Q3 2022 Norwegian Cruise Line Holdings Ltd Earnings Call
Good morning, and welcome to the Norwegian Cruise line Holdings business update and third quarter 2022 earnings Conference call. My name is Maria and I'll be your operator today 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.
All participants this conference call is being recorded I would now like to turn the conference over to your host Jessica Jones, Vice President Investor Relations for ESG and corporate Communications Mr. John . Please proceed.
You Maria and good morning, everyone. Thank you for joining us for our third quarter 2022 earnings and business update call I'm joined today by Frank del Rio President and Chief Executive Officer of Norwegian Cruise line Holdings, and Mark Kempa Executive Vice President and Chief Financial Officer.
Frank will begin the call with opening commentary after which mark will follow to discuss our financials before handing the call back to Frank for closing remarks, We will then open the call for your questions. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at Www Dot and C. L. H LTV dot com slash investors.
We will also make reference to a slide presentation. During this call, which may be found on our Investor Relations website.
Both the conference call and presentation will be available for replay for 30 days following today's call.
Before we begin I would like to cover a few items our press release with third quarter 2022 results was issued this morning and is available on our IR website. This call includes forward looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statements contained.
Thank you for joining us today.
I am pleased to report that we reached another significant achievement on a road to recovery this quarter with a generation of positive adjusted EBITDA for the first time since the pandemic began.
We have been clear about our intentional and methodology will return to service strategy consistently meeting or even exceeding the operational and financial milestones we had guided to.
I'm encouraged by our progress as each quarter has seen substantial sequential improvement in load factor with a shortfall gap continuing to narrow versus pre pandemic levels, while our industry, leading pricing continues to hold strong.
And while we are always looking for ways to capitalize on opportunities to accelerate our recovery I want to reiterate that our primary focus continues to be maximizing profitability for 2023 and beyond.
Sustainable banner by prioritizing, our long term brand equity and protecting our industry leading pricing.
While the macroeconomic environment heading into 2023 remains more uncertain than usual, we see several tailwind and catalysts to sustain our current positive trajectory as outlined on slide five.
Okay.
First public health regulatory Covid related protocols continued to improve.
Past 30 to 45 days alone key countries like Canada, Bermuda, Greece, and all of South America have removed COVID-19 testing requirements for entry and many countries in Asia have begun reopening to cruise.
These developments have paved the way for us to relax our own COVID-19 protocols, allowing us to reach a wider cruising population as well as adding greater variety to high yielding itineraries as more ports around the world become accessible to cruising.
With the public health environment, improving in September our three brands removed mandatory vaccination requirements and just last month Norwegian cruise line took another significant step forward with the elimination of all COVID-19 related gas protocols.
That means no more vaccination testing are masking requirements on any of the lines 18 ships, except in the very few areas around the world would you still have specific COVID-19 rules.
This is a long awaited alignment of protocols to the rest of the travel leisure and hospitality industries, which reduces friction eliminates the number one reason for not booking at cruise and meaningfully enhances the cruise experience for our guests.
Our sales state program was always designed to evolve and the improvement in our public health environment, along with the near elimination of intrusive protocols remain in place allow us to uphold our number one priority of protecting the health safety and wellbeing of our guests and crew and the communities we visit.
Second while there are heightened concerns surrounding an economic slowdown in the broader marketplace.
Primary target cohort of our three brands, which is more upmarket and affluent than that of the crude industry as a whole continues to demonstrate a willingness to spend on travel and experiences in.
In fact, you may have heard commentary from credit card issuers. This earning season about continued strong spend on travel and experiences, especially by those and higher income categories reinforcing that continued strength and resilience of demand for cruising, particularly among Americans.
Within the cruise industry, we believe our company is well positioned to outperform if indeed, the macroeconomic environment weakened.
And as slide six illustrates our dominance in the upscale space, which we participated in not only through our Oceania and regent brands, but also with our exclusive high and ship within a ship concept on Norwegian with the Haven is significant.
And while this quarter is not totally immune to economic downturns and has been very resilient historically.
In addition, slide six also demonstrates our favorable guest demographic mix, which skews towards the higher end of the income spectrum as each of our brands operate at the top of their respective industry categories.
The vast majority of our guests have a net worth of 250000, plus again, a more resilient cohort in the event of an economic downturn, particularly if the job market remains strong and the equity markets stabilize.
With over 85% of our guest sourcing coming from North America. We will also benefit in the near term given our relatively low exposure to European sourcing, where the economic environment is already challenged.
Long term this bodes well for our business as North Americans have historically been the guests who book the earliest garner the highest ticket price and spend the most on board.
Taken together these factors contribute to our strong book position. Despite current macroeconomic worries in a turbulent geopolitical environment.
Last quarter, we spoke about the two indicators in our business that we typically monitor to evaluate the extent and willingness of consumers to spend on cruise travel the first being the booking window, which provides a peek into the consumer's psyche about the future and the second being our onboard revenue generation, which is our best <unk>.
All time now indicator.
Both of these indicators continued to meet or exceed our expectation in fact, our onboard revenue generation continues to break records as onboard revenue revenue per passenger cruise day was approximately 30% higher than the comparable 2019 period.
In addition, our booking window in the third quarter was approximately 245 days nearly 10% ahead of the same quarter in 2019.
This is important because and Ellen gated booking window is preferable as it provides better visibility, which allows us to increase prices sooner, while moderating marketing expense.
The last catalyst I want to touch on is our industry, leading new build pipeline outlined on slide seven, which we expect will enhance our brand profile and product offerings and most importantly drive significant revenue adjusted EBITDA adjusted earnings per share and cash flow growth.
Turning to slide eight in August we celebrated a questioning of our newest ship Norwegian Prima and the Reykjavik and Reykjavik, Iceland. The first major cruise ship Kristen in this historic seafaring locale.
<unk> has been incredibly well received with extremely positive feedback from the guests travel partners media and the investment community who have participated in the ship sailings so far.
The addition of prima in her upcoming five sister ships, along with the oceanic cruises, New generation Vista class ships, and regent seven seas, grander well without a doubt reinforce the positioning of our brands as the leaders in providing upscale experiences and each of the major cruise category.
Looking ahead to 2023, we have three newbuild one for each brand entering the fleet with over 5000 additional births.
These new ships are expected to attract nida brand guests create excitement for our loyal past guests and contribute significantly to top and bottom line financial results.
With the relatively small size of our current 29 ship fleet. We are confident that we can absorb this capacity growth.
Not only do we have many unserved and underserved markets around the world, but we also continue to believe that the cruise industry at large is vastly underpenetrated, especially when measured against other land based vacation alternatives.
To put this pointing to perspective as you can see on slide nine which we provided at our Investor event last month. The total number of state rooms aboard our 29 ships across our three brands is less than one fourth of total number of hotel rooms in Orlando, Florida alone.
Just one city in one single country.
And even if you look at the entire cruise industry. There are fewer state rooms, and the global cruise fleet of over 250 ships than there are hotel rooms in the top three U S cities for hotel capacity, which is Orlando Las Vegas and Chicago.
So the opportunity to grow demand is significant and when you couple that with the supply side of the equation and where we have a high degree of visibility and a limited pipeline of new ships due to shipyard constraints the industry and Norwegian cruise line holdings in particular have a strong foundation for continued growth.
Shifting our discussion is off to a bookings demand and pricing trends.
As you can see on slide 10 in the third quarter, our load factor was approximately 82% in line with our guidance and demonstrating continued and substantial improvement over the prior quarter of 65%.
We expect load factors to continue improving sequentially to the mid to high 80% range in the fourth quarter. Despite the fourth quarter, historically being a seasonally lower occupancy quarter in the third quarter.
Looking at our quarterly load factor in terms of the gap with 2019 third quarter occupancy was approximately 30% below the comparable 2019 period and we expect continued sequential improved improvement in closing this gap to above 20% during the fourth quarter.
The steady occupancy ramp up is expected to continue until we reach historical 100% plus levels beginning in the second quarter of 2023.
In terms of pricing as you can see on slide 11, our net per DM price growth in the third quarter of 2002, when compared to the third quarter of 2019 was up approximately 5%.
This is particularly impressive when considering the hit pricing took with the absence of premium priced Baltic itineraries in the quarter due to the Russia, Ukraine conflict.
These strong results demonstrate the effectiveness of our strategy of holding firm on our core to go to market strategy of market to fill versus discount to fill and maintaining price integrity by emphasizing high value over low price, which you can see on slide 12.
I've said this before and I will reiterate again today given its high importance.
We strongly believe that this strategy is the optimal path to continually deliver high quality and sustainable profitability. Once we return to a fully normalized post pandemic environment, which again, we expect will be in the early second quarter of 2023.
Turning to slide 13 as expected our fourth quarter 2022 booked position remains below that of 2019 that said pricing continues to be significantly higher when compared to 2019, even when taking into consideration the dilutive effect of future cruise credits.
Dilution from future cruise credits will not carry forward into 2023 as the bonus or value add portion of certificates issued during the pandemic will expire at year end.
Focusing in on 2023, our full year book position is equal to 2019 as record performance and our ongoing net booking pace is at the level needed to sail full beginning in the second quarter of 2023.
We believe our cumulative book position as at the optimal level when balancing our desire to encourage guests to book early in order to be approximately 65% booked by year end for the following year, while also maximizing our industry, leading pricing so as not to leave yield on the table.
This volume versus price dynamic is a delicate balance that we have fine tuned over the years using historical itinerary specific data and our sophisticated revenue management system and is key to our success.
Pricing is also significantly higher for 2023 versus the comparable 2019 period with strength seen across all three brands as.
As we have said previously pricing naturally will level off as we fill out our book for 2023, but we continue to expect to achieve record pricing for full year 2023.
As we look to the future of our entire team has mobilized energized and ready to flawlessly execute our eyes are wide open and we are preparing for multiple scenarios given the current uncertainty in the microeconomic environment, and we are ready to adapt and pivot if needed or.
Our company and our industry has demonstrated its resilience time and again in the past I'm confident that if necessary we will do so again.
We are also encouraged by the relaxation of protocols and the regulatory and public health environment, which paved the way for us to return to normal operations and we are excited to welcome. The eight additional ships to our fleet. We have on order through 2027, we will continue to be disciplined and strategic as we work to set our company up for long term success.
And to maximize value for all stakeholders I'll be back with closing comments, a little later, but for now I'll turn the call over to Mark for his commentary on our financial position Mark.
Thank you Frank and good morning, everyone. My commentary today will focus on our third quarter financial results and outlook and the progress we continue to make on our path to full recovery.
Slide 14 outlines key metrics, highlighting our third quarter results all of which were at or above our previous guidance during the quarter, our load factor improved 17 points over the prior quarter to 82% in line with the guidance previously provided.
This is consistent with our phased and methodical approach to ramping up occupancies, while maintaining pricing discipline as we remain on track to reach historical load factor levels for the second quarter of 2023.
Fourth quarter load factor is expected to be in the mid to high 80% range, which while on the surface appears only modestly higher than third quarter represents continued significant improvement when taking into account the seasonality of our operations.
Strong ticket pricing and onboard revenue generation drove total revenue per passenger cruise day in the quarter up approximately 14% versus 2019.
Better than our expectation for a high single digit increase.
This is particularly impressive given the impact in 2022 of the Russia, Ukraine conflict on premium priced Baltic itineraries, which are heavily weighted to this quarter.
In addition.
<unk> related capacity constraints on the high yielding pride of America, where another headwind during the quarter.
As we look to the fourth quarter, we expect this metric to increase by approximately 20% compared to 2019 levels.
Slide 15 illustrates our advanced ticket sales built which continues to indicate healthy consumer demand.
Our total Acs balance stood at $2 5 billion at the end of the third quarter flat.
Flat versus the prior quarter's record high balance and versus the seasonal decline, we typically see between the second and third quarter.
On a gross basis Acs built was one 5 billion.
Assistant with the prior quarter, which was the highest level in three years.
In addition, approximately $1 6 billion of the total.
<unk> balance at quarter end is associated with bookings that are already within the final payment window, and therefore subject to cancellation penalties, which by definition results from stickier bookings and lower risk of churn.
Turning to cost we continue to feel the impact of inflation and global supply chain constraints, which is pressuring margins in the near term.
As seen on slide 16, we have opportunistically added to our fuel hedge position during the quarter and are now approximately 44% hedged for the remainder of 2002 and approximately 38% hedged for 2023.
We continue to expect adjusted net cruise cost excluding fuel per capacity day to decrease approximately 10% in the second half of 2022 compared to the first half.
Given our ongoing ramp up second half costs are not representative of a go forward run rate.
In part due to the additional demand generating marketing investments as we lay the foundation for 2023, which we expect will normalize closer to historical levels on a capacity adjusted basis beginning next year.
In addition, we're starting to see some moderation of the hyperinflation, we have seen in late areas of late in areas, such as boost food costs and related.
Looking ahead to 2023 net cruise cost ex SKU, excluding fuel per capacity day will exceed 2019 levels as anticipated due to both normal and hyper inflation over the past three years or four years. However, we are laser focused on managing our cost base and our entire team. This.
Focused on mitigating this impact by increasing efficiencies and right sizing the business.
All while still preserving the exceptional guest experience our brands are known for.
To help with modeling we have also provided additional guidance on key metrics by capacity days revenue expectations, depreciation and amortization interest expense fuel consumption and capital expenditures all of which can be found on slide 17 and in our earnings release.
Shifting to our financial performance Slide 18 demonstrates our continued momentum and consistency in achieving key milestones.
Last quarter, we generated operating cash flow for the first full quarter since the beginning of the pandemic.
And this quarter. We are pleased to report positive adjusted EBITDA of approximately $28 million.
The next step forward is our expectation to achieve adjusted free cash flow in the fourth quarter.
We have been clear throughout our return to service that this will not be an overnight flip the switch process, particularly given our intense focus on best positioning our company to maximize profitability. Once we return to a fully normalized operating environment.
On our current trajectory each of these building blocks are expected to lead to record net yields and record adjusted EBITDA for the full year 2023.
Moving to liquidity on our balance sheet on slide 19, our overall liquidity position remained strong totaling approximately $2 2 billion at quarter end consisting of cash.
Of approximately $1 2 billion and the Undrawn $1 billion commitment keep.
Keep in mind that during the third quarter, we took delivery of Norwegian Prima, which resulted in a cash outlay, partially offset by incremental ECA ship financing.
On our current projections and trajectory we continue to believe we will be able to meet our liquidity needs organically.
Slide 20 demonstrates the result of our deliberate measures throughout the pandemic to optimize our debt maturity profile, which positions us well as we ramp up to a normal operating environment for the remainder of 2022 and for the full year 'twenty three we have approximately $300 million and $1 billion of debt payments.
Coming due respectively.
Vast majority of which are related to our low cost export credit agency backed ship financing.
We have previously disclosed that we are in the process of extending our operating credit facility, consisting of a revolver and term loan a which.
During early 2024, and we are on track to complete this by year end.
Upon completion, we expect to have a relatively smooth maturity profile over the course of the next few years.
For additional detail on the breakdown of upcoming debt payments through 2027, we provide a detailed schedule on our investor Relations website.
Our total debt portfolio was approximately 75% fixed rate today and this is.
<unk> to increase to approximately 80% by year end 2023, with the addition of three new builds next year, which positions us well in a rising rate environment.
Turning to slide 21. In addition to maximizing our current fleet are expected future earnings growth from today's normalized levels will be fueled by the transformational growth profile, we already have in the pipeline, representing a 50% growth in capacity versus 2019 levels.
As Frank touched on we welcome this new capacity, given our company and more broadly the cruise industry's underpinned a penetration within the larger leisure landscape.
Our new ships have a very favorable and efficient financing structure locked in at the time of contract which results in an expected immediate boost to profitability once they enter service.
For all new builds on order. Our findings are financing is committed at fixed rates, averaging approximately two 5% over the portfolio.
Another important component of our Newbuild pipeline is that well prior to a ship delivery. We are already receiving significant cash flows in the form of advanced ticket sales and pre sale of onboard revenue streams.
This typically equates to roughly $100 million to $150 million of cash inflow from future bookings prior to a vessels first revenue sailing essentially resulting in a cash infusion into the business that continues to build over time as final payments for future voyages also become due.
Before handing the call back to Frank <unk>.
Want to reiterate that while we are proud of the tremendous progress. We have made to date, we are not taking our foot off the gas and are relentlessly focused on executing our medium and long term financial strategy as laid out on slide 22.
We are keeping a close watch on the macroeconomic environment and are preparing to adapt to any potential scenario, but we're confident we're taking the right steps to set up our company for a successful future.
With that I'll turn the call back over to Frank for closing comments. Thank.
We successfully completed the testing of a biodiesel fuel blend on regent seven seas splendor in October and we announced the signing of a memorandum of understanding with man energy solutions to conduct the feasibility study and retrofitting an existing engine to operate with dual fuels diesel and methanol.
We will continue to evaluate a variety of alternative fuels and share learnings with other companies as we collectively try to find a viable long term solution.
We believe we are very well positioned in the current economic environment, given <unk> unique drivers, which have allowed us to excel financially in the past and we will continue to do so in the future.
Second we are hitting our targets and reaching key milestones on our path back to normalcy. We are focused on laying the foundation for long term sustainable profitability for 2023 and beyond.
As well as our impressive onboard revenue performance and lastly, our cash generation engine has wrapped up which along with our Newbuild pipeline provides a clear path for return to meaningful profitability and a deleveraging of our balance sheet in the coming years.
Thank you Frank if you have a question at this time. Please press the Star then the one key on your Touchtone telephone.
Order to get as many people through the queue. Please limit your time to one question with your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Particularly if we face an economic slowdown or recession, Mark do you want to answer that one.
And as I said that consisted of cash of one two and the $1 billion Undrawn commitment.
As I said in my prepared remarks based on our current projections and trajectory. We do believe we will be able to meet our liquidity needs organically.
Thank you Mark our first question from the line comes from Patrick Scholes with two Securities. Please proceed with your question.
Good morning.
Can you tell us why is now the right time for that and then related to that.
It would seem.
But this is something your competitors could do.
Maybe it does.
Sort of a zero if everybody is doing it why do you see.
At this time and then I'll have one more follow up questions. Thank you.
Hey, Patrick it's Frank.
A couple of reasons number one the travel agency community is not fully yet back to pre pandemic levels at least not for the cruise space.
There are other marked by saving and saving and saving you make your mark on the topline and this is what this is that's what this move is meant to do to generate more revenue.
Makes sense.
<unk> results and this is also <unk>.
And this is before you made your.
So much higher than comparable in 2019.
Our next question comes from Robin Farley with UBS. Please proceed with your question.
Could sort of put a range for us around when you talk about.
With Q2 results indicated that that would come down the road.
Similarly, Bob.
Yes.
I cannot give you a range. We gave you. The one time data point, we did say that that we would expect that to level off but its up significantly and again that is all part of our phased ramp up strategy. We're protecting price we want the consumer to pay more yes are we are we is there an offset in the very short term.
Term that we are sacrificing a small amount of load factor, yes, we've said that but that is part of our strategy. We expect to be back at normalized load factors in the second for the second quarter of next year. So we're right on path, we are right on track with our intentional actions and.
All I can tell you that the pricing is up and that continues to show in both our actual results and if you recall in my prepared remarks, I said that gross pricing is expected to be up 20% in Q4. So if you think about that you can kind of get an idea of where we're trending but all signs are looking good for next year.
Net cruise costs.
Happy.
Yes extremely elevated cost here.
Is it going to take you a couple of quarters searching online I'm, just trying to clarify what sort of in 2022.
Look it's going to be a tapering down and what I would broadly guide you to is that when you look at FY 'twenty three.
Certainly not in the first quarter, but when you look at the year on a whole youre, probably looking at net cruise costs down at.
Additional crew that is tapering off in the quarter. So we did see some ramping down in Q4 as it related to that in Q3, we had a significant launch of the new class of.
Vessel Prima that's a drag on costs, but the other thing to keep in mind too is that starting next year.
Or in 'twenty, three we no longer have quarantine cabins that are out of service so while.
It has a double impact because if you think about that in 'twenty, two and especially in Q3 and Q4 from a unit cost standpoint that impacts our denominator from a capacity day basis. So by the mere fact that we have we are putting those cabins back into.
Revenue sale mode. So to speak for 2023, it will inherently reduce our unit cost, but we're also going to get the benefit from additional revenue. So there's a lot of moving parts in 2022, it's just as I've said before it's a bit of a noisy noisy and bumpy year, but I'll go back to the.
<unk> that is at least we expect mid single digit decreases and.
Just Chris to make sure I understand when you are saying down mid single digits.
Hi here, so maybe I will let you do the math, but I did say in my prepared remarks that we expect cost to be up versus <unk> 19 in 'twenty three.
Some of the broader industry, so when I'm talking about at least what my commentary on mid single digits that software. We are in terms of run rate for Q3 and Q4 of this year.
Okay. Thank you.
Yes.
Our next question comes from Steve.
Henske with Stifel. Please proceed with your question.
See a path back to investment grade over the next let's call. It couple of years. Just just wondering if you guys have thought about a similar path and maybe what the next couple of years might look like from a deleveraging perspective is as I think I remember you guys had some massive deleveraging.
Post 2014, or 2013, and what you basically cut your leverage and have over let's call it three or four year period.
Also noticed Mark your Capex forecast for 2024 dropped a good bit from last quarter and I assume thats just a promote class plus ship getting pushed back into early 'twenty five, but thats kind of how you got to generate some significant free cash flow as well in 'twenty four which.
Good morning, Steve Thats, a lot to unpack, there, but I'll start with.
Investor event, we are charting charting a path back to success and first and foremost that means right sizing the business getting the business back to full operating capacity, which is just around the corner.
It's going to result in significant cash flow and that results in Delevering and Derisking derisking the balance sheet. So that is what the entire management team as well as our board is focused on I've said that before I said that in 30 days ago I'm, telling you.
Today, we need to Delever. This company, we have done it before we've taken the company down from 910 times Levered to where we were at the end of 19.
Low threes going into the two so.
As we look forward.
And if I have a crystal ball as I said at the Investor event.
We want to turn out we want to finish FY 'twenty three with a five point X handle in leverage and then our goal in 'twenty four is a four point X handle and then three <unk> handle so we obviously have a path of how we can do that.
We need to continue to execute we need a relatively stable environment, but.
Signs are looking good we're getting where we need to be our strategy is working.
Will there be bumps in the road, yes, theres going to be bumps in the road, but we've proven time and again that we can get past that.
What was the last part of your question now.
Yes, sorry about that yes, youre absolutely right. So look as we said in our in our in our earnings release.
We do have a slight delay with Leo three and four class vessels and that is strictly 100% as a result of.
Shipyard delays from supply chain constraints I think on average.
Ships are being delayed on average by about four to five months each vessel. So that just really just simply pushes some of your capex.
From 24% to 25% and so forth, so a little bit of an opportunity.
Certainly not.
Not a huge shift, but given where the world is today, we think that's okay and that's going to further help us when we think about next year.
Having.
Over the next couple of years, having slightly better lower capex that should provide more cash to the business.
Maybe just how youre thinking about the next four or five months from a booking perspective, and I guess, what I'm getting at here is.
You have had a lot of strong booking activity since all the COVID-19 restrictions have been removed and whatnot, but maybe just how youre thinking wave season.
Start to gear up here over the next call it four to five weeks.
How are you guys kind of thinking about the booking patterns over the next couple of months are you expecting kind of a normalized wave season premiere.
10 days doesn't make a trend necessarily but the last 10 days.
The Norwegian brand.
<unk> had its best 10 day streak ever.
Ever.
And I think that's going to carry on throughout the fourth quarter and into <unk>.
<unk>.
It is a consumer event, but travel agents get behind it and travel agents haven't had a wave in three years and they are excited and when you travel agent excited I can't help but.
Joining them so.
I really think that the next four months five months into the end of March which is typically the end of waste season are going to be exceptionally strong booking periods.
Okay, great. Thanks, guys appreciate it take care thanks, Steve.
So mark I, just wanted to follow up in terms of the spend cadence.
I know you mentioned down mid single digits versus that second half run rate for net cruise costs in 2022.
As we think about for 2023, and I guess the cadence over the course of the year. It sounds like it's going to be certainly front end weighted is that mostly the elevated marketing costs and then as you kind of exit 2023, how should we think about the net cruise costs.
When you look at the.
Cadence, while it is still a bit early to give exact guidance on cadence, we're still going through all of our operating plans internally I think its fair to say that Q1 is going to be probably a bit higher than Q. Then Q2 would be and then naturally I think we're going to start to see more scale in Q2 and Q3, so youre going to continue.
To see a downward trend.
And as Youre looking at your models keep in mind, we do have three new ships that were taking delivery of next year. So there will be some startup cost related to those so just keep that in mind, but it's going to be a downward slope next year and youre going to.
Starting to see that that take effect look as we look into 2024, we're going to continue to garner scale benefit as we take on new capacity.
We believe that.
Throughout the course of 2023, we're going to find opportunities and were right sizing the business from from some of the cost creep that we've just seen over the last two to three years.
We've had to take hard looks at ourselves and make sure. We're doing all the right things are first and foremost we wanted to make sure we were getting back operating in a healthy and safe manner. We've done that we're doing now we're focusing on what does it take to deliver that product. So we are focused on it.
We're attacking it from every angle, but youre going to it will be it will be a slow downward trend in <unk>.
But too early to comment on 2024.
Just on the surface, we will see some scale benefit.
Got it thanks, and just for my follow up in terms of the 2023, you gave your deployment mix, which I think was pretty helpful.
As we think about pricing.
Top line, so what extent do you attribute that the pricing tracking higher to this.
More attractive or optimal itinerary mix with less Caribbean more Europe more Alaska in Asia Pac versus 2019 or is it is this more your market to fill strategy and kind of just holding the line on pricing.
Especially the Norwegian brand has pivoted to longer more exotic higher yielding itineraries.
That book earlier.
There's no such thing as a good close in bookings and Thats one of the things that we're trying to.
To get away from that part of the strategy over the paying NCS by the way I failed to mention that NCS are only paid a commission if the booking is more than 120 days from from booking date and there is a big demarcation of the quality the pricing of our booking that has made early rather than Clos.
<unk>.
But yes.
We've made no bones about that we hold price.
We lead the industry by such a wide margin on price that.
It's almost untouchable and we continue to grow you see what we've done in the second quarter third quarter of this year compared to our peers. What we're projecting for Q4, we're projecting for 2023 that is the central theme of our go to market strategy and we accomplish it by marketing to fill by bundling.
And by having top line product onboard so.
That's going to continue it is core to our strategy.
Its price price price and Thats why as Mike mentioned, we have taken a very disciplined approach to filling we don't care, if we're behind others by a quarter or two in terms of.
Load factor.
Simply won't sacrifice price because we have seen historically the dose to drop prices to ridiculous levels in order to fill take years, if not decades to recover and we are simply not prepared to do that.
Got it thanks, so much for all the color Frank and Mark.
Thanks, Dan.
Our next question comes from Vince <unk> with Cleveland Research Company. Please proceed with your question.
Great. Thanks for taking my question, a little bit longer term.
Curious your perspective on kind of finding the balance of growing capacity with continuing to source the strongest gas providing unique and interesting itineraries.
I know you talked a little bit about the low penetration rates of crews imagine share gains as kind of part of it but how are you thinking about kind of managing that build along with continue.
Continuing to have poor capacity and interesting itineraries to meet that demand youre going after.
Okay.
That's our secret sauce, Vince if I tell you everyone will do it.
But I will I.
I will tell you that there are just dozens and dozens of either.
Or places that we simply don't go because we don't have enough vessels.
In the U S.
There are cities in the U S that are hit.
Historically very strong.
So it's markets that we don't have a vessel.
Seasonally or.
Or at least.
Our year round and.
And we think that with new vessels coming online, we'll be able to do that Alaska, where we've made huge investments in land based infrastructure and ports, we're still underpenetrated. The Norwegian brand. For example, only has four vessels there Oceania and regent only one each our competitors have multiples of that and the reason for that is.
We need to be in other places so we see Alaska, we see Europe as growth markets. We believe South America is becoming very very interested in greater demand for South American ports.
Asia has taken a backseat over the last couple of years because of the Covid situation, there, but I've got to tell you Japan is red Hot for us.
Australia is red Hot.
So I'm excited about the possibility of going to.
New places with new ships.
And continuing to just feed the beast of high yielding itineraries, you've heard me say before Vince itineraries as the number one driver of yields and we think that we do itineraries better than most and we will continue to do so.
Great.
Kent.
For Mark.
There is a little bit of confusion on the cost front and I know you guys don't want to give specific guidance I, maybe wanted to come at this from a different direction.
When you talk about record EBITDA.
2023, which it sounds like you guys still feel good about like getting there is some component of pricing costs, but.
As you think about managing the business from a margin perspective, obviously fuels outside of your control, but just think about the next one to two years those margins ex fuel.
Relationship between price and operating costs any reason to think that that would be a departure from kind of where you've been historically.
Vince absolutely not.
We've talked about this before.
And I'm not going to sit here and tell you today that there is not near term pressure on margins. We've said there is we acknowledged that.
It'd be a full not to say that but I think when you look out over the course of the next year or two.
And you look at where the business is going and where the.
Cost will settle right. This hyper inflationary environment cannot last forever.
And.
We are taking actions internally as well to ensure that we're right sizing all of the all of the cost of the business but.
More importantly, we believe the operating leverage of this industry and more most more particularly our company is intact is it going to be there in the next quarter or two I think that's going to be a challenge, but when you look over the next one to two years certainly we believe this industry gets back to pre pre COVID-19 margin level.
<unk> and plus.
But as I said in my remarks, it is not going to be an overnight.
Over night.
Flip of the switch so it's going to take some time, but without a doubt. This industry. We believe is intact from a margin perspective, and then thats why maintaining those high prices is so important because we can't control that or at least we can greatly influence pricing.
And the relationship between marketing and sales in all of our distribution channels.
Whereas.
You acknowledged that we don't control the cost of fuel, but we don't really control the cost of beef or Paris, or onions, or a lot of other things that we consume and unless you are prepared to slash and burn the product, which will in turn affect your pricing.
The best way to control margins.
Or influence margins positively is through pricing, which is what we do.
Alright, thank you.
Our next question comes from James Hardiman with Citi. Please proceed with your question.
Hey, good morning, Thanks for taking my question so.
Some of this has been covered but I just want to make sure.
We're able to sort of unpack the difference between.
Gross pricing and that pricing right in the third quarter I think growth was up 14% versus 2019 net was up 5%. It sounds like the difference is some of the bundling airfare.
I guess as we move forward some of the NCS Mcf stuff is going to be in there. So I guess as we look to 2023.
How should we think about the gap between those two should we expect that to.
Widen even even further as we move forward or does some of that stuff.
Sort of Peel back.
Hi, Vince good morning, it's Mark So youre absolutely right. When you look at the last two to three quarters. The differential between gross to net has been about anywhere from eight to nine points I think when you look at the second and third quarter. So if you look at where our implied guidance is for Q4.
You do the math, you're probably going to get to a spread of about seven points. So.
Our best view of everything we can see given the bundling getting back to normalized load factor levels and full ships.
Probably going to be somewhere in the zone of that 7% to eight point differential on a run rate basis, now could it be higher or lower than in a particular quarter. It may be a point or two but I think generally speaking we're looking at somewhere around that seven seven point differential.
Got it that's really helpful and then.
Obviously, one of the things that shaped this year, maybe less so for you than some of your peers, but obviously wave season.
Hijacked by.
I'm, a crime and you had the Ukrainian conflict.
I know, it's difficult, but is there any way to.
Quantify or estimate what type of an impact that ultimately had on your business with your and I'm, assuming that it's primarily a pricing impact.
More so than occupancy, but maybe walk us through that ultimately I'm just trying to think through or think about what this year would have looked like with a more normal wave season, which.
I think we're all hoping that that is the case in 2023.
Yes, Jamie looked a lot better.
Yes.
Sure.
Yes.
<unk>.
We look back at all of the major changes that took place starting in early June when.
The U S government no longer required people to test to get back into the country that was a huge one it was only four or five months ago. I think we all want to put COVID-19, so far behind us that we forget some of these major milestones that occurred just very recently then of course the CDC dropping.
Yes.
There are protocols, allowing us to do what we're doing now that all has contributed to less friction with consumers, bringing travel agents back to the fold so to speak and so thats why im so excited about this upcoming wave period, because it doesn't have all the all the burdens that.
The last two or three had but in Pacific.
Specifically to your question about Q3 pricing in Ukraine look.
If you had asked me what is the single city in the World Port in the World that you cannot live without.
I'd tell you in St. Petersburg.
And we lost it.
Very very high yields incredible shore excursion sales so onboard revenue with just.
The higher than any other itineraries that I can think of.
Relatively long season, you can get to St. Pete in the Baltic.
Mid may and you can leave in mid September .
So it's a real blow it's a real blow.
And.
And so by we kept most of the ships there although one vessel came out of the Baltic and we send it to the Caribbean, which is about as extreme from one to the other that you can think of so it did affect.
Did affect load factors and no question it affected pricing.
And the impact on on EBITDA has to be in the tens of millions of dollars.
That's really good color. Thank you.
Our next question is with Paul Golding with Macquarie Capital. Please proceed with your question.
Thank you so much and congrats on the quarter.
I wanted to ask.
A bit of a follow on question with Europe .
Given the protracted geopolitical issues.
I'm looking at the deployment mix for 'twenty three it looks like Europe is.
In terms of plan for 'twenty, three deployment mix versus <unk>.
<unk> 19, so I just wanted to get a sense of the demand picture for presumably the north American cruisers that still strong for Europe . Despite the geopolitics.
A lot of tailwind that we should see.
Also given the 85% North American sourcing comment from from prior thanks.
Yes, I think it is a tailwind for several reasons one it wasn't until mid summer that.
Americans, we're allowed back into the U S unless they had to test and so this revenge travel and pent up demand that we've been talking about for months. It is really alive and well for Americans going to Europe , and we want Americans going to Europe , because they do.
<unk> cell.
By the highest cabin categories book really and also because of the strength of the dollar I mean going to Europe now, even though you do pay Americans do pay in dollars for our cruises here, they're going to spend a lot more money enjoy themselves a lot more once they get to Europe . So we do believe that Europe is.
Poised for an incredible.
With 2023 season, that's why we increased our capacity there by six percentage points of occupancy at the expense of the Caribbean I'll take that trade all day long because the yields both on ticket and onboard revenue are so dramatically better for European cruises that.
We'll take that.
Thats right.
Great. Thanks, Frank and then maybe staying on the <unk>.
The topic of Eastern Europe was wondering if theres been any change.
So the positive side in terms of cost with respect to your onboard labor costs due to the issues in Europe are you seeing any benefits there and maybe more structurally short side, even though I know, it's a smaller piece of the chain.
Change in the structural labor cost picture, there and in general no.
No change at all the vast majority of our onboard crew.
Come from Asia, not from Eastern Europe .
Things have changed 20 years ago. It was western Europeans became eastern Europeans now, it's primarily agent so no no positive.
Question, what's the weather we have with operative question for one more time for one more question. Please.
Our next question is from Ivan Science Tiger. Please proceed with your question.
Alright, Thanks for taking my question and congratulations on another great quarter and the ongoing progress. Thank you Ed.
The big gain in onboard spending.
The key drivers of that what are you seeing being most popular cruisers are spending on.
We're seeing it in experiences so our casino is doing really really well, we're going to get Vegas, a run for their money.
People are enjoying the destinations we have industry, leading itinerary, so shore excursion business is up.
<unk> is second to none and people are enjoying <unk>, but even our spa.
<unk> is doing very very well.
So I'm happy for the I'm happy for the folks over at Oneworld Spa.
And then Mark had commented a couple times about seeing slight moderation in commodity food commodity prices are you still seeing those trends or what's your outlook there.
Yes.
We continue to see that.
Certain categories are trending down and theyre starting to get into their historical averages were not certainly not where we would like them to be or need them to be but we are seeing continued continued momentum in there, but I wish it was quicker but.
We're at the Mercy of the rest of the world, but again, we're seeing positive momentum on that front.
Wishing you, a big Q4 and happy holidays.
Thank you Ivan.
Thank you.
Operator, and thank you everyone for.
For joining us. This morning, we ran a little bit over time, but those are all great questions and we were happy to have the opportunity to answer them as always our team will be standing by to answer any of your questions have a great day everyone.
This concludes today's conference call you may now disconnect.
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