Norwegian Cruise Line Holdings Ltd.

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.

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?

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.