Yahoo Finance Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) Q4 2023 Earnings Call Transcript
Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) Q4 2023 Earnings Call Transcript February 27, 2024
Norwegian Cruise Line Holdings Ltd. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.13. 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Donna, and I will be your operator. [Operator Instructions]. I would now like to turn the conference over to your host, Sarah Inman. Ms. Inman please proceed.
Sarah Inman: Thank you, Donna, and good morning, everyone. Thank you for joining us for our fourth quarter 2023 earnings and business update call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and Chief Financial Officer. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltd.com/investors. We will also make reference to a slide presentation during this call, which may also be found on our Investor Relations website. Both the conference call and 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 fourth quarter and full year 2020 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 call -- turn the call over to Harry Sommer. Harry?
Harry Sommer: Well, thank you, Sarah, and good morning, everyone. Thank you all for joining us today. I want to welcome everyone to our fourth quarter earnings call. It's such a great time to be in the cruise industry with wonderful new products available across all 3 of our award-winning brands. The demand for cruise vacations is certainly as robust as we have ever seen it. And the continued innovation on board is leading to outstanding financial performance and exceptional guest satisfaction scores and guest repeat rates. Today, it's my pleasure to discuss some of our key milestones in 2023, our progress on our near-term priorities, recent booking trends and our outlook for 2024. Later in the call, I'll turn it over to Mark, who will provide more color on our 2023 performance and guidance for 2024.
Now 2023 can best be described as a landmark year for Norwegian Cruise Line Holdings. We started the year on the heels of the last of the impact from COVID and the last of the cruise ports reopening in the Asia Pacific region throughout Q1. But as you can see on Slide 5, consumer demand was quick to rebound in full and we were pleased to return to full ships and full year profitability. It is so incredibly rewarding for our staff and crew to be able to operate full ships and deliver vacation experiences of a lifetime to our happy guests. While that in and of itself would have made for a spectacular 2023, we were further going by the introduction of 3 new world-class ships into our fleet, one for each of our 3 award-winning brands. This was an unprecedented achievement and a first in the 57-year history of our company.
We welcomed Oceania Cruises Vista in May, Norwegian Viva in August, and most recently, the highly anticipated Regent Seven Seas Grandeur in November. The successful launch of 3 vessels in 1 year would not have been possible without the hard work and unwavering commitment of crew and team members across the globe. Thanks to their dedication and passion for providing an unmatched guest experience, the reception for these new ships continues to be overwhelmingly positive across the board. This reception, combined with the strong demand environment, we continue to experience across all 3 of our brands, has enabled us to successfully absorb an 18% increase in capacity in 2023 versus 2019 levels at record pricing levels. As a result, we have driven revenue per passenger cruise day up 17%, allowing us to finish the year with year-end advanced ticket sales of $3.2 billion up an incredible 56% compared to 2019.
At the same time, we continue to maximize onboard revenue generation, as shown by growth onboard revenue per passenger cruise day, which is up 27% over 2019. A main driver of this large improvement is through enhanced presold onboard revenue, so our guests come on board with a fresh wallet. But none of this is new news. As we have been and continue to be the industry leader in net yields. We are proud of the work our teams do day in and day out to drive the highest yields in the industry. But today, I also want to emphasize that we are equally passionate about the cost side of the business. Our relentless focus on cost optimization has produced 4 sequential quarters of year-over-year adjusted new -- of year-over-year adjusted net cruise cost per capacity day reduction with full year 2023 coming in 21% lower than the prior year.
We achieved this by focusing our efforts on optimizing spend and investments across all areas of the business, from fuel to food and consumables and marketing. We are committed to continuing to optimize our margins by balancing products, revenue and cost considerations through better leveraging data and analytics to drive decision-making and accountability. The net result of these healthy revenue and cost metrics allowed us to get back to driving results. As we generated $1.9 billion in adjusted EBITDA in 2023, allowing us to generate the adjusted free cash flow to further strengthen our balance sheet with the repayment of nearly $2 billion in debt. On the product front, we are strategically enhancing the guest experience by identifying smart ROI-driven investments and decisions to profitably maximize guest satisfaction.
Our recent success has been the rollout of Starlink high-speed Internet. We moved quickly and have been able to roll out this cutting-edge technology across half of our fleet since the spring of 2023 and expect to finish the full fleet by year-end this year. In addition, to significantly elevating the guest experience aboard our ships, we've been focusing on improving the pre-cruise guest experience and better leveraging digital tools across all 3 of our brands. For example, we've been making improvements to our pre-cruise planning functionality at Norwegian to allow guests to book even more before they leave their homes, and we rolled out a flexible air program at Oceania, sharing an innovation which began at Norwegian earlier in the year.
This innovation gives guests the few day window to deviate their air at the beginning and end of their cruise so they can have more time to explore and enjoy destinations before and after they sail with us, while at the same time, allowing us to spread air demand over multiple days and save costs, a true win-win for us and our guests. On the digital side, we recently launched the Regent onboard mobile app on Seven Seas Grandeur, and we continue to see strong adoption of the NCL mobile app, which reached record high guest usage in January. These improvements are not only resonating with our guests, giving them a better and more frictionless experience before, during and after their cruise, but are also generating positive returns. Finally, we announced important interim sustainability commitments, announcing our target to reduce greenhouse gas intensity on a capacity a day basis by 10% by 2026 and by 25% by 2030 versus 2019 levels.
The company is truly firing on all cylinders. These solid operational and financial results have laid the foundation for a strong 2024 and position us to deliver sustained profitable growth in the future and incredible vacation experiences to the millions of guests who sail with us every year. In addition to these priorities, a key cornerstone of our long-term strategy is delivering measured capacity growth and optimizing our fleet to drive strong financial results. Our new build pipeline of 5 ships, which you can see on Slide 7, represents a capacity growth of 28% from 2023 to 2028 with a 5% CAGR over the period. Historically, capacity growth has led to outsized revenue and EBITDA growth and we expect this capacity growth to be no different and deliver meaningful top and bottom line growth.
We believe that these measured capacity additions will enable us to further enhance our long-term profitability and continue to significantly strengthen our balance sheet while providing guests new and innovative experiences. Shifting our discussion to the current booking environment shown on Slide 8. We continue to experience strong and resilient customer demand across all 3 of our brands. The strong momentum we saw in 2023 has continued into 2024 with an all-time high book position and pricing buoyed by strong wave season demand. This has led to some of the best booking weeks in the company history, which began with successful Black Friday and Cyber Monday promotions. In general, we continue to see healthy demand across all markets, brands and products.
Let me walk you through some recent trends. First, close-in demand for Caribbean sailing is particularly strong prompting the redeployment of Norwegian Epic and Norwegian Getaway from offering shoulder season full 2024 voyages in the med to offering Caribbean sailings from Port Canaveral and New Orleans, respectively, beginning in October. As a result, our Caribbean capacity for the NCL brand is expected to increase by approximately 300 basis points in 2024 versus the prior year. Our industry's advantage lies in our ability to redeploy our ships and adapt to changes in consumer demand and preferences. These changes demonstrate our team's responsiveness to our guests' preferences. We have also seen demand return for sailings in Hawaii. While only accounting for approximately 4% of capacity in this period, these sailings are performing exceptionally well in 2024.
Next, our Norwegian Cruise Line brand continues to see exceptionally strong demand and our book position and pricing are higher than last year for all 4 quarters of 2024. Oceania, Regent also continued to see strong demand across all geographies with the exception of redeployed voyages due to cancellations in the Middle East and Red Sea. Turning to the Middle East. Last quarter, we made the preemptive decision to cancel all calls to Israel in 2024. And recently, we have announced the rerouting of our cruises sailing through the Red Sea for the rest of the year. As a reminder, just 1% and 4% of our capacity in Q1 and full year '24, respectively, was expected to dip in the broader Middle East region. However, the Middle East represents a larger percentage of our capacity for our Oceania and Regent brands making up 12% and 8%, respectively.
We now have no calls in the region in 2024 and all replacement cruises have been or are in the process of being put on sale. Overall, we are encouraged by the strength in our book position for 2024, which remains at all-time highs with commensurate higher pricing. As a result, 2024 is shaping up to be a solid year. We expect healthy full year net yield growth of approximately 5.4% this year on a constant currency basis, driven primarily by improved occupancy and pricing strength. Onboard revenue continues to be a bright spot with strength seen across the board, an encouraging indicator that our target consumer remains healthy and resilient. We are continuing to see strong demand for pre-cruise purchases which typically results in higher overall spend throughout a guest cruise journey.
And while we have talked about our strong cost focus during 2023, we want to emphasize that this was not just a 1-year exercise for our team. Rather, it is a cultural shift in the way our entire company looks at cost to ensure that we are operating as efficiently as possible while delivering experiences our guests truly value. This company-wide focus should allow us to not only continue to reduce costs but even more importantly, create operating leverage to enhance profitability, which will be foundational for our long-term success. Our recently established transformation office is allowing us to monitor and track these changes holding each area accountable for their initiatives. We believe this is apparent in our guidance where we expect our core cost to be flat in 2024 versus 2023.
In conclusion, our strong top line growth, combined with our continued focus on cost and margin enhancements are expected to drive 2024 adjusted EBITDA and adjusted EPS to grow by 18% and 76%, respectively, over last year. We are very excited about the future, and we plan to discuss our multiyear targets with the investment community in mid-May. We look forward to meeting with you all then. With that, I'll turn it over to Mark to walk you through our financial results and outlook. Mark?
Mark Kempa: Thank you, Harry, and good morning, everyone. My commentary today will focus on our fourth quarter 2023 financial results, 2024 guidance, and our financial position. Unless otherwise noted, my commentary on 2023 and 2024 net per diem, net yield and adjusted net cruise cost, excluding fuel per capacity day metrics are on a constant currency basis and comparisons are to the same period in 2019 and 2023, respectively. Let's begin with our fourth quarter results, which are highlighted on Slide 11. Starting with the top line, results were strong with net per diems increasing approximately 14.5% and net yield increasing approximately 8.6%. As discussed last quarter, Several factors contributed to the exceptionally strong growth we saw, including the favorable comp from the rapid exit of Cuba in 2019 as well as a very strong close-in demand for Caribbean sailings.
Looking at costs. Adjusted net cruise costs excluding fuel per capacity day was in line with guidance at $151 in the quarter marking our fourth consecutive quarter of improvement on this important metric. As expected, this included approximately $1 of certain nonrecurring net benefits realized in the quarter. We have made significant progress streamlining our cost base during 2023, demonstrating our focus and commitment to our margin enhancement initiatives, and expect to continue this focus in 2024 and beyond. Adjusted EBITDA was approximately $360 million, in line with guidance, while adjusted EPS was a loss of negative $0.18 slightly below guidance due to a $0.06 impact from FX below the line. Overall, we were very pleased with the results we generated in the fourth quarter and full year.
Strong top line growth combined with continued progress on reducing costs, enabled us to generate full year adjusted EBITDA just short of $1.9 billion and adjusted EPS of $0.70. All of which drove strong adjusted free cash flow of $1.1 billion. I am confident that our improved financial performance in 2023 has set the foundation for a solid 2024 and beyond. Moving on to expectations for '24. Our outlook for the first quarter and full year can be found on Slide 12. Starting with the full year, adjusted EBITDA is expected to be approximately $2.2 billion, an 18% improvement versus 2023 with adjusted EBITDA margins expected to improve by almost 250 basis points. Adjusted net income is expected to be approximately $635 million with adjusted EPS expected at approximately $1.23, a 76% increase versus 2023.
Before I get into our top line expectations, there are a couple of important points to keep in mind for your models. First, given our strong expected net income growth for the year, shares related to our exchangeable notes are expected to be dilutive and are included in our share count for 2024. As a reminder, we must settle the exchangeable notes due in 2024 and 2025 in shares while both of our exchangeable notes due 2027 can be settled in cash or shares at our sole election. However, the accounting treatment requires we consider all notes as if they were settled in shares. As a result, we assume our full year 2024 average share count to be approximately 516 million. Secondly, we successfully migrated our tax residency from the U.K. to Bermuda as of December 31, 2023, and we do not expect recently enacted Bermuda corporate income tax legislation to have a significant impact on our overall tax rate as this was already assumed in our planning.
Taking a closer look at the components of the outlook, occupancy is expected to be approximately 105%. Net yield is expected to increase approximately 5.5% inclusive of the headwinds from the outsized impact of the Middle East and Red Sea on our Oceania and Regent brands primarily in the second and fourth quarter. For modeling purposes, our year yield growth will be highest in the first quarter as we are lapping lower load factors and a non-optimized itinerary mix in the first quarter of 2023. In addition, we are seeing strong demand for Caribbean sailings in the first quarter of 2024, which represents approximately 58% of our total deployment in the quarter. For the remainder of the year, yield growth is expected to return to more normalized levels despite the pressure from the aforementioned Middle East and Red Sea headwinds.
Moving to costs. Adjusted net cruise cost excluding fuel per capacity day is expected to average approximately $159 for the full year. This represents a 3.4% increase versus full year 2023, but -- which includes the incremental impact of more dry dock days in 2024. Excluding that impact, our core costs are essentially flat on a year-over-year basis. To put this in perspective, this effectively represents approximately $100 million of cost savings given our expected core inflation rate of around 3% for next year. For modeling purposes, keep in mind that 2023 had less dry docks than normal as we took the opportunity to dry docks ships while they were out of service, this year we are returning to a more normalized dry dock schedule and expect roughly a 175 dry dock days in the year.
This will impact adjusted cruise cost ex fuel by approximately 325 basis points on a year-over-year basis or approximately $5 on a unit cost basis. This includes both the impact of dry dock costs and the related reduction of capacity days. Excluding the impact of that, we expect full year adjusted net cruise cost ex fuel would be approximately $154 essentially flat on a year-over-year basis. Note that the timing of this impact is expected to be weighted more to the first half of the year, with approximately 2/3 of our dry dock days occurring in that period. This year we will continue to be relentless in our efforts to enhance margins and reduce costs. We are leaving no stone unturned and are continually identifying opportunities big and small across the business.
Our transformation office is running full speed ahead in identifying operating inefficiencies and operating -- and opportunities for improvement across all areas of our operating platform in order to enhance the acceleration of our margin recovery and related cash generation. One key focus area for us has been optimizing both our fuel consumption and bunkering strategies. Fuel costs are one of our largest expense line items, and our teams have been hard at work at fostering partnerships with the likes of DNV on decarbonization and long term agreements with industry leader ABB to drive new opportunities to lower our fuel consumption per capacity day. In addition to the consumption side of the equation we have made a big leap in the optimization of our fuel bunkering strategy that allows us to maximize price leverage across the various ports and suppliers we use during a season and in many cases even during a single voyage.
We believe this will drive double-digit millions in savings in the first year alone. This is just one of the many examples that support our relentless drive to improve our unit costs and leverage our scale all without impacting the guest experience. I look forward to sharing many more tangible examples at our upcoming Investor Day in May. The combination of our more efficient cost structure and strong expected top line growth for the year is expected to drive the expansion of our full year adjusted EBITDA margins up by approximately 250 basis points. Now let's take a look at our expectations for the first quarter. As I said earlier, net yield is strong in the first quarter and is expected to increase approximately 15.5%. Adjusted net cruise cost ex fuel per capacity day is expected to be $165 or approximately 3% versus the same quarter last year.
As mentioned, we expect an increase in dry dock days in the quarter, which will have a $6 or a 350 basis point impact on adjusted net cruise cost in Q1. Excluding that impact, adjusted net cruise costs would be $159, essentially flat on a year-over-year basis, demonstrating our ability to offset the impact of inflation with our cost savings. As a result, adjusted EBITDA for the first quarter is expected to be approximately $450 million. Adjusted net income is expected to be approximately $50 million and adjusted EPS is expected to be approximately $0.12. Given the quarter is essentially complete, we do not expect significant outperformance in the top line versus expectations as the vast majority of our inventory is already sold. Any limited upside would result from our onboard revenue generating performance during the month of March.
Moving on to our balance sheet and debt maturity profile on Slide 14. In 2023, we generated almost $2 billion of net cash from operating activities, which included $500 million return of cash collateral. And we repaid $1.9 billion of debt, including the full paydown of our $875 million revolving loan facility. Most recently, we successfully negotiated a refinancing of our $650 million backstop commitment from a secured to an unsecured basis. And in connection with this refinancing $250 million 9.75 secured notes due in 2028, our highest interest rate debt is expected to be repaid. This refinancing, which is expected to close in early March will reduce interest expense, improve leverage while also releasing all of the related collateral, another important step forward in improving our balance sheet.
Moving to leverage on Slide 15. The company has a solid track record of delevering the balance sheet. From 2014 to 2019, we successfully delevered by over 3 turns. We will continue to be opportunistic and look for further ways to strengthen our balance sheet. We are confident we can make meaningful progress on this front going forward. At year-end '23, with reported net leverage of approximately 7.3x or approximately 6.75x when excluding the impact of ships delivered in the second half of the year. We continue to expect significant improvement in this metric over time, driven by our organic cash generation and scheduled debt amortization payments. Over the course of 2024, we expect to reduce our reported leverage by almost 1.5 turns with sequential improvements in each quarter.
This improvement does not assume any prepayment of debt, apart from the aforementioned takeout of our $250 million notes expected in early March. Going forward, we are refining a multiyear plan to further accelerate the reduction of leverage and derisk our balance sheet in order to drive shareholder value. With that, I'll turn it back to Harry for closing remarks.
Harry Sommer: Well, thank you, Mark. Truly encouraging results. Moving forward, our entire team will be focused on the most important work. First, we will continue to execute on our near-term priorities and capitalize on the strong demand from cruising from our target upscale demographic. Second, we will build upon the progress we've already made with our ongoing margin enhancement efforts with further improvements in costs. And finally, we will continue to improve our balance sheet and reduce leverage over time. In closing, I couldn't be more excited about the year ahead. I am confident that we have the right resources in place to capitalize on the strong demand environment and deliver exceptional vacation experiences for our guests across all 3 of our brands, execute on our operational and financial goals for 2024 and ultimately deliver long-term profitable growth and shareholder value.
I look forward to share you the results of our strategic assessment of our business and defining our vision for the future of the company, including long-term financial targets at our Investor Day this coming May. With that, I'm happy to turn it over to the operator for questions.
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