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

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

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

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

Sarah Inman: Thank you, John, and good morning, everyone. Thanks for joining us for our first quarter 2024 earnings and business update call. I’m joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and CFO. As a reminder, this conference call is being simultaneously webcast on the company’s Investor Relations website at www.nclhltd.com/investors. Throughout the call we will refer to a slide presentation that can be found on our Investor Relations website. Both the conference call and the presentation will be available for replay for 30 days following today’s call. Before we begin, I would like to cover a few items. Our press release with first quarter 2024 results was issued this morning and is available on our Investor Relations website.

This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also refer to non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. With that, I’d like to turn the call over to Harry Sommer. Harry?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Q&A Session

Daniel Politzer: Hey, good morning, everyone, and thanks for taking my questions. I was hoping we could dive in a little bit more on kind of the pricing and setup for the remainder of the year. I mean, it seems certainly the first quarter was very strong. As we think about the tweaks to your capacity allocation for the rest of 2024 and certainly, some more Europe and at least in the second quarter, but kind of falling off in the back half, how should we think about the relationship between that capacity allocation relative to pricing? And put more simplistically, can you maybe classify the pockets where you’re seeing outsized strength versus maybe a little bit more modest strength in terms of pricing?

Harry Sommer: So good morning, Dan, and thanks for joining us today. Listen, I wouldn’t say that there are any areas that are outsized or undersized. We’re seeing good pricing yield strength across all three of our brands, across all the major areas that we deploy our ships, we’re doing well in Europe, we’re doing well in Alaska, Bermuda, Hawaii, of course, the Caribbean. I think the only place where we’ve talked before where we had a little bit of a challenge is the voyages in Q2 and Q4 that it previously visited the Red Sea and had to redeploy to other itineraries. But outside of those, we’re seeing broad based demand across the board. We’re very happy with our yield growth in the back three quarters. As we discussed both Mark and myself, we’re increasing our yield guidance by a full point which I think underscores the strengths that we’re seeing. We continue to be at record book positions, record pricing. We’re very happy with where we are.

Daniel Politzer: Got it. Thanks. And then just pivoting to the cost side, can you just remind us a couple of those pockets where you really seem to be cutting the fat, right? I think food is an area where you’ve seen some success. Also, I think on marketing, you’ve talked about the expenses you’ve cut there. So as we think about the kind of the buckets across the cost structure, where have you seen more success? And where’s kind of the additional opportunity that you see looking ahead?

Mark Kempa: Good morning, Dan. It’s Mark. So first, I just want to clarify, I wouldn’t classify it as cutting the fat so to speak, that’s, that’s probably a little bit too generous. We’re really looking at how we can get much more efficient across the entire organization. As I mentioned in our Q1 — in our in our prior earnings call, the first big piece of that was really reducing, looking at our fuel and bunkering processes. And if I recall correctly, I said that was a double-digit million savings. And that’s actually reflected in our latest fuel guidance, where if you think about, if you look at the curves, the curves were up anywhere from mid to upper single digits, yet I think we only raised our costs up by 2%. But apart from that, yes, it’s across marketing, it’s across the things on the vessel that the customers really don’t value.

But more importantly, we’re not just cutting to cut, we’re really looking at what is — what do customers care about, let’s improve on those experiences, while reducing items that the customer really doesn’t care about. So there’s no silver bullets here. It’s just a lot of little things across the board. We are very excited with the progress we’re making. That’s been reiterated by the fact that we just reiterated our cost guidance, and I’m hopeful in the future that we can continue to improve on that.

Harry Sommer: Again, I’ll just add one more thing, specifically related to the food. I just want to emphasize, we have in no way reduced the quality of food that we serve our guests, we still serve, especially at Oceania region, the best quality food that we can and [indiscernible] very good quality food as well, where we have seen the efficiencies, if you will, are on things like buying direct as opposed to intermediaries and in logistics. We have made massive improvements in logistics, warehousing, shipping, that obviously will show up in the food, but do not reflect the lower quality food. I can’t emphasize that enough. We believe that our three brands in their respective places and industry have the most — have the best food quality and the most food options. And we are committed to that. But we think we can do that and still save money through the other items that I mentioned.

Daniel Politzer: Got it. Thanks so much for the additional detail.

Operator: And our next question comes from the line of Vincent Ciepiel with Cleveland Research. Please proceed.

Vincent Ciepiel: Thanks so much for taking my question. I wanted to zoom in a little bit more on the second half. I think at one point you guys had quantified the Red Sea impact. It was like 1 to 2 points for 2Q to 4Q. I think there was a view that third quarter might be the highest yield growth quarter of 2Q through 4Q because it had the least Red Sea impact. Again, I was just curious if you still expected that to be the case.

Harry Sommer: Yes. Good morning, Vince. Yes, you are correct. We still expect third quarter to be the highest yield growth quarter. And I will remind everybody that in Q4 of ’23, if I recall correctly, we had pricing of growth of 15% and yield growth of 9%. So we are rolling over a very healthy Q4 of 2023. So that’s not to be implied that Q4 of this year is not doing well, but it is just certainly rolling over a much higher comp. But we do expect third quarter to be the highest.

Vincent Ciepiel: Great. Thanks. And then a little bit bigger picture kind of strategy question, you and peers across the industry seem to be really investing in private islands and ramping efforts there, marketing leaning in. Just kind of curious what you’re seeing out there that leads you to believe returns are there that that’s what the customer is looking for and how you kind of have went about making that decision.

Harry Sommer: Yes. So when we look at our two private islands we have today, Great Stirrup Cay in the Bahamas and Harvest Caye in Belize, those are our two highest rated destinations. Now we really had a pier at Harvest Caye. So there were no issues in that area, but in GSC, Great Stirrup Cay, excuse me, the lack of a pier caused us to miss much more frequently than we would have liked. So for us, it almost funds on an ROI basis just by us being able to visit there. But of course, once we have the confidence that we can visit there almost 100% of the time, we certainly believe that it will be worth making the investments to continue to improve the guest experience as long as we focus, as Mark said before, on the things that gets value.

I will say, listen, we’ve seen geopolitical uncertainty in various places of the world over time. So clearly places like Belize and the Bahamas have an added benefit of being perhaps any more certain zone more close to home, which continues to give us confidence to invest. But we think what we’re doing with GSC is fantastic. We think the pier, which will be available just in a year from now. So it’s not like multiyears in the future will be a great addition. We are committed to the area. Our guests love it. I think the experience on the island is already fantastic, more of a resort type experience, and we’ll continue to improve it.

Vincent Ciepiel: Great. Looking forward to Investor Day.

Harry Sommer: [Indiscernible]. Thanks, Vince.

Operator: And our next question comes from the line of Steve Wieczynski with Stifel. Please proceed.

Steven Wieczynski: Yes, guys, good morning. So if we kind of stay on yields and if we think about breaking down your revised yield guidance for the remainder of the year, I mean, look, it’s pretty clear that the demand remains extremely strong. So I guess it seems to us that maybe your revised yield guidance is somewhat conservative. And I guess the question is around how you’re thinking about pricing versus onboard for the rest of the year. It seems like you might be taking a pretty conservative view around onboard metrics, which makes sense or possibly the close opportunity just isn’t as great as what we are used to witnessing given the strong book position. So just any help there would be appreciated.

Harry Sommer: I will maybe take the second part of the question on onboard business ticket, and I’ll let Mark comment on the first part. With the way that we package and pre-sell onboard items, I think the distinction between onboard and ticket is much less important than it is in the past. So I would just encourage you and the other analysts [indiscernible] listeners to focus on the total revenue number because really the split is a little bit arbitrary. That being said, obviously, we’re happy with the future sales, as we talked about in our prepared remarks and in our press release. We are happy with the onboard packages that are being sold in advance. And that’s what gives us confidence for raising our yield guidance by a full point for the year. In terms of conservatism, maybe Mark can talk to that.

Mark Kempa: Yes, good morning, Steve. So look, maybe as an example, look, we continue to see the consumer very, very healthy, we continue to see very strong trends across every revenue stream on the ship. So we remain very, very optimistic on that front. And maybe a way to frame it is, if you think about our prior guidance for the first quarter, we had — we were already 2 months into the quarter when we had provided that guidance. And I think when you look at where we ended, we beat by almost 0.75 point. That’s predominantly driven by onboard revenue. So — while I don’t want to say we are ultra conservative, yes, we know we expect the consumer to spend. But I think given our extended booking curve, most of the upside in the quarter if we see any will be driven by onboard revenue. And I want to reiterate that we continue to see a very, very strong consumer in that respect.

Steven Wieczynski: Okay. That’s great. And then, Mark, if I’m looking at Slide 13, you guys are projecting just about a 34% EBITDA margin towards the end of this year. And I guess if we look a little bit further out, how should we think about the longer term margin opportunity, especially as you think about where margins were pre-pandemic versus where they are now, will the driver of kind of yield — or excuse me, of margin improvement, just be more on the yield side of the equation? I guess what I’m trying to get at here is the — about the opportunity to take a significant amount of cost out of the equation, given what you guys have already done so far and maybe this is something you’ll address more on May 20.

Harry Sommer: Yes. So I think that’s — thank you for that last sentence because that was the answer I was going to provide you. Listen, we’re super focused in this call talking about Q1 and guidance for Q2 in ’24, which I think we’ve laid out. I think talking about more longer term, we’ll have to wait the 19 more days till May 20 to talk about it.

Steven Wieczynski: Okay. I will wait. Thank you guys. Appreciate it.

Harry Sommer: Thanks, Steve, and we look forward to seeing you.

Operator: Our next question comes from the line of Brandt Montour with Barclays. Please proceed.

Harry Sommer: Brandt? We lost Brandt. Brandt? Okay. Maybe we should move on to the next.

Mark Kempa: Let’s move on to next caller.

Operator: And our next question will come from the line of Conor Cunningham with Melius Research. Please proceed.

Conor Cunningham: Hi, everyone. Thank you. In your prepared remarks, or even in the press release, I think you mentioned that you’re at a record book position over the next 12 months. I know you want to talk only about ’24, but just curious on how ’25 is shaping up. I assume pricing is up. Just any details around that could be helpful. Thank you.

Harry Sommer: So thank you for that, Conor. So I’ll just point out that the next 12 months would include Q1 of ’25. So I think that gives you some guidance. And of course, that would be, at this point in the booking cycle the best booked quarter 2025. So not really prepared to give guidance for the last three quarters, but I think that gives you some insights into how ’25 is shaping up.

Conor Cunningham: Okay. And then I appreciate the details on the dry-dock headwinds, and I realize that kind of lingers throughout ’24, but does that roll off in ’25? Or is it more of a ’26? I’m just trying to understand, your exit rate on cost is obviously going to be really good in ’24. So just curious on how we should think about dry-dock specifically next year and the year after. Thank you.

Mark Kempa: Yes, Conor. So look, I think we’ve said this before, ’24 is really a normalization year in terms of dry-docks as we took the advantage during the shutdown to dry-dock most of our ships. But if you look at the size of our fleet and the composition of our fleet, as you go forward, whether it’s ’24, ’25, ’26, you’re going to see about the same level of dry-docks just given the size of our fleet. So it might go up a couple of points, — or no, I shouldn’t say a couple of points, it might go up or down a few days, but there’s not going to be any material step up or step down going forward as we get back into a more normalized cycle for the next few years.

Conor Cunningham: Great. Thank you. See you in a couple of weeks.

Mark Kempa: Thank you.

Operator: Our next question comes from the line of Brandt Montour with Barclays. Please proceed.

Sarah Inman: Brandt?

Mark Kempa: I think Brandt might [indiscernible] mic gets muted.

Harry Sommer: Well, we’ll try again on Brandt. Let’s go to the next question.

Sarah Inman: Let’s go to the next question, John.

Operator: And the next question will come from the line of Patrick Scholes with Truist Securities. Please proceed.

Patrick Scholes: Great. Good morning, everyone. My first question concerns commissions paid out to the trade. It looks like your ticket revenues were up 21% year-over-year, though commissions, transportation and others were up 6%. Can you give a little more color on why the — what’s driving the divergence in there? Is it increases in book direct or change in mix of new to crews that typically will book direct? More color, please? And then I’ll have a follow-up question. Thank you.

Harry Sommer: Yes. Thanks, Patrick. So — sorry, there. Just [indiscernible]. Let me start again. No, what we’re seeing is not a reflection of changes in direct or significant changes in passenger mix. It’s really more driven by the airline. You know that as a cruise line, we package air across all three of our brands. And as participation rate shift from year-to-year and also we are buying air a little bit better this year versus last year, the air component cost goes down. So it’s a combination of slightly lower participation rate for air and us buying air a little bit more efficiently than we did last year. But our general direct versus trade, new to cruise has remained substantially the same year-over-year across the brands.

Patrick Scholes: Okay. Interesting. And then you’ve talked about your book position up significantly or whatnot year-over-year. Can you give a little bit more granularity on percentage wise, how much ahead you are for the rest of the year versus the same time last year? And then also how much ahead, in fact, if you are ahead for next year versus, say, the same time last year for the comparable period. Thank you.

Mark Kempa: Yes, Patrick. Look, we won’t give an exact percentage. What I can tell you is, if you refer to our prior remarks on our calls, generally speaking, we had said our sweet spot is somewhere in that 60% to 65% on a forward 12-month basis or at any given time, I should say. And so if you think of it from that reference, we could be up from there, but I won’t give any specific percentages on that, other than the fact that we continue to see a very strong consumer, consumers who are willing to book further out and who are willing to pay higher prices. So, I think all of that lends itself to a great environment to continue to capitalize on this demand.

Patrick Scholes: Are you — can you say for your — without giving a percentage, can you say your ’25 book position is ahead versus comparable where you were a year ago for this year?

Mark Kempa: Well, I think if you think about — as Harry said, our forward 12 months, which would include Q1 would imply that Q1 is ahead. But we won’t comment on the rest of the year other than bookings are in line with our expectations where we believe they should be so.

Harry Sommer: The only additional [technical difficulty] color that I’ll give is related to Europe, which is a large part of our deployment this year in Q2 and Q3, where — because we’ve had the benefit of a full booking cycle, we are seeing more Americans on our European deployment this year, which tends to elongate the booking curve a little bit and also tends to deliver slightly higher yields as opposed to selling those cabins a little closer into locals in Europe.

Patrick Scholes: Okay. Thank you for the color. [Indiscernible].

Harry Sommer: Thanks, Patrick.

Operator: Our next question comes from the line of Ben Chaiken with Mizuho. Please proceed.

Benjamin Chaiken: Hey, good morning. Thanks for taking my questions. Your comments on 2Q yields onboard booking — forward booking trends are all very helpful. Just attacking this a little differently. Curious how you’re thinking about 2Q yields on the net yield side. There are some headwinds and tailwinds, it’d be great if you could help us think about the different moving parts, specifically for 2Q, I guess I’m asking. So for example, there is less Caribbean, but as you’ve suggested earlier, it sounds like the mix is not a factor. You’ve got Red Sea, anything else just big picture. And maybe to put a finer point on it, however you cut it year-over-year versus ’19 sequentially, it just seems like optically, there’s a step down, and I guess I’m trying to open this up and understand the moving parts. Thanks.

Mark Kempa: Well, good morning, Ben. I think there is a step down from Q1, but that’s purely as a result of the comparison in the same quarter of 2023. So as we said on our last call and this call, we are not, and I will repeat this, we are not seeing deceleration. I don’t know how many more times I can say that across different calls and conferences. We are getting back to what we would we call a more normalized yield growth in terms of our business, which we have always said would be somewhere in the low to mid single digits. And obviously, we continue to pursue much better than that. So yes, there is a impact in both Q2 and Q4 as a result of the Mid East and Red Sea, we’ve been very specific about that. But even absent that, we still continue to see very healthy pricing and yield growth. So I just want to make it clear, it’s not a deceleration issue. It really is a comparison issue from quarter-to-quarter.

Benjamin Chaiken: Sure. The premise of the question was actually not a deceleration. It was that you’ve said that in the past, so I’m trying to understand the moving parts that might kind of help us explain the nuances, but that’s helpful.

Mark Kempa: Yes, Ben, the moving parts in Q2 are really the Mid East and Red Sea for the most part, and that also impacts Q4 as well as Q4 having a significant rollover versus the same quarter in 2023.

Benjamin Chaiken: Okay. And then as you think about Great Stirrup Cay, you announced the pier construction, which makes a lot of sense. Were you suggest — were you suggesting earlier in the call that you wait for the pier to be built and then wait a year or so to get kind of the demand picture under your belt before you start to invest in the island? Or is that not the correct interpretation?

Harry Sommer: I wouldn’t interpret it that way. I’m not prepared here to discuss our full long-term plans for Great Stirrup Cay, we’ll talk little bit more about that in 3 weeks. I’m just — my comment was meant to say that the pier was the gating item that before we committed and have a schedule for the pier, it would not have been prudent for us to make substantial additional investments to the island, which for the record, is already a great experience. But now that we have the pier, it allows us to have a slightly more long-term view towards that. But I don’t want to give any indication of whether it’s happening imminently or later. We’ll talk little bit more about that in 3 weeks.

Sarah Inman: Next question.

Operator: And our next question comes from the line of Lizzie Dove with Goldman Sachs. Please proceed.

Lizzie Dove: Hi, there. Good morning. Thanks so much for taking the question.

Harry Sommer: Good morning.

Lizzie Dove: To kind of belabor this net yield point, but I just want to understand the moving pieces in terms of the kind of quarterly cadence. Like as we think of your 2Q guidance of 4.3% growth and 3Q being higher, I would have thought that means quite a steep step down in 4Q, especially I would have thought you maybe get some occupancy recovery from the Hawaii comp last year. Anything you can say that can kind of help me think about that kind of quarterly cadence?

Mark Kempa: Hi, Lizzie. I think as we said, we believe in the back half of the year, second — third quarter will be the highest yielding quarter. Fourth quarter, there was — if you think about fourth quarter 2023, yes, there was a small impact on occupancy as a result of Hawaii. But I think as we look at the comp rolling over, again, if I recall correctly, somewhere in the zone of 14% pricing growth and maybe 9% to 10% yield last year, that’s a very quality comp to roll over. So I think stay tuned. I think fourth quarter, there’s still time and we are still building there. But we — everything we see today, the environment remains healthy, and we expect strong results across all our quarters.

Harry Sommer: Yes, I mean the only additional color I’ll add, which Mark talked about in an earlier question and not this one is a slight headwind related to Red Sea cancellations in Q4, which would be a little bit more — a little bit less, excuse me, than the headwind in Q2 because we had a little more time to have the replacement voyages on sale. And that’s why it was so critical for us to get well ahead of this for 2025. So we’ve already canceled all of our voyages that have previously [indiscernible] for 2025 and all the Red Sea crossings in the first half of ’25 so that we wouldn’t have the same headwind challenges to our 2025 growth.

Lizzie Dove: Perfect. That’s really helpful. Thank you. And it feels like the very premium luxury market is more focused, especially with the capital markets activity. Anything you can share there in terms of pricing on your more premium brands versus the Norwegian brands? And also any step it might take to protect share? Or is this competitor has some pretty aggressive supply growth targets?

Harry Sommer: So I’m trying to distill that question down into some thoughts in my mind. So obviously, we are excited to see new entrants into the market. We think anything that has — that draws more focused, if you will, to this market and the public market and the excellent opportunity that cruising represents is positive for all of us. So I [indiscernible] email congratulating this morning on a successful IPO, and we obviously wish him the best of luck. We see the growth that Viking has, and we have nice growth on the Oceania region brand that’s measured that we can absorb and that we are happy for.

Lizzie Dove: Perfect. Thank you.

Operator: Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed.

Fred Wightman: Hey, guys. I just wanted to come back to the Red Sea impact for next year. Are you expecting to fully offset the yield impact from this year? Was that a comment — is that a comment on costs? I just want to understand if it’s yield dilutive from a — if you do have to do repositionings and it’s less desirable itineraries?

Mark Kempa: Hi, Fred. So we have announced all cancellations of our Red Sea and Mid East itineraries for 2025, with the exception, I believe we may have one sailing still on sale in the back half of ’25 for the Oceania brand. Apart from that, we have canceled all those sailings. The — and the thinking there is, obviously, the earlier you reroute those and create better itineraries, the better sales cycle you have, so the — certainly, the improved yield and economics that you can garner from that should improve. That said, if I had a choice of doing other areas in the world versus those select Mid East and Red Sea, those are always a premium. But certainly, it won’t be a significant tailwind, but it won’t — at the same point, it won’t be a significant drag.

Fred Wightman: Okay. That’s fair. And then just trying to understand where there could potentially be some upside for yields throughout the year. It sounded like in response to an earlier question that you were saying the potential upside would come largely from onboard. I think that was in response to 2Q specifically. But just thinking about the back half of the year, especially in 4Q when that Caribbean exposure increases again? I mean you guys still feel like you have the ability to take price and grow yields from a ticket perspective later in the year, right?

Harry Sommer: Yes. So, Fred, that’s the job of our brands. We look at the booking curve, the consumer demand, and we do everything we can to raise price at any time that we can. I think as Mark mentioned, Q2 and most of Q3 is pretty big, given where we are in the booking curve. Is there potential in Q4? Absolutely, and we’ll do everything that we can to optimize that potential.

Fred Wightman: Perfect. Thanks a lot.

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

Robin Farley: Great. Thank you. I have two questions. One is, in your release, you showed that a percent change in net yield would add about $67 million to EBITDA. You raised by a point and raising EBITDA by $50 million. Maybe half of that looks like it’s from higher fuel of — the sort of kind of the — like looking for that other $17 million that was not in your EBITDA raise. Maybe half of that was due to higher fuel. Is the other half just sort of conservatism and leaving a little powder dry, which is fine? Or just — or is there another factor there that’s not getting it down to the EBITDA line. And then — my second question, just to there as well, is any color you can give us on your new ship orders in terms of the cost per berth kind of relative to previous ship orders, fully understanding that there would be inflation at the yards and all that, but just trying to quantify that in some way. Thanks.

Mark Kempa: Yes. Thanks for your — you’re exact in calculations, Robin. Obviously, there’s some slight rounding in there when you look at the yield and the sensitivity. So essentially, yes, we did carry over about 100 basis point increase. And I think if you look at my prepared remarks, most of that was — some of that was partially offset by higher fuel and then higher interest expense as — for two reasons. Number one, the portion of our debt portfolio that is not fixed, which is about 5%, 6%, but then also commitment fees related to some of our newbuild announcements that went effective as well. So all in all, I think when you look at the back half of the year, as I said, we are raising yield guidance, and that’s about $0.10 — $0.10, $0.11, offset by $0.04 or $0.05 of interest in fuel. And I didn’t catch the back end of your question. I apologize.

Harry Sommer: She asked about any color [technical difficulty] inflation.

Robin Farley: Yes, to see the cost per berth or kind of getting a sense of the change in building costs at the yards, understanding that there will be inflation there, but just trying to get a ballpark for it. And the prior questions have been about the EBITDA. I fully understand the interest expense impact on the EPS. I was looking for the extra $10 million in EBITDA. But anything on the cost per berth? Thanks.

Mark Kempa: Just to be really clear on the EBITDA side, we calculated the 1% raise that we had at just over $60 million. So it wasn’t exactly a full point. It was more like 97 basis points or something like that. So the 60 minus the fuels should get you to almost exactly the $50 million EBITDA range. So we apologize for that confusion between the $60 million and $67 million. Listen, in terms of inflation on newbuilds, I think what you’ll see is sort of two factors offsetting each other. I think the inflation on newbuilds is similar to the inflation you see in the general population, at least when we do our calculations. I think what we can do to help offset that inflation is the same as what you’re seeing in our general cost structure, the same transformation office process that looks to doing things more efficiently and effectively will allow us to offset part of the impact of inflation, certainly not all of it.

So that would be our guide, if you will, going forward. And then I think we have time for one last question, operator.

Operator: And our last question will come from the line of James Hardiman with Citi. Please proceed.

James Hardiman: Hey, good morning, and thanks for fitting me in here. So just quickly I wanted to circle back to the cost conversation. Obviously, a lot of noise around dry dock, pretty flattish, though ex the dry dock step up for the first half. Is that the assumption for the second half that ex the dry dock movement that costs are going to be pretty flattish year-over-year. And if so, how long can that last, particularly as dry docks flatten out in 2025?

Harry Sommer: So the quick answer is yes. We believe that the cost will be essentially flat, excluding dry dock, as you mentioned for the back half of the year. We are very proud of the efforts that the team are making, not really prepared to comment on ’25 and beyond at this point.

Mark Kempa: James, all I would add to that is, again, we’ve talked about we’ve a laser focus on rightsizing and leveraging our scale, we continue to do that. This is a permanent activity for us, not a one-time exercise. So while obviously, it gets harder further down the stream you go, we are just relooking at every facet of our business, and we continue to believe that there’s opportunity out there all without impacting the guest experience and actually delivering a better product than what we’ve had today.

Harry Sommer: Well, what a wonderful set of comments in the call, I share Mark’s passion for continuing to improve our operating margins while delivering a fantastic guest experience. I want to thank all of you for your time today, and I really am looking forward to talking about our long-term targets and strategy when we meet on May 20. Thank you all very much.

Operator: Thank you. This concludes today’s conference. You may now disconnect your lines at this time. Enjoy the rest of your day.