Q3 2021 Norwegian Cruise Line Holdings Ltd Earnings Call

November 3, 2021

[music].

Good morning, and welcome to Norwegian Cruise line Holdings third quarter 2021 earnings Conference call. My name is Laurie and I will be our 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 then zero on your Touchtone telephone I. That's a reminder to all participants. This conference call is being recorded I would now like to turn the conference I'll go to your host Ms. Jessica John Vice President of Investor Relations.

Corporate communications and E. S. G. Ms. Shang. Please proceed.

Thank you Lori and good morning, everyone. Thank you for joining us for our third quarter 2021 earnings and business business update call I'm joined today by Frank del Rio President and Chief Executive Officer of Norwegian Cruise line Holdings, and Mark Kempa Executive Vice President and Chief Financial Officer, Frank will begin the call with opening commentary after.

Which mark will follow to discuss our financials before handing the call back to Frank for closing remarks, We will then open the call for your questions. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at Www Dot N C. L. H L. P D dot com slash 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 third quarter 2021 results was issued this morning.

And is available on our Investor Relations website.

This call includes forward looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release.

Our comments May also reference non-GAAP financial measures a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation with that I'd like to turn the call over to Frank del Rio Frank.

Thank you Jessica and good morning, everyone and thank you for joining us today and as always I hope that all of you as well as your loved ones remain healthy and safe.

Today, we will discuss commentary on three areas.

First the progress we have made on our great crews come back.

Second our recent booking and demand trends, which have shown particular sniper sailings operating in the second half of 'twenty two and for all of 2023, when our fleet is expected to be back in full operation and at normalized occupancy levels.

And finally on our exciting pipeline of new vessels, which we expect to contribute outsized EBITDA growth and other important financial metric improvement.

Slide four outlines how far we have come on a return to service plan.

When we last spoke in early August we have just relaunched the first vessel in our fleet Norwegian Jade and grief and we're on the verge of assuming crews in the U S with Norwegian encore, making her west coast debut sailing to Alaska from Seattle.

Since then we have successfully relaunched 11 of our 28 vessels with all three of our award winning brands resuming operation.

We couldn't be more pleased with the performance of our relaunched chips.

First our crew has not missed a beat since returning seamlessly adapting to a new health and safety protocols and going above and beyond to deliver the exceptional vacation experiences.

Our brands are known for.

This commitment to service has resulted in record high guest satisfaction scores with each month sequentially better than the month before.

And second we are seeing the power of our industry, leading bundling strategy strategy pay off as guests are boarding our vessels with fresh wallet, which coupled with robust pent up demand for all kinds of experiences it's translating to remarkably strong onboard revenue generation.

In fact onboard revenue has exceeded our baseline expectations by over 20% with broad based strength across all shifts regent and revenue streams.

Well I would caution though against extrapolating these figures as permanent.

Or indicative of steady state future performance just yet.

As there are several transitory factors that may be contributing to the elevated current levels, including pent up demand cabin and guest mix. It is nonetheless, encouraging and positive signal of the healthy consumer demand we are experiencing.

Lastly, and most importantly, these relaunched chips have already contributed positive cash flow in the third quarter, even with our self imposed occupancy level caps.

Despite a return to service coinciding with the unfortunate some resurgence of Delta variant.

Happy to say that a robust multi layered sales say health and safety protocols work is designed to mitigate the introduction and transmission of COVID-19, our board our vessels the.

The prevalence of cases, we identified a pre boarding testing mid crews and then a deportation or inconsequential and well below what we all saw in the general population during this time.

In short, we were able to fairly evaluate and fine tune our rigorous protocols during one of the highest height of the pandemic and the stellar results speak for themselves.

Today, all ships in our fleet continue operating with a strict 100% vaccination requirement.

Coupled with universal pre embarkation testing in multiple layers of additional protection once on board, including upgraded air filtration system, and well resource medical centers, we will.

Continue to follow the science and evaluate and modify our protocols as needed with guidance from our team of experts led by former FDA Commissioner, Scott Gottlieb and from applicable public health authorities.

As I have said time and time again, our commitment to health and safety is far and away. The most important principle that guides how our company operates at all levels and not just now, but pre and post pandemic as well and we are willing to go to great lengths to protect our guests crew and the communities we visit.

Just last week, we were pleased to receive positive news from the CDC with a temporary extension of the framework for conditional sealing order through January 15th of 2022 at which point the order will revert to a voluntary program.

We view this as a positive step forward for our company and the industry at large and we were encouraged to see positive recognition by the CDC.

Our successful resumption of cruising in the length, we have all taken to enhance our already stringent health and safety protocols and we pass the response to COVID-19, which continue to be much more rigorous and much more comprehensive than those implemented by any other travel leisure hospitality sector.

With the progress the Saudi is made with vaccinations therapeutics and adapting to living in the ongoing pandemic environment. The worst is seemingly behind us.

Each day will be coming increasingly confident in our ability to flawlessly execute on our phase void your assumption, which is detailed by brand and by vessel on slide five.

We continue to expect our full fleet to be back in operation by April one of 2022 and with the steady and prudent trajectory. We are well positioned for a projected return to pre pandemic occupancy levels across our fleet no later than the beginning of the third quarter of 2022 and in time to cap.

Is your peak summer season demand and pricing.

While we expect to continue seeing some fits and starts as we ramp up our relaunch we are keeping a close watch on port availability travel restrictions and any other changes in the global public health environment, which could affect our return to service plan as we are ready to adapt accordingly.

Turning to slide six we shipped todays discussion to our booking and demand trends.

I am pleased to report that we continue to see robust future demand for cruising, particularly for sailings operating in the second half of 2022, and all of 2023 as evidenced by our record cumulative book position during this period.

You'll recall at the beginning of our third quarter, our book position for full year 2022, what meaningfully and significantly ahead of 2019 as record levels and at higher pricing.

However, and consistent with the pullback seen by the broader economy and in particular, the travel and leisure sector. The summer Delta variants third resulted in a marked slowdown in our net booking volume.

The impact was heavily weighted to closer in sailings, particularly for fourth quarter of 2021, and first quarter of 2022 with the impact lessening sequentially throughout 2022 and beyond.

Rather than chase scares demand during the delta search by dropping prices and spending marketing funds in a less than optimal manner. We strategically chose to wait for consumer sentiment to rebound as we have seen direct ebbs and flows in our booking patterns throughout the pandemic coinciding with changes in the public.

Health environment.

This typical 10 week period, we remain disciplined and continue to hold or even raised pricing and the outcome is that today, we see both record load and record pricing for the second half of 2022 and for all of 2023.

We are intently focused on the long term brand positioning and profitability of the company and are simply not willing to sacrifice pricing in order to increase load factors in the upcoming transitional quarters.

As has happened in past surges and as the COVID-19 situation recently improved we have experienced a rebound in bookings with net booking volumes improving sequentially over the past six weeks. We believe this improvement will accelerate moving forward as first our brands begin to ramp up their demand generating marketing.

Investments in mid November coinciding with Black Friday, cyber Monday promotion and second a much anticipated and expected recovery in the travel agent channel space and.

And lastly, the approval of vaccines for children Ages five to 11, which came just last night and will allow for an expanded group of 100% back guests, especially families. So to say.

On our brand.

Our go to market in full vaccination strategy strategy has paid off and drove and today. Our full year 2022 load factor remains in line with 2019 record levels and at higher pricing, even when including the diluted impact of future cruise credits.

In addition, we are meaningfully better book for second half of 'twenty, two and full year 'twenty, three sailings and at better pricing that had any similar point in time in the past.

Our primary focus continues to be on these periods. When our fleet is expected to be in full operation and at normalized occupancy levels.

And as I mentioned before just in time to capture the all important third quarter peak summer season, which traditionally is the most profitable quarter for the industry.

Breaking down our book position for full year 2022 further more than 55% of bookings are from loyal repeat cruisers to our brand. In addition, approximately 75% is comprised of new cash bookings with the remainder comprised of future cruise credits.

So far approximately 60% of the total value of our outstanding FCC's have been redeemed.

As a reminder, the value added 125% in future cruise credits will issue that we issued at the beginning of the pandemic can only be applied to sailing through year end 2022, resulting in zero yield dilution when we look to 2023 and beyond.

And while still early booking trends for 2023 years.

Thus far are also off to an impressive start our booking windows continues to be elongated versus historical level with guest booking further into the future, particularly for the Oceania cruises and regent seven seas cruises brand.

<unk> point in August Regent set a record for the largest booking day in his 29 year history with the launch of its 2023 2020 for voyage collection reservations surpassed its previous record by approximately 15%.

And while all itineraries were popular notable destinations of interests, where Africa Asia and the Baltics, demonstrating our guests' continued appetite for long and exotic itineraries.

And in September the sales launch with just a single ship Oceania cruises, New 1200 passenger Vista, which doesn't debut until April 23 set an all time single day booking record for that brand that surpassed the most recent recent record set in March of 2021 by nearly.

60%.

Half of the available inventory for Vista inaugural season was sold in a single day with 30% of bookings coming from new to brand guests.

These incredible record breaking milestone a further proof of the exceptional demand we continue to experience for our brand's unique product offerings from both new and loyal guests alike.

Strong future demand in both load factor and pricing is also empirically evident in our advanced ticket sales spills.

Advanced ticket sales increased approximately $500 million on a gross basis in the quarter equating to an approximately 65% increase versus the prior quarters spilt.

In addition, and more importantly, our cash advance ticket sales for sailings beginning in the second quarter of 2022 and beyond are approximately 45% higher than at the same time for a record year 2019.

As we move forward with phasing in the rest of our fleet, we expect there's tremendous momentum to continue sequentially.

Looking to the future 2022 will also mark an exciting new chapter for our company as we welcomed the first ship in the next class of vessels for Norwegian cruise line Norwegian Prima in summer of 2022.

I just returned from the shipyard in Italy, a few weeks ago, where I was able to witness firsthand what an evolution prima is for them the regent brand and for the industry at large which you can see on slide seven.

Everything about who was impressive as she has been meticulously designed to elevate the guest experience last month, we unveiled Primus entertainment lineup, including its interactive headlines show the Tony Award nominated musical Summer the Donna Summer musical Norwegian Prima will also showcase numerous cruise industry.

<unk> and new to brand experiences, including the world's first transforming venue that converts may three storey theater into a vegas style nightclub exhilarating freefall dropped dry fly in a tri level 200 foot long race track the largest let's see.

That pretty much speedway will be the first ever three level race track and it's over 20% larger than that on Norwegian Encore, featuring 14 turns where drivers can reach speeds of nearly 40 miles per hour.

Three months advanced sales continued to impress even after her record shattering sales debut in May which set a single best booking day and best initial booking week record doubling the previous record set by Norwegian Bliss in 2018.

And despite her introduction being six weeks later than Norwegian Bliss or booking volumes are trending in line with that of Bliss, the previous fastest selling new builds for the blind and materially higher prices.

As you can see on slide eight in our region pretty much set the first ship to look forward to when our industry leading growth profile of nine world class ships coming online through 2027.

These newbuild will grow our birth count by approximately 40%, adding 24000 additional birth across our three brands.

In 2023, when it actually gets back in full force, we expect our berth capacity to be approximately 20% higher than 2019 to pre pandemic levels.

The addition of these new cutting edge chips will also favorably change our cabin mix.

Illustrated on slide nine with premium cabins, increasing to approximately 65% of total berth versus approximately 60% today.

In addition to the premium mix of real estate onboard our new ships have all the bells and whistles additional screens for onboard revenue generation with new and innovative experiences and the latest technology to improve efficiency versus our existing fleet.

Excitement around new ship is also a significant demand driver and a powerful engine to fuel future yield EBITDA cash flow and ROIC growth. It brings new guests to our brand and it brings back repeat guests as well, helping us to appeal to every segment that we are targeting in.

And given our base of only 28 ships in our fleet, we are ready and eager to to easily and profitably absorbed this new capacity as it will allow us to further diversify our product offerings and penetrate numerous attractive and high potential unserved and underserved markets globally.

The strategic addition of the Prima and premium plus class for example, which are smaller but more upscale than our previous breakaway breakaway plus class at approximately 3200 birth for their first two prima class ships and increasing to nearly 3600 berths for the next for premium plus class shifts will give us additional <unk>.

Bandwidth and flexibility to optimize the deployments are most profitable and allow the line to continue commanding premium pricing with the right size ship in the right place and at the right time.

And as slide 10 shows we have historically demonstrated our success in not only absorbing capacity, but translating this capacity growth into outsized revenue outsized adjusted EBITDA and operating cash flow growth that significantly outpaces the growth in absolute capacity.

We fully expect that to continue this trend and drive meaningful growth to the top and bottom line with the addition of these exciting new ship.

Back later to provide an update on our ESG effort as well as provide closing remarks, but for now I'd like to turn the call over to Mark for a financial update Mark.

Thank you Frank.

We reached a significant financial milestone in the third quarter with our first voyages resuming sailing after a previously unimaginable 500, plus days with zero revenue generating operations.

Our return to service has been very successful and we remain on track to execute on our phase <unk> voyage resumption plan.

By the end of the third quarter. We had started 37 voyages completed 29 and had eight ships and service representing approximately 40% of our birth capacity.

Occupancy in the third quarter was approximately 57% in line with our expectations and reflecting our self imposed occupancy limits.

As we have outlined previously we have taken a conservative approach to occupancy with our voyage resumption, which proved to be prudent with the rise of the delta variant to ensure that health and safety remains our number one priority <unk>.

Increasing our occupancy is not a race and we are focused on being diligent and thoughtful and ramping up of occupancy levels to protect not just our guests and crew, but also our long term brand equity.

<unk> reduced occupancy levels in the quarter I am extremely happy to report that the fleet that operated in the period was cash flow positive.

Looking ahead by year end, we expect to have 17 ships, representing approximately 75% of capacity back in service with the full fleet operating as we entered the second quarter 2022.

Turning to liquidity and cash burn on slide 11, we ended the quarter with approximately $1 9 billion of cash and cash equivalents. In addition earlier. This week, we further enhanced our liquidity profile by entering into a $1 billion commitment through mid August 2022.

This liquidity backstop enhances our financial flexibility and provides immediate and additional liquidity should the need arise if.

If drawn the commitment would convert into an unsecured note maturing in April 2024 four.

For sake of clarity, we have not drawn on this facility and do not intend to do so given our current projected recovery at this time.

As for cash burn for the third quarter, our average monthly cash burn rate was approximately $275 million lower than prior guidance of $285 million.

For the fourth quarter, we expect our average monthly cash burn to increase to approximately $350 million as we continued to ramp up restart expenses and additional vessels reenter service.

During the quarter, we are expecting a ramp up of demand generating marketing investments as we head into the holidays with Black Friday, cyber Monday and wave season.

It is important to note that this cash burn estimate does not include our expected cash inflows from both new and existing bookings or the contribution from ships that I've read entered service both of which we expect to accelerate as we move forward.

On a net basis based on our current resumption plan, we continue to expect to reach a crucial inflection point with operating cash flow turning positive towards the tail end of the first quarter of 2022.

In addition, based on our current trajectory and market conditions. We are on a solid path to return to profitability for the second half of 2022.

Turning to slide 12, our cash balance in the third quarter decreased to $1 9 billion of cash and equivalents driven by approximately $825 million of operating cash burn, including Opex expenses SG&A interest and Capex.

Customer cash refunds of approximately $115 million and net working capital and other inflows of approximately $125 million, which is net of health and safety investments and cash collections from current and future voyages.

With 2022 now just around the corner, we have provided some additional guidance to assist with modeling for certain metrics on slide 17, including depreciation and amortization interest expense fuel consumption and capital expenditures. In addition, we have provided detail on our annual capacity growth expectations on slide 18.

As we gear up to deliver on our impressive growth profile through 2027, which we expect to be meaningfully accretive to both earnings and cash flow generation.

Lastly, with much of the focus on the market on inflationary pressure I wanted to touch quickly on what we are experiencing we are still fine tuning, our 2022 plans and related projections and will provide more color on our cost outlook on our next earnings call.

Similar to almost all other industries, we are seeing pockets of pressures in areas such as fuel food and other commodities.

Our supply chain group continues to work diligently to mitigate these costs and we are fortunate that the timing of our ramp up in operations is relieving some of the transitory cost pressures.

The good news is that we are a primarily fixed cost business, which is beneficial in an inflationary environment on the labor front, we have a high degree of visibility on our costs as the vast majority of our crew which comprises the bulk of our employee base are covered under multi year agreements on the flip side. We're also seeing very.

Strong pricing power, which is helping to offset inflationary pressure.

Even with the pricing power, we are seeing cruise vacations continues to offer an incredibly compelling value proposition versus a land based vacation alternatives. We have said in the past that a cruise vacation typically offers at least 20% to 30% better value than a similar a land based alternative.

With the current inflationary backdrop and on a relative scale, we believe our offering and value proposition is even more compelling now than ever before.

Without the same labor market pressures that many of our land based peers are experiencing we can provide a consistent and exceptional level of service for our guests, which is evidenced by our record high guest satisfaction scores since resuming sailing.

These factors combined will continue to allow us to further increase our prices on our multi year strategy strategy to achieving pricing parity to that of land based vacation offerings.

Before handing the call back to Frank I want to reiterate that while the global public health environment remains fluid and we are not yet completely out of the woods. We are increasingly optimistic as we continue on our road to recovery.

We are now in a position to pivot to a more offensive approach and shift our attention to executing on our medium and long term financial recovery plan, which is outlined on slide 13.

As part of this plan, we will remain focused on rebuilding our strong track record of financial performance optimizing our balance sheet and delivering on our attractive and disciplined growth profile I look forward to updating you on our progress on our next call, but for now I'll hand, the call back over to <unk>.

Rank to provide closing commentary Frank Thank you, Mike before we wrap up our prepared remarks I'd like to provide an update on our global sustainability program sustain on slide 14.

We are committed to driving a positive impact on society and the environment through the advancement of this program on.

On the environmental front in addition to ongoing initiatives to reduce our greenhouse gas emissions rate during the quarter. We made the first purchase under our new carbon offset program that.

Reminder, over the summer, we announced that we have committed to purchasing high quality verified carbon credits to offset the equivalent of 3 million metric tons of carbon dioxide over a three year period. This is a measurable step in near term emissions reductions, which will help bridge the gap in our de carbonization effort until new.

<unk> become feasible, our 3 million ton commitment is sizable and we plan to increase up purchases in future years to help us reach our goal of carbon neutrality.

We also strive to maintain a supportive and empowering workplace for our team members across the globe, who are without doubt our most valuable asset.

Such we recently announced that we have and definitely moved to a four one flexible work model for our shore side team members globally, which requires employees to work in office Monday through Thursday, and remotely on Friday.

This new work model allows us to provide additional flexibility for our team members, while also supporting our business goals, maintaining productivity and fostering the in person collaboration and workplace culture that we are so proud of we are honored that this commitment to our team was recognized with our naming to the Forbes world's best.

Lawyers list. This recognition came after also being named to the Forbes America's Best employers list earlier this year in which we ranked among the top 75 companies in the overall large employer category and among the top 10 companies in the travel and leisure sector.

And while we are pleased with the progress we have made to date on our ESG efforts. We have no plans to stop here, we are committed to continuing to drive positive change and make a lasting impact on the world as a responsible corporate citizen and.

In addition, we remain focused on enhancing disclosures around our ESG efforts to ensure transparency and accountability around this critical topic for our key stakeholders and I look forward to sharing additional details with you as we continue on our ESG journey.

Turning to slide 15, I'd like to leave you with a few final key takeaways first our return to service is on track and initial voyages have been successful on all fronts.

Health and safety protocols are working as intended and we are seeing strong onboard revenue and high guest satisfaction scores. We are increasingly confident in our ability to execute on our phase voyage resumption plan with a target to have our full fleet in operation by April one.

Up next year.

Despite headwinds in the third quarter related to the Delta variant, we continued to experience strong future demand for cruising with positive booking and pricing trends, particularly for the back half of 2022 and throughout 2023 and lastly, we believe we are nearing an inflection point with the worst of the pandemic now appearing.

To be behind Us our future is bright and we look forward to the next chapter in our company's storied history as we deliver on our industry, leading growth profile, which we expect will providing meaningful bliss.

Our financial results and shareholder value in the coming years and.

And with that Laurie, let's open up for questions.

Thank you Frank and if you have a question at this time.

At this time, then one key on your Touchtone telephone.

Our debt to get as many people through the queue. Please limit your time to one question.

My question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Our first question comes from Stephen Grambling of Goldman Sachs. Your line is.

Okay.

Hey, Thank you for taking the questions I know you don't want to give too much color on 2022, yet, but I would love to just hear any kind of guardrails to think about for load factor over the course of the year and then maybe looking longer term.

As you compare and contrast, the company versus 2019, what structural changes are you contemplating as it relates to either itineraries marketing approaches or otherwise as you assess consumer behavior and changes to your own operations.

Well, that's a mouthful, but I'll try to get through it look we.

We thought we have perfected our itineraries our deployment and so I don't see major changes in how we deploy our vessels in 'twenty, two and beyond assuming the world reopens.

Today the world is in the process of reopening as you know Asia is still primarily closed but we believe that by the time our next AGM.

Season begins which would be about this time in 'twenty two.

That it will be open.

We do have new vessels coming online like I said for over the next two years and we're eager to take possession of those vessels. We said time and time again, we have many unserved and underserved market because we only have a fleet of 28 vessels. So weird.

Anxiously awaiting the.

The receipt of those vessels, which we believe will be accretive to the yields and certainly EBITDA and ROIC.

And all the financial metrics turning to 2022.

To start looking at 'twenty to not as a year and not as a block.

Sequentially.

Certainly the back half of 'twenty. Two today is looking much better than the first half partly because of the effects of the delta variant and none on.

On booking trends.

And consumer.

Behavior.

Will affect Q1 more than Q2, and Q2 more than Q3, but sequentially.

'twenty two is ramping up very very nicely.

We said in our prepared remarks, the back half of 'twenty two today is meaningfully.

And significantly better booked than we were at this time for 2019 or any year. So we're way ahead in load and that gives us confidence to continue with the price.

Disciplined because today not only do we have that meaningful load, but we're ahead in pricing. So I feel very very good about 2022 and I can make the same identical remarks about 23.

Head in and load meaningfully and ahead in pricing.

Q2 is a what I would really call the pivot quarter.

We see.

Demand coming back strongly for 'twenty two.

But as you know we still have by the end of the year. We will have 17 ships in the water that means that we're going to introduce 11 vessels between January one and April one and those will be ramping up until the second quarter will be a transition year.

A transition quarter, where all the vessels will be in operation, but we look we feel very very good about Q2 as well so look.

<unk>.

Im feeling better than I have in nearly two years.

Advanced bookings are strong one of the wonderful things about this industry is that we have incredible visibility into the future and because consumers are booking earlier than ever as I had mentioned in my prepared remark, we have visibility into the further into the future than we ever have and that visibility is a very positive one.

Perhaps as a quick follow up when you look at the strong booking trends in the back half of the year can you provide any color on the composition between.

New to brand or new to cruise versus the existing customer base and what's what's driving that.

Look I think it's not much different than what I said earlier about.

About 55% of repeaters slightly higher than normal.

We've we've moderated our marketing spend and so when you moderate your marketing spend you tend to go to that segment of the market that you know best.

Easiest and least expensive to go after and hatch our past guests. So we have a little bit of an elevated past guest which is good.

No the brand Thats, what you want we're not getting ready to rollout our big marketing push in anticipation of ways to promote black Friday to promote cyber Monday.

And we have high hopes for a very very good wave season.

Fair enough. Thanks, so much I'll jump back in the queue.

Okay.

One is from Brian <unk> of Jpmorgan. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions.

Frank or Mark I was hoping you could provide a little bit more color on occupancy near term, perhaps maybe exit rate coming out of the third quarter or maybe even better just talk a little bit about the self imposed caps and how you foresee.

Your ability to raise those in the next call it two to five months.

Yes, good morning brands look so.

Third quarter was in line with our expectations I think we had roughly 57% occupancy as we've said time and time and again, we're not in a race to just fill volume we want to maintain price discipline and we're going to do that.

When we look ahead at the fourth quarter, we're going to have I believe 17 ships in operation approximately 75% of our capacity.

And as we as we continue in the first quarter, we will have almost our entire fleet operational effectively by the end of the first quarter. So rather than look at occupancy I think I think a better metric is looking at the number of passengers that we're carrying I think in the third quarter. We had about 60000 roughly passengers carried.

That's going to increase to roughly 150 to 175000 in Q4 250 to 300000 in Q1, and then youre up back into the half a million dollars. So.

Occupancy is ramping up in line with our with our with our fleet rollout pricing.

Pricing discipline is important to us.

We've said time and time and again, we want to protect that we want to protect the long term brand equity. So we're going to do it in a thoughtful and rational manner, rather than chasing that that cheap customer.

Again that that point of occupancy.

Okay.

Thanks for that Mark that's helpful and then as a follow up.

One of the themes of travel and leisure. This this quarter is just trying to figure out how long the pent up demand can last and positively impact consumer spend Frank I was wondering if you wanted to just give some thoughts.

On the onboard spend picture and is there any reason why it doesn't eventually revert to 2019 levels anything structural you would call out is why it might settle above those levels going forward.

In terms of your pent up demand question no. One has a crystal ball all I can tell you is the empirical evidence that we have based on bookings people are booking out booking further out than ever before that the combination of the fact that we have introduced itineraries earlier than ever so they're available for sale, but also people.

The psyche of the consumer they Wanna crews they want to travel maybe they don't want to travel this quarter or maybe even next quarter and they're pushing it out further and further hoping that the COVID-19 situation.

<unk> drastically so I do believe that we're going to continue having greater visibility than we had in the past.

Then that will continue for some time in terms of onboard revenue look.

We've seen the consumer spending across lots of different sectors are up and it's no different onboard our vessels.

As you know we lead the industry by a very wide margin and onboard.

Onboard revenue yield and that continues I cautioned in my prepared remark that.

Im not ready to declare victory in the sense that the very positive trends in onboard revenue higher than they've ever been before will continue indefinitely and that you can put it in the permanent column because it's just too early.

The reason why people are spending so much because of the pent up demand.

Is it because of a cabin mix, we're at least in the third quarter and Youll see it in the fourth quarter as well slightly elevated.

On page of ours happens that has sold or in the upper categories that suite, the balcony cabins and one of the Truisms of this business is.

Those who pay more to get onboard PE or spend more once onboard but it also goes to the fundamental strength of our industry, leading bundling strategy. We believe in the bundling strategy, we're doing more and more bundling across the three brands and that gives people a very fresh wallet.

Because the combination of them booking further out it means they have even more time to refill that wallet and make it even fresher. If you will and so all of these factors are contributing to the higher onboard spend.

I hope it continues we will do everything possible to fuel that that continuation, but I just wanted to throw a little bit of caution to the wind that I'm not ready to the chalk it up as a permanent.

Shift if you will or a permanent.

Source of <unk>.

Revenue above and beyond what we've always.

Led the industry on and brand one just one piece of additional color. There as we are getting smarter not only with the bundling, but our marketing systems around that around the pre pre pre onboard itself, we're getting smarter throughout the booking cycle, we started really working on that heavily.

A couple of years ago, when we started to see some fruit bearing on that in 2019. So again, that's just going to be another propellant to help us but but.

But I think as Frank has said, we'd be naive to think that theres not going to be some settling.

Yes.

Excellent thanks for the thoughts guys.

Yeah.

And our next question is from Vince.

Oh Cleveland Research your line is open.

Thanks for taking my question I'd be curious what the moving pieces as it relates to.

Occupancy brand.

And it's quite strong.

Paul.

Yes.

Fuel prices are up.

The other side of this exiting next year.

More back to normal.

The margin opportunity is within the business long, even 'twenty three and a few of them.

<unk> game and put your margins all of them.

Thanks.

Hey, Hi, Vince look.

Sure.

I think we're setting ourselves up nicely for margin expansion and ROIC improvement that's why it's so important to keep that pricing discipline.

We've seen time and time again.

Companies have dropped prices as we saw back in 2008 and 2009 during the great recession.

It takes years, there are some who have not yet recovered to their pre great recession yields.

A decade later or more than a decade later, so we're fixated on maintaining pricing will sacrifice short term load factors in order to preserve long term pricing and long term pricing at the end of the day is what is going to drive margins along with the fact that we're going to be introducing four vessels that are premium.

Including the Norwegian new Prima vessels.

More balcony cabins were increasing our percentage of the of our premium.

Accommodations to 65%.

So all those factors, including the fact that we were.

We're getting we have gotten a lot smarter during the pandemic about how we market to our customers using technology.

So called Zoom World.

Marketing is becoming more efficient and we will see whether the <unk>.

General.

Inflation pressures that are being called transitory.

Our transitory or not but as Mark mentioned, we are primarily a fixed cost business and during inflationary time.

We we come out ahead and were seeing at that.

We have pricing pricing power pricing power is the <unk>.

Pretty word of inflation, yes, we have inflation pressures on some line items as Mark mentioned fuel commodities food, but we've got that pricing power that is translating into high yield so.

We believe that in late 'twenty, two 'twenty three forward.

Our margins should improve.

Rents on those on the new capacity that comes online generally speaking.

We're bringing new capacity it tends to be anywhere from 10% to 15% more efficient on a unit basis, so that inherently provide some tailwind for us.

As we move forward with our growth profile I think we can there's some tremendous opportunity there.

Great, Thanks, and as a follow up.

Okay.

Using relative to land based alternatives.

Hotel leisure pricing.

A good amount of 2019 levels Im curious if theres any way to kind of quantify that gap.

You'll see it being a significant opportunity.

20%.

How are you relative to land based or any way to qualify.

Moving towards parity of loan basis, and what that can mean for yield.

Look I think there's a great opportunity and you have to do it almost brand by brand you want to compare.

Ah regent cruise to a stay at a four seasons hotel you want to compare at Norwegian cruise to perhaps a sheraton or a hyatt.

But I can tell you that all the internal analysis that we do when you can when you combine the cost the total cost of a vacation transportation accommodations. Your meals your drinks entertainment in any location.

Our cruise vacations value is just off the chart and while we want to continue offering consumers that great value, which is why our ships are always fully industry shifts are always full hotel change can't stay that their hotel rooms are always full but we can't because of the value proposition the way, we market and therefore, that's where the opportune.

<unk>.

The opportunity is to claw back some of that.

Value that we're giving away and still provide consumers with a very attractive vacation experience and every dollar we compare we can.

We cannot claw back in that gap you know the vast majority of that drops directly to the bottom line. So it really becomes.

<unk>.

This really bottomline economic driver pretty quickly. So we're very very focused on that.

Thanks Nicole.

And our next question is from Steve <unk>.

Your line is open.

Yeah, Hey, guys good morning.

So Franklin asking another question about load factors and kind of getting that path.

Pat back to normalized load factors, but you talked about the third quarter of next year.

I'm just wondering if you could elaborate on that a little bit more and it seems like the most debatable.

Vaccine demographics, so to speak is obviously around kids.

Meaning that it seems a lot of parents are not going to get there seatbacks needed. So I guess your excellent questions.

Once the CSO is eventually rollbacks of January do you see yourself, starting to potentially relax that vaccine mandate for kids in order to get your load factor is back to normal or that just won't be the case.

Not the case, maybe help us bridge that gap.

Yes.

Steve I don't.

We're going to announce very very soon that we indefinitely extended our 100% vaccination requirement I think that today that continues to be a competitive advantage.

Two or three brands I think that.

Our three brands emerge from this.

Covid crisis in a much better standing in the consumers' eyes because of our strong early stance on health and safety vaccinations et cetera, and it's something we want to build on.

Sure.

The children's vaccination.

Back to 11 year olds, with just announced yesterday.

My understanding is that likely sometime in Q1.

The same vaccination approval will be given or up to four year old. So I do believe that.

The target market that cruises is more likely than general population to number one be vaccinated, we see time and time again, where.

Our cruiser pass throughs, or one who intends to cruise.

Is significantly more vaccinated than the than those who don't intend to cruise. So it's a bit of a self selection situation.

I believe that will translate also into children, but we're not going to sacrifice the health and safety of anyone.

For the sake.

Adding a point or two or three or whatever the number is.

To load.

So we will continue mandating, a 100% and vaccination as long as the science dictates that that's what we ought to do.

Understood Thanks for that.

Second question would be around direct bookings and it seems to us from the outside that direct bookings are have moved a good bit higher relative to pre pandemic levels and I'm wondering if that's kind of what you guys are seeing as well and maybe what you think is potentially driving that and is this something that could change long term booking patterns.

Or is it just something else thats, causing uplift right now in direct.

We've seen it as well.

We're hoping that the travel agent community comes back in full force they've also been out of.

Out of work and.

And unlike the big public cruise companies that can go to wall Street and raised billions of dollars.

These are mostly smaller businesses in cans, and so I'm praying and hoping that they do come back in full force, but at the end of the day, we have to fill our vessels in any way, we can and we do offer consumers multiple choices of how to engage with us.

We prefer the travel agency.

Channel. It is our biggest channel it is coming back we have seen improvement sequentially quarter by quarter in terms of the percentage of our business that is.

Being booked by travel agents and I do believe that once.

Our.

Fleet is back in operation along with that of our peers that they will come back.

But if not we have adapted we are prepared we have the technology, we have the wherewithal to.

Take the bookings.

Okay, great. Thanks, guys appreciate the color.

Okay.

And our next question is from James Ainley of Citi. Your line is open.

Great. Thanks for taking my question.

Can I ask you maybe for some color on the brand performances I guess basically a trucking suggest that harman brands have been garnering much stronger interest.

Are you seeing or are you seeing that demand spreading out.

It's back down the French scales.

Well look.

The upscale brands the luxury brands typically booked further out than the contemporary brands because they are itineraries are longer more exotic.

Therefore, the planning process and so we do have more visibility into especially into 2023 on the Oceania and regent brands than we do at Norwegian, but we're seeing steady progress.

Throughout the ecosystem, the Norwegian brand customer coming back and booking.

As they normally would book.

Except that for second half of 'twenty, two and in all of 'twenty three that booking volume is better than ever.

And so we're very pleased with that that the demand is such that consumers wanted crews and as I said earlier everything else being equal they feel more confident being able to cruise in Q3.

Next year than in Q1 for example, because of the.

Ever present.

The threat of the of Covid and is is COVID-19 starts to fade.

Into the background.

All the experts have said Covid is not going to go away one day.

It will pivot from being a pandemic to an epidemic and we'll all have to learn to live with it we may have to take.

Covid booster shot every year like the flu, but I do I am encouraged to see how in different parts of the world and I travelled internationally for the first time in the last few weeks went to Italy went to the UK winter.

Went to New York for the first time in almost two years.

How people have adapted.

And like I said earlier, the cruising population the target cruiser.

Is.

A better reversed individual in the average population that can afford to cruise.

They're better vaccinated and so all those points I am encouraged that.

That again, the pandemic is not going to go away or the Covid is never going to disappear.

But we will learn to live with it.

Great. Thank you.

So a follow up could I ask about.

How youre handling the sort of operating restrictions I mean are you able to two sales youll ships too.

Majority of places you want to go to I suppose the reason I'm asking is.

Yes.

Loyal regent seven seas customer might come back for one crews, but then just looking for something new and something different.

Did you feel that you can offer enough for us just given the kind of state of port restrictions as you see them today.

We are the answer the short answer is yes. The longer answer is we are staging the return of our vessels not haphazardly, but in a very.

Measured way.

Based on the availability of ports.

And so by the time that our entire fleet is operating which will be very early in Q2 on April one we believe that the seasonal nature of the cruise industry being heavily in Alaska and Europe, beginning in Q2, our Q3 that the world will be opened by the time, we get.

The Q4 of 'twenty, two and you start scaling to exotic places.

Throughout Asia.

South America, we believe that by then.

<unk>.

The closures that we are seeing today will abate and so yes itineraries are a big deal it's one of the.

Secret sauce ingredients that make our company the.

Highest yielding company because we go to high yielding itineraries with wonderful vessels that have a lot of.

Cabins that are hit with balconies and suites, which as I said many times in the second driver of yield after itinerary. We believe all those pressures that we're seeing today will subside.

By the time that our operations are back in full.

Great. Thank you very much.

Youre welcome.

Operator, I think we have time for one more question.

Alright.

<unk> is from Robin Farley of UBS. Your line is open.

Great. Thanks, I wanted to ask a balance sheet question.

You mentioned in the slides.

Before returning to paying dividends that you wanted to focus on the balance sheet I'm. Just wondering if there's kind of a targeted leverage range, you're thinking and then kind of related on that.

The balance sheet and I'm curious why the $1 billion.

Facility Undrawn, you're so close to positive cash flow and you have no big maturities in the next two years.

Just kind of curious behind that.

Setting that up.

Good morning, Robyn so.

Sure.

Yes, first covering the targeted leverage pre pandemic, we had said our goal was to get to that two five.

Two and three quarter range.

And we haven't lost sight of that but I think when we look at the at the near and mid mid term. Our first goal is going to be to get let's get below five and then we're going to target to get below four so we're going to we're going to continue to take a.

Chop it down year after year with accelerating accelerating cash flows and get that back down into that.

Three or four times, it's going to take some time to do that but we're focused on it we've done it before we know how to do it this management team.

So we're confident we can get there we have the ability and the business in terms of the $1 billion commitment.

Look I think as we look forward I stated in my remarks that we're now going into a.

More offensive approach.

Offensive approach around our balance sheet management. So what this does is this really as we look at it as a very.

Low cost, but yet effective backstop, rather than us having to necessarily go out and commit to permanent debt and are permanent.

Further dilution.

No.

It is an extremely low cost measure to have on the books, which will allow us independently of that to start taking some balance sheet action.

And not have to worry about the broader picture. So again, we do not intend to draw on it our intention is not to draw on it we have the facility there.

As part of our larger.

As part of our larger game plan, but in the event, we need to draw on it or something in that nature, most likely or more than likely we would go out to the public markets and <unk>.

And go after some paper that is much more cost effective so again and balancing all of our needs. We think this provides a backstop.

Without committing us for any long term additional debt <unk> dilution.

And one additional thought is that we've seen what delta does and we want to make sure. We're always been in a position to be ahead of some of the unknown. So.

Again this is more of us going to an offensive approach in terms of our balance sheet on a go forward basis.

Okay, Okay that makes sense. Thanks.

Just one final thing are you are you back to issuing future cruise credits again, when you have to cancel the crews, which I realize there's not probably know we stopped that I believe in the either at the end of 2020 or the first quarter on the first quarter of 2021.

Actually much much earlier than that I'm, sorry, mid 2020, I think it was so we have not issued future cruise credits I want to say, probably since second quarter ish of 'twenty.

I might be off slightly but generally speaking that was the timeframe.

Great. Thank you.

Thank you Robyn.

Thank you everyone for your time and support today, we will be available to answer any of your questions. A little later on so have a great day and stay safe. Thank you everyone Bye bye.

And this concludes today's conference call you may now disconnect.

Okay.

[music].

Sure.

[music].

Good morning, and welcome to Norwegian Cruise line Holdings third quarter 2021 earnings Conference call. My name is Laurie and I will be our 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 then zero on your Touchtone telephone and that's a reminder to all participants. This conference call is being recorded I would now like to turn the conference over to your host Ms. Jessica Fye.

Vice President of Investor Relations Corporate Communications and E. S. G. Michelle. Please proceed.

Mark will follow to discuss our financials before handing the call back to Frank for closing remarks, We will then open the call for your questions. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at Www Dot N C. L. H L. P D dot com slash investors.

Before we begin I would like to cover a few items our press release with third quarter of 2021 results was issued this morning and is available on our Investor Relations website.

Thank you Jessica and good morning, everyone.

Thank you for joining us today and as always I hope that all of you as well as your loved ones remain healthy and safe.

Today, we will discuss commentary on three areas.

The progress we have made on our great crews come back.

Our recent booking and demand trends, which have shown particular, thanks for sailings operating in the second half of 'twenty, two and for all of 2023, when our fleet is expected to be back in full operation and at normalized occupancy levels and.

And finally on our exciting pipeline of new vessels, which we expect to contribute outsized EBITDA growth and other important financial metric improvement.

Slide four outlines how far we have come on a return to service plan when.

When we last spoke in early August we have just relaunched the first vessel in our fleet Norwegian Jade in Greece, and we are on the verge of risks you mean cruising in the U S with Norwegian encore, making or West coast debut sampling to Alaska from Seattle.

Since then we have successfully relaunched 11 of our 28 vessels with all three of our award winning brands resuming operation.

We couldnt be more pleased with the performance of our relaunch chips.

First our crew has not missed a beat since returning seamlessly adapting to a new health and safety protocols and going above and beyond to deliver the exceptional vacation experiences.

Brands are known for.

This commitment to service has resulted in record high guest satisfaction scores with each month sequentially better than the month before.

Second we are seeing the power of our industry, leading bundling strategy strategy pay off as guests are boarding our vessels with fresh wallet, which coupled with robust pent up demand for all kinds of experiences is translating to remarkably strong onboard revenue generation.

In fact onboard revenue has exceeded our baseline expectations by over 20% with broad based strength across all shifts regent and revenue streams.

Well I would caution though against extrapolating these figures as permanent or indicative of steady state future performance Chuck Yes.

There are several transitory factors that may be contributing to the elevated current levels, including pent up demand cabin and guest mix. It is nonetheless, encouraging and positive signal of the healthy consumer demand we are experiencing.

Lastly, and most importantly, these relaunched chips have already contributed positive cash flow in the third quarter, even with our self imposed occupancy level caps.

Despite a return to service coinciding with the unfortunate summer surge as a delta variant I'm happy to say that a robust multi layered sales say health and safety protocols work is designed to mitigate the introduction and transmission of COVID-19 onboard our vessels.

The prevalence of cases, we identified a pre boarding testing mid crews and then a deepwater patients were inconsequential and well below what we all saw in the general population during this time.

In short, we were able to fairly evaluate and fine tune our rigorous protocols during one of the highest height of the pandemic and the stellar result speak for themselves.

Today, all ships in our fleet continue operating with a strict 100% vaccination requirement couple.

Coupled with Universal a pretty embarkation testing in multiple layers of additional protection and once onboard including upgraded air filtration systems, and well resource medical centers.

We will continue to follow the science and evaluate and modify our protocols as needed with guidance from our team of experts led by former FDA Commissioner, Scott Gottlieb and from applicable public health authorities.

As I have said time and time again, our commitment to health and safety is far and away. The most important principle the guys. How our company operates at all levels and not just now, but pre and post pandemic as well and we are willing to go to great lengths to protect our guests group and the communities we visit.

We view this as a positive step forward for our company and the industry at large and we were encouraged to see positive recognition by the CDC. Other successful resumption of cruising in the length. We have all taken to enhance our already stringent health and safety protocols and report response to COVID-19, which continue.

To be much more rigorous and much more comprehensive and those implemented by any other travel leisure hospitality sector.

With the progress <unk> made with vaccination of therapeutics and adapting to living in the ongoing pandemic environment.

First is seemingly behind us each.

Each day, we become increasingly confident in our ability to flawlessly execute on our face forward your assumption, which is detailed by brand and by vessel on slide five.

Your peak summer season demand and pricing.

Turning to slide six we shipped todays discussion to our booking and demand trends.

You'll recall at the beginning of our third quarter, our book position for full year 2022, what meaningfully and significantly ahead of 2019 as record levels and at higher pricing.

However, and consistent with the pullback seen by the broader economy and in particular, the travel and leisure sector. The summer Delta variant third resulted in a marked slowdown in our net booking volume.

The impact was heavily weighted to closer in sailings, particularly for fourth quarter of 2021, and first quarter of 2022 with the impact lessening sequentially throughout 2022 and beyond.

Rather than chase scares demand during the delta surged by dropping prices and our spending marketing funds in a less than optimal manner. We strategically chose to wait for consumer sentiment to rebound as we are seeing direct ebbs and flows in our booking patterns throughout the pandemic coinciding with changes in our public.

Health environment.

Rob This difficult 10 week period, we remain disciplined and continue to hold or even raise pricing and the outcome is that today, we see both record load and record pricing for the second half of 2022 and for all of 2023.

Investments in mid November coinciding with Black Friday, and cyber Monday promotion and second the much anticipated and expected recovery in the travel agent channel space and.

And lastly, the approval of vaccines for children Ages five to 11, which came just last night and will allow for an expanded group of 100% vaccinated guests, especially families to sale on our brands.

In addition, we are meaningfully better book for a second half of 'twenty, two and full year 'twenty three sailing and at better pricing that had any similar point in time in the past.

Our primary focus.

Continues to be on these periods when our fleet is expected to be in full operation and at normalized occupancy levels.

And as I mentioned before just in time to capture the all important third quarter peak summer season, which traditionally is the most profitable quarter for the industry.

Now breaking down our book position for full year 2022 further more than 55% of bookings are from loyal repeat cruisers to our brand. In addition, approximately 75% is comprised of new cash bookings with the remainder comprised of future cruise credits.

So far approximately 60% of the total value of our outstanding FCC's have been redeemed.

As a reminder, the value added 125% of future cruise credits will issue debt, we issued at the beginning of the pandemic can only be applied to sailings through year end 2022, resulting in zero yield dilution when we look through 2023 and beyond.

And while still early booking trends for 2023 years.

Thus far are also off to an impressive start.

Our booking windows continues to be elongated versus historical level with guest booking further into the future, particularly for the Oceania cruises and regent seven seas cruises brand.

<unk> point in August Regent set a record for the largest booking dana's 29 year history with the launch of its 2023 2020 for voyage collection reservations surpassed its previous record by approximately 15%.

While all itineraries were popular notable destinations of interest where Africa Asia and the Baltics, demonstrating our guests' continued appetite for long and exotic itineraries.

And in September the sales launch of just a single ship.

Oceania cruises, new 200 passenger Vista, which doesn't debut until April of 'twenty three set an all time single day booking record for that brand that surpass the most recent recent record set in March of 2021 by nearly 60%.

Half of the available inventory for Vista's inaugural season was sold in a single day with 30% of bookings coming from new to brand guests.

These incredible record breaking milestone are further proof of the exceptional demand we continued to experience for our brand's unique product offerings from both new and loyal guests alike.

Strong future demand in both load factor and pricing is also imperatively evidenced in our advanced ticket sales bills.

Our advanced ticket sales increased approximately $500 million on a gross basis in the quarter equating to an approximately 65% increase versus the prior quarter as built.

As we move forward with phasing in the rest of our fleet. We expect this tremendous momentum to continue sequentially.

Looking to the future 2022 will also mark an exciting new chapter for our company as we welcomed the first ship in the next class of vessels or Norwegian cruise line Norwegian Prima in summer of 2022.

I just returned from the shipyard in Italy, a few weeks ago I was able to witness firsthand what an evolution prima is for the regent brand and for the industry at large which you can see on slide seven.

Everything about who was impressive as she has been meticulously designed to elevate the guest experience last month, we unveiled three months entertainment lineup, including its interactive headlines show the Tony Award nominated musical Summer the Donna Summer musical Norwegian Prima will also showcase numerous cruise industry.

And new to brand experiences, including the world's first transforming venue that converts may three storey theater into a vegas style nightclub exhilarating freefall drop drive slides in a tri level 200 foot long racetrack the largest at sea.

But prima speedway will be the first ever three level race track and is over 20% larger than that on Norwegian encore, featuring 14 turns where drivers can reach speeds of nearly 40 miles per hour.

<unk> advanced sales continued to impress even after a record shattering sales debut in May which set a single best booking day and best initial booking week record doubling the previous record set by Norwegian Bliss in 2018.

Despite her introduction being six weeks later than Norwegian Bliss or booking volumes are trending in line with that of Bliss, the previous fastest selling new builds for the blind and materially higher prices.

As you can see on slide eight in our region pretty much sets. The FERC shipped to look forward to and our industry leading growth profile of nine world class ships coming online through 2027.

These newbuild will grow our birth count by approximately 40%, adding 24000 additional birth across our three brands and.

In 2023, when I forget back in full force, we expect our berth capacity to be approximately 20% higher in 2019 pre pandemic levels.

The addition of these new cutting edge chips will also favorably change our cabin mix.

Illustrated on slide nine with premium cabins, increasing to approximately 65% of total berth versus approximately 60% today.

In addition to the premium mix of real estate onboard our new ships have all the bells and whistles additional streams for onboard revenue generation with new and innovative experiences and the latest technology to improve efficiency versus our existing fleet.

And given our base of only 28 ships in our fleet, we are ready and eager to to easily and profitably absorb this new capacity as it will allow us to further diversify our product offerings and penetrate numerous attractive and high potential unserved and underserved markets globally.

The strategic addition of the Prima and premium plus class for example, which are smaller but more upscale than our previous breakaway breakaway plus class at approximately 3200 birth for their first through prima class ships and increasing to nearly 3600 berths for the next for premium plus class ships will give us additional <unk>.

Bandwidth and flexibility to optimize the deployments that are most profitable and allow the line to continue commanding premium pricing with the right sized ship in the right place and at the right time.

And on Slide 10 shows we have historically demonstrated our success in not only absorbing capacity, but translating this capacity growth into outsized revenue outsized adjusted EBITDA and operating cash flow growth that significantly outpaces the growth in absolute capacity.

We fully expect that to continue this trend and drive meaningful growth to the top and bottom line with the addition of these exciting new ship.

Back later to provide an update on our ESG effort as well as provide closing remarks, but for now I'd like to turn the call over to Mark for a financial update Mark.

Thank you Frank.

We reached a significant financial milestone in the third quarter with our first voyages resuming sailing after a previously unimaginable 500, plus days with zero revenue generating operations.

Our return to service has been very successful and we remain on track to execute on our phase voyage resumption plan.

By the end of the third quarter. We had started 37 voyages completed 29 and had eight ships and service representing approximately 40% of our birth capacity.

<unk> seen the third quarter was approximately 57% in line with our expectations and reflecting our self imposed occupancy limits.

Increasing our occupancy is not a race and we're focused on being diligent and thoughtful and ramping up of occupancy levels to protect not just our guests and crew, but also our long term brand equity.

Despite the reduced occupancy levels in the quarter I am extremely happy to report that the fleet that operated in the period was cash flow positive.

Looking ahead by year end, we expect to have 17 ships, representing approximately 75% of capacity back in service with the full fleet operating as we enter the second quarter 2022.

This liquidity backstop enhances our financial flexibility and provides immediate and additional liquidity should the need arise.

If drawn the commitment would convert into an unsecured note maturing in April 2024.

For sake of clarity, we have not drawn on this facility and do not intend to do so given our current projected recovery at this time.

As for cash burn for the third quarter, our average monthly cash burn rate was approximately $275 million lower than prior guidance of $285 million for.

For the fourth quarter, we expect our average monthly cash burn to increase to approximately $350 million as we continued to ramp up restart expenses and additional vessels reenter service.

During the quarter, we are expecting a ramp up of demand generating marketing investments as we head into the holidays with Black Friday, cyber Monday and wave season.

It is important to note that this cash burn estimate does not include our expected cash inflows from both new and existing bookings or the contribution from ships that have re entered service both of which we expect to accelerate as we move forward on.

On a net basis based on our current resumption plan, we continue to expect to reach a crucial inflection point with operating cash flow turning positive towards the tail under the first quarter of 2022.

In addition, based on our current trajectory and market conditions. We are on a solid path to return to profitability for the second half of 2022.

Turning to slide 12, our cash balance in the third quarter decreased to $1 9 billion of cash and equivalents.

Driven by approximately $825 million of operating cash burn, including Opex expenses, SG&A interest and Capex cut.

As we gear up to deliver on our impressive growth profile through 2027, which we expect to be meaningfully accretive to both earnings and cash flow generation.

Lastly, with much of the focus on the market on inflationary pressure I wanted to touch quickly on what we are experiencing.

We are still fine tuning, our 2022 plans and related projections and will provide more color on our cost outlook on our next earnings call.

Similar to almost all other industries, we are seeing pockets of pressures in areas such as fuel food and other commodities our supply chain group continues to work diligently to mitigate these costs and we are fortunate that the timing of our ramp up in operations is relieving some of the transitory cost pressures.

The good news is that we are a primarily fixed cost business, which is beneficial in an inflationary environment on.

On the labor front, we have a high degree of visibility on our costs as the vast majority of our crew which comprises the bulk of our employee base are covered under multi year agreements on the flip side. We're also seeing very strong pricing power, which is helping to offset inflationary pressure.

With the current inflationary backdrop and on a relative scale, we believe our offering and value proposition is even more compelling now than ever before.

These factors combined will continue to allow us to further increase our prices on our multiyear strategy strategy to achieving pricing parity to that of land based vacation offerings.

We are now in a position to pivot to a more offensive approach and shift our attention to executing on our medium and long term financial recovery plan, which is outlined on slide 13.

Thank you Mike before we wrap up our prepared remarks I'd like to provide an update on our global sustainability program sale and sustain on slide 14.

We are committed to driving a positive impact on society and the environment through the advancement of this program on the environmental front. In addition to ongoing initiatives to reduce our greenhouse gas emissions rate during the quarter. We made the first purchase under our new carbon offset program as a reminder, over the summer we announced that we have committed.

Purchasing high quality verified carbon credits to offset the equivalent of 3 million metric tons of carbon dioxide over a three year period.

This is a measurable step in near term emissions reductions, which will help bridge the gap in our de carbonization effort until new technologies become feasible or a 3 million ton commitment is sizable and we plan to increase our purchases in future years to help us reach our goal of carbon neutrality.

We also strive to maintain a supportive and empowering workplace for our team members across the globe, who are without doubt our most valuable asset as such we recently announced that we have indefinitely moved to a four one flexible work model for our shore side team members globally, which requires employees, who work in office Monday through Thursday and remote.

On Friday this new work model allows us to provide additional flexibility for our team members, while also supporting our business goals, maintaining productivity and fostering the in person collaboration and workplace culture that we are so proud of we are honored that this commitment to our team was recognized with our name into the <unk>.

Forbes world's best employers list. This recognition came after also being named to the Forbes America's Best employers list earlier this year in which we ranked among the top 75 companies in the overall large employer category and among the top 10 companies in the travel and leisure sector.

Turning to slide 15, I'd like to leave you with a few final key takeaways first our returning to service is on track and initial voyages have been successful on all fronts.

Up next year.

Despite headwinds in the third quarter related to the Delta variant, we continue to experience strong future demand for cruising with positive booking and pricing trends, particularly for the back half of 2022 and throughout 2023 and lastly, we believe we are nearing an inflection point with the worst of the pandemic now appearing.

Financial results and shareholder value in the coming years.

And with that Laurie, let's open up for questions.

Thank you Frank and if you have a question at this time please.

Please press the Star then one key on your Touchtone telephone.

Order to get people through the queue. Please limit your time to one question.

My question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Our first question comes from Keybanc Grambling with Goldman Sachs. Your line is open.

Well, that's a mouthful, but I'll try to get through it look we.

We thought we have perfected our itineraries our deployment and so I don't see major changes in how we deploy our vessels in 'twenty, two and beyond assuming the world reopens.

Today the world is in the process of reopening as you know Asia is still primarily closed but we believe that by the time our next season.

Season begins which would be about this time in 'twenty two.

That it will be open.

Anxiously awaiting the.

The receipt of those vessels, which we believe will be accretive to the yields and certainly EBITDA and ROIC.

And all the financial metrics turning to 2022, we have to start looking at 'twenty to not as a year not as a block but sequentially.

Certainly the back half of 'twenty two today is looking much better than the first half.

Partly because of the effects of the Delta variant and none.

Booking trends.

And consumer.

Behavior.

We will affect Q1 more than Q2, and Q2 more than Q3, but sequentially.

22 is ramping up very very nicely, we said in our prepared remarks, the back half of 'twenty two today is meaningfully.

And significantly better booked than we were at this time for 2019 or any year. So we're way ahead.

And load.

And that gives us confidence to continue with the price discipline because today not only do we have that meaningful load, but we're ahead in pricing. So I feel very very good about 2022 and I can make the same identical remarks about 23.

Head in and load meaningfully and ahead in pricing.

Q2 is a what I would really call the pivot quarter.

We see.

Demand coming back strongly for 'twenty two.

A transition quarter, where all the vessels will be in operation, but we look we feel very very good about Q2 as well so look.

I'm feeling better than I have in nearly two years.

Advanced bookings are strong one of the wonderful things about this industry is that we have incredible visibility into the future and because consumers are booking earlier than ever as I mentioned in my prepared remarks, we have visibility into further into the future than we ever have and that visibility is a very positive one.

Perhaps as a quick follow up when you look at the strong booking trends in the back half of the year can you provide any color on the composition between.

New to brand or new to cruise versus the existing customer base and what's what's driving that.

Look I think it's not much different than what I, what we said earlier.

About 55% of repeater is slightly higher than normal.

We've we've moderated our marketing spend and so when you moderate your marketing spend you tend to go to that segment of the market that you know best.

Easiest and least expensive to go after and that's our past guests. So we have a little bit of an elevated past guest which is good.

Brian That's what you want we're now getting ready to rollout our big marketing push in anticipation of ways to promote black Friday to promote cyber Monday.

And we have high hopes for a very very good wave season.

Fair enough. Thanks, so much I'll jump back in the queue.

Okay.

One is from Brian <unk> of Jpmorgan. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions.

Our ability to raise those in the next.

Call it two to five months.

Yes. Good morning brands look so third quarter was in line with our expectations I think we had roughly 57% occupancy as we've said time and time and again, we're not in a race to just fill volume we want to maintain price discipline and we're going to do that.

When we look ahead at the fourth quarter, we're going to have I believe 17 ships in operation approximately 75% of our capacity.

That's going to increase to roughly 150 175000 in Q4 250 to 300000 in Q1, and then youre up back into the half a million or so.

Our occupancy is ramping up in line with our with our with our fleet rollout.

Pricing discipline is important to us.

Just to gain that point of occupancy.

Thanks for that Mark that's helpful and then as a follow up.

On the onboard spend picture and is there any reason why it doesn't eventually revert to 2019 levels anything structural you would call out is why it might settle above those levels going forward.

The psyche of the consumer they wanted crews they want to travel maybe they don't want to travel this quarter or maybe even next quarter and they're pushing it out further and further hoping that the COVID-19 situation.

<unk> drastically so I do believe that we're going to continue having greater visibility than we had in the past.

Then that will continue for some time in terms of onboard revenue look.

We've seen the consumer spending across lots of different sectors are up and it's no different onboard our vessels.

We lead the industry by a very wide margin and onboard.

Yield onboard revenue yield and that continues I cautioned in my prepared remark that im.

The reason why people are spending so much because of the pent up demand.

Is it because of a cabin mix, we're at least in the third quarter and Youll see it in the fourth quarter as well slightly elevated percentage of ours happens that have sold or in the upper categories that suite, the balcony cabins and one of the Truisms of this business is.

Those who pay more to get onboard PE or spend more once onboard but it also goes to the the fundamental strength of our industry, leading bundling strategy. We believe in the bundling strategy, we're doing more and more bundling across the three brands and that gives people.

A very fresh wallet, because the combination of them booking further out means they have even more time to refill that wallet and make it even fresher. If you will and so all of these factors are contributing to the higher onboard spend.

I hope it continues will do everything possible to fuel that that continuation, but I just wanted to throw a little bit of caution to the wind that I'm not ready to the chalk it up as a permanent <unk>.

<unk>, if you will or a permanent.

Source of revenue above and beyond what.

We've always.

Led the industry on and brand one just one piece of additional color. There as we are getting smarter not only with the bundling, but our marketing systems around the around the pre pre pre onboard sell we're getting smarter throughout the booking cycle.

We started really working on that heavily a couple of years ago. When we started to see some fruit bearing on that in 2019. So again, that's just going to be another propellant to help us, but but I think as Frank has said we'd be naive to think that theres not going to be some settling.

Yeah.

Excellent thanks for the thoughts guys.

Yes.

And our next question is from Vince.

Cleveland Research your line is open.

Thanks for taking my question I'd be curious.

A lot of moving pieces as it relates to.

Occupancy ramp.

<unk> quite strong.

Question is on the board.

Yes.

Fuel prices are up.

On the other side of this exiting next year.

Those things are more back to normal what do you think the margin opportunity is within the business falling in 'twenty, three and a few of them.

Efficiency gains and put your margins all of them.

Thanks.

Hey, Hi, Vince look.

I think we're setting ourselves up nicely for margin expansion and ROIC improvement.

So important to keep that pricing discipline.

We've seen time and time again that.

Companies have dropped prices as we saw back in 2008 and 2009 during the great recession.

It takes years there are some who have not yet recovered to their pre great recession yields a decade later or more than a decade. Later, so we're fixated on maintaining pricing will sacrifice short term load factors in order to preserve long term pricing and long term pricing at the end of the day is what's going to drive margins.

Along with the fact that we're going to be introducing four vessels that are premium.

Including the Norwegian new Prima vessels.

Balcony cabins were increasing our percentage of the of our premium.

Accommodation to 65%.

And so all of those factors, including the fact that we were getting we have gotten a lot smarter during the pandemic about how we market to our customers using technologies, the so called zoom world.

Marketing is becoming more efficient and we will see whether the.

General.

Inflation pressures that are being called transitory.

Our transitory or not but as Mark mentioned, we are primarily a fixed cost business.

And during inflationary times.

We.

We come out ahead, and we're seeing it debt.

We have pricing pricing power pricing powers, the pretty word of inflation, yes, we have inflation pressures on some line items as Mark mentioned fuel commodities food, but we've got that pricing power that is translating into.

High yield so.

We believe that in late 'twenty, two 'twenty three forward our margins should improve.

Rents on those on the new capacity that comes online generally speaking.

As we're bringing new capacity it tends to be anywhere from 10% to 15% more efficient on a unit basis, so that inherently provide some tailwind for us.

As we move forward and with our growth profile I think we can there's some tremendous opportunity there.

Great, Thanks, and as a follow up to that.

Okay.

Losing relative to land based alternatives.

Hotel leisure pricing a.

Good amount ahead of 2019 levels I'm curious if there's any way to kind of quantify that yeah, and then you see it being a significant opportunity.

20%.

How are you relative to land based or any way to qualify.

Moving towards parity or Brian based on what that could mean for yield.

Look I think there's a great opportunity.

To do it almost brand by brand you want to compare.

Regent cruise to a stay at a four seasons hotel, you want to compare and Norwegian cruise to perhaps a sheraton or a hyatt.

But I can tell you that all the internal analysis that we do when you when you combine the the cost the total cost of a vacation transportation accommodations your meals youre drinks entertainment in any location.

Our cruise vacations value is just off the charts and while we want to continue offering consumers that great value, which is why our ships are always fully industry ships are always full hotel change can't say that their hotel rooms are always full but we can't because of the value proposition the way, we market and therefore, that's where the opportune.

<unk>.

The opportunity is to claw back some of that.

Value that we're giving away and still provide consumers with a very attractive vacation experience and every dollar we compare we can.

We cannot claw back and that gap the vast majority of that drops directly to the bottom line. So it really becomes.

This really bottom line economic driver pretty quickly. So we're very very focused on that.

Thanks for all the color.

And our next question is from Steve <unk> of Stifel. Your line is open.

Yeah, Hey, guys good morning.

So Franklin asking another question about load factors and kind of getting to that path. The path back to normalized load factors, but you talked about the third quarter of next year.

I'm just wondering if you could elaborate on that a little bit more on it seems like the most debatable.

Vaccine demographics, so to speak is obviously around kids.

Meaning that it seems a lot of parents are not going to get their kids vaccinated. So I guess the actual questions years. Once the CSO is eventually relax in January do you see yourselves starting to potentially relax that vaccine mandate for kids in order to get your boat factors back to normal or that just won't be the case and if that's not the case, maybe help us bridge.

Yeah Yeah.

Steve I don't know.

We're going to announce very very soon that we indefinitely extended our 100% vaccination requirement I think that today that continues to be a.

Competitive advantage too.

Our three brands I think that.

Our three brands emerge from this.

Covid crisis in a much better standing in the consumers' eyes because of our strong early stance on health and safety vaccinations et cetera and.

We want to build on.

The children's vaccination for 5% to 11 year olds with just announced yesterday.

My understanding is that likely sometime in Q1.

The same vaccination approval will be given for up to four year old So I do believe that.

The target market that cruises is more likely than general population to number one be vaccinated, we see time and time again, where.

Our cruiser our pass throughs are wanted to intends to cruise.

Is significantly more vaccinated than the than those who don't intend to cruise. So it's a bit of a self selection situation.

I believe that will translate also into children, but we're not going to sacrifice the health and safety of anyone.

For the sake of <unk>.

Adding a point or two or three or whatever the number is.

To load. So we will continue mandating, 100% and vaccination as long as the science dictates that that's what we ought to do.

Understood Thanks for that.

The second question would be around direct bookings and it seems to us from the outside that direct bookings are have moved a good bit higher relative to pre pandemic levels and I'm wondering if that's kind of what you guys are seeing as well and maybe what you think is potentially driving that and is this something that could change long term booking patterns.

Or is it just something else thats, causing uplift right now with direct.

No we've seen it as well.

We're hoping that the travel agent community comes back in full force they've also been out of.

Out of work and.

And unlike the big public cruise companies that can go to wall Street and raised billions of dollars.

These are mostly smaller businesses and can't and so on on praying and hoping that they do come back in full force, but at the end of the day, we have to fill our vessels in any way, we can and we do offer consumers multiple choices of how to engage with us.

We prefer the travel agency.

Channel. It is our biggest channel it is coming back we have seen improvement sequentially quarter by quarter in terms of the percentage of our business that is.

Being booked by travel agents and I do believe that once.

Our.

Fleet is back in operation along with that of our our peers that they will come back.

But if not we have adapted we are prepared we have the technology, we have the wherewithal to.

The bookings.

Okay, great. Thanks, guys appreciate the color.

And our next question is from James Ainley of Citi. Your line is open.

Great. Thanks for taking my question.

Can I ask you maybe for some color on the brand performances I guess basically you're tracking suggest that.

Harman brands have been garnering much stronger interest is that something you're seeing or you're seeing that demand spreading out.

Back down the branch sales.

Well look.

The upscale brands the luxury brands typically booked further out than the contemporary brands because their itineraries are longer more exotic.

The planning process and so we do have more visibility into especially into 2023 on the Oceania and regent brands than we do in Norwegian but we're seeing steady progress.

Throughout the ecosystem, the Norwegian brand customer coming back and booking.

As they normally would book.

Except that for second half of 'twenty, two and in all of 'twenty three that booking volume is better than ever.

And so we're very pleased with that that the demand is such that consumers wanted crews and as I said earlier everything else being equal they feel more confident being able to cruise in Q3.

Next year than in Q1 for example, because of the.

Ever present.

The threat of the of Covid and is is COVID-19 starts to fade.

Into the background.

All the experts have said Covid is not going to go away one day.

It will pivot from being a pandemic to an epidemic and we'll all have to learn to live with it we may have to take.

Covid booster shots every year like the flu, but I do I am encouraged to see how in different parts of the world and I travelled internationally for the first time in the last few weeks went to Italy went to the U K.

Went to New York for the first time in almost two years.

Our people have adapted and and like I said earlier, the cruising population the target cruiser.

Is.

A better reversed individuals and the average population that can afford to cruise.

They are better vaccinated and so all of those points I'm encouraged that.

That.

Again, the pandemic is not going to go away or the Covid is never going to disappear.

But we will learn to live with it.

Great. Thank you.

So a follow up can I ask you about.

How you are handling the sort of operating restrictions I mean are you able to sell your ships to the majority of places you want to go to I suppose the reason I'm asking is.

Yes.

Our loyal regent seven seas customer might come back for one crews, but then it's looking for something new and something different and do you feel that you can offer enough for us just given the kind of state of poor cool restrictions as you see them today.

We are the answer the short answer is yes. The longer answer is we are staging the return of our vessels not haphazardly, but in a very.

Measured way.

Based on the availability of ports.

The Q4 of 'twenty, two and you start scaling to exotic places.

Throughout Asia, South America, we believe that by then.

The closures that we are seeing today will abate and so yes itineraries are a big deal it's one of the.

Secret sauce ingredients that make our company the <unk>.

Highest yielding company because we go to high yielding itineraries with wonderful vessels that have a lot of.

Cabins that are with balconies and suite, which as I said many times the second driver of yield after itinerary. We believe all those pressures that we're seeing today will subside.

By the time that our operations are back in full.

Great. Thank you very much.

Youre welcome.

Operator, I think we have time for one more question.

Alright.

One is from Robin Farley of UBS. Your line is open.

Great. Thanks, I wanted to ask a balance sheet question.

You mentioned in the slides.

Before returning to paying dividends that you'd like to focus on the balance sheet I'm. Just wondering if there's kind of a targeted leverage range, you're thinking and then kind of related on that.

The balance sheet is.

I'm curious why the $1 billion.

Facility Undrawn Youre, so close to positive cash flow and you have no big maturities over the next two years.

Just kind of curious behind the.

Setting that up.

Good morning, Robyn so.

Yes, first covering the targeted leverage pre pandemic, we had said our goal was to get to that $2 five.

Two and three quarter range.

Chop it down year after year with accelerating accelerating cash flows and get that back down into that three or four times, it's going to take some time to do that but we're focused on it we've done it before we know how to do it. This management team. So we're confident we can get there we have the ability and the business in terms of the one bill.

Dollar commitment.

Look I think as we look forward I stated in my remarks that we're now going into a.

A more offensive approach.

Offensive approach around our balance sheet management. So what this does is this really is we look at it as a very.

Low cost, but yet effective backstop, rather than us having to necessarily go out and commit to permanent debt and are permanent.

Further dilution.

No.

It is an extremely low cost measure to have on the books, which will allow us independently of that to start taking some balance sheet action.

And not have to worry about the broader picture. So again, we do not intend to draw on it our intention is not to draw on it we have the facility there.

As part of our larger.

As part of our larger game plan, but in the event, we need to draw on it or something in that nature. Most likely are more than likely we would go out to the public markets.

And go after some paper that is much more cost effective.

Again in balancing all of our needs. We think this provides a backstop.

Without committing us for any long term additional debt <unk> dilution.

And one.

One additional thought is that we've seen what delta does and we want to make sure. We're always been in a position to be ahead of some of the unknown. So.

Again this is more of us going to an offensive approach in terms of our balance sheet on a go forward basis.

Okay. Okay.

That makes sense. Thanks, maybe just one final thing are you are you back to issuing future cruise credits again, when you have to cancel the crews, which I realize theres not probably no. We stopped that I believe in the either at the end of 2020 or the first quarter and the first quarter of 2021.

Actually much much earlier than that I'm, sorry, mid 2020, I think it was so we have not issued future cruise credits I want to say, probably since second quarter ish of 'twenty.

I might be off slightly but generally speaking that was the timeframe.

Great. Thank you.

Thank you Robyn.

And thank you everyone for your time and support today, we will be available to answer any of your questions. A little later on so we have a great day and stay safe. Thank you everyone Bye bye.

And this concludes today's conference call you may now disconnect.

Q3 2021 Norwegian Cruise Line Holdings Ltd Earnings Call

Request a DemoDemo

NCLH

Norwegian Cruise Line

Earnings