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.

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?

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…

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…

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.

[Operator Instructions]. Our first question is coming from Brandt Montour of Barclays.

So looking at your 1Q guidance and the full year net yield guidance, there obviously is a pretty big decel or sort of a more conservative implied growth in the back -- in the sort of 2Q through 4Q net yield. But it's not out of line with your longer-term algo on that 2Q to 4Q. So I guess the question is, one, would you be willing to, Mark, or Harry willing to sort of quantify the disruption from the Middle East and the repositioning of those ships and sort of give us a sense for what the core business outside of those disruptions, how you see that sort of growing in the back half of the year?

Yes. Thank you, Brandt, again, for that. So I do think you have the right thought pattern. Q2 to Q4 are in line with our long-term express goals where we look to have low to mid-single-digit yield growth, of course, measured capacity growth, strong cost controls, all leading to outsized EBITDA and margin performances, which should allow us to continue to strengthen our balance sheet. I think you are right that the situation in the Red Sea, Suez Canal had some impact on our Oceania, Regent brand, not on NCL. NCL is extraordinarily strong in all 4 quarters, as we see the booking patterns now. But for the Oceania and Regent perspective, since it was 8% and 12% of their respective capacities, we would expect that to have an impact of about 1 to 2 points on yield in the back 3 quarters of the year. What that means, all that's taken into consideration in the guidance we provided. So we stand by our numbers. And what that means is we should have a modest tailwind in 2025 when those -- when we less those items.

That's super helpful. That's great. And then as a follow-up, taking the Middle East disruption -- direct disruption out of it and just thinking about core Europe sailings, core Norwegian-branded Europe sailings, Americans traveling to Europe. That's an area that people -- that some of us have been a little bit more concerned about. Maybe talk about the evolution of the bookings patterns you're seeing in that specific segment? And should we be taking that into account when we think about the cadence for the 3Q?

We talked last year a little bit about some of the challenges we had coming out of COVID with some of our itineraries that require a slightly longer booking period like Europe. And I think that had impacted some of our results in Q3 or Q4 of last year -- I'm sorry, Q2 or Q3 of last year, my apologies, when we gave the results in our earnings calls. We learned from that, and we've absolutely extended our booking curve for Europe, primarily for Americans going into the 2024 season. So we're very happy with what we're seeing across all 3 brands, with the exception of those cruises that had previously been going to Israel and the Middle East on the Oceania, Regent brand.

Thank you. The next question is coming from Andrew Didora of Bank of America.

Harry, I guess, just when I think about the visibility into the first half of '24 and maybe for the full year, just curious how kind of your booking curve has changed over the years. And I think Mark spoke about 1Q, obviously, being fully booked here. Kind of where do you stand in terms of 2Q being booked at this point? And how should we think about where you stand for full year '24 based on your budgeted capacity.

Well, thank you, Andrew, for that question. We don't give specific guidance on our book position for each quarter. Yes, Mark did say we are entirely booked for Q1 because we're sitting here on February -- late February, February 27. So we're not going to get any more meaningful bookings for Q1. But for the other 3 quarters, we continue to be with the exception of those Red Sea and Middle East Cruises, which I referred to before, in record booked positions where we're referring to as all-time high booked positions across the 3 quarters and especially on the NCL brand.

Okay. And Mark, just on the balance sheet. Obviously, you're addressing the expense of 2028 maturity. I guess I thought you couldn't prepay debt before all the deferred amortizations, you can also kind of proactively pay down? I know it's not in your assumptions, but just curious if it's possible or is it just too costly to do at this point?

Andrew, you're right. Technically, we do not have the capability to technically prepay debt until we have all of our deferred amortization cut up. However, with this particular transaction, it is deemed a refinancing and as such, we do have the ability to take out that portion of the debt. As we look forward over the course of the remainder of the year of '24, we do have some notes that are maturing in December $565 million, 3.625% notes which are very cost effective, but we will be looking to address those between now and sometime obviously, well before the end of the year. And then outside of that, a little bit too early for us to be thinking about or giving guidance in terms of what we may or may not take out. But I think the point to be made here really is that we are now starting to actively address the balance sheet and address the leverage. And we've always said this will be a little bit of a chip away each year, and we're happy that coming out of the gate for 2024, we've been able to start that. So we're very excited about that. It's definitely a solid path to -- in our journey.

The next question is coming from Steve Wieczynski of Stifel.

So Harry or Mark, first off, congratulations on the cost improvement. It's been pretty impressive. And as we move through this year and we think about costs then for the out years, I mean, how do you guys think about cost growth or lack of cost growth in those as we move past 2024. I mean, I would assume it's going to be tough to keep cost in that flattish range. So just maybe some color around your long-term cost outlook moving forward would be helpful.

So thank you, Steve, for those the kind words on cost control. It's something that we're extraordinarily proud of, and as Mark mentioned in his prepared comments, represents over $100 million improvement versus core inflation. Listen, I -- we're not here to give specific guidance yet on '25 and '26, so we won't. We'll do that in -- we give our long-term financial metric outlook in our Investor Day in May. But I will say that this goal of being able to grow cost at less than the rate of inflation is certainly something that we inspire to do on a long-term basis. So I know that's not exactly what you're looking for, but hopefully gives you some indication of our direction.

And Steve, to just further highlight what Harry is saying is I want to make it very clear. We've been laser-focused on this. We are looking at all different ways how we can improve and more importantly, improve and get more efficient to leverage our scale. We've said time and again, this is not a onetime exercise. This is what we've actually established a transformation office, which I imagine will become something like a continuous improvement office. But things -- we're setting up performance dashboards. I talked about some of our bunkering strategies. There's a lot of ways where we can improve the overall underlying fundamental cost structure, all without impacting the guest experience. I talked about our fuel, I talked about our bunkering strategy, food waste. Food waste is just a big area that when you start really monitoring the waste side of it, has significant upstream benefits when you think about the waste side of it. So again, we're focused on this. We got the message. We've been taking this serious. And we believe there's multiyear benefits here, but we look forward to certainly sharing more details around that in our May Investor Day.

Okay. Got you. And then second question, you mentioned in the release that pricing and bookings are higher for the Norwegian brand for all 4 quarters of this year. Just wondering if you can give a little bit more color about what you're seeing in terms of what kind of price action you can take for more second half of this year into 2025. And then maybe also a little bit of color around the luxury brands, which obviously are being somewhat impacted by what's going on in the Med, but any color there would be helpful as well.

Yes. So listen, on the NCL brand, we have very robust and sophisticated revenue management systems. And when we see demand as it is today, we take price action or promotional action, which is sort of an opaque way to take price action in order to generate the highest yields for the company, and we're doing that. So nothing has changed in our core philosophy from that perspective. When demand is good, we take advantage of it. And I think it's reflected in our oversized gains for Q1 and our reasonably strong gains for Q2 to Q4, especially on the NCL brand. In Oceania, Regent, I want to be clear, there's something fundamentally wrong with the model at the luxury space. We see demand for luxury being very high. But when you have to take 60 or 70 days out of service on 2 ships out of a regularly small fleet for 2 brands, it does have an outsized impact on the ability to grow yield at those 2 brands. We hope that to be a onetime thing. All the new voyages for Oceania, Regent, with the new deployment already on sale and starting to fill, well albeit because we're filling them closer in it at lower pricing than we normally would have gotten, but it's just limited to those areas. We are very happy with the performance on Oceania and Regent, in the other regions of the world.

And Steve, in terms of the Norwegian brand, not apart from our sophisticated revenue management systems, let's not forget our models around onboard revenue. We are in a continuous improvement mode in terms of expanding our presale of onboard revenue and getting more share of the wallet over a longer period of time from the point a customer enters our ecosystem. And we continue to refine that. We continue to look at that. And that plays a key part as we -- going forward as we look at our revenue opportunity. So that's something we are very, very focused on.

The next question is coming from Daniel Politzer of Wells Fargo.

I just wanted to dive a little bit deeper, just make sure I'm understanding your comments in terms of how you're thinking about the yield growth for this year. So the Middle East, it sounds like the impact is largest in the second quarter and the fourth quarter. So is it fair to assume the third quarter in terms of the yield growth, first quarter, third quarter and then 2Q, 4Q about the same in terms of greatest to least?

Yes, Dan, certainly, when you look at the impact of the Middle East on the O&R brands, it's definitely impacting us more in the second and fourth quarter, as mentioned in our results. So I think as you look across the 3 quarters, as we said in our prepared remarks, you're going to see more of a normalized consistent yield growth. There's always some puts and takes within each quarter, but I wouldn't expect any significant lumpiness necessarily, so to speak, across the remaining 3 quarters.

Got it. And then just for my follow-up, this is maybe an add-on to Brandt's question. But as we think about that second quarter to fourth quarter and kind of getting back to a more normal algo, I think, Harry, you mentioned geopolitical was maybe 1 or 2 points of a headwind. But I think you've also been pretty adamant that you guys were going to guide a fairly conservative outlook for the year. So I guess as we think about that, the 2Q through fourth quarter outlook, like to what degree you're baking in conservatism and any impact from itinerary mix shifts?

I think if we told you what level of conservatism we are baking into our guidance, I wouldn't be giving you new guidance. So listen, suffice to say that we are providing the numbers that we're confident in. We have, of course, incredible visibility into future book positions. So I'm not saying there's no upside there, but I certainly wouldn't expect huge upside to the numbers that we've provided. We're going to manage our business to the best of our abilities, and we're providing you numbers that we are confident that we can hit.

The next question is coming from James Hardiman of Citi.

Thanks for taking my call. So I don't want to belabor the point, but just this sort of this dichotomy between 1Q and the rest of the year on the yield front. Obviously, some of that is just occupancy, right, that catch up. But if I think about, what I get to is being maybe 800 to 900 basis point detail from 1Q to the rest of the year. How much can just be explained by mix, right? I mean you've got the slide that shows Europe going from 0% to 34% and 51%, while the Caribbean is coming down from 58% to 18%. Obviously, Caribbean pricing is a lot more robust than what we're seeing out of Europe. Is there any way to quantify how much of that decel just stems from that? And I guess is there a way to think about sort of how you're seeing like-for-like pricing in North America and Europe as we get past the first quarter and into the rest of the year?

James, I appreciate the question as always. Listen, I don't think there's really much of a mix issue here from the perspective that our deployment in 2024 is not that much different than our deployment in 2023 with the exception of the couple of big NCL ships that we moved out of Europe a month or 2 early in early Q4. So I wouldn't necessarily say to Q4-ish, right? I think there's 2 primary issues that we've discussed, which I'm happy to articulate, Q1 of '23 was particularly weak, coming out of COVID, there was short booking curves. There were disruptions, especially on the Oceania and Regent brand with our itineraries that visited Asia, Australia. Both those brands have world crews, which was very difficult to sell, given the time commitment that gets past to make and the fact that they would have had to make those decisions in early '22 when COVID was still alive and well. So we're coming off a reasonably weak comp in Q1. That being said, we're still very, very happy that we were able to get Q1 of '24 back to where it is with a 16% growth year-over-year. So obviously, there's some spend in Q1. It's not of this year, not just the weakness of last year. I think the other 3 quarters, the only issue that we're seeing when we look across the brands, across the quarters, across the geographic areas, it's simply this issue with the Red Sea and Suez, which I want to elaborate because I talked to it before. We believe we have the right mix of Caribbean product for our guest set over the summer. We do have ships in the Caribbean. We don't go to a 0% capacity, but we have seen higher returns out of Europe and Alaska and Bermuda than we do out of the Caribbean, which is why we position our ships there. So it's possible that the growth in the Caribbean could have been more, but the end result would have been less. I repeat what I said in my prepared remarks, we still have the highest net yields within the competitive set. So maybe we would have grown more on a like-for-like basis, but it would have resulted in a lower overall number if we positioned more of our capacity in the Caribbean.

And James, just keep in mind, when you think about 2024, Obviously, we're getting the benefit in Q1 versus Q1 of '23 an outsized growth algo because of the aforementioned factors. But then you roll that forward and you look at Q4 of 2023, where we had roughly 8.5%, 9% yield growth, we're going to be lapping over that in the fourth quarter of this year. So there is a little bit of lapping issues going on. But I think as Harry said, the underlying strength in pricing in the business is looking good across all sectors and all geopolitical areas, I'm sorry, all geographical areas, apart from the Middle Sea and the Red Sea area.

Got it. And maybe just a follow-up there to that geographical point. So if I just think about 5.5, call it, yield growth for the year, I guess that's probably if we just thought about pricing, right, ex the occupancy piece maybe 4Q, call it, is there ex the Red Sea and the Middle East impact, is there a meaningful difference in terms of how we're thinking -- we should be thinking about pricing growth for Europe versus pricing growth for the Caribbean, but maybe not.

I don't think there's any meaningful difference between the markets, James. I think we're -- again, we're seeing strong pricing for all those markets and other markets. So obviously, you have a total difference in net per diem depending on the area of operation. But in terms of growth, we're not seeing any sort of significant differences between markets.

Got it. Very helpful. and good luck.

Thank you. The next question is coming from Vince Ciepiel of Cleveland Research.

I wanted to dig into the margin a little bit helpful, your color on, I think, close to 2.5 points of improvement that gets you back to about the mid-20s, but there's still a handful of points behind where you were pre-COVID. And maybe you could help walk through some of those moving pieces. I think selling more air is probably just a headwind as it's more of a pass-through. I think that fuel is probably a point or so of headwind. But just help us kind of understand and bridge the margin differential versus pre-COVID times and get your confidence on a path back to getting close to something near 30% over time?

Yes. Thanks, Vince. While I don't want to give too many details because I think we're going to give some significant visibility at our May Investor Day. But look, the bottom line is really that we have to continue to improve on our pricing. That's key number one. But it all comes down to leveraging our cost base and our unit cost and leveraging that scale. We've made significant progress, what I would say in the last 18 to 20 months when we really first started addressing this back in the second half of 2022. So we're going to continue to look at that. We have to improve. When you think about overall cost from 2019, when we look at it, I think we were somewhere about a 3% CAGR over 2019 through 2024 guidance. So we think we can definitely improve on that. Obviously, there is some incremental drag from fuel given new regulations versus '19 and '24 and so on. But we have to do a better job of leveraging our scale. We're doing that. As I've said, we've been able to confidently mitigate over $100 million of expected inflation in 2024. It's no small feat that I want to reiterate, when we look at our cost base, excluding the dry dock and the reduced capacity days, our cost base is flat, expected to be flat for 2024. So I want to make sure everybody understands that. It doesn't end here. We're looking at everything and we think there's continuous opportunity there. So we're going to chip away at that. And I think in a combination between, again, strong top line growth and moderate cost growth or improvement, we think definitely there's opportunity for significant margin expansion over time.

And just to add to that, I know we talk a lot about metrics, NCC excluding fuel, or NCC excluding fuel and dry dock, but I want to emphasize that fuel expense is not something we ignore. Mark talked about it extensively in his prepared remarks. And our goal is to find ways to reduce consumption. Ultimately, obviously, that's great for our sustainability goals, but it's also great for our overall profitability. So I don't want to -- despite the fact that we don't necessarily report on that metric extensively, I want to assure everyone that is one of the main focuses. I mean we spend something like $700 million a year on fuel, and Mark talked about the multi-, multi-, multi-million dollar things that we're going to do to improve fuel from bunkering to better monitoring and things like that. And those numbers are real and of course, are reflected in our EBITDA numbers.

And then maybe one more for thinking about this kind of more normalized yield growth 2Q through 4Q. And maybe walk us through how you envision onboard versus ticket versus occupancy gains kind of contributing to that growth? And if it's equal, if one is a bigger driver? Any additional color there would be helpful.

Yes. Look, onboard revenue is always a significant generator of our overall revenue profile. When you look at the quarters 2 through 4, yes, I think we're getting probably, what, about 1.5 points of occupancy benefit in those 3 quarters, and the rest is really coming on the back of pricing. So on board is an important component, it always is, and it always has been. We'll continue to improve on that. Our goal, again, is to get more of that wallet share well prior to the customer over stepping on foot any one of our vessels. And we continue to improve on that. And that -- but I don't think there's going to -- I don't think we're expecting any meaningful outsized growth from that particular revenue stream versus necessarily our core ticket price across the 3 brands.

Donna, I think we have time for one more question, please.

Our final question today is coming from Conor Cunningham of Melius Research.

Maybe if I could just sneak two in. Just on the cost trajectory in 2024. Trying to understand a little bit more. I understand the dry docks and the inflation, but it's -- what's the offset that's happening there? Is marketing spend kind of trending down? And maybe secondly to stick with Mark on that as well. The comments around the balance sheet improvement, the tone is definitely changing. So that's positive. Simple maths as you're going to 6x leverage. Are we going to get back to this 3x to 4x that you did pre-COVID? Just any thoughts there would be helpful.

Yes. So I'll let Mark talk about our balance sheet number because we're very proud of that. And I'll let him finish up the commentary on that. But on the cost side, this isn't specifically related to marketing. We obviously will look at improvements in efficiencies and marketing in the same way we look at efficiencies everywhere else. But any improvement we find in marketing will be strictly around efficiency, the volume, if you will, of marketing will remain the same. We're very happy with the demand we drive. We carefully track it through web visits, lead generation and all the other type of metrics that are necessary in order to keep both top and mid-funnel our marketing alive and well, and that volume will continue. Any benefit we have will be on efficiency, not on volume. But really, the cost is everywhere. I mean, we talked about fuel, we talked about food waste. But I mean we could go through every line item of the P&L. There is nothing off the table. I mean we've made improvements in air costs. We made improvements in our consumables and maintenance, really across the way in SG&A expenses. So I really want you to think about it as a whole P&L and not that we're going to, in any way, focus on marketing in order to reduce those important demand metrics. And Mark take it away.

Conor on leverage. Look, we've said we are very focused on it. And we've said that this will improve significantly over time. We're very excited that we expect our leverage -- current leverage levels at year-end. We expect to at least decrease that by 1.5 turns. And again, that's going to -- that's slowly but surely restoring our balance sheet back to pre-COVID levels. So obviously, that 3% to 4% range is something we're focused on. I would not -- certainly would not expect that to happen in 2024, but we are starting the sequential improvement quarter after quarter. This year, you will see significant improvements in leverage. And we're excited to see that same thing happening over the course of '25 and '26. So we're on the right path.

The only thing I'll add to Mark's comment is just a simple math one. If we were at 7.3%, and we plan to reduce it by 1.5%, I think the number would be in the 5-something range, not the 6-something range just to keep that in the back of your mind. That being said, I want to thank everyone for joining us today. We'll be around to answer any questions you may have. We look forward to seeing you all in May. We wish you a great day and all the best.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.