billion because there is a lot of technical aspects behind that in relation to making the vessels bigger. So I would just caution you on that note. And I think your first part of the question was on the exit rate of our costs. I think you're thinking about it correctly. You know, somewhere in the low teens, probably where we would look vis-a-vis 19 but again we are squarely focused on we have to do a better job of leveraging our scale and I think as we continue to prove that quarter after quarter this year you're going to see improvements on that front great thanks very much as always thank you everyone for your time and support today we will be available to answer any of your questions throughout the day and
spk05: And we wish you a good day, and please stay safe. Thank you.
spk06: And this concludes today's conference call. You may now disconnect your lines. Thank you, and have a great day.
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