Norwegian Cruise Line Holdings Ltd (NCLH) — Q2 2022 Transcript

Thank you, Darryl, and good morning, everyone. Thank you for joining us for our second quarter 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. 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 be found on our Investor Relations website. Both the conference call and presentation will be available for replay for 30 days following today's call. Before we begin, I would like to cover a few items. Our press release with second quarter 2022 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. Frank?

Thank you, Jessica, and good morning, everyone, and thank you for joining us today. Over the past several quarters, we have reached many pivotal milestones as we continue the steady march of our post-pandemic recovery. On our last call, we had just welcomed the last ship in our fleet back to service, becoming the first major cruise operator to be fully operational. This quarter, we are pleased to report that we have reached another key milestone with operating cash flow turning positive for the second quarter. While our focus is on our profitable future, when I take a moment to reflect on the tremendous progress we have made since launching our great cruise comeback just over a year ago, I can't help but be immensely proud of the entire team at Norwegian for rising to the occasion time and again and delivering impressive results. Working well alongside us has been the travel agent community who more than anyone can appreciate the challenges that we as an industry have overcome, and more importantly, can also see the tremendous opportunities that lie ahead. We thank them for their unyielding support throughout this journey. We have been disciplined and methodical in our ramp-up and have maintained a clear and consistent mindset focused on our go-to-market strategy of market-to-fill and emphasizing value over price by continuing to expand and refine our bundling strategy. Our guiding principle has been a focus on the long-term profitability of the Company, particularly for 2023 and beyond, by protecting our long-term brand equity and building on our industry-leading pricing. This means making intentional tactical sacrifices in the short term in favor of long-term sustainable results. With this ethos at the forefront of our business plan, we also continue to be opportunistic, exploring all options to accelerate our recovery. As I survey the current landscape, I see several tailwinds and catalysts for our company which are outlined on slide 4. First, since we last spoke, we have seen further improvement in the public health and regulatory environment, which has allowed us to relax COVID-related protocols and align us more closely to the rest of the hospitality industry. Last month, the CDC discontinued its voluntary COVID-19 program for cruise ships. This was a strong signal of confidence by the CDC that the industry's COVID-19 mitigation and management plans are robust and effective. This very positive development has paved the way for us to begin removing barriers for our guests. We're committed by local regulations, bringing us not quite to equal footing with land-based vacation and leisure alternatives, but significantly closer. Just yesterday, we announced a number of changes to our own health and safety protocols, which are effective September 3rd, and as always, are subject to local regulations. We will no longer have a mandatory vaccination requirement on any of our ships, and we have relaxed testing protocols, regardless of sailing length. To put it simply, vaccinated individuals, including those embarking on an NCLH ship from U.S. ports, will no longer have any pre-cruise related protocols, and those who are unvaccinated or choose not to provide proof of vaccination will be required to test negative within 72 hours prior to embarkation. In addition, all guests 11 years old and younger will be exempt from vaccination and testing requirements of any kind. There remain a few jurisdictions with strict requirements, including Canada, Greece, and Bermuda, where we will continue to comply with local mandates. These modifications to our protocols are meaningful and give us additional flexibility to reach a wider cruising population, reducing friction and travel-related hassles for our guests, and bringing greater variety to our itineraries. In fact, yesterday's announcement was an instant catalyst, resulting in one of our top three best booking days of the year. Our top priority remains the health, safety, and well-being of our guests, crew, and communities we visit. And this commitment too is unwavering even as we are evolving our SailSAFE protocols to adapt to the changing public health environment. Across the globe, we continue to see the easing of travel restrictions and the reopening of ports to cruising, bringing us closer to a normal operating environment. One significant example of this easing is the lifting in June of the onerous one-day testing requirement to enter the U.S. While the decision was too late to have a meaningful impact on ship sailing in the second and, to a lesser degree, third quarters of this year, the change resulted in an immediate and sustained boost in booking volumes for future periods in the weeks following the announcement. Second, and despite recession and economic slowdown fears abounding in the broad marketplace, we continue to see a strong upmarket consumer, with booking trends continuing to show steady improvement week-over-week, which I will touch on in more detail later in the call. But at a high level, to evaluate the extent and willingness of consumers to spend on cruise travel, we typically monitor two key indicators. First is the booking window, which provides a peek into the consumer psyche about the future, given that cruise is a long lead time and relatively high ticket purchase. To be clear, we have not seen any cracks emerge in the dynamics of the booking window, and it remains both within historical range and our own expectations. Second is our onboard revenue generation, which is a real-time indicator of how our guests are feeling about their financial situation right now and while onboard our ships. Onboard revenue generation has continued to be impressive, even as we continue to ramp up occupancy, carrying more guests across all ships and cabin classes. In the second quarter, onboard revenue per passenger cruise day was approximately 30% higher than during the comparable 2019 period. We continue to focus on enhancing our market-leading bundled offerings and increasing quality touch points with our guests, starting from the time of booking to capture even more revenue pre-cruise, allowing guests to arrive onboard with an ever fresher wallet, which ultimately results in higher overall spend. In fact, our pre-cruise revenue on a per passenger day basis for the second quarter '22 is up over 50% versus 2019 levels. At a high level, guests who make pre-cruise purchases tend to spend approximately double that of guests who do not pre-book onboard activities. And while the broader economy has experienced a pullback in consumer spending for physical goods, we continue to see a strong propensity for spending on travel and experiences, particularly from the affluent consumer. Hotel average daily rates and airline fares remain at or near record levels, with occupancies reaching pandemic peaks. Consumers want a vacation even during economic downturns. And we believe cruises are much better positioned than land-based alternatives to capture the strong demand given our unmatched value proposition. While consumer appetite for experiences bodes well for the entire cruise industry, we believe our company in particular is best positioned to outperform in this environment. Our three brands focus on providing upscale experiences relative to their respective industry categories and therefore, skew towards the higher-end consumer, which while not immune have proven more resilient than other cohorts in previous downturns. And all indications are that the intent to travel for this demographic has not abated. The last and arguably most exciting catalyst I want to touch on is our attractive pipeline of new builds, which will greatly enhance our already world-class fleet and drive significant contributions to the top and bottom line. I just came back from Italy last week where we took delivery of Norwegian Prima, the first of six next-generation Norwegian Cruise Line ships, bringing our total fleet to 29 vessels with approximately 62,000 berths. We are excited to celebrate her christening ceremony later this month in Reykjavik, Iceland, and I encourage all of you to experience her firsthand as she is truly incredible. In fact, our shipbuilding partner has said Prima is their most demanding and most complex vessel they have ever built. The Prima class marks an evolution for Norwegian Cruise Line as every aspect of the design and guest experience has been elevated. Last week, we also celebrated the float-out of Norwegian Viva, the second vessel in this groundbreaking new class, which is expected to debut in summer of 2023. The Prima class will further differentiate Norwegian Cruise Line compared to our cruise peers and reinforce the positioning of our brands as the leaders in providing upscale experiences in each of the major cruise categories. In addition to the new Norwegian vessels, we are also gearing up for the delivery of Oceania Vista in spring of '23 and Regent Seven Seas Grandeur later that year. These new additions will further add to our dominance in the flourishing upper premium and luxury segments. I often get asked whether we are confident that we can profitably absorb the capacity growth we are expecting for the next few years. And the answer is a resounding yes. Given our relatively small base of only 29 ships, we still have many unserved and underserved markets around the world. We are continually innovating and enhancing our product offerings through our new builds and refurbishment upgrades to our existing fleet and making enhancements to our bundle offering to provide even more value and attract even more high-paying guests to our brands. I can't emphasize this enough. So, I will show you once again how we've proven our ability over the years to absorb capacity and deliver outsized revenue, adjusted EBITDA, and operating cash flow contributions relative to our capacity growth, and we fully expect to continue this trend. Turning now to our booking, demand, and pricing trends. We continue to see sequential improvement as we remain disciplined and focused on laying the foundation for a record 2023 and beyond. In the second quarter, our load factor was approximately 65%, in line with our expectations and a significant improvement versus the prior quarter of 48%. We expect load factors to increase to the low 80% range in the third quarter, with July already coming in at 85%. This steady sequential ramp is expected to continue until we reach historical 100%-plus levels beginning for the second quarter of 2023. In terms of pricing, our net per diem growth in the first half of 2022 over the first half of 2019 pricing was significant at 18%. These results are consistent with our strategy of holding firm on our go-to-market strategy of market-to-fill versus discount-to-fill and maintaining pricing integrity by emphasizing high value over low price. We absolutely believe this is the optimal path to continually deliver high-quality and sustainable profitability once we return to a fully normalized environment post pandemic. As expected, our second half 2022 book position remains below an extraordinarily strong 2019, driven primarily by the lasting impacts of Omicron and the Russia-Ukraine conflict. That said, pricing for the second half of 2022 continues to be higher when compared to 2019, even when taking into consideration the dilutive effect of future cruise credits and the impact of premium-priced Baltic itineraries from the Ukraine conflict. As we move beyond this transition year and focus on 2023, our full year book position is in line with 2019's record performance. And our booking pace in recent weeks has reached the level needed to consistently sail full. Pricing is also significantly higher for 2023. And while we typically would not provide this level of detail, our performance in this area is so extraordinary that I just had to share it with you this one time. Pricing for 2023 is currently running in excess of 20% above 2019's record pricing and is higher by double digits across all three brands. And while pricing will naturally tend to level off as we continue to build our book for 2023, it is nevertheless a testament that our steadfast strategy of focusing on long-term price increases over short-term load factors is indeed working as intended. Another proof point that I will provide is ticket sales already on the books for 2023 sailings. When compared to the same time in 2018 for 2019 sailings and taking into account capacity growth of approximately 20%, 2023 sales are a whopping 40% higher. In addition, the quality and stickiness of our ticket sales for '23 sailings is also expected to improve, as a significantly higher proportion of bookings, four times the level seen in 2019, include air travel booked through our own air programs, which in the past has proven to be indeed stickier. Another positive indicator demonstrating strong consumer demand is our advance ticket sales build. Our advance ticket sales balance stood at $2.5 billion as of the end of the second quarter, up over $300 million versus the prior quarter, despite approximately $1 billion of revenue recognized. This represents an all-time record high ATS balance for the Company. On a gross basis, advance ticket sales build increased by over 40% to $1.5 billion in the quarter, the highest level in three years. In addition, approximately $1.5 billion of the total ATS balance at quarter-end is associated with bookings that are already within the final payment window, and therefore, subject to cancellation penalties. The bottom line is that our entire team is more energized now than ever before. We are striving to reach our goal of record net yields and record adjusted EBITDA in 2023, welcoming eight additional ships to our fleet through 2027 after Prima this year and leveraging all opportunities to maximize value for our stakeholders. This will not be an easy feat, especially as we continue to navigate an uncertain macroeconomic environment, but an increasingly encouraging public health and regulatory environment. We are prepared for all scenarios. And I'm confident that we are taking the right steps today to set us up for future success. 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?

Thank you, Frank, and good morning, everyone. Before I begin my commentary on our financial results and outlook, I would be remiss if I did not take a moment to thank our team of nearly 35,000 team members across the globe for their continued dedication, passion, and commitment to excellence. Their collective efforts are propelling us forward as we continue to execute on our operational and financial recovery plan. We have made tremendous progress to date, which has led to the significant financial inflection point of generating positive operating cash flow in the quarter for the first time since the start of the pandemic. Turning to our second quarter results. During the quarter, we returned our full fleet back to service with the relaunch of Norwegian Spirit in early May. Our load factor for the quarter was 65%, in line with our prior guidance, which reflects our methodical approach to ramping up occupancy while maximizing pricing. Numerous sailings across key regions and markets achieved over 90% and 100% occupancy, with particular strength in recent months in the Caribbean and Bermuda markets. We continue to expect sequential quarterly increases in occupancies, with load factors returning to historical levels for the second quarter of 2023. Strong ticket pricing and onboard revenue generation drove total revenue per passenger cruise day in the quarter up approximately 20% versus 2019. As we look to the third quarter, we expect this metric to increase by high single digits compared to 2019 levels. This is impressive considering the impact in 2022 of the Russia-Ukraine conflict on premium-priced European, particularly Baltic, itineraries, which are heavily weighted to the third quarter. As a reminder, three ships were redeployed entirely as a result of the conflict, including one for each brand, and a total of 60 sailings across our fleet were canceled or modified. In addition, crew-related capacity constraints on the high-yielding Pride of America are a further headwind to overcome. Turning to costs. Like every company across the globe, we continue to experience pressure from inflation and global supply chain constraints. Fuel prices remain a headwind, but our hedge program provides partial protection, and more recently, we have also seen prices beginning to moderate. We have opportunistically added to our hedge position during the quarter and are now approximately 40% hedged for the remainder of '22 and approximately 30% for 2023. We are also experiencing pressure on food costs, although we have recently seen green shoots of prices moderating for certain commodities, such as beef and pork. In addition, we are starting to see shipping and logistical costs moderating from their highs experienced in 2021 and early '22. Our supply chain and logistics teams continue to work around the clock to find measures to minimize this impact. Lastly, in the first half of 2022, we continued to incur additional costs associated with our COVID-19 health and safety protocols, primarily related to testing. As the industry continues to align its protocols with the broader travel and leisure space, we expect these costs to ramp down in the future. Taken together, we expect adjusted net cruise cost, excluding fuel per capacity day, to decrease approximately 10% in the second half of 2022 compared to the first half. Guided by our core market-to-fill strategy, we will continue to make disciplined demand-generating investments in marketing in the near term, with a focus on laying the foundation for a strong 2023. Looking ahead, while it is still too early to provide concrete guidance, we expect net cruise costs, excluding fuel per capacity day in 2023 to exceed 2019 levels. Aside from the fact of three or four years of both normal and now hyperinflation, remember that we have the youngest fleet of the major operators. We have not disposed of any ships during the pandemic and therefore, will not receive the unit cost benefit from the removal of less efficient capacity. To help with modeling, we have also provided additional guidance on key metrics like capacity days, revenue expectations, depreciation and amortization, interest expense, fuel consumption, and capital expenditures, all of which can be found on our Investor Relations website. Shifting to our financial performance. Slide 14 lays out the key financial milestones already achieved as well as our expectations for the upcoming quarters. As previously stated, we generated approximately $260 million of operating cash flow for the second quarter after first turning positive for the month of March. Given that just over a year ago we were just beginning the herculean task of returning our ships to service after 500 days on the sidelines, this is no small accomplishment. The next milestone we are aiming to achieve is slightly positive adjusted EBITDA for the second half of 2022, leading to positive adjusted free cash flow for the fourth quarter. All of these stepping stones are consistent with our return to service plan and position us extremely well for 2023, where a return to a more normal operating environment, along with our focus on pricing discipline, is expected to lead to record net yields and record adjusted EBITDA for the full year. Moving to liquidity and our balance sheet. Our overall liquidity position remains strong, totaling approximately $2.9 billion at quarter-end, which consisted of cash of approximately $1.9 billion and an undrawn $1 billion commitment. This existing $1 billion commitment, originally entered into in November 2021, was recently extended through March 2023. We have been clear that we view this facility as a backstop, and we currently do not intend to draw on it. However, given the volatility in the capital markets in recent months, we felt extending the facility was the prudent choice to enhance our financial flexibility. Based on our current projections and trajectory, we continue to believe we will be able to meet our liquidity needs organically. Slide 15 demonstrates the result of the proactive and deliberate measures we undertook throughout the pandemic to optimize our debt maturity profile. We resumed debt amortization payments in April, which were previously deferred during the pandemic. For the remainder of 2022 and for full year 2023, we have approximately $500 million and $900 million of debt payments coming due, respectively. The vast majority of which is related to our export credit agency-backed ship financing. While on the surface, 2024 maturities appear high, approximately $2.4 billion is related to our operating credit facility, consisting of our revolver and Term Loan A, both of which we expect to refinance well prior to maturity. This positions us well as we continue to ramp up and return to a more normal operating environment. After taking delivery of Prima less than two weeks ago, with fixed-rate financing that was secured back in 2017, our debt portfolio is approximately 75% fixed rate today. This fixed ratio is expected to increase to approximately 80% by year-end 2023, with the addition of three new builds next year, positioning us well in a rising rate environment. The weighted average cost of debt for the portfolio is approximately 5%. We took out, as a reminder, all of the high-cost double-digit debt we incurred during the pandemic at an opportune time prior to the current dislocation we are seeing in the markets by completing balance sheet optimization transactions in November '21 and February 2022. Turning to slide 16. As I've said this before and will repeat it today, we believe the transformational growth we have in the pipeline over the next few years, representing 50% growth in capacity by 2027 as compared to 2019, is an underappreciated component of our company's investment thesis. Our new ships have very favorable and efficient financing structures, resulting in an expected and immediate boost to profitability. For all new builds on order, our financing is committed at fixed rates averaging approximately 2.5% over the portfolio. To help you better understand the mechanics of the cash inflows and outflows associated with the new ship, slide 17 lays out an illustrative scenario demonstrating the typical timeline. In general, approximately 20% of the ship's cost is due in four installments tied to various milestones preconstruction beginning at the contract signing. Typically, 80% of the cost is then due upon taking delivery of the ship. However, while this looks like a large capital expenditure outlay in the financial statements, we also receive very efficient export credit agency-backed financing at the same time. This ECA-backed financing covers approximately 80% of the ship cost, which, as I mentioned earlier, is committed prior to contract signing and at extremely attractive rates. In certain cases, we also structure predelivery financing in order to better match the timing of cash flows. Amortization payments on this deck begin six months after the delivery of each vessel and continue over 12 years. An often overlooked but incredibly important facet in the cash flow mechanics of a new build timeline is that well prior to the delivery of a vessel, we are already receiving significant cash inflows in the form of advanced ticket sales and onboard presales. Given that final payments from our guests are typically due 120 days prior to a sailing, this is when the cash engine begins to come to life. As a rough estimate, we typically receive in the range of $100 million to $150 million of cash inflow from future bookings prior to a vessel's first revenue sailing, resulting in a cash infusion into the business that continues to build over time as final payments for future voyages also become due. So, while we often hear concerns surrounding the industry's capacity growth, we welcome and are excited for the new capacity we have coming online. We have a high degree of visibility into the supply chain and supply pipeline for the industry, with only four major shipyards globally who can build cruise ships of scale. This, coupled with the incredibly efficient cost and financing structure of the new builds, are a unique differentiator for us and the industry at large. So, in summary, I am pleased with the progress we have made so far, but more importantly, how we have positioned our company for the future. While there continue to be challenges facing our business and we are keeping a close eye on how the macroeconomic environment evolves, we also have significant tailwinds, including a continued post-pandemic return to normalcy and the industry-leading capacity growth that I just discussed, all of which bode well for our future prospects. With that, I'll turn it back over to Frank for closing comments.

Thank you, Mark. And before we wrap up our prepared remarks, I'd like to provide an update on our global sustainability program, Sail & Sustain, which outlines key accomplishments and milestones. Since we last spoke, we published our second annual comprehensive ESG report and SASB-aligned disclosure on World Oceans Day in June. The report highlights our progress and commitments on our top ESG priorities. As we strive to provide critical transparency to our stakeholders this year, we focused on expanding and improving the data disclosed in our report, including expanding Scope 3 greenhouse gas emissions reporting, providing climate risk and resiliency data through our TCFD assessment, and strengthening human capital disclosure, including with data related to diversity as well as training and development. We also increased the scope of our third-party assurance to include many of these new data points. Earlier this year, we also announced that we are pursuing net-zero greenhouse gas emissions by 2050. This ambition spans our entire operation and value chain as we aim to bring all of our key partners along with us on this important journey. As we have said previously, a key driver to achieve our net zero ambition is the development of alternative fuels along with the associated critical infrastructure at destinations globally to support the creation, distribution, storage, and usage of these fuels. Methanol is one of the fuels we are actively exploring, and we recently joined the Methanol Institute to collaborate, share, and adapt solutions alongside the institute's members of methanol producers, distributors, and technology providers. 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. And before I turn the call over to Q&A, I'd like to leave you with some key takeaways. First, we continue to execute on our return-to-service plan and are achieving key milestones as a return-to-normalcy. The improving public health and regulatory environment, including our recent relaxation of testing and vaccination protocols, are a tailwind. And our entire team is focused on setting the stage for long-term sustainable profitability in '23 and beyond. Second, we are seeing a strong consumer with a healthy desire to spend on travel and experiences, particularly in the upscale demographics our brands target. This strength is demonstrated by our improving booking trends, robust pricing, and strong onboard revenue generation. Lastly, we are excited for the transformational and highly profitable growth we have in store over the next five years as we welcome eight additional ships to our fleet after Norwegian Prima. We've covered a lot today, so I'll conclude our commentary here and open up the call for your questions.

You mentioned some positive insights regarding 2023. Frank, you indicated for the first time that sales are currently pacing 40% higher than historically at this time. I'm trying to understand how this relates to the 2023 EBITDA, which you mentioned will be a record. Does this expectation rely on pricing continuing to increase, or is it mainly due to a reduction in cruise costs from the second half pace that you have established?

Hi, Dan, and welcome to the cruise industry. I believe everything looks optimistic. We anticipate that occupancy levels will return to normal, beginning in the second quarter of '23. We project that pricing in '23 will exceed 2019 levels. Our capacity is increasing, particularly with more high-priced options. In 2019, we received the Encore in the last weeks of the year and had no contributions from the Regent Splendor, which was delivered in February 2020. Both vessels will contribute fully in '23, along with a full year of Prima, approximately seven months of Vista, six months of Viva, and a bit of Grandeur at year-end. Our new ship deliveries are impressive and high-priced. Currently, trends are improving every day, and I believe our announcement yesterday about easing protocols will provide a significant boost. We noticed immediate positive impacts yesterday, with an acceleration throughout the day. Today, we're experiencing exceptional performance compared to a typical Tuesday. The only uncertainty we face is overall inflation. However, if we trust the experts and observe, as Mark noted in his prepared remarks, there are emerging signs of costs reducing, including fuel and food prices, which is promising. Today, we report record loads, record pricing, and record capacity days that we're managing easily. Therefore, we are confident that we will achieve a record net yield in '23, leading to record EBITDA.

And Dan, just to highlight, further to what Frank's saying, it's not only the top line growth and the profitability of the new ships we have coming online. We are focused on costs. Obviously, 2022 has been a very lumpy year. It will continue to be a bit lumpy for the second half given where our load factors are expected to be. You have to remember that a lot of our costs are fixed in nature. So when you look at it on a unit basis, yes, they are a little bit higher in the second half in 2022. But again, we expect normalization of that as we go into 2023. And we've stated very clearly, we are spending dollars on demand-generating initiatives, i.e., marketing, building a very strong 2023 book across the board. So we're making the investment today. We're not chasing the incremental load factor for next quarter. We are focused on a very profitable, high-yielding, lower-cost 2023, which we believe will result in a record EBITDA year next year.

Got it. And then, just for my follow-up. For the third quarter, I know you guys have talked about pricing tracking up high single digits. Any additional color, or if you could unpack that, just given, obviously, Europe, I would assume, is a headwind this year. So to the extent you've seen strength in other regions, just kind of a lay of the land would be helpful.

Yes. Look, Alaska is very, very strong. Our Caribbean product is also selling well. We took a large vessel out of the Baltic very last minute and repositioned to Port Everglades, which she's doing very, very well. Bermuda is doing great. Europe isn't doing all that bad considering what's going on over there with the Ukraine conflict. We are leaning more on European store business, which typically underperforms in terms of both ticket price and onboard revenue. And still, overall, our yields are better in Q3. So, I think we're going through, like Mark mentioned, some lumpiness. We've had protocol situations that are improving. The elimination of the testing requirement to get back into the country was huge. Americans simply didn't want to take the chance to be stuck in Europe should they contract COVID. That's had an impact over the short and medium term. Remember, one of the wonderful things about the cruise industry is you have great visibility because of the booking curve; people book way in advance. So, when these things occur, it impacts the short term, which is why we simply don't want to chase short-term occupancy at the expense of long-term pricing. Pricing has a long tail. The occupancy, the load factor of any given sailing, once that sailing is finished, it’s finished. It has no impact on the long run or no cumulative impact. But pricing does. So for us, it's incredibly important, especially since we target that high-quality, high-paying consumer to maintain pricing discipline, as you can see, across the board to be up in pricing, 20% for 2023 is truly extraordinary.

So maybe just on the back of that, and apologies for the near-term question. I feel like I'm splitting hairs a little bit here. But when I look in your deck now versus last quarter, it looks like the back half in terms of when you sort of were looking for positive adjusted EBITDA may have down shifted a little bit. And I think maybe you just covered it, Frank, in talking about not giving up occupancy for price. But I want to know if there was anything else in there that you just weren't really expecting three months ago that maybe impacted that.

No, I don't think so. It's just the cumulative sustained lasting issues related to Omicron. It's only been in the last weeks that, number one, the Biden Administration took down the requirement to test negative to get back into the U.S., and number two, the CDC dropping the cruise guidelines, which occurred about three weeks ago, and just yesterday, us announcing the relaxation of our own protocols. I think those three items, each one of them had a positive impact on bookings. And as we said in our prepared remarks, each one of those events triggered an improvement in booking volumes. But remember, the booking curve on average is about seven months out. So when you say that all this happened around midyear, whether it was late June, mid-July, now early August, and you look seven months into the future, that's where you get to 2023. We could, we could like others, chase short-term occupancy and sell cruises for crazy prices, but we don't want to do that. We never have done that. That is not our strategy. I remind you what happened back in '08 and '09, when certain cruise companies did drop their prices to ridiculous levels. It took them, in some cases, 10-plus years to reach those pre-great recession yields. I'm not willing to mortgage the company for 10-plus years in order to window dress the next quarter or so. I just won't do it. We're here for the long term. We're managing the business on a long-term basis. COVID had a major impact. We were shut down for 18 months or so, and the recovery is not instant mashed potatoes. If you want instant mashed potatoes, you have to go elsewhere because we're here for the long run. And our pricing strategy, how disciplined it is, is proof of that. To be able to have 40% more ticket sales on the books right now compared to 2018 despite a 20% increase in capacity is formidable. And I've been doing this for 30 years. I've managed cruise companies in good times and in bad times, and I am convinced beyond a shadow of a doubt that you don't sacrifice the long-term pricing power of your brand in order to achieve short-term load factor gains.

Thanks for that, Frank. We share your dislike for instant mashed potatoes. I have a quick modeling question regarding gross revenue guidance for the third quarter. Could you explain that in relation to net revenue per PCD? I noticed that the commission and transportation costs in the second quarter were somewhat elevated. I'm curious if this was due to higher flight costs being passed on, and I'd appreciate if you could clarify that for us.

Yes. Hi Brandt. Good morning. It's Mark. So yes, when you compare our gross in Q2 versus Q1, you will see, gross to net, you will see a slightly elevated cost structure. This is going to be representative of more of the ongoing cost structure. I think Q1, given all the dynamics where we had many sailings and many cancellations, we had quite a bit of ancillary revenue coming through in the gross line, which may have bumped up the next, so to speak. But as we stated in our prepared remarks, we have now embarked on our air program that we've been working on for many years. So, you are starting to see the costs of that come through. And so, I think you're going to see these are going to be the more norm level, so to speak. But it's coming through in both the gross. And obviously, when you look at the net, and again, considering the fact that in Q3, we were heavily weighted, particularly in Europe, and we're still having very strong pricing, I think it's a pretty impressive result.

One of the questions we've received this morning, which Frank has touched on, is about the change in the 2023 book position compared to what it was in May. While pricing has improved quite a bit, the level of bookings may have slowed down somewhat. This likely relates to your go-to-market strategy, which has been discussed extensively. Moving forward, should we expect pricing to continue to rise, but also be prepared for more fluctuations in the book position than we have seen in the past? Additionally, could you provide some insight into where you expect to end the calendar year for 2023 bookings compared to historical figures?

Good morning, Steve, there was a lot there in your question, so I'll try to remember it all and remind me if I miss something. You can't be ahead significantly forever, because at some point, the timelines converge. So, we're very, very pleased where we are today for 2023 in terms of cumulative book position. As the calendar goes forward and we get closer to '23, I would expect us to stay more or less where we are today. Because if you recall, back in 2018, I think it was this very call in early August, where I said we had now reached the optimal balance between advanced bookings and pricing. If you book too fast, you leave money on the table. If you book too slow, you'll pay the price later by having to discount to fill, and we don't want to go there. So, we're very happy with the pace that we're at. We don't want to accelerate it much more than we have. We're instead focusing on price. We think that the tailwinds that I described so far this morning are going to help. But we don't want to be ahead any more than we are today because we reached that point in '18 where we thought we were optimum, and we want to maintain it. It all had to do with the booking curve and different itineraries. So, I'm pleased with where we are today. Not looking to push load factors to accelerate load factors, although, again, I do believe that two or three tailwinds that we discussed this morning are going to have a natural tailwind to bookings. Did I miss one of your questions, Steve?

No, that covers it all, Frank. The second question is likely for Mark and concerns liquidity, which I know you're probably tired of discussing. Mark, I understand your comments from your prepared remarks regarding your competitors claiming their liquidity profiles were fine, only to later raise equity or pursue some debt deal. I want to clarify that we shouldn't expect any type of dilutive raise in the near term since, as you mentioned, your cash flows should be able to cover most of your near-term maturities.

Hi, Steve. Yes. Based on everything we see today, I want to reiterate that we believe we can meet all of our liquidity needs organically. What you've observed from some competitors recently was primarily related to refinancing near-term maturities. Specifically, I mentioned in my prepared remarks that this was something we focused on during the pandemic. If you look at our maturity profile and set aside our normal operating facilities, our revolver, and our term loan A, which we plan to amend and extend by the end of this year, we have a very clear path during our recovery. Moreover, we still have debt capacity available should we need to access the markets. We have no intention of raising liquidity through equity, as we’ve already diluted our shareholders enough during the pandemic. We're confident in our current position and will keep monitoring the situation. More importantly, we have a relatively clean path ahead, and we feel optimistic today.

With your pricing strategy, I completely understand the rationale behind it, but I'm curious about how much the current staffing market affects the decision to potentially give up some occupancy while maintaining pricing. I relate this to recent news about Diamond Princess canceling some itineraries due to staffing shortages. So, how significant are staffing issues in influencing your strategy? Additionally, could you provide an update on the overall staffing environment for your team?

Yes. Patrick, this is Frank. Look, the internationally sourced crew that makes up the abundance of our staffing onboard is pretty back to normal. Quite frankly, I was surprised to see what you mentioned happen to another company, but we're not immune to it. We have challenges in that area that are not keeping us from filling the vessels, except for one, and that's Pride of America, which as you know is the only American flag vessel that requires us to have 75% of our crew as American citizens. And we are having issues sourcing labor and crew for that vessel. And that vessel, which unfortunately is also our highest yielding vessel with the Norwegian brand, we've purposely kept the load factor since she's returned to service at 40%. So, would our overall load factors be higher in Q3 and Q4? Yes. And pricing would be higher. But we're purposely keeping it at that lower level because of labor shortages. We believe we have a road where, by year-end, we should see that vessel return to full occupancy. Certainly, the demand is there. It's disheartening every time we have to cancel and tell people who are booked and expect to go, and we have to keep that load factor in the 40% range. But that's around the edges. And like I said, we expect to be back at 100% occupancy on that vessel by year-end.

I wanted to come at the cost perspective from maybe a different angle. Obviously, a lot of puts and takes here, with restart costs, maybe some pull forward of marketing, and you have elevated fuel prices to deal with as well. You go back pre-COVID, the business was pretty well dialed in, with EBITDA margins in the low 30s. And as you're thinking about the business longer term and planning for years ahead, and maybe you just assume that fuel prices at some point get back to what I'll call more normal range, is there any reason to think that margins don't get back to the neighborhood that they were before? I guess, another way of asking it is, has something changed in the relationship between operating costs and the pricing that you're seeing out in the market today?

Good morning, Vince. To answer your question directly, no. We are experiencing some immediate challenges due to cost pressures that many businesses are facing. However, we are confident in our long-term operating leverage. A straightforward way to illustrate this is that for every point of yield, we typically see a two-fold return in terms of monetary value. We believe this remains valid as we look to 2023. It's still early to provide specific guidance on this. If we consider 2022, we need to normalize the cost structure while acknowledging that we are currently bearing full costs despite not having the complete passenger capacity. This is intentional on our part. The metrics may appear inconsistent, but as we look forward to 2023 and beyond, we see our operating leverage remaining strong, excluding fuel costs, which we believe we've effectively managed through our hedge program. There is a clear, achievable path to return to our historical margins, but we need to maintain consistent operations and achieve historical load factors, which we anticipate for the second quarter of 2023. I believe you'll start to notice a return to normalcy quite soon.

That's really helpful. And maybe separately, on the bookings commentary, it sounded really encouraging with sequential improvement, a record day yesterday, a strong morning, and just thinking about the occupancy guide for the third quarter. And I guess less short-term focus, but maybe more of an update on where the booking curve is at. Can you help us understand where close-in bookings are versus where they are historically and where the booking curve is at from a length perspective?

There's a lot there as well, Vince. Look, historically, the booking curve at the age level, knowing that each brand has slightly different nuances, it's about 7 months. And today, it's slightly more elongated than that, I would say, closer to 9 months, primarily because of our focus on 2023 bookings versus 2022. If you gave me a choice of selling a cabin or a booking for a '22 departure versus a '23 departure, I'll take a '23 departure. So, our marketing is all geared towards 2023. We'll take '22 bookings, of course. But we're not pushing it. And certainly, we're not discounting to attract that kind of business. We believe investors are focused on '23 and beyond and not necessarily '22. So for us, '22 is a transition year. We're very pleased that we got the entire fleet operating. We're very pleased we took delivery of Prima. We're very pleased that we've now turned cash positive. But in terms of pedal to the metal focus, getting back to normal on margin, on yields, on EBITDA, on profitability, it's all about 2023 and beyond.

Most of my questions have already been answered. I have one regarding your maturing debts in the next 18 months, which seem to be related to ECA. Could you discuss the possibility of those being extended or postponed without needing to go to the capital markets for borrowing? Thank you.

Our ECA and all of our lenders have been exceptional throughout the pandemic and have shown great flexibility. However, they are commercial organizations. While we plan to work closely with them, we believe we can fulfill all our liquidity needs through our efforts. We have 20% more capacity coming online next year, which will drive significant growth. Looking ahead, if we encounter any immediate challenges, we will consider all available options. I don't want to single out the ECAs or any other lender, but we will evaluate every possibility. Historically, we have seen strong support to ensure the industry's success. However, we don't believe we need to take that path, nor does the industry. The industry is on the path to recovery. Remember where we were a year ago; we were just beginning operations, and now we are generating positive cash flow and positive EBITDA. The progress has begun, and we just need to continue nurturing it. We feel confident, but we will explore all options if necessary.

Thank you for that information. I have a follow-up question for clarification. You mentioned that onboard revenue has increased by 30% compared to the second quarter of 2019, which is impressive. Can you explain how this relates to bundling? Is there a higher percentage of bundling now compared to Q2 2019, or what adjustments account for this increase? Is the 30% rise based solely on what customers spend once they are onboard, or does it include ticket price allocations for accounting purposes? Thank you.

It's clear from what we're observing in today's consumers and their spending on board. I want to remind everyone that we've been bundling our offerings since late 2016 or 2017, which was a first for the industry. Therefore, our figures on a comparable basis are fairly straightforward. There are always some differences between the two categories, but we're not comparing apples and oranges between our 2022 results and those from 2019. As we've mentioned, we've increased prices across all our on-board offerings, and consumers are definitely spending. We've become more effective at pre-marketing our products, generating a sense of urgency before guests board. Additionally, consumers who are more inclined to make presales tend to spend significantly more, about 30% or 40% more once they are on board. It's a combination of these factors. Overall, the numbers are strong, and we're seeing a robust consumer today who is spending current dollars. We believe this is a positive indicator for both ourselves and the industry.

I guess, my question primarily is around sourcing strategy and maybe how you guys have altered that given the weakness that we've been hearing in European consumers and how you're using that as a competitive advantage. And then just any details you have on marketing plans ahead of the wave season given the strong demand that you're seeing? Thanks.

Yes. We're not going to share with you our marketing plans for wave. I do believe that this coming Q1 will be the first true wave since 2020, which was cut short by the beginning of the pandemic. In terms of sourcing, look, we prefer an American consumer onboard all our vessels regardless of where the itinerary is operating. Americans book earlier, book a higher cabin category, and as Mark mentioned, spend more money onboard. And that is still our basic go-to-market strategy. But for European sailings, partly because of the hesitancy by many Americans to travel to Europe until the mandate to test negative to come back to the U.S. is lifted, we leaned a little heavier on our European sourcing. Our European sales and marketing team did a fantastic job of accelerating demand from European marketplaces. But pricing suffered a bit. And in spite of that, overall pricing is still suffering a bit, we still posted higher pricing in Q2, and expect higher pricing in Q3 going forward. So, I think overall, the European consumer has improved a bit or we've done a better job of sourcing those high-quality consumers out of Europe like we do in the States. But make no mistake, we rely on the American consumer perhaps more so than others because at the end of the day, we think they're the most resilient, certainly the wealthiest, understand our product best, and we'll continue to do that. Okay. Well, as always, thank you so much for your time this morning and for your support. The entire team here at Norwegian Cruise Line Holdings will be available today to answer any of your questions. Have a great day, and stay safe, everyone.