NCLH - NYSE

Good morning, and welcome to the Norwegian Cruise Line Holdings Second Quarter 2023 Earnings Conference Call. My name is Maria, and I will be your operator. [Operator Instructions]. As a reminder, all participants of this conference is being recorded. I would now like to turn the conference over to your host, Jessica John, Vice President of Investor Relations, ESG and Corporate Communications. Ms. John, please proceed.

Thank you, Maria, and good morning, everyone. Thank you for joining us for our Second Quarter 2023 Earnings and Business Update Call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings and Mark Kempa, Executive Vice President and Chief Financial Officer. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltd.com/investors. We will also make reference to a slide presentation during this call, which may also be found on our Investor Relations website. Both the conference call and presentation will be available for replay for 30 days following today's call. Before we begin, I would like to cover a few items. Our press release with second quarter 2023 results was issued this morning and is available on our Investor Relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. With that, I'd like to turn the call over to Harry Sommer. Harry?

Well, thank you, Jessica, and good morning, everyone. Thank you all for joining us here today. So today marks exactly 1 month since I began my new role as President and CEO of Norwegian Cruise Line Holdings. I'm humbled and honored to have been trusted to lead this incredible company, and I'm excited about the significant opportunities I see at. The responsibility they have to our best network of stakeholders, including our 40,000 team members worldwide, our guests our travel adviser partners, suppliers, lenders, shipyards, the over 700 communities we visit and all of you in the investment community is not something I take likely. Rest assured, my leadership team, the Board of Directors and I are committed to best positioning Norwegian Cruise Line Holdings for success. My focus now is squarely on the future and how we can refine and enhance our strategy to optimize our existing fleet of high-quality assets, further differentiate our business model, build resiliency, advance our efforts to drive a positive impact on society in the environment and ultimately drive more value to our shareholders and broader stakeholders. With new leadership not only in my seat, but in all 3 of our award-winning brands and most recently for our vessel operation function, there is a possible feeling of reinvigoration and excitement about the future across the entire company. We are approaching every decision with fresh perspective and new energy, challenging the status quo at every level and encouraging our entire team to think outside of the box and come to the table with new ideas, however big or small. Along with these changes, you can see for yourself on Slide 5 that while many of the senior leaders are new to their roles, there is still continuity and extensive experience among all of the leaders allowing for smooth transition without skipping a beat. Our executive team has an average of over 20 years in the cruise industry and nearly all has been with NCLH for a decade plus. I have the unlost confidence that this team is the right one to take the company to even greater heights. As we are fine-tuning our longer-term strategic vision and priorities, we are also focused on execution today, and Slide 6 outlines my near-term priorities. First, we are focused on capitalizing on the healthy demand environment for cruise, which I will talk about in more detail a little later in my commentary. At a high level, this means remaining within a booked position of approximately 60% to 65% on a 12-month forward basis while increasing pricing and maximizing onboard revenue generation. After years of experience, we believe this level will be the sweet spot based on our current deployment mix, and I am pleased to say we are comfortably in this range today. Our revenue management process is dynamic and we carefully monitor on a granular level how each ship itineranvoyage is tracking against its optimal booking curve and adjust marketing spend, promotional construct and pricing as needed depending on the market environment to maximize each voyage's contribution to the bottom line. The next priority is rightsizing our cost base through our ongoing margin enhancement initiatives. Mark will dive into more detail on the great progress we've already made on this critical effort but I want to emphasize that we have many additional opportunities in the pipeline to do even more, and we are not shying away from this challenge. The reality is we are operating against the different backdrop today than we were in 2019 requiring an even keener focus on balancing the top line with the cost structure that supports our unique business model and allows us to accelerate our margin recovery and help build resilience to vary external and macroeconomic environments. We are undertaking this effort with a strategic and data-driven approach that allows us to identify additional opportunities for efficiencies, sets, monitor and maintain accountability against concrete KPIs and increased agility to adapt quickly as market or consumer preferences evolve. I'm pleased to report that we're already seeing a change in the core culture of the company at every level of the organization to emphasize efficiency, cost mindfulness and results without impacting the guest experience. We built significant momentum in recent months with this initiative, and we look forward to demonstrating continued improvement in the coming quarters. This does tells nicely into our next priority, which is to make strategic and intentional modifications to enhance our offerings and better align them to our guests' needs and wants. There is no question that investment in our product and service offerings are critical to keeping our brand value propositions intact. However, we are refocusing the business on making smart investments in areas that generate the highest return and maximize guest satisfaction over the course of their entire cruise journey starting from the time they book. For example, we are deep in the development of a streamlined booking process at the Norwegian Cruise Line brand which uses generative AI technology to personalize the experience for guests, while also simplifying and reducing the number of considerations required to book by orders of magnitude. This, along with several other initiatives underway, should translate to more satisfied guests who spend more on board and return to sale with us more frequently, resulting in a win-win of higher yields and stronger loyalty. Turning to the fourth priority on the list. The entire team is hard at work preparing for the delivery of Norwegian Viva on Thursday as well as Regent Seven Seas Grandeur in November, which you can see on Slide 7. I just came back from Italy where I visited the shipyards to check on their progress and I left even more excited than I was previously to welcome these new additions to our already guest and class slate. Both are sister ships to existing vessels that have been elevated even first so we have a high degree of confidence that there will be an overwhelmingly positive reception the ships from our guests and travel partners, which we are already seeing in their incredible advanced booked position. I'm also pleased that both are on schedule and on time for delivery despite supply chain and other challenges, a testament to our great working relationship we have developed with our partners at Fincantieri. In June, we announced that global Munich sensation in Aladdin music icon, Louis Fonsi, will serve as Godfather to Norwegian Viva. The announcement alone generated a reach of over 200 million globally, including new audiences in the targeted Spanish-language demographic. The ship will be christened in Miami later this year and home port in San Juan, Puerto Rico starting in December for a season of Caribbean itineraries. We also recently announced Seven Seas Grandeur Godmother Sarah Faberge, the great grand order of Peter Carl Faberge, the legendary artist jeweler and created an entrepreneurial genius to find a world renowned company that bears his name. This is a natural choice and celebration of Regions partnership with Faberge. The disciplined addition of new build is a key component to our strategy, and we have said consistently in the past, we welcome new hardware introductions as they not only generate excitement and bring more attention and awareness to our brand but they are expected to be meaningful drivers of the company's future earnings growth and margin expansion. As the smallest of the 3 large public cruise operators, we continue to believe that we have outsized opportunity to grow our footprint and meaningfully drive the bottom line. Our new build pipeline, which you can see on Slide 8, represents approximately 50% capacity growth by 2028 versus 2019, a CAGR of approximately 5%. After the delivery of 3 newbuilds in 2023, a record for the company, we have no additional ship delivery scheduled until spring of '25. In the interim, we expect to benefit from both organic growth as well as the annualization of the 2023 new build next year. And lastly, the final priority on the list, but arguably the most important is starting the path to reduce leverage and derisk the balance sheet. Given the necessary actions we took to navigate the past few challenging years, our leverage ratios are currently not at optimal levels. Our goal remains to evaluate all options available and then clearly define a multiyear pathway to return to an investment-grade like financial position. This only happened overnight, but as you can see on Slide 9, the company has successfully reduced leverage in the past, and I am confident we will do so again. In the interim term, our expected cash flow generation boosted by our robust new build pipeline, along with normal course debt installment payments are expected to result in significant organic improvement in our net leverage. Over the next several months, we are focused on the successful execution of our near-term priorities while fine-tuning the future vision and strategy for the company with 3 strong brands, a world-class C and destiny industry, we are starting from a strong foundation and a position of strength. And I can say without a doubt that we have a bright future ahead with significant potential to unlock incremental value for our stakeholders. Shifting our discussion now to our current bookings demand and pricing trends. We achieved rental revenue of $2.2 billion in the second quarter, an increase of 33% over the same period in 2019. We have been able to tap into strong consumer demand environment, achieving the right balance of underlying revenue growth with net per diems up 6%, while at the same time materially growing our fleet with capacity of 19% for the quarter. We also kept our ships full, reaching a load factor of 105% in the second quarter, in line with guidance and a long awaited milestone as we return to normalized levels, which you can see on Slide 10. As previously mentioned and as illustrated on Slide 11, several years ago, we strategically shifted our deployment to longer, more immersive itineraries at the Norwegian Cruise Line brand and increased our concentration of premium destinations while reducing our Caribbean deployment. This was designed to attract a higher quality guest and maximize our competitive position. A natural bright product of this new deployment mix is left third and fourth passengers in the cabin, which is what historically pushed passenger occupancy above the 100% mark. As a result, we expect full year occupancy going forward to be roughly 200 basis points lower than 2019 levels. This shift also resulted in an elongation of our booking window which was 255 days in the second quarter, an increase of 51 days or 20% compared to the same quarter in 2019 and meaningfully enhancing our future visibility and reducing our exposure to volatile and less predictable cost in bookings. Thinking together, we believe this strategy will drive higher yields, higher guest satisfaction and higher guest repeat rates with longer runway to optimize our pricing and marketing strategy as macro environment evolved over time. Turning to Slide 12. Our cumulative book position for the second half of 2023 remains ahead of 2019's record performance and at higher prices another indication of continued healthy demand environment and the resilience of our target consumer. This strength continues past this year to sailings in 2024 and beyond, which at this point in the booking curve is our primary focus. In fact, over the past 90 days, over 70% of our ticket sales were for 2024 and '25 sailings, considerably higher than in 2019. Onboard revenue generation, our best real-time indicator of how consumers are feeling financially today also continues to perform exceptionally well. During the quarter, gross onboard revenue for passive Cruise Day was approximately 30% higher than the comparable 2019 period. Our efforts to enhance our market-leading bundled offerings and increase quality touch points with our guests starting from the time of booking and continuing throughout their cruise journey are clearly bearing fruit. In fact, presold revenue on a per passenger day basis for the second quarter of 2023 was over 75% higher than in 2019. An important contributor to our onboard revenue strength as these guests tend to spend more overall throughout their journey than guests who do not pre-book onboard activities. Before I turn the call over to Mark, I'd like to provide an update on our global sustainability program, Sail & Sustain, in which Slide 14 outlines key accomplishments and milestones. Since we last spoke, we published our annual Sail & Sustain report and disclosure on World Environmental Day in June. The report provides transparency in our progress and initiatives on top ESG priorities. Some of the highlights this year for more detail on our new climate action strategy and enhanced data and disclosures on community impact, human capital and greenhouse gas emission reported. In addition, we demonstrated progress against several of our environmental goals, including targets to equip our ships with short power capabilities and reduced bunkering of freshwater. I encourage all of you to take some time to explore the report and welcome -- I'm sorry, to explore the report and visit our website for more information. I'm also proud to share that just last week, we announced the winners of our annual Giving Joy recognition program that has been celebrating teachers across North America since 2019 for their hard work and relentless dedication. Each of the 20 winning educators want a free 7-day voyage for 2 and the top 3 grand prize winners were invited to attend the exclusive cresting voyage for Norwegian Depot. This year's content drew support from over 3,400 teachers across the U.S. and Canada and garnered hundreds of thousands of lots. With that, I will now turn the call over to Mark for his commentary on our financial position and outlook. Mark?

Thank you, Harry, and good morning, everyone. My commentary today will focus on our second quarter 2023 financial results, 2023 guidance and our financial position. Unless otherwise noted, my commentary on net per diem, net yield and adjusted net cruise cost, excluding fuel per capacity day metrics are on a constant currency basis and comparisons are to the same period in 2019. Slide 15 highlights our second quarter results in which we are very pleased to report that we've met or exceeded guidance for all key metrics. Focusing on the top line, results were strong with revenue per up 33% and net per diems increasing approximately 6.5%, surpassing the high end of guidance, while net yield was in line with guidance at 2.9%. Keep in mind that comparisons to 2019 includes certain premium-priced Baltic and Cuba voyages in that year, which did not operate in 2023. Turning to costs. Adjusted net cruise costs, excluding fuel per capacity day, came in below in the quarter, demonstrating further improvement from the prior quarter and the high watermarks seen in the second half of 2022. The reduction in cost this quarter was primarily driven by lower food costs and crew optimization efforts as we continue to realize the benefits of cost savings initiatives identified and implemented during the first phase of this initiative. I will note that across all 3 brands, our guest satisfaction scores remain strong, reflecting our continued focus on cost rationalization without impacting the guest experience. Adjusted EBITDA was approximately $30 million higher than our guidance at approximately $515 million in the quarter. In addition, adjusted EPS of $0.30 also beat our projection by $0.05, and was the first time we generated positive EPS since 2019 as well as the first time that our quarterly adjusted EBITDA exceeded the same quarter in 2019. Shifting our attention to guidance. Our out for the third quarter can be found on Slide 16. We are projecting net per diem growth of approximately 7% to 8% and net yield growth of approximately 2.25% to 3.25%. Similar to the second quarter, the loss of certain premium priced Baltic itineraries will continue to impact the comparison versus 2019. In the fourth quarter, pricing and yield are both expected to exhibit mid-teens growth compared to 2019. There are several other factors contributing to the exceptionally strong growth we are expecting for the fourth quarter which include more luxury and upper premium capacity operating with the new region and Oceania ships as well as a favorable comp from the rapid exit from Cuba in 2019 and the close in resale of those sailings. Adjusting for these factors, net per diem growth is still expected to be up approximately 10%, which reflects our organic pricing power and strong consumer demand that Harry referred to as well as the benefit of our shift to premium deployments with extended Alaska and Europe seasons this year. Given that we have already -- we already have a substantial booked position and our pace of bookings is on track with our optimal booking curves. This gives us confidence in our ability to deliver on this top line outlook for the fourth quarter. Adjusted net cruise cost excluding fuel per capacity day is expected to be approximately $152 in the third quarter which includes approximately $3 of certain nonrecurring benefits realized in the quarter. Looking ahead, there are also onetime expenses associated with new capacity additions in the fourth quarter. Adjusting for these items, this metric is expected to slightly decrease quarter-over-quarter, which is noted on Slide 17. Taking all of this into account, adjusted EBITDA for the third quarter is expected to be approximately $730 million, and adjusted EPS is expected to be approximately $0.70 on a projected diluted share count of approximately 510 million shares. Keep in mind that we have our 4 outstanding exchangeable notes, which will cause variability in the diluted weighted average shares outstanding used to calculate EPS when we follow the if-converted method. It is also important to note that despite our ability to settle our 2 2027 exchangeable notes in cash rather than its shares, these notes would still be included in our diluted weighted average shares outstanding for GAAP reporting purposes, if they are dilutive in the quarter. We've included an additional slide in our earnings deck, Page -- Slide 24, with more information to help with modeling. Now shifting our focus to our outlook for the full year 2023, we are raising the floor of our adjusted EBITDA guidance to a range of $1.85 billion to $1.95 billion despite approximately $30 million of headwinds for our interest and fuel expense in the back half of the year. This is expected to translate to adjusted EPS of approximately $0.80 or $0.05 above our prior guidance, reflecting the second quarter outperformance. As you can see on Slide 18, since we first guided for the year in February, we have increased our adjusted EPS guidance by $0.10 or 14% on strong results in the underlying business which overcame headwinds from higher fuel FX and interest rates. Excluding these headwinds, adjusted EPS growth versus initial guidance would have been approximately 20 percentage points higher. Taking a closer look at the components of the full year outlook, our healthy net per diem growth of approximately 9% to 10.5% as compared to 2019 and net yield growth guidance of approximately 5% to 6.5% are unchanged versus our prior guidance with capacity up 18%. Turning to costs. Adjusted net cruise costs, excluding fuel first capacity date is expected to average approximately $156 for the full year better than the prior guidance of $159, reflecting lower-than-expected costs in the second quarter. As we have previously mentioned, when comparing this metric to 2019, please note that we do not have the benefit from the disposal of older, less efficient tonnage that some of our peers have. And we have also added capacity at our high-end Oceania Regent brands, which while accretive to margins do have higher operating costs. Another thing to keep in mind is that the timing of expenses such as dry docks can cause variability in these metrics when comparing different periods. For example, in 2023, we have limited dry docks as we took the opportunity during the pandemic to optimize the schedule while ships were already out of service. As Harry noted earlier, this improvement is the result of the deliberate actions we have taken to enhance margins and rightsize our cost base. To further supplement our internal efforts, which have been in full force since we kicked off this initiative last fall. We have also more recently engaged a third-party consultant to benchmark best practices across sectors and identify incremental areas of opportunity. Our entire team is working around the clock to find ways to accelerate our margin recovery, and we are leaving no stone unturned in the process. To date, the savings we have identified in the broad-based have been broad-based, touching every aspect of the business with the largest buckets consisting of fuel, food and consumables and marketing, as shown on Slide 19. To give you an example of one of the initiatives we are undertaking, we are optimizing crew movements and reducing ship crew transfers, which we expect to result in multimillion dollars savings. To put this into context, each year, we have approximately 90,000 crew movements including 6,000 or so between ships. This is just one example, but it demonstrates how incremental changes can add up to a larger impact on the bottom line. We recognize that we still have more work to do, and we are committed to doing so in a way that preserves the exceptional guest experience and superior service levels that our target higher-end guests expect from our brands all while setting us up well for continued margin improvement in the next few years. Turning our attention to the balance sheet and our debt maturity profile on Slide 20. In the first half of the year, we generated over $1.5 billion of cash flow from operations, including over $1 billion in the second quarter. This allowed us to repay approximately $1.4 billion of debt including the full paydown of our $875 million revolving credit facility. In addition, we have approximately $475 million of scheduled debt payments for the back half of the year, the vast majority of which are related to our export credit agency-backed ship financing. As we have previously stated, we intend to refinance our operating credit facility in the normal course of business before year-end. As mentioned earlier, we expect our net leverage to improve significantly, driven by our organic cash flow generation and payment of scheduled debt installments. Excluding debt associated with ships on order for future delivery, trailing 12 months net leverage is expected to meaningfully reduce versus current elevated levels dropping below 6x over the course of the first half of 2024. This does not adjust for ships that were delivered in 2023 which would have the full debt load in the numerator without a full year of contribution included in adjusted EBITDA. Turning to liquidity. Our overall liquidity position remains strong at approximately $2.4 billion at quarter end, as outlined on Slide 21. This consists of approximately $900 million of cash and cash equivalents, $875 million under our revolver and a $650 million undrawn commitment. This does not include the separate $300 million undrawn backstop commitment, which enhances our future liquidity, but is not currently available to draw. During the quarter, we received approximately $500 million of cash collateral back from a credit card processor. This collateral release not only provided a meaningful increase to liquidity but was also a very strong signal that our external partners have increased confidence in our financial position and future outlook. Overall, I feel the same optimism about the direction of our business. I want to echo Harry's comments that our entire management team is reinvigorated and focused on delivering on our business and strategic goals while also pursuing all opportunities to maximize value creation and create a more nimble and resilient organization for the future. With that, I'll turn it back to Harry for closing comments.

Well, thank you, Mark. So before turning it over to Q&A, I'd love to leave you with some key takeaways, which you can also see on Slide 22. First, we are focused on execution of the near-term priorities outlined today, including the delivery of 2 new builds in the coming months, while simultaneously fine-tuning our vision of the future. With new leadership in many functions, including my own, we are approaching this exercise of open minds and a fresh perspective as we work to best position the company for success. Second, our target higher-end demographic continues to be healthy and resilient with strong demand for travel and experiences. This is demonstrated by our strong revenue performance, a record up 33% in the quarter with our strong book position, which when looking over the next 12 months is within our sweet spot range of approximately 60% to 65% booked and at higher prices and advanced customer deposits of $3.5 billion, 52% over Q2 2019. Third, we are demonstrating the results of our margin enhancement initiatives, including through our efforts to maximize revenue, improve efficiencies and right size costs. We now have 2 straight quarters of sequential improvement in our key cost metrics and we'll continue to identify and implement additional measures to accelerate our margin recovery while still delivering the exceptional product and service offerings that our guests desire. Lastly, our liquidity position is solid and we are committed to prioritizing restoration of our balance sheet and reducing leverage in the coming years. We've covered a lot today. So I'll conclude our commentary here and open up the call for your questions.

[Operator Instructions].

Before we get to the questions on the line, we first want to address the top questions from our online shareholder Q&A platform, which provides all of our investors another avenue to submit and upvote questions for management. One of the top voted questions we received this quarter was, what do you consider the biggest challenge for growth over the next 18 to 24 months? And how do you plan to attack that challenge? Harry, do you want to take that one?

Sure, Jessica. I'm happy to, and that's really a great question. I wouldn't say there are big challenges for growth. If anything, what we have is a huge opportunity. While we're always keeping a keen eye on growing revenue on our existing fleet while tempering costs, growth in the cruise industry is mainly predicated on capacity. And this year, we had 3 vessels entering the fleet, one for each of our award-winning brands, which is the first for our company. This growth allows us to take more guests to more destinations and offer them more varied experiences while contributing to the top and bottom line right off the bat. In addition, with no scheduled shift deliveries in 2024, we have ample opportunity to divest its capacity at high sizes while preparing for new capacity entering our fleet in 2025. So to me, it's not about challenges of growth. It's optimizing the opportunity we have for our new capacity and doing what we have consistently done in the past, which has translated that to outsized impact to our bottom line.

Operator, we can take the first question from the line now.

Our first question from the line comes from Vince Ciepiel with Cleveland Research Company.

I wanted to talk about kind of the path for organic price growth. I think that was really helpful the way you broke out 4Q, obviously, anticipated to step up a lot. But even comparisons and new hardware, net per diems up 10% points to sequential acceleration through the course of this year. So curious kind of how you're thinking about that into next year? I know you get a lift from full year contribution of the 2023 deliveries. But how are you feeling on organic price today versus 90 days ago?

Sure. I'm happy to take that one. Thanks for the question. I think I can sort of break this up into 3 periods, Q4, 2024 and 2025 and beyond. Q4 still has some comparable distinctions between this year and the past but we are super excited that we're going to see an 18% net per diem growth in '23 versus '19, sort of fully hitting our strides there, and we're pretty well booked for Q4. So we have great confidence in that number. You turn to 2024, we get to a more normalized environment, but we still had some tailwinds on when we compare '24 to '23 because in Q1 of 2023, we were 100% back up in service. So I think we can expect some outsized growth in '24 relative to '23. On a more long-term basis, return back to norm. We've consistently talked about having low to mid-single-digit yield increases year-over-year with moderate and disciplined capacity growth, strong cost control while maintaining high guest satisfaction all leading to the type of oversight dividend earnings growth you saw during our run from '14 to '19. So I think once we get back to '25, that's exactly the path we'll be on again.

Great. And then maybe on the cost side, obviously, a lot of effort that is visible based on the guide that looks like net cruise revenue is going to be up $2.5 billion plus this year whereas costs certainly up about $100 million. So it's clear that you guys have been focused. Curious, you mentioned guest satisfaction score remaining strong, kind of along this flex down path. But curious maybe what you're seeing within rebooking behavior as more of that 2024 business is coming on the books? How you're feeling about the guests coming back to you?

So it's a great question. I think there were 2 parts, so I'll try to address both of them. On the cost side, we are really excited about the efforts that we make and you continue to see the sequential modest improvements in costs, Q1 to Q2 to Q3 and Q4 despite the fact that inflation is still out there for the fact that we continue to reduce our cost structure each quarter, it's not just a reduction in the base but also fighting against inflation. So we're really excited when you can see that number come down. But Mark also alluded to, we're just maybe in the fourth inning of this cost reduction strategy, if I was to use a baseball analogy. And we still believe there are more efforts ahead. We have not baked in anything that we haven't found yet. Our guidance numbers only include what we've identified and what we firmly are able to implement, but we hope to be able to deliver a little bit more in the future. In terms of the guest rebooking behavior, we're simply put, we're at record levels. Across all 3 of our brands, we are seeing -- the one measure that's most relevant internally is we take a look at first-time guests and how -- and when and how much or what percentage of them, I should say, rebooked within the first year or 2 coming back, and the guests coming off the ships in '23 are relooking at record levels compared to '18, '19 and the further back period. So, so far, the formula seems to be working quite well.

And Vince, just to highlight that. I think last quarter, we had mentioned record sales of our Cruise -- next certificates. And again, not just another anecdotal point that consumers on board our ships are enjoying their vacation. They're satisfied with the product. Everything we're doing on the cost reduction front is under the lens of protecting the guest experience and the product. So we monitor that closely. And so far, we are seeing positive reception to everything we're doing.

Our next question comes from Robin Farley with UBS.

Great. Two questions. One is on the yield side, that 14% growth in Q4. I know you have some shift in your premium luxury brands contributing to that. Can you kind of give us a sense of what the increase would be for saving Norwegian brand? Or just to think about the increase that's embedded in that guidance that outside of those new ship additions, and then my other question is on expense. And I'm sorry if I missed if you said what was the nonrecurring benefit in Q3 there? And then just thinking about Q4. It looks like your footnote is sort of saying you're excluding the cost of new ships in that. And I just wanted to clarify, I feel like you hadn't done that before. I just want to think about comparability to expenses in 2019. So is that new that, that guide excludes the cost of new ships?

Thanks for the question. So in Q4, when we talk about our pricing or yield, pricing is expected to be up approximately 18%. And as we highlighted in our prepared remarks, if you adjust for the new capacity as well as the favorable year-over-year comps, that 18% would translate to about 10% of your organic fleet. So very, very strong growth consistent with what we've seen over the last 2 to 3 quarters. So we're very, very pleased with that. In terms of Q3, the onetime nonrecurring benefit, we highlighted that because we didn't want to take artificial credit so to speak, for our cost-reduction initiatives. And that was simply a benefit that we received as a result of some port volume commitments accruals that we had during the course of COVID. We were able to negotiate with the various ports around the world to reduce that. So we didn't want to take credit for that because it's a onetime nonrecurring, so we called that out. And then in Q4, again, trying to be ultra-transparent on the surface, it would appear that our net cruise cost ticks up slightly by $1. But if you really look at that and you exclude the onetime start-up operating costs for both Viva and Granger, which come on in the fourth quarter, and you really rightsize that to a normal run rate that is actually reduced by $1 or $2. So again, what we're trying to do is show that we have sequential improvement in our core fundamental operating costs, and you're seeing that over the course of all 4 quarters in the year.

Our next question comes from Patrick Scholes with Truist Securities.

First question concerns the onboard and other line item. How much as we think about for next year and perhaps 2025, you've certainly seen outside growth in this line item. How much do you think of that is really sustainable and how much might be from revenge travel and maybe some of the growth also might be from bundling or accounting changes. So how should we think about sustainability of that going forward?

Patrick, it's a good question. I believe it's fully sustainable. We don't necessarily see this huge revenge travel being a huge club nor the levels that we are going at today, diminishing. My best proxy is the Norwegian Cruise Line brand because it's our largest brand and when we look at bookings for this year, every month, it's been a record month in terms of new booking volume. January was the best January in the history of a company, February to February, cleared through July, which just ended yesterday, which was the best dividend in the history of the company. And in fact, our second best booking month of the year, which is a little bit odd because usually July and August is a little bit slower due to action, and the like. Onboard pet similarly, every month continues to be good. We're not seeing any weakness. We're not seeing any denigration of trends. There's nothing super unusual that we're doing in bundling today compared to '19. We continue to refine our processes and make the marketing and product proposition a little bit better each quarter than the quarter before. But I don't anticipate any huge changes for '24 either. I think the numbers you see today are the numbers that we would expect to improve ongoing into '24.

And Patrick to further highlight on that is we've talked about we have more touch points with the consumer well prior to the consumer ever stepping on board ship, onboard the vessel. So we're getting more share of the wallet from the consumer ahead of that. And I think one of our stats that we talked about, our prebooked revenue was up by almost 70% versus 2019. So again, it's a longer elongated sales cycle that just helps build that overall onboard revenue product. So we are not seeing any signs of any consumer deterioration. In fact, we continue to see strength on that and we're very happy with that. We continue to see -- expect that to be strong.

Okay. Just a quick follow-up question, Mark, you had noted in the earnings release about $500 million released from the credit card reserves. Is there any money left still to go with that? Or was that $500 million the last slug of that?

Yes. So we're very happy with that. So with that, that essentially we have 0 collateral with any of our reserve holders as of the quarter end. So that was not only a significant boost to our liquidity profile long term. But more importantly, as I said in my prepared remarks is that it demonstrates confidence in the business from a completely external partner who has no stake in the game other than their inherent risk on advanced ticket sales. So again, we see that as a big demonstration of confidence in the business and where the trajectory of the business is going.

Our next question comes from Steve Wieczynski with Stifel.

So if we think about your load factors moving forward, which Mark, you mentioned will be about 200 basis points lower than where 2019 levels were that's you guys are long itineraries and whatnot. Just wondering how these lower load factors impact or potentially impacts your cost structure moving forward. And add on to that, Mark, as we think about you guys exiting the year in that low, let's call it, 150 range in terms of cost per APCD, is there any way to help us kind of think about it as well, where you might be able to get that number to over time?

Steve, it's a good question. I don't look at this as a huge material change in our cost structure. It will be a modest tailwinds having 2% less guests on the ship and the 2% less guests that we have are primarily young children, which aren't particularly expensive. This really isn't about our cost structure. This is really about yield and EBITDA where we believe being in more premium itineraries that are booked further in vans, giving us a much longer booking curve and a more stable and predictable demand profile, which allows us to manage demand, manage our marketing a little bit more effectively and not rely so much on close-in, unstable and unpredictable demand is really a key to our success. I think both Mark and I commented on the higher rebooking rates, the higher BNS ticket sales, the higher revenue, the higher booking window, all of these positives which seem to endorse our strategy, which I think we'll see the full benefit of in 2024 as we then will have gone through a full year cost structure. So I mean, listen, bottom line is we're committed to getting back to the EBITDA margins that we saw back in '19 over time. It's going to take us a little time to get there, but we're looking at the trends, and we see a path towards that and we think this premium deployment, which we already started shifting to in '18, '19 will be a vehicle that will allow us to continue on that path. And I'll remind you, we have always had industry-leading yields and we continue to have industry-leading yields far above the competitive set, and we believe that this deployment strategy will allow us to continue with that.

Okay. Got you. And Mark, I just want to kind of add the question I was going to ask before to you. Again, as you kind of think about you guys being in that low 150 range in terms of cost. Just is there any way to kind of help us think about where you could get that number over time. I'm not looking for guidance or anything, but just trying to understand where that number potentially could go?

Yes. Look, Steve, obviously, as we're looking to 2024, we're still early in the -- we're in the planning process. And as I said, I think we're probably halfway through the baseball game, so to speak, in terms of initiatives. So we fully anticipate that we're going to improve on that. One note, as I did say in my prepared remarks is we have to keep in mind that there is going to be some dry dock pressure in 2024 when you compare that to '23. But excluding that, I would venture to say that we're going to continue to see improvement in our core fundamental cost structure. So we're working hard. Hopefully, we've demonstrated and given you confidence that quarter-over-quarter, we sequentially continue to improve. We think there's more -- we think there's more to go after, and we're going after it. We're going to do it in a methodical manner, but protecting that guest experience. So stay tuned for the next few quarters to come, and I think we'll continue to show improvement.

Our next question comes from Brandt Montour with Barclays.

So I'm just curious if you could comment on the last 3 months of just fundamental demand strength on the booking side. We've heard from peers that demand has accelerated over those last 3 months. Harry, you just called out in May, June, July being each successively record booking months. But yield guidance for the year was left unchanged. And so I guess the question is, is that a function of guidance 3 months ago just already sort of betting on that acceleration coming? Or did slight flight prices in Europe take a bite out of 3Q? I think we talked about that last quarter or anything else that you might want to highlight?

Thanks, Brian. Great question. I think with our deployment strategy, most of the demand that we're seeing today and over the last quarter, is primarily focused on 2024. I think we mentioned in our commentary, but if we did, and I'll mention it now, that over the last 13 weeks, over 70% of our new booked revenue was for '24 and '25 departures. So in that respect, this acceleration in demand, the record booking levels that I discussed really are increasing our optimism about 2024. Obviously, in prior guidance, we did assume some bookings, right, for the back half of the year, and they're coming to fruition just as we expected, but these records are really helping to firm up the '24 book position. I mean this record booking window of 255 days, which is 51 days ahead of where we are in '19 is a huge number for the company and again, really gives us confidence for 2024 and beyond.

So Brandt, I would not take it as any sort of sign of deceleration in demand. It's just simply a function of our itineraries, we're more fully booked than we ever have been, and there's just not a lot left to sell, so which is a good thing. That gives us more stability and predictability over our numbers. So if anything, that said, there's always -- as we talked about, the consumer is strong onboard revenue trends continue to do well. So I think if there's going to be any room for upside, it's going to be on continued strength of the consumer spend on board.

That's really helpful. Okay. And then just a quick follow-up on that. I remember pre-COVID, Mark, specifically, you guys could get really great returns on incremental marketing dollars, and that was part of the strategy back then. And so -- now in a world where you guys are, I think, trying to be a little bit, I guess, smarter, you call it, on your marketing dollar spend and Harry, what you think about this. Just as you tinker with that, sort of algorithm or equation with marketing spend. What are you learning about that process? Are you happy with sort of the pricing retention that you're getting as you sort of tinker with the marketing dollars? Or any commentary on that would be helpful.

I think, Brandt, this is really the first quarter or the second quarter where marketing spend was sort of normal, where we were able to judge each of the individual projects that we do in marketing and see normal ROI, normal returns, normal gets demand. But of course, we weren't just waiting through the last couple of quarters to refine our marketing machine. We've gone all in with marketing analytics. We've done some work with AI, machine learning, all those terms to really refine our individual marketing efforts and what we spend in each individual channel. The best example I can give you on the NCL brand, our spend today on a booking basis, it's similar to what we were doing in '19, but we're generating nearly double the lease right, which is sort of a customer that raises their hand. We think that's fantastic. Conversion rates continue well, which is one of the things that's leading to these record bookings. And as long as we continue refining our analytics around marketing, we're happy with the spend levels.

Our next question comes from James Hardiman with Citi.

So on the net per diem side, good performance in the second quarter, maybe a little surprised that, that didn't flow through to the full year guide. And I can certainly appreciate more often than not, if it's onboard spend that's driving that for diem, it's hard to sort of assume -- you have less visibility as we think about the back half of the year. Is that ultimately what happened in Q2 or how should we think about sort of the lack of flow through to the full year?

Well, James, I think our pricing continues to be very strong. And I think out of the gate, we set very high levels. So again, I wouldn't read into anything whether or not that's -- if there's any deceleration, there is flow through. And the fact that we're still guiding, reiterating 9% to 10.5% growth. So very strong -- we don't have a lot of inventory left to sell, which is by design. So I think it's really going to be on the back of what does the onboard spend level do. And as we've touched on here and several times before, it continues to be very strong. But while we have good visibility on that, there is always some variability on that. So it remains to be seen. And -- but everything we're seeing is we're seeing strength and demand across all sectors of the industry.

Got it. That's helpful. And then a separate question. I mean, we started to see refinancing activity pick up, maybe a more full corporate debt environment. What are you seeing there? Is there an opportunity for you guys to do some transaction whether it be a focus on lowering interest rates, extending maturities. I guess if so, what instruments are sort of low-hanging fruit for you guys? I guess, more broadly, I mean, as you think about deleveraging, it seems like the messaging has been more about increasing EBITDA than actually reducing debt. This current environment maybe changed any of that calculation?

Well, we're -- James, we're always looking for opportunities to optimize our debt structure. And I think we were very fortunate in 2022 to get rid of some of our higher cost debt that was incurred during the pandemic. So we don't have any double-digit notes that are out there. As I did say, we will be out in the market later this year in normal course to refinance or amend and extend our operating facilities, which is our term loan A and our revolver. Beyond that, our next big slug of debt as it comes due in December of 2024. We have notes that are out there. And we'll look over the course of the next 12 months, what to do with that. But as the cash machine continues to ramp up, as advanced ticket sales continue to ramp up, as EBITDA and margin continues to improve, that is the number one thing we're focused on is delevering to -- in order to help derisk the stock. So we're going to -- we're focused on that. We've done this before. It's going to take a little bit of time. But I think there's more to see over the course of the next 12 to 18 months.

And James, I'll just take this opportunity to reiterate a comment that Mark made in his prepared remarks that we have paid down $1.4 billion of debt in the first half of the year which we're super excited about.

Got it. That's really helpful. And Harry, congratulations on the new role and good luck.

Our next question comes from Conor Cunningham with Melius Research.

Just one for me. Harry, in the prepared remarks, you made a comment around just culture change that's underway at the company. Can you just provide a little context to that comment? Is it -- why do you need it now? And what's the most -- what's the biggest pressing that you want to achieve with it -- or is that more of a comment just around just the refreshing?

Well, I think Conor, it's a little bit of both, right? With new leadership team, we have to set a culture that's going to work for us in the mid- to long term. And I'm really excited that the entire leadership group, both the new members and the existing ones are embracing. But if I was to sum it up in one sentence, we're looking to build a culture where we're firmly focused on margin enhancements that we discussed while at the same time delivering exceptional guest experience. And it's really a fine line to walk -- I mean you can cut costs and have a worse guest experience. That's not what we're looking to do. Maybe in the past, we were a little bit overly focused on the guest experience without the cost side of it. The question is, how do we balance both of it. And I have to say, I'm excited. Mark and I have both talked about the reduction, the sequential improvement in our underlying core plus over all 4 quarters of this year, while at the same time our guest satisfaction continues to do very well. Our first guest repeat rate is at record levels, really good guest satisfaction scores, advanced bookings through the root. So this formula seems to be working well. To do this right, it has to take more than one quarter because we're not looking to do anything drastic. We're looking to do this a little bit at a time and make sure that we monitor it closely, and that's what we're going to continue to do. Thank you, Conor. So with that, Maria, we have time for one last question. So please call it out.

Our next question comes from Dan Politzer with Wells Fargo.

Just a quick question, Harry. It feels like there's been a tangible shift more to focus on the cost side than the yield side. Maybe that's just reflected in current numbers versus how you're looking at things. But I guess as you think about 2024, 2025 and as you think about also long-term targets, is this an accurate depiction? And could we maybe get long-term targets from you as you kind of settle into the role later this year or possibly early 2024?

So Dan, great question. So first off, we are absolutely focused on yield and cost, right? Because ultimately, margin is a combination of those 2 numbers. I think I discussed in one of the earlier questions that we think we can do an outsized job in 2024 in yield growth somewhat because of the tailwinds we saw in Q4 and '23 when we weren't fully back up to operations, but also because of all the healthy consumer demand metrics that we're seeing over the last few months that we believe will continue into the future. And on a long-term basis, we are committed to a low to mid-single-digit yield increases with moderate and disciplined capacity growth as we had in 2014 to 2019. So that absolutely will continue. In terms of long-term target, we think about it a lot, but I've been on the job now for 30 days. So a little bit early for me to go all in. I've been spending a lot of time with our -- on our ships, with our operations folks, with our employees, with our travel agency community, with our customers, spending some time with the investment community as well. And we believe by early '24, we'll be in the position to provide not only guidance for '24, of course, but also long-term metrics on how we view the future EBITDA margin, yield and cost components of the business going forward. Okay. So once again, I want to thank everyone for joining us today. We'll be around to answer any questions you may have. Have a great day. Stay safe and all the best. Bye now.