Good morning, and welcome to the Norwegian Cruise Line Holdings Second Quarter 2020 Earnings Conference Call. My name is Michelle and I will be your operator. . I would now like to turn the conference over to your host, Ms. Andrea DeMarco, Senior Vice President of Investor Relations, Corporate Communications and ESG. Ms. DeMarco, please proceed..

Thank you, Michelle, and good morning, everyone, and thank you for joining us for our second quarter 2020 earnings call. I'm joined today virtually by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and Chief Financial Officer.

Frank will begin the call with opening commentary, after which Mark will follow to discuss results for the quarter before handing the call back to Frank for closing remarks. We will then open the call for your questions..

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Did we lose Frank?.

I'm sorry, I had you on mute. I will begin from the top. Thank you, Andrea, and good morning. I hope that everyone joining us today as well as your loved ones are healthy and safe. Similar to our previous earnings call in May, today, we will provide a business update on the progress of our response to the COVID-19 global pandemic.

I'd like to start off by putting the current no-sail situation into perspective. In the last 5 months, our company and the cruise industry at large has experienced more adversity than at any other time in our 50-plus-year history.

The negative effect the cruise industry faces from the COVID crisis eclipses that of 9/11, the Great Recession and any other stress test scenario that once imagination has ever modeled combined.

Looking back, it would have been unimaginable for us to foresee that today, 5 months after the initial suspension of service, which was declared on March 13, that our entire 28-ship fleet would still be at a complete standstill. Motor anchored in ports around the world waiting to set sail again.

We are experiencing about the pandemic is unprecedented and extreme and uncertain and will surely be chronicled as those extraordinary events in our sailing history. Nevertheless, I continue to remain confident and upbeat that we will once again demonstrate our resilience and adapt to the complex and ever-changing COVID-19 environment.

There is always a silver lining in all hardships, and as you know, our company is nimble and innovative, and we will find ways to meet the needs of the current environment, no matter what they may be.

Whether that's developing and implementing new and innovative health and safety protocols, developing new or modified itinerary or changes to the onboard experience, understanding consumer trends or any other obstacles that come our way, we will look back on 2020 and this pandemic and, once again, witness the evolution it will bring not just to the cruise and hospitality space, but to all aspects of life and society around the world..

Thank you, Frank. Given the rapid and significant impact COVID-19 has had on our business, my remarks will focus on the continued execution of our financial action plan and how we believe we have positioned our company to weather an extended period of voyage suspensions.

The global pandemic has lasted longer than anticipated, resulting in the continued suspension of our cruise voyages, which have now been extended through October 31. There is still much uncertainty around how the pandemic will evolve so we will have to continue to adapt and modify our strategy in real time..

Thank you, Mark. We have taken important initial steps on our road map to relaunch, which is illustrated on Slide 11, particularly in the first phase, which is the enhancement of health and safety protocols.

Nothing is more important than the sustained restart of cruise operations than the implementation of health and safety protocols that protect those onboard our vessels and provide guests with greater confidence in our ability to deliver a safe and healthy vacation environment.

Our company and the cruise industry added another tool in our toolbox for developing these enhanced protocols with the formation of the Healthy Sail Panel, a collaboration with our industry peer, Royal Caribbean Group. While we compete fiercely on everything having to do with business, we do not compete on health and safety issues.

At the end of the day, the entire industry has one goal in common. And that is to create an environment that mitigates the risk of COVID-19. The panel is tasked with providing recommendations to advance our public health response to COVID-19 and inform us on the development of a science-backed plan for a safe and healthy return to cruising.

We have incredible players on the panel, Dr. Scott Gottlieb, the former commissioner of the Food and Drug Administration; and Governor, Mike Leavitt, former Secretary of U.S. Health and Human Services.

The co-chairs jointly recruited and rounded out the panel with an impressive group of globally recognized experts with diverse backgrounds, including in public health, infectious disease, biosecurity, hospitality and marine operations, as is shown on Slide 12.

The vast experience and breadth of knowledge of the panel's members make them uniquely suited to inform us as we develop the next generation of cruise health and safety standards, while at the same time enabling us to preserve as much as possible what makes the cruise experience so special, so and so successful.

Bringing aboard these respective experts demonstrates our absolute commitment to the common goal of combating the spread of COVID-19 and bringing back the cruise industry operations sooner rather than later.

In an effort to make broader contribution to global public health, the panel's work will also be open source and can be freely adopted by any company or industry that would benefit from the group's scientific medical insights.

Given cruising is unique in that it encompasses several experiences in one vacation, that being lodging, dining, entertainment and, of course, transportation, we believe the process and structure we've come up with could be a best-in-class effort and a model for how other industries can work through this public health challenge.

The panel has been hard at work developing its initial recommendations for the resumption of cruising, which our operations team will then incorporate into specific and detailed plans to submit to the U.S. CDC and other public health and maritime agencies across the globe.

In addition to their initial recommendations, the panel will continue researching other cutting-edge health and safety technologies and innovation that could further benefit the cruise industry, but which may take more time to implement. So will there be changes? Yes, there will be.

But as I mentioned earlier, adaptability and innovation are 2 characteristics in which our company and our industry excels.

So while we do expect cruising to be different in the future, at least until such time as the COVID-19 crisis is no longer a threat to public health, we are confident the work of these changes, while being mindful as to how those changes may impact guest satisfaction, the overall cruise experience.

If you think about cruising 10, 15, 20 years ago, the experience was different than it is today. Think of how we've introduced freestyle cruising and then how much has changed since then, with innovations such as our groundbreaking electric Go-Kart race tracks and Galaxy Pavilion.

To guarantee you that 5 to 10 years from today, things will also be different. A concurrent step in our road map is to determine port availability, both for home porting and for ports of call. Conversations continue with key destinations regarding the reopening of ports and the resumption of calls.

The key theme in these conversations is naturally the enhanced health and safety protocols as destinations look to cruise lines and public health officials to develop and approve these new procedures.

This step is critical as it will allow for destinations to prepare their ports, their terminals, crew operations and other considerations for these new procedures. In certain parts of the world where the spread of virus has lessened, cruising has taken a critical first step in resuming operation.

Regional operators are sailing both large and expedition size ships once again, albeit with reduced capacity and limited to guests from their home countries. Recent events demonstrate that with the resumption of sailings, just as with the reopening of any other sector of the economy or of society, fits and starts are to be expected.

In just like carriers of the economy, such as air travel, hotels, restaurants, shopping centers and the like, cruise operators will learn from these initial setbacks and adapt protocols to provide even a safer vacation experience.

Our industry has an unparalleled history of successfully implementing regulations, which gives us the confidence that we will successfully adapt to this challenge as well. The third step in our road map is the revving up of our marketing engine.

My earlier commentary outlined our current strategy in terms of the quantum and direction of our marketing investments.

There is certainty around the timing of the resumption of sailings, a milestone that is entirely dependent on obtaining the approval to sail from government agencies, such as the CDC, we can augment our marketing and demand generation investments and do what we do best, execute on our go-to-market strategy of marketing to fill, which leads to our industry-leading yields.

Lastly, comes the gradual sailing and relaunch of our ships, first with the launch of a handful of vessels, likely at some reduced occupancy level, followed by the gradual addition of the rest of our fleet, which we continue to estimate will take at least 6 months to complete.

Before turning the call over to Q&A, I'd like to leave you with a few key takeaways that are shown on Slide 13. We continue to execute on our financial action plan to reduce expenses, conserve cash and opportunistically tap the capital markets to further strengthen our financial position and enhance our liquidity runway.

We continue to observe strong demand for cruising across all source and sailing regions and brands in the medium to longer term. And lastly, we are focused on our road map to relaunch as we work alongside our Healthy Sail Panel and global public health authorities to resume sailing. And with that, Michelle, please open the call to questions.

Thank you..

. Our first question comes from the line of Steve Wieczynski with Stifel..

So Mark, I want to go back, and I don't know if I picked this up right, but when you talked about the ship operating expenses and what you need to in terms of revenue to cover those, did I hear this right? So an individual ship, you're basically saying that's 40% of net revenue, and then to cover your corporate overhead, it would be 60% of typical net revenue levels.

Is that kind of -- based on what I missed is, is that kind of pre-COVID levels? Is that 2019? That's what I'm a little bit confused about..

Yes. Steve, yes, you're absolutely right. So when you look at the ships from just the ship operating expenses, based on our, let's call it, 2019 or 2020 planned levels, we would need about 40% of our typical revenue to cover the vessel operating expenses. When you layer on your corporate overhead into that, that goes up to about 60%.

So keep in mind, that's an average. That's a blend. Obviously, certain ships, it might be lower than that and certain ships that may be higher than that. But generally speaking, it's about that 40% and 60%..

Okay, got you. And then Frank, probably a bigger picture question for you. It's really about the long-term health of your -- the distribution network. And what I mean by that is, it seems there's a lot of smaller or mom-and-pop agencies might be -- are going to be forced to kind of shut their doors, if they haven't already.

So I guess the question is, how do you see the travel agent network really looking over the next 5 or 10 years? And could this potentially force the hand of customers to start booking a little bit more direct with you guys?.

Look, it could happen. We've seen smaller mom-and-pop types travel agents already folding their tents, even larger travel agent distributors furloughing employees, no different than the cruise lines are furloughing employees. You have to adjust to the current volume.

We have seen an uptick in our direct business, more business coming in through our website and other direct channels. We think that might be exaggerated at the given time, given the -- at least partial closure of the travel agency distribution system. But I believe that travel agents will survive this, just like we will.

There will always be casualties. There's been casualties so far in the cruise space. So I think on the margins of at least the short term when sailings resume, you might see a disproportionate of business coming through direct channels versus where we were seeing prior to the crisis.

But I think over the long term, the travel agents have shown their resilience over the years. They've adapted to technology. It wasn't too long ago that many people predicted the demise of travel agents. And if anything, over the years, they've gone stronger.

So maybe around the margins at the beginning, at the outset of the restart, but I think longer term, you're not going to see much change..

Okay. Can I squeeze 1 more quick 1 in for you, Frank? And you obviously have the youngest fleet in the industry. And I think you only have a handful of ships over 20 years old. But you've seen some of your competitors start to retire or scrap ships.

And do you start thinking about taking similar actions or do you just continue to believe you need more capacity over time and you really remain underrepresented in certain markets?.

Yes, Steve, you answered the question beautifully. We have a young fleet. In fact, the oldest vessel we have, prior to the pandemic, we completed the work in mid-February. We invested $150 million in the Norwegian Spirit so that ship is better than you. We love our capacity. We are the smallest of the big 3.

So we're always wanting more, although I think you've heard me say that during this pandemic, I'm glad I am the smallest because there's less mouths to feed, so to speak. But look, we not only have the youngest fleet, but we also have 9 incredible vessels on order, which allows us to have the fastest-growing fleet.

And so no, we absolutely have no plans to divest of any of our vessels..

And our next question comes from the line of Felicia Hendrix with Barclays..

Frank and Mark, you've given us tremendous information with the limited stuff that we know right now. Frank, just wondering what inning do you think you are in with the CDC in terms of having the protocols in place for both crew and passengers to sail safely.

And as you know, there's unfortunately been several lines recently that have tried to sail and have had issues with COVID.

So do you view that as a setback at all?.

Yes. Look, there's no way to spin the initial reemergence of COVID onboard vessels. But it's like, I said in my prepared remarks, it's an opportunity to learn from them. This virus teaches us something every day.

And so while it's disappointing, I'm glad that the ports that the cruise company that suffered these setbacks have handled the situation very, very well. We haven't had a repeat of what happened earlier during the pandemic crisis. And in terms of where we stand with the CDC, look, I think the next 60 to 90 days are going to be very, very key.

As you know, the CDC requested an RFI, request for information, that's due through September '21. I'm told that there are thousands of comments that have already been received by the CDC.

Around the same time, our panel is going to be completing at least their first initial set of recommendations, which we, along with Royal, will look to implement in our return to sail protocols that we will submit about the same time as the RFI.

And so the CDC will have a lot of information to comb through and digest and opine on, let's say, beginning in Q4. And so we'll see how they react to it. We're confident that our -- the panel is going to come up with key science-based recommendations that the cruise industry can implement. That should be impressive to the cruise industry -- to the CDC.

And then there's the hope that during the same time, the prevalence of the pandemic will subside to more manageable levels, and that the combination of the 2 will lead to a speedy return to service..

And just, Mark, on your balance sheet, just can you remind us, do you have any more capacity or do you have any secured debt capacity? And then are there any practical limitations on how much in unsecured or convertible debt you could issue?.

Yes. From a secured standpoint, Felicia, we are pretty -- we are at our capacity, given some of the negative covenants we have on our 3.6% notes. But we do believe there is -- we do have additional capacity on an unsecured basis and -- as well as through additional convertibles and common.

And so we are in active discussions with our various investment banks and always looking at additional options, should we need to do so. But we do have additional options available should we need it. But given where we stand today, we feel like we're in a good position. But it's really going to be about time, and time is the enemy here in this case.

But we will continue to evaluate all options that we have..

And our next question comes from the line of Brandt Montour with JPMorgan..

So just going back to Frank's comments on the delta widening between the booking pace and the cumulative book position, I mean, that makes sense to us. I think it's just mass.

But I guess, if you are able to turn marketing back on and you are able to start drumming up demand, can you give us a sense for -- if you're sailing in earnest in the 2Q, at what point would we start to see that delta begin to close again?.

It begins to close once we discharge our full arsenal of marketing initiatives and marketing spend. Our base -- the market philosophy is market to spend, not taking no longer, the type of thing. And so we don't like discounting. We have not discounted.

And the good news is that I think your analysis has indicated, for the most part, the industry-wide has not been FCC adjusted basis, our yields in '21 are relatively flat to where they were for 2020. And as you know, 2020 was tracking to be a record year before the pandemic hit. So on the pricing side, we're holding our own very well.

And again, given the limited marketing spend, I'm astonished how well bookings are coming in, given the fact that the industry is suspended. There is not a lot of positive news flow. And going forward, cruise lines now -- have now suspended sailings through October 31, and in some cases through the end of the year.

So I do believe that we, in the cruise industry, enjoy a very loyal customer base. Across our 3 brands, over 50% of our guests on any given cruise are repeaters. We're going to lean on them heavily. They're going to lean on us. They want to cruise again.

Depending on when you think the restart is, there's going to be 15 million, 20 million people who were not allowed to cruise this year. And there's a lot of pent-up demand there. So I can't give you a specific date when we think that the booking window to normal. It will take some time.

But we've seen one of the basic business tenets of the cruise industry is you sail full and you do what you have to do to sail full. And in our case, we market to fill. And we think that's the best strategy. It's proven its time -- its mettle time and time again. It's proving itself now.

So I can't give you a specific date, but I don't think it will take that long..

And I appreciate that adjusted net yield and pricing bit of information you gave us there.

As you look to other industry participants as we start to get into the prime booking season for 2Q and '21 and beyond, are you seeing anyone else get more promotional with pricing?.

Really haven't. As I said, there's always pockets. There's always a sailing here or there. But I'm very happy to see the discipline that the industry has shown across the board in this pandemic.

I think logic tells you that business is soft not because of business fundamentals, business is soft because you can opt and in spite of that, business is relatively strong. If you had told me that we were going to be facing these set of circumstances, and your question is, "Frank, would you be taking any bookings?" I would have laughed at you.

I'll say, "Of course, not, who would book? It's crazy." But people are booking. People are confident that we're going to come back. People do want to cruise. They miss it. It's a heck of a vacation experience, a heck of a vacation value. And so this is temporary. The question is how temporary is temporary. But it is temporary.

And those who have the wherewithal, the financial wherewithal to stay in the game will reap the rewards later on..

And our next question comes from the line of Vince Ciepiel with Cleveland Research..

I wanted to focus a little bit on kind of your exposure to U.S. source.

And as you think about starting up sailings in key markets for you, what have you seen over time in terms of guest willingness to maybe switch over itineraries that you're not rolling the whole fleet out at once, you're going a handful of ships by month? What have you seen over time about how willing guests are to switch ships?.

Well, it all depends on the extreme -- on how the switch occurs. If, for example, we're talking about Q1 in which the vast majority of the fleet is Caribbean-centric and you stand up a handful of ships in the Caribbean but not all, moving from a ship that is not being stand up to those that are, is a relatively easy phenomenon.

It's more complicated if you're asking someone who booked a 4-day cruise to the Bahama to take a 12-day cruise to Europe. So a lot depends on the start dates, what we're talking about. For example, in Alaska, we have 4 vessels in Alaska.

And so it's, again, relatively easy to move people within a region within an itinerary from, let's say, Norwegian Joy and Norwegian Bliss, that they're both operating 7-day cruises in Alaska. The only difference is one departs on a Saturday and one departs on a Sunday.

But over time, we've seen that customers are willing to make those kinds of changes. You may have to sweeten the pot with a shipboard credit or a cabin upgrade or something like that to induce some. But generally speaking, not an overwhelming obstacle..

Great. And then I wanted to circle back on the 60% in the breakeven.

And not to get too into the weeds here, but the -- did you mention that, that would cover the pre-crisis 2020 overhead? And haven't you made changes to that as you flex down costs, some of which I think would maybe continue into 2021? And then on top of that, you've talked about the chance that pricing is holding up well because demand has been exceeding supply of available sailings for next year and the potential for that, the potential for not having the market as much.

So in your analysis, have you factored that into kind of the margin and the breakeven levels?.

Yes, Vince, this is Mark. So look, what we tried to do is 2020 is fluctuating so much, and you're absolutely right that we have lowered our cost base. In fact, we've lowered our operating expenses a little more than 60%.

But what we tried to do to give everybody a solid foundation in which to measure that was really provided on either a 2019 or 2020 expectations, just to give it a consistent base. So -- but you are absolutely right. As we continue to flex down, that should improve with our lower cost structure.

But keep in mind, this is a relatively fixed cost business for the most part. So there will be some opportunities, but that was really the basis for providing it on those levels..

And our next question comes from the line of Ivan Feinseth with Tigress Financial..

First, in the bookings that you're getting, are you seeing any surprise trends? For example, are you seeing more large families booking multiple cabins or any certain trends that pop up from zip codes? Are more people who are booking coming from drivable locations to the ports or are they flying? Is there anything that's positively surprising you? And then second, are -- do you -- are you able to work with airlines to create some kind of package promotion to take advantage of the -- of an opportunity there?.

So in terms of the airlines, they've lowered their rates substantially from their normal level. So they're good pricing and, hopefully, consumers will take advantage of it. Your first question is, I think, the more important one, and I mentioned that in my script. We've not seen any major shift in consumer behavior. We have not altered our itinerary.

So the same itineraries that were available for purchase before the pandemic for 2021, for example, are still available today. So that means by definition, that. If they are showing favoritism to close-to-home cruising or not cruising to Asia or avoiding Europe, we're not seeing it because our itineraries have not changed.

And as our booking volumes are still relatively strong, given the marketing spend and the pricing is strong, we believe that our itineraries are still attractive to our customers. We are very proud of our itineraries. As you heard me say before, itineraries is the #1 driver of yields.

We lead the industry in yields by a very wide margin, which tells me that our itineraries are very well received. And so as you know, there are travel restrictions just about everywhere today. And until those begin to get lifted, we really won't see whether customers favor one versus another..

. Our next question does come from the line of Tim Conder with Wells Fargo Securities..

Frank, Mark and everyone, first of all, congrats on doing basically everything you can in an ongoing fluid difficult situation.

To circle back to kind of a state of what maybe a new normal could be, and again, I know this is probably very highly speculative even on your part, what type of occupancies do you think would be reasonable? Let's just say, it'd be at the end of Q2 before you get the fleet back in full service.

What type of occupancy would you guesstimate may be reasonable either at that point or for '21 as a whole? And then also the -- returning to the structural cost question, how should we -- once we get back to the new normal, how much of the cost, both on the ship side and then on the shoreside, would you anticipate at this point to be more structural?.

I'll classify it. In terms of load factors, there's going to be so many variables. And I know you prefaced your question with -- it's highly speculative, and you're right.

But I -- my instinct and it's no more than my instinct, my 25-plus years in this business peppered with a little bit of really perhaps reading between the lines of the government authorities, somewhere in the 75% range for full year of sailing. And my guess is it will be gradual, like everything else, it might start at 50%, 60%.

I think some of the cruise companies that have already begun cruising are adaptable, and it will. With the limitation being more concerned for the spread of COVID than constraints on consumer demand, I think consumer demand will be there. I think we're all sick and tired of being cooped up in the house and we want to get out.

And as long as we can ask to retain it, cruising is a safe viable vacation alternative. You're going to find customers coming back in roads. With that, I'll leave it to Mark on the cost..

Yes, Tim. So I think when you look at the cost structure, we certainly are learning as we go along that maybe there is levers we can look at. So from a ship-side standpoint, I wouldn't anticipate any significant changes in our ship operating expenses. Yes, may we have some incremental costs here and there as a result of new health or safety measures.

But I think on the margin, that's going to be pretty minimal. When we look at our overhead structure, one of the interesting things we've learned that, as Frank mentioned, is we've really cut back our marketing spend and yet we continue to see relatively strong bookings.

So we're going to learn from that and we're going to figure out, is there a better way to spend and more and get more for that dollar? That said, our strategy is market to fill. So we will continue along that strategy. But if we can find ways to become more efficient, we certainly will do that.

And as we start sailing and as the business starts to ramp back up, we're going to be prudent in terms of adding back to our overhead. We have always run a relatively lean organization. But we will continue to try and err on the side of being lean until we get back to normalized levels. So....

Okay.

And just to clarify, Frank, you -- just to make sure I heard you right, you would guesstimate that 75%, that would kind of be an exit run rate for '21 or the back half of '21? And then Mark, to your point, would we benchmark off of '18, '19 being lower than those levels, sort of like on a per diem basis?.

Yes. I think....

Go ahead, Mark..

Yes, I think when you look at '18 or '19, off those levels, the 1 piece you're really going to have to look at is what did we spend in marketing in those years? Because look, we've always said, on a net cruise cost basis, our costs are pretty normal.

And when we do have fluctuations in our net cruise, we've always said it typically comes from marketing. And when we've spent that marketing, we've also garnered that significant yield uplift as well. So it's been accretive to the bottom line.

So I think when you're looking at that, try to figure out how to isolate that in the background, but I think '18 or '19 levels is reasonable when you take out some of the hurricane and storm noise from those years. And Cuba as well. Don't forget, we had some increased costs in '19..

Our last question comes from the line of Greg Badishkanian with Wolfe Research..

It's actually Fred Wightman on for Greg. Last quarter, so back in mid-May, you talked about being in a positive working capital position within 30 to 60 days. We've obviously seen the restart date pushed back a few times since then.

Just wondering if you could give an update on where that stands today, and if it's really just a matter of getting ships back into the water.

If there's something else we should be tracking?.

number one, at that point, voyages were only suspended through June 30, and now we've added -- we're now suspended through October 31. So that's, obviously, put more pressure on our advanced ticket sale refunds that have been in the queue. So we did not -- we were not working capital positive in the quarter.

Although when you look at the numbers, we were only roughly $100 million deficit. I think as we go forward, the biggest piece of our working capital is that ATS. And from an outflow standpoint, there's really not much more that we -- and from a cash standpoint, that we would have to refund.

We have about $1.1 billion or $1.2 billion of ATS on the books as of the quarter, and roughly $800 million of that is in the form of future cruise certificates. So when you think about that, there's not a lot of cash outflow. And so from the inflow standpoint, we continue to take new bookings.

We continue to collect deposit and final payments from customers. All the customers that we've referenced that are booking in 2021, they continue to deposit funds. So we would anticipate looking toward the tail end of the third quarter, fourth quarter being breakeven or positive on a working capital standpoint..

Okay. Thank you, everyone, for joining us this morning. Tough environment. we've a good liquidity runway to see this through and are hopeful that things will begin to improve, both on the prevalence of the COVID case and our ability to put together a comprehensive and robust set of protocols that gets us back in service quick.

So we look forward to speaking to you again, I guess, in late October, early November. And please stay healthy and safe. All the best. Bye-bye..

Thank you. Bye, bye..

This concludes today's conference call. You may now disconnect..