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spk04: Good morning and welcome to the Norwegian Cruise Line Holdings second quarter 2023 earnings conference call. My name is Maria 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 and then zero on your touchtone phone. 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. Ms. John, please proceed.
spk05: Thank you, Maria, and good morning, everyone. Thank you for joining us for our second quarter 2023 earnings and business update call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings, and Mark Kempe, Executive Vice President and Chief Financial Officer. 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 second quarter 2023 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 Harry Sommer. Harry?
spk08: Well, thank you, Jessica, and good morning, everyone. Thank you all for joining us here today. So today marks exactly one month since I began my new role as President and CEO of Norwegian Cruise Line Holdings. I'm humbled and honored to have been trusted to lead this incredible company And I'm excited about the significant opportunities I see ahead. The responsibility I have to our vast network of stakeholders, including our 40,000 team members worldwide, our guests, our travel advisor partners, suppliers, lenders, shipyards, the over 700 communities we visit, and all of you in the investment community, is not something I take lightly. Rest assured, my leadership team, the Board of Directors, and I are committed to best positioning Norwegian Cruise Line holdings for success. My focus now is squarely on the future and how we can refine and enhance our strategy to optimize our existing fleet of high-quality assets, further differentiate our business model, build resiliency, advance our efforts to drive a positive impact on society and the environment, and ultimately drive more value to our shareholders and broader stakeholders. With new leadership not only in my seat, but at all three of our award-winning brands, and most recently for our vessel operation function, there is a palpable feeling of reinvigoration and excitement about the future across the entire company. We are approaching every decision with fresh perspective and new energy, challenging the status quo at every level, and encouraging our entire team to think outside of the box and come to the table with new ideas, however big or small. Along with these changes, you can see for yourself on slide five that while many of the senior leaders are new to their roles, there is still continuity and extensive experience among all of the leaders, allowing for smooth transitions without skipping a beat. Our executive team has an average of over 20 years in the cruise industry, and nearly all have been with NCLH for a decade plus. I have the utmost confidence that this team is the right one to take the company to even greater heights. As we are fine-tuning our longer-term strategic vision and priorities, we are also focused on execution today, and slide six outlines my near-term priorities. First, we are focused on capitalizing on the healthy demand environment for groups, which I will talk about in more detail a little later in my commentary. At a high level, this means remaining within a booked position of approximately 60 to 65% on a 12-month forward basis, while increasing pricing and maximizing onboard revenue generation. After years of experience, we believe this level to be the sweet spot based on our current deployment mix, and I am pleased to say we are comfortably in this range today. Our revenue management process is dynamic, and we carefully monitor on a granular level how each shift, itinerary, and voyage is tracking against its optimal booking curve and adjust marketing spend, promotional construct, and pricing as needed, depending on the market environment, to maximize each voyage's contribution to the bottom line. The next priority is right-sizing our cost base through our ongoing margin enhancement initiative. Mark will dive into more detail on the great progress we've already made on this critical effort, but I want to emphasize that we have many additional opportunities in the pipeline to do even more, and we are not shying away from this challenge. The reality is we are operating against a different backdrop today than we were in 2019, requiring an even keener focus on balancing the top line with a cost structure that supports our unique business model and allows us to accelerate our margin recovery and help build resilience to varied external and macroeconomic environments. We are undertaking this effort with a strategic and data-driven approach that allows us to identify additional opportunities for efficiencies set, monitor, and maintain accountability against concrete KPIs, and increase agility to adapt quickly as market or consumer preferences evolve. I'm pleased to report that we're already seeing a change in the core culture of the company at every level of the organization to emphasize efficiency, cost mindfulness, and results without impacting the guest experience. We've built significant momentum in recent months with this initiative, and we look forward to demonstrating continued improvement in the coming quarters. This dovetails nicely into our next priority, which is to make strategic and intentional modifications to enhance our offerings and better align them to our guests' needs and wants. There's no question that investment in our product and service offerings are critical to keeping our brand value propositions intact. However, we are refocusing the business on making smart investments in areas that generate the highest returns and maximize guest satisfaction over the course of their entire cruise journey, starting from the time they book. For example, we are deep in the development of a streamlined booking process at the Norwegian Cruise Line brand, which uses generative AI technology to personalize the experience for guests while also simplifying and reducing the number of considerations required to book by orders of magnitude. This, along with several other initiatives underway, should translate to more satisfied guests who spend more on board and return to sail with us more frequently, resulting in a win-win of higher yields and stronger loyalty. Turning to the fourth priority on the list, the entire team is hard at work preparing for the delivery of Norwegian Viva on Thursday, as well as Regent 7 Sea Grandeur in November, which you can see on slide 7. I just came back from Italy, where I visited the shipyards to check on their progress, and I left even more excited than I was previously to welcome these new additions to our already destined class fleet. Both are sister ships to existing vessels that have been elevated even further, so we have a high degree of confidence that they will be an overwhelmingly positive reception to these ships from our guests and travel partners, which we are already seeing in their incredible advanced booked position. I'm also pleased that both are on schedule and on time for delivery, despite supply chain and other challenges, a testament to our great working relationship we have developed with our partners at Fincantieri. In June, we announced that global music sensation and Latin music icon Luis Fonsi will serve as godfather to Norwegian Viva. The announcement alone generated a reach of over $200 billion globally, including new audiences in the targeted Spanish-language demographic. The ship will be christened in Miami later this year and home port in San Juan, Puerto Rico starting in December for a season of Caribbean itineraries. We also recently announced 7C Grandeur's godmother, Sarah Fabergé, the great-granddaughter of Peter Carl Fabergé, the legendary artist, jeweler, and creative and entrepreneurial genius behind the world-renowned company that bears his name. This is a natural choice in celebration of Regent's partnership with Fabergé. The discipline addition of new builds is a key component to our strategy, and we have said consistently in the past, we welcome new hardware introductions as they not only generate excitement and bring more attention and awareness to our brand, but they are expected to be meaningful drivers of the company's future earnings growth and margin expansion. As the smallest of the three large public cruise operators, we continue to believe that we have outsized opportunity to grow our footprint and meaningfully drive the bottom line. Our new build pipeline, which you can see on slide A, represents approximately 50% capacity growth by 2028 versus 2019, a CAGR of approximately 5%. After the delivery of three new builds in 2023, a record for the company, we have no additional shift delivery scheduled until spring of 2025. In the interim, we expect to benefit from both organic growth as well as the annualization of the 2023 new builds next year. And lastly, the final priority on the list, but arguably the most important, is charting a path to reduce leverage and de-risk the balance sheet. Given the necessary actions we took to navigate the past few challenging years, our leverage ratios are currently not at optimal levels. Our goal remains to evaluate all options available and then clearly define a multi-year pathway to return to an investment-grade-like financial position. This won't happen overnight, but as you can see on slide nine, the company has successfully reduced leverage in the past, and I am confident we will do so again. In the interim term, our expected cash flow generation, boosted by our robust new build pipeline, along with normal course debt installment payments, are expected to result in significant organic improvement in our net leverage. Over the next several months, we are focused on the successful execution of our near-term priorities while fine-tuning the future vision and strategy for the company. With three strong brands, a world-class seat, and best team in the industry, we are starting from a strong foundation in a position of strength. And I can say without a doubt that we have a bright future ahead with significant potential to unlock incremental value for our stakeholders. Shifting our discussion now to our current bookings, demand, and pricing trends, We achieved record revenue of $2.2 billion in the second quarter, an increase of 33% over the same period in 2019. We've been able to tap into strong consumer demand environment, achieving the right balance of underlying revenue growth with net per diems up 6%, while at the same time materially growing our fleet with capacity at 19% for the quarter. We also kept our ships full, reaching a load factor of 105% in the second quarter in line with guidance, and a long-awaited milestone as we return to normalized levels, which you can see on slide 10. As previously mentioned and as illustrated on slide 11, several years ago, we strategically shifted our deployment to longer, more immersive itineraries at the Norwegian Cruise Line brand and increased our concentration of premium destinations while reducing our Caribbean deployment. This was designed to attract a higher quality guest and maximize our competitive position. A natural bright product of this new deployment mix is less third and fourth passengers in a cabin, which is what historically pushed passenger occupancy above the 100% mark. As a result, we expect full-year occupancy going forward to be roughly 200 basis points lower than 2019 levels. This shift also resulted in an elongation of our booking window, which was 255 days in the second quarter, an increase of 51 days, or 20%, compared to the same quarter in 2019, and meaningfully enhancing our future visibility and reducing our exposure to volatile and less predictable quotes and bookings. Taken together, we believe this strategy will drive higher yields, higher guest satisfaction, and higher guest repeat rates with longer runways to optimize our pricing and marketing strategy as the macro environment evolves over time. Turning to slide 12, our cumulative book position for the second half of 2023 remains ahead of 2019's record performance and at higher prices, another indication of continued healthy demand environment and the resilience of our target consumer. This trend continues past this year to sailings in 2024 and beyond, which at this point in the booking curve is our primary focus. In fact, over the past 90 days, over 70% of our ticket sales were for 2024 and 2025 sailings, considerably higher than in 2019. Onboard revenue generation, our best real-time indicator of how consumers are feeling financially today, also continues to perform exceptionally well. During the quarter, gross onboard revenue for passenger cruise day was approximately 30% higher than the comparable 2019 period. Our efforts to enhance our market-leading bundled offering and increase quality touchpoints with our guests starting from the time of booking and continuing throughout their cruise journey, are clearly bearing fruit. In fact, pre-sold revenue on a per-passenger day basis for the second quarter of 2023 was over 75% higher than in 2019, an important contributor to our onboard revenue strength as these guests tend to spend more overall throughout their journey than guests who do not pre-book onboard activities. Before I turn the call over to Mark, I'd like to provide an update on our global sustainability program, SAIL and Sustain, in which slide 14 outlines key accomplishments and milestones. Since we last spoke, we published our annual SAIL and Sustain report and SASD-aligned disclosure on World Environmental Day in June. The report provides transparency on our progress and initiatives on top ESG priorities. Some of the highlights this year include more detail on our new climate action strategy and enhanced data and disclosures on community impact, human capital, and greenhouse gas emission reporting. In addition, we demonstrated progress against several environmental goals, including targets to equip our ships with shore power capabilities and reduce bunkering of fresh water. I encourage all of you to take some time to explore the report and visit our website for more information. I'm also proud to share that just last week we announced the winners of our annual Giving Joy recognition program that has been celebrating teachers across North America since 2019 for their hard work and relentless dedication. Each of the 20 winning educators won a free seven-day voyage for two, and the top three grand prize winners were invited to attend the exclusive christening voyage for Norwegian Diva. This year's contest drew support from over 3,400 teachers across the US and Canada, and garnered hundreds of thousands of votes. With that, I will now turn the call over to Mark for his commentary on our financial position and outlook.
spk09: Mark? Thank you, Harry, and good morning, everyone. My commentary today will focus on our second quarter 2023 financial results, 2023 guidance, and our financial position. Unless otherwise noted, my commentary on net per diem, net yield, and adjusted net cruise cost excluding fuel per capacity day metrics are on a constant currency basis and comparisons are to the same period in 2019. Slide 15 highlights our second quarter results in which we are very pleased to report that we met or exceeded guidance for all key metrics. Focusing on the top line, results were strong with revenue performance up 33% and net per diems increasing approximately 6.5%, surpassing the high end of guidance while net yield was in line with guidance at 2.9%. Keep in mind that comparisons to 2019 include certain premium priced Baltic and Cuba voyages in that year, which did not operate in 2023. Turning to costs, adjusted net cruise cost excluding fuel per capacity day came in below our guidance at $156 in the quarter, demonstrating further improvement from the prior quarter and the high watermark seen in the second half of 2022. The reduction in cost this quarter was primarily driven by lower food costs and crew optimization efforts as we continue to realize the benefits of cost savings initiatives identified and implemented during the first phase of this initiative. I will note that across all three brands, our guest satisfaction scores remain strong, reflecting our continued focus on cost rationalization without impacting the guest experience. Adjusted EBITDA was approximately 30 million higher than our guidance at approximately 515 million in the quarter. In addition, adjusted EPS of 30 cents also beat our projection by five cents and was the first time we generated positive EPS since 2019, as well as the first time that our quarterly adjusted EBITDA exceeded the same quarter in 2019. Shifting our attention to guidance, Our outlook for the third quarter can be found on slide 16. We are projecting net per diem growth of approximately seven to eight percent and net yield growth of approximately two and a quarter to three and a quarter percent. Similar to the second quarter, the loss of certain premium priced Baltic itineraries will continue to impact the comparison versus 2019. In the fourth quarter, pricing and yield are both expected to exhibit mid-teens growth compared to 2019. There are several other factors contributing to the exceptionally strong growth we are expecting for the fourth quarter, which include more luxury and upper premium capacity operating with the new Regent and Oceana ships, as well as a favorable comp from the rapid exit from Cuba in 2019 and the close-in resale of those sailings. Adjusting for these factors, net per diem growth is still expected to be up approximately 10%. which reflects our organic pricing power and strong consumer demand that Harry referred to, as well as the benefit of our shift to premium deployments with extended Alaska and Europe seasons this year. Given that we already have a substantial booked position and our pace of bookings is on track with our optimal booking curves, this gives us confidence in our ability to deliver on this top-line outlook for the fourth quarter. Adjusted net cruise cost excluding fuel per capacity day is expected to be approximately $152 in the third quarter, which includes approximately $3 of certain non-recurring benefits realized in the quarter. Looking ahead, there are also one-time expenses associated with new capacity additions in the fourth quarter. Adjusting for these items, this metric is expected to slightly decrease quarter over quarter, which is noted on slide 17. Taking all of this into account, adjusted EBITDA for the third quarter is expected to be approximately $730 million, and adjusted EPS is expected to be approximately $0.70 on a projected diluted share count of approximately 510 million shares. Keep in mind that we have our four outstanding exchangeable notes, which will cause variability in the diluted weighted average shares outstanding used to calculate EPS when we follow the if converted method. It is also important to note that despite our ability to settle our two 2027 exchangeable notes in cash rather than in shares, these notes would still be included in our diluted weighted average shares outstanding for gap reporting purposes if they are dilutive in the quarter. We've included an additional slide in our earnings deck, page slide 24, with more information to help with modeling. Now shifting our focus to our outlook for the full year 2023, we are raising the floor of our adjusted EBITDA guidance to a range of 1.85 billion to 1.95 billion, despite approximately 30 million of headwinds from higher interest and fuel expense in the back half of the year. This is expected to translate to adjusted EPS of approximately 80 cents or five cents above our prior guidance, reflecting the second quarter outperformance. As you can see on slide 18, since we first guided for the year in February, we have increased our adjusted EPS guidance by 10 cents for 14% on strong results in the underlying business, which overcame headwinds from higher fuel FX and interest rates. Excluding these headwinds, adjusted EPS growth versus initial guidance would have been approximately 20 percentage points higher. Taking a closer look at the components of the full-year outlook, our healthy net per diem growth of approximately 9% to 10.5% as compared to 2019, and net yield growth guidance of approximately 5% to 6.5% are unchanged versus our prior guidance with capacity of 18%. Turning to cost, adjusted net cruise cost excluding fuel per capacity day is expected to average approximately $156 for the full year, better than the prior guidance of $159, reflecting lower than expected cost in the second quarter. As we have previously mentioned, when comparing this metric to 2019, please note that we do not have the benefit from the disposal of older, less efficient tonnage that some of our peers have, and we have also added capacity at our high-end Ocean and Regent brands, which, while accretive to margins, do have higher operating costs. Another thing to keep in mind is that the timing of expenses, such as dry docks, can cause variability in this metrics when comparing different periods. For example, in 2023, we have limited dry docks as we took the opportunity during the pandemic to optimize the schedule while ships were already out of service. As Harry noted earlier, this improvement is the result of the deliberate actions we have taken to enhance margins and right size our cost base. To further supplement our internal efforts, which have been in full force since we kicked off this initiative last fall, we have also more recently engaged a third party consultant to benchmark best practices across sectors and identify incremental areas of opportunity. Our entire team is working around the clock to find ways to accelerate our margin recovery, and we are leaving no stone unturned in the process. To date, the savings we have identified have been broad-based, touching every aspect of the business, with the largest buckets consisting of fuel, food, and consumables, and marketing, as shown on slide 19. To give you an example of one of the initiatives we are undertaking, we are optimizing crew movements and reducing ship crew transfers, which we expect to result in multi-million dollars savings. To put this into context, each year we have approximately 90,000 crew movements, including 6,000 or so between ships. This is just one example, but it demonstrates how incremental changes can add up to a larger impact on the bottom line. We recognize that we still have more work to do, and we are committed to doing so in a way that preserves the exceptional guest experience and superior service levels that our target higher end guests expect from our brands, all while setting us up well for continued margin improvement in the next few years. Turning our attention to the balance sheet and our debt maturity profile on slide 20, in the first half of the year, we generated over $1.5 billion of cash flow from operations. including over $1 billion in the second quarter. This allowed us to repay approximately $1.4 billion of debt, including the full pay down of our $875 million revolving credit facility. In addition, we have approximately $475 million of scheduled debt payments for the back half of the year, the vast majority of which are related to our export credit agency-backed SHIP financings. As we have previously stated, we intend to refinance our operating credit facility in the normal course of business before year end. As mentioned earlier, we expect our net leverage to improve significantly, driven by our organic cash flow generation and payment of scheduled debt installments. Excluding debt associated with ships on order for future delivery, trailing 12-month net leverage is expected to meaningfully reduce versus current elevated levels dropping below six times over the course of the first half of 2024. This does not adjust for ships that were delivered in 2023, which would have the full debt load in the numerator without a full year of contribution included in adjusted EBITDA. Turning to liquidity, our overall liquidity position remains strong at approximately 2.4 billion at quarter end, as outlined on slide 21. This consists of approximately 900 million of cash and cash equivalents, $875 million under our revolver and a $650 million undrawn commitment. This does not include the separate $300 million undrawn backstop commitment, which enhances our future liquidity but is not currently available to draw. During the quarter, we received approximately $500 million of cash collateral back from a credit card processor. This collateral release not only provided a meaningful increase to liquidity, but was also a very strong signal that our external partners have increased confidence in our financial position and future outlook. Overall, I feel the same optimism about the direction of our business. I want to echo Harry's comments that our entire management team is reinvigorated and focused on delivering on our business and strategic goals, while also pursuing all opportunities to maximize value creation and create a more nimble and resilient organization for the future. With that, I'll turn it back to Harry for closing comments.
spk08: Well, thank you, Mark. So before turning over to Q&A, I'd love to leave you with some key takeaways, which you can also see on slide 22. First, we are focused on execution of the near-term priorities outlined today, including the delivery of two new builds in the coming months, while simultaneously fine-tuning our vision of the future. With new leadership in many functions, including my own, we are approaching this exercise with open minds and a fresh perspective, as we work to best position the company for success. Second, our target higher-end demographic continues to be healthy and resilient, with strong demand for travel and experiences. This is demonstrated by our strong revenue performance, a record of 33% in the quarter, with our strong book position, which when looking over the next 12 months, is within our sweet spot range of approximately 60% to 65% booked, and at higher prices and advanced customer deposits of $3.5 billion, 52% over Q2 2019. Third, we are demonstrating the results of our margin enhancement initiative, including through our efforts to maximize revenue, improve efficiencies, and right size costs. We now have two straight quarters of sequential improvement in our key cost metrics and will continue to identify and implement additional measures to accelerate our margin recovery while still delivering the exceptional product and service offerings that our guests desire. Lastly, our liquidity position is solid, and we are committed to prioritizing restoration of our balance sheet and reducing leverage in the coming years. We've covered a lot today, so I'll conclude our commentary here and open up the call for your questions.
spk04: Thank you, Harry. If you have a question at this time, please press the star, then one key on your touchtone's telephone. In order to get as many people through the queue, please limit your time to one question. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.
spk05: 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. One of the top-voted questions we received this quarter was, what do you consider the biggest challenge for growth over the next 18 to 24 months, and how do you plan to attack said challenge? Harry, do you want to take that one?
spk08: Sure, Jessica. I'm happy to, and that's really a great question. I wouldn't say there are big challenges for growth. If anything, what we have is a huge opportunity. While we're always keeping a keen eye on growing revenue on our existing fleet while tempering costs, growth in the cruise industry is mainly predicated on capacity and And this year, we have three vessels entering the fleet, one for each of our award-winning brands, which is a first for our company. This growth allows us to take more guests to more destinations and offer them more varied experiences while contributing to the top and bottom line right off the bat. In addition, with no scheduled ship deliveries in 2024, we have ample opportunity to digest its capacity at high prices while preparing for new capacity entering our fleet in 2025. So to me, it's not about challenges of growth. It's optimizing the opportunity we have for our new capacity and doing what we have consistently done in the past, which is translate that to outside impact to our bottom line.
spk05: Operator, we can take the first question from the line now.
spk04: Okay. Thank you. Our first question from the line comes from Vincent Capil with Cleveland Research Company. Please proceed with that question.
spk03: Great, thanks. I wanted to talk about kind of the path for organic price growth. I think that was really helpful the way you broke out 4Q. Obviously anticipated to step up a lot, but even X, you know, comparisons and new hardware, net per diems up 10%, points to sequential acceleration through the course of this year. So curious kind of how you're thinking about that into next year. I know you get lift from you know, full year contribution of the 2023 deliveries. But how are you feeling on organic price today versus 90 days ago?
spk08: Sure. I'm happy to take that one. Thanks for the question. I think I can sort of break this up into three periods, Q4, 2024, and 2025 and beyond. You know, Q4 still has some comparable distinctions between this year and the past. But we are super excited that we're going to see an 18% net per diem growth in 2023 versus 19. You know, sort of fully hitting our strides there. And, you know, we're pretty well booked for Q4. So we have great confidence in that number. You turn to 2024, we get to a more normalized environment. But we still have some tailwinds. when we compare 24 to 23, because in Q1 of 2023, we weren't 100% back up to service. So I think we can expect some outsized growth in 24 relative to 23. On a more long-term basis, we return back to normal. We've consistently talked about having low to mid single-digit yield increases, year over year with moderate and disciplined capacity growth, strong cost control, while maintaining high gift satisfaction, all leading to the type of oversized dividend earning growth you saw during our run from 14 to 19. So I think once we get back to 25, that's exactly the path we'll be on again.
spk03: Great, thanks. And then maybe on the cost side, obviously a lot of effort that is visible based on the guide. It looks like net cruise revenue is going to be up $2.5 billion plus this year, whereas costs are only up about $100 million. So it's clear that, you know, you guys have been focused. You know, you mentioned guest satisfaction score remaining strong kind of along this flex down path, but curious maybe what you're seeing within rebooking behavior as more of that 2024 business is coming on the books. How are you feeling about the guests coming back to you?
spk08: So, great question. I think there were two parts, so I'll try to address both of them. You know, on the cost side, we are really excited about the efforts that we make, and you continue to see these sequential, you know, modest improvements in costs, Q1 to Q2 to Q3 and Q4. You know, despite the fact that inflation is still out there, for the fact that we continue to reduce our cost structure each quarter, it's not just a reduction in the base, but also fighting against inflation. So, we're really excited when we can see that number come down. But Mark also alluded to, you know, we're just maybe in the fourth inning of this cost reduction strategy, if I was to use a baseball analogy, and we still believe there are more efforts ahead. We have not baked in anything that we haven't found yet. Our guidance numbers only include what we've identified and what we firmly are able to implement, but we hope to be able to deliver a little bit more in the future. You know, in terms of the guest rebooking behavior, again, We're simply put, we're at record levels. You know, across all three of our brands, we are seeing, you know, the one measure that's most relevant internally is we take a look at first-time guests and how and when and how much or what percentage of them, I should say, rebooked, you know, within the first year or two of coming back. And the guests coming off the ships in 23 are rebooking at record levels compared to, you know, 18, 19 and the further back periods. So, so far, the formula seems to be working quite well.
spk09: And, Vince, just to highlight that, I think, you know, last quarter we had mentioned record sales of our cruise neck certificates. And, again, that's just another anecdotal point that consumers on board our ships are enjoying their vacation. They're satisfied with the product. Everything we're doing on the cost reduction front is under the lens of protecting the guest experience and the product. So we monitor that closely, and so far we are seeing positive reception to everything we're doing.
spk03: Appreciate all that detail. Thanks.
spk04: Our next question comes from Robin Farley with UBS. Please proceed with your question.
spk00: Great. Two questions. One is on the yield side, that 14% growth in Q4. I know you have some shifts in your premium and luxury brands contributing to that. Can you kind of give us a sense of what the increase would be for, say, the Norwegian brand? Or just to think about the increase that's embedded in that guidance that you know, outside of those new ship additions. And then my other question was on expense. And I'm sorry if I missed if you said what was the non-recurring benefit in Q3 there? And then just thinking about Q4, it looks like your footnote is sort of saying you're excluding the cost of new ships in that. And I just wanted to clarify, I feel like you hadn't done that before, and I just want to think about comparability to, you know, expenses in 2019. So is that... knew that that guide excludes the cost of new ships. Thanks.
spk09: Hi, good morning, Robin. Thanks for the question. So in Q4, when we talk about our pricing or yield, pricing is expected to be up approximately 18%. And as we highlighted in our prepared remarks, if you adjust for the new capacity as well as the favorable year-over-year comps, that 18% would translate to about 10% of your organic fleet. So very, very strong growth consistent with what we've seen over the last two to three quarters. So we're very, very pleased with that. In terms of Q3, the one-time non-recurring benefit, We highlighted that because we didn't want to take artificial credit, so to speak, for our cost reduction initiatives. And that was simply a benefit that we received as a result of some port volume commitments, accruals that we had during the course of COVID. We were able to negotiate with the various ports around the world to reduce that. So we didn't want to take credit for that because it's a one-time non-recurring, so we called that out. And then in Q4, again, trying to be ultra-transparent, on the surface it would appear that our net cruise cost ticks up slightly by $1. But if you really look at that and you exclude the one-time startup operating costs for both Viva and Grandeur, which come on in the fourth quarter, and you really right-size that to a normal run rate, that is actually reduced by a dollar or two. So, again, what we're trying to do is show that we have sequential improvement in our core fundamental operating costs, and you're seeing that over the course of all four quarters in the year.
spk00: Okay, great. Thank you.
spk04: Our next question comes from Patrick Scholz with Truro Securities. Please proceed with your question.
spk02: Great. Good morning, Harry and Mark. First question concerns the onboard and other line item. How much, as we think about for next year and perhaps 2025, you've certainly seen outside growth in this line item. How much do you think of that as really sustainable and how much might be from revenge travel, and maybe some of that growth also might be from bundling or accounting changes. So how should we think about sustainability of that going forward?
spk08: Patrick, it's a good question. I believe it's fully sustainable. We don't We don't necessarily see this huge revenge travel being a huge plus, nor the levels that we are going at today diminishing. My best proxy is the Norwegian Cruise Line brand because it's our largest brand. And when we look at bookings for this year, every month has been a record month in terms of new booking volume. You know, January was the best January in the history of the company. February was the best February. You know, clear through July, which just ended yesterday, which was the best July in the history of the company. In fact, our second best booking month of the year, which is a little bit odd because usually July and August is a little bit slower, you know, due to vacation, you know, people being on vacation and the like. On board spec, similarly, every month continues to be good. We're not seeing any weakness. We're not seeing any denigration of trends. There's nothing super unusual that we're doing in bundling today compared to 2019. We continue to refine our processes and make the the marketing and product proposition a little bit better each quarter than the quarter before, but I don't anticipate any huge changes for 24 either. So I think the numbers you see today are the numbers that we would expect to improve on going into 24.
spk09: And Patrick, to further highlight on that is, you know, we've talked about, you know, we have more touch points with the consumer well prior to the consumer ever stepping on board ship, on board the vessel. So we're getting more share of the wallet from the consumer ahead of that. And I think one of our stats that we talked about, our pre-booked revenue was up by almost 70% versus 2019. So, again, it's a longer, elongated sales cycle that just helps build that overall onboard revenue product. So we are not seeing any signs of any consumer deterioration. In fact, we continue to see strength on that, and we're very happy with that. We continue to expect that to be strong.
spk02: Okay. Good to hear. Just a quick follow-up. Mark, you had noted in the earnings release about $500 million released from the credit card reserves. Is there any money left still to go with that, or was that $500 the last slug of that?
spk09: Yeah, so we're very happy with that. So with that, that essentially, we have zero collateral with any of our reserve holders as of the quarter end. So that was not only a significant boost to our liquidity profile long term, but more importantly, as I said in my prepared remarks, is that It demonstrates confidence in the business from a completely external partner who has no stake in the game other than, you know, their inherent risk on advanced ticket sales. So, again, we see that as a big demonstration of confidence in the business and where the trajectory of the business is going.
spk02: Okay. Thank you.
spk04: Our next question comes from Steve Wazinski with Steeple. Please proceed with your question.
spk10: Hey, guys. Good morning. So, you know, if we think about your load factors moving forward, which, you know, Mark, you mentioned will be about 200 basis points lower than, you know, where 2019 levels were, you know, and that's just because of longer itineraries and whatnot. Just, you know, just wondering how these lower load factors impacts or potentially impacts your cost structure moving forward. And, uh, you know, to add onto that market, you know, as we, as we thinking about, you know, you guys exiting the year and that low, you know, it's called one fifties range in terms of cost per APCD. Is there any way to help us kind of think about as well, you know, where you might be able to get that number two, um, you know, over time?
spk08: You know, Steve, it's a good question. You know, I don't look at this as a huge material change in our cost structure. You know, it'll be a modest tailwind having 2% less guests on the ship, but the 2% less guests that we have are primarily young children, which aren't particularly expensive. So this really isn't about our cost structure. This is really about, you know, yield inhibitor, where we believe being in more premium itineraries that are booked further in advance, giving us a much longer time booking curve and a more stable and predictable demand profile, which allows us to manage demand, manage our marketing a little bit more effectively, and not rely so much on close-in, unstable, and unpredictable demand, is really a key to our success. I think both Mark and I commented on the higher rebooking rates, the higher advanced ticket sales, the higher revenue, the higher booking window, you know, all of these positives, which seem to endorse our strategy, which I think we'll see the full benefit of in 2024 as we then have gone through a full year of cost structure. So, I mean, listen, bottom line is we're committed to getting back to the EBITDA margins that we saw back in 19 over time. It's going to take us a little time to get there, but we're looking at the trends and we see a path towards that. and we think this premium deployment, which we already started shifting to in 18-19, will be a vehicle that will allow us to continue on that path. And I'll remind you, you know, we have always had industry-leading yields, and we continue to have industry-leading yields far above the competitive set, and we believe that this deployment strategy will allow us to continue with that.
spk10: Okay, gotcha. And, Mark, I just want to kind of add the question I was kind of asking before to you. You know, again, as you kind of think about you guys being in that low 150 range in terms of cost, you know, just is there any way to kind of help us think about where you could get that number over time? I'm not looking for guidance or anything, but just trying to understand where that number potentially could go.
spk09: Yeah, look, Steve, you know, obviously, you know, as we're looking to 2024, we're still early in the – we're in the planning process. And as I said, I think we're probably halfway through the baseball game, so to speak, in terms of initiatives. So we fully anticipate that we're going to improve on that. One note, as I did say in my prepared remarks, is we have to keep in mind that there is going to be some dry dock pressure in 2024 when you compare that to 23. But excluding that, I would venture to say that we're going to continue to see improvement in our core fundamental cost structure. So we're working hard. Hopefully we've demonstrated and given you confidence that quarter over quarter we sequentially continue to improve. We think there's more to go after, and we're going after it. We're going to do it in a methodical manner but protecting that guest experience. So, you know, stay tuned for the next few quarters to come, and I think we'll continue to show improvement. Okay, gotcha. Thanks, guys. Appreciate it.
spk04: Our next question comes from Brant Montour with Barclays. Please proceed with your question.
spk06: Hey, good morning, everybody. Thanks for taking my questions. So I'm just curious if you could comment on, you know, the last three months of just fundamental demand strength on the booking side. You know, we've heard from peers that demand has accelerated over those last three months. Harry, you just called out May, June, July being each successively record booking months. But yield guidance for the year, you know, was left unchanged. And so I guess the question is, is that a function of guidance three months ago just already sort of betting on that acceleration coming? Or did flight prices in Europe take a bite out of 3Q? I think we talked about that last quarter. Or anything else that you might want to highlight? Thank you.
spk08: You know, thanks, Fran. Great question. I think with our deployment strategy, most of the demand that we're seeing today and over the last quarter is primarily focused on 2024. I think we mentioned in our commentary, but if we didn't, I'll mention it now, that over the last 13 weeks, over 70% of our new book revenue was for 24 and 25 departures. So, you know, in that respect, this acceleration demand, the record booking levels that I discussed, really are increasing our optimism about 2024. Obviously, in prior guidance, we did assume some bookings, right, for the back half of the year, and they're coming to fruition just as we expected, but these records are really helping to firm up the 24-book position. I mean, this record booking window of 200, 55 days, which is 51 days ahead of where we are in 19, is a huge number for the company and, again, really gives us confidence for 2024 and beyond.
spk09: So, Brent, I would not take it as any sort of sign of deceleration in demand. It's just simply a function of our itinerary's We're more fully booked than we ever have been, and there's just not a lot left to sell, which is a good thing. That gives us more stability and predictability over our numbers. So if anything, that said, there's always, as we talked about, the consumer is strong. Onboard revenue trends continue to do well. So I think if there's going to be any room for upside, it's going to be on continued strength of the consumer spend onboard.
spk06: That's really helpful. Okay. And then just a quick follow up on that. And I remember pre-COVID, Mark, specifically, you know, you guys could get really great returns on incremental marketing dollars. And that was part of the strategy back then. And so now in a world where you guys are, I think, trying to be a little bit, I guess, smarter, you call it, on your marketing dollar spend. And Harry, what you think about this is just as you tinker with that, sort of, you know, algorithm or equation with marketing spend, you know, what are you learning about that process? Are you happy with sort of, you know, the pricing retention that you're getting as you sort of tinker with the marketing dollars or any commentary on that would be helpful?
spk08: You know, I think, Brant, this is really the first quarter or maybe the second quarter of where marketing spend was sort of normal, where we were able to judge, you know, each of the individual projects that we do in marketing and see, you know, normal ROIs, normal returns, normal gets demand. But, of course, we weren't just waiting for these last couple of quarters to refine our marketing machine. You know, we've gone all in with marketing analytics. We've done some work with AI, machine learning, you know, all those terms to really refine our individual marketing efforts and what we spend in each individual channel. You know, the best example I can give you on the NCL brand, you know, our spend today on a booking basis is similar to what we were doing in 19, but we're generating nearly double the leads, right, you know, which is sort of a customer that raises their hand. We think that's fantastic. Conversion rates continue well, which is one of the things that's leading to these record bookings. And as long as we continue refining you know our analytics around marketing. We're happy with the spend levels That's great color.
spk04: Thanks everyone Our next question comes from James Hardiman with city please proceed with your question Hey good morning.
spk01: Thanks for taking my call so I On the net per diem side, good performance in the second quarter. Maybe a little surprised that that didn't flow through to the full year guide, and I can certainly appreciate, you know, more often than not, if it's onboard spend that's driving that per diem, it's hard to sort of assume. You have less visibility as we think about the back half of the year. Is that ultimately what happened in 2Q, or how should we think about sort of the lack of flow through to the full year?
spk09: Well, James, I think our pricing continues to be very strong, and I think out of the gate, we set very high levels. So, again, I wouldn't read into anything whether or not that's – if there's any deceleration. there is flow through. And the fact that we're still guiding, you know, reiterating 9% to 10.5% growth. So, very strong. We don't have a lot of inventory left to sell, which is by design. So, I think it's really going to be on the back of, you know, what does the onboard spend level do? And as we've touched on, you know, here and several times before, it continues to be very strong. But while we have good visibility on that, there is always some variability on that. So, remains to be seen, but everything we're seeing is we're seeing strength and demand across all sectors of the industry.
spk01: Got it. That's helpful. And then separate question, I mean, we've started to see refinancing activity pick up, maybe a more favorable corporate debt environment. What are you seeing there? Is there an opportunity for you guys to do some transactions whether it be to focus on lowering interest rates, extending maturities. I guess if so, you know, what instruments are sort of low-hanging fruit for you guys? I guess more broadly, I mean, as you think about deleveraging, it seems like the messaging has been more about increasing EBITDA than actually reducing debt. Does this current environment maybe change any of that calculation?
spk09: Well, James, we're always looking for opportunities to optimize our debt structure. And I think we were very fortunate in 2022 to get rid of some of our higher cost debt that was incurred during the pandemic. So we don't have any double digit notes that are out there. As I did say, we will be out in the market later this year in normal course to refinance or amend and extend our operating facilities, which is our term loan and our revolver. Beyond that, our next big slug of debt comes due in December of 2024. We have three and five-eighths notes that are out there. And we'll look over the course of the next 12 months what to do with that. But as the cash machine continues to ramp up, as advanced ticket sales continue to ramp up, as EBITDA and margin continues to improve, that is the number one thing we're focused on is delevering in order to help de-risk the stock. We're focused on that. We've done this before. It's going to take a little bit of time, but I think there's more to see over the course of the next 12 to 18 months.
spk08: And, James, I'll just take this opportunity to reiterate a comment that Mark made in his prepared remarks, that we have paid down $1.4 billion of debt in the first half of the year, which we're super excited about.
spk01: Got it. That's really helpful. Thanks, Mark. Thanks, Harry. And, Harry, congratulations on the new role, and good luck.
spk10: Thank you.
spk04: Our next question comes from Connor Cunningham with Milius Research. Please proceed with your question.
spk11: Hey, everyone. Thank you for the time. Just one for me. Harry, in the prepared remarks, you made a comment around just culture change that's underway at the company. Can you just provide a little context to that comment? Why do you need it now? And what's the biggest pressing that you want to achieve with it? Or is that more of a conscious around just a refreshing?
spk08: Well, I think, Connor, it's a little bit of both, right? With new leadership team, we have to set a culture that's going to work for us in the mid to long term. And I'm really excited that the entire leadership group, both the new members and the existing one, are embracing. But if I was to sum it up in one sentence, We're looking to build a culture where we're firmly focused on margin enhancements that we've discussed while at the same time delivering an exceptional guest experience. And it's really a fine line to walk. I mean, you can cut costs and have a worth guest experience. That's not what we're looking to do. Maybe in the past we were a little bit. overly focused on the guest experience without the cost side of it. The question is, how do we balance both of it? And I have to say, I'm excited. You know, Mark and I have both talked about the reduction, the sequential improvement in our underlying core costs over all four quarters of this year, while at the same time our guest satisfaction continues to do very well. Our first guest repeat rate is at record levels, really good guest satisfaction scores, advanced bookings through the roof. So this formula seems to be working well. You know, to do this right, it has to take more than one quarter because we're not looking to do anything drastic. We're looking to do this a little bit at a time and make sure that we monitor it closely, and that's what we're going to continue to do.
spk11: Thank you.
spk08: Thank you, Connor. So with that, Maria, we have time for one last question. So please call it out.
spk04: Okay. Our next question comes from Dan Pollicer with Wells Fargo. Please proceed with that question.
spk07: Hey, good morning, everyone, and thanks for hitting me in. Just a quick question, Harry. It feels like there's been a tangible shift more to focus on the cost side than the yield side. Maybe that's just reflected in current numbers versus how you're looking at things. But I guess as you think about 2024, 2025, and as you think about also long-term targets, Is this an accurate depiction? And, you know, could we maybe get long-term targets from you as you kind of settle into this role later this year or, you know, possibly early 2024?
spk08: So, Dan, great question. So, first off, we are absolutely focused on yield and cost, right, because ultimately margin is a combination of those two numbers. You know, I think I discussed in one of the earlier questions that we think we can do an outsized job in 2024 in yield growth. somewhat because of the tailwinds we saw out of Q4 and 23 when we weren't fully back up to operations, but also because of all the healthy consumer demand metrics that we're seeing over the last few months that we believe will continue into the future. And on a long-term basis, we are committed to low to mid single-digit yield increases with moderate and disciplined capacity growth as we had in 2014 to 2019. So that absolutely will continue. In terms of long-term targets, Yeah, you know, we think about it a lot, but I've been on the job now for 30 days, so a little bit early for me to go all in. You know, I've been spending a lot of time on our ships, with our operations folks, with our employees, with our travel agency community, with our customers, spending some time with the investment community as well. And we believe by early 24 we'll be in a position to provide not only guidance for 24, of course, but also long-term metrics on how we view the future EBITDA, you know, margin, yield, and cost components of the business going forward. Got it. Thanks so much. Okay. So once again, I want to thank everyone for joining us today. We'll be around to answer any questions you may have. Have a great day. Stay safe and all the best. Bye now.
spk04: This concludes today's conference call you may now disconnect.
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