Norwegian Cruise Line Holdings Ltd. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, and welcome to the Norwegian Cruise Line Holdings First Quarter 2024 Earnings Conference Call. My name is Joe, and I will be your operator. [Operator Instructions] As a remainder to all participants, this conference call is being recorded. I would now like to turn the conference over to your host, Sarah Inman. Ms. Inman, please proceed.
Thank you, Joe, and good morning, everyone. Thanks for joining us for our first quarter 2024 earnings and business update call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and CFO. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltd.com/investors. Throughout the call, we will refer to a slide presentation that can be found on our Investor Relations website.
Thank you, Sarah, and good morning, everyone. Thank you all for joining us today for our first quarter 2024 earnings call. It's such an exciting time for our company with wonderful new products available across all 3 of our award-winning brands, strong demand and some recent noteworthy announcements that have solidified our trajectory for years to come.
Thank you, Harry, and good morning, everyone. I'm a little under the weather today, so if my voice cracks, I apologize in advance. My commentary today will focus on our strong first quarter 2024 financial results, our improved full year 2024 guidance and our increasingly solid financial position. Unless otherwise noted, my commentary on 2024 net yield and adjusted net cruise cost, excluding fuel per capacity day metrics are on a constant currency basis and comparisons are to the same period in 2023.
First, capitalizing on the strong demand in the market, and converting this into quality and sustainable net yield growth; and second, continued focus on net cruise costs and rightsizing our cost base.
Well, thank you, Mark, and I wish you a speed of recovery. Moving forward, our entire team will be focused on our most important work, as shown on Slide 16. First, we will continue to focus on execution, capitalizing on the strong demand from our target upskill demographics to drive net yield while delivering experiences that guests value. .
[Operator Instructions] And our first question comes from the line of Dan Politzer with Wells Fargo.
I was hoping we could dive in a little bit more on kind of the pricing and set up for the remainder of the year. I mean it seems certainly the first quarter was very strong. As we think about the tweaks to your capacity allocation for the rest of 2024 and certainly similar Europe and at least in the second quarter, but kind of falling off in the back half. How should we think about the relationship between that capacity allocation relative to pricing?
So Dan, and thanks for joining us today. Listen, I wouldn't say that there are any areas that are outsized or undersized. We're seeing good pricing yield strength across all 3 of our brands, across all the major areas that we deploy our ships. We're doing well in Europe, we're doing well in Alaska, Bermuda, Hawaii, of course, the Caribbean. I think the only place where we've talked before, where we had a little bit of a challenge is the voyages in Q2 and Q4 that had previously visited the Red Sea and had to redeploy to other itineraries.
Got it. And then just pivoting to the cost side. Can you just remind us a couple of those pockets where you really seem to be cutting the fat, right? I think food is an area where you've seen some success. Also I think on marketing, you've talked about the expenses you've cut there. So as we think about the kind of the buckets across the cost structure, where have you seen more success? And where is kind of the additional opportunity that you see looking ahead?
Dan, it's Mark. So first, I just want to clarify. I wouldn't classify it as cutting the fat, so to speak. That's probably a little bit too generous. We're really looking at how we can get much more efficient across the entire organization. As I mentioned in our -- in our prior earnings call, the first big piece of that was really reducing -- looking at our fuel and bunkering processes.
And Dan, I'll just add one more thing, specifically related to the food. I just want to emphasize we have in no way reduced the quality of food that we serve our guests. We still serve, especially on Oceania region, the best quality food that we can and in NCL very good quality food as well, where we have seen the efficiencies, if you will, are in things like buying direct as opposed to intermediaries and in logistics.
And our next question comes from the line of Vince Ciepiel with Cleveland Research.
I wanted to zoom in a little bit more on the second half. I think at one point, you guys had quantified the Red Sea impact. I think it was like 1 to 2 points for 2Q through 4Q. I think there was a view that third quarter might be the highest yield growth quarter of 2Q through 4Q because it had the least Red Sea impact. And I was just curious if you still expected that to be the case?
Vince, yes, you are correct. We still expect third quarter to be the highest yield growth quarter. And I will remind everybody that in Q4 of '23, if I recall correctly, we had pricing of growth of 15% and yield growth of 9%. So we are rolling over a very healthy Q4 of 2023. So that's not to be implied that Q4 of this year is not doing well, but it is just certainly rolling over a much higher comp, but we do expect third quarter to be the highest.
Great. And then a little bit bigger picture kind of strategy question. You and peers across the industry seem to be really investing in private islands and ramping efforts there, marketing leaning in. Just kind of curious what you're seeing out there that leads you to believe returns are there, that that's what the customer is looking for and how you kind of have -- went about making that decision?
Yes. So when we look at our 2 private islands we have today, Great Stirrup Cay in the Bahamas and Harvest Caye in Belize, those are our 2 highest-rated destinations. Now we really had a pier at Harvest Caye. So there were no issues in that area. But in GSC, Great Stirrup Cay, excuse me, the lack of a pier caused us to miss much more frequently than we would have liked.
Great. Looking forward to Investor Day.
And our next question comes from the line of Steven Wieczynski with Stifel.
So if we kind of stay on yields and if we think about breaking down your revised yield guidance for the remainder of the year, I mean, look, it's pretty clear that the demand remains extremely strong. So I guess it seems to us that maybe your revised yield guidance is somewhat conservative. And I guess the question is around how you're thinking about pricing versus onboard for the rest of the year.
I'll maybe take the second part of the question on onboard business ticket, and I'll let Mark comment on the first part. With the way that we package and presell our onboard items, I think the distinction between onboard and ticket is much less important than it is in the past. So I would just encourage you and the other analysts, the other listeners, to focus on the total revenue number because really the split is a little bit arbitrary.
Yes, Steve. So look, maybe as an example, look, we continue to see the consumer very, very healthy. We continue to see very strong trends across every revenue stream on the ship. So we remain very, very optimistic on that front. And maybe a way to frame it is, if you think about our prior guidance for the first quarter, we had -- we were already 2 months into the quarter when we had provided that guidance.
Okay. That's great. And then, Mark, if I'm looking at Slide 13, you guys are projecting just about a 34% EBITDA margin towards the end of this year. And I guess if we look a little bit further out, how should we think about the longer-term margin opportunity, especially as you think about where margins were prepandemic versus where they are now. Will the driver of kind of yield -- or excuse me, of margin improvement, just be more on the yield side of the equation?
Yes. So I think that's -- thank you for that last sentence because that was the answer I was going to provide you. Listen, we're super focused in this call talking about Q1 and guidance for Q2 in '24, which I think we've laid out. I think talking about more longer term, we'll have to wait the 19 more days until May 20 to talk about it.
Our next question comes from the line of Brandt Montour with Barclays.
Brandt?
We lost Brandt.
Brandt? Okay. Maybe we should move on to the next.
Yes. So we'll move on to next caller.
And our next question will come from the line of Conor Cunningham with Melius Research.
In your prepared remarks, or even in the press release, I think you mentioned that you're at a record book position over the next 12 months. I know you want to talk only about '24, but just curious on how '25 is shaping up? I assume pricing is up. Just any details around that would be helpful.
Thank you for that, Conor. So I'll just point out that the next 12 months would include Q1 of '25. So I think that gives you some guidance. And of course, that would be, at this point in the booking cycle the best booked quarter of 2025. So not really prepared to give guidance for the last 3 quarters, but I think that gives you some insights into how '25 is shaping up.
Okay. And then I appreciate the details on the dry-dock headwinds, and I realize that kind of lingers throughout '24, but does that roll off in '25? Or is it more of a '26? Just trying to understand, your exit rate on cost is obviously going to be really good in '24. So just curious on how we should think about dry-dock specifically next year and the year after?
Yes, Conor. So look, I think we've said this before, '24 is really a normalization year in terms of dry-docks as we took the advantage during the shutdown to dry-dock most of our ships. But if you look at the size of our fleet and the composition of our fleet, as you go forward, whether it's '24, '25, '26, you're going to see about the same level of dry-docks just given the size of our fleet. So it might go up a couple of points -- or no, I shouldn't say a couple of points. It might go up or down a few days, but there's not going to be any material step up or step down going forward as we get back into a more normalized cycle for the next few years.
Our next question comes from the line of Brandt Montour with Barclays.
Brandt?
Well, we'll try again on Brandt. Let's go to the next question.
Let's go to the next question, Joe.
And the next question will come from the line of Patrick Scholes with Truist Securities.
Great. My first question concerns commissions paid out to the trade. It looks like your ticket revenues were up 21% year-over-year, though commissions, transportation and others were up 6%. Can you give a little more color on why the -- what's driving the divergence in there? Is it increases in book direct or change in mix of new to crews that typically will book direct? More color, please? And then I'll have a follow-up question.
Yes. Thanks, Patrick. So, no, what we're seeing is not a reflection of changes in direct or significant changes in passenger mix. It's really more driven by the airline. You know that as a cruise line, we package air across all 3 of our brands. And as participation rate shifts from year-to-year -- and also, we're buying air a little bit better this year versus last year. The air component cost goes down. So it's a combination of slightly lower participation rate for air and us buying air a little bit more efficiently than we did last year. But our general direct versus trade, new to cruise has remained substantially the same year-over-year across the brands.
Okay. Interesting. And then you've talked about your book position up significantly, whatnot year-over-year. Can you give a little bit more granularity on percentage-wise. How much ahead you are for the rest of the year versus the same time last year? And then also how much ahead, in fact, if you are ahead for next year versus, say, the same time last year for the comparable period?
Yes, Patrick. Look, we won't give an exact percentage. What I can tell you is, if you refer to our prior remarks on our calls, generally speaking, we had said our sweet spot is somewhere in that 60% to 65% on a forward 12-month basis or at any given time, I should say. And so if you think of it from that reference, we could be up from there, but I won't give any specific percentages on that, other than the fact that we continue to see a very strong consumer, consumers who are willing to book further out and who are willing to pay higher prices. So I think all of that lends itself to a great environment to continue to capitalize on this demand.
Are you -- can you say for your -- without giving a percentage, can you say your '25 book position is ahead versus comparable where you were a year ago for this year?
Well, I think if you think about, as Harry said, our forward 12 months, which would include Q1, would imply that Q1 is ahead. But we won't comment on the rest of the year other than bookings are in line with our expectations where we believe they should be. So...
The only additional the color that I'll give is related to Europe, which is a large part of our deployment this year in Q2 and Q3, where because we've had the benefit of a full booking cycle, we're seeing more Americans on our European deployment this year, which tends to elongate the booking curve a little bit and also tends to deliver slightly higher yields as opposed to selling those cabins a little closer into locals in Europe.
Our next question comes from the line of Ben Chaiken with Mizuho.
Your comments on 2Q yields onboard forward booking trends are all very helpful. Just attacking this a little differently. Curious how you're thinking about 2Q yields on the net yield side. There are some headwinds and tailwinds. It'd be great if you could help us think about the different moving parts, specifically for 2Q, I guess I'm asking. So for example, those less Caribbean, but as you've suggested earlier, it sounds like the mix is not a factor. You've got Red Sea. Anything else just big picture?
Well, Ben, I think there is a step down from Q1, but that's purely as a result of the comparison in the same quarter of 2023. So as we said on our last call and this call, we are not, and I will repeat this, we are not seeing deceleration. I don't know how many more times I can say that across different calls and conferences. We are getting back to what we call a more normalized yield growth in terms of our business, which we have always said would be somewhere in the low to mid-single digits. And obviously, we continue to pursue much better than that.
Sure. The premise of the question was actually not a deceleration. It was that you've said that in the past. So I'm trying to understand the moving parts that might kind of help us explain the nuances, but that's helpful.
Yes. Ben, the moving parts in Q2 are really the Mid East and Red Sea for the most part, and that also impacts Q4 as well as Q4 having a significant rollover versus the same quarter in 2023.
Okay. And then as you think about Great Stirrup Cay, you announced the pier construction, which makes a lot of sense. Were you suggesting earlier in the call that you wait for the pier to be built and then wait a year or so to get kind of the demand picture under your belt before you start to invest in the island? Or is that not the correct interpretation?
I wouldn't interpret it that way. I'm not prepared here to discuss our full long-term plans for Great Stirrup Cay. We'll talk a little bit more about that in 3 weeks. I'm just -- my comment was meant to say that the pier was the gating item that before we committed and have a schedule for the pier, it would not have been prudent for us to make substantial additional investments to the island, which for the record, is already a great experience. But now that we have the pier, it allows us to have a slightly more long-term view towards that.
Our next question comes from the line of Lizzie Dove with Goldman Sachs.
To kind of belabor this net yield point, but I just want to understand the moving pieces in terms of the kind of quarterly cadence. Like as we think of your 2Q guidance of 4.3% growth and 3Q being higher. I would have thought that means quite a steep step down in 4Q, especially I would have thought you maybe get some occupancy recovery from the Hawaii comp last year. Anything you can say that can kind of help me think about that kind of quarterly cadence?
Lizzie, I think as we said, we believe in the back half of the year, third quarter will be the highest yielding quarter. Fourth quarter, there was -- if you think about fourth quarter 2023, yes, there was a small impact on occupancy as a result of Hawaii. But I think as we look at the comp rolling over, again, if I recall correctly, somewhere in the zone of 14% pricing growth and maybe 9% to 10% yield last year, that's a very quality comp to roll over.
Yes. I mean the only additional color I'll add, which Mark talked about in an earlier question and not this one is a slight headwind related to Red Sea cancellations in Q4, which would be a little bit more -- a little bit less, excuse me, than the headwind in Q2 because we had a little more time to have the replacement voyages on sale. And that's why it was so critical for us to get well ahead of this for 2025. So we've already canceled all of our voyages that have previously gone to [ Israel ] for 2025 and all the Red Sea crossings in the first half of '25 so that we wouldn't have the same headwind challenges to our 2025 growth.
Perfect. That's really helpful. And it feels like the very premium luxury market is more on focus, especially with the capital markets activity. Anything you can share there in terms of pricing on your more premium brands versus the Norwegian brands? And also any step you might take to protect share? Or is this competitor has some pretty aggressive supply growth targets?
So I'm trying to distill that question down into some thoughts in my mind. So obviously, we're excited to see new entrants into the market. We think anything that has -- that draws more focus, if you will, to this market and the public market and the excellent opportunity that cruising represents is positive for all of us.
Our next question comes from the line of Fred Wightman with Wolfe Research.
I just wanted to come back to the Red Sea impact for next year. Are you expecting to fully offset the yield impact from this year? Was that a comment -- is that a comment on costs? I just want to understand if it's yield dilutive from a -- if you do have to do repositionings and it's less desirable itineraries?
Fred, so we have announced all cancellations of our Red Sea and Mid East itineraries for 2025, with the exception, I believe we may have one sailing still on sale in the back half of '25 for the Oceania brand. Apart from that, we have canceled all those sailings. And the thinking there is, obviously, the earlier you reroute those and create better itineraries, the better sales cycle you have. So the -- certainly, the improved yield and economics that you can garner from that should improve.
Okay. That's fair. And then just trying to understand where there could potentially be some upside for yields throughout the year. It sounded like in response to an earlier question that you were saying the potential upside would come largely from onboard. I think that was in response to 2Q specifically. But just thinking about the back half of the year, especially in 4Q when that Caribbean exposure increases again? I mean you guys still feel like you have the ability to take price and grow yields from a ticket perspective later in the year, right?
Yes. So Fred, that's the job of our brands. We look at the booking curve, the consumer demand, and we do everything we can to raise price at any time that we can. I think as Mark mentioned, Q2 and most of Q3 is pretty big, given where we are in the booking curve. Is there potential in Q4? Absolutely, and we'll do everything that we can to optimize that potential.
And our next question comes from the line of Robin Farley with UBS.
I have 2 questions. One is, in your release, you showed that a percent change in net yield would add about $67 million to EBITDA. You raised by 1 point and raising EBITDA by $50 million. Maybe half of that looks like it's from higher fuel -- of the sort of kind of the -- like looking for that other $17 million that was not in your EBITDA raise. Maybe half of that was due to higher fuel. Is the other half just sort of conservatism and leaving a little powder dry, which is fine? Or is there another factor there that's not getting it down to the EBITDA line?
Yes. Thanks for your exacting calculations, Robin. Obviously, there's some slight rounding in there when you look at the yield and the sensitivity. So essentially, yes, we did carry over about 100 basis point increase. And I think if you look at my prepared remarks, most of that was -- some of that was partially offset by higher fuel and then higher interest expense for 2 reasons. Number one, the portion of our debt portfolio that is not fixed, which is about 5%, 6%, but then also commitment fees related to some of our newbuild announcements that went effective as well.
She asked about any color on inflation.
Yes, just the cost per berth or kind of getting a sense of the change in building costs at the yards, understanding that there will be inflation there, but just trying to get a ballpark for it. And the prior questions have been about the EBITDA. I fully understand the interest expense impact on the EPS. I was looking for the extra $10 million in EBITDA. But anything on the cost per birth?
Just to be really clear on the EBITDA side, we calculated the 1% raise that we had at just over $60 million. So it wasn't exactly a full point. It was more like 97 basis points or something like that. So the $60 million minus the fuels should get you to almost exactly the $50 million EBITDA range. So we apologize for that confusion between the $60 million and $67 million.
And our last question will come from the line of James Hardiman with Citi.
So just quickly I wanted to circle back to the cost conversation. Obviously, a lot of noise around dry-dock, pretty flattish, though ex the dry-dock step-up for the first half. Is that the assumption for the second half that ex the dry-dock movement that costs are going to be pretty flattish year-over-year. And if so, how long can that last, particularly as dry docks flatten out in 2025?
So the quick answer is yes. We believe that the cost will be essentially flat, excluding dry-dock, as you mentioned for the back half of the year. We're very proud of the efforts that the team are making, not really prepared to comment on '25 and beyond at this point.
James, all I would add to that is, again, we have talked about we have a laser focus on rightsizing and leveraging our scale. We continue to do that. This is a permanent activity for us, not a onetime exercise. So while obviously, it gets harder further down the stream you go, we are just relooking at every facet of our business, and we continue to believe that there's opportunity out there all without impacting the guest experience and actually delivering a better product than what we've had today.
Well, what a wonderful set of comments in the call. I share Mark's passion for continuing to improve our operating margins while delivering a fantastic guest experience. I want to thank all of you for your time today, and I really am looking forward to talking about our long-term targets and strategy when we meet on May 20. Thank you all very much.
Thank you. This concludes today's conference. You may now disconnect your lines at this time. Enjoy the rest of your day.