Norwegian Cruise Line Holdings Ltd.

Good morning and welcome to the Norwegian Cruise Line Holdings second quarter 2024 earnings conference call. My name is Donna and I will be your operator. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session and instructions for the session will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder to all participants, this conference call is being recorded. I will now turn the conference over to your host, Sarah Inman. Ms. Inman, please proceed.

Good morning, everyone. Thanks for joining us for our second quarter 2024 earnings and business update call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings, and Mark Kempa, Executive Vice President and CFO. As a reminder, this conference call is being simultaneously webcast on the company's investor relations website at www.nclhltd.com backslash investors. Throughout the call, we will refer to a slide presentation that can be found on our investor relations website. Both the conference call and the 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 2024 results was issued this morning and is available on the 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. Harry?

Well, thank you, Sarah, and good morning, everyone. We appreciate you joining us today for our second quarter 2024 earnings call. This is an exciting time for Norwegian Cruise Line Holdings. The second quarter has surpassed our expectations with results exceeding guidance on all key metrics, allowing us to increase our full-year guidance for the third time this year. At our Invest Your Day, we emphasize our unwavering commitment to balancing return on experience, what we call ROX, and return on investment, or ROI. This strategy is clearly yielding results. We are witnessing robust demand, with strong pricing and booking volumes, leading to record-breaking advanced ticket sales. This demand, coupled with our onboard offering and high-quality service, has led to strong get satisfaction scores while we continue to effectively control costs. These indicators affirm that our strategic approach is positioning us for sustained long-term success on our well-defined path forward for continued growth to achieve our charting the course strategy, which includes ambitious 2026 financial and sustainability targets. Today, I'm excited to discuss some of our key milestones for the second quarter and the factors that drove our enhanced guidance for the remainder of 2024. We're thrilled to see how the pillars and initiatives under our Charting the Core strategy are moving the needle for our business. As these are strongly underpinned by our global sustainability program, SAIL and Sustain, we're also excited to share the progress outlined in our recent sustainability report. Later in the call, I will hand it over to Mark who will provide more color on our second quarter performance and updated outlook for 2024. We kicked off the second quarter with impressive momentum, continuing the positive trends from the beginning of 2024 and proudly executing on our exceptional performance pillar. As you can see on slide four, our second quarter results beat guidance across the board. Adjusted EBITDA grew 14% and adjusted EPS was up 33%. Notably, we hit our year-end target of decreasing net leverage by one and a half turns a full six months early. As we move forward, we remain committed to further deleveraging with a clear focus and attaining a 2026 target of mid-four times. These strong results also allowed us to raise our full-year revenue and earnings guidance. We now expect to end the year with adjusted operational EBITDA margin of 34.5%, a full 400 basis point improvement over 2023, which puts us well on the way to our 2026 target of approaching historical margin levels of 39%. We also increased our adjusted EPS guidance for the full year to $1.53, an approximate 120% increase over 2023, and an impressive step forward towards our 2026 target of $2.45. And lastly, we are on track to achieve double-digit adjusted ROIC by year end. This acceleration in our financial results speaks volumes about our team's dedication and hard work. Turning to slide five, I want to emphasize how our long-term growth platform pillar is set to deliver measured capacity growth and optimize our fleet to drive strong financial returns. Historically, capacity growth has driven outsized revenue and adjusted IBA growth, and we expect this trend to continue with the incorporation of larger and more efficient state-of-the-art vessel store fleet, which I'll now give some updates on. Turning to slide six, we are currently focused on our next two new ships being delivered in 2025, both currently scheduled for an on-time delivery. Our first milestone in the quarter was the float out of Norwegian Aqua, which we celebrated with our partner Fincantieri Norwegian Aqua, the first ship in the next generation Prima Plus class is an evolution of the previous Prima class ship and will be 10% larger This space allows for more innovative offerings including the world's first ever hybrid roller coaster and water slide the Aqua Slide Coaster We are also building a digital sports complex with an interactive LED floor and our most expansive 360-degree outdoor promenade, the Ocean Boulevard. We cannot wait for Aqua to make her debut in April 2025. Most recently, we also celebrated the float-out of Oceana's Allura at the Fincantieri Shipyard in Genoa. This marked the transition of the vessel from dry dock to fitting out berth, initiating the final stages of construction. Allura will redefine luxury with its designer-inspired interiors, including opulent suites, sophisticated lounges, and exceptional new dining venues. Scheduled to enter service in the Mediterranean in July 2025, she will follow her normal summer season with winter voyages in the Caribbean. Oceana was also busy this quarter with the return to service of Marina after an extensive refurbishment. This all-encompassing rejuvenation includes the addition of three new dining options and reimagined penthouse suites. And just as we add more capacity and new features on existing ships, we are also excited for enhancements to our destination and home ports. We're increasing our sailing to exciting destinations, such as Bermuda and Great Surf Cay, where we plan to complete construction of our two-ship pier towards the end of next year. We'll also be adding a new home port to our roster in 2025, Jack's Port in Jacksonville, Florida. And in April 2026, NCL will make its return to Philadelphia after a 17-year hiatus. With the addition of Philadelphia, NCL will now service seven of the top 10 largest metropolitan regions in the United States. We are excited about our deployment, and our guests are as well, as shown by our booking trends, which you can see on slide seven. The company continues to experience strong consumer demand. In the second quarter, we continue to see strong bookings with our 12-month forward book position at the upper end of our optimal range on strong pricing. During the second quarter, we observed continued strength in onboard revenue as well, which was driven by our guests' continued enjoyment of our shore excursion and onboard amenities, including specialty restaurants and communications services, which had been bolstered by the continued implementation of Starlink across the fleet. Additionally, pre-booked onboard revenue for capacity day showed solid growth, increasing by 15% as more guests opted for pre-cruise purchases. And as we've seen from prior experience, higher pre-cruise spend typically results in higher overall spend throughout a guest's cruise journey. As a result, our net yield grew 6.3% during the second quarter, surpassing our guidance by a full 200 basis points. During the second quarter, about 3% of our capacity was originally scheduled to be in the Middle East region, with high team percentages on our Oceana and Regent brands scheduled to be in that region. The cancellation of these itineraries resulted in a very short resale cycle. Despite the setback, results for this quarter were strong enough to offset this, underscoring the robust demand environment for cruises and the agility and effectiveness of our teams to overcome difficult challenges. Without a doubt, our financial performance exceeded our expectations, and we're therefore raising our yearly net yield growth guidance, increasing 100 basis points from 7.2% to 8.2%. It is worth noting that our occupancy guidance remains essentially unchanged as we're already guiding to full shifts, so the entire increase in our guidance is on the back of stronger pricing. we are anticipating strong pricing growth across all four quarters in 2024. Turning to slide eight, to continue cementing our leading position beyond 2024, I am excited to announce that our second quarter advance ticket sales surpassed the first quarter, increasing 11% year over year and reaching a new all-time high of $3.9 billion. This success was driven by robust pricing, a dynamic deployment mix, coupled with increased pre-sale packages and capacity growth. Now moving on to what is at the core of our Charting the Core strategy, our sustainability program, SAIL and Sustain. In June, we were pleased to result our annual sustainability report. On slide nine, we summarized some of our main 2023 highlights, which underscore our commitment to integrating sustainability into our overall business approach. So noticeable accomplishments include achieving our 2024 target to equip 50% of our fleet with shore power technology a full year early. We remain on track to equip 70% of our fleet with this technology by 2025. In fact, we recently celebrated the launch of shore power at Port Miami, making it the first major cruise port on the U.S. East Coast to offer shore power at five of its terminals, including our own terminal B, the Pearl of Miami. We also reached our goal of testing 20% of our fleet with biodiesel blend by expanding tests to four more ships throughout 2023. Our new target is 40% of our fleet to test biodiesel by 2024. Finally, doubling down on our people excellence pillar, we continue diversifying our sourcing, having spent over $635 million with small businesses and businesses with minority, women, veteran, or economically disadvantaged qualifications in 2023. And most recently, Forbes named us as the best American employer for women, a milestone we are particularly pleased with. Our journey does not stop here. We remain dedicated to advancing towards our sale and sustained targets going forward, maintaining high standards of operational excellence, and creating lasting value for our business and various stakeholders through sustainable practices. I couldn't be more proud of our entire team for all of these impressive accomplishments. With that, I'll turn it over to Mark to walk you through our financial results and outlook. Mark.

Thank you, Harry, and good morning, everyone. My commentary today will focus on our very strong second quarter 2024 financial results, our improved full year 2024 guidance, and our increasingly solid financial positions. Unless otherwise noted, my commentary on 2024 net yield and adjusted net cruise cost ex-fuel PCD are on a constant currency basis and comparisons are to the same period in 2023. Let's begin with our second quarter results, which are highlighted on slide 10. In short, we exceeded guidance across the board, outpacing our targets for the quarter. Starting with the top line, results were impressive, with net yield increasing 6.3%, exceeding our guidance of 4.3% by 200 basis points. Several factors contributed to the exceptionally strong top line growth in the quarter, which included robust demand for European, Caribbean, and Alaskan sailings, where the majority of our capacity is deployed this quarter. stronger than anticipated onboard revenue and close-in sailing demand. And finally, the redeployment of canceled Red Sea sailings were better than our initial expectations. Looking at costs, adjusted net cruise cost ex-fuel PCD came in below guidance at 163, primarily due to the timing of certain expenses that will now fall into the third quarter. As expected, our unit cost this quarter included approximately $9 from higher dry dock days and related costs as compared to 23. Excluding the impact of the dry docks, our adjusted next cruise cost ex-fuel PCD would have been flat year over year, once again demonstrating our ability to fully offset the impacts of inflation with our disciplined cost savings initiatives across the entire organization. These initiatives, combined with robust top-line growth, have yielded strong results. Adjusted EBITDA came in at approximately $588 million, surpassing our guidance of $555 million, resulting in a year-over-year increase of 14%. Adjusted EPS was 40 cents, exceeding our guidance of 32 cents, and increased 33% compared to the same quarter last year. Overall, we are extremely pleased with our second quarter performance. Strong top line growth combined with our ongoing cost reduction initiatives enabled us to surpass our guidance metrics for the quarter. This strong momentum positions us well as we look ahead, and as a result, we are raising our earnings guidance as highlighted on slide 11. We are thrilled to announce that for the third time this year, we have raised our full-year guidance, reflecting the strong performance and strength of our business. Since our initial guidance in February, net yield growth is expected to increase 280 basis points to 8.2%. And we have maintained our adjusted net cruise cost ex-fuel PCD guidance, which, excluding the impact of dry docks, is expected to be flat for the year. I will go into more detail on this a bit later in my remarks. As a result of the strong top line and subinflationary unit cost growth, we have increased our guidance for adjusted EBITDA by $150 million from $2.2 billion to $2.35 billion. All of this is flowing to the bottom line, resulting in an increase in our adjusted EPS guidance of approximately 25%, underscoring our impressive operational execution and strong market demand. These results mark significant progress towards achieving our Charting the Course 2026 targets, as we outlined in May. Moving on to a more detailed look at our guidance on slide 12, we outline our expectations for the third quarter and full year, as well as the implied metrics for the fourth quarter. Starting with net yield, we anticipate net yield growth of almost 6.5% in the third quarter. This growth is driven by several factors. Over 70% of our sailings in the third quarter are in Europe and Alaska, regions where we are experiencing strong demand from North American customers. Continued strong onboard revenue trends combined with healthy pre-booking for onboard amenities. Unlike Q2 and Q4, this quarter is unaffected by disruptions from the Middle East cancellations and reroutings. These favorable trends and our ongoing momentum have allowed us to increase our full-year net guidance to 8.2%. I want to emphasize that our latest guidance implies a healthy net yield growth of 5% for the fourth quarter. This builds off of an impressive 8% growth in 2023 that was underpinned by 14% pricing. Our Q4 2024 growth also comes in the face of headwinds from rerouted Middle East sailings, which comprise 10% of our deployment in the fourth quarter and was disproportionately weighted to our luxury brands. Now turning to our attention to adjusted net cruise cost, where our guidance remains unchanged, a true testament to the diligent efforts of the entire organization. For the third quarter, we anticipate adjusted net cruise cost ex-fuel PCD to increase by 3.3% to $156,000. from 151 in the same period last year. I would like to highlight a few points about the quarterly numbers as there are many moving parts, and I will get into those yearly changes later in my remarks. First, in Q3 of last year, we recognized approximately $2 of non-recurring benefits. Second, keep in mind the timing of expenses. As I mentioned previously, our Q2 unit costs were better than expected, primarily due to timing differences of certain expenses between Q2 and Q3. Consequently, on a year-over-year basis, Q3 unit costs are up. However, this is merely a timing issue, and for the full year excluding the impact of dry docks, we still expect our unit costs to remain essentially flat and in line with our prior guidance. And third, I will mention variable compensation. we are recognizing higher variable compensation due to our business outperforming initial forecasts. And this has a disproportionate weighting in the third quarter consistent with the seasonality of our earnings. As a result of strong net yield growth and cost savings initiatives, our third quarter adjusted EBITDA is expected to be 870 million, which is driving adjusted EPS of 92 cents a 21% increase over the same period in 2023. Moving to slide 13, I'd like to revisit our net yield guidance since our Q1 results in May and highlight the confidence and strength we are seeing for the latter half of 2024. At our investor day, we increased our full year guidance, indicating that the majority of the uplift was expected in the second half of the year. Giving more detail on this now, we had expected that about 35 million of the 50 million adjusted gross margin improvement or an increase of 120 basis points of net yield to materialize in the second half. Today, we are raising our full year guidance once again with an additional 35 million improvement in adjusted gross margin or 120 basis points in the second half. This positions us to achieve solid net yield growth of 5.9% in the back half of 2024. Moving to slide 14, I want to dive a bit deeper into our margin enhancement initiatives. As we stated at our investor day, a key pillar of our algorithm is boosting margins and reducing costs across the entire organization. And we continue to see these fruits the fruits of these efforts during 2024. During the first and second quarters, we have been able to keep our unit costs flat, excluding dry dock. And as I mentioned earlier, due to the timing, this metric will increase in the third quarter, but should decline in the fourth quarter. And as a result, our adjusted net cruise cost ex-fuel PCD will be essentially flat year over year, fully offsetting inflation, as well as the increased variable compensation due to the company's strong performance. This feat is not easy and is the result of the tireless work of our entire organization and transformation team. I am confident that we will be able to continue this momentum in the years that come. Turning to slide 15, we can clearly see the impact of our disciplined approach to earnings and returns as outlined during our recent investor day. The key elements of our algorithm are straightforward. Improved net yields and rigorous cost management drive margin expansion. That margin expansion in conjunction with controlled capacity growth results in substantial adjusted EPS growth. Moreover, this adjusted EPS growth, when paired with our disciplined capital allocation strategy, allows us to prioritize debt repayment in the short to midterm. This approach not only reduces our net leverage, but also strengthens our balance sheet and enhances our adjusted ROIC, which, by the way, is on target to hit double digits this year, another important milestone toward our 2026 target of 12%. During the second quarter, we improved our trailing 12-month adjusted operational EBITDA margin to 33%. As we close out the year, we anticipate ending with a margin of 34.5%, marking a substantial improvement of 400 basis points from 2023. This progress is a significant milestone as we strive toward our target of approaching historical margins of approximately 39%. Now let's shift to our balance sheet and debt maturity profile on slide 16 which has not changed significantly since Q1. During the quarter, and as expected, our 6% 2024 exchangeable notes converted to shares. And our next maturity is our 565 million notes due 2024, which we are expecting to refinance and or partially repay by its maturity in December. Turning over to leverage on slide 17, we are proud that we achieved our net leverage goal six months ahead of schedule, reducing our leverage by approximately one and a half turns and ending the quarter at 5.9 times. Achieving leverage in the five is no small feat since we ended 2023 at 7.3 times. As you know, we are on a multi-year deleveraging journey to de-risk the balance sheet, targeting the mid-fours, And this quarter's results are another significant milestone in that journey. In closing, I want to emphasize that this has been an exceptional quarter where we surpassed guidance across all key metrics. This momentum has enabled us to raise our full year guidance for the third time. This is all a testament to the strategy we outlined at our investor day and that I discussed earlier. We are excited about the second half of the year and remain confident in our strategy going forward. With that, I'll turn it back to Harry for closing remarks.

Well, thank you, Mark. I want to close by reminding everyone of the ambitious targets and strategies that we laid out in Investor Day just two months ago, which are listed on slide 17. Our bold vision is to provide guests with exceptional vacation experiences, allowing them to vacation better and experience more. This vision is the foundation of our Charting the Course strategy, supported by our four pillars, people excellence, guest-centric product offering, long-term growth platform, and exceptional performance. These pillars are all underpinned by our commitment to sustainability through our SAIL and SUSTAIN program. This new strategy and vision lead to a simple yet powerful earnings and return algorithm that Mark discussed earlier, that will help us deliver on our 2026 financial targets. Our entire management team is driven and focused on this new strategy, and I'm positive that this quarter's results gives you even greater confidence that we are on track to achieve our long-term goals. We are optimistic about our future and look forward to sharing this journey of growth and success with you. With that, I'll hand the call back over to the operator to begin our Q&A session.

Thank you, Harry. If you have a question at this time, please press the star then one on your touch tone 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 star two. Today's first question is coming from Steve Wozinski of Stifel. Please go ahead.

Hey, guys. Good morning. Congrats on the results here. So Harry or Mark, in terms of booking trends, it seems like you're obviously well booked out for this year. And as you noted, most of your bookings today are for 2025 or beyond. So just wondering as we kind of look out to 2025, if you're seeing pretty much strength across all itineraries at this point, or are there certain itineraries that are getting more attention right now? And And then you also noted that, you know, you're at the high end of your, you know, what you call your optimal book position. But, you know, has that optimal book position changed at all given, you know, how much further out, you know, your customers are booking these days?

So I'll take that one, Steve, Terry. First off, thanks for the kind words. We were very happy with our results this quarter and our increased guidance for the year as well. So, you know, two different questions. I'll do my best to address both. You know, on the booking trends, you know, Not really seeing any key patterns there. We're happy with the strength across the board. We're seeing good strength in the Caribbean, Europe, Alaska, exotics, all the places that we go to. We were pretty meticulous going into 25 with our itinerary planning to do a good job at balancing our demand and supply by... by region of the world, and we seem to generally be successful. If I point out one thing that I'm particularly pleased with, it's Alaska and Europe for next summer. And please don't take that as a comment that I'm not pleased with anything else. We're pleased with everything, but that's one area that seems to be doing particularly well and a little bit ahead of our expectations, so we're happy with that. In terms of your second comment about whether or not our view of book position has changed, I think so. I think if you were to compare this, for example, to 2019, which, you know, last normal year way back when, I would say their optimal book position is probably a little bit ahead. But I think that's just due to better analytics, better revenue management tools. you know, better thoughts of the future. You know, I just want to reiterate, you know, perhaps save a question from someone else in the future. You know, our goal is not to be at record book positions. Our goal is to be at optimum book positions such that we can maximize yield. We don't take record book positions to the bank. We take yield to the bank. And we have calibrated our tools such that, you know, sometimes it's okay to slow down bookings in order to raise prices. And one thing that we're particularly proud of that I mentioned in my prepared remarks is we have really seen robust pricing for 2025 up significantly compared to this time last year for 24. And that's something that obviously we're going to continue to do our best on to deliver towards our 25 and 26 long-term financial goals, which we mentioned on Investor Day.

And Harry, maybe if I can ask one more real quick one here, but you made a remark in your prepare remarks about how you're charting the course targets are, you use the word ambitious, which I think is a pretty interesting adjective there. So maybe I'm reading too much into that remark, but as we sit here today, I mean, if you guys are targeting double digit ROICs by the end of this year and your target out to 26 is 12%, I mean, that doesn't seem overly ambitious to us. So Maybe that's not even a question, but I'll stop there and see how you would respond to that.

I'm not sure I read a question in there either, so I'll try to do my best to respond. Listen, when I say they're ambitious, I mean that we believe that it's the proper cadence that drives the company forward to have great results. I wouldn't read my comments that ambitious that I think they're crazy, optimistic, nor are they in such a way that we can't achieve them. We're very much committed, and we are reiterating our support today. that we're committed to hitting these targets in 26. And I think the commentary that we gave on both position, the visibility we have into 25, you know, allows us to reiterate the goals that we think we're well on track to achieving now.

Okay, great. Thanks, Harry. Appreciate it.

Thank you. The next question is coming from Ben Chaykin of Mizuho Securities. Please go ahead.

Hey, good morning. Good morning. Thanks for taking my question. I know you called up timing as a factor between 2Q and 3Q for costs, but it sounds like some incremental progress on the cost side as well that helped offset costs both in the quarter and the year. I'm not sure if there's anything you can elaborate on. Were these essentially incremental cost saves as part of the longer-term goal that you found early or maybe incremental opportunities? And I guess what I'm referring to is the incremental compensation expense yet essentially unchanged. full year cost guide. And then any quantification would be super helpful. Thanks. And then I have one more.

Yeah. Good morning, Ben. This is Mark. So you're absolutely right. We continue to be very, very confident in achieving our cost reduction and waste elimination goals So when you think about the full year, you know, I think in the quarter our costs were favorable. I think it was, what, six, seven million. That's just the timing between quarters. But when you step back and you think about that on a full year basis, You are absolutely right. Due to better performance that we called out, we do have variable comp that is hitting us both in second quarter and second half of the year and disproportionately weighted to the third quarter. So all in all, that indicates that we're actually pacing ahead in terms of our overall 100% million goal that we had committed for this year. So we continue to find new things. We continue to hone in and eliminate waste. We're committed to that and very happy on the progress we're seeing going forward.

Gotcha. That's helpful. And then switching gears, thinking longer term. Great start, Kay. I know the pier will be complete in October 25th. Do you plan on making incremental investments in parallel with that opening, or do you think it'll be subsequent to?

I think there'll be a little bit of both. I think there'll be some parallel investments, but I think this is a long-term development plan for us. As you know, we have one of the largest private islands in the Caribbean. We have lots of real estate to build on, and we have a long-term master plan. So I think you can look to see some things opening up in 25 with the pier, and more things will come in 26 and 27. We are committed. We have a significant percentage, especially of our NCL fleet, visiting there in the winters and even now some in the summers as well. Perhaps you caught some of our deployment changes when we announced our 26 deployment for NCL a couple of weeks ago. And we plan to maximize our real estate and what we believe is a competitive advantage in the Caribbean with this island.

And Ben, I just want to highlight that, that that will be over time. We are not anticipating or should you expect there's going to be some level of ramped up CapEx over the next year or two. We will make measured disciplined investments there while looking to repurpose dollars that were otherwise going to be spent within the organization. So again, it will be in a measured way and associated with returns that we would expect with such investment.

Got it. That's very helpful. Thank you.

Thank you. The next question is coming from Connor Cunningham of Milius Research. Please go ahead.

Hi. Thank you. Mark, just sticking with costs. So, yeah, the core cost performance seems to be tracking ahead. I just, as you start to think about 2025, I realize you have some lingering dry dock headwinds and just any early reads on the puts and takes there? Like, for example, like, does the development of like Jacksonville or the private island start to add incremental costs to next year in general? Just any thoughts there right now. Thank you.

Yeah, good morning, Conor. Look, I think when you think about 25, you know, we're not expecting any sort of material headwinds from our core fundamental costs, you know, other than what we would expect against normal inflation, which, again, we've been very adamant we believe we can deliver subinflationary costs. But things around the island or even I think you mentioned dry docks, when we think about dry docks year over year, there is no substantial step up. I think our dry dock days, you know, might change year over year. It's in the single-digit number. Now, there may be different capacity days in terms of timing of the dry docks are similar of next year. But overall, that's not a headwind when you think about it from a 20,000-foot level. So we're focused on, as we've been saying, we're focused on our algorithm. We believe we can deliver subinflationary unit cost growth or better. And, you know, Q2 and our second half guidance is another testament to that, that we're on a strong path toward that course.

And the only additional color I'll add, as you asked specifically about Jacksonville, is we have no material investment. That's an investment led by the local community, which obviously we're going to partner with by bringing ships there long term. But that's on their dime, so to speak, not ours.

Okay, helpful.

And then on the comment... I'm sorry, Connor, for color, same situation with Philadelphia, which we also announced.

Okay, helpful. Then on the comment of booking for 25 and just where the curve sits, you know, in the past you've talked about the negative impact to having like longer, more immersive, you know, cruises that won't let you, basically will inhibit you from getting back to 2019 occupancy levels. But just given the stated demand, like why wouldn't occupancy be a further tailwind into 25 outside of just pushing rate in general for yield? Thank you.

You know, I'll just say, Connor, and I hope I get to the essence of your question. You know, listen, our core driver of revenue is the first and second guests in the cabin, not necessarily the third guest in the cabin. The third guest doesn't tend to pay very much. So, you know, our focus is really more on cabin occupancy. than passenger occupancy because those third and fourth guests have a very small marginal benefit. So, you know, once again, this really gets to optimizing yield, not necessarily optimizing an occupancy number or something along those lines.

That's actually helpful. Thank you.

Thank you. The next question is coming from Matthew Boss of J.P. Morgan. Please go ahead.

Great, thanks, and congrats on a nice quarter. So two-part question. Harry, on the robust demand that you cited into the back half of the year, could you elaborate on pricing power globally or just any pushback at all that you're seeing in any region? And then, Mark, with the fourth quarter net yield raised today, and if we think about demand momentum, if demand momentum continued, I guess how linear is the two and a half point cost spread target multi-year, thinking if net yields were to continue to outperform your plan, how best to think about that two and a half point cost spread?

Okay, those are two good questions. I may take a crack at both of them, and then Mark will do some cleanup after my second answer, because the first one is relatively straightforward. You know, the overwhelming majority of our demand, especially on the NCO brand, but even across Oceania and region, comes from the North American consumer. So, you know, it really wouldn't be – while I'm happy to share what's happening in the rest of the world, which is really good as well, it wouldn't materially impact our numbers anyway. So I think that's a more important – answer to the question. The European and Asian consumer is only on the margin important to us, but to be clear, they're doing well as well. We are happy with the demand out of Europe. We're happy with the demand out of Latin America, Australia, all the places that we sell. Core consumers, the U.S., and they continue to do well for us. You know, in terms of next year, listen, you know, 2.5% is a baseline. Obviously, we are going to do everything in our power to overachieve on yield, and we're going to do everything in our power to overachieve on cost, meaning coming in with better costs. But I think 2.5% is a very good place to start. You know, we only announced that about two months ago. We're still focused on that for 25 and 26.

Yeah, and Matthew, you know, just to highlight some things. So, look, when we announced our targets... You know, what I think it would be important to understand is, number one, there is no hockey stick implication or assumption that, you know, we're going to do X in 25 and we have to do X in 20, Y in 26. That was a, you know, that was a very broad-based spread that we've committed to. So what do I mean by that? Yes, there may be some variability between quarters, but either upward or downward of that. I mean, it's very, very early when we look at 25 and 26. So, you know, I wouldn't get caught up on the quarterly spread. I would concentrate on the full year spread, which is what we're aiming for. And again, we're not assuming any sort of hockey stick scenario. And I think that's the important thing to keep in mind in your models and your thinking.

Great color. Best of luck. Thank you, Matt.

Thank you. The next question is coming from Brant Montour of Barclays. Please go ahead.

Good morning, everybody. Thanks for taking my question. So the first one, just on the fourth quarter implied guide, I think the fourth quarter implied guidance on our math for per diems is something in the low two percentage range. And I think there's Middle East there. Can you just start up quantifying what the Middle East impact is on the fourth quarter in particular?

Yeah, look, good morning. And as we've talked about before in the Middle East, you know, I think a call or two earlier in the year, we had said the Middle East Red Sea was about a one to two point impact for the year. And if you think about that on the quarters, it's disproportionately weighted to Q4 of this year because about 10% of our capacity was in that region. So I can't give you full, you know, I'm not going to give you full or complete quantification for Q4 other than I would urge you to consider that it was 10% of our deployment that was disproportionately weighted on our luxury brand. So it is certainly weighing down on the fourth quarter. That said, as I've also said in my remarks, fourth quarter of last year we had 14% pricing growth and 8% yield. And even more importantly, I think when you look at the fourth quarter and the second half and you think about the progression that we've made over the last four to five months, we have continually increased our guidance for both the third and fourth quarters consistently. And I think that is a testament that we are seeing strength and we are seeing strong momentum. So I'll leave you with that. But I think we're very satisfied with where we are. And hopefully we can outperform that.

And, you know, the only additional color, Brent, that I'll add is, you know, we now, as I said earlier in the Q&A session, we managed to yield not to price. And we're guiding now to a five-point yield increase year over year, which quite frankly, considering that we're guiding at 6% now for Q2 and Q3, we don't view that as a material difference. We don't go 6% one quarter, 5% another quarter as anything other than the normal ebbs and flows of businesses. So I think this conversation about some sort of deceleration can finally be put to bed. We tried last time, but obviously weren't successful. Hopefully after this time we can finally put that to bed.

Thanks for that, Harry and Mark. So on a follow-up question, Marriott this morning talked about seeing slightly lower ancillary spend across the system. The U.S. was implicated in that. Again, broad-based but slight. You guys have your own real-time cash register. Are you seeing any wobbles or waivers in that onboard spend over the last few weeks? Sorry for the short-term question, but it's topical.

Sure. I'll give you a short answer and then a longer answer. So the short answer is no. We are seeing no, absolutely zero decrease in onboard spend. I think we mentioned in our prepared remarks, in fact, how the pre-swelling of onboard is actually up considerably, you know, over the prior period that we comped it to. The slightly longer answer is, you know, you need to keep in mind, you know, a couple of factors. You know, the huge value gap between hotel ADRs. and cruise line yields. I think yesterday we referenced the 40% value gap, which really still means we have tremendous runway to go to catch up to hotels. We consider that a long-term tailwind for the company. You know, and also the fact that because our booking pattern is so much further in advance, we have lots of opportunities to engage with our consumer and discuss with them all the value of being on our ship, You have a little bit of the fact that the people are in our product the whole time. Unlike a hotel where people come and go, they sort of are on the ship for extended periods of their vacation, which gives us a little bit of a tailwind there as well. So overall, the short answer is no cracks. No deterioration. If anything, it continues to be strong and more long-term. I think they're fundamental things that work in our favor that make our business quite a bit more resilient than the hotel on the ancillary slash onboard spend category.

Perfect. Thanks, everyone.

Next question.

Donna?

Donna?

My apologies. My mic was muted. The next question is coming from Vin Siepel of Cleveland Research Company. Please go ahead.

Great. So really encouraging to hear about the positive revision of the fourth quarter. And I think you used the word robust to describe what you're seeing for pricing for 2025. So it sounds like things are setting up pretty well for that low to mid single digit yield growth range that you target. Could you comment on how you think new hardware And maybe any itinerary or geographic type changes could impact yield for next year? Is it something that you think will be accretive, neutral, dilutive to yield? How should we be thinking about that?

You know, so thanks, Vincent. I think the reiteration of the low to mid-single-digit yield growth for next year is spot on, and that continues to be our goal for 25 and 26. You know, when we look at our deployment mix for 25 versus 24, you know, obviously there's some changes on the margin, but it's not a substantial change year over year. Obviously, we didn't have any new hardware come online this year, which would be a tailwind for next year. We have two ships coming on next year, one a little earlier, one towards the back half of the year. So I don't think that new ships will have a material impact as well. I think most of what you see next year is just going to be organic based on marketing, demand, tweaking revenue management tools, and just being more effective at executing in the company. So I don't think there's any huge... you know, one-time or ancillary items that impact yields for next year.

Thanks. And an unrelated follow-up on loyalty, I know this is something that we've talked about briefly in the past. Just curious where you guys are at in that process and if you've given more thought or are already taking steps to help, you know, reward folks for staying within the brand family across the portfolio of brands.

You know, good question, Vince. Not really something we're prepared to talk about yet. You know, obviously, what we see in the industry is on our radar screen, and we're studying it, but not really in a place to comment at the current time. Okay, thank you. Thank you.

Thank you. The next question is coming from James Hardiman of Citi. Please go ahead.

Hey, good morning, and thanks for taking my questions. You guys have done a great job the last couple of quarters and really implied in the guidance for the year on the cost front, basically keeping that cruise cross flat next to dry dock. Maybe help us think through how long you can continue to do that, i.e., you know, if we think about this year, was there a disproportionate benefit from some of the costs saved that, you know, would inevitably slow next year? And I guess conversely, how to think about inflation next year. Or could that sort of flattish ex-Dry Dock trend continue for longer? Thanks.

Good morning, James. It's Mark. So thanks for the question. Look, you know, as we've stated and more importantly as we've committed, we've said that we're targeting $300 million of savings over the course of the three years through 2026. And we're confident in that. It doesn't mean it's in the bag, but it's an ever-evolving journey. And we think, you know, we have the right tools. We have the right culture that's in place. We are seeing changes in the organization. And we're starting to eliminate waste effectively. And, again, it remains to be seen when you think about next year what is inflation. We generally think of inflation as somewhere around 3%. And of course, we all know that could be up or down, but our goal is to mitigate some or all of that. And what I can say is to date and our performance indicates it, we are doing well on that track. And we're actually ahead of that track for 2024. So a bit early to commit on what 2025 is going to look like, but we have a lot of runway. We have a lot of annualization from initiatives that started this year. that we'll get the full annualization of next year. So we're feeling comfortable on our targets, and we are laser-focused on this in eliminating that waste but preserving the entire guest experience and the product that we're known to deliver.

Got it. And then, you know, obviously it's way too early to really handicap 2025 in terms of some of the key sort of demand and cost factors. But I don't know if you could maybe help corral us in terms of some of the below-the-line items. As I think about interest expense, share count, DNA for next year, obviously your balance sheet is changing. You've got some converts. Any help with that math so we could all be maybe within the same ballpark?

Yeah, you know, so first on share count, I think we've been guiding to about 515 or 516 million shares. fully diluted. And I would expect that number to be very similar next year because that does assume that all of our convertibles that are out on the horizon are converted to shares. That is not our intention, of course, for our 2027s, as we've always said. But the 2025 convertibles, we expect to convert to shares because we don't have another option. You know, in terms of DNA and, you know, DNA, I think our DNA generally runs probably about 9.5% or so of gross revenue. And I would anticipate that it's probably going to be in that same zone going forward. And in terms of interest, you know, again, I think we continue to make progress on the interest. You know, we're guiding to, what are we guiding to, about 760 or so this year. And I think that's about, what is that, about 6.5% or so of gross. As we continue to pay down debt, as hopefully we can take out some debt early, as we've potentially indicated with our 2024 December maturity, I think hopefully we can continue to see some improvement on that front. So I'm not going to give you a specific number on it. But think about where we are this year, 730, 740 or so. I think that would probably be a consistent percent of gross revenue or better.

Got it. Really helpful. Thanks, Mark.

Thank you. The next question is coming from Lizzie Dove of Goldman Sachs. Please go ahead.

Hi there. Thanks so much for taking the question and congrats on a nice set of results. I just wanted to ask about kind of the The ALGO, I suppose, for net yield, it feels like maybe the growth side of things in terms of onboard and ticket was a touch lower than expected, but really, really nice kind of commissions leverage that you got there. So I guess any change of how you're kind of thinking about that longer term, and I'll ask my follow-up now, is there, you know, how much more room to go is there on that kind of commissions leverage that you're getting? And is that really just coming from more direct bookings, change in demographics that you're seeing? Any help there would be great. Thank you.

Yeah, so thank you, Lizzie, and we had seen the question in your initial report this morning, too, so we appreciate the heads up on it. You know, so I'll just say at a high level, I understand how you drew the conclusion you did that the benefit was based on commission or direct bookings or something like that, but I just want to explain that was not the case. The entire benefit we saw on that line was as a result of better air purchasing. So as you know, we bundle air on Oceana region and Seattle on anywhere between 35% and 60% of our guests, depending on the brand and the region. And as we're able to buy air more effectively, we pass on the savings to the guests. which results in lower gross revenue and lower air costs, so to speak, which show up in the commission transportation and other lines, yet better net revenue because we believe our air program is an advantage in driving demand. So, therefore, for us, having higher net revenue and lower gross revenue is actually a huge benefit, which I think that an analyst community misunderstands. They think we've missed on growth. It's actually a benefit. It means we're buying air more effectively, again, passing on those savings to the guests, which allow us to have a more robust demand environment. In terms of how much more leverage there may be on buying air better, listen, we have a team. This is what they do. We continue to do our best to contract with new carriers, especially both on the domestic and international front. That gives us more choices to offer our guests. So I do not think we have run the entire course. You know, I could sort of, although it doesn't necessarily show up in cost, so it isn't officially part of a transformation office for the $300 million that Mark mentioned, clearly find air better and providing that benefit to the guests is a long-term benefit for the company.

Awesome. Thank you. That's helpful.

I think we have operator time for one more question.

Thank you. Our next question is coming from Dan Pulitzer of Wells Fargo. Please go ahead.

Hey, good morning everyone. And thanks for taking my question. I just wanted to follow up on that. The difference between gross and net, as we think about kind of the remainder of the year, and obviously you've given that net yield guidance, you know, should we think about that, that transportation and airfare costs continuing to be down year over year, or, you know, should, should kind of gross and net be, you know, changing at a similar pace for the rest of the year?

I think, Dan, generally speaking, you know, to the extent we can continue to improve on that line item, we're going to continue to improve on it. Obviously, you know, we are at the mercy of some of the market volatility in terms of whatever air does. But I think it's a good assumption to assume that we're going to continue to work hard on that and see improvement. So a bit of a nod again. answer because I think there is some variability there, but I think we're going to continue to see improvements there.

Got it. And then obviously you reach your year-end target for leverage pretty much in this quarter. How should we think about the year-end net leverage target at this point? If there's any way to just kind of help us as we think about the working capital and those other moving pieces in terms of your balance sheet and cash flow?

Yeah, I think the way to think about it is it provides us another solid milestone toward our 2026 target of mid-fours. You know, I think generally the models out there know what our debt is, net debt is, and I think you have a good handle on obviously where our EBITDA is. So we are making progress, and we think by year end we're going to see significant improvements in that quarter after quarter.

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, and we look forward to seeing you in our next call. Thanks, everyone.

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