Norwegian Cruise Line Holdings Ltd. (NCLH) Earnings Call Transcript & Summary

Good morning and welcome to the conference call to discuss Norwegian Cruise Line Holdings announcement of a fleet expansion and private island development. My name is Kevin and I'll be your operator. [Operator Instructions] As a reminder to all participants, this conference call is being recorded. I'd now like to turn the conference over to your host, Sarah Inman. Ms. Inman, please proceed.

Thanks, Kevin and good morning, everyone. Thanks for joining us to discuss the recent announcement regarding our fleet expansion and private island development. 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. We will also refer to a slide presentation during this call, which may also be found on our website. Both the conference call and presentation will be available for replay for 30 days. Before we begin, I would like to cover a few items. The press release covering our recent announcement was issued yesterday and is available on our 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 the related press 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 the press release and presentation. With that, I'd like to turn the call over to Harry Sommer. Harry?

Well, thank you, Sarah and good morning, everyone, from sunny Miami Beach. Thank you for joining us so early this morning. I'm excited to announce that yesterday, we unveiled a bold new vision for the future growth of Norwegian Cruise Line Holdings, a summary of which you can see on Slide 3. This comprehensive decade-long plan includes the largest ship order in the history of our company with 8 vessels across all 3 of our award-winning brands, as well as infrastructure enhancements that will elevate our guest experience and strengthen our footprint in the Caribbean. Starting with our new builds, Norwegian Cruise Line is expected to take delivery of 4 approximately 200,000 gross ton ships each with capacity for approximately 5,000 guests beginning in 2030 and extending through 2036. Oceania Cruises is expected to take delivery of two 86,000 gross ton ships, each with the capacity for approximately 1,450 guests in 2027 and 2029. Lastly, Regent Seven Seas Cruises is scheduled to take delivery of two 77,000 gross ton ships with capacity for 850 guests in 2026 and 2029. Given the industry's limited capacity for new builds, these orders not only lock in our slots with Italian shipbuilder, Fincantieri but more importantly, solidify our company's growth with cutting-edge vessels, well into the future. We are also today announcing the construction of a multi-ship pier at Great Stirrup Cay, our private island destination in the Bahamas, to support the new capacity we are adding. The new pier will allow for greater guest throughput to the island and better monetization of this key asset. Additionally, considering that only a small portion of our island footprint has been developed, this will give us flexibility and support to continue with expansion activities. Looking at Slide 4, these new ships comprise the largest class of vessel ever constructed for each of our respective brands, enhancing our operational scale, improving fleet efficiency and advancing our commitment to innovation and sustainability. The Norwegian ships build off the success of the brand's Prima class with this larger next-generation class expected to integrate innovations around the guest experience and alternative fuel technologies. The Oceania ships built on the popularity and success of the Allura class ships and is expected of the line that provides the finest cuisine at sea, the new class will continue evolving the brand's varied and immersive culinary experiences. Lastly, the new class of ultra-luxury vessels for Regent Seven Seas will build on the unrivaled experience that the brand is known for, ensuring unparalleled service and an all-inclusive experience with a larger footprint, providing unmatched Space at Sea. Turning to Slide 5. I want to emphasize our long-term strategy of delivering measured capacity growth and optimizing our fleet to drive strong financial returns. Our new build pipeline has increased from 5 to 13 ships, representing a capacity CAGR of 6% from 2023 to 2028 and 4% from 2023 to 2036. As you can see on Slide 6, historically, capacity growth has driven outsized revenue and adjusted EBIT growth and we expect this trend to continue with the incorporation of larger and more efficient state-of-the-art vessels to our fleet. Our new capacity will be supported by a 2-ship pier year at Great Stirrup Cay, which will also enhance our operational consistency and guest experience, as you can see on Slide 7. Construction is expected to start this summer and be completed by late 2025. And we plan to meaningfully leverage this pier right away with guests counts to the island expected to grow over 50% in the first 12 months of operation. Along with our private island in the Western Caribbean, Harvest Caye in Southern Belize as seen here on Slide 8, our new infrastructure project will allow us to continue providing our guests with immersive natural and cultural experiences on both sides of the Caribbean. As much as I'd like to use more time to discuss our exciting new build and island enhancements, I'll now hand over the call to Mark to take us through the announcement from a financial perspective. Mark?

Thank you, Harry and good morning, everyone. I want to echo Harry's excitement about the new build order and pier development at Great Stirrup Cay. These strategic investments will secure our growth trajectory, significantly boost our earnings profile and enhance our shareholder value well into the future. With our future growth profile solidified, we can focus entirely on our near-term priorities as we have carefully structured the financing for the Oceania and Regent ships to keep us on the path to reaching our long-term financial goals, first and foremost of which is reducing leverage. As a reminder, the total of predelivery installment payments are typically 20% of the contract cost, with only 1% due at contract effectiveness and the remainder due in installments based on certain milestones. The remaining 80% is then due upon delivery of the vessel. For the Oceania and Regent ships, we have predelivery financing, which means our financing also covers 80% of each of the predelivery payments. Terms and conditions for the NCL ships are not yet finalized, as we are in the process of securing financing. On Slide 9, you can see the benefits of our attractive export credit financing structure that we secured for the 2 Oceania and 2 Regent newbuilds. We were able to secure a 6-month term SOFR plus 210 basis points for 80% of the total contract price, including predelivery financing. As a result of this attractive financing structure, the impact of the new builds on our cash capital expenditure outlays is minimal, as illustrated on Slide 10. Turning to Slide 11. You can see that due to modest capital outlays, these new ship orders and the pier development will have very little impact on our multiyear plan to reduce net leverage levels. Thanks to our financing and payment terms, the new build order will not only have -- will have only an approximate 0.1 turn impact on net leverage for the next few years and we still anticipate strong net leverage reduction of 1.5 turns by the end of 2024 relative to 2023. And we expect the company to continue reducing net leverage for the foreseeable future. With that, I will hand the call back over to Harry for some closing remarks before we head into Q&A. Harry?

Well, thank you, Mark. To sum up, we're excited about the path ahead and we believe we are very well poised for a continued growth in the next decade and beyond. Before we wrap up, we'd like to open the floor for any questions you may have, although I kindly ask that all questions focus on this new build and pier announcement. We will be reporting Q1 results in a few weeks and we'll be happy to discuss broader market trends at that point in time.

[Operator Instructions] Our first question today is coming from Steve Wieczynski from Stifel.

So as we think about the 4% CAGR growth to your supply base between now and 2036, I would assume all your capacity projections are on a gross basis, meaning you've not included any retirements in those assumptions over the next 10 to 12 years. And if that's true, that it's on a gross basis, I mean look, if we look at your Norwegian brand, I think the average age of your Norwegian brand is somewhere maybe around 12 to 13 years right now. So as we think about 10 years down the road, I mean you're going to have a handful of ships in the Norwegian brand that are going to be over 30 years old. So I guess what I'm trying to understand is, maybe how we should be thinking about your capacity growth more on a net basis?

I think #1, first and foremost, you're absolutely correct. It is on a gross basis. We're fortunate of the fact that we have a very young fleet, especially for the Norwegian brand. And look, as we look into the future, we think there's strong market opportunity across the globe. And we are the third largest operator. So we think there's a lot of markets that we still have yet to serve. But as our fleets continue to age, we invest in them in a rational, disciplined manner to make sure that they stay relevant and they stay on point with the brand. But as they age down the road, we will look at opportunities for redeploying those vessels to either other markets or other alternative players throughout the globe. But we have no near-term plans for any sort of disposals or any sort of retirements on that front.

And then second question. I don't know if this is for you, Mark or Harry. But you talked about the cost to build the pier at Great Stirrup Cay but have you guys contemplated what other costs there might be to whether -- we talked about building out or improving Great Stirrup Cay, given, Harry, I think you said you're expecting visitation to go up over 50% once the pier is completed?

Yes. I think we absolutely are looking to do further build-outs on the island. But the first step in the process was to build the pier so that we can have confidence that we can get the guest count that we need to support further investments. But I don't think we're looking at substantial investments over the next few years. I think this pier will go in. I think there'll be other modifications we make. I think there's things that we can do that are very cost effective and would be supported by guests paying additional money for them, so high ROI that will allow us to keep our financial metrics intact.

Steve, recall we have a great island existing today. We have a good infrastructure there. We have significant amenities. We have a lot of space to grow over time but the key is there to ensure that we're getting the sufficient throughput for -- with our existing ships and our existing assets. So this is a big first step for us. And I think over the course of the next few years, it will allow us to have better opportunities to further monetize that asset.

Next question is coming from Conor Cunningham from Melius Research.

Just back on the private island for a second. You mentioned the increase of 50% throughput. Just curious on what the throughput is today. And then if you could just talk a little bit about the economics around what -- if you have an itinerary attached to Stirrup, what does that drive for you today? And then what do you think about it in the future?

Yes. In a typical 12-month period, we're doing about 400,000 guests to GSC. So a 50% increase would fill that -- excuse me, would raise that count up to about 600,000 guests a year starting in '26 once the pier is built. We think there's yield opportunities because there's more certainty in visiting the pier because the experience is going to continue to get better, because it is one of our top-rated ports in the Caribbean Basin and we're excited about the opportunity.

And then maybe on the new classes. Can you talk -- I mean it seems like size is a big part of the new order today. But can you just talk about the incremental points of focus that you see as you look to develop the new class of ships?

We're super passionate about delivering a great guest experience, that our guests will value and obviously, are willing to pay for and it's something we talk about a lot internally. So fortunately, across all 3 of our brands, we have lots of ships in the fleet. We know how they operate. We know what gets enjoy. We know what they enjoy less. We know where they frequent, where they're willing to spend money. And we are super focused on delivering, doubling down on those experiences that guests enjoy, so using the NCL fleet as an example, we have beautiful ships in our Breakaway and Breakaway Plus class series. We have beautiful ships in our Prima series. We think we can take the best of Breakaway, the best of Prima, put it together and create something that's really world class for those guests. And I would make similar comments on the Oceania and Regent fleet.

And Conor, this is going to significantly allow us to continue leveraging our operating scale. That's one of the things we have really been focused on over the last 12 months of change within the company and this will significantly complement that. So I think, when you look at the overall economics, we're not talking jumbo size ships here. We're talking ships that are in this 4,000 to 5,000 or 5,000-ship range, which are quite similar to, as Harry said, to our Encore class but those provide significant economics and allow us to really leverage. So we're looking forward to this new evolution of the ships for the Norwegian brand as well as the O&R brands.

Next question today is with Lizzie Dove from Goldman Sachs.

Congratulations, exciting announcement. I wanted to follow up on the kind of new Norwegian class of ships, which are -- is that function higher than the Prima class, what was the driver of that decision? How do you think of the unit economics? And is there kind of certain geographical areas where you think those ships might be better suited versus others?

Sure. I think when we look at the new NCL ships, we believe they would be they would run perfectly in perhaps what we would call warmer weather destinations, places like the Caribbean and the Med and those are likely the places that we would look to put them in when they came online. I think this new development we're having at GSC is a perfect complement to this new class of ship that we're delivering, that we're going to be building, excuse me, for the NCL brand, hence the reason that we announced them together. Past that, Mark already commented on the fact that we are super focused on leveraging our operating scale, which we believe slightly larger ships will allow us to do. But again, to Mark's point, this is not a jumbo ship. This isn't an incredible increase in size for us. I think the Encore ship is about 163,000 tons. These ships will be about 200,000 tons, so a little bit less than 20% bigger. But we think they will allow us to continue to maintain our focus on net cruise costs, which you know has been a focus of the company since I began my tenure a year ago and will allow us to increase our efficiency and give our guests a great product that they'll enjoy.

And just 1 follow-up on that. Is there anything you can share in terms of average cost per berth maybe versus what you were kind of ordering prepandemic? And what kind of pricing you think you might need to generate returns that are consistent with that rest of the fleet there?

Yes, like anything in the world today, everything is a bit more expensive but -- no matter where you look in the world. But as we said, as we continue to enhance the size of the ship, that provides significant economics. We are focused on the total return of the vessel. And I will remind you that, on average, these types of vessels have a 30- to 40-year operating life with minimal capital investment required. So as we look at the total return economics, it still looks very favorable. We've always said that we target a return of cash on cash payback, somewhere in the zone of 5 to 6 years, generally speaking. And based on our knowledge today, we think that is still very much achievable. And it's not just the cost of the ship. It's also about how we're operating it and how we're value engineering it. Yes, the cost of steel is more but we can build the ship at a better cost in terms of value engineering, not necessarily having everything as fancy as -- maybe it needs to be but putting the value into the ship where it matters, where the customer is willing to pay and what the customer values. So there's lots of opportunities. But again, like anything, yes, it is a bit more expensive but the overall return economics, we still anticipate to be within our overall goal range.

Next question today is coming from Dan Politzer from Wells Fargo.

Can you maybe walk us through a little bit more in terms of the rationale for such a large ship order at this point in time? Is it a function of you seeing more ship orders coming from competitors to shipyards and you wanted to reserve your spots? Was it a function of financing? And maybe can you also talk about the premiums on new hardware that you've been able to extract over time?

So the general question was why now, I think was your -- the first part of this and it's simply because it's available. We see the future. We think this is the right strategic direction to go in, the slots are available. And obviously, we want to secure them before the competition does. We certainly believe that the competitive set will be ordering ships as well. You've already seen some of that over the last couple of months. And we think we have secured financing at very good rates that Mark talked about as well, which we needed to lock in as well at this time. So it's a simple question of, this is the right time because it's available and it's part of our strategic long-term plan for the company.

And Dan, just remember, there's only 4 shipyards in the world that can build ships of any consequential size. So as the industry continues to build, we have to be more strategic in nature and make sure we have the opportunity to build. It's not a given right that if you want to build a ship, you can just go order it. So this is, again, more long-term, strategic in nature. And we think it's the right thing to do. There's minimal impact on the near term and also gives us the time and ability to really design something that is new and innovative for the brand. In terms of premiums, look, new ships always garner a premium. Some of that and a lot of that is dependent upon, obviously, where you deploy the vessel. But a lot of it is also driven on the fact by the balcony or the premium cabin mix. As the ships get larger, as technology improves, we are able to have a better overall cabin mix on each of the new vessels, so always drives a premium. We're not prepared to talk about what those specifically are, as we typically don't do that. But generally, it trends well for us.

And I'd be remiss if I didn't point out the outstanding working relationship we have with our partners at Fincantieri. We've been building ships there for the last 10 years, starting with the Marina and Riviera for the Oceania brand and they've just done a fantastic job with us building. I think it's now 3 ships for Oceania, 3 ships for Regent, and a pair of ships for NCL. And that really gives us the confidence to continue to work with them for the next 12 years.

And then just quickly for my follow-up. On the premiums, can you maybe talk about -- do your -- do the ships that visit Great Stirrup Cay currently get a premium just from that destination? And is maybe the rationale that the premium goes up over time as you get that pier and maybe build out the island a little bit?

It's sort of a little bit of a double-edged sword because right now because we don't have a pier at Great Stirrup Cay, we often miss. And customers are smart and they know that. So when we visit Great Stirrup Cay, we see a big improvement in guest satisfaction scores. They enjoy the island. We already have quite a bit build out. I think Mark mentioned before, zip lines, cabanas, spa, private beach, all types of water sport activities along those lines, jet skis, swimming with pigs, my daughter's favorite and people really enjoy that. I think when they have the confidence that we're going to go there 100% of the time, we will see a further improvement in the incremental yields that we get today.

Next question today is coming from Stephen Grambling from Morgan Stanley.

I guess aside from increasing the size of the ship, are there any design aspects you could share that you're considering that could differentiate the product and experience versus peers on these ships as we look further out?

It's really premature for us to talk about the NCL ship because it's going to be delivered in 6 years from now. I will tell you, Oceania and Regent -- focused on what Oceania and Regent do best. Oceania is the premier foody cruise line, founded by foodies, run by foodies. We deliver undoubtedly the finest cuisine at sea and you can expect to see a continued and even enhanced focus on the culinary aspects of that ship. We're very proud of what we do there and our guests love it and come back over and over again. And of course, Regent is all about space, luxury and you'll see more of that, more space, more luxury. I think we calculated that the space ratio on Regent -- I was actually lamenting that it's even getting better because it makes it a little bit more expensive but our guests are really, really going to enjoy it. I think the space ratio on this new class of ship is going to be 16% higher than on the Explorer, Splendor and Grandeur, which are simply incredible ships on their own right. So I think guests will get more of what they love the Regent brand for, more of what they love the Oceania brand for. And when we have more to say about NCL, we certainly will let you know.

And maybe one other follow-up on NCL ships. I guess you said pricing was higher but would love any help in quantifying this, as we think about key input costs. I mean is it fair to look at the product that's being built through 2026 through the lens of -- the pricing was set prepandemic. So any step-up should be kind of versus that point?

I don't think we would look at 2026 pricing as being set prepandemic. I think certainly, you have some of that for 2023 and 2024 but we wouldn't have been selling 2025 in earnest until just recently, which is certainly in a post pandemic environment. So I think the pricing that we're going to see for '25 and '26 is more endemic of the natural demand in the industry right now.

Steve, I think I am going to step in. Steve, I think you are referring to the build cost or the ship cost. All of our vessels prior to today's announcement were all contracts in place well prior to 2019, in fact. They were mostly done in 2016 and 2017. So yes, when you look at that versus what the cost to build a ship today is, of course, the cost of steel goes up, the cost of labor goes up. But again, when you put that in the lens of the backdrop of still incredibly efficient financing, shipyards want orders. They want to build, they want to secure long-term pipeline. That against, again, what we believe are going to be continued favorable economics for this industry. We always talk about the value proposition of this industry. It is still well under that of what other land-based resorts get. So as we continue to close that gap, that's going to continue to provide pricing opportunity and allow us to continue to drive better economics on these ships. So it's just a natural state of the world. Inflation doesn't go away but the economics continue to improve on the top line.

Our next question today is coming from Vince Ciepiel from Cleveland Research Company.

You mentioned that there's a lot of markets yet to serve. Maybe you could talk a little bit about your sourcing strategy. I think at 1 point and maybe even now, it was about 85% of passengers coming from North America. How do you envision that changes in the next 5, 10 years with this capacity expansion? And do you think the brand at a global basis is where it needs to be to support that type of expansion?

So the first question, a little simpler. The second question, a little bit more involved. In terms of sourcing, you are right, we do source about 85% of our guests for the Norwegian brand from North America and we believe that's going to continue for the foreseeable future, certainly for the next few years. We'll see how it evolves over time. But we're happy with the American consumer. They are a robust consumer. They value what we offer. Our product is made to suit their needs and tastes and they spend a lot of money onboard the ship, which we enjoy as well and they enjoy our experiences. So it's a win-win all around and we expect that to continue. In terms of the brand, absolutely. We think the brand is robust enough. We have a great team looking over the brand, sales and marketing. Every metric that we see continues to improve, from website visits and leads, to all types of metrics that we look at to measure demand and we're very, very happy with the direction of the brand and that's part of what gave us the confidence to place this order through 2036.

And then just a quick housekeeping. You mentioned new build, I think, only has a 0.1x impact on leverage per year. The impact of GSC build-out similar, more or less than that impact. Any way to quantify it?

Steve, I mean, Vince, it's all blended. It's all blended in there. When we look at the pier, the pier, we said it's about $150 million and it's spread out over 18, 20 months or so. So it's pretty -- that's immaterial in the overall scope of things. But it is all inclusive in that stat that we provided.

So we have time for 1 last question.

Your final question today is coming from Robin Farley from UBS.

Great. I wanted to ask about the sort of the commitment 12 years out, just because one of the dynamics that had seemed like it had changed over the course of the pandemic is that other cruise lines are saying, they're going to be ordering fewer ships and that means that by definition, there will be slots available at shipyards in the future. And this is a much, much further in advance ordering here than anything we've seen from any company before the pandemic. So I am just wondering, given the fact there's more availability at shipyards into the future now, why commit sort of 12 years in advance? And I didn't know if it was -- was it the availability of ECA financing for predelivery payments that was sort of the incentive to commit that far in advance? Or I don't know if you can give any color on that.

I'm glad we were able to get to your question this morning. I think the narrative that there's availability in yards and that it will be easier to secure slots is not an assumption that I would start with. I believe that you see the competitive set of our friends at the other 4 companies that are regularly ordering ships. And they are, to the best of our knowledge, all in advanced talks with shipyards to get ships in future classes of ships available. Now as Mark pointed out, the good news here is there are only 4 yards in the world that can build a ship of this size, which sort of -- it's a double-edged sword. On the one hand, it means that capacity growth can't be too high in the industry, which we look as a tremendous tailwind for the industry as a whole. But on the other hand, it means that we need to get sort of at the front of the line if we want to secure what we want to secure. The other part of that in terms of the long lead time, especially for the NCL brand because for Oceania and Regent, it's not such a long lead time, is we really want to build something special. And what we've seen is, we have some help on this front. We have a great operations team that's really, really good at building ships. Our head of operations built ships from one of our competitors for many years and is now part of our team. And what we've seen is, there is a tremendous advantage for doing this 5 to 6 years ahead so we can design the product that we really wanted to deliver to our guests, as opposed to sort of inheriting a footprint that perhaps another company designed or we sort of have to settle. We're not going to settle. This product is going to be truly extraordinary. It's going to be a brand-new platform, purpose built and we're going to take the time to deliver -- to construct it and deliver it right. And by deliver it right, I mean, have extraordinary guest experience and extraordinary economics. I think this new order, especially for the NCL brand with this longer lead time will be truly transformative, both from our guests and on the financial side.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, I just want to take this opportunity to thank you again for joining us so early. As I mentioned in my preliminary comments, we are very, very excited about the future and I hope that came through in our comments today. We look forward to seeing you all again in a few weeks for our quarterly earnings call and a few weeks afterwards for our Investor Day in New York. Thank you all for joining us today. Bye.

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.