Norwegian Cruise Line - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, and welcome to the Norwegian Cruise Line Holdings Third Quarter twenty twenty Earnings Conference Call. My name is Crystal, 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. As a reminder to all participants, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Andrea DeMarco, Senior Vice President of Investor Relations, Corporate Communications and ESG. Ms. DeMarco, please proceed.

Speaker 1

Thank you, Crystal, and good morning, everyone. Thank you for joining us for our third quarter twenty twenty earnings 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 results for the quarter 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 at www.nclhltdinvestor.com. We will also make references 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 thirty days following today's call. Before we discuss our results, I'd like to cover a few items. Our press release with third quarter twenty twenty results was issued last night 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 statements 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?

Speaker 2

Thank you, Andrea, and good morning. I hope that everyone joining us today as well as your loved ones are healthy and safe. Similar to our last earnings call, today we will provide a business update focusing more on the progress of our response to the COVID-nineteen global pandemic than on financial results. I'd like to begin by saying that we welcome the issuance of the CDC's framework for conditional sailing order. We view this as a positive step in the right direction on the path of our shared goal of resuming cruising in The United States in a safe and responsible manner.

The return to cruising is a much anticipated event for our loyal past guests, valued travel partners, our team members and the communities we visit around the globe, but in particular by our home ports around The United States. These ports and the entire cruise ecosystem which includes port employees, luggage handlers, stevedores, tour operators, taxi and rideshare drivers, coach operators, suppliers, airlines, hotels and many other businesses and industries have experienced significant economic hardship due to the ongoing suspension of cruising and I am sure that they are anxiously waiting the resumption of cruising as much as we are. While there continues to be a long road to full recovery ahead of us with many uncertainties still to be overcome, the new CDC framework allows us to take the first definitive steps towards this recovery process. The new conditional order creates phases for the resumption of cruising, including first testing an additional safeguard for guests and crew and building laboratory capacity and medical capabilities for future testing. Second, simulated trial sailings where we will test the overall effectiveness of our health and safety protocols in real life situations.

Third, evaluation and certification for vessels on a ship by ship basis versus by brand or operator to confirm they meet specific requirements. And fourth, a phased return of guests to revenue generating voyages while mitigating the risks of COVID-nineteen. The framework contains numerous rigorous hurdles that are without a doubt challenging for the cruise industry, but challenging they should be given the current high prevalence of the virus around the world. But even so, we believe we are making continued sequential progress towards the resumption of cruise operations and a return to pre COVID normality. There are points in the order that require further dialogue and clarification with the CDC and we have not yet received all the technical guidelines for many aspects of the framework.

Given the short timeframe since the order was issued, the complex logistics of the order and the many salient points that must still be clarified, our team is working on analyzing and scoping the operational requirements of this order. Our shared goal in this process is to create and implement a series of protocols that are driven by science. We are appreciative and encouraged that the CDC has expressed a willingness to engage with us in meaningful dialogue. We will continue to collaborate with the CDC to further clarify outstanding questions and determine next steps, at which point we hope to be in a position to share additional details about our return to service plans with all of you. I want to be clear that despite this positive development, we are still very much in the midst of this public health crisis.

As we sit here today, COVID-nineteen cases are surging in many areas of the world, particularly in Europe and in The United States, and we are seeing nation states, cities and communities across the globe responding to the surge in different ways. As the seasons change, scientists are warning of a likely hard winter ahead. The good news is that our understanding of the virus and the advancements in testing, treatments and therapeutics are leaps and bounds ahead of earlier this year. And I believe that as a society, we are much better equipped to respond this time around. In fact, and as you know, just yesterday Pfizer and BioNTech announced that their trials demonstrated that their vaccine was more than ninety percent effective in preventing COVID-nineteen among trial participants.

This is a significant milestone and likely the first of many breakthroughs to come on the vaccine front. And while we recognize the continued fluidity of the current global public health environment and expect additional headwinds to get in our way, our company and our industry has demonstrated resilience time and time again and I believe this time will be no different. I am confident that our extraordinary team is well prepared to continue to adapt and innovate to overcome the challenges of this pandemic. I want to take this opportunity to thank all our team members around the globe. Their dedication, perseverance, patience and hard work is what is propelling us through this once in a lifetime crisis.

I could not be prouder of how this team has risen to the occasion despite the significant personal and professional challenges they are all facing during this pandemic. As cruising gradually resumes in other areas of the world, we continue to be encouraged by the success our peers have experienced and we congratulate them for leading the way and demonstrating that the cruise industry can indeed safely operate in a pandemic environment. We know it is impossible to fully eliminate all risks pertaining to COVID-nineteen anywhere in society, including on cruise ships. But with the appropriate science back protocols in place, and now with the prospects of an effective vaccine and therapeutic, we have witnessed relaunched cruise ships dramatically reduce control and manage this risk and even successfully contain and mitigate COVID-nineteen cases on board. Turning to our company's recent events since our last earnings call, we have had another eventful quarter as you can see on Slide three.

These key events include two additional extensions of our voyage suspension resulting in a pause in operations through year end twenty twenty. This brings our temporary suspensions to a total of nine plus months. The announcement of the healthy sales panel 74 recommendations, will inform our specific health and safety strategy going forward and discussions and collaborations with the CDC, which resulted in the issuance of the framework for conditional sale order replacing a no sale order. As we continue to navigate through this crisis, we have made continued progress on many fronts as you can see on Slide four. We addressed significant operational challenges including the repatriation of over 24,000 crew members to their homes around the globe and the transition of our vessels to minimum manning status.

As we have previously stated, our goal during the vessel layup period was to reach a minimum level of manning on each of our ships while complying with all the applicable regulations, minimizing our cash burn rate and maintaining our vessels in class and ready to reenter service under short notice. Going forward, we plan to begin the process of a phased re staffing of our ships as we prepare for a gradual return to service. Next, we continue to execute on our financial action plan to position us to withstand this period of disruption. Mark will provide an update on our progress and on the incremental actions we have taken to bolster liquidity later in the call. So I won't go into details now.

We also continue to make significant progress on our roadmap to relaunch, which is illustrated on Slide five, particularly in the first phase, the enhancement of health and safety protocols. The Healthy Sale Panel, a group of 11 globally renowned scientific and medical experts, which we assembled in collaboration with Royal Caribbean Group, provided us with their recommendations to mitigate the risks of COVID-nineteen on cruise ships. As you can see on Slide six, the healthy sales panel led by Doctor. Scott Godley, former FDA Commissioner and Governor Mike Levitt, former Health and Human Services Secretary provided 74 detailed recommendations across five key focus areas and concluded that cruising can be made safe in the current health environment with a robust set of science backed protocols and procedures in place. Guided by expert advisors, including a healthy sales panel and further informed by successful sailings in Europe, CLIA and its member lines also committed to mandatory core elements for our health and safety strategies, including one 100% COVID-nineteen testing of guests and crew, the wearing of face coverings, physical distancing requirements, highly controlled shirt excursions and much more.

Our multi layered approach to health and safety will have protocols expand the entire cruise journey, starting from the time guests booked the cruise and continuing post cruise disembarkation. There is no single solution to the current public health challenge, no silver bullet, but we believe the cumulative effect of testing coupled with dozens of other measures of protection at different phases of the cruise journey will significantly mitigate risk and allow us to provide one of the safest vacation alternatives anywhere. Furthermore, as society learns more about the virus and the effects of COVID-nineteen, we in collaboration with the CDC will continuously evaluate, refine and improve upon these protocols with our team of experts applying the best practices, science and technology available. A concurrent step in our roadmap is to continually assess port availability and travel restrictions, which we believe will remain fluid as the virus prevalence ebbs and flows in different regions around the world. Our team is in constant communication with key destinations regarding the reopening of ports and we are ready to adapt as needed.

Certainly a conditional order in the news of an effective vaccine and this morning of a promising therapeutic for COVID-nineteen infections will also aid in the return to normal in these critical areas. The third step in our roadmap is to begin reactivating our sales and marketing machine. Once we receive further clarity around the conditional order, which will then allow us to finalize an initial void resumption plan, we will begin a disciplined process of ramping up our sales and marketing efforts focusing on our go to market strategy of market to fill versus discount to fill to take advantage of our annual wait period. Lastly, we will initiate the gradual phase relaunch of our vessels in U. S.

Territorial waters. But before recommencing guest voyages, we will conduct trial sailings, which will be independently audited by a third party and overseen by the CDC. Trial sailings will allow us to train crew and check the effectiveness of our enhanced health and safety protocols, confirm their flawless implementation and execution and comply with new CDC requirements including the necessary clearance on a ship by ship basis certifying that the ship has complied with and passed all regulatory mandates. The independent audit which will be conducted by DNV GL, our classification society will provide another layer of reassurance to all our key stakeholders that our health and safety program is working as designed. When we are ready to resume guest sailings in U.

S. Waters and have received all necessary approvals, we will take a gradual and methodical approach to returning vessels back to service. Initial voyages will likely operate shorter duration itineraries of seven days or less that reduce guest capacity levels. Focusing on today's current business environment and what we are seeing in our booking trends on Slide seven, we continue to be encouraged that despite our reduced investments in sales and marketing and other demand generating activities and the overall lackluster travel environment, there continues to be strong demand for future cruise vacation. As expected, the load factor for the full year 2021 is now below historical ranges, primarily driven by weak first half of the year occupancies impacted by continued uncertainty around the timing of the resumption of cruising.

However, load factors for the 2021 and into 2022 continue to be in line with historical ranges. And as for pricing, full year 2021 is in line with pre pandemic levels despite the dilutive impact of the value added future cruise credits we provided for canceled voyages. On a company wide basis, approximately 50% of these future cruise certificates issued to date have already been redeemed, including nearly 50% for the Norwegian brand, nearly 60% on Oceania cruises and approximately 75% on Region Seven Seas cruises. Consumer demand is evident across our entire suite of offerings with no one sailing region, sailing length, brand or source market materially outpacing others in terms of performance. A particular area of strength that you would expect is with our loyal past guests, who currently represent approximately 60% of all twenty twenty one bookings.

In fact, our luxury brands Regent and Oceana announced multiple booking records they have achieved in the past two months. First, Oceana had the most successful holiday promotion in its history with its Labor Day upgrade sale. Even more impressive was the fact that nearly half of the reservations were from new to brand guests and the vast majority of the reservations were cash bookings with less than 5% of these reservations utilizing future cruise certificates from canceled voyages. For the Regent brand, the opening of the twenty twenty three World Cruise shattered its previous World Cruise opening day booking record, doubling reservations versus last year's record levels. Regent also announced that the launch of its 2022, 2023 voyage collection reservations on opening day surpassed Region's previous all time booking day record by nearly 40%, which was set back in April 2018 with the launch of Seven Seas Splendors inaugural season.

While all destinations experienced high levels of interest, cruises in Africa, Asia, The Mediterranean and Northern Europe, the Baltics in particular were notably popular. And I must note that contrary to the perception that the more mature cruiser is reluctant to travel, these three examples demonstrate the opposite that our older guests have a continued appetite for upscale luxury travel even for long and exotic cruises once the immediate impact of that pandemic subsides. As I have said previously, our marketing investment strategy will correspond with a gradual ramp up of sailings. Our go to market strategy of market to fill as opposed to discount to fill has served us well in the past is serving us well now and I am confident it will continue to serve us well as we reengage with guests and travel agent partners in earnest to resume cruise voyages. I'll be back later to provide closing comments, but now I'd like to turn the call over to Mark for a financial update.

Mark, please.

Speaker 3

Thank you, Frank, and good morning, everybody. My remarks today will focus on the continued execution of our COVID-nineteen financial action plan and our road map to relaunch as we prepare for the resumption of cruising. The global pandemic continues to have a significant impact on our business with cruise voyages now suspended through the 2020. There is still much uncertainty around how the pandemic will evolve, so we are focused on what we can control and are prepared to adapt and modify our strategy in real time. As part of our action plan, we continue to take proactive measures to conserve cash and enhance our liquidity profile.

Slide eight illustrates some of the additional initiatives taken since the beginning of the third quarter. These include further reducing operating expenses, including shoresight general and administrative expenses opportunistically executing on the July capital raise transactions to further bolster our liquidity profile and refinancing our short term $675,000,000 revolving credit facility, which extended maturity from early twenty twenty two to 2026. Slide nine outlines the improvement of our debt maturity profile in response to the crisis, which we accomplished through numerous initiatives, including capital markets transactions, the deferral of amortization payments and the extension of maturities. The support we continue to receive from the export credit agencies, our commercial lenders and the shipyards has been incredible, and we cannot thank them enough for their ongoing partnership with us during this challenging time. During the quarter, we successfully executed a triple tranche capital raise of approximately $1,500,000,000 comprised of senior secured notes, exchangeable notes and ordinary shares.

To date, we've raised nearly $4,000,000,000 since March and increased our cash position by nearly $5,000,000,000 with the drawdown of the $875,000,000 revolver early in the year, providing us with a solid liquidity foundation. We truly appreciate the support we've received from all of our investors. Thank you for believing in our business model, in our management team and in the long term potential of our company and of the industry. Turning to liquidity. Slide 10 provides our current illustrative liquidity profile.

Our total liquidity as of September 30 was approximately $2,300,000,000 on a pro form a basis, which includes the portion of customer deposit refunds that are included in accounts payable as of quarter end. We have also earmarked approximately $300,000,000 to account for anticipated health and safety investments and other related items. Our health and safety investments may change as we finalize requirements in the CDC conditional order and as we continuously improve and refine our protocols with the best available science and technology. All of these factors combined result in a pro form a available liquidity of approximately $2,000,000,000 enabling us to continue to navigate through this environment and execute on our return to service plan. Once we have additional certainty around our voyage resumption schedule, we expect bookings to accelerate, which restarts the cash flywheel and further improves our liquidity profile.

We have made significant progress in reducing our controllable cash burn, with the Q3 average monthly rate coming in at approximately $150,000,000 representing an over 60% reduction in net cruise cost versus normalized levels. Our entire organization has worked tirelessly to pare back expenses while at the same time balancing the need to be ready to reactivate quickly when the time comes to resume cruise operations. For comparative purposes, if all of our vessels remained in their layup status at minimum manning levels and did not begin preparations for a return to service, we would expect fourth quarter monthly cash burn to average approximately $175,000,000 This is slightly higher than the third quarter, driven primarily by the timing of certain cash interest expense payments that are expected to be approximately $120,000,000 incrementally higher in the fourth quarter. Overall, for the 2020, this would result in an average monthly cash burn rate of approximately $160,000,000 which is in line with the company's previously disclosed target rate during a voyage suspension period. However, due to the fluidity of the voyage resumption schedule and associated expenses, our actual cash burn rate for the fourth quarter is expected to be higher.

As we begin to prepare our fleet for the gradual resumption of operations, our cash burn will increase from the voyage suspension levels as a result of the following: additional disciplined demand generating marketing investments, which drive new bookings and associated cash inflows the restaffing and repositioning of our vessels the provisioning of our ships and, of course, the new health and safety investments that we plan to make. Given the continued uncertainty around the timing of our resumptions, we are not yet prepared to give guidance for 2021 capital expenditures. Broadly speaking, however, excluding newbuild payments, the minimum required CapEx needed to run the business and maintain our best in class fleet is generally a few 100,000,000. Going forward, we do not expect a straight line recovery, so we will take a thoughtful and disciplined approach to reintroducing costs as we resume voyages in order to conserve cash while at the same time balancing the need to drive new cash bookings. Shifting the focus to our financial results.

The third quarter was significantly impacted by the pandemic. As a result, we recorded a net loss on a U. S. GAAP basis of approximately $677,000,000 or $2.5 per share. Turning to Slide 11.

We ended the third quarter with approximately $2,400,000,000 of cash and cash equivalents. Our cash balance in the third quarter increased, driven by the $775,000,000 of net proceeds from our July capital raise after completing the payoff of our short term credit facility. This was partially offset by customer cash refunds for canceled voyages of approximately $200,000,000 approximately $450,000,000 of operating cash burn, including operating expenses, SG and A interest and required CapEx and a net working capital outflow of approximately $25,000,000 Looking ahead, given the continued impacts of the pandemic, we will report a net loss on a U. S. GAAP basis for both the fourth quarter and the year ending 12/31/2020.

Before turning the call back to Frank, I want to emphasize that we while we are prioritizing our immediate business needs, we are also focused on the future of our company. Our medium and long term financial recovery plan, as laid out on Slide 12, focuses on three critical components: first, rebuild and gradually return to pre COVID margin levels. We also continue to identify opportunities to drive margin expansion through structural cost reductions and a continued strong focus on price discipline. Second, maximize cash generation, which will be bolstered by a robust and disciplined growth profile of nine cash accretive ships on order through twenty twenty seven and third, focus on optimizing our balance sheet and charting a path to delevering. The decision to increase our leverage and issue shares was not taken lightly.

But given the extraordinary circumstances presented by the pandemic, these were necessary steps. Despite these transactions, our weighted average cost of debt is approximately 5%, and our priority once we emerge on the other side of this is to focus on improving the balance sheet as we have demonstrated and proven our ability to do so time and time again. I'll now hand the call back over to Frank to provide closing comments.

Speaker 2

Thank you, Mark. I'd like to leave you with a few key takeaways on Slide 13. We will continue to work with our expert advisors including a healthy sale panel and the CDC to refine our science backed plans for a safer and healthy return to cruise, protect our guests, crew and communities we visit. We continue to observe strong demand for cruising across all source markets, deployments and brands in both the medium and longer term. And lastly, we are focused on the initial resumption of voyages in The U.

S. And a gradual phase relaunch worldwide as we work in partnership with authorities around the globe. With that, Crystal, please open the call up for questions.

Speaker 0

Thank you, Mr. Del And our first question comes from Felicia Hendrix from Barclays. Your line is open.

Speaker 4

Hi, good morning. I have so many more than one question, but I will follow the rules. So, Mark, considering that you, kind of ended your prepared comments on your cash flow liquidity and your plans in terms of your long term financial recovery plan. I did have to ask that given that you could continue to have cash outflows longer than you initially anticipated and you guys laid that out a lot on the call and acknowledging that your liquidity runway takes you well into next year, just wondering how you're thinking about accessing the capital markets for further liquidity? Your competitors have recently tapped the market.

So just wondering your thoughts there.

Speaker 3

Yes. Thanks, Felicia, and good morning. We continue to look and have the ability to access the capital markets should we need to. As we've said in the past, we believe and as we said on this call, we believe we have a very solid runway with just almost $2,500,000,000 of cash on the balance sheet. So as we look forward, we will be we will look at it on an opportunistic basis.

But given like I've said in my prepared remarks, we've raised almost $4,000,000,000 this year so far or almost $5,000,000,000 of incremental cash when you include the drawdowns of the revolver. So we have the ability. We're constantly looking at it, but we're not in a rush. We're going to do it on an as needed and as an on an opportunistic basis.

Speaker 4

And can you just remind us what your balance sheet looks like just in terms of raising further debt? And do you think something like an ATM structure would be more attractive under these circumstances?

Speaker 3

Yes. When you look at our raises to date, roughly half of it, roughly $2,500,000,000 has been via debt. So we've obviously encumbered the balance sheet pretty heavily. So looking forward, it would not be our desire to necessarily our first desire to issue any incremental debt. We do not have the ability to offer any material secured debt as we are at limits on our negative covenants.

However, there could be opportunities to issue unsecured debt. But most likely, we are looking at if we go down that path, it would be some sort of equity type transaction, whether it be an ATM, similar to whatever competitors have done or any further exchangeable type or common equity.

Speaker 1

Okay. Thank you.

Speaker 0

Thank you. Our next question comes from Brantz Montour from JPMorgan. Your line is open.

Speaker 5

Hey, everyone. Good morning and thanks for taking my questions. So I hate to ask such a short term question, but obviously there's a lot of exciting headlines in the cruise world out there over the last couple of weeks. So just curious regarding bookings that you guys are seeing, we were all sort of expecting some type of positive inflection when the CDC finally lifted its no sale order. Wondering what you saw when that order was converted to the conditional selling order?

Then if I may, I know it's only been a day since the vaccine news, but if you've seen any type of positive uptick in bookings data over the last twenty four hours?

Speaker 2

Hi, it's Frank. So bookings the last twenty four hours yesterday were pretty good, better than the previous four or five Mondays. And that's, I think, attributable to the vaccine news. We did not have any particular promotion or did any outsized marketing. So I do think that, that was a positive news.

Contrary, when the conditional sale order was issued, it was issued on a late on a Friday. Bookings are typically week on over the weekend. We didn't see much of an uptick, much of anything given the CDC news. Most consumers, I don't think follow that level of detail of what happens at CDC level vis a vis the cruise industry. But the vaccine is something that made huge news, stock market hit an all time high.

So it was front and center on all consumers' minds.

Speaker 5

Got it. Thank you, Frank. That's great color. And then I wanted to ask a quick question about the medium and long term financial recovery plan, number one, rebuilding margins. I was wondering if you've given any thought into what the potential sort of margin differential would be looking out a couple of years when, let's say, line is back to 2019 levels?

If you get any thought on what that what how much better the margin normalized margins could be in that scenario?

Speaker 2

Well, as you know, we did have industry leading margins. We were very happy with our margins. Today, we have no margin. So it's not like we have to rebuild from where we are. We just want to get back to where we were.

And I believe that going forward, we're going to have, as Mark mentioned, nine new vessels that are going to be high yielding, very cash accretive joining our fleet over the next few years. That's going to help margins. And I think we all have learned through this pandemic ways that to control costs better. We are amazed that we do as well as we do booking wise with little or no advertising and marketing and very little support from the travel agency community. So we think there may be opportunities on the cost side.

But primarily, we are a revenue driven, marketing driven company. We win the game, given our size, not because we're the best at controlling costs, given our limited scale, but we're the best at generating the highest ticket yields in the industry by a very wide margin, the highest onboard revenue yield by even a wider margin. And we think that will continue and grow as we bring on these nine incredible ships that we have on order.

Speaker 5

Got it. Thanks for that. Good luck everyone.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from Steve Wieczynski from Stifel. Your line is open.

Speaker 6

Yes. Hey, good morning guys. So Frank, in the past, you've indicated it could take five to six months before your full fleet would potentially could get mobilized. And I'm guessing the question is based on what you know today or what you know now, is that still a pretty fair range? And then the second part of that question would be maybe help us think about when you would potentially see a full recovery, meaning kind of getting back to that 2019 EBITDA level.

You've been pretty helpful in the past kind of walking us through that.

Speaker 2

Look, it's still very fuzzy, very fluid. We don't have a single ship operating. So this is very speculative, Steve. In terms of how long it's going to take to get the full fleet up and going, my best sense today, given all the uncertainties that we still have to work out with the CDC and when we can start is six to nine months. Broadly speaking, I look at 2021 as a transition year.

I believe that we will be able to have our entire fleet up and running sometime in the latter half of 2021. So that 2022 becomes the first full year since 2019 that we can operate the entire fleet for the full year. 2022 is the road to normalization and then 2023 forward is normalization. So a lot of questions still to be answered. We still have travel restrictions around the world, travel bans in some cases, airlines have got to get back up and running, ports have got to open.

But let's look at just what's happened in the last two weeks, one week and a half. We have the framework from the CDC. That was step one. We are very encouraged by the CDC's willingness to sit down and discuss the issues that we see with the order with us. We think that's going to start very, very soon.

And that's just a great positive note. We've seen the vaccine. And although it's going to take some time for the vaccine to find its way throughout the populations of the world, it's what we've been hoping for. And my guess is that the Pfizer vaccine may be the first out of the gate, but they won't be the only one. And just this morning, breakthrough therapeutic from Eli Lilly is certainly a very positive step.

We've seen incredible leaps in progress in the technology of testing. So we now have some wind to our back. We've got that flywheel going a little bit. And my the encouragement, the excitement level is hasn't been this high in a long, long time. So we're encouraged.

But still a lot of obstacles to overcome. We're prepared. We've got the liquidity. We've got the know how. We've got the history behind us.

We're going to get over this.

Speaker 3

And Steve, to add on that, this is not a race. We are cognizant. We said we are going to take our time. We want to instill confidence in the consumers. We want to instill confidence in all the constituents with our brands.

So you only get one shot to do that right. So we're going to take it on a methodical approach and do it right because, again, you have one shot to do it.

Speaker 6

Okay, guys. Thanks a lot. And Mark, could I ask one more quick one? That 175,000,000 you called out in the fourth quarter in terms of cash burn, does and I understand that's uptaking mostly because of interest. But are there any costs embedded in there in terms of getting some of your crew back in place for these test cruises?

Or if that doesn't, can you help us think about maybe what that cash burn does start to look like over the next couple of months as you start to get folks and ships back in position?

Speaker 3

The 175,000,000 for Q4 is really on a like for like basis, just to give you a comparison of how that stacks up against Q3. And again, the differential is really just the timing of cash interest. So no, the 175,000,000 does not include any material start up costs that we may incur. But given where we are today and given the lead time in which we think we need to stand up vessels, there could be some more slightly higher cost to come through in Q4 certainly. But I don't anticipate that it would be material.

At the end of the day, your first and largest cost is really repatriating your crew. And fortunately, we have ships to do that right now. So it doesn't really cost us an incremental lot of dollars to do that. So that's first and foremost. All the other related start up costs are going to happen closer into your actual start up with the exception of marketing.

So yes, there may be some slightly higher, but I don't anticipate that it will be materially different.

Speaker 6

Okay. Thanks, Frank. Thanks, Mark. Appreciate it.

Speaker 0

Thank you. Our next question comes from Vince Staples from Cleveland Research. Your line is open.

Speaker 7

Hi, thanks for taking my question. I wanted to talk a little bit more on the future cruise credits. I think, in August, you were seeing something like a little under half of those canceled cruisers taking the FCC. Not sure if you mentioned that updated number and what you've been seeing recently. And then the second part of that is, I think you alluded to half of FCC still being outstanding, which represents a really nice base of pent up demand that you've already spent kind of the marketing dollars on.

As you think about that group of customers booking for next year, booking for 2022, can the pricing on the overall booked position continue to hold at what's really impressive at flat as more of those FCCs come into the mix?

Speaker 3

Yes. So Vince, this is Mark. Thanks. On your first question in terms of the refund rate, Yes, it has been hovering slightly in the mid-50s. And that was really as a result of the refund pressure that we incurred in the early part of the pandemic.

But when you look at the last three months or so of canceled voyages, that average rate has gone down significantly, somewhere in the 30% to mid-thirty percentile range. So again, it's brought the overall. So that's been that again shows confidence from our existing consumers. And you're absolutely right. When you look at on a go forward basis, we do have a nice book of business inherently on the books from those FCC customers.

So what that's going to allow us to do is that allows us, number one, to leverage our cost base. We don't have to remarket to those. When we do remarket to them, we're going to certainly try and see if we can upgrade those customers. And what we're finding, and I think I've said this in the past is those customers inherently have a 25% bonus on their hands today. So what we're finding is that when they rebook, they're actually upgrading over and above the 25% incremental.

So that's been beneficial toward to us as well. So certainly, I think that's going to help pricing. We've always said that we want to maintain price discipline. We are maintaining it, and we can see that in our booking patterns and our pricing commentary.

Speaker 2

Yes. Vince, note that we said in my prepared statements that a little over half of all FCCs issued to date have been redeemed. So of all the FCCs that we've issued, they represent about 15% of annual capacity. So that means that 7.5 of annual capacity has already been redeemed. It's not insignificant, but not material.

And we've seen that pricing for 2021 and 2022 is flat to slightly higher than it was prior to the pandemic for like for like period. So the bottom line is the FCC redemption has had zero effect on pricing. We're maintaining pricing for new bookings. And since people have the 25% bonus, should we raise prices? It's still a great deal for them.

So bottom line is FCCs are not going to be affecting future pricing decisions.

Speaker 7

Very helpful explanation. Thank you.

Speaker 0

Thank you. Our next question comes from Jamie Katz from Morningstar. Your line is open.

Speaker 4

Hi, thank you. I'm curious if you guys have any noteworthy trends you can share from the 40% of the consumers that are not repeat cruisers to the brand? So I think on one of the slides, it said 60% were loyal repeat cruisers. Are you seeing any differences in behavior booking trends or anything like that, that would be helpful to us?

Speaker 2

No, nothing that we've discerned. Marketing is being done more online than digitally than when we would normally do because again of the wanting to preserve cash and the fact that travel agents are not as active as they normally do. So we find and this is one of the potential areas for future cost savings is that digital marketing is a real venue and it's not just kids buying things on Amazon or on Instagram. People are buying cruises worth thousands and thousands of dollars online. And we think that's a trend that the pandemic might have accelerated, the whole Zoom world.

So we think that's a positive on a net net basis. And we'll continue to manage our business and manage our workforce and devote resources to this kind of digital transformation that we find ourselves in.

Speaker 4

Okay. And then just out of curiosity, I know the original restart duration was for six months when you guys were estimating it and that went from six to nine months. I assume that's more about logistics and not about anything structural that's stretching that time period out. Is that right?

Speaker 2

Yes. It's logistics. It's the prevalence of the disease around the world. It's seasonal. If ship number 25 is ready to go in September 1, and she normally would have been in Alaska.

Maybe we don't bring her up on September 1 because the season's almost over and it would be penny wise pound foolish to stand her up then and there and maybe we wait until the following month when she normally would have been in The Caribbean. So those types of positioning and deployments, considerations like that are important.

Speaker 4

Excellent. Thank you.

Speaker 0

Thank you. Our next question comes from Thomas Allen from Morgan Stanley. Your line is open.

Speaker 7

Thank you. Good morning. So just

Speaker 5

a clarification on back to sailing. When do you expect to start the trial sailings? And how long do you expect the trial to take? And then should it take six to nine months after that to get all the ships sailing? And kind of a follow-up question, at what point in there do you see free cash flow or EBITDA Thank you.

Speaker 2

You've overstepped your boundary of one question, Thomas. But we'll do our best to remember everything.

Speaker 5

I hope I don't get in trouble.

Speaker 2

Question police won't get you. Look, we have a lot of questions to sit down with the CDC to work out. But if you just read literally the order and in the sequence that we need to get a vessel ready to start the sailings, we think those sailings could start as early as early January. As Mark said, this is not a race for us. We want to get this 100 right.

We're stressing flawless execution. There's still a lot to learn about the order and the nuances of how to execute those orders, how to implement the 74 recommendations seamlessly along with the framework that the CDC has laid out. And those are complex issues. What kind of testing? How often do we test, etcetera?

So don't pin me down to an exact date, but I would tell you that there's a chance that maybe some companies can start these trial cruises in December. We don't forecast that we will be wanting to do so until probably sometime in January. And then there's another series of sequence that the CDC has called for in terms of giving notice and getting the ship certified on a ship by ship basis, the audits that have to go through. And so we're very reluctant to give you a date of when the first trial sailing begins because your next question is going to be well, then when is your first revenue sailing going to begin? And we simply don't know at this early stage when that is.

In terms of when do we return to EBITDA breakeven or cash breakeven on a ship by ship basis, we have said that given where our pricing is, which is historical levels, we believe that number on a ship by ship basis is somewhere between 40% to 50% depending on the ship, the size of the vessel and so forth. On a corporate level, I would be very hesitant, so hesitant that I'm not going to answer the question as to when we would be corporate wise EBITDA breakeven or even cash breakeven. It's going to

Speaker 3

take some time. And just to further elaborate on that. If you look at our working capital changeover from Q2 to Q3, it's essentially we essentially flattened it out, excluding our normal ongoing operating expenses. So we are making progress there. And it's just going to take time.

It's going to be a matter of what load factor capacities we roll out, how quick the ships are rolling out. So it's tough to give you an answer to say we're going to be cash flow positive on x date. There are so many variables involved, but I can assure you that we are going to ramp up our costs on an as needed basis. We will be very disciplined about it, as I've said in my prepared remarks. But we will spend the dollars where we need to, to protect price and drive demand, which is what we always do.

Speaker 5

Helpful color. Thank you.

Speaker 0

Thank you. And our next question comes from Paul Golding from Macquarie. Your line is open.

Speaker 8

Thanks so much for taking the question and appreciate the detail as always. For either Mark or Frank, I was wondering in the table that you have around pro form a liquidity, you have that $300,000,000 cash health and safety initiatives component. I was wondering if you could give any detail around how much that covers of the fleet or how long that's supposed to be good for? Is that just for an initial restart? Any color around that?

And then I have a follow-up.

Speaker 3

Yes. That $300,000,000 obviously, is an estimate. And when you look at it on a go forward basis, what we really were trying to do is give the market color on some of the funds that we're carving out. So in the past, I think we've said we in the past couple of calls, we've estimated that we think we need 100,000,000 to $150,000,000 of investments to make the ships safer under the new standards. That's going to be spent over time.

It's not all going to be spent in the fourth quarter or the first quarter. It's to come out over time over the next few quarters. So that's not going to be an immediate outflow, but it's an estimate. As you can imagine, as the framework has been issued and as we continue to assess the more intricate technical guidelines around that framework, that enables us to then just determine what needs we have on the back end for investment purposes. So again, we just wanted to be cognizant that we were carving out a significant amount of funds related to that to cover ourselves.

Speaker 8

Got it. So not implying that it's payable or going to be spent immediately once

Speaker 3

You there's some sort of can think about that, that outflow would probably happen over the course of two to three quarters.

Speaker 8

Got it. That's super helpful. And then the follow-up I had around basically liquidity again would be, we saw the Regent twenty twenty three world cruise go up and you've got that far out booking available. I was wondering how you're considering pricing versus far out bookings now for the other brands from a liquidity shoring perspective?

Speaker 2

Our pricing strategy has not changed. As you know, if you go back the last four or five years, on average, we're able to raise our ticket yields in the 3% to 4% range. We want to continue that trend. We think that the combination of pent up demand in the marketplace, our industry leading brands, less capacity in the marketplace, the new ships that are coming online for us. As you recall, had so many underpenetrated markets or markets where we simply didn't have a presence because we don't we only have 28 ships.

We longed for our vessels to new vessels to come online. And we think that will help the overall yield growth profile of our company.

Speaker 3

And Paul, remarks around the region and Oceana bookings, I think that was more of us signaling more around the demand, that there is solid demand out there and there's pent From up a liquidity standpoint, if you think about it, that really doesn't impact us or benefit us in the near term as, yes, we do get deposits initial deposits from that. But the bulk of those funds don't come in until roughly anywhere on average one hundred and twenty to depending it could be one hundred and eighty days on a world voyage or more. But again, there's not going to be a significant near term liquidity benefit from that.

Speaker 8

Is there a general rule that you're comfortable with sharing as far as how much is of deposit base is nonrefundable at this point?

Speaker 3

Well, yes, it's fully refundable. We don't at this point in time, we don't have nonrefundable fares. So it is fully refundable up until again, depending on the voyage, anywhere from one hundred twenty to could be one hundred and eighty days or more for a world voyage.

Speaker 8

Got it. Thanks so much. Appreciate it.

Speaker 0

Thank you. Our next question comes from Ben Chaikin from Credit Suisse. Your line is open.

Speaker 2

Hey, how's it going? Thanks for taking my question. With regards to the CDC no sale update, the way I read it, I guess the I think the dates for ship approval, simulated testing and then revenue sailings all kind of run on a sequential timeline, I think thirty days for the simulated and then sixty days for the revenue sailing. Guess number one, is that correct? And then two, is there any opportunity or wiggle room that that process could be changed to run concurrently, I guess?

Yes. Not all those periods and notice periods are sequential. We think they are concurrent. And those are some of the clarification questions that we have that we will be discussing with the CDC in the coming weeks. Great.

Thank you. That's it for me.

Speaker 0

Thank you. Our next question comes from Ivan Feinseth from Tigris Financial Partners. Your line is open.

Speaker 9

Hi, thank you for taking my question. What are your thoughts on developing more private islands and like creating more of a controlled destination environment and building on let's say you said once said if you had a hotel on Great Stirrup Cay, it would be one of the world class destinations in The Caribbean and creating shifting to something like that.

Speaker 2

Yes, I still stand by those comments. Ivan, as you know, we're the only cruise company that actually has a private island, private destination in the Western Caribbean. A lot of folks have it in The Bahamas area as we do a great stirrup of where we've made significant investments in making it an up scale destination as you mentioned. And we're very, very proud, very happy. It doesn't get the fanfare that the Bahamian Islands get, maybe that's our fault, but great excuse me, Harvest Caye in Belize is just a wonderful destination.

We think that because of the pandemic over time, the new vessels coming online that it'll be more utilized than it has been in the past as we position vessels around the southern part of the country that can reach Belize and back in seven days or So we're very happy with those two islands. You take what we're doing in Alaska, where we have made major investments in real estate development at Ketchikan with Ward Cove, the land we bought in Juneau. So we now have besides the investment we've made in Seattle at the port there, we are really, really in good shape and leading the industry and controlling the destinations that we need so that we can deploy even more vessels to Alaska. Real estate is expensive and it takes a lot of money to develop real estate. I think that around the world, I'd love to have a private island in the Mediterranean.

Let me know if you can have any for sale. I don't think they are. But we're very happy with what we've got today, one in The Bahamas, one in Western Caribbean, our Alaska investment. The situation we have in Hawaii with our part of America vessel and the fact that it's the only American flag vessel that cruise in Hawaii gives us even more flexibility there. So are very happy with our land based offerings.

And we'll keep an eye out in case there's other available. But for the time being, we're very pleased with what we got.

Speaker 9

Do you think, We've let's say Yes.

Speaker 2

Go ahead, Ivan. I'm sorry.

Speaker 9

Consumers, let's say, if because you could create a controlled environment once people are onboard, let's say, in Miami and been tested and then they go to your island, for example, they're still in this contained environment that you control.

Speaker 2

So at

Speaker 9

some point, could be I that, I believe, would be a good vacation. And we're marketing that as being a way to have a nice vacation but have limited outside exposure?

Speaker 2

Certainly, the bubble that we're trying to create on board can be created in private island. But remember that what we're going through now is not what we're going to go through forever. And I don't want to make long term investments, long term decisions in order to fix a short term problem. But we've seen that our customers like these private destinations, they're controlled. Forget about the health and safety part of it, they're controlled just an experience point of view.

And I'm glad I've got two of them. So but I do think that, look, the pandemic won't last forever, we will return to normalcy. People do like variety in itineraries. People do like itinerary rich or port intensive itineraries. And we're hoping that and our plan is to continue to offer that.

Thanks, Ivy. Operator, we got time for

Speaker 9

one Thank more question,

Speaker 0

Thank you. And our last question comes from Stephen Grambling from Goldman Sachs. Your line is open.

Speaker 4

Hey, thanks for sneaking

Speaker 10

me in. This is a bit of a multi part follow-up, but and for Mark, but can you maybe help us think about free cash flow sensitivities to different occupancy levels? And then just touch on kind of intermediate term target net debt to EBITDA levels and also how the long term kind of pre COVID targets of two point five to two point seven five times has maybe changed or not changed for the longer term?

Speaker 3

Yes. Yes. Well, look, obviously, we're targeting to get back to our reduced net leverage levels. That's going to take time, and there's a lot of variables in between there, but we're focused on that. In terms of sensitivities on the cash flows and load factors, again, we've said generally a ship breaks even roughly at 40% to 50%.

So if you take that, that can kind of give you your free cash flow sensitivity from there. And the second part, I apologize, I got lost on your second part of the question.

Speaker 10

It was more on the leverage levels, thinking through if there's like an intermediate term target that you might be thinking

Speaker 3

about Yes. To lower.

Speaker 10

To lower. Ahead of some of

Speaker 2

order As soon as

Speaker 3

we can. I mean, number one, we need earnings, and we need visibility on the industry. So our number one one of our top priorities as we emerge from this is going to be figuring out how do we delever and finding financial flexibility in the markets to possibly refinance some of our debt or again, balance sheet management. So that's front and center, but we have to emerge out of this first.

Speaker 2

Okay. Thank you, Steve, thanks, everyone, for your time and support, your patience during our third Distance earnings call. As always, we'll be available to answer your questions later on today. Stay safe. Bye bye.

Speaker 0

This concludes today's conference call. You may now disconnect. Everyone, have a great day.