Norwegian Cruise Line Holdings Ltd (NCLH) — Q3 2021 Transcript

Thank you, Laurie, and good morning, everyone. Thank you for joining us for our Third Quarter 2021 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. As a reminder, this conference call is being simultaneously webcast on the Company's Investor Relations website. We will also make reference to a slide presentation during this call, which may also be found on our Investor Relations website. Both the conference call and presentation will be available for replay 30 days following today's call. Before we begin, I would like to cover a few items. Our press release with third quarter 2021 results was issued this morning and is available on our Investor Relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. With that, I'd like to turn the call over to Frank Del Rio.

Thank you, Jessica, and good morning everyone. Thank you for joining us today. As always, I hope that all of you, as well as your loved ones, remain healthy and safe. Today, we will discuss commentary on three areas. First, the progress we have made on our cruise comeback. Second, our recent booking and demand trends, which have shown particular strength for sailings operating in the second half of 2022 and for all of 2023, when our fleet is expected to be back in full operation at normalized occupancy levels. Finally, our exciting pipeline of new vessels, which we expect to contribute outsized EBITDA growth and improvements across other important financial metrics. Slide 4 outlines how far we have come on our return to service plan. Last discussed in early August, we had just relaunched the first vessel in our fleet, Norwegian Jade in Greece, and were on the verge of resuming cruising in the U.S., with Norwegian Encore making our West Coast debut sailing to Alaska from Seattle. Since then, we successfully relaunched 11 of our 28 vessels, with all three of our award-winning brands resuming operations. We couldn't be more pleased with the performance of our relaunched ships. First, our crew has not missed a beat since returning, seamlessly adapting to our new health and safety protocols and going above and beyond to deliver the exceptional vacation experiences our brands are known for. This commitment to service has resulted in record high guest satisfaction scores, with each month sequentially better than the one before. Second, we are seeing the power of our industry-leading bundling strategy pay off, bringing onboard our vessels with fresh wallets, which, coupled with robust pent-up demand for all kinds of experiences, is translating to remarkably strong onboard revenue generation. In fact, onboard revenue has exceeded our base expectations by over 20%, with broad-based strength across all shifts, regions, and revenue streams. While I would caution against extrapolating these figures as permanent or indicative of future steady-state performance just yet, as there are several transitory factors that may be contributing to the elevated current level including pent-up demand, cabin and guests mix, it is nonetheless an encouraging and positive signal of the healthy consumer demand we are experiencing. Lastly, these relaunched ships have contributed positive cash flow in the third quarter, even with our self-imposed occupancy level caps. Despite the return to service encountering challenges with the unfortunate summer surge of the Delta variant, I'm happy to say that our robust multilayered sales face health and safety protocols worked as intended to mitigate the introduction and transmission of COVID-19 aboard our vessels. The prevalence of cases identified through pre-boarding testing, mid-cruise, and during disembarkation were inconsequential and well below what we all saw in the general population during this time. In short, we were able to fairly evaluate and fine-tune our rigorous protocols during one of the highest points of the pandemic, and the stellar results speak for themselves. Today, all ships in our fleet continue operating with a strict 100% vaccination requirement, coupled with universal pre-embarkation testing and multiple layers of additional protection once onboard, including upgraded air filtration systems and well-resourced medical centers. We will continue to follow science and evaluate and modify our protocols as needed with guidance from our team of experts. As I have said time and again, our commitment to health and safety is far and away the most important principle that our Company operates at all levels, not just now, but pre and post-pandemic as well. We are willing to go to great lengths to protect our guests, crew, and the communities we visit. Just last week, we were pleased to receive positive feedback from the CDC with a temporary extension of the framework for conditional sailing order through January 15th, 2022, at which point the order will revert to a voluntary program. We view this as a positive step forward for our Company and the industry at large, and we were encouraged to see recognition from the CDC of the successful resumption of cruising and the lengths we have all taken to enhance our already stringent health and safety protocols. With the progress we've made in vaccinations, therapeutics, and adapting to living in the ongoing pandemic environment, the worst seems to be behind us. Each day we become increasingly confident in our ability to flawlessly execute on our Phase Voyager assumptions. We continue to expect our full fleet to operate by April 1st, 2022, and with this steady and prudent trajectory, we are well-positioned to return to pre-pandemic occupancy levels across our fleet no later than the beginning of the third quarter of 2022, just in time to capture peak summer season demand and pricing. While we expect to continue seeing some fits and starts as we ramp up our relaunch, we are monitoring port availability, travel restrictions, and any changes in the global public health environment that could affect our return to service plans. Turning to slide 6, we shift today's discussion to our booking and demand trends. I'm pleased to report that we see robust future demand for cruising, particularly for sailings operating in the second half of 2022 and all of 2023, as evidenced by our record cumulative book position during these periods. At the beginning of the third quarter, our booked position for full-year 2022 was significantly ahead of 2019's record levels and at higher pricing. However, consistent with the pullback seen by the broader economy, particularly in the travel and leisure sector, the summer Delta variant surge resulted in a marked slowdown in our net booking volumes. The impact was heavily weighted towards closer in-sailings, particularly for fourth quarter 2021 and first quarter 2022, with the impact lessening sequentially throughout 2022 and beyond. Rather than chase scarce demand during the Delta surge by dropping prices or spending marketing funds in a less than optimal manner, we strategically chose to wait for consumer sentiment to rebound. We have seen direct ebbs and flows in our booking patterns throughout the pandemic coinciding with changes in the public health environment. Throughout this difficult 10-week period, we remained disciplined and continued to hold or even raise pricing, resulting in both record load and record pricing for the second half of 2022 and all of 2023. We are focused on the long-term brand positioning and profitability of the Company and are not willing to sacrifice pricing to increase load factors in the upcoming transitional quarters. As seen in past surges, as the COVID-19 situation recently improved, we have experienced a rebound in bookings, with net booking volumes improving sequentially over the past six weeks. We believe this improvement will accelerate, as first, our brands begin to ramp up their demand-generating marketing investments around mid-November, coinciding with Black Friday and Cyber Monday promotions, and second, with the much anticipated recovery in the travel agent channel space. Lastly, the approval of vaccines for children ages 5 to 11 will allow for an expanded group of 100% vaccinated guests, especially families, to sail on our brand. Our go-to-market and full vaccination strategy has paid off, and today our full year 2022 load factor remains in line with 2019 record levels at higher pricing, even when including the diluted impact of future cruise credits. Additionally, we are meaningfully better booked for the second half of 2022 and full-year 2023 sailings with better pricing than at any similar point in time in the past. Our primary focus is on these periods when our fleet is expected to be in full operation. As I mentioned before, just in time to capture the all-important third quarter peak summer season, which traditionally is the most profitable quarter for the industry. Now, breaking down our booked position further for full-year 2022, more than 55% of bookings come from loyal repeat cruisers to our brand. Additionally, approximately 75% consists of new cash bookings, with the remainder comprised of future cruise credit. So far, approximately 60% of the total value of our outstanding future cruise credits have been redeemed. As a reminder, the value added 125% future cruise credits we issued at the beginning of the pandemic can only be applied to sailings through year-end 2022, resulting in no yield dilution as we look to 2023 and beyond. And while still early, booking trends for 2023 are also off to an impressive start. Our booking windows continue to be elongated versus historical levels, with guests booking further into the future, particularly for the Oceania Cruises and Regent Seven Seas Cruises brands. For example, in August, Regent set a record for the largest booking day in its 29-year history with the launch of its 2023/2024 voyage collection, surpassing its previous record by approximately 15%. While all itineraries were popular, notable destinations of interest included Africa, Asia, and the Baltics. In September, the sales launch of a single ship, Oceania Cruises' new 1,200 passenger Vista, which doesn't debut until April of 2023, set an all-time single-day booking record for that brand, surpassing the most recent record set in March 2021 by nearly 60%. Half of the available inventory for Vista's inaugural season was sold in a single day, with 30% of bookings coming from new to brand guests. These incredible record-breaking milestones are further proof of the exceptional demand we continue to experience for our brand's unique product offerings from both new and loyal guests alike. Strong future demand in both load factor and pricing is also supported by our advanced ticket sales reports. Our advanced ticket sales increased approximately $500 million on a gross basis in the quarter, equating to a roughly 65% increase versus the prior quarter's figures. More importantly, our cash advanced ticket sales for sailings beginning in the second quarter of 2022 and beyond are approximately 45% higher than at the same time during the record year 2019. As we move forward with phasing in the rest of our fleet, we expect this tremendous momentum to continue sequentially. Looking ahead, 2022 will mark an exciting new chapter for our Company as we welcome the first ship in the next class of vessels for Norwegian Cruise Line, Norwegian Prima, in summer of 2022. I just returned from the shipyard in Italy a few weeks ago, where I was able to witness firsthand how what an evolution Prima represents for the brand and the industry at large, which you can see on slide 7. Everything about her was impressive, and she has been meticulously designed to elevate the guest experience. Last month, we unveiled Prima's entertainment lineup, including its interactive headline show, the Tony-award nominated musical Summer: The Donna Summer Musical. Norwegian Prima will also showcase numerous cruise industry firsts and new brand experiences, including the world's first transforming venue that converts from a three-story theater into a Vegas-style nightclub, an exhilarating free-fall drop dry slide, and a three-level 1,200-foot-long race track, the largest at sea. The Prima Speedway will be the first-ever three-level race track and is over 20% larger than that on Norwegian Encore, featuring 14 turns where drivers can reach speeds of nearly 40 miles per hour. Prima's advanced sales continue to impress, even after her record-shattering sales debut in May 2021, which set a single best booking day and best initial booking week record, doubling the previous record set by Norwegian Bliss in 2018. Despite the introduction being six weeks later than Norwegian Bliss, our booking volumes are trending in line with Norwegian Bliss as the previous fastest selling new builds for the line at materially higher prices. As you can see on Slide 8, Norwegian Prima is just the first ship to look forward to in our industry-leading growth profile of nine world-class ships coming online by 2027. This new build will grow our berth count by approximately 40%, adding 24,000 additional berths across our three brands. In 2023, when our fleet is back in full force, we expect our berth capacity to be approximately 20% higher than 2019's pre-pandemic levels. The addition of these new cutting-edge ships will also favorably change our cabin mix, with premium cabins increasing to approximately 65% of total berths, up from approximately 60% today. In addition to the premium mix of real estate onboard, our new ships include all the latest technology to improve efficiency versus our existing fleet, additional streams for onboard revenue generation with new and innovative experiences, and excitement around new ships is a significant demand driver. It also serves as a powerful engine to fuel future yields, EBITDA, cash flow, and ROIC growth. It brings new guests to our brands and brings back repeat guests as well, which helps us appeal to every segment we are targeting. Given our limited fleet of only 28 ships, we are ready and eager to easily and profitably absorb this new capacity as it allows us to further diversify our product offerings and penetrate numerous attractive high potential unserved and underserved markets globally. The strategic addition of the Prima and Prima Plus Class ships, which are smaller but more upscale than our previous Breakaway and Breakaway Plus Class at approximately 3,200 berths for the first two Prima Class ships and increasing to nearly 3,600 berths for the next four Prima Plus Class ships, will give us additional bandwidth and flexibility to optimize the deployments that are most profitable and allow the line to continue to maintain premium pricing with the right size ship in the right place at the right time. As slide 10 shows, we have historically demonstrated success in not only absorbing capacity but translating this capacity growth into outsized revenue, adjusted EBITDA, and operating cash flow growth that significantly outpaces growth in absolute capacity. We fully expect to continue this trend and drive meaningful growth to the top and bottom line with the addition of these exciting new ships.

Thank you, Frank. We reached a significant financial milestone in the third quarter with our first voyages resuming sailing after an unimaginable 500 plus days with 0 revenue-generating operations. Our return to service has been very successful, and we remain on track to execute on our Phase Voyager resumption plan. By the end of the third quarter, we had started 37 voyages, completed 29, and had 8 ships in service, representing approximately 40% of our berth capacity. Occupancy in the third quarter was approximately 57%, in line with our expectations and reflective of our self-imposed occupancy limits. As we have outlined previously, we have taken a conservative approach to occupancy with our voyage resumption. This proved prudent with the rise of the Delta variant to ensure that health and safety remains our number one priority. Increasing our occupancy is not a race, and we are focused on being diligent and thoughtful in ramping up occupancy levels to protect not just our guests and crew but also our long-term brand equity. Despite the reduced occupancy levels in the quarter, I am happy to report that the fleet that operated in the period was cash flow positive. Looking ahead, by year-end, we expect to have 17 ships representing approximately 75% of capacity back in service with the full fleet operating as we enter the second quarter of 2022. Turning to liquidity and cash burn on Slide 11, we ended the quarter with approximately $1.9 billion in cash and cash equivalents. Earlier this week, we enhanced our liquidity profile by entering into a $1 billion commitment through mid-August 2022. This liquidity backstop enhances our financial flexibility and provides immediate and additional liquidity should the need arise. If drawn, the commitment would convert into an unsecured note maturing in April 2024. For clarity, we have not drawn on this facility and do not intend to do so given our current projected recovery. Our average monthly cash burn rate for the third quarter was approximately $275 million, lower than prior guidance of $285 million. For the fourth quarter, we expect our average monthly cash burn to increase to approximately $350 million as we ramp up restart expenses and additional vessels reenter service. During the quarter, we anticipate a ramp-up of demand-generating marketing investments as we head into the holidays with Black Friday, Cyber Monday, and Wave Season. It's important to note that this cash burn estimate does not include our expected cash inflows from both new and existing bookings, nor the contribution from shifts that have re-entered service, both of which we expect to accelerate as we move forward. On a net basis, based on our current resumption plan, we expect to reach a crucial inflection point with operating cash flow turning positive towards the tail end of the first quarter of 2022. Based on our current trajectory and market conditions, we are on a solid path to return to profitability in the second half of 2022. Turning to slide 12, our cash balance in the third quarter decreased to $1.9 billion, driven by approximately $825 million of operating cash burn, including OpEx expenses, SG&A interest, and CapEx, customer cash refunds of approximately $115 million, and net working capital inflows of approximately $125 million. With 2022 just around the corner, we have provided additional guidance to assist with modeling for certain metrics on slide 17, including depreciation and amortization, interest expense, fuel consumption, and capital expenditures. We have also provided detail on our annual capacity growth expectations on Slide 18. As we gear up to deliver on our impressive growth profile through 2027, which we expect to be significantly accretive to both earnings and cash flow generation. Lastly, with much of the focus in the market on inflationary pressure, I wanted to quickly address what we're experiencing. We're still fine-tuning our 2022 plans and related projections. However, similar to almost all other industries, we are seeing pockets of pressure in areas such as fuel, food, and other commodities. Our supply chain group continues to work diligently to mitigate these costs. We're fortunate that the timing of our ramp-up in operations is alleviating some of the transitory cost pressures. The good news is that we operate primarily as a fixed-cost business, which is beneficial in an inflationary environment. On the labor front, we have a high degree of visibility on our costs as the majority of our crew, which comprises the bulk of our employee base, are covered under multi-year agreements. We're also seeing strong pricing power, helping to offset inflationary pressures. Even with the pricing power we are observing, cruise vacations continue to offer an incredibly compelling value proposition compared to land-based vacation alternatives. We've said in the past that a cruise vacation typically offers at least 20% to 30% better value than a similar land-based alternative. Given the current inflationary backdrop, we believe our offering and value proposition is even more compelling now than ever. Before handing the call back to Frank, I want to reiterate that while the global public health environment remains fluid and we are not yet completely out of the woods, we are increasingly optimistic as we progress on our road to recovery. We are now in a position to pivot to a more offensive approach and shift our attention to executing our medium and long-term financial recovery plan. As part of this plan, we will remain focused on rebuilding our track record of financial performance, optimizing our balance sheet, and delivering on our attractive and disciplined growth profile. I look forward to updating you on our progress in our next call, but for now, I will hand the call back to Frank for closing commentary.

Thank you, Mark. Before we wrap up our prepared remarks, I'd like to provide an update on our global sustainability program. We are committed to driving a positive impact on society and the environment through this advancement. On the environmental front, in addition to ongoing initiatives to reduce our greenhouse gas emissions rate, during the quarter, we made our first purchase under our new carbon offset program. Over the summer, we announced our commitment to purchasing high-quality, verified carbon credits to offset the equivalent of 3 million metric tons of carbon dioxide over a 3-year period. This is a measurable step toward near-term emissions reductions, which will help bridge the gap in our decarbonization effort until new technologies become feasible. Our 3-million-ton commitment is sizable, and we plan to increase offset purchases in future years to help us reach our goal of carbon neutrality. We strive to maintain a supportive and empowering workplace for our team members across the globe, who are without doubt our most valuable asset. We recently announced we have indefinitely moved to a 4-1 flexible work model for our shoreside team members globally, requiring employees to work in the office Monday through Thursday and remotely on Fridays. This new work model offers additional flexibility for our team members while also supporting our business goals, maintaining productivity, and fostering the in-person collaboration and workplace culture that we are proud of. We are honored that this commitment to our team was recognized with our naming to the Forbes World's Best Employers list, following the recognition as one of Forbes America's Best Employers earlier this year, where we ranked among the top 75 companies in the overall large employer category and among the top ten companies in the travel and leisure sector. While we are pleased with our progress in ESG efforts, we have no plans to stop here. We are committed to continuing to drive positive change and make a lasting impact on the world as responsible corporate citizens. Additionally, we remain focused on enhancing disclosures around our ESG efforts to ensure transparency and accountability on this critical topic for our stakeholders. I look forward to sharing additional details as we continue on our ESG journey. Turning to slide 15, I'd like to leave you with a few final key takeaways. First, our return to service is on track and initial voyages have been successful on all fronts. Our health and safety protocols are working as intended, and we are seeing strong onboard revenue and high guest satisfaction scores. We are increasingly confident in our ability to execute on our phase voyage resumption plan, targeting our full fleet in operation by April 1st of next year. Despite headwinds in the third quarter related to the Delta variant, we continue to experience strong future demand for cruising, with positive booking and pricing trends, particularly for the back half of 2022 and throughout 2023. Lastly, we believe we are nearing an inflection point with the worst of the pandemic appearing to be behind us. Our future is bright and we look forward to the next chapter in our Company's storied history as we deliver on our industry-leading growth profile, which we expect will provide a meaningful boost to financial results and shareholder value in the coming years. With that, Laurie, let's open up for questions.

Hey, thank you for taking the questions. I know you don't want to give too much color on 2022 yet, but I would love to hear any guidance on load factor over the course of the year. Also, could you compare how the Company is structurally changing its itineraries, marketing approaches, or otherwise in light of consumer behavior and changes to your operations?

That's a mouthful, Steve, but I'll try to get through it. We have perfected our itineraries and deployment. I don’t foresee major changes in how we deploy our vessels in 2022 and beyond, assuming the world reopens. Today, as the world is in the process of reopening, Asia is still primarily closed, but we believe that by the time our next Asia season begins, by about this time in 2022, it will be open. We do have new vessels coming online, four over the next two years, and we’re eager to take possession of those vessels. Time and time again, we mention we have many unserved and underserved markets because we only have a fleet of 28 vessels. We are waiting for those vessels to help accretive to yields and certainly EBITDA, ROIC, and all financial metrics. For 2022, we must start analyzing sequentially rather than as a single block. Certainly, the back half of '22 today looks much better than the first half partly due to the impacts of the Delta variant on booking trends.

As a follow-up, could you please provide insight on the strong booking trends in the back half of the year? What is the composition between new to brand or new to cruise versus existing customers, and what is driving that?

About 55% of our bookings are repeat customers, slightly higher than usual. We have moderated our marketing spend, leading us to target the market segment we know best – our past guests. Our marketing push is anticipated soon, in preparation for Black Friday and Cyber Monday promotions.

Good morning, everyone. Thanks for taking my questions. Frank or Mark, could you provide a bit more detail about occupancy nearer term, particularly around your self-imposed caps and your ability to raise those in the next 2 to 5 months?

Good morning, Brandt. The third quarter occupancy was in line with our expectations at roughly 57%. Our focus isn't merely on filling volume; we want to maintain price discipline. We're excited about occupancy ramping up sequentially, as we expect to operate 17 vessels, covering roughly 75% of our capacity.

Thanks for that, Mark. As a follow-up, could you provide insights on onboard spending trends and whether you anticipate these will revert to 2019 levels?

I cannot predict the future, but empirical evidence from bookings demonstrates that consumers desire to cruise and travel. The onboard spending is currently higher than we've seen, and while we hope these trends continue, they are likely influenced by several factors such as pent-up demand and the cabin mix.

Thanks for taking my question. What do you think the margin opportunity is within the business going forward, and could efficiencies gained put your margins higher than they were pre-COVID?

We are positioning ourselves nicely for margin expansion and ROIC improvement. It’s essential to maintain pricing discipline. We’ve seen time and time again that companies that drop prices often struggle to recover to pre-crisis pricing levels. Our new premium vessels will help drive these improvements as we forecast they will increase the percentage of profitable accommodations onboard.

We're learning to market new value propositions effectively and improve our pre-cruise sales. The price increases we're observing will drop directly to the bottom line. We are focused on capitalizing on this opportunity.

Hey, guys. Good morning. I'd like to ask about load factors and the potential to normalize those moving forward. How do you see the vaccine mandate affecting this, particularly for children?

We will maintain our 100% vaccination requirement indefinitely. This continues to provide a competitive advantage for our brands. As vaccinations expand to younger demographics, we believe this will support our return to normalcy.

Could I ask for some color on the brand performances? Are the higher-end brands seeing much stronger interest compared to the contemporary brands?

The luxury brands tend to book further out, but we are seeing steady progress across our brand segments. We're encouraged by how consumers want to cruise again, and the higher-end brands are definitely commanding interest.

I wanted to inquire about the balance sheet. Do you have a targeted leverage range, and what is the rationale behind setting up the billion-dollar facility?

Our goal remains to get back to a leverage range of 2.5 to 2.75, but we are focused on lowering it below 5 in the near term. The backstop facility is a low-cost measure to ensure flexibility without committing to permanent debt.