Norwegian Cruise Line Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2022

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Norwegian Cruise Line Holdings Business Update and Third Quarter 2022 Earnings Conference Call. My name is Maria, and I'll be your operator today. And Answer Session and instructions for this session will follow at that time. 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 Dunn, Vice for the company's Investors of Investor Relations with EMG and Corporate Communications.

Operator

Ms. Dawn, please proceed.

Speaker 1

Thank you, Maria, and good morning, everyone. Thank you for joining us for our Q3 2022 earnings and business update call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings and Mark Kempa, Executive Vice President and Chief Financial Officer. Frank will begin the call with opening commentary, after which Mark will follow to discuss our financials before handing the call back to Frank for closing remarks. We will then open the call for your questions.

Speaker 1

As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltd.com/investors. We will also make reference to a slide presentation during this call, which may be found on our Investor Relations website. Both the conference Before we begin, I would like to cover a few items. Our press release with Q3 2022 results was issued this morning and is available on our IR website. This call includes forward looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements.

Speaker 1

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

Speaker 2

Thank you for joining us today. I am pleased to report that we reached another significant achievement on our road to recovery this quarter With the generation of positive adjusted EBITDA for the first time since the pandemic began, we have been clear about our I am encouraged by our progress as each quarter has seen substantial sequential improvement in load factor With the shortfall gap continuing to narrow versus pre pandemic levels, while our industry leading pricing continues to hold strong. And while we are always looking for ways to capitalize and opportunities to accelerate our recovery, I want to reiterate that our Primary focus continues to be maximizing profitability for 2023 and beyond in a sustainable banner by prioritizing our long term brand equity and protecting our industry leading pricing. While the macroeconomic environment heading into 2023 remains more uncertain than usual, we see several tailwinds and catalysts to sustain our Current positive trajectory as outlined on Slide 5. First, the public health regulatory COVID related protocols continue to improve.

Speaker 2

In the past 30 to 45 days alone, key countries like Canada, Bermuda, Greece And all of South America have removed COVID testing requirements for entry and many countries in Asia have begun reopening to cruise. These developments have paved the way for us to relax our own COVID-nineteen protocols, allowing us to reach a wider cruising population as well as adding greater variety to high yielding itineraries as more ports around the world become accessible to cruising. With the public health environment improving, in September, our 3 brands removed mandatory vaccination requirements. And just last month, Norwegian Cruise Line took another significant step forward with the elimination of all COVID-nineteen related guest protocols. That means no more vaccination, testing or masking requirements on any of the lines 18 ships, except in the very few areas around the world, which still have Specific COVID rules.

Speaker 2

This is a long awaited alignment of protocols to the rest of the travel leisure and hospitality industries, which reduces friction, eliminates the number one reason for not booking a cruise and meaningfully enhances the cruise experience for our guests. Our sales safe program was always designed to evolve and the improvement in the public health environment along with the near elimination of intrusive protocols remain in place allow us to uphold our number one priority of protecting the health, safety and well-being of our guests, crew and the communities we visit. 2nd, while there are heightened concerns surrounding an economic slowdown in the broader marketplace, the primary target cohort of our 3 brands, which is more upmarket and affluent than that of the cruise industry as a whole, continues to demonstrate its willingness to spend on travel and experiences. In fact, you may have heard commentary from credit card issues this earnings season about continued strong spend on travel and experiences, especially by those In higher income categories, reinforcing the continued strength and resilience of demand for cruising, particularly among Americans. Within the cruise industry, we believe our company is well positioned to outperform if indeed the macroeconomic environment weakens.

Speaker 2

1st, and as slide 6 illustrates, our dominance in the upscale space, which we participate in not only through our Ocean and Regent brands, but also with our exclusive high end ship within a ship concept on Norwegian with The Haven is significant. And while this quarter is not totally immune to economic downturns, it has been very resilient historically. In addition, Slide 6 also demonstrates our favorable guest demographic mix, which skews towards the higher end of the income As each of our brands operate at the top of their respective industry categories, the vast majority of our guests particularly if the job market remains strong and the equity markets stabilize. With over 85% of our guest sourcing coming from North America, we will also benefit in the near term given our relatively low exposure to European sourcing where the economic environment is already challenged. Long term, this bodes well for our business as North Americans have historically been the guests who book the earliest, Garner the highest ticket price and spend the most on board.

Speaker 2

Taken together, these factors contribute to our strong book position despite current microeconomic worries and a turbulent geopolitical environment. Last quarter, we spoke about the 2 indicators in our business that we typically monitor to evaluate the extent and willingness Of consumers to spend on cruise travel. The first being the booking window, which provides a peek into the consumer's psyche about the future And the second being our onboard revenue generation, which is our best real time now indicator. Both of these indicators continue to meet or Our expectation. In fact, our onboard revenue generation continues to break records as onboard revenue per passenger cruise day was Approximately 30% higher than the comparable 2019 period.

Speaker 2

In addition, our booking window in the 3rd quarter was approximately The last catalyst I want to touch on is our industry leading new build pipeline outlined on Slide 7, which we expect will enhance our brands profile and product offerings And most importantly, drive significant revenue, adjusted EBITDA, adjusted earnings per share and cash flow growth. Turning to Slide 8. In August, we celebrated the christening of our newest ship Norwegian Prima In Reykjavik, Iceland, the 1st major cruise ship christened in this historic seafaring locale. Prima has been incredibly well received with Positive feedback from the guests, travel partners, media and the investment community who have participated in the ship sailings so far. The addition of Prima and her upcoming 5 sister ships, along with Vista class ships in Region 7 Seas Grandeur will without a doubt reinforce the positioning of our brands as the leaders in providing upscale experiences in each of the major cruise categories.

Speaker 2

Looking ahead to 2023, we have 3 new builds, 1 for each Brand entering the fleet with over 5,000 additional births. These new ships are expected to attract new to brand guests, create excitement for our loyal past guests and contribute significantly to top and bottom line financial results. With the relatively small size of our current 29 ship fleet, we are Confident that we can absorb this capacity growth. Not only do we have many unserved and underserved markets around the world, But we also continue to believe that the cruise industry at large is vastly underpenetrated, especially when measured against other land based vacation alternatives. To put this point into perspective, as you can see on Slide 9, which we provided at our investor event last month, The total number of staterooms aboard our 29 ships across our 3 brands is less than 1 fourth And even if you look at the entire cruise industry, there are fewer staterooms in the global cruise fleet of over 250 ships Then there are hotel rooms in the top 3 U.

Speaker 2

S. Cities for hotel capacity, which is Orlando, Las Vegas and Chicago. So the opportunity to grow demand is significant. And when you couple that with the supply side of the equation where we have a high degree of visibility and a limited pipeline of new ships Due to shipyard constraints, the industry and Norwegian Cruise Line Holdings in particular have a strong As you can see on Slide 10, in the Q3, our load factor was approximately 82%, in line with our guidance and demonstrating continued and substantial improvement over the prior quarter of 65%. We expect load factors to continue improving to the mid to high 80% range in the 4th quarter despite the 4th quarter historically being a seasonally lower occupancy quarter than the 3rd quarter.

Speaker 2

Looking at our quarterly load factor in terms of the GAAP with 2019, 3rd quarter occupancy was approximately 30% below the Comparable 2019 period and we expect continued sequential improvement in closing this gap to about 20% during the 4th quarter. The steady occupancy ramp up is expected to continue until we reach historical 100% plus levels beginning in the Q2 of 2023. In terms of pricing, as you can see on Slide 11, our net per diem price growth in the Q3 of 2022 when compared to the Q3 of 2019 was up approximately 5%. This is particularly impressive when considering the hit pricing took with the absence of premium priced Baltic itineraries in the quarter due to the Russia Ukraine conflict. These strong results demonstrate the effectiveness of our strategy of holding firm on our core to go market strategy of market to fill versus discount to fill and maintaining price integrity by emphasizing high value over low price, which you can see on Slide 12.

Speaker 2

I've said this before and I will reiterate again today given its high importance that we strongly believe that this strategy is the optimal path to continually deliver high quality and sustainable profitability once we return to a fully normalized post pandemic environment, which again we expect will be in the early Q2 of 2023. Turning to Slide 13, Our Q4 2022 booked position remains below that of 2019. That said pricing continues to be Significantly higher when compared to 2019, even when taking into consideration the dilutive effect of future cruise credit. Dilution from future cruise credits will not carry forward into 2023 as the bonus or value add portion of certificates issued during the pandemic will expire at year end. Focusing in on 2023, our full year book position is equal to 20 nineteen's record performance And our ongoing net booking pace is at the level needed to sail full beginning in the Q2 of 2023.

Speaker 2

We believe our cumulative book position is at the optimal level when balancing our desire to encourage guests to book early In order to be approximately 65% booked by year end for the following year, while also maximizing our industry leading pricing, so as not to leave yield on the table. This volume versus price dynamic is a delicate balance that we have fine tuned Over the years, using historical itinerary specific data and our sophisticated revenue management system and is key to our success. Pricing is also significantly higher for 2023 versus the comparable 2019 period with strength seen across all three brands. As we have said previously, pricing naturally will level off as we fill out our book for 2023, but we continue to expect to Record pricing for full year 2023. As we look to the future, our entire team is mobilized, energized and ready to flawlessly execute.

Speaker 2

Our eyes are wide open and we are preparing for multiple scenarios given the current high uncertainty in the microeconomic environment and we are ready to adapt and pivot if needed. Our company and our industry has demonstrated its resilience time and again in the past. And I'm confident that if necessary, We will do so again. We are also encouraged by the relaxation of protocols in the regulatory and public health environment, which paved the way for us return to normal operations and we are excited to welcome the 8 additional ships to our fleet we have on order through 2027. We will continue to be disciplined and strategic as we work to set our company up for long term success and to maximize value for all stakeholders.

Speaker 2

I'll be back with closing comments a little later, but for now I'll turn the call over to Mark for his commentary on our financial position. Mark?

Speaker 3

Thank you, Frank, and good morning, everyone. My commentary today will focus on our Q3 financial results and outlook and the progress we continue to make on our path to full recovery. Slide 14 outlines key metrics highlighting our 3rd quarter results, all of which were at or above our previous guidance. During the quarter, our load factor improved 17 points over the prior quarter to 82%, in line with the guidance previously provided. This is consistent with our phased and methodical approach to ramping up occupancies while maintaining pricing discipline as we remain on track to reach historical load factor levels for the Q2 of 2023.

Speaker 3

4th quarter load factor is expected to be in the mid to high 80% range, which while on the surface Appears only modestly higher than 3rd quarter, represents continued significant improvement when taking into account The seasonality of our operations. Strong ticket pricing and onboard revenue generation drove total revenue Per passenger cruise day in the quarter, up approximately 14% versus 2019, Better than our expectation for a high single digit increase. This is particularly impressive given the impact in 2022 of the Russia Ukraine conflict on premium priced Baltic itineraries, which are heavily weighted to this quarter. In addition, Fruit related capacity constraints on the high yielding Pride of America were another headwind during the quarter. As we look to the Q4, we expect this metric to increase by approximately 20% compared to 2019 levels.

Speaker 3

Slide 15 illustrates our advanced ticket sales build, which continues to indicate healthy consumer demand. Our total ATS balance stood at $2,500,000,000 at the end of the 3rd quarter, flat versus the prior quarter's record high balance and versus the seasonal decline we typically see between the 2nd and third quarter. On a gross basis, ATS bill was $1,500,000,000 consistent with the prior quarter, which was the highest level in 3 years. In addition, approximately $1,600,000,000 of the total ATS balance at quarter end is associated with bookings that are already within and lower risk of churn. Turning to cost, we continue to feel the impact of inflation in global supply chain constraints, which is pressuring margins in the near term.

Speaker 3

As seen on Slide 16, we have opportunistically added to our fuel hedge position during the quarter and are now approximately 44% hedged for the remainder of 2022 and approximately 38% hedged for 2023. We continue to expect adjusted net cruise cost excluding fuel per capacity day to decrease approximately 10% in the second half of twenty twenty two compared to the first half. Given our ongoing ramp up, second half costs are not representative of a go forward run rate, In part due to the additional demand generating marketing investments as we lay the foundation for 2023, which we expect will normalize closer to historical levels on a capacity adjusted basis beginning next year. In addition, we are starting to see some moderation of the hyperinflation we have seen in late areas of late in areas such as food costs and related. Looking ahead to 2023, net cruise costs excluding fuel per capacity day will exceed 2019 levels As anticipated, due to both normal and hyperinflation over the past 3 to 4 years.

Speaker 3

However, We are laser focused on managing our cost base and our entire team is focused on mitigating this impact by increasing efficiencies and rightsizing the business all while still preserving the exceptional guest experience our brands are known for. To help with modeling, we have also provided additional guidance on key metrics like capacity days, revenue expectations, Shifting to our financial performance, Slide 18 demonstrates our continued momentum and consistency in achieving key milestones. Last quarter, we generated operating cash flow for the 1st full quarter since the beginning of the pandemic. And this quarter, we are pleased We have to report positive adjusted EBITDA of approximately $28,000,000 The next step forward is our expectation to achieve adjusted free cash flow in the 4th quarter. We have been clear throughout our return to service that this will not be an overnight flip the switch process, particularly given our intense focus on best positioning our company to maximize profitability once we return to a fully normalized operating environment.

Speaker 3

On our current trajectory, each of these building blocks are expected to lead to record net yields and record adjusted EBITDA for the full year 2020 Moving to liquidity and our balance sheet on Slide 19, our overall liquidity position remains strong totaling approximately $2,200,000,000 at quarter end consisting of cash of approximately $1,200,000,000 and the undrawn $1,000,000,000 commitment. Keep in mind that during the Q3, we took delivery of Norwegian Prima which resulted in a cash outlay partially offset by incremental ECA ship financing. Based on our current projections and trajectory, We continue to believe we will be able to meet our liquidity needs organically. Slide 20 demonstrates the result of our deliberate measures throughout the pandemic to optimize our debt maturity profile, which positions us well as we ramp up to a normal operating environment. For the remainder of 2022 and for the full year 'twenty three, we have approximately $300,000,000 $1,000,000,000 of debt payments coming due respectively.

Speaker 3

The vast majority of which are related to our low cost export credit agency backed ship financing. We have previously disclosed that we are in the process of extending our operating credit facility consisting of our revolver and term loan A which mature in early 2024 and we are on track to complete this by year end. Upon completion, We expect to have a relatively smooth maturity profile over the course of the next few years. For additional detail on the breakdown of upcoming debt payments Through 2027, we provide a detailed schedule on our Investor Relations website. Our total debt portfolio is approximately 70 5% fixed rate today and this is expected to increase to approximately 80% by year end 2023 with the addition of 3 new builds next year, which positions us well in a rising rate environment.

Speaker 3

Turning to slide 21, in addition to maximizing our current fleet, our expected future earnings growth from today's normalized levels will be fueled by the transformational growth profile we already have in the pipeline, representing a 50% growth in capacity versus 2019 levels. As Frank touched on, we welcome this new capacity given our company and more broadly the cruise industry's under Penetration within the larger leisure landscape. Our new ships have a very favorable and efficient financing structure locked in at the time of contract which results in an expected immediate boost to profitability once they enter service. For all newbuilds on order, our financing is committed at fixed rates averaging approximately 2.5% over the portfolio. Another important component of our newbuild pipeline is that well prior to a ship delivery, we are already receiving significant cash flows in the form of advanced ticket sales and presale of onboard revenue streams.

Speaker 3

This typically equates to roughly $100,000,000 to 150,000,000 of cash inflow from future bookings prior to a vessel's first revenue sailing, essentially resulting in a cash infusion into the business that continues to build over time as final payments for future voyages also become due. Before handing the call back to Frank, I want to reiterate that while we are proud of the tremendous progress we have made to date, we are not taking our foot off the gas and are relentlessly focused on executing our medium and long term financial strategy as laid out on Slide 22. We are keeping a close watch on the macroeconomic environment and are preparing to adapt to any potential scenario, but we are confident we are taking the right steps to set up our company for a successful future. With that, I'll turn the call back over to Frank for closing comments.

Speaker 2

Thank you, Mark. Before we wrap up our prepared remarks, I'd like to provide an update on our global sustainability program, Sail in sustained, which Slide 23 outlines key accomplishments and milestones. Since we last spoke, we continue to advance Our commitment to pursue net 0 greenhouse gas emissions. We successfully completed the testing of a biodiesel fuel blend on Regent's 7 Seas Splendor in October and we announced the signing of a memorandum of understanding with Mann Energy Solutions to conduct a feasibility study And retrofitting an existing engine to operate with dual fuels, diesel and methanol. We will continue to evaluate A variety of alternative fuels and share learnings with other companies as we collectively try to find a viable long term solution.

Speaker 2

In September after Hurricane Ian had a devastating impact to our neighbors in Southwest Florida, we responded as quickly and as generously as we could and donated $100,000 to the American Red Cross to assist in emergency relief efforts. We also committed to matching donations from team members, business And before turning the call over to Q and A, I'd like to leave you with some key takeaways, which you can find on Slide 24. First, We believe we are very well positioned in the current economic environment given NCLH's unique drivers, which have allowed us to excel financially in the past and we'll continue to do so in the future. 2nd, we are hitting our targets and reaching key milestones and our path back to normalcy. We are focused on laying the foundation for long term sustainable profitability for 2023 and beyond.

Speaker 2

3rd, our target upmarket consumer continues to hold strong, which is reflected in our excellent book position and significantly higher pricing for 23 as well as our impressive onboard revenue performance. And lastly, our cash generation engine has revved up, which along with our newbuild pipeline provides a clear path for return to meaningful profitability and a deleveraging of our balance sheet in the coming years. We've covered a lot today, so I'll conclude right now with this our commentary and open the call for your questions. Operator?

Operator

Thank you, Frank. In order to get as many people through the queue, please limit your time to one question.

Speaker 1

Before we get to the questions on the line, we first want to address a top question from our new online shareholder Q and A platform, which provides all of our investors another avenue to submit and upvote questions for management. Several of the top questions we received this quarter were centered around the same key theme, which was our comfort around our current financial position and liquidity, particularly if we face an economic slowdown or recession. Mark, do you want to answer that one?

Speaker 3

Sure. Thanks, Jessica. And it's very exciting to have this new engagement platform being utilized by our broad shareholder base. So Nice step forward. Look, we feel good about our liquidity position today, which is north of $2,200,000,000 And as I said, that consisted of cash of 1,200,000,000 and the $1,000,000,000 undrawn commitment.

Speaker 3

As I said in my prepared remarks, based on our current projections and trajectory, We do believe we will be able to meet our liquidity needs organically. So far despite the heightened concerns around the economy, we have not seen any Signs of a pullback from our target consumer. We continue to believe that we are better relatively better positioned in the event of an economic downturn Given our brands skew to the higher end of their respective market categories and that results in a more upmarket consumer, which Typically has been very resilient to weaker economic environments. So we'll continue to Monitor the evolving landscape and we're preparing for multiple scenarios. But overall, we feel confident that if faced with We will demonstrate our resilience as we have so many done so many times in the past.

Speaker 1

Thank you, Mark. Our first question from

Operator

the line comes from Patrick Scholes with Truist Securities. Please proceed with your question.

Speaker 4

Hi, good morning, everyone. Thank you. Good morning, Patrick. Good morning. A couple of questions for you regarding commissions.

Speaker 4

There's really been a lot of news about your Changes in the NCF. And could you tell why is now the right time for that? And then related to that, It would seem that this is something your competitors could do and if they did it, maybe this It's sort of a net zero if everybody is doing it. Why do you see a competitive advantage of doing that at And then I'll have one more follow-up question. Thank you.

Speaker 2

Hey Patrick, it's Frank. Couple of reasons. Number 1, The travel agency community is not fully yet back to pre pandemic levels, at least not for the cruise space, Because while we were out and remember we were out nearly 500 days, travel agents had to continue making a living and they Made a living by selling more land resorts, more land vacations than they ever had before and they're still doing it. So we have to find a way to draw them back to the cruise industry And away from the land vacations, which is our number one competitor anyway as opposed to other cruise brands. And we think this is a way to do it.

Speaker 2

We actually did an experiment over the summer using a relatively good sized sample and we found that Travel agents who were paid commissions on these non commissionable fares increased their business with us Significantly, such that the revenue that they generated over a long period of More than offset the increase in commission expense. So we think this is an ROI type of Moov. In many ways, I hope the competition does match this because I think it will be great overall for The Travel Agency community, which we all rely on. And at the end of the day, it's not about So much about commission savings, it's all about generating additional revenue and filling the vessels that are coming online for us and for the rest of the industry. So I know of no company has ever made their mark by saving and saving and saving.

Speaker 2

You make your mark on the top line. And this is what this is That's what this move is meant to do, to generate more revenue. And your second question, Patrick?

Speaker 4

Yes. Thank you. That makes sense. Just taking a look actually at the 3Q results and this was also for 2Q as well. Can you remind us why again and this was before you made your commission change, why were commissions and onboard cost rates So much higher than comparable in 2019.

Speaker 3

Yes. Hi, Patrick. And this is Mark. I touched on that last quarter. So If you recall, as part of our overall free at sea and part of our broader bundling package, We introduced a significantly new air program.

Speaker 3

So we started to see some of the cost of that flowing In the Q2 and then of course if you look at the Q3 that's where most of our ships are often The more premium and exotic itinerary. So you do see a higher cost of air component within that. That said on a net net basis, It does drive better overall net revenue per diems and that's certainly evidenced by our performance in the last 2 to 3 quarters.

Speaker 4

Okay. Thank you for the clarity on that. I'm all set.

Operator

Our next question comes from Robin Farley with UBS. Please proceed with your question.

Speaker 5

Great. Thanks. I wonder if you could sort of put a range for us around when you talk about Price being up significantly for 2023, to get a sense of what range that may be. I know you had given a range with Q2 results and indicated that that would come down as load moved up, but wondering if you'd sort of give a similar ballpark.

Speaker 3

Thanks. Hi, Robin. It's Mark. So I'm going to hold Frank back off on that one because I think if you recall last quarter we said it was going to be a one time data So, I have to be the bad guy in the room. Look, our pricing as we said 30 days ago is significantly up.

Speaker 3

We reiterated that today in our release.

Speaker 2

It's up.

Speaker 3

I cannot give you a range. We gave you the one time data point. We did say that that we would expect that to level off, But it's up significantly. And again, that is all part of our phased ramp up strategy. We're protecting price.

Speaker 3

We want the consumer to pay more. Yes. Are we is there an offset in the very short term that we are sacrificing a small amount of load factor? Yes, we've said that, but that is part of our strategy. We expect to be back at normalized load factories in the second for the Q2 of next year.

Speaker 3

So We are right on path. We are right on track with our intentional actions. And all I can tell you is the pricing is up and that continues to show In both our actual results and if you recall in my prepared remarks, I said that gross pricing is To be up 20% in Q4. So if you think about that you can kind of get an idea of where we're trending. But All signs are looking good for next year.

Speaker 5

That's great. Thanks. And just as a follow-up, Just to clarify your comments about the expense, the net cruise cost for 2023, you said it would normalize in 2023. Will that be as soon as Q1? In other words, is this extremely elevated Cost here in Q is it just a Q4 thing or is it going to take you a couple of quarters for it to normalize?

Speaker 5

Just trying to clarify what sort of in 2020, was it by 2023 or at some point during 2023? Thanks.

Speaker 3

Yes, great question. So look, if we look at Q3 where our costs came in and if You do the math and you imply where Q4 is, it's coming down slightly. Look, it's going to be a tapering down. And What I would broadly guide you to is that when you look at FY2023, certainly not in the Q1, but when you look at the year on a whole, You're probably looking at net cruise cost down at least mid single digits from the prior year and obviously we expect To do better than that, but you have to really look at the composition of what's going in there. And if you look at the 3rd Q4, We do still have some trailing COVID related costs, whether it's testing, additional crew, That is tapering off in the quarter.

Speaker 3

So we did see some ramping down in Q4 as it relates to that. In Q3, we had a significant launch of the new class of Of vessel Prima, that's a drag on cost. But the other thing to keep in mind too is that starting next year Or in 2023, we no longer have quarantine cabins that are out of service. So while that and that's a double impact Because if you think about that in 2022 and especially in Q3 and Q4 from a unit cost standpoint that impacts Our denominator you know from a capacity day basis. So by the mere fact that we have we are putting those cabins back into Revenue sale mode so to speak for 2023, it will inherently reduce our unit cost, but we're also going to get the benefit from additional revenue.

Speaker 3

So there's a lot of moving parts in 2022. It's just as I said before, it's a bit of a noisy and bumpy year. But I'll go back to you know the expectation that is at least we expect mid single digit decreases And we're going to do everything in our power to do much better than that.

Speaker 5

Just to make sure I understand, when you're saying down mid single digit, if that's year over year, are you saying then sort of relative to 2019 that the Costs could still be up like 20% or 30%. I'm trying to do the math on the slide here. I won't

Speaker 3

let you do the math, But I did say in my prepared remarks that we expect cost to be up versus 2019 and 2023. Recall, we did not have the benefit Removing any older ships from the fleet nor did we have the benefit of selling any higher Grain cost brands visavis some of the broader industry. So when I'm talking about at least what I my commentary on mid single digits, That's off where we are in terms of run rate for Q3 and Q4 of this year, not the entire FY 'twenty two.

Speaker 5

Okay. Thank you.

Operator

Our next question comes from Steve Wieczynski with Stifel. Please proceed with your question.

Speaker 6

Yes. Hey, guys. Good morning. So probably for you, Mark, but want to start with the balance sheet. And we recently saw one of your peers lay out Some longer, let's call it longer term financial targets in which they see a path back to investment grade over the next, let's call it, couple of years.

Speaker 6

Just wondering if you guys have thought about a similar path and maybe what the next couple of years might look like from a deleveraging perspective is, I think I remember you guys had some massive deleveraging. I think that was post 2014 or 2015 in which you basically cut your leverage in half over, let's call it, 3 or 4 year period. Also noticed, Mark, your CapEx forecast for 2024 dropped a good bit from last quarter and I assume that's just your Primo Class Plus ship getting pushed back into early 25, but that's going to allow you guys to generate some significant free cash flow as well in 2024 which potentially could help your deleveraging path. That all makes sense.

Speaker 3

Good morning, Steve. That's a lot to unpack there, but I'll start with 1st and foremost, yes, We think about it every day in terms of where this business is going and the opportunity and how do we get back to pre pandemic levels. As we stated 30 days ago in our investor event, we are charting a path back to success. And 1st and foremost, that means rightsizing the business, getting the business back to full operating capacity, which is just around the corner. That's going to result in significant cash flow and that results in delevering and de risking the balance So that is what the entire management team as well as our Board is focused on.

Speaker 3

I've said that before. I said that in 30 days ago. I'm telling you again today, we need to delever this company. We've done it before. We've taken the company down from 9, 10 times levered to where we were in the end of 2019 at low 3s going into the 2.

Speaker 3

So as we look forward And if I have a crystal ball, as I said at the investor event, is we want to turn we want to finish FY2023 with a 5.x handle and leverage and then our goal in 2024 is a 4.x handle and then 3.x handle. So we obviously have a path of how we can do that. We need to continue to execute. We need a relatively stable environment. But signs are looking good.

Speaker 3

We're getting where we need to be. Our Strategy is working. Will there be bumps in the road? Yes, there's going to be bumps in the road, but we've proven time and again that we can get past that. What was the last part of your question now?

Operator

I just

Speaker 3

kept it. Yes, sorry about that. Yes, you're absolutely right. So Look, as we said in our earnings release, we do have a slight delay with LEO 3 and 4 class vessels, And that is strictly 100% as a result of shipyard delays from supply chain constraints. I think on average, Those ships are being delayed on average by about 4 to 5 months each vessel.

Speaker 3

So that just really just simply pushes some of your CapEx from 2024 to 2025 and so forth. So a little bit of an opportunity, certainly not a huge shift, But given where the world is today, we think that's okay. And that's going to further help us when we think about next year of having Over the next couple of years, having slightly better lower CapEx that should provide more cash to the business.

Speaker 6

Okay, understood. And then if I could ask one more question, I know I asked a bunch to you, Mark, but maybe for Frank. Maybe just how you're thinking about the next 4 or 5 months from a booking perspective. And I guess what I'm getting at here is, you obviously have had a lot of Strong booking activity since all the COVID restrictions have been removed and whatnot. But maybe just how you're thinking wave season should start to gear up here over the next call it 4 or 5 How are you guys kind of thinking about the booking patterns over the next couple of months?

Speaker 6

Are you expecting kind of a normalized wave season from here?

Speaker 2

No, I think it will be an extraordinary wave season. It's already started. 10 days doesn't make a trend necessarily, but the last 10 days, the Norwegian brand had its best 10 day streak Ever. And I think that's going to carry on throughout the Q4 and into Wave. WAVE is a it is a consumer event, but travel agents get behind it.

Speaker 2

And travel agents haven't had a WAVE in 3 years and they're excited. And when I see Travel Agent excited, I can't help but join them. So I really think that the next 4 months, 5 months into the end of March, which is typically the end of the way season are going to be exceptionally strong booking periods.

Speaker 6

Okay, great. Thanks guys. Appreciate it.

Speaker 7

Take care. Thanks, Steve.

Operator

Our next question is from Dan Pulitzer with Wells Fargo. Please proceed with your question.

Speaker 7

Hey, good morning, everyone, and thanks for taking my questions. So Mark, I just wanted to follow-up in terms of the spend cadence. I know you mentioned down mid single digits versus that second half run rate for net cruise costs in 2022. But as we think about for 2023 and I guess the cadence over the course of the year, it sounds like it's going to be certainly front end weighted. Is that mostly the elevated marketing And then as you kind of exit 2023, how should we think about the net cruise costs?

Speaker 3

Yes. Look, Good morning, Dan. I think when you look at the cadence, while it is still a bit early to give exact guidance on cadence, We're still going through all of our operating plans internally. I think it's fair to say that Q1 is going to be probably a bit higher than Q2 would be and then naturally I think we're going to I think we're going to start to see more scale in Q2 and Q3. So you're going to continue to see a downward trend.

Speaker 3

And as you're looking at your models, keep in mind, we do have 3 new ships that we're taking delivery of next year. So there will be some startup costs related to those. So just keep that in mind. But it's going to be a downward slope next And you're going to we're already starting to see that take effect. Look, as we look into 2024, We're going to continue to garner scale benefit as we take on new capacity.

Speaker 3

We believe that throughout the course 2023, we're going to find opportunities and we're rightsizing the business from some of the cost creep that we've just seen over the last 2 to 3 years. We've had to take hard looks at ourselves and make sure we're doing all the right things. 1st and foremost, we wanted to make sure we were getting back operating in a healthy and safe manner. We've done that. We're doing it.

Speaker 3

Now we're focusing on what does it take To deliver that product. So we are focused on it. We're attacking it from every angle. It will be a slow downward trend and but too early to comment on 2024, but I Just on the surface, we will see some scale benefit.

Speaker 7

Got it. Thanks. And just for my follow-up, in terms of 2023, you gave your deployment mix, which I think was pretty helpful. So as we think about Which I think was pretty helpful. So as we think about pricing and the top line, to what extent do you attribute that the pricing tracking higher to this More attractive or optimized itinerary mix with less Caribbean, more Europe, more Alaska and Asia Pac versus 2019?

Speaker 7

Or is this more your market to fill strategy and kind of just holding the line on pricing?

Speaker 2

I think it's a little bit of both, Dan. Especially the Norwegian brand has pivoted to longer, more exotic, Higher yielding itineraries, that book earlier. There is no such thing as a good close in bookings and that's one of the That we're trying to get away from. It's part of the strategy over the paying NCS. By the way, I failed to mention that NCS They're only paid commission if the booking is more than 120 days from booking date.

Speaker 2

And there's a big demarcation of the quality, the Pricing of a booking that is made early rather than close in. But yes, We make no bones about that we hold price. We lead the industry by such a wide margin on price That it's almost untouchable and we continue to grow. You see what we've done in Q2, Q3 of this year compared to our Here is what we're projecting for Q4, we're projecting for 2023. That is the central theme of our go to market strategy and we accomplish it By marketing to Phil, by bundling and by having top line product on board.

Speaker 2

So that's going to continue. It is core to our strategy. It's price, price, price. And that's why as Mark mentioned, we have taken a very disciplined approach to filling. We don't care if we're behind others by a quarter or 2 in terms of load factor.

Speaker 2

We simply won't sacrifice price because we've seen historically that those who drop prices to ridiculous levels in order to fill take years, if not decades to recover and we're simply not prepared to do that.

Operator

Our next question comes from Vince Siefel with Cleveland Research Company. Please proceed with your question.

Speaker 8

Great. Thanks for taking my question. A little bit longer term, curious, Frank, your perspective on kind of finding the balance of growing With continuing to source the strongest guests, providing unique and interesting itineraries, I know you talked a little bit about the low penetration rates of crews, imagine share gains is kind of part of it, but how are you thinking about kind of managing that Build along with continuing to have full capacity and interesting itineraries to meet that demand you're going after.

Speaker 2

That's our secret sauce, Vince. If I tell you, everyone will do it. But I will tell you that there are just dozens, Dozens of either underpenetrated or places that we simply don't go because we don't have enough vessels. Just in the U. S, There are cities in the U.

Speaker 2

S. That are historically very strong source markets that we don't have a vessel, either seasonally or at least year round. And we think that with new vessels coming online, we'll be able to do that. Alaska, where we've made huge investments in land based infrastructures in ports, we're still underpenetrated. The Norwegian brand, for only has 4 vessels there, Ocean and Region only 1 each.

Speaker 2

Our competitors have multiples of that. And the reason for that is that we need to be in other places. So We see Alaska, we see Europe as growth markets. We believe South America is becoming very, very interesting, greater demand for South Asia has taken a back seat over the last couple of years because of the COVID situation there. But I got to tell you Japan is red hot for us.

Speaker 2

Australia is red hot. And so I'm excited about the possibility of going to New places with new ships and continuing to just feed the beast of high yielding itineraries. You've heard me say before Vince,

Speaker 8

Great. And second, for Mark. I think there's a little bit of confusion on the cost front and I know you guys don't want to give specific So I maybe wanted to come at this from a different direction. When you talk about record EBITDA in 2023, which sounds Obviously, fuel is outside of your control, but as you just think about the next 1 to 2 years, those margins ex fuel, a. K.

Speaker 8

A. The relationship between price and operating costs. Any reason to think that that would be a departure from kind of where you've been historically?

Speaker 3

Vince, absolutely not. We've talked about this before and I'm not going to sit here and Today that there is not near term pressure on margins. We've said there is. We acknowledge that. I'd be a fool not to say that.

Speaker 3

But I think when you look out over the course of the next year or 2 and you look at where the business is going and where the cost will settle, Right. This hyperinflationary environment cannot last forever. And we are taking actions internally as well to ensure that we're rightsizing all of the cost of the business. But more importantly, we believe the operating leverage of this Industry and more particularly our company is intact. Is it going to be there in the next Quarter or 2, I think that's going to be a challenge.

Speaker 3

But when you look over the next 1 to 2 years, certainly we believe this industry gets Back to pre COVID margin levels and plus. But as I said in my remarks, it is not going to be an Overnight flip of the switch. So it's going to take some time, but without a doubt this industry we believe is intact

Speaker 2

From a margin perspective. And Vince, that's why maintaining those high prices is so important because we can't control that or at least we can't Greatly influenced pricing and the relationship between marketing and sales and all our distribution channels. Whereas you acknowledge that we don't control the cost of fuel, but we don't really control the cost Beef or carrots or onions or a lot of other things that we consume and unless you're prepared to slash and burn the product, which will in turn affect your pricing, The best way to control margins or influence margins positively is through pricing, which is what we do.

Speaker 8

Great. Thank you.

Operator

Our next question comes from James Hardiman with Citi. Please proceed with So

Speaker 3

some of this has been covered, but

Speaker 9

I just want to make sure We're able to sort of unpack the difference between gross pricing and net pricing, right? In the Q3, I think gross was up 14 versus 2019, net was up 5%. It sounds like the difference is some of the bundling the airfare. I guess as we move forward some of the NCF stuff is going to be in there. So I guess as we look to 2023, how should we think about The gap between those 2, should we expect that to widen even further as we move forward or does some of that stuff sort of peel back?

Speaker 3

Vince, good morning. It's Mark. So you're absolutely right. When you look at the last 2 to 3 quarters, the differential between gross That has been about anywhere from 8 to 9 points, I think when you look at the second and third quarter. So you know if you look at where our implied guidance is for Q4 and you do the math, you're probably going to get to a spread of about 7 points.

Speaker 3

So, you know, our best view of everything we can see given the bundling, getting back to normalized load factor levels And full ships. It's probably going to be somewhere in the zone of that 7 to 8 point differential on a run rate basis. Now could it be higher or lower In a particular quarter, it may be a point or 2, but I think generally speaking, we're looking at somewhere around that 7 point differential.

Speaker 9

Got it. That's really helpful. And then, obviously one of the things that shaped this year, maybe less so for you than some of your peers. But obviously, wave season was hijacked by You know, Omicron and you had the Ukraine conflict. I know it's difficult, but is there any way to quantify or What type of an impact that that ultimately had on your business this year?

Speaker 9

And I'm assuming that it's primarily a pricing impact more so than occupancy, but maybe walk us through that. Ultimately, I'm just trying to think through or think about What this year would have looked like with a more normal wave season, which I think we're all hoping that that is the case in 2023?

Speaker 2

Yes, James, it would have looked a lot better. If you look back at all the major changes that took place starting in early June when the U. S. Government no longer required people to test to get back into the country. That was a huge one.

Speaker 2

It was only 4 or 5 months ago. I think we all want to put COVID so far behind us that we forget some of these major milestones that occurred just very recently. Then of course, The CDC dropping their protocols and allowing us to do what we're doing now, That all has contributed to less friction with consumers bringing travel agents back to the fold, so to speak. And so that's why I'm so excited about this upcoming wave period because it doesn't have All the burdens that the last 2 or 3 had. But specifically to your question about Q3 pricing in Ukraine, Look, if you had asked me what is the single city in the world, port in the world that you cannot live without?

Speaker 2

I tell you it's St. Petersburg and we lost it. Very, very high yields, incredible shore excursion Sales, so onboard revenue was just higher than any other itinerary that I can think of. Relatively long season, you can get to St. Pete And so by we kept most of the ships there, although one vessel came out of the Baltic and we send it to the Caribbean, which is about as extreme from one to the other that you can think of.

Speaker 2

So it did affect load factors And no question it affected pricing. And the impact on EBITDA had to be in the tens of 1,000,000 of dollars.

Speaker 9

That's really good color. Thank you.

Operator

Our next question is with Paul Golding with Macquarie Capital, please proceed with your question.

Speaker 10

Thanks so much and congrats on the quarter. I wanted to ask a bit of a follow on question with Europe. Given the protracted geopolitical issues, I'm looking at the deployment mix for 'twenty three. It looks like Europe is up in terms of plan for 'twenty three deployment mix versus 'nineteen. So I just wanted to get a sense of the demand picture for presumably the North American Cruiser, is that still strong for Europe despite the geopolitics?

Speaker 10

And is that a tailwind that we should see also given the 85%

Speaker 2

Yes. I think it is a tailwind for several reasons. One, it wasn't till mid summer that Americans were allowed back into the U. S. Unless they had to test.

Speaker 2

And so this revenge travel and pent up demand that we've been talking Bob, for months, it is really alive and well for Americans going to Europe. And we want Americans going to Europe because they do Sell the buy the highest cabin categories, book really and also because of the strength of the dollar. I mean going to Europe Now even though you do pay Americans do pay in dollars for our cruises here, they're going to spend a lot more money, enjoy themselves a lot more once they get to Europe. So we do believe that Europe is poised for an incredible 2023 season. That's why we increased our capacity there by 6 percentage points of occupancy at the expense of the Caribbean.

Speaker 2

I'll take that Trade all day long because the yields both on ticket and on onboard revenue are so dramatically better for European cruises That we'll take that trace.

Speaker 10

Great. Thanks, Frank. And then maybe staying on The topic of Eastern Europe, I was wondering if there's been any change to the positive side in terms of Costs with respect to your onboard labor costs due to the issues in Europe, are you seeing any benefits there? And maybe more structurally shore side, even though I No, it's a smaller piece. Any change in the structural labor cost picture there and in general?

Speaker 10

Thanks.

Speaker 2

No change at all. The vast majority of our onboard crew come from Asia, not from Eastern Europe. Things have changed. 20 years ago, it was Western Europeans, became Eastern Europeans. Now it's primarily Asian.

Speaker 2

So No positive question whatsoever. We have an operative question for one more or time for one more question, please.

Operator

Our next question is from Ivan Feinseth with Tigris. Please proceed with your question.

Speaker 11

Hi. Thanks for taking my question and congratulations on another great quarter and the ongoing progress.

Speaker 2

Thank you, Isaac.

Speaker 11

The big gain in onboard spending, what are the key drivers of that? What are you seeing being most popular that cruisers are spending on?

Speaker 2

We're seeing it in experiences. So our casino is doing really, really well. We're going to give Vegas a run for their money. People are enjoying the destinations. We have industry leading itineraries, so shore excursion business is up.

Speaker 2

Our cuisine is second to none and people are Enjoying Cuisine. But even our spa, our spa is doing very, very well. And so I'm happy for the folks over at One World Spa.

Speaker 11

And then, Mark had commented a couple of times about you seeing slight moderation in commodity, food commodity prices. Are you still seeing those trends or what's your outlook there?

Speaker 3

Yes, Ivan. We continue to see that. You know Certain categories are trending down and they're starting to get into their historical averages. We're not certainly not where we would like them to be or need them to be, but We are seeing continued momentum in there. But I wish it was quicker.

Speaker 3

But we're at the mercy of the rest of the world. But we again, we're

Speaker 2

Thank you, operator, and thank you everyone Thank you for joining us this morning. We ran a little bit over time, but those were all great questions and we were happy to have the opportunity to answer them. As always, our team will be standing by to answer any of your questions. Have a great day everyone.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Norwegian Cruise Line Q3 2022
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