Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) Q1 2024 Earnings Call Transcript May 1, 2024

Norwegian Cruise Line Holdings Ltd. misses on earnings expectations. Reported EPS is $0.04026 EPS, expectations were $0.12. Norwegian Cruise Line Holdings Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Norwegian Cruise Line Holdings First Quarter 2024 Earnings Conference Call. My name is John, and I will be your operator. [Operator Instructions] As a reminder, to all participants, this conference call is being recorded. I would now like to turn the conference over to your host, Sarah Inman. Ms. Inman please proceed.

Sarah Inman: Thank you, John, and good morning, everyone. Thanks for joining us for our first quarter 2024 earnings and business update call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and CFO. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltd.com/investors. Throughout the call we will refer to a slide presentation that can be found on our Investor Relations website. Both the conference call and the 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 first quarter 2024 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 refer to non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. With that, I'd like to turn the call over to Harry Sommer. Harry?

Harry Sommer: Thank you, Sarah, and good morning, everyone. Thank you all for joining us today for our first quarter 2024 earnings call. It's such an exciting time for our company with wonderful new product available across all three of our award winning brands, strong demand and some recent noteworthy announcements that have solidified our trajectory for years to come. The demand for cruise vacations continues to be at all-time high, as evidenced by record booking, record book decision and record advanced ticket sales as the continued innovation and service delivery on border ships lead to exceptional guest satisfaction scores. The combined effect is strong financial performance in the quarter, and an even brighter outlook for the year ahead.

Today, it's my pleasure to discuss some of our Q1 milestones, including the recent newbuild ship announcement and peer development, our strong performance in the quarter, and the exciting booking trends that are driving our improved guidance for the remainder of 2024. I'll also be diving into the significant progress we've made on our global sustainability program Sale and Sustain. Later in the call, I'll turn it over to Mark, who will provide more color on our first quarter performance and update guidance for 2024. We kicked off the year with impressive momentum carrying forward several positive trends from the end of 2023. As you can see, on Slide 4, we sustained strong demand throughout the quarter achieving record bookings in this period, which led to our most successful wave season ever.

As a result, our 12-month forward booked position remains at an all-time high. In terms of financial results, adjusted EBITDA nearly doubled during the first quarter compared to the last year on the back of stronger pricing and higher occupancy levels. Our margins also noticeably improved during the period, with our core costs essentially flat year-over-year, leading to a robust growth and adjusted operational EBITDA margin, which is adjusted EBITDA divided by adjusted gross margin now approaching 33% for the trailing 12 months. As a result, we reduced our leverage by a full turn during the quarter when compared to the end of 2023 and in the first quarter at 6.3x net leverage, marking an important milestone in our journey to strengthen our balance sheet and well on our path for the 1.5 turn improvement in net leverage we guided for the year.

These drives will recognize the S&P which upgraded both our issuer credit rating and issue level ratings during the quarter. While we'll get more details later in the call, I can't help but share that we have exceeded essentially all of our guidance metrics for the first quarter of 2024 and consequently raised guidance on our key metrics for the full year, including net yield, adjusted EBITDA, adjusted net income and adjusted EPS. Another key milestone during the first quarter was our historic newbuild order, which we shared on our last conference call during Seatrade Cruise Global, encompassing eight new ships across all three of our award winning brands, this is the most transformative newbuild program in our company's history. We also announced the construction of a two ship pier at Great Stirrup Cay, which will enhance our existing infrastructure on the private island, making it an even more attractive destination for our guests.

I am thrilled about our future as I know we're paving the way for our continued growth in the next decade and beyond. Our first quarter successes are due to our continued focus on our near-term priorities, which are detailed on Slide 5. We successfully grew capacity 8% compared to 2023, while achieving a record 12-month forward book position, all while increasing price and reducing our net leverage by a full turn and we're seeing strong results across the board. Turning to Slide 6, we have shown you frequently in the past, I want to once again emphasize our long-term strategy of delivering measured capacity growth and optimizing our fleet to drive strong financial returns. Our newbuild pipeline increased from 5 to 13 ships in the quarter, representing a capacity CAGR of 6% from 2023 to 2028 and 4% from 2023 to 2036.

Historically, capacity growth has driven outsized revenue and adjusted EBITDA growth and we expect this trend to continue with the incorporation of larger and more efficient state-of-the-art vessels to our fleet. Turning our attention to the current booking environment shown on Slide 7, we are witnessing robust and resilient consumer demand across all three of our brands in all of our markets. As a result during the first quarter of this year, we noted record bookings culminating a record wave season, leading to a continued record book position for the next 12 months extending into 2025. We continue to see healthy demand across all markets, brands and products, including Europe and Alaska, which continue to perform very well and make up the majority of our deployment over the summer.

All of this strength is despite the cancellation and rerouting of our itineraries that we announced in the Middle East and Red Sea earlier this year. We also recently announced the cancellation of all Red Sea sailings across all three of our brands for the spring of 2025 and replacement sailings are already on sale. By adjusting these sailings well in advance, we can assure a full sales cycle for the replacement itineraries and no impact to our 2025 deals. Overall, we are encouraged by the strength in our book position for the next 12 months, which remains at all-time highs with commensurate higher pricing. As a result, yield growth is strong. During the first quarter, yield growth exceeded guidance coming in at 16.2% on a constant currency basis, up 70 basis points from the guidance we provided just 2 months ago in late February.

2024 is shaping up to be a strong year. And as a result, we are raising our full year yield guidance 100 basis points from 5.4% to approximately 6.4% on a constant currency basis on the back of the strong first quarter and strong demand for the remainder of 2024. Please note that our occupancy guidance remains unchanged, as we are essentially already guiding to full ships, so the entire increase in our guidance is on the back of stronger pricing. Onboard revenue also remains a highlight with strengths seen across the board. This is a positive sign that our target consumer remains healthy and resilient. We continue to absorb strong demand from pre-cruise purchases, which were up 16% compared to 2023. Pre-selling of packages of forward cruise typically leads to a higher overall spending during a guest's cruise journey [ph].

Turning to Slide 8. To continue cementing our leading industry position beyond 2024, I'm excited to announce that this first quarter reached an all-time high in advanced ticket sales. This success was driven by robust pricing, a dynamic deployment mix, coupled with increased presale packages and capacity grow. Our advanced ticket sales balance rose 30% year-on-year reaching a record $3.8 billion. Over the past quarter we have taken considerable strides in our sustainability efforts to our Sale and Sustain program which you can see on Slide 9. We kicked off the year seeking out government grants to support our green initiatives by applying to the EU innovation fund with the goal of accelerating the transition of our six Prima Class vessels from being methanol ready to being fully methanol capable.

We continue to be committed to our short and long-term decarbonization goals. We're also proud to announce that 50% of our company-wide fleet is now equipped with shoreside technology, achieving our year-end 2024 target well ahead of schedule. This is key to our journey to minimizing emissions during port stays and contributing to cleaner air in the port communities we visit. Our proactive approach to environmental impacts didn't go unnoticed. CDP Climate gave us a notable B rating in recognition of the steps we've taken to measure and manage our risk and opportunities related to climate change. This acknowledgement endorses our efforts and pushes us to continue enhancing our sustainability initiatives. Our commitment to operating ethically and with integrity also gained us recognition in the equity markets.

Just Capital in the Restaurants & Leisure category of America's Most JUST Companies Index named us as a Top 5 company. This recognition is a testament to our dedication to fair and equitable operation and the prioritization of our stakeholders wellbeing. Also, we completed the purchase of 3 million carbon offsets invested in renewable energy products. These offsets not only support our decarbonization journey, but invest in cleaner energy sources and local job creation in the communities where these projects are located. Finally, we were recently honored with being one of Forbes Best Employer for Diversity in 2024. This award is a testament to our dedicated efforts in fostering an inclusive workforce, where diverse backgrounds are represented, engaged and empowered to generate and execute on innovative ideas.

I want to express my gratitude to our entire team for their efforts in making our company a welcoming place for all of our talented team members. This recognition motivates us to continue creating a workplace where every individual feels valued and empowered. This progress underscores our unwavering commitment to environmental sustainability, ethical business practices, and the wellbeing of all of our stakeholders. These accomplishments serve as building blocks in our ongoing journey towards a more sustainable and responsible future. I couldn't be more proud of our entire team for all of these impressive accomplishments. With that, I'll turn it over to Mark to walk you through our financial results and outlook. Mr. Kempa?

Mark Kempa: Thank you, Harry, and good morning, everyone. I'm a little under the weather today, so if my voice cracks, I apologize in advance. My commentary today will focus on our strong first quarter 2024 financial results, our improved full year 2024 guidance and our increasingly solid financial position. Unless otherwise noted, my commentary on 2024 net yield and adjusted net cruise cost excluding fuel per capacity day metrics are on a constant currency basis, and comparisons are to the same period in 2023. Let's begin with our first quarter results, which are highlighted on Slide 10. We had an exceptional start to the year and we exceeded guidance across the board, beating our already ambitious targets for the first quarter, which we only announced 2 months ago.

Starting with the top line, results were impressive with net yield increasing 16.2%, materially exceeding our guidance of 15.5%. As discussed last quarter, several factors contributed to the exceptionally strong top line growth we saw this quarter, including the lapping of lower load factors and a less than optimized itinerary mix in the first quarter of 2023. But more importantly, we experienced unprecedented demand for Caribbean sailings in the first quarter of 2024, which represented approximately 58% of our total deployment in the quarter. Looking at costs, adjusted net cruise cost excluding fuel per capacity day came in slightly below guidance at $164. As expected, this number includes approximately $5 from the increased dry-dock days and related costs in the quarter compared to 2023.

Excluding the impact of dry-docks, our adjusted net cruise cost excluding fuel would have been essentially flat year-over-year, demonstrating our ability to offset the impacts of inflation with our disciplined cost savings initiatives across the organization. Adjusted EBITDA was approximately $464 million, exceeding guidance of $450 million and almost doubling the prior year's results. We return to first quarter profitability with adjusted EPS of $0.16, exceeding guidance of $0.12 in the quarter, and well above the loss of $0.30 in the prior year. Overall, we are incredibly pleased with the results we generated in the first quarter. Strong top line growth, combined with continued progress at reducing costs allowed us to essentially beat all of our guidance metrics in the quarter.

We are building on this momentum, and with our revised expectations for 2024 are raising our full year guidance on several metrics, which can be seen on Slide 11. We raised our full year net yield growth a full percentage point from 5.4% to approximately 6.5%. This 100 basis point increase reflects the strength we experienced in the first quarter. But more importantly, our higher expectations through the rest of the year as a result of strong demand and record bookings that we have experienced for the remainder of 2024. Last quarter, we mentioned the impact on our business due to cancellations and redeployment of itineraries in the Middle East and Red Sea. The strength we have seen in the business through wave season, however, has allowed us to almost fully offset this impact.

Our full year guidance implies net yield growth for the remainder of the year in the low to mid single-digit range and is exceeding our pre-pandemic growth rate. Adjusted EBITDA guidance for the year increased $50 million to $2.5 billion, building on the first quarter guidance beat a $14 million. Adjusted EPS guidance for the year increased on a net basis of $0.09 to $1.32 made up of our $0.04 beat in the first quarter, a $0.10 raise for the balance of the year due to higher demand and pricing, which was partially offset by higher fuel costs and interest expense of approximately $0.04. These strong numbers and related guidance raise would not be possible without the continued focus and efforts from our entire team, both shoreside and shipboard.

Now let's take a look at our guidance for the second quarter. We expect a strong second quarter with net yield growth expected to increase approximately 4.3%, which is slightly above our historical averages. Despite the impacts of the [indiscernible] itineraries and redeployments in the Middle East and Red Sea. Adjusted net cruise cost excluding fuel per capacity day, is expected to be approximately $165 or approximately 5.8% above the same quarter last year. As we mentioned last quarter, dry-dock days in 2024 will make comparisons to prior year more challenging. Second quarter '24 has approximately 70 more dry-dock days scheduled than last year. This increase for the quarter results in a $9 or 550 basis point impact on adjusted net cruise cost ex fuel in the quarter.

Excluding the dry-dock impact, adjusted net cruise cost excluding fuels are expected to be approximately $156, essentially flat year-over-year, demonstrating once more the continued success of our cost savings initiatives across the organization. As a result, adjusted EBITDA for the second quarter is expected to be approximately $555 million, adjusted net income is expected to be about $160 million and adjusted EPS to be approximately $0.32. Moving to Slide 12, I want to dive a bit deeper into our margin enhancement initiatives. We remain fully committed to boosting margins and reducing costs across the organization. With a meticulous approach supported by our transformation office, we are continuously pinpointing opportunities, irrespective of their scale across every facet of our business.

The results of these efforts are clear in the first quarter of 2024 were adjusted net cruise cost ex fuel per capacity day was 165, but was flat -- essentially flat compared to the first quarter and 2023 excluding the dry-dock impact. Our guidance on adjusted net cruise cost ex fuel remains unchanged for the full year 2024 and is expected to be $159, net of the approximately $5 impact from dry-docks in the full year, which are -- ex the dry-dock, which are essentially expected to be flat. For your models, I would remind you that we expect to see about two-thirds of the dry-dock impact during the first half of the year, with the remainder in the fourth quarter. Turning over to Slide 13. I want to focus on an important metric that we track internally, which is our adjusted operational EBITDA margin, which is calculated by dividing adjusted EBITDA by adjusted gross margin.

Looking at the last 12 months, you can see the significant improvements we’ve made as we have returned the business to full operations and focused on right sizing our cost basis. In Q1, trailing 12 months adjusted operational EBITDA margin was 32.7%, improving 200 basis points compared to the full year 2023. We expect to see this margin continue to improve throughout the year, ending 2024 at approximately 33.5% based on our updated guidance. As you know, we are striving to improve our margins. And this journey will be fueled by two main drivers. First capitalizing on the strong demand in the market, and converting this into quality and sustainable net yield growth; and second, continued focus on net cruise costs and right sizing our cost base.

Shifting to the balance sheet and debt maturity profile on Slide 14. During the quarter, we completed the refinancing of our 650 million backstop commitment from a secured to an unsecured basis. In connection with this refinancing, we repaid $250 million, 9.75% secured notes due in 2028, which was our highest interest rate debt. This refinancing reduces our interest expense and improves leverage, while also releasing all related collateral. Another important step forward in strengthening our balance sheet. Moving to leverage on Slide 15, we have a track record of delivering on net leverage reduction, as we've discussed in many previous earnings calls. And we are currently on a path to do so again. In the first quarter alone, we reduced our net leverage by a full turn from year-end and turn the quarter at 6.3x.

This is a significant reduction for one quarter and we expect to continue to improve net leverage over time propelled by our organic cash generation and scheduled debt amortization payments. By the end of 2024, we anticipate reducing our net leverage by approximately 1.5 turns from year-end 2023, ending 2024 in the upper 5x range, with sequential improvements in each quarter. We are currently refining a multiyear plan to further continue the reduction of leverage and derisk our balance sheet to drive shareholder value. I plan to share more on this plan at our Investor Day on May 20. Closing out my section I want to reiterate this has been a fantastic quarter, where we beat guidance on all key metrics. The strong momentum we have seen in the quarter is carrying over to the full year and we've been able to raise our guidance for the full year on a -- on yield, adjusted EBITDA, adjusted net income and adjusted EPS.

This quarter is a testament to our ability to use strong top line results coupled with efficiencies to enhance margins and drive strong EBITDA and related cash flows, resulting in lower leverage and derisking the balance sheet. We are excited to see how the rest of the year plays out after the strong start. With that, I'll turn it back to Harry for closing remarks.

Harry Sommer: Well, thank you Mark, and I wish you a speedy recovery. Moving forward, our entire team will be focused on our most important work as shown on Slide 16. First, we will continue to focus on execution. Capitalizing on the strong demand from our target of skill demographics to drive net yield, while delivering experiences that guests value. Second, we will build upon the progress already made over the last quarters from our ongoing margin enhancement efforts with further improvements in cost reduction and efficiencies throughout the organization. And finally, we will continue to improve our financial stability by further strengthening our balance sheet and continuing to reduce net leverage over time. In a few weeks time, we'll be having the privilege of hosting an Investor Day.

We hope you are able to attend either in person at the New York Stock Exchange or virtually through our webcast. It is an occasion that we are eagerly looking forward to as it provides us with a platform to articulate our long-term strategy and financial metrics for the business. This strategic roadmap will offer insight into our ambitions and aspirations for the future of Norwegian Cruise Line Holdings. We will outline the key initiatives and measures that will underpin our drive towards providing our guests with the experiences they value, while delivering long-term profitable growth and shareholder value. The future is certainly bright and we are excited to share this journey with you. And with that, I'll hand the call back to the operator, to begin our Q&A session.

Operator: [Operator Instructions] And our first question comes from the line of Dan Politzer with Wells Fargo. Please proceed.

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