Norwegian Cruise Line - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to the Norwegian Cruise Line Holdings second quarter 2023 earnings conference call. My name is Maria, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions for the session will follow at that time. If anyone should require assistance during the conference, please press star and then 0 on your touchtone phone. As a reminder to all participants, this conference call is being recorded. I would now like to turn the conference over to your host, Jessica John, Vice President of Investor Relations, ESG, and Corporate Communications. Ms. John, please proceed.

Jessica John (VP)

Thank you, Maria, and good morning, everyone. Thank you for joining us for our second quarter 2023 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 Chief Financial Officer. As a reminder, this conference call is being simultaneously webcast on the company's investor relations website at www.nclhltd.com/investors. We will also make reference to a slide presentation during this call, which may also 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 2023 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 Harry Sommer. Harry?

Harry Sommer (President and CEO)

Well, thank you, Jessica. Good morning, everyone. Thank you all for joining us here today. Today marks exactly one month since I began my new role as President and CEO of Norwegian Cruise Line Holdings. I'm humbled and honored to have been trusted to lead this incredible company. I'm excited about the significant opportunities I see ahead. The responsibility I have to our vast network of stakeholders, including our 40,000 team members worldwide, our guests, our travel advisor partners, suppliers, lenders, shipyards, the over 700 communities we visit, and all of you in the investment community, is not something I take lightly. Rest assured, my leadership team, the board of directors, and I are committed to best positioning Norwegian Cruise Line Holdings for success.

My focus now is squarely on the future and how we can refine and enhance our strategy to optimize our existing fleet of high-quality assets, further differentiate our business model, build resiliency, advance our efforts to drive a positive impact on society and the environment, ultimately drive more value to our shareholders and broader stakeholders. With new leadership, not only in my seat, but at all three of our award-winning brands, most recently for our vessel operation function, there is a palpable feeling of reinvigoration and excitement about the future across the entire company. We are approaching every decision with fresh perspective and new energy, challenging the status quo at every level, encouraging our entire team to think outside of the box and come to the table with new ideas, however big or small.

Along with these changes, you can see for yourself on slide 5, that while many of the senior leaders are new to their roles, there is still continuity and extensive experience among all of the leaders, allowing for smooth transitions without skipping a beat. Our executive team has an average of over 20 years in the cruise industry, and nearly all have been with NCLH for a decade plus. I have the utmost confidence that this team is the right one to take the company to even greater heights. As we are fine-tuning our longer-term strategic vision and priorities, we are also focused on execution today, and slide 6 outlines my near-term priorities. First, we are focused on capitalizing on the healthy demand environment for cruise, which I will talk about in more detail a little later in my commentary.

At a high level, this means remaining within a booked position of approximately 60%-65% on a 12-month forward basis, while increasing pricing and maximizing onboard revenue generation. After years of experience, we believe this level to be the sweet spot based on our current deployment mix, and I am pleased to say we are comfortably in this range today. Our revenue management process is dynamic, and we carefully monitor on a granular level how each ship, itinerary, and voyage is tracking against its optimal booking curve and adjust marketing spend, promotional construct, and pricing as needed, depending on the market environment, to maximize each voyage's contribution to the bottom line. The next priority is right-sizing our cost base through our ongoing margin enhancement initiative.

Mark will dive into more detail on the great progress we've already made on this critical effort, but I want to emphasize that we have many additional opportunities in the pipeline to do even more, and we are not shying away from this challenge. The reality is, we are operating against a different backdrop today than we were in 2019, requiring an even keener focus on balancing the top line with a cost structure that supports our unique business model and allows us to accelerate our margin recovery and help build resilience to varied external and macroeconomic environments. We are undertaking this effort with a strategic and data-driven approach that allows us to identify additional opportunities for efficiencies, set, monitor, and maintain accountability against concrete KPIs, and increase agility to adapt quickly as market or consumer preferences evolve.

I'm pleased to report that we are already seeing a change in the core culture of the company at every level of the organization to emphasize efficiency, cost-mindfulness, and results without impacting the guest experience. We've built significant momentum in recent months with this initiative, and we look forward to demonstrating continued improvement in the coming quarters. This dovetails nicely into our next priority, which is to make strategic and intentional modifications to enhance our offerings and better align them to our guests' needs and wants. There's no question that investment in our product and service offerings are critical to keeping our brand value propositions intact. However, we are refocusing the business on making smart investments in areas that generate the highest returns and maximize guest satisfaction over the course of their entire cruise journey, starting from the time they book.

For example, we are deep in the development of a streamlined booking process at the Norwegian Cruise Line brand, which uses generative AI technology to personalize the experience for guests, while also simplifying and reducing the number of considerations required to book by orders of magnitude. This, along with several other initiatives underway, should translate to more satisfied guests who spend more on board and return to sail with us more frequently, resulting in a win-win of higher yields and stronger loyalty. Turning to the fourth priority on the list, the entire team is hard at work preparing for the delivery of Norwegian Viva on Thursday, as well as Regent Seven Seas Grandeur in November, which you can see on slide seven.

I just came back from Italy, where I visited the shipyards to check on their progress, and I left even more excited than I was previously to welcome these new additions to our already best-in-class fleet. Both are sister ships to existing vessels that have been elevated even further. We have a high degree of confidence that there will be an overwhelmingly positive reception to these ships from our guests and travel partners, which we are already seeing in their incredible advanced book position. I'm also pleased that both are on schedule and on time for delivery, despite supply chain and other challenges, a testament to our great working relationship we have developed with our partners at Fincantieri. In June, we announced that global music sensation and Latin music icon, Luis Fonsi, will serve as godfather to Norwegian Viva.

The announcement alone generated a reach of over 200 million globally, including new audiences in the targeted Spanish language demographic. The ship will be christened in Miami later this year, and homeported in San Juan, Puerto Rico, starting in December for a season of Caribbean itineraries. We also recently announced Seven Seas Grandeur's godmother, Sarah Fabergé, the great-granddaughter of Peter Carl Fabergé, the legendary artist, jeweler, and creative and entrepreneurial genius behind the world-renowned company that bears his name. This is a natural choice in celebration of Regent's partnership with Fabergé.

The disciplined addition of new builds is a key component to our strategy. We have said consistently in the past, we welcome new hardware introductions as they not only generate excitement and bring more attention and awareness to our brand, but they are expected to be meaningful drivers of the company's future earnings growth and margin expansion. As the smallest of the 3 large public cruise operators, we continue to believe that we have outsized opportunity to grow our footprint and meaningfully drive the bottom line. Our new build pipeline, which you can see on slide 8, represents approximately 50% capacity growth by 2028 versus 2019, a CAGR of approximately 5%. After the delivery of 3 new builds in 2023, a record for the company, we have no additional ship deliveries scheduled until spring of 2025.

In the interim, we expect to benefit from both organic growth as well as the annualization of the 2023 new builds next year. Lastly, the final priority on the list, but arguably the most important, is charting a path to reduce leverage and de-risk the balance sheet. Given the necessary actions we took to navigate the past few challenging years, our leverage ratios are currently not at optimal levels. Our goal remains to evaluate all options available and then clearly define a multi-year pathway to return to an investment-grade-like financial position. This won't happen overnight, but as you can see on slide 9, the company has successfully reduced leverage in the past, and I am confident we will do so again.

In the interim term, our expected cash flow generation, boosted by our robust new build pipeline, along with normal course debt installment payments, are expected to result in significant organic improvement in our net leverage. Over the next several months, we are focused on the successful execution of our near-term priorities, while fine-tuning the future vision and strategy for the company. With three strong brands, a world-class fleet, and best team in the industry, we are starting from a strong foundation in a position of strength. I can say without a doubt that we have a bright future ahead, with significant potential to unlock incremental value for our stakeholders. Shifting our discussion now to our current bookings, demand, and pricing trends. We achieved record revenue of $2.2 billion in the second quarter, an increase of 33% over the same period in 2019.

We've been able to tap into strong consumer demand environment, achieving the right balance of underlying revenue growth with Net Per Diems up 6%, while at the same time materially growing our fleet with capacity at 19% for the quarter. We also kept our ships full, reaching a load factor of 105% in the second quarter, in line with guidance and a long-awaited milestone as we return to normalized levels, which you can see on slide 10. As previously mentioned, and as illustrated on slide 11, several years ago, we strategically shifted our deployment to longer, more immersive itineraries at the Norwegian Cruise Line brand and increased our concentration of premium destinations while reducing our Caribbean deployments. This was designed to attract a higher quality guest and maximize our competitive position.

A natural by-product of this new deployment mix is less third and fourth passengers in a cabin, which is what historically pushed passenger occupancy above the 100% mark. As a result, we expect full year occupancy going forward to be roughly 200 basis points lower than 2019 levels. This shift has also resulted in an elongation of our booking window, which was 255 days in the second quarter, an increase of 51 days or 20% compared to the same quarter in 2019, meaningfully enhancing our future visibility and reducing our exposure to volatile and less predictable closing bookings. Taken together, we believe this strategy will drive higher yields, higher guest satisfaction, and higher guest repeat rates, with longer runways to optimize our pricing and marketing strategy as the macro environment evolves over time.

Turning to slide 12, our cumulative book position for the second half of 2023 remains ahead of 2019's record performance and at higher prices, another indication of continued healthy demand environment and the resilience of our target consumer. This trend continues past this year to sailings in 2024 and beyond, which at this point in the booking curve, is our primary focus. In fact, over the past 90 days, over 70% of our ticket sales were for 2024 and 2025 sailings, considerably higher than in 2019. Onboard revenue generation, our best real-time indicator of how consumers are feeling financially today, also continues to perform exceptionally well. During the quarter, gross onboard revenue per passenger cruise day was approximately 30% higher than the comparable 2019 period.

Our efforts to enhance our market-leading bundled offerings and increase quality touch points with our guests, starting from the time of booking and continuing throughout their cruise journey, are clearly bearing fruit. In fact, pre-sold revenue on a per passenger day basis for the second quarter of 2023 was over 75% higher than in 2019, an important contributor to our onboard revenue strength, as these guests tend to spend more overall throughout their journey than guests who do not pre-book onboard activities. Before I turn the call over to Mark, I'd like to provide an update on our global sustainability program, Sail & Sustain, in which slide 14 outlines key accomplishments and milestones. Since we last spoke, we published our annual Sail & Sustain report and SASB-aligned disclosure on World Environment Day in June.

The report provides transparency on our progress and initiatives on top ESG priorities. Some of the highlights this year include more detail on our new climate action strategy and enhanced data and disclosures on community impact, human capital, and greenhouse gas emission reporting. In addition, we demonstrated progress against several of our environmental goals, including targets to equip our ships with shore power capabilities and reduce bunkering of fresh water. I encourage all of you to take some time to explore the report. I'm sorry, to explore the report and visit our website for more information. I'm also proud to share that just last week, we announced the winners of our annual Giving Joy recognition program that has been celebrating teachers across North America since 2019 for their hard work and relentless dedication.

Each of the 20 winning educators won a free 7-day voyage for 2, and the top 3 grand prize winners were invited to attend the exclusive christening voyage for Norwegian Viva. This year's contest drew support from over 3,400 teachers across the U.S. and Canada, and garnered hundreds of thousands of votes. With that, I will now turn the call over to Mark for his commentary on our financial position and outlook. Mark?

Mark Kempa (EVP and CFO)

Thank you, Harry. Good morning, everyone. My commentary today will focus on our second quarter 2023 financial results, 2023 guidance, and our financial position. Unless otherwise noted, my commentary on Net Per Diem, 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 2019. Slide 15 highlights our second quarter results, in which we are very pleased to report that we met or exceeded guidance for all key metrics. Focusing on the top line, results were strong, with revenue performance up 33% and Net Per Diems increasing approximately 6.5%, surpassing the high end of guidance, while Net Yield was in line with guidance at 2.9%.

Keep in mind that comparisons to 2019 include certain premium-priced Baltic and Cuba voyages in that year, which did not operate in 2023. Turning to costs. Adjusted Net Cruise costs, excluding fuel per capacity day, came in below our guidance at $156 in the quarter, demonstrating further improvement from the prior quarter and the high watermark seen in the second half of 2022. The reduction in cost this quarter was primarily driven by lower food costs and crew optimization efforts as we continue to realize the benefits of cost savings initiatives identified and implemented during the first phase of this initiative. I will note that across all three brands, our guest satisfaction scores remain strong, reflecting our continued focus on cost rationalization without impacting the guest experience.

Adjusted EBITDA was approximately $30 million higher than our guidance, at approximately $515 million in the quarter. In addition, Adjusted EPS of $0.30 also beat our projection by $0.05 and was the first time we generated positive EPS since 2019, as well as the first time that our quarterly Adjusted EBITDA exceeded the same quarter in 2019. Shifting our attention to guidance, our outlook for the third quarter can be found on slide 16. We are projecting Net Per Diem growth of approximately 7%-8% and Net Yield growth of approximately 2.25%-3.25%. Similar to the second quarter, the loss of certain premium price Baltic itineraries will continue to impact the comparison versus 2019. In the fourth quarter, pricing and yield are both expected to exhibit mid-teens growth compared to 2019.

There are several other factors contributing to the exceptionally strong growth we are expecting for the fourth quarter, which include more luxury and upper-premium capacity operating with the new Regent and Oceania ships, as well as a favorable comp from the rapid exit from Cuba in 2019 and the close-in resale of those sailings. Adjusting for these factors, Net Per Diem growth is still expected to be up approximately 10%, which reflects our organic pricing power and strong consumer demand that Harry referred to, as well as the benefit of our shift to premium deployments with extended Alaska and Europe seasons this year. Given that we already have a substantial booked position and our pace of bookings is on track with our optimal booking curves, this gives us confidence in our ability to deliver on this top-line outlook for the fourth quarter.

Adjusted Net Cruise Cost, excluding fuel per capacity day, is expected to be approximately $152 in the third quarter, which includes approximately $3 of certain non-recurring benefits realized in the quarter. Looking ahead, there are also one-time expenses associated with new capacity additions in the fourth quarter. Adjusting for these items, this metric is expected to slightly decrease quarter-over-quarter, which is noted on slide 17. Taking all of this into account, Adjusted EBITDA for the third quarter is expected to be approximately $730 million, and Adjusted EPS is expected to be approximately $0.70 on a projected diluted share count of approximately 510 million shares.

Keep in mind that we have our 4 outstanding exchangeable notes, which will cause variability in the diluted weighted average shares outstanding used to calculate EPS when we follow the if-converted method. It is also important to note that despite our ability to settle our 2 2027 exchangeable notes in cash rather than in shares, these notes would still be included in our diluted weighted average shares outstanding for GAAP reporting purposes if they are dilutive in the quarter. We've included an additional slide in our earnings deck, slide 24, with more information to help with modeling.

Now, shifting our focus to our outlook for the full year 2023, we are raising the floor of our Adjusted EBITDA guidance to a range of $1.85 billion-$1.95 billion, despite approximately $30 million of headwinds from higher interest and fuel expense in the back half of the year. This is expected to translate to Adjusted EPS of approximately $0.80 or $0.05 above our prior guidance, reflecting the second quarter outperformance. As you can see on slide 18, since we first guided for the year in February, we have increased our Adjusted EPS guidance by $0.10 for 14% on strong results in the underlying business, which overcame headwinds from higher fuel, FX, and interest rates. Excluding these headwinds, Adjusted EPS growth versus initial guidance would have been approximately 20 percentage points higher.

Taking a closer look at the components of the full-year outlook, our healthy Net Per Diem growth of approximately 9%-10.5% as compared to 2019, and Net Yield growth guidance of approximately 5%-6.5% are unchanged versus our prior guidance, with capacity up 18%. Turning to cost, Adjusted Net Cruise Cost, excluding fuel per capacity day, is expected to average approximately $156 for the full year, better than the prior guidance of $159, reflecting lower than expected costs in the second quarter.

As we have previously mentioned, when comparing this metric to 2019, please note that we do not have the benefit from the disposal of older, less efficient tonnage that some of our peers have, and we have also added capacity at our high-end Oceania and Regent brands, which, while accretive to margins, do have higher operating costs. Another thing to keep in mind is that the timing of expenses, such as dry docks, can cause variability in this metrics when comparing different periods. For example, in 2023, we have limited dry docks as we took the opportunity during the pandemic to optimize the schedule while ships were already out of service. As Harry noted earlier, this improvement is the result of the deliberate actions we have taken to enhance margins and rightsize our cost base.

To further supplement our internal efforts, which have been in full force since we kicked off this initiative last fall, we have also more recently engaged a third-party consultant to benchmark best practices across sectors and identify incremental areas of opportunity. Our entire team is working around the clock to find ways to accelerate our margin recovery. We are leaving no stone unturned in the process. To date, the savings we have identified have been broad-based, touching every aspect of the business, with the largest buckets consisting of fuel, food and consumables, and marketing, as shown on slide 19.

To give you an example of one of the initiatives we are undertaking, we are optimizing crew movements and reducing ship crew transfers, which we expect to result in multimillion dollars savings. To put this into context, each year we have approximately 90,000 crew movements, including 6,000 or so between ships. This is just one example, but it demonstrates how incremental changes can add up to a larger impact on the bottom line. We recognize that we still have more work to do, and we are committed to doing so in a way that preserves the exceptional guest experience and superior service levels that our target higher-end guests expect from our brands, all while setting us up well for continued margin improvement in the next few years. Turning our attention to the balance sheet and our debt maturity profile on slide 20.

In the first half of the year, we generated over $1.5 billion of cash flow from operations, including over $1 billion in the second quarter. This allowed us to repay approximately $1.4 billion of debt, including the full paydown of our $875 million revolving credit facility. In addition, we have approximately $475 million of scheduled debt payments for the back half of the year, the vast majority of which are related to our export credit agency-backed ship financing. As we have previously stated, we intend to refinance our operating credit facility in the normal course of business before year-end. As mentioned earlier, we expect our net leverage to improve significantly, driven by our organic cash flow generation and payment of scheduled debt installments.

Excluding debt associated with ships on order for future delivery, trailing-twelve-month net leverage is expected to meaningfully reduce versus current elevated levels, dropping below 6x over the course of the first half of 2024. This does not adjust for ships that were delivered in 2023, which would have the full debt load in the numerator without a full year of contribution included in Adjusted EBITDA. Turning to liquidity, our overall liquidity position remains strong at approximately $2.4 billion at quarter-end, as outlined on slide 21. This consists of approximately $900 million of cash and cash equivalents, $875 million under our revolver and a $650 million undrawn commitment. This does not include the separate $300 million undrawn backstop commitment, which enhances our future liquidity, but is not currently available to draw.

During the quarter, we received approximately $500 million of cash collateral back from a credit card processor. This collateral release not only provided a meaningful increase to liquidity, but was also a very strong signal that our external partners have increased confidence in our financial position and future outlook. Overall, I feel the same optimism about the direction of our business. I want to echo Harry's comments that our entire management team is reinvigorated and focused on delivering on our business and strategic goals, while also pursuing all opportunities to maximize value creation and create a more nimble and resilient organization for the future. With that, I'll turn it back to Harry for closing comments.

Harry Sommer (President and CEO)

Well, thank you, Mark. Before turning over to Q&A, I'd love to leave you with some key takeaways, which you can also see on slide 22. First, we are focused on execution of the near-term priorities outlined today, including the delivery of two new builds in the coming months, while simultaneously fine-tuning our vision of the future. With new leadership in many functions, including my own, we are approaching this exercise with open minds and a fresh perspective as we work to best position the company for success. Second, our target higher-end demographic continues to be healthy and resilient, with strong demand for travel and experiences.

This is demonstrated by our strong revenue performance, a record of 33% in the quarter, with our strong book position, which, when looking over the next 12 months, is within our sweet spot range of approximately 60%-65% booked and at higher prices. Advanced customer deposits of $3.5 billion, 52% over Q2-2019. Third, we are demonstrating the results of our margin enhancement initiative, including through our efforts to maximize revenue, improve efficiencies, and right-size costs. We now have 2 straight quarters of sequential improvement in our key cost metrics and will continue to identify and implement additional measures to accelerate our margin recovery while still delivering the exceptional products and service offerings that our guests desire. Lastly, our liquidity position is solid, and we are committed to prioritizing restoration of our balance sheet and reducing leverage in the coming years.

We've covered a lot today, so I'll conclude our commentary here and open up the call for your questions.

Operator (participant)

Thank you, Harry. If you have a question at this time, please press the star, then one key on your touchtone telephone. In order to get as many people through the queue, please limit your time to one question. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Jessica John (VP)

Before we get to the questions on the line, we first want to address a top question from our online shareholder Q&A platform, which provides all of our investors another avenue to submit and upvote questions for management. One of the top-voted questions we received this quarter was: What do you consider the biggest challenge for growth over the next 18-24 months, and how do you plan to attack that challenge? Harry, do you want to take that one?

Harry Sommer (President and CEO)

Sure, Jessica, I'm happy to, and that's, that's really a great question. Yeah, I wouldn't say there are big challenges for growth. If anything, what we have is a huge opportunity. While we're always keeping a keen eye on growing revenue on our existing fleet while tempering costs, growth in the cruise industry is mainly predicated on capacity, and this year we have three vessels entering the fleet, one for each of our award-winning brands, which is a first for our company. This growth allows us to take more guests to more destinations and offer them more varied experiences, while contributing to the top and bottom line right off the bat. In addition, with no scheduled ship deliveries in 2024, we have ample opportunity to digest this capacity at high prices while preparing for new capacity entering our fleet in 2025.

To me, it's not about challenges of growth, it's optimizing the opportunity we have for our new capacity and doing what we have consistently done in the past, which is translate that to outsized impacts to our bottom line.

Jessica John (VP)

Operator, we can take the first question from the line now.

Operator (participant)

Okay, thank you. Our first question from the line comes from Vincent Ciepiel with Cleveland Research Company. Please proceed with that question.

Vince Ciepiel (Senior Research Analyst)

Great, thanks. I want you to talk about kind of the path for organic price growth. I think that was really helpful, the way you broke out 4Q. Obviously anticipated to step up a lot, but even X, you know, comparisons and new hardware, Net Per Diem is up 10%, points to sequential acceleration through the course of this year. Curious kind of how you're thinking about that, into next year. I know you get lift from, you know, full year contribution of the 2023 deliveries, but how are you feeling on organic price today versus 90 days ago?

Harry Sommer (President and CEO)

Sure. I'm, I'm happy to take that one. Thanks, Vince, for the question. I think I could sort of break this up into three periods: Q4, 2024, and 2025 and beyond. You know, Q4 still has some comparable distinctions between this year and the past, but we are super excited that we're going to see an 18% Net Per Diem growth in 2023 versus 2019. You know, sort of fully hitting our strides there, and, you know, we're pretty well booked for Q4, so we have, we have great confidence in that number. You turn to 2024, we get to a more normalized environment, but we still have some tailwinds when we compare 2024 to 2023, because in Q1 of 2023, we weren't 100%, you know, back up to service.

I think we can expect some outsized growth in 2024 relative to 2023. You know, on a more long-term basis, we return back to normal. You know, we've consistently talked about having low to mid-single digit yield increases year-over-year with, you know, moderate and disciplined capacity growth, strong cost control while maintaining high guest satisfaction, all leading to the type of oversized EBITDA and earning growth you saw during our run from 2014 to 2019. I think once we get back to 2025, that's exactly the path we'll be on again.

Vince Ciepiel (Senior Research Analyst)

Great, great, thanks. Then maybe on the cost side, obviously a lot of effort that is visible, uhm, based on the guide. It looks like net cruise revenue is going to be up $2.5 billion plus this year, whereas costs are only up about $100 million. It's clear that, you know, you guys have been focused. Curious, you know, you mentioned guest satisfaction score remaining strong, kind of along this flex down path, but curious maybe what you're seeing within rebooking behavior as more of that 2024 business is coming on the books, uhm, how are you feeling about the guests coming back to you?

Harry Sommer (President and CEO)

Great question, and I think there were two parts, so I'll try to address both of them. You know, on the cost side, we, we are really excited about the efforts that we make, and you continue to see these sequential, you know, modest improvements in cost Q1 to Q2 to Q3 and Q4. You know, despite the fact that inflation is still out there, the fact that we continue to reduce our cost structure, each quarter is, is not just a reduction in the base, but also fighting against inflation. We're really excited when we can see that number come down. Mark also alluded to, you know, we're just, you know, maybe in the fourth inning of this cost reduction strategy, if I was to use a baseball analogy, and we, we still believe there are more efforts ahead.

We have not baked in anything that we haven't found yet. Our guidance numbers only include what we've identified and what we, we firmly are able to implement, but we hope to be able to deliver a little bit more in the future. You know, in terms of the guest rebooking behavior, we're simply put, we're at record levels. You know, across all three of our brands, we are seeing, you know, the, the one measure that's most relevant internally is we take a look at first-time guests and how and when and how much, or what percentage of them, I should say, rebook, you know, within the first year or two of coming back, and the guests coming off the ships in 2023 are rebooking at record levels compared to, you know, 2018, 2019 and the further back periods.

So far, the formula seems to be working quite well.

Mark Kempa (EVP and CFO)

Vince, just to highlight that, I think, you know, last quarter we had mentioned record sales of our CruiseNext certificates. Again, that's just another anecdotal point that consumers on board our ships are enjoying their vacation. They're satisfied with the product. Everything we're doing on the cost reduction front is under the lens of protecting the guest experience and the product. We monitor that closely, and so far we are seeing positive reception to everything we're doing.

Vince Ciepiel (Senior Research Analyst)

Appreciate all that detail. Thanks.

Operator (participant)

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

Robin Farley (Managing Director and Leisure Analyst)

Great. 2 questions. One is on the yield side, that 14% growth in Q4. I know you, you have some shifts in your premium and luxury brands contributing to that. Can you kind of give us a sense of what the increase would be for saving Norwegian brand, or just to think about the increase that's embedded in that guidance that you know, outside of those, those new ship additions. Then my other question was on expense. I'm sorry if I missed, if you said what was the non-recurring benefit in, in Q3 there? Then just thinking about Q4, it looks like your footnote is sort of saying you're excluding the cost of new ships in that. I just, I just wanted to clarify.

I feel like you hadn't done that before, I, I just wanna think about comparability to, you know, expenses in 2019. Is that new, that that guide excludes the, the cost of new ships? Thanks.

Mark Kempa (EVP and CFO)

Hi, good morning, Robin, thanks for the question. In Q4, when we talk about our pricing or yield, pricing is, is expected to be up approximately 18%. As we highlighted in our, in our prepared remarks, if you adjust for the new capacity as well as the favorable year-over-year comps, that 18% would translate to about 10% of your organic fleet. Very, very strong growth, consistent with what we've seen over the last 2-3 quarters. We're very, very pleased with that. In terms of Q3, the one-time non-recurring benefit, we highlighted that because we didn't want to take artificial credit, so to speak, for our cost reduction initiatives.

That was simply a benefit that we received as a result of some port volume commitments, accruals that we had, we, we had during the course of COVID. We were able to negotiate with the various ports around the world to reduce that. We didn't wanna take credit for that because it's a one-time, non-recurring, so we called that out. Then in Q4, again, trying to be ultra-transparent, on the surface, it would appear that our, our net cruise cost ticks up slightly by $1. If you really look at, look at that, and you exclude the one-time startup operating costs for both Viva and Grandeur, which come on in the fourth quarter, and you really right-size that to a normal run rate, that is actually reduced by a $1 or $2.

Again, what we're trying to do is show that we have sequential improvement in our core fundamental operating costs, and you're seeing that over the course of all four quarters in the year.

Robin Farley (Managing Director and Leisure Analyst)

Okay, great. Thank you.

Operator (participant)

Our next question comes from Patrick Scholes with Truist Securities. Please proceed with your question.

Patrick Scholes (Managing Director)

Great. Good morning, Harry and Mark. First question, concerns the onboard and other line item. You know, how much as we think about for next year and perhaps 2025, you know, you've certainly seen outside growth in this line item. How much do you think of that is really sustainable, and how much might be from revenge travel? Maybe some of that growth also might be from, from bundling or accounting changes. You know, how should we think about sustainability of that going forward?

Mark Kempa (EVP and CFO)

You know, Patrick, it, it, it's a good question. I, I, I believe it's fully sustainable. We, we don't, we don't necessarily see this, this, this huge revenge travel being a huge plus, nor the levels that we are going at today diminishing. You know, my, my best proxy is, is the Norwegian Cruise Line brand, because it's, it's our largest brand. When we look at bookings for this year, every month has been a record month in terms of new booking volumes. You know, January was the best January in the history of the company. February was the best February, you know, clear through July, which just ended yesterday, which was the best July in, in the history of the company.

In fact, our, our 2nd best booking month of the year, which is a little bit odd, because usually July and August is a little bit slower, you know, due to, to vacation, you know, people being on vacation and the like. You know, onboard spent similarly, every month continues to be good. We're not seeing any weakness. We're not seeing any denigration of trends. There's nothing super unusual that we're doing in bundling today compared to 2019. We continue to refine our processes and make the, the, the marketing and product proposition a little bit better each quarter than the quarter before, but I don't anticipate any huge changes for 2024 either. I think the numbers you see today are the numbers that we would expect to improve on going into 2024.

Patrick Scholes (Managing Director)

Okay.

Mark Kempa (EVP and CFO)

Patrick, to further highlight on that is, you know, we've talked about, you know, we have, we have more touch points with the consumer well prior to the consumer ever stepping on board ship, on board the vessel. So we're getting more share of the wallet from the consumer ahead of that. And I think one of our stats that we talked about, our pre-booked revenue was up by almost 70% versus 2019. So again, it's a longer elongated sales cycle that just helps build that overall onboard revenue product. So we are not seeing any signs of any consumer deterioration. In fact, we continue to see strength on that, and we're, we're very happy with that. We continue to see, expect that to be strong.

Patrick Scholes (Managing Director)

Okay, good to hear. Just a quick follow-up question, Mark. You had noted in the earnings release about $500 million, released from the credit card reserves. Is there any money left still to go with that, or was that 500 the last slug of that? Thank you.

Mark Kempa (EVP and CFO)

Yeah. We're, we're, we're very happy with that. With that, that essentially, we, we have zero collateral with any of our, our, our reserve holders as of, as of the quarter end. That was a, not only a significant boost to our liquidity profile long term, but more importantly, as I said in my prepared remarks, is that it demonstrates confidence in the business, from a completely external partner who has, has no stake in the game other than, you know, their, their inherent risk on advanced ticket sales. Again, we see that as a, as a, as a big demonstration of confidence in the business and where the trajectory of the business is going.

Brandt Montour (Director)

Okay, thank you.

Operator (participant)

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

Steven Wieczynski (Managing Director)

Yeah. Hey, guys, good morning. You know, if we think about your, your load factors moving forward, which, you know, Mark, you mentioned will be about 200 basis points lower than, you know, where 2019 levels were. You know, that's just because of longer itineraries and whatnot. Just, you know, just wondering how these lower load factors impacts or potentially impacts your cost structure moving forward. You know, to add on to that, Mark, you know, as we, as we think about, you know, you guys exiting the year in that low, you know, let's call it 150s range in terms of cost per APCD, is there any way to help us kind of think about as well, you know, where you might be able to get that number to, you know, over time?

Harry Sommer (President and CEO)

You know, Steve, it's a good question. You know, I don't look at this as, as a huge material change in our cost structure. You know, it'll, it'll be a modest tailwind, having 2% less guests on the ship, but the 2% less guests that we have are primarily young children, which aren't particularly expensive. This really isn't about our cost structure. This is really about, you know, yield and EBITDA, where, where we believe being in more premium itineraries that are booked further in advance, giving us a much longer booking curve and a more stable and predictable demand profile, which allows us to manage demand, manage our marketing a little bit more effectively, and not rely so much on close-in, unstable and unpredictable demand, is really a key to our success.

You know, I, I think both Mark and I commented on the higher rebooking rates, the higher advance ticket sales, the higher revenue, the higher booking window, you know, all of these positives, which seem to endorse our strategy, which I think we'll see the full benefit of in 2024, as we then will have gone through a full year cost structure. I mean, listen, bottom line is we're committed to getting back to the EBITDA margins that we saw back in 2019 over time. It's going to take us a little time to get there, we're looking at the trends, and we see a path towards that.

We think this premium deployment, which we already started shifting to in 2018, 2019, will be a vehicle that will allow us to continue on that path. I'll remind you, you know, we have always had industry-leading yields, and we continue to have industry-leading yields far above the competitive set, and we believe that this deployment strategy will allow us to continue with that.

Steven Wieczynski (Managing Director)

Okay, gotcha. Mark, I just wanna kind of add the question I was gonna ask him before to you. You know, again, as you, you kind of think about you guys being in that low $150 range in terms of, of cost, you know, just is there any way to kind of help us think about where you could get that number over time? I'm not looking for guidance or anything, but, just, just trying to understand where that number potentially could go.

Mark Kempa (EVP and CFO)

Yeah, look, Steve, you know, obviously, you know, as we're looking to 2024, we're still early in the planning process. You know, as I said, I think we're probably, you know, halfway through the baseball game, so to speak, in terms of initiatives. We fully anticipate that we're going to improve on that. One note, as I did say in my prepared remarks, is we have to keep in mind that there is going to be some dry dock pressure in 2024 when you compare that to 2023. Excluding that, I would venture to say that we're going to continue to see improvement in our core fundamental cost structure. We're working hard.

Hopefully, we've, we've demonstrated and given, given you confidence that quarter-over-quarter, we sequentially continue to improve. We think there's more to go after, and we're going after it. We're going to do it in a methodical manner, but protecting that guest experience. You know, stay tuned for the next few quarters to come, and I think, we'll continue to show improvement.

Steven Wieczynski (Managing Director)

Okay. Gotcha. Thanks, guys. Appreciate it.

Operator (participant)

Our next question comes from Brandt Montour with Barclays. Please proceed with your question.

Brandt Montour (Director)

Hey, good morning, everybody. Thanks for taking my questions. So I'm just curious if you could comment on, you know, the last three months of just fundamental demand strength on the, on the booking side. You know, we've heard from, from peers that, that demand has accelerated over those last three months. Harry, you just called out May, June, July being each successively record booking months. But yield guidance for the year, you know, was, was left unchanged. So I guess the question is: Is that a function of guidance three months ago, just already sort of betting on that acceleration coming? Or did flight prices in Europe take a bite out of 3Q? I think we talked about that last quarter. Anything else that you might want to highlight. Thank you.

Harry Sommer (President and CEO)

You know, I, I. Thanks, Brandt. Great question. I, I think with our deployment strategy, most of the demand that we're seeing today and over the last quarter is primarily focused on 2024. I think we mentioned in our commentary, but if we didn't, I'll mention it now, that over the last 13 weeks, over 70% of our new booked revenue was for 2024 and 2025 departures. You know, in that respect, this acceleration demand, the record booking levels that I discussed, really are increasing our optimism about 2024. Obviously, in prior guidance, we did assume some bookings, right, for the back half of the year, and they're coming to fruition just as we expected.

These records are really helping to to to firm up the 2024 booked position. I mean, this, this record booked is a booking window of 255 days, which is 51 days ahead of where we are in 2019, is, is, is a huge number for the company, and again, really gives us confidence for 2024 and beyond.

Mark Kempa (EVP and CFO)

Brent, I would not take it as any sort of sign of deceleration in demand. It's just simply a function of our itineraries. We, we're, we're more fully booked than we ever have been, and there's just not a lot left to sell, which is a good thing. That gives us more stability and predictability over our numbers. If anything, that, that said, there's always, as we talked about, the consumer is strong, onboard revenue trends continue to do well. I think if there's, you know, if there's gonna be any, any room for upside, it's gonna be on continued strength of the, of the consumer spend on board.

Brandt Montour (Director)

That's really helpful. Okay, then just a quick follow-up on that. I remember pre-COVID, Mark, specifically, you know, you guys could get really great returns on, on incremental marketing dollars, and that, that was part of the strategy back then. So now in a, in a world where you guys are, I, I think, trying to be a little bit, I guess, smarter, you call it, on your marketing dollar spend, and Harry, what you think about this, just as you tinker with that sort of, you know, algorithm or equation with, with marketing spend, you know, what are you learning about that process? Are you, are you happy with sort of, you know, the, the pricing retention that you're getting as you sort of tinker with the marketing dollars? Any, any commentary on that would be helpful.

Harry Sommer (President and CEO)

You know, I, I, I, I, I think, Brant, this is really the first quarter or maybe the second quarter, where, where marketing spend was sort of normal, where we were able to judge, you know, each of the individual projects that we do in marketing and see, you know, normal ROIs, normal returns, normal, get demand. Of course, we weren't just waiting through these last couple of quarters to refine our marketing machine. You know, we've gone all in with, with marketing analytics. We've done some work with AI, machine learning, you know, all, all, all those terms to really refine, our individual marketing efforts and the, you know, what we spend in each individual channel.

You know, the best example I can give you on the NCL brand, you know, our spend today on a booking basis is similar to what we were doing in 2019, we're generating nearly double the leads, right? You know, which is sort of a customer that raises their hand. We think that's fantastic. Conversion rates continue well, which is one of the things that's leading to these record bookings. And as long as we continue refining, you know, our analytics around marketing, we're happy with the spend levels.

Brandt Montour (Director)

That's great color. Thanks, everyone.

Operator (participant)

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

James Hardiman (Director and Travel Analyst)

Hey, good morning. Thanks for taking my call. On the Net Per Diem side, good, good performance in the, in the second quarter. Maybe a little surprised that that didn't flow through to the full year guide, and, and I can certainly appreciate, you know, more often than not, if, if, if it's onboard spend that's driving that Net Per Diem, it's hard to sort of assume... You, you have less visibility as we think about the back half of the year. Is that ultimately what happened in Q2, or how should we think about sort of the, the lack of flow through to the full year?

Mark Kempa (EVP and CFO)

Well, James, I, I think, you know, I, I think our, our pricing continues to be very, very strong, and I think, you know, out of, out of the gate, we set very high levels. Again, I wouldn't read into anything, whether or not that's, you know, if there's any deceleration. There is flow through, and the fact that we're, we're still guiding, you know, reiterating 9%-10.5% growth. Very strong. We don't have a lot of inventory left to sell, which is by design. I think it's really gonna be on the back of, you know, what, what does the onboard spend level do? As we've touched on, you know, here and several times before, it continues to be very strong.

While we have good visibility on that, there is always some variability on that. Remains to be seen and, but everything we're seeing is we're, we're seeing strength and demand across all sectors of the of the industry.

James Hardiman (Director and Travel Analyst)

Got it. That's helpful. Separate question, I mean, we've started to see refinancing activity pick up, maybe a more favorable corporate debt environment. What are you seeing there? Is there an opportunity for you guys to, to do some transactions, whether it be to focus on lowering interest rates, extending maturities? I guess, if so, you know, what instruments are, are sort of, low-hanging fruit for you guys? I guess, more broadly, I mean, as you think about deleveraging, it, it seems like the messaging has been more about increasing EBITDA than, than actually reducing debt. Does, does this current environment maybe change any of that calculus?

Mark Kempa (EVP and CFO)

Well, we're, James Hardiman, we're always looking for opportunities to optimize our debt structure, and I think, we were very fortunate in 2022 to get rid of some of our higher cost debt that was incurred during the pandemic. We don't have any double-digit notes that are out there. As I did say, we will be out in the market later this year, in normal course, to refinance or amend and extend our operating facilities, which is our Term Loan A and our revolver. Beyond that, our next big slug of debt is it comes due in December of 2024. We have 3 5/8% notes out that are out there.

We'll look over the course of the next 12 months, what to do with that. As the cash machine continues to ramp up, as advanced ticket sales continue to ramp up, as EBITDA and margin continues to improve, that is the number 1 thing we're focused on, is delivering to in order to help de-risk the stock. We're focused on that. We've done this before. It's gonna take a little bit of time.

Harry Sommer (President and CEO)

I think there's more to see over the course of the next 12 to 18 months.

James, I'll, I'll just take this opportunity to reiterate a comment that Mark made in his prepared remarks, that we have paid down $1.4 billion of debt in the first half of the year, which, which we're super excited about.

James Hardiman (Director and Travel Analyst)

Got it. That's really helpful. Thanks, Mark. Thanks, Harry, and, and, and Harry, congratulations on the new role, and good luck.

Harry Sommer (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Conor Cunningham with Melius Research. Please proceed with your question.

Conor Cunningham (Director and Travel Analyst)

Hey, everyone. Thank you for the time. Just, just one from me. Harry, in, in the prepared remarks, you made a comment around just culture change that's underway at the company. Can you just provide a little context to, to that comment? Why do you need it now? And what's the biggest pressing need that you want to achieve with it? Or is that more of a comment just around just a refreshing?

Harry Sommer (President and CEO)

Well, I, I, I think, Conor, it's a little bit of, of both, right? With, with new leadership team, we have to set a culture that's going to work for us in the mid to long term, and I'm, I'm really excited, you know, that the entire leadership group, both, both the new members and the existing one, are embracing. If I was to sum it up in, in one sentence, we're looking to, to build a culture where we're, we're firmly focused on margin enhancements that we've discussed, while at the same time delivering an exceptional guest experience. It's really a fine line to, to walk. I mean, you can cut costs and, and, and, and have a worse guest experience. That's not what we're looking to do.

Maybe in the past, we were a little bit overly focused on the guest experience without the cost side of it. The question is, how do we balance both of it? I have to say, I'm excited. You know, Mark and I have both talked about the reduction, the sequential improvement in our underlying core costs over all four quarters of this year, while at the same time, our guest satisfaction continues to do very well. Our first guest repeat rate is at record levels, really good guest satisfaction scores, advance bookings through the roof. The formula seems to be working well. You know, to do this right, it has to take more than one quarter, because we're not looking to do anything drastic.

We're looking to do this a little bit at a time and make sure that we monitor it closely, and that's what we're going to continue to do.

Conor Cunningham (Director and Travel Analyst)

Thank you.

Harry Sommer (President and CEO)

Thank you, Conor. With that, Maria, we have, we have time for one last question, so please call it out.

Operator (participant)

Our next question comes from Dan Politzer, with Wells Fargo. Please proceed with that question.

Daniel Politzer (Executive Director)

Hey, good morning, everyone, and thanks for, for fitting me in. Just a quick question, Harry. It, it feels like there's been a tangible shift, more to focus on the cost side than, than the yield side. Maybe that's just, you know, reflected in, in current numbers versus how you're looking at things. I guess, as you think about 2024, 2025, and as you think about also long-term targets, is this, is this an accurate depiction? You know, could we maybe get long-term targets from you as you kind of settle into this role later this year or, you know, possibly early 2024?

Harry Sommer (President and CEO)

Dan, Dan, great question. First off, we are absolutely focused on yield and cost, right? Because ultimately, margin is a combination of those two numbers. You know, I think I discussed in one of the earlier questions that we think we can do an outsized job in 2024 in yield growth. Somewhat because of the tailwinds we saw out of Q4 in 2023, when we weren't fully back up to operations, but also because of all the healthy consumer demand metrics that we're seeing over the last few months that we believe will continue into the future. On a long-term basis, we are committed to low to mid-single-digit yield increases with moderate and disciplined capacity growth, as we had in 2014 to 2019. That absolutely will continue.

In terms of, of long-term targets, yeah, you know, we, we think about it a lot, but I, I've been on the job now for 30 days, so a little bit early for me to go all in. You know, I, I, I've been spending a lot of time with on our ships, with our operations folk, with our employees, with our travel agency community, with our customers, you know, spending some time with the investment community as well. We, we believe by early 2024, we'll be in a position to provide not only guidance for 2024, of course, but also long-term metrics on, on how we view the future EBITDA, you know, margin, yield, and cost components of the business going forward.

Daniel Politzer (Executive Director)

Got it. Thanks so much.

Harry Sommer (President and CEO)

Okay. Once again, I want to thank everyone for joining us today. We'll be around to answer any questions you may have. Have a great day, stay safe, and all the best. Bye now.

Operator (participant)

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