Good morning and welcome to the Norwegian Cruise Line Holdings' Third Quarter 2023 Earnings Conference Call. My name is John, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for the session will follow at that time. [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, Jessica John. Mrs. John, thank you, please proceed.

Thank you, John and good morning everyone. Thank you for joining us for our third 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 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 2023 results was issued this morning and is available on our Investor Relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. With that, I’d like to turn the call over to Harry Sommer. Harry?

Well, thank you, Jessica and good morning everyone. Thank you all for joining us today. Before we get into prepared remarks, if you haven't already heard the good news, I'd like to congratulate Jessica on her recent appointment to Chief Strategy Officer for Regent Seven Sea Cruises. I'd also like to welcome Sarah Inman, who recently joined the company, last week, as our new Head of Investor Relations and Corporate Communications. We are very pleased to have Sarah on the team, and I'm sure many of you will have the chance to meet her in the weeks and months ahead. As she ramps up on the company, Jessica will continue to be available in the interim to ensure a smooth transition. Congratulations to Jessica and congratulations to Sarah. Now, in turning to results, I'm pleased to share with you this morning that we achieved strong third quarter results generating record revenue and a meeting or exceeding guidance on all key metrics. I have to attribute this success to the hard work and dedication of our incredible team members both on our ships and our offices worldwide. We also continue to make good progress on both defining our longer term strategic vision and executing on the near-term priorities I shared last quarter, which are shown on Slide 5. First, our team is focused on capitalizing on the strong demand environment for cruise to ensure we stay on our optimal booking curve, while maximizing pricing and onboard revenue generation. On a 12-month forward basis, our book position continues to be at record levels within our optimal ranges and at higher prices. While we are very pleased with our progress so far in building our book for 2024 and beyond, we are also keeping a close eye on the evolving macroeconomics and geopolitical…

Thank you, Harry and good morning everyone. My commentary today will focus on our third quarter 2023 financial results, 2023 guidance, and our financial position. Unless otherwise noted, my commentary on 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. Slide 13 highlights our third quarter results in which we are very pleased to report that we met or exceeded guidance for all key metrics. Focusing on the top line, results were strong with net per diems increasing nearly 8% and net yield increasing approximately 3%, both coming in at the high end of guidance. Turning to costs, adjusted net cruise costs excluding fuel per capacity day was in line with guidance at $152 in the quarter, demonstrating our third consecutive quarter of improvement since we began our cost reduction efforts in earnest late last year. As expected, this also included approximately $2 of certain non-recurring benefits realized in the quarter. Adjusted EBITDA was approximately $22 million higher than our guidance at approximately $752 million in the quarter. In addition, adjusted EPS of $0.76 also meet our projection by $0.06. Overall, we were very pleased with the strong results we generated in the third quarter. Shifting our attention to guidance, our outlook for the fourth quarter can be found on Slide 14. We are projecting very strong net per diem growth of approximately 15% to 16% and net yield growth of approximately 7.75% to 8.75%. Keep in mind, as we laid out last quarter, there are several factors contributing to the exceptionally strong pricing growth we are expecting in the fourth quarter, as a result of more luxury and upper premium capacity operating with our new Regent in…

Well, thank you, Mark. Before turning the call over to Q&A, I'd like to leave you with some key takeaways that you can find on slide 19. First, we are focused on execution of the near-term priorities outlined today. Second, we are committed to defining our vision for the future with the comprehensive strategic review we are currently undertaking. Third, consumer demand for travel and experiences continues to be strong. Despite temporary regional disruptions, we continue to maintain a very strong record 12-month forward book position and at higher prices. Our advanced customer deposits also stand at $3.1 billion, 59% higher than Q3 2019. Fourth, we have seen a fundamental shift in culture at our company as a result of our margin enhancement initiatives. We now have three straight quarters of sequential improvement in our key cost metrics and we will continue to identify and implement additional measures to accelerate our margin recovery, while still delivering the exceptional products and service offerings that our guests desire. Lastly, our liquidity position is very strong, and we are committed to prioritizing restoration of our balance sheet and reducing leverage in the coming years. We've covered a lot today. So I'll conclude our commentary here and open up the call to your questions. Operator?

Thank you, Harry. [Operator Instructions]

Before we get to the questions on the line, we first want to address a top question from our online shareholder Q&A platform, which provides all of our investors another avenue to submit and up-vote questions for management. One of the top-voted questions we received this quarter was how are you navigating heightened geopolitical instability. Harry, do you want to take that one?

Sure. Thank you, Jessica. Appreciate the question. You know one of the main strengths and differentiators in our industry is our ability to reposition our assets, which is what we've done with the heightened tensions in the Middle East. The safety and well-being of our guests and crew members are, without a doubt, our number one priority. And when the unrest in the region began in early October, we immediately modified itineraries starting first with sailings turning or cooling in Israel in the ensuing weeks and expanding modifications to include all sailings through 2024. I want to add that, I'm extremely proud of how our marine commercial and brand teams came together quickly to make these modifications and proactively work on confirming alternative port and communicating them to our guests. We will continue to closely monitor and evaluate future sailings and adjust as needed. We know that making changes such as these on short notice is never easy, that our organization has risen to this latest challenge in a way that demonstrates once again while we're the best team in the industry. Operator, open for questions.

Thank you, Harry. And our first question comes from the line of Dan Politzer with Wells Fargo. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking my question. I mean, I think that the key question and topic that I think us and investors are focused on this morning is your outlook for 2024, unsurprisingly. So I mean, I think you gave a couple of different data points on costs as it relates to dry docks. But I guess, as we think about the ongoing cost savings, how do you think about the next year's adjusted cruise costs outside of the dry docks and then similarly, in terms of the demand picture, which is obviously pretty -- it's a little bit TBD right now in terms of the Eastern Mediterranean and the tensions there. But how would you think about the impact from Israel on yields? Just obviously, it's probably a higher-yielding type itinerary? Thanks.

Dan, thanks for the question. Good morning. So listen, I'll take the yield demand question, and I'll let Mark comment on cost guidance for next year. Listen, of course, this is a tragic event hearts go out to the victims in that part of the world. But we're hopeful that this will be a reasonably short-term event. So while we've seen obviously some impact on Q4, we have very little of our inventory there in Q1. In fact, we don't meaningfully get back to the region until Q4 of next year. So far, absent a handful of sailings we have in Q1 and Q2, and it's a very, very small percentage of our overall inventory, or we continue to be very, very well booked. In fact, I was looking at the report this morning. And every month, every individual month next year is looked at a higher rate than the same month was at this time last year for 2023. So we're not going to provide guidance today. We've talked about that a little bit in the script, but demand for next year continues to look well.

And Dan, I'll take the question on the cost. As we have stated, we have been razor-focused on our cost base, trying to right-size it. And I think we've been very successful at demonstrating that with three sequential quarters of decreased unit cost. As we translate to 2024, there is going to be some pressures. We talked about the dry-dock impact, both from the actual dry-dock cost itself as well as the reduced capacity days. That's going to add about 300 basis points or about $4 to the unit cost. So, if you think of where our exit rate at 2023 is somewhere in the zone of $1.53 to $1.54 on a normalized basis and you add about $4 to that, then the piece we're looking at is where does inflation come into play. I can tell you we have a lot of programs underway as part of our margin enhancement initiative and we're going to keep clawing back at all of our cost base. Too early to say how much of the inflationary pressures we can mitigate. But again, I think our demonstration of what we've been able to do over the last three quarters specifically from the back half of 2022, I think presents some very solid data points to start thinking about from a modeling standpoint.

Got it. That's helpful. And then just for my follow-up, Harry, your predecessor was pretty adamant about maintaining pricing discipline and avoiding discounting. I mean I guess as you think about next year and all the moving pieces and what seems like a pretty fluid environment and you just added three new ships and you're entering wave season. Is there any change in your approach to pricing? And as you think about the trade-off between loading yields there?

No, I too am a firm believer of maintaining pricing discipline. Obviously, that's the key to long-term yield growth. It's really hard to come back from significant price discounting because your guests come to expect it. That being said, we're in a fortunate position to be so well booked for next year, record level, the commentary we've given previously on the call and in the script that we really don't need to turn in that direction even if I wasn't a believer, but to be clear, I am.

Got it. Thanks so much.

And the next question comes from the line of Steve Wieczynski with Stifel. Please proceed with your question.

Yes, hey guys. Good morning. So, I want to stay on the cost side, if I could, and maybe ask about your margin opportunity moving forward. And maybe just how you balance that margin opportunity versus trying to protect the customer experience on board. And then I guess to follow-up on that, I mean, if you were in to encounter some type of slowdown from a booking or onboard perspective. How do you guys think about the flow through? And maybe what that would look like under a more distressed topline environment?

Sure. So, let me take the part about balancing cost against customer experience, and I'll let Mark talk about margin opportunities and what may happen in the slowdown environment. Listen, we have great data points. At any given point in time, we have 60,000 or 70,000 guests on some part of their vacation experience. So, we get real-time immediate impact as we make changes. In fact, we talk to guests and study changes before we make them to begin with and I think with this robust view towards guest satisfaction scores, onboard bookings, repeat rate, and onboard revenue generation, we know right away whether it's something that we've done is positive or negative. Now, Steve, I'm not going to say we always get it right. But because we have such a methodical approach to making these changes, we get it right much, much more often than we get it wrong. And that's why despite the fact that inflation continues in the world, we've now had three straight quarters of cost reduction. I share my passion. We're not done. Now, I can't promise that we're going to continue to have cost reductions. Mark talked about a few of the headwinds related to dry-docks for next year and inflation is real. But I can promise that we have a continued focus. This is not a short-term initiative, where we're not halfway there. This is a permanent sea change in the way we view the business that we are constantly going to be attacking every single cost in the business to make sure that it's rightsized and balance against giving guests great experiences. Listen, across our fleet at any given time, something like half of our guests are past guests, we would be foolish to do something that would take away from that. That being said, we're still optimistic about the opportunities out there.

Steve, and related to the margin improvement and flow-through, let me highlight what Harry just said on the cost side. We really are changing the DNA of the company. This is not a one-time opportunity. This is a continued culture change. So we want to stress that, and we are committed to it. I think one of the things that sets us apart on in terms of whether if there's a slowdown, what are the opportunities to try and mitigate that. Look, I think, first and foremost, we have perfected -- almost perfected the bundling strategy. And I think that's been a very good tailwind for us. In addition to that, when you think about the onboard spend, we continue to get smarter and we continue to get better at getting more of the customers' wallet over time from the point they enter our ecosystem. And we talked about in our prepared remarks that our pre-cruise revenue sales were up over 80% versus same time in 2019. So I think that is a strategy that we'll continue to fine-tune. We never get it exactly right. but I think that provides us some additional protection, again, to get that wall over a longer period of time. We are very focused on margin improvement. We've said this will be -- in our case, this will be a multiyear effort. We don't see anything structurally in the business that would preclude us from getting back to 2019 margins and better. But given our fleet and our deployment mix, I think it's going to take us a little bit longer on our path to do that, but we are ultra committed to do so.

That's great color. I appreciate that, Mark and Harry. And then second question is maybe if you could give some more color around how 2024 is really kind of shaping up from a booking perspective. And look, I fully understand you guys talked about in the release that you're booked in an optimal position. But wondering if you could maybe give some more color around the brands themselves, meaning are you seeing any material differences between, let's say, the Norwegian brand and the two luxury brands into next year?

We don't, Steve, typically comment on a brand-specific basis. I can just reiterate some of the color we gave already. We are in a record booked position for the next 12 months. We're in a record book position for 2024. If you just want to look at that time period and pricing is higher. So I think past that, we're going to take some time over the next few months to develop this long-term strategy, which will impact everything from our choices on deployment, investments, CapEx onboard product. And at the end of the process, we'll be in a good position to give not just guidance for 2024, but clear the clear financial guideposts, if you will, for 2025, 2026 and beyond.

Okay. Got you. Thanks, guys. Appreciate it.

[Operator Instructions] The next question comes from the line of Vince Ciepiel with Cleveland Research. Please proceed with your question.

Great. Thanks. So within the updated 4Q yield guide, it seems like pricing is probably more in line with what you were thinking 90 days ago, while more of the change has been in occupancy. Curious, how much of that is related to Israel, Hawaii? And then as you think into 2024, I believe there previously was a view of maybe one to two points structural headwind from changes in the fleet since pre-COVID times, is that still a good way to think about the occupancy recovery path into next year?

Yeah. Hi, Vince, I think when you think about the occupancy, I think that is still a good way to think about it on a normal annualized basis that it will be down somewhere 200 to 300 points about in the zone of 105 to 106. When you think about Q4, it really is all about occupancy. If you look at our metrics, we were guiding or expecting somewhere about 101 to 102 for the fourth quarter. And right now, we're forecasting roughly 98 and that really is the vast majority related to Israel and the broader Middle East region. We have seen, as we said, an elevated number of cancellations, as well as a lower volume for the close-in sailings, which essentially top off the ship. As well as, as we talked about, we did see some minor hiccups in our late season Asia itineraries, which we believe we fixed from a structural standpoint. But on the pricing side, look, Q4 pricing was strong. We're still expecting to deliver 15% to 16% pricing. So when you think about the change in Q4 revenue, it really is the vast majority on the back of the load, which results in about somewhere in the zone of $40 million to $50 million as a result of these isolated conflicts.

Yes. And Vince, the only thing I'd add and just to sort of tie this in for a question earlier today, this reinforces our commitment to price integrity, because we didn't chase trying to fill these close-in cancels with low-yielding business. It makes no sense for us to divert our attention away from 2024 to chase another 100 basis points of occupancy of guests who won't necessarily be high yielding guests and won't likely come back. We prefer to keep our focus on 2024, which as we've now repeatedly said is shaping up quite well with a record booked position on those forward 12-month basis and for 2024 on a stand-alone basis.

Thanks and best of luck.

Thank you.

And the next question comes from the line of Robin Farley with UBS. Please proceed.

Hi, Robin.

Hi. How are you? I wonder if you could give a little more color. You mentioned some of the product outside of the Middle East and Hawaii having sort of softer close in? You mentioned Asia and maybe other exotics as well. Can you talk a little bit about what you think may be happening there? Because clearly well-understood what's happening with Hawaii and the Middle East, but just a little less clear on what you think may be happening in some of those other destinations?

I would say that Hawaii and Middle East was widespread. The other area was more what would I say on – what’s the word I'm looking for. It was just partial, it was not as widespread. So, for example, we've seen a couple of cruises that go through Turkey. When we talk about Eastern Med that have had a few more than normal closing cancels not so much a suppression of demand for next year, more on the closing cancel. And similarly, we've had some cruises as an example, that go from Dubai to India or in those type of regions, which has also seen slightly more closing cancels. But clearly, Hawaii, Middle East are the ones that were widespread across all three brands and most of our Q4 departures, those are the ones for more sporadic.

Okay. That's helpful. Thanks. And just if I have a follow-up, if I can. Just circling back to the expense question. Just looking at your exit rate in Q4 expenses being up about 19% versus 2019 levels. And I think your fleet mix is pretty similar to 2019. Are there sort of big expense increases relative to 2019 that are still kind of holding on there? And is there any opportunity to get rid of any of those costs that driving that 19% increase like that would bring the base down outside of sort of normal inflation there? It seems like there may still be some unusual things in that 19% increase. Thanks.

Hi. Good morning, Rob. When you look at 2019, Q4 versus 2019, the 2019 for a myriad of the different reasons was a bit lower than our usual run rate even when you look at all the quarters in 2019. Yes, this is a seasonal business. But generally speaking, our costs are not really exposed to seasonal issues. There was just a lot of noise going on in 2019. I think the more important metric to look at is if you look at the run rate and the consistency over the course of 2023 versus 2022, we continue to move downward. And your comment about the fleet mix, I would like to clarify that a bit because I think when we look where we are today, we absolutely have a higher mix of luxury and ultra luxury product from Oceania and Regent that we didn't have back in 2019. So that is playing a part, but I would not focus so much on the absolute number in 4Q 2019, because I think it just was not a representative run rate going forward.

Okay. Thanks a lot. I'm at the fleet next time on a full year basis. But, yeah, Q4 certainly, yeah higher luxury. Okay. Thank you. Thanks very much.

Thanks.

[Operator Instructions] The next question comes from the line of Brandt Montour with Barclays. Please proceed.

Hey, good morning, everybody. Thanks for taking my questions. So I just want to follow-up on Robin's first question and talk about those 4Q close-in hiccups that you mentioned. And I want to differentiate between Turkey, which could be construed as indirect impact from what's going on in Israel and that of what's going on in Asia, which sounds like it's more specific to the strategy, the longer-term strategy of moving things to more exotic and -- longer-dated itinerary. So I guess, on that latter stuff, that seems like something that was put in place a while back that we've been talking about for many quarters now. And so I guess the question is, is that something that was 4Q specific based on the destinations and won't roll into the 1Q? Or could there be sort of some leakage into next year on that situation? Thanks.

So I think the 4Q situation and -- first, let me start off by saying good morning, Brandt. The 4Q situation was really limited to Q4 and related to the fact that we didn't quite get the booking curve right. I mean ,we do lots of things right. We didn't get this one quite right. But when I look at Q4 of next year and comparing it to Q4 this year, we are significantly booked ahead for Q4 of next year, both for Asia itinerary specifically and in general, across the fleet. And that gives us confidence that this short-term dislocation, as Mark mentioned, has been solved for next year. I'm not as concerned about Q1, because if you remember, our Q1 comp will now be back against 2023. And in 2023, we had all types of issues in Q1 in Asia because of COVID restrictions and the like. So that is one of the meaningful tailwinds going into next year.

Okay. That's helpful. Sorry, everyone else got two questions, so I'm going to take a shot here. The hedge book at 36% -- I mean, the hedge book at 36% is a little -- still a bit below where you would have been. I think at this time in 2019 for 2020, we're at something like 55% or 56%. So, I guess, just update us on the strategy as the way you see it for fuel heading into next year.

Yes, Brent, there is no change in the strategy. Yes, when you look at 2024, we are 36% hedged. And like we've always said, our goal is we'd like to be about 50% hedged going into a year. And we are just very opportunistic on that front. So, when there's dips in the marketplace, we take advantage of that. There was a little bit of a dip yesterday, and we took advantage of some position. So, no fundamental change in strategy just really timing of the market and when we feel there's a good opportunity to place some additional positions on the books.

Makes sense. Thanks everyone.

And the next question comes from the line of James Hardiman with Citi. Please proceed.

Hey good morning. Thanks for taking my question. So, I just want to make sure I understand how you guys are thinking about the impact from the Middle East beyond the closing impact for the fourth quarter. I guess, A, as you talk about removing Israel from the itineraries in 2024, obviously, you're replacing that with something. Do you think that's impacted your outlook in any meaningful way for 2024? And then you talked about 4% of your visits being to the Middle East next year. How do we think about how that business is impacted? I think you said, Harry, that you're hopeful and obviously, it's difficult right now, obviously. And our hearts go out to all the people that are affected in the region but that you're hopeful that this will be a short-term event or a reasonably short-term event. Is that with regards to, hopefully, the conflict itself is short-lived and then your business can go back to normal or even in sort of a state of elevated tensions in the region just based on history bookings beyond that epicenter ultimately return to normal. Just want to make sure I understand how to compartmentalize all of that?

So, James, let me try to deconstruct because you sort of touched upon a couple of points. I'll start out by saying that this 4% that we talk about for next year is mostly skewed to Q4. So, it's 1% of our capacity in Q1, 1% Q3, 3% in Q2, and 10% in Q4. And because it is skewed so far in the future, we're optimistic that the alternative itineraries that we're going to put in place that would go to other places instead of Israel have a reasonable time to book at normal levels. And just -- there was sort of a half push in their US assets if it's correct to assume that any time we remove this role, we'll replace it with something else. The answer to that question is yes. We are not planning to fully cancel or lay out any of our ships because of this disruption. I think when we think about this a little bit longer term, I think it will be a while before people are comfortable going back to Israel which is why we are canceling all Israel calls in 2024, even if the complex was and we hope it does, a reasonably short amount of time, we are more bullish about the ability to return to places like Egypt and other places in the Middle East. And quite frankly, we don't go to that many places in the Middle East, as part of our – our normal cruise, that it's just normally part of our transitions when ships come and leave Europe at the beginning and end of each season. So that being said, while obviously, it's a little early to tell, and this is somewhat dependent on how long the conflict goes, we're relatively optimistic that the scope and nature of this will not in any way meaningfully impact our 2024 targets.

Got it. That makes a lot of sense. Obviously, its difficult but that’s really good color. Thank you.

And the next question comes from the line of Conor Cunningham with Melius Research. Please proceed.

Hi, everyone. Thank you. Just back to costs for a quick second, sorry about that. Just you have a lack of new deliveries in 2024, and you've talked about your strong book position. It just curious on how that might change your marketing spend into next year? It just seems like there will be a natural step down. And then just like the lack of overall deliveries is really what sticks out to me relative to some of your peers in 2024. So just curious on how you're thinking about that specific plan on it. Thank you.

Thanks, Conor. Yes, you're absolutely right. We don't take after recent grant during December, we don't take our next delivery until spring time of 2025. So we do have a little bit of opportunity there. But I think when you think about the cost and specifically, your question around marketing, there will be -- we do expect a reduction in that area. I would not classify it as a significant reduction because obviously, you are still selling for new capacity that's coming on in 2025, and you sell that well in advance of the delivery date. But of course, we would expect to find some efficiencies on that front simply as a result of that timing between deliveries.

Yes. Keep in mind, just as a follow-up, that we do have two ships coming in the fleet in 2025, one for Oceania and one for in Seattle, both in the first half of the year.

Okay.

I think we have time for one more question, John?

Thank you. And the final question comes from the line of Patrick Scholes with Truist Securities. Please proceed.

Great. Thank you. Good morning, Harry and Mark. Certainly, there's some new luxury higher-end capacity with Ritz-Carlton brand for seasons coming in the market next year in 2025. Are you seeing any impact from that new competitive supply on your two higher-end brands?

Patrick, they are mostly smaller ships, and it's not a meaningful increase in capacity in the overall scheme of things. So the short answer to that question is no, Patrick. We've not seen any change in the trajectory of bookings for either region for Oceania.

Okay. Thank you. And then just a quick follow-up question here. In the press release, you used the word optimal book position. I want to focus on the word optimal. Harry, what exactly is optimal in your mind? What does that mean in this case?

At a high level, we have defined optimal as being booked 60% to 65% for voyages departing in the next 12 months. It's not a hard and fast rule. We've also said that we're at a record level you can put those $0.02 together and make whatever extrapolation you like. But it's really much more than that, we like to look at every single voyage where they are in the booking curve. Make sure that we're not managing demand pricing, marking the expense in a way that maximizes our bottom line margins. And that's what we mean by optimal. So there's a macro concept and a granular concept on a voyage basis.

Okay. Thank you.

Thank you, Patrick. So, once again, I want to thank everyone for joining us today. We'll be around to answer any questions and you get both Jessica and Sarah today, two for one. So with that, I'd love to wish you a good day. Stay safe and all the best. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.